The primary derivative financial instruments used are interest rate derivatives, in particular interest rate swaps which are primarily en- tered into in the course of trading activities. 

Pursuant to IAS 39, derivative financial instruments are reported under financial assets or liabilities held-for-trading. Gains or losses arising from valuation at fair value are included under trading income. 

This applies to free standing derivatives and for bifurcated em- bedded derivatives of hybrid financial instruments that are not used for hedge transactions recognized in the consolidated balance sheet. In contrast, derivatives used in hedge transactions are in principle recognized in accordance with the classification of the hedged item. 

Derivative financial instruments used for hedge transactions are clas- sified as follows: 

The Allianz Group principally uses fair value hedging. Important hedging instruments are interest rate swaps and futures. Hedging in- struments may be implemented for individual transactions (micro hedge) or for a portfolio of similar assets or liabilities (portfolio hedge). The derivative financial instruments used for fair value hedges had a fair value of ¤55 (2002: 33; 2001: 1,925) mn. Ineffec- tiveness in hedge transactions produced a gain of ¤ 1 mn (2002: ¤ 10 mn loss, 2001: ¤ 66 mn gain). 

Additionally, cash flow hedges were used to hedge variable cash- flows exposed to interest rate fluctuations. The swaps utilized had a fair value of ¤ 5 mn; other reserves decreased by ¤ 41 mn. Ineffec- tiveness amounted to – ¤ 4 mn. 

## 41 Related party disclosures 

Allianz Group companies maintain various types of business relations (particularly in the area of insurance, banking and asset management) to related enterprises. Those relations are based on ordinary market terms. In particular, the business relations with associated companies which are active in the insurance business take on various forms and may also include special service, computing, reinsurance, cost-shar- ing and asset management agreements whose terms are deemed appropriate by management. Similar relationships may exist with pension funds, foundations, joint ventures and companies which pro- vide services to Allianz Group companies. 

The following report relates to material business relationships with associated enterprises and enterprises in which the Allianz Group held ownership interest between 10.0 % and 20.0 % during the last fiscal year and enterprises which held such ownership interest in Allianz AG and transactions with associated natural persons which require disclosure. 

## Münchener Rückversicherungs-Gesellschaft AG in Munich (Munich Re) 

At the beginning of fiscal year 2003 the ownership interest of Allianz Group in Munich Re’s share capital was above 20 %. The ownership interest was reduced in the course of the first quarter 2003 to below 20 %. As a result, Munich Re was as of that time no longer an asso- ciated company of the Allianz Group. During the course of fiscal 2003 Allianz Group further reduced its ownership interest in Munich Re and as of December 31, 2003 held only approximately 12.4 % of Mu- nich Re’s share capital. On March 2, 2004 a further reduction of own- ership interest will occur as a result of the exchange of the MILES- bond in Munich Re shares so that Allianz Group’s ownership interest in Munich Re’s share capital will be reduced to 9.4 %. Pursuant to German insurance group solvency rules, Allianz’s interest in Munich Re is no longer considered as a participation. 

Munich Re has also reduced its ownership interest in Allianz AG during 2003 and as of December 31, 2003 Munich Re held 12.2 % of Allianz AG’s share capital. Taking into account the treasury shares held by Allianz Group as of this date this corresponds to an owner- ship percentage of 12.8 %. 

The relationship between Allianz AG and Munich Re was set forth in the past in the so-called Principles of Cooperation of May 2000. After several transactions during 2001 and 2002, including the re- duction of mutual participation in each other and the mutual partic- ipations in other insurance companies, this contract became irrelevant and was formally canceled with effect from December 31, 2003. Also, mutual board interlocks had been terminated. Certain reinsurance relationships between both enterprises will continue. Furthermore, a continuing quota share agreement provides that Munich Re shall pro- vide reinsurance for 10.5 % of the gross self-retention of the insurance business of the companies of Allianz’s German Property-Casualty Group via Allianz AG. According to an agreement dated December 2001 the mutually ceded reinsurance volume is to be adjusted on a step-by-step basis by 2008. The reinsurance relationship between Mu- nich Re and Allianz Leben will also continue on the basis of the old agreements until 2010. In addition, a variety of reinsurance and retro- cession agreements exists between specific subsidiaries of the Allianz Group and Munich Re which determine, which insurance business the Munich Re Group or the Allianz Group will receive. The conditions of those reinsurance arrangements between the Groups are subject to ams-length, third party terms. 

