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Principles of consolidation

Scope of consolidation

The consolidated financial statements of the Allianz Group include those of Allianz SE, its subsidiaries and certain investment funds and special purpose entities (“SPEs”). Subsidiaries, investment funds and SPEs, hereafter “subsid- iaries”, which are directly or indirectly controlled by the Allianz Group, are consolidated. Control exists when the Allianz Group has the power to govern the financial and operating policies of the subsidiary generally either when the Allianz Group owns directly or indirectly more than half of the voting rights of the subsidiary or when control can be legally evidenced otherwise because of an agreement with other investors or of a specific corporate charter. In order to determine whether control exists, potential voting rights that are currently exercisable or convertible have to be taken into consideration. If no control exists from a legal perspective, it has to be assessed whether control exists from an economic perspective, as in the case of SPEs. Sub- sidiaries are consolidated from the date control is obtained by the Allianz Group. Subsidiaries are consolidated until the date that the Allianz Group no longer maintains control. The Allianz Group has used interim financial statements for certain subsidiaries whose fiscal year is other than Decem- ber 31, but not exceeding a lag of three months. Adjustments are then made for the effects of significant transactions or events that occur between that date and the date of the Allianz Group’s financial statements.

The Allianz Group transfers financial assets to certain SPEs in revolving securitizations of commercial mortgage or other loan portfolios. The Allianz Group consolidates these SPEs as the Allianz Group continues to control the financial assets transferred and retains the servicing of such loans. of America (“US GAAP”) have been applied to those aspects where specific guidance is not provided by IFRS 4, Insurance Contracts.

The accounting policies adopted are consistent with those of the previous financial year except for recently adopted IFRSs effective January 1, 2008 as described in Note 3. The consolidated financial statements are prepared as of and for the year ended December 31, and presented in mil- lions of Euro (), unless otherwise stated.

Allianz Group Annual Report 2008 Notes to the Consolidated Financial Statements

Consolidated Financial Statements and Notes

Associated enterprises and joint ventures

Associated enterprises are entities over which the Allianz Group can exercise significant influence and which are not joint ventures. Significant influence is the power to partici- pate in, but not to control, the financial and operating poli- cies within an enterprise. Significant influence is presumed to exist where the Allianz Group has at least 20 % but not more than 50 % of the voting rights unless it can be clearly demonstrated that this is not the case. If the investor holds less than 20 % of the voting power of the investee, it is pre- sumed that the investor does not have significant influence unless such influence can be clearly demonstrated. Joint ventures are entities over which the Allianz Group and one or more other parties have joint control.

Investments in associated enterprises and joint ventures are generally accounted for using the equity method of accounting, in which the results and the carrying amount of the investment represent the Allianz Group’s proportionate share of the entity’s net income and net assets, respectively. The Allianz Group accounts for all material investments in associates on a time lag of no more than three months. In- come from investments in associated enterprises and joint ventures is included in interest and similar income. The positive difference between the cost of the investment and the Allianz Group’s share of the net fair value of the associ- ate’s identifiable assets and liabilities is accounted for as goodwill and included in the carrying amount of the invest- ment. Profits and losses resulting from upstream and downstream transactions between the Allianz Group and an associated enteprise are recognized in Allianz Group’s financial statements only to the extent of unrelated inter- ests in the associate. Allianz Group’s share in the associate’s profits and losses resulting from these transactions is elimi- nated. Accounting policies of associated enterprises and joint ventures have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Allianz Group.

Foreign currency translation

Translation from any foreign currency into functional currency

The individual financial statements of each of the Allianz Group’s subsidiaries are prepared in the prevailing currency in the environment where the subsidiary conducts its ordi- nary activities (its functional currency). Transactions record- ed in currencies other than the functional currency (foreign currencies) are recorded at the exchange rate prevailing on the date of the transaction. At the balance sheet date, Third party assets held in an agency or fiduciary capacity

are not assets of the Allianz Group and are not presented in these consolidated financial statements.

Accounting policies of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Allianz Group. The effects of intra- Allianz Group transactions have been eliminated.

Business combinations including acquisitions and disposals of minority interests

A business combination occurs when the Allianz Group obtains control over a business. Business combinations are accounted for using the purchase method. The purchase method requires that the Allianz Group allocates the cost of a business combination on the date of acquisition by recog- nizing the acquiree’s identifiable assets, liabilities and certain contingent liabilities at their fair values. The cost of a business combination represents the fair value of the as- sets given, equity instruments issued and liabilities incurred or assumed in exchange for control at the acquisition date, plus any costs directly attributable to the acquisition. If the acquisition cost of the business combination exceeds the Allianz Group’s proportionate share of the fair value of the net assets of the acquiree, the difference is recorded as goodwill. Any minority interest is recorded at the minority’s proportion of the fair value of the net assets of the acquiree. If the initial accounting for a business combination can only be determinded provisionally, Allianz Group accounts for the combination using those provisional values. Any adjustments to those provisional amounts as a result of completing the initial accounting are recognized within twelve months of the acquisition date and from the acquisi- tion date. If Allianz Group’s proportionate share of the fair value of the net assets exceeds the acquisition cost, Allianz Group reassesses the identification and measurement of the identifiable assets, liabilities and contingent liabilities as well as the measurement of the cost of the combination and recognises immediately in profit or loss any excess remaining after that assessment. Acquisitions and dispos- als of minority interests are treated as transactions between equity holders. Therefore, any difference between the acqui- sition cost or sale price of the minority interest and the carrying amount of the minority interest is recognized as an increase or decrease of equity.

For business combinations with an agreement date before March 31, 2004, minority interests are recorded at the minor- ity’s proportion of the pre-acquisition carrying amounts of the identifiable assets and liabilities.

exchange rate and non-monetary assets and liabilities are translated at historical rates.

Foreign currency gains and losses arising from foreign currency transactions are reported in investment expenses. Translation to the presentation currency

For purposes of the consolidated financial statements, the results and financial position of each of the Allianz Group’s subsidiaries are expressed in Euro, the functional currency of the Allianz Group. Assets and liabilities of subsidiaries not reporting in Euro are translated at the closing rate on the balance sheet date and income and expenses are trans- lated at the quarterly average exchange rate. Any foreign currency translation differences, including those arising from the equity method, are recorded directly in shareholders’ equity, as foreign currency translation adjustments.

Use of estimates and assumptions

The preparation of consolidated financial statements re- quires the Allianz Group to make estimates and assump- tions that affect items reported in the consolidated balance sheets and consolidated income statements, and the disclo- sure of contingent assets and liabilities. Actual results could differ from those estimates. The most significant accounting estimates are associated with the reserves for loss and loss adjustment expenses, reserves for insurance and invest- ment contracts, loan loss allowance, fair value and impair- ments of financial instruments, goodwill, deferred acquisi- tion costs, deferred taxes and reserves for pensions and similar obligations.

Cash and cash equivalents

Cash and cash equivalents include balances with banks payable on demand, balances with central banks, cash on hand, treasury bills to the extent they are not included in financial assets held for trading, checks and bills of ex- change which are eligible for refinancing at central banks, subject to a maximum term of three months from the date of acquisition.

Real estate held for investment

Real estate held for investment (i.e., real estate and rights equivalent to real property and buildings, including build- ings on leased land) is carried at cost less accumulated depreciation and impairments. Real estate held for invest- ment is depreciated on a straight-line basis over its esti- mated life, with a maximum of 50 years. When testing for impairment, the fair value of real estate held for investment is determined by the discounted cash flow method. Im-

Financial instruments

Classification, recognition and initial measurement Financial assets within the scope of IAS 39 are either classi- fied as financial assets carried at fair value through income, available-for-sale investments, held-to-maturity invest- ments, loans and advances to banks and customers or as derivative financial instruments used for hedging. Further- more financial assets comprise funds held by others under reinsurance contracts assumed and financial assets for unit-linked contracts.

Financial liabilities within the scope of IAS 39 are either classified as financial liabilities carried at fair value through income, liabilities to banks and customers, investment contracts with policyholders, derivative financial instru- ments used for hedging, financial liabilities for puttable equity instruments, certificated liabilities or participation certificates and subordinated liabilities. Furthermore finan- cial liabilities comprise financial liabilities for unit-linked contracts.

The classification depends on the nature and purpose of the financial instrument and is determined at initial recognition. Financial instruments are initially recognized at fair value plus, in the case of financial instruments not carried at fair value through income, directly attributable transaction costs. Financial instruments are generally recognized and de- recognized on trade date, when the Allianz Group has en- tered into contractual arrangements with counterparties to purchase or sell securities or incur a liability.

Fair value of financial instruments

The Allianz Group applies the IAS 39 fair value hierarchy to determine the fair value of financial instruments.

Active markets - quoted market price

The fair values of financial instruments that are traded in active markets are based on quoted market prices or dealer price quotations on the last exchange trading day prior to and including the balance sheet date. The quoted market price used for a financial asset held by the Allianz Group is the current bid price; the quoted market price used for financial liabilities is the current ask price. The impact of the Allianz Group´s own credit spread on financial liabili- ties carried at fair value is calculated by discounting future nized as an expense as incurred.

Allianz Group Annual Report 2008 Notes to the Consolidated Financial Statements

Consolidated Financial Statements and Notes

Amortized cost of financial instruments

The amortized cost of a financial instrument is the amount at which the financial instrument is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount, and minus any reduction for impair- ment or uncollectability.

Recognition of a day one profit or loss

If the fair value of a financial instrument differs from its initial transaction price (i.e. by comparing it to other ob- servable current market transactions or by using a techni- cal valuation model incorporating only observable market data), it is required that the recognition of a “day one profit or loss“ is consistent with the subsequent measurement of the financial instrument with all the other requirements regarding the calculation of fair value. A profit or loss should be recognized after initial recognition only to the extent that it arises from a change in a factor that market participants would consider in setting a price.

Subsequent measurement of financial instruments

The subsequent measurement of financial instruments depends on their classification as follows:

Financial assets and liabilities carried at fair value through income

Financial assets and liabilities carried at fair value through income include financial assets and liabilities held for trad- ing and financial assets and liabilities designated at fair value through income.

Financial assets and liabilities are classified as held for trading if they have been principally acquired for the pur- pose of generating a profit from short-term fluctuations in price or for the purpose of selling in the near future. Financial assets consist of debt and equity securities, promissory notes and derivative financial instruments with positive fair values that do not meet the criteria for hedge accounting.

Financial liabilities held for trading primarily consist of derivative financial instruments with negative fair values that do not meet the criteria for hedge accounting and obligations to deliver assets arising from short sales of securities, which are carried out in order to benefit from short-term price fluctuations. The securities required to close out short sales are obtained through securities bor- rowing or reverse repurchase agreements.

cash flows at a rate which incorporates the Allianz Group´s observable credit spread.

No active markets - valuation techniques

If the market for a financial instrument is not active, the fair value is determined by using valuation techniques. The valu- ation techniques used are based on market observable in- puts when available. Such market inputs include references to recently quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets, quoted prices for similar instruments from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign cur- rency exchange rates. Where observable market prices are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques include net present value techniques, the dis- counted cash flow method, comparison to similar instru- ments for which observable market prices exist and other valuation models. In the process, appropriate adjustments are made for credit and measurement risks.

Due to the worldwide financial market crisis, some markets faced a significant shortage of liquidity, which affected the valuation techniques used by the Allianz Group to measure fair value. For certain financial instruments, the market has been completely illiquid and market prices were no longer available. In addition, the market prices of certain asset- backed securities (“ABS”)-based products declined signifi- cantly.

For ABS-based products the availability of price quotations from a functioning market was limited during 2008 and as of December 31, 2008. Therefore the valuation of these financial instruments is mainly based on quoted market prices or current market values of very similar financial instruments. The market values used were taken from other market participants that are representative of the market. In all other cases Allianz Group used model-based valuation techniques. Regardless of the valuation technique used, that technique reflects current market conditions and appropriate risk adjustments that market participants would make.

No active market – equity instruments

If the fair value cannot be measured reliably, unquoted equity instruments and derivatives linked to such instruments are stated at cost until a fair value can be measured reliably. These financial instruments are subject to the normal im- pairment procedures.

Financial assets and liabilities held for trading are measured at fair value. Changes in fair value are recognized directly in the consolidated income statement. The recognized net gains and losses include dividends and interest of the un- derlying financial instruments.

Financial assets and liabilities designated at fair value through income are measured at fair value with changes in fair value recorded in the consolidated income statement. The recognized net gains and losses include dividends and interest of the underlying financial instruments. A financial instrument may only be designated at inception as held at fair value through income and cannot be subsequently changed.

Available-for-sale investments

Available-for-sale investments comprise debt and equity securities that are designated as available-for-sale or are not classified as held-to-maturity, loans and advances to banks and customers, or financial assets carried at fair value through income. Available-for-sale investments are recorded at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are included as a separate component of shareholders’ equity, net of deferred taxes and the latent reserve for pre- mium refunds to the extent that policyholders will partici- pate in such gains and losses on the basis of statutory or contractual regulations when they are realized. When an available-for-sale investment is derecognized or deter- mined to be impaired, the cumulative gain or loss previ- ously recorded in shareholders´ equity is transferred and recognized in the consolidated income statement. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level. Available-for-sale equity securities include investments in limited partnerships. The Allianz Group records its invest- ments in limited partnerships at cost, where the ownership interest is less than 20 %, as the limited partnerships do not have a quoted market price and fair value cannot be reliably measured. The Allianz Group accounts for its investments in limited partnerships with ownership interests of 20 % or greater using the equity method due to the rebuttable pre- sumption that the limited partner has no control over the limited partnership.

or determinable payments and fixed maturities for which the Allianz Group has the positive intent and ability to hold to maturity. These securities are recorded at amortized cost using the effective interest method over the life of the secu-