485BPOS 1 file001.txt HIGH FIVE L 485B DATED APRIL 27, 2009 File Nos. 333-120181 and 811-05618 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ( ) Pre-Effective Amendment No. ( ) ------------ ------------ Post-Effective Amendment No. 8 (X) ------------ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( ) Amendment No. 264 (X) ------------ (CHECK APPROPRIATE BOX OR BOXES.) ALLIANZ LIFE VARIABLE ACCOUNT B (EXACT NAME OF REGISTRANT) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA (NAME OF DEPOSITOR) 5701 GOLDEN HILLS DRIVE, MINNEAPOLIS, MN 55416-1297 (ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (763) 765-2913 (DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE) STEWART D. GREGG, SENIOR SECURITIES COUNSEL ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA 5701 GOLDEN HILLS DRIVE MINNEAPOLIS, MN 55416-1297 (763) 765-2913 (NAME AND ADDRESS OF AGENT FOR SERVICE) IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK THE APPROPRIATE BOX): ____ immediately upon filing pursuant to paragraph (b) of Rule 485 _X__ on April 27, 2009 pursuant to paragraph (b) of Rule 485 ____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485 ____ on (date) pursuant to paragraph (a)(1) of Rule 485 IF APPROPRIATE, CHECK THE FOLLOWING: ____ this post-effective amendment designates a new effective date for a previously filed post-effective amendment. APPROXIMATE DATE OF THE PROPOSED PUBLIC OFFERING: April 27, 2009 TITLES OF SECURITIES BEING REGISTERED: Individual Flexible Purchase Payment Variable Deferred Annuity Contracts PART A - PROSPECTUS 1 THE ALLIANZ HIGH FIVE[{R}] L VARIABLE ANNUITY CONTRACT ISSUED BY ALLIANZ LIFE[{R}] VARIABLE ACCOUNT B AND ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA FOR YOUR CONVENIENCE WE HAVE PROVIDED A GLOSSARY (SEE SECTION 13) THAT DEFINES KEY, CAPITALIZED TERMS THAT ARE USED IN THIS PROSPECTUS. This prospectus describes an individual flexible purchase payment variable deferred annuity contract (Contract) issued by Allianz Life Insurance Company of North America (Allianz Life, we, us, our). The Contract is a "flexible purchase payment" contract because you (the Owner) can make more than one Purchase Payment, subject to certain restrictions. The Contract is "variable" because the Contract Value and any variable Annuity Payments you receive will increase or decrease depending on the performance of the Investment Options you select (in this prospectus, the term "Investment Options" refers only to the variable Investment Choices listed on the following page, and not to any fixed Investment Choices). The Contract is "deferred" because you do not begin receiving regular Annuity Payments immediately. Additional information about the Separate Account has been filed with the Securities and Exchange Commission (SEC) and is available upon written or oral request without charge. A Statement of Additional Information (SAI) dated the same date as this prospectus includes additional information about the annuity offered by this prospectus. The SAI is incorporated by reference into this prospectus. The SAI is filed with the SEC and is available without charge by contacting us at the telephone number or address listed at the back of this prospectus. The table of contents of the SAI appears before the Privacy and Security Statement in this prospectus. The SEC also maintains a website (http://www.sec.gov). The prospectus, the SAI and other information about the Contract are available on the EDGAR database on the SEC's website. Please read this prospectus before investing and keep it for future reference. It contains important information about your annuity and Allianz Life that you ought to know before investing. This prospectus is not an offering in any state, country, or jurisdiction in which we are not authorized to sell the Contracts. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. To the extent that the issuance of this Contract may subject Allianz Life to a duty under section 15(d) of the Securities Exchange Act of 1934 to file reports required by section 13(a) of that Act, Allianz Life is relying on the exemption from such reporting provided by Rule 12h-7 under that Act. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN THIS CONTRACT IS NOT A DEPOSIT OF A BANK OR FINANCIAL INSTITUTION AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL GOVERNMENT AGENCY. AN INVESTMENT IN THIS CONTRACT INVOLVES INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. VARIABLE ANNUITY CONTRACTS ARE COMPLEX INSURANCE AND INVESTMENT VEHICLES. BEFORE YOU INVEST, BE SURE TO ASK YOUR REGISTERED REPRESENTATIVE ABOUT THE CONTRACT'S FEATURES, BENEFITS, RISKS AND FEES, AND WHETHER THE CONTRACT IS APPROPRIATE FOR YOU BASED UPON YOUR FINANCIAL SITUATION AND OBJECTIVES. Dated: April 27, 2009 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 2 This prospectus discusses two versions of the same Contract. The Original Contract first became available on April 29, 2005 and was replaced in most states by the May 2007 Contract. The product features and expenses of Original and May 2007 Contracts differ in certain respects as set out in this prospectus. Unless specifically indicated otherwise, all prospectus language applies equally to both Original and May 2007 Contracts. We currently offer the Investment Options listed below. You can invest in up to 15 Investment Options at any one time. Currently, the only fixed Investment Choices we offer under our general account are the Fixed Period Accounts (FPAs). You can only allocate up to 50% of any Purchase Payment to the FPAs. However, if your Contract includes the Living Guarantees we will make transfers to and from the FPAs to support these guarantees and we may transfer more than 50% of the total Purchase Payments to the FPAs beginning on the second Contract Anniversary. One or more of the Investment Choices may not be available in your state. We may add, substitute or remove Investment Choices in the future. CONTRACTS WITH THE GUARANTEED PRINCIPAL VALUE (GPV) BENEFIT OR THE GUARANTEED ACCOUNT VALUE (GAV) BENEFIT ARE SUBJECT TO SYSTEMATIC TRANSFERS BETWEEN YOUR SELECTED INVESTMENT OPTIONS AND THE FPAS. THIS MEANS THAT YOU MAY NOT ALWAYS BE ABLE TO FULLY PARTICIPATE IN ANY UPSIDE POTENTIAL RETURNS AVAILABLE FROM THE INVESTMENT OPTIONS AND YOUR CONTRACT VALUE MAY POTENTIALLY BE LESS THAN THE CONTRACT VALUE YOU WOULD HAVE HAD WITHOUT THE GPV OR GAV BENEFIT. TRANSFERS OUT OF THE FPAS MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT THAT MAY INCREASE OR DECREASE YOUR CONTRACT VALUE AND/OR THE AMOUNT OF THE TRANSFER. INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT AIM AZL[{R}] AIM International Equity Fund BLACKROCK AZL[{R} ]BlackRock Capital Appreciation Fund AZL[{R}] BlackRock Growth Fund AZL[{R}] International Index Fund AZL[{R}] Money Market Fund BlackRock Global Allocation V.I. Fund COLUMBIA AZL[{R}] Columbia Mid Cap Value Fund AZL[{R}] Columbia Small Cap Value Fund AZL[{R}] Columbia Technology Fund DAVIS AZL[{R}] Davis NY Venture Fund Davis VA Financial Portfolio DREYFUS AZL[{R}] Dreyfus Equity Growth Fund AZL[{R}] S&P 500 Index Fund AZL[{R}] Small Cap Stock Index Fund FIRST TRUST AZL[{R}] First Trust Target Double Play Fund FRANKLIN TEMPLETON AZL[{R}] Franklin Small Cap Value Fund AZL[{R} ]Franklin Templeton Founding Strategy Plus Fund Franklin Global Real Estate Securities Fund Franklin Growth and Income Securities Fund Franklin High Income Securities Fund Franklin Income Securities Fund Franklin Large Cap Growth Securities Fund Franklin Rising Dividends Securities Fund Franklin Small-Mid Cap Growth Securities Fund Franklin Templeton VIP Founding Funds Allocation Fund Franklin U.S. Government Fund Franklin Zero Coupon Fund 2010 Mutual Global Discovery Securities Fund Mutual Shares Securities Fund Templeton Foreign Securities Fund Templeton Global Bond Securities Fund Templeton Growth Securities Fund FUND OF FUNDS AZL[{R}] Allianz Global Investors Select Fund AZL[{R}] Balanced Index Strategy Fund AZL[{R}] Fusion Balanced Fund AZL[{R}] Fusion Conservative Fund AZL[{R}] Fusion Growth Fund AZL[{R}] Fusion Moderate Fund AZL[{R}] Moderate Index Strategy Fund JENNISON AZL[{R}] Jennison 20/20 Focus Fund J.P. MORGAN AZL[{R}] JPMorgan Large Cap Equity Fund AZL[{R}] JPMorgan U.S. Equity Fund NICHOLAS-APPLEGATE AZL[{R}] NACM International Fund OPPENHEIMER CAPITAL AZL[{R}] OCC Growth Fund AZL[{R}] OCC Opportunity Fund OpCap Mid Cap Portfolio[(1)] OPPENHEIMER FUNDS AZL[{R}] Oppenheimer Global Fund AZL[{R}] Oppenheimer International Growth Fund Oppenheimer High Income Fund/VA PIMCO AZL[{R}] PIMCO Fundamental IndexPLUS Total Return Fund PIMCO VIT All Asset Portfolio PIMCO VIT CommodityRealReturn[TM] Strategy Portfolio PIMCO VIT Emerging Markets Bond Portfolio PIMCO VIT Global Bond Portfolio (Unhedged) PIMCO VIT Global Multi-Asset Portfolio PIMCO VIT High Yield Portfolio PIMCO VIT Real Return Portfolio PIMCO VIT StocksPLUS[{R}] Growth and Income Portfolio[(2)] PIMCO VIT Total Return Portfolio PRUDENTIAL SP International Growth Portfolio SP Strategic Partners Focused Growth Portfolio SCHRODER AZL[{R}] Schroder Emerging Markets Equity Fund AZL[{R}] Schroder International Small Cap Fund TARGETPLUS PORTFOLIOS AZL TargetPLUS[SM] Balanced Fund AZL TargetPLUS[SM] Equity Fund AZL TargetPLUS[SM] Growth Fund AZL TargetPLUS[SM] Moderate Fund TURNER AZL[{R}] Turner Quantitative Small Cap Growth Fund VAN KAMPEN AZL[{R}] Van Kampen Comstock Fund AZL[{R}] Van Kampen Equity and Income Fund AZL[{R}] Van Kampen Global Franchise Fund AZL[{R}] Van Kampen Global Real Estate Fund AZL[{R}] Van Kampen Growth and Income Fund AZL[{R}] Van Kampen Mid Cap Growth Fund (1)A fund of the Premier VIT series. (2)The fund will be liquidated on or about July 17, 2009 and will then no longer be available as an Investment Option under the Contract. For additional information regarding the liquidation, please see the PIMCO VIT StocksPLUS Growth and Income Portfolio prospectus. Any Contract Value remaining in the Investment Option at the time the fund is liquidated will be transferred to the AZL Money Market Fund. NOTE: Contracts issued in the state of Oregon are issued as individual modified single payment variable deferred annuity contracts. Contracts issued in the state of Massachusetts are issued as individual limited payment variable deferred annuity contracts. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 3 TABLE OF CONTENTS FEE TABLES........................4 Contract Owner Transaction Expenses4 Contract Owner Periodic Expenses5 Annual Operating Expenses of the Investment Options5 Examples........................6 1.THE VARIABLE ANNUITY CONTRACT...7 Ownership.......................8 2.THE ANNUITY PHASE...............9 Income Date.....................9 Partial Annuitization...........9 Annuity Options................10 Annuity Payments...............12 3.PURCHASE.......................13 Purchase Payments..............13 Automatic Investment Plan (AIP)14 Allocation of Purchase Payments14 Tax-Free Section 1035 Exchanges14 Accumulation Units/Computing the Contract Value15 4.INVESTMENT OPTIONS.............16 Substitution and Limitation on Further Investments24 Transfers......................24 Excessive Trading and Market Timing26 Dollar Cost Averaging (DCA) Program27 Flexible Rebalancing...........28 Financial Advisers - Asset Allocation Programs28 Voting Privileges..............29 5.OUR GENERAL ACCOUNT............29 Fixed Period Accounts (FPAs)...29 Market Value Adjustment (MVA)..31 6.GUARANTEED VALUES UNDER THE LIVING GUARANTEES33 Calculating the GPV and GAV....34 GPV and GAV Transfers..........36 The GPV and GAV Fixed Account Minimums38 Resetting the GPV and GAV Benefits38 Other Information on the GPV and GAV Benefits39 7.EXPENSES.......................39 Mortality and Expense Risk (M&E) Charges40 Contract Maintenance Charge....40 Withdrawal Charge..............40 Transfer Fee...................43 Premium Taxes..................43 Income Taxes...................43 Investment Option Expenses.....43 8.TAXES..........................44 Annuity Contracts in General...44 Qualified Contracts............44 Multiple Contracts.............45 Partial 1035 Exchanges.........45 Distributions - Non-Qualified Contracts45 Distributions - Qualified Contracts46 Assignments, Pledges and Gratuitous Transfers47 Death Benefits.................47 Withholding....................47 Federal Estate Taxes...........48 Generation-Skipping Transfer Tax48 Foreign Tax Credits............48 Annuity Purchases by Nonresident Aliens and Foreign Corporations...........48 Possible Tax Law Changes.......48 Diversification................48 Required Distributions.........48 9.ACCESS TO YOUR MONEY...........49 Partial Withdrawal Privilege...50 Guaranteed Withdrawal Benefit (GWB)50 Systematic Withdrawal Program..52 The Minimum Distribution Program and Required Minimum Distribution (RMD) Payments 52 Suspension of Payments or Transfers53 10.ILLUSTRATIONS.................53 11.DEATH BENEFIT.................53 Traditional Guaranteed Minimum Death Benefit (Traditional GMDB)54 Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB)................54 GMDB Adjusted Partial Withdrawal Formula54 Termination of the Death Benefit55 Death of the Owner Under Inherited IRA Contracts55 Death of the Owner and/or Annuitant Under All Other Contracts............55 Death Benefit Payment Options..58 12.OTHER INFORMATION.............58 Allianz Life...................58 The Separate Account...........58 Distribution...................59 Additional Credits for Certain Groups60 Administration/Allianz Service Center60 Legal Proceedings..............61 Financial Statements...........61 13.GLOSSARY......................62 14.TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION (SAI)65 15.PRIVACY AND SECURITY STATEMENT66 APPENDIX A - ANNUAL OPERATING EXPENSES FOR EACH INVESTMENT OPTION...........68 APPENDIX B - CONDENSED FINANCIAL INFORMATION73 APPENDIX C - GAV CALCULATION EXAMPLE80 APPENDIX D - DEATH BENEFIT CALCULATION EXAMPLES82 APPENDIX E - WITHDRAWAL CHARGE EXAMPLES84 FOR SERVICE OR MORE INFORMATION..86 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 4 The following is a list of common abbreviations used in this prospectus: FPA = FIXED PERIOD ACCOUNT GWB = GUARANTEED WITHDRAWAL BENEFIT GAV = GUARANTEED ACCOUNT VALUE MAV = MAXIMUM ANNIVERSARY VALUE GPV = GUARANTEED PRINCIPAL VALUE MVA = MARKET VALUE ADJUSTMENT GMDB = GUARANTEED MINIMUM DEATH BENEFIT FEE TABLES The following tables describe the fees and expenses that you will pay when owning and taking a withdrawal from the Contract. For more information, see section 7, Expenses. The first tables describe the fees and expenses that you will pay if you take a withdrawal from the Contract during the Accumulation Phase or if you make transfers. CONTRACT OWNER TRANSACTION EXPENSES[(1)] WITHDRAWAL CHARGE DURING THE ACCUMULATION PHASE[(2),(3)] (as a percentage of each Purchase Payment withdrawn)
MAY 2007 CONTRACT ORIGINAL CONTRACT (first issued April 29, 2005) NUMBER OF COMPLETE YEARS SINCE WE RECEIVED YOUR PURCHASE CHARGE NUMBER OF COMPLETE YEARS SINCE WE RECEIVED YOUR PURCHASE CHARGE PAYMENT PAYMENT 0 8.5% 0 8% 1 7.5% 1 7% 2 5.5% 2 5% 3 3.0% 3 years or more 0% 4 years or more 0%
TRANSFER FEE[(4)]...................$25 PREMIUM TAXES[(5)]...........0% to 3.5% (as a percentage of each Purchase Payment) (1)Amounts withdrawn or transferred out of a FPA may be subject to an MVA. This MVA may increase or decrease your Contract Value and/or your transfer or withdrawal amount. For more information, please see section 5, Our General Account - Market Value Adjustment (MVA). (2)The partial withdrawal privilege for each Contract Year is equal to 10% of your total Purchase Payments, less any previous withdrawals taken under the partial withdrawal privilege, GWB, or as an RMD payment in the same Contract Year and before any MVA. We will not deduct a withdrawal charge from amounts withdrawn under the partial withdrawal privilege, but an MVA may apply. There is no partial withdrawal privilege during the Annuity Phase. Any unused partial withdrawal privilege in one Contract Year does not carry over to the next Contract Year. For more details and additional information on other penalty-free withdrawal options, please see the discussion of the partial withdrawal privilege and other information that appears in section 9, Access to Your Money. (3)The total amount under your Contract that is subject to a withdrawal charge is the Withdrawal Charge Basis. The Withdrawal Charge Basis is equal to the total Purchase Payments, less any Purchase Payments withdrawn (excluding any penalty-free withdrawals), less any withdrawal charges. (4)The first twelve transfers in a Contract Year are free. Dollar cost averaging transfers, flexible rebalancing transfers, and GPV or GAV Transfers do not count against any free transfers we allow. Currently, we deduct this fee only during the Accumulation Phase, but we reserve the right to deduct this fee during the Annuity Phase. For more information, please see section 7, Expenses - Transfer Fee. (5)It is our current practice not to make deductions from the Contract to reimburse ourselves for premium taxes that we pay, although we reserve the right to make such a deduction in the future. For more information, please see section 7, Expenses - Premium Taxes. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 5 CONTRACT OWNER PERIODIC EXPENSES The next tables describe the fees and expenses that you will pay periodically during the time that you own your Contract, not including the Investment Options' fees and expenses. The Separate Account annual expenses include the mortality and expense risk (M&E) charges. DURING THE ACCUMULATION PHASE: CONTRACT MAINTENANCE CHARGE[(6)]....$40 (per Contract per year) SEPARATE ACCOUNT ANNUAL EXPENSES The annualized rate is realized on a daily basis as a percentage of the net asset value of an Investment Option.
M&E CHARGES TRADITIONAL GMDB ENHANCED GMDB No Living Guarantees or Living Guarantees with the GPV Benefit 1.65% 1.85% Living Guarantees with the GAV Benefit 1.75% 1.95%
DURING THE ANNUITY PHASE: CONTRACT MAINTENANCE CHARGE[(7)]....$40 (per Contract per year) SEPARATE ACCOUNT ANNUAL EXPENSES - IF YOU REQUEST VARIABLE ANNUITY PAYMENTS The annualized rate is realized on a daily basis as a percentage of the net asset value of an Investment Option. M&E CHARGE[(8)].................1.65% (6)We waive the contract maintenance charge if the Contract Value is at least $75,000 at the time we are to deduct the charge. If the total Contract Value of all your Contracts that are registered with the same social security number is at least $75,000, the charge is waived on all your Contracts. For more information, please see section 7, Expenses - Contract Maintenance Charge. (7)We waive the contract maintenance charge during the Annuity Phase if your Contract Value on the Income Date is at least $75,000. For more information, please see section 7, Expenses - Contract Maintenance Charge. (8)Because the Contract allows Partial Annuitization, it is possible for different portions of the Contract to be in both the Accumulation and Annuity Phases at the same time. It is also possible to have different M&E charges on different portions of the Contract at the same time if you request variable Annuity Payments under a Partial Annuitization. For more information, please see section 2, The Annuity Phase - Partial Annuitization. ANNUAL OPERATING EXPENSES OF THE INVESTMENT OPTIONS This table describes the total annual operating expenses associated with the Investment Options and shows the minimum and maximum expenses for the period ended December 31, 2008, charged by any of the Investment Options before the effect of any contractual expense reimbursement or fee waiver. We show the expenses as a percentage of an Investment Option's average daily net assets.
MINIMUM MAXIMUM Total annual Investment Option operating expenses* 0.63% 1.93% (including management fees, distribution or 12b-1 fees, and other expenses) before fee waivers and expense reimbursements
* Some of the Investment Options or their affiliates may also pay service fees to us or our affiliates. The amount of these fees may be different for each Investment Option. The maximum current fee is 0.25%. The amount of these fees, if deducted from Investment Option assets, is reflected in the above table and is disclosed in Appendix A. Appendix A also contains more details regarding the annual operating expenses for each of the Investment Options, including the amount and effect of any waivers and/or reimbursements. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 6 EXAMPLES The expenses for your Contract may be different from those shown in the examples below depending upon which Investment Option(s) you select and the benefits that apply. These examples are intended to help you compare the cost of investing in a Contract with the cost of investing in other variable annuity contracts. These costs include Contract Owner transaction expenses, Contract Owner periodic expenses, and the annual operating expenses of the Investment Options before the effect of reimbursements and waivers. You should not consider the examples below as a representation of past or future expenses. Actual expenses may be greater or less than those shown. The entire $40 contract maintenance charge is deducted in the examples at the end of each year during the Accumulation Phase. Please note that this charge does not apply during the Accumulation Phase if your Contract Value at the end of year is at least $75,000, or during the Annuity Phase if your Contract Value on the Income Date is at least $75,000. Transfer fees may apply, but are not reflected in these examples. For additional information, see section 7, Expenses. If you take a full withdrawal at the end of each time period, and assuming a $10,000 investment and a 5% annual return on your money, you may pay expenses as follows. a) May 2007 Contract with the Enhanced GMDB and the Living Guarantees with the GAV Benefit (the highest M&E charge of 1.95%). b) May 2007 Contract with the Traditional GMDB and either no Living Guarantees or the Living Guarantees with the GPV Benefit (the lowest M&E charge of 1.65%). c) Original Contract with the Enhanced GMDB and the Living Guarantees with the GAV Benefit (the highest M&E charge of 1.95%).
TOTAL ANNUAL INVESTMENT OPTION OPERATING EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS BEFORE ANY FEE WAIVERS OR EXPENSE REIMBURSEMENTS OF: a) $1,359 $1,886 $2,195 $4,504 1.93% (the maximum Investment Option operating expense) b) $1,330 $1,799 $2,055 $4,245 c) $1,300 $1,830 $2,195 $4,504 a) $1,230 $1,504 $1,570 $3,315 0.63% (the minimum Investment Option operating expense) b) $1,200 $1,414 $1,420 $3,015 c) $1,171 $1,449 $1,570 $3,315
If you do not take a full withdrawal or if you take a Full Annuitization* of the Contract at the end of each time period and assuming a $10,000 investment and a 5% annual return on your money, you may pay expenses as follows.
TOTAL ANNUAL INVESTMENT OPTION OPERATING EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS BEFORE ANY FEE WAIVERS OR EXPENSE REIMBURSEMENTS OF: a) $430 $1,304 $2,195 $4,504 1.93% (the maximum Investment Option operating expense) b) $401 $1,217 $2,055 $4,245 c) $430 $1,304 $2,195 $4,504 a) $301 $922 $1,570 $3,315 0.63% (the minimum Investment Option operating expense) b) $271 $832 $1,420 $3,015 c) $301 $922 $1,570 $3,315
* Annuity Payments are generally not available until the second Contract Anniversary in most states. See Appendix B for condensed financial information regarding the Accumulation Unit values (AUVs) for the highest and lowest M&E charges. See the appendix to the Statement of Additional Information for condensed financial information regarding the AUVs for other expense levels. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 7 1. THE VARIABLE ANNUITY CONTRACT The Contract is no longer offered for sale. However, as an existing Owner, you can make additional Purchase Payments to your Contract during the Accumulation Phase subject to certain restrictions. An annuity is a contract between you (the Owner), and an insurance company (in this case Allianz Life), where you make payments to us and, in turn, we promise to make regular periodic income payments (Annuity Payments) to the Payee. The Contract is tax deferred. You generally are not taxed on any earnings or appreciation on the assets in your Contract until you take money out of your Contract. FOR QUALIFIED CONTRACTS, THE TAX DEFERRAL IS PROVIDED THROUGH COMPLIANCE WITH SPECIALIZED TAX-QUALIFICATION RULES, AND YOU DO NOT RECEIVE ANY ADDITIONAL TAX BENEFIT BY PURCHASING THE CONTRACT. The Contract has an Accumulation Phase and an Annuity Phase. You can take withdrawals from the Contract during the Accumulation Phase and, subject to certain restrictions, you can make additional Purchase Payments. The Accumulation Phase begins on the Issue Date and ends upon the earliest of the following. o The Business Day before the Income Date if you take a Full Annuitization. o The Business Day we process your request for a full withdrawal. o Upon the death of any Owner (or the Annuitant if the Contract is owned by a non-individual), it will terminate on the Business Day we receive in good order at our Service Center, both due proof of death and an election of the death benefit payment option, unless the spouse of the deceased continues the Contract. The Annuity Phase is the period during which we will make Annuity Payments from the Contract. Annuity Payments must begin on a designated date (the Income Date) that is at least two years after your Issue Date. If you apply the entire Contract Value to Annuity Payments, we call that a Full Annuitization, and if you apply only part of the Contract Value to Annuity Payments, we call that a Partial Annuitization. The maximum number of annuitizations you can have at any one time is five. Because the Contract allows Partial Annuitization, it is possible that some portion of the Contract will be in the Accumulation Phase and other portions will be in the Annuity Phase at the same time. The Annuity Phase begins on the Income Date (or the first Income Date if you take any Partial Annuitizations) and ends when all portion(s) of the Contract that you apply to Annuity Payments have terminated, as indicated in section 2, The Annuity Phase. Your Investment Choices include the Investment Options and any available general account Investment Choice. You cannot invest in more than 15 Investment Options at any one time. Depending upon market conditions, you can gain or lose value in the Contract based on the investment performance of the Investment Options. The Investment Options are designed to offer the opportunity for a better return than any available general account Investment Choice; however, this is not guaranteed. The amount of Contract Value you are able to accumulate in your Contract during the Accumulation Phase and the amount of any variable Annuity Payments we make during the Annuity Phase depend in large part upon the investment performance of any Investment Options you select. The only general account Investment Choices available during the Accumulation Phase are the Fixed Period Accounts (FPAs). You can allocate up to 50% of any Purchase Payment to the FPAs during the Accumulation Phase. However, in some states, the FPAs may only be available for GPV and GAV Transfers we make if your Contract includes the Living Guarantees. In addition, we may transfer more than 50% of the total Purchase Payments to the FPAs beginning on the second Contract Anniversary in order to support the Living Guarantees. The FPAs have Account Periods ranging from one to ten years. Only one FPA is available for Purchase Payments or transfers in each Contract Year. Amounts allocated to the FPAs earn interest that we declare periodically. If you have money invested in the FPAs, the amount of Contract Value you are able to accumulate in your Contract during the Accumulation Phase will depend in part upon the total interest credited to your Contract. Withdrawals or transfers from the FPAs may be subject to a Market Value Adjustment. For more information, please see section 5, Our General Account - Market Value Adjustment (MVA). We will not make any changes to your Contract without your permission except as may be required by law. THE CONTRACT WILL TERMINATE WHEN: o the Accumulation Phase has terminated, o the Annuity Phase has terminated, and/or o all applicable death benefit payments have been made. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 8 STATE SPECIFIC CONTRACT RESTRICTIONS If you purchased a Contract, it will be subject to the law of the state in which it is issued. Some of the terms of your Contract may differ from the terms of a Contract delivered in another state because of state-specific legal requirements. Areas in which there may be state-specific Contract provisions may include the following. o The withdrawal charge schedule. o Availability of Investment Options, Annuity Options, DCA programs, endorsements, and/or riders. o Free look rights. o Selection of certain Income Dates. o Restrictions on your ability to make additional Purchase Payments. o Selection of certain assumed investment rates for variable Annuity Payments. o Our ability to restrict transfer rights. If you would like information regarding state-specific Contract provisions, you should contact your registered representative or contact our Service Center at the toll free number listed at the back of this prospectus. OWNERSHIP OWNER You, as the Owner, have all the rights under the Contract. The Owner is designated at Contract issue. You can change Owners at any time subject to our approval. However, Qualified Contracts can only have one Owner and there may be Internal Revenue Service (IRS) or other restrictions on changing the ownership of a Qualified Contract. Upon our approval, any ownership change will become effective as of the date you sign the request. Changing ownership may be a taxable event. You should consult with your tax adviser before doing this. JOINT OWNER A Non-Qualified Contract can be owned by up to two Owners. Upon the death of either Joint Owner, the surviving Joint Owner will become the sole primary Beneficiary. We will then treat any other Beneficiary designation on record at the time of death as a contingent Beneficiary. You can change Joint Owners under the same conditions as described for an Owner. If a Contract has Joint Owners, we require the signature of both Owners on any forms that are submitted to our Service Center, unless we allow otherwise. NOTE FOR PARTIAL ANNUITIZATIONS: Partial Annuitizations are not available to Joint Owners. There can be only one Owner, the Owner must be the Annuitant, and we will not allow the Owner to add a joint Annuitant. ANNUITANT The Annuitant is the individual on whose life we base Annuity Payments. Subject to our approval, you designate an Annuitant and you can add a joint Annuitant for the Annuity Phase if you take a Full Annuitization. You may change the Annuitant at any time before the Income Date unless the Contract is owned by a non-individual (for example, a qualified plan or trust). You cannot change the Annuitant if the Contract is owned by a non-individual, but you can add a joint Annuitant (subject to our approval) for the Annuity Phase if you take a Full Annuitization. For Qualified Contracts, the Owner must be the Annuitant unless the Contract is owned by a qualified plan or is part of a custodial arrangement. DESIGNATING DIFFERENT PERSONS AS OWNER(S) AND ANNUITANT(S) CAN HAVE IMPORTANT IMPACTS ON WHETHER A DEATH BENEFIT IS PAID, AND ON WHO WOULD RECEIVE IT. USE CARE WHEN DESIGNATING OWNERS AND ANNUITANTS, AND CONSULT YOUR REGISTERED REPRESENTATIVE IF YOU HAVE QUESTIONS. PAYEE The Payee is the person or entity you designate (subject to our approval) to receive Annuity Payments during the Annuity Phase. The Owner will receive tax reporting on those payments. For Non-Qualified Contracts, an Owner or Annuitant can be the Payee, but it is not required. For Qualified Contracts owned by a qualified plan, the qualified plan must be the Payee. For all other Qualified Contracts, the Owner is not required to be the Payee, but the Owner cannot transfer or assign his or her rights under the Contract to someone else. If you do not designate a Payee by the Income Date, we will make Annuity Payments to the Owner unless the Contract is a Qualified Contract owned by a qualified plan. The Owner can change the Payee at any time, subject to our approval, provided that designation of a Payee is consistent with federal and state laws and regulations. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 9 BENEFICIARY The Beneficiary is the person(s) or entity you designate at Contract issue to receive any death benefit. You can change the Beneficiary or contingent Beneficiary at any time before your death unless you name an irrevocable Beneficiary. If you do not designate a Beneficiary, any death benefit will be paid to your estate. NOTE FOR JOINT OWNERS: For jointly owned Contracts, the sole primary Beneficiary will be the surviving Joint Owner. For Contracts that are jointly owned by spouses, if both spousal Joint Owners die before we pay the death benefit, we will pay the death benefit to the contingent Beneficiaries, or to the estate of the Joint Owner who died last if there are no named contingent Beneficiaries. However, for tax reasons, if the Joint Owners were not spouses and both Joint Owners die before we pay the death benefit, we will pay the death benefit to the estate of the Joint Owner who died last. ASSIGNMENT OF A CONTRACT An authorized request specifying the terms of an assignment of a Contract must be provided to our Service Center and approved by us. We will not be liable for any payment made or action taken before we record the assignment. An assignment may be a taxable event. We will not be responsible for the validity or tax consequences of any assignment. After the death benefit has become payable, an assignment can only be made with our consent. If the Contract is assigned, your rights may only be exercised with the consent of the assignee of record. Qualified Contracts generally cannot be assigned. 2. THE ANNUITY PHASE You can apply your Contract Value to regular periodic income payments (Annuity Payments). A Full Annuitization occurs when you apply the entire Contract Value to Annuity Payments. A Partial Annuitization occurs when you apply only part of your Contract Value to Annuity Payments. The Payee will receive the Annuity Payments. You will receive tax reporting on those payments, however, whether or not you are the Payee. We may require proof of the Annuitant(s)' age before making any life contingent Annuity Payment. If the age or gender of the Annuitant(s) have been misstated, the amount payable will be the amount that would have been provided at the true age or gender. NOTE: YOU WILL BE REQUIRED TO TAKE A FULL ANNUITIZATION OF YOUR CONTRACT ON OR BEFORE THE MAXIMUM PERMITTED INCOME DATE IF, AT THAT TIME, YOU HAVE NOT REDUCED YOUR CONTRACT VALUE TO ZERO. At our discretion, we may extend the maximum permitted Income Date subject to the requirements of applicable law. The maximum permitted Income Date may vary depending on the broker/dealer you purchased your Contract through and your state of residence. UPON FULL ANNUITIZATION YOU WILL NO LONGER HAVE A CONTRACT VALUE, ANY PERIODIC WITHDRAWAL OR INCOME PAYMENTS (OTHER THAN ANNUITY PAYMENTS) WILL STOP, AND THE DEATH BENEFIT WILL TERMINATE. IN ADDITION, IF YOUR CONTRACT INCLUDES THE LIVING GUARANTEES, THE FPAS AND THE GUARANTEED WITHDRAWAL BENEFIT WILL NO LONGER BE AVAILABLE TO YOU AND YOU WILL NO LONGER RECEIVE ANY TRUE UPS. If you have not selected an Annuity Option we will make payments under the default option described in the "Annuity Payments" discussion of this section. INCOME DATE The Income Date is the date Annuity Payments will begin. Your Income Date is specified in your Contract as the maximum permitted date allowed for your Contract, which is the first day of the calendar month following the later of: a) the Annuitant's 90th birthday, or b) ten years from the Issue Date. This limitation may not apply when the Contract is issued to a charitable remainder trust. You can make an authorized request for a different Income Date, however, any such request is subject to our approval. Your Income Date must be the first day of a calendar month and must be at least two years after the Issue Date. Some states may require us to allow you to select an earlier Income Date. The Income Date will never be later than what is permitted under applicable law. An earlier Income Date may be required to satisfy minimum required distribution rules under certain Qualified Contracts. Your election to start Annuity Payments may involve an MVA if any of your Contract Value is in a FPA on the Income Date. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 10 PARTIAL ANNUITIZATION PARTIAL ANNUITIZATIONS ARE NOT AVAILABLE TO EVERYONE. THERE CAN BE ONLY ONE OWNER, THE OWNER MUST BE THE ANNUITANT, AND WE WILL NOT ALLOW THE OWNER TO ADD A JOINT ANNUITANT. You can take Partial Annuitizations as Annuity Payments after the second Contract Anniversary. Partial Annuitizations are not available after you take a Full Annuitization. If you take a Full Annuitization, the Accumulation Phase of the Contract will end. You can take one Partial Annuitization every 12 months. THE MAXIMUM NUMBER OF ANNUITIZATIONS WE ALLOW AT ANY ONE TIME IS FIVE. We do not allow you to allocate additional Contract Value to an existing stream of Annuity Payments. You also cannot transfer any amounts allocated to a stream of Annuity Payments to any other portion of the Contract. If you have four Partial Annuitizations and you would like to take a fifth, you must take a Full Annuitization and apply the entire remaining Contract Value to Annuity Payments, and the Accumulation Phase of the Contract will end. The amounts you apply to a Partial Annuitization and Annuity Payments we make under a Partial Annuitization are not subject to the withdrawal charge. A Partial Annuitization will decrease the Contract Value, the Withdrawal Charge Basis, the GMDB value, and for Contracts with the Living Guarantees, it will also decrease the GPV or GAV. This will decrease the amounts available for withdrawals, additional Annuity Payments, and payment of the death benefit. For more information, see section 6, Guaranteed Values Under the Living Guarantees; section 7, Expenses - Withdrawal Charge; and see section 11, Death Benefit - GMDB Adjusted Partial Withdrawal Formula. FOR TAX PURPOSES, ANNUITY PAYMENTS WE MAKE UNDER A PARTIAL ANNUITIZATION WILL BE TREATED AS PARTIAL WITHDRAWALS AND NOT AS ANNUITY PAYMENTS. However, once the entire Contract Value has been reduced to zero, we intend to treat all Annuity Payments we make after that as annuity payments (and not withdrawals) for tax purposes. If you take a Partial Annuitization(s) and subsequently take a full withdrawal of the entire remaining Contract Value, all Annuity Payments we make on or after the Business Day you take the withdrawal, should be treated as annuity payments (and not withdrawals) for tax purposes. If the Annuity Payments we make are treated as withdrawals (and not annuity payments) for tax purposes, under Non-Qualified Contracts, any gains in the entire Contract will be considered to be distributed before Purchase Payments and will be subject to ordinary income tax. For Qualified Contracts, in most cases, the entire Annuity Payment we make under a Partial Annuitization will be subject to ordinary income taxes. If any Owner is younger than age 59 1/2, the taxable portion of the Annuity Payments we make under a Partial Annuitization may also be subject to a 10% federal penalty tax. Partial Annuitizations may also affect the tax treatment of any future Annuity Payments. YOU SHOULD CONSULT A TAX ADVISER BEFORE REQUESTING A PARTIAL ANNUITIZATION. ANNUITY OPTIONS You can choose one of the income plans (Annuity Options) described below or any other payment option to which we agree. Before the Income Date, you can select and/or change the Annuity Option with at least 30 days written notice to us. After Annuity Payments begin, you cannot change the Annuity Option. Annuity Payments will usually be lower if you select an Annuity Option that requires us to make more frequent Annuity Payments or to make payments over a longer period of time. For example, the guaranteed initial monthly fixed payout rates under Annuity Option 4 with a guarantee period of 20 years or more are the lowest fixed rates we offer, and the guaranteed initial monthly fixed payout rates under Annuity Option 1 are the highest fixed rates we offer. Annuity Payments will also be lower if you request Annuity Payments at an early age (for example, when the Annuitant is age 50) as opposed to waiting until the Annuitant is older (for example, when the Annuitant is age 70). OPTION 1. LIFE ANNUITY. We will make Annuity Payments during the life of the Annuitant, and the last payment will be the one that is due before the Annuitant's death. If the Annuitant dies shortly after the Income Date, the Payee may receive less than your investment in the Contract. OPTION 2. LIFE ANNUITY WITH PAYMENTS OVER 5, 10, 15 OR 20 YEARS GUARANTEED. We will make Annuity Payments during the life of the Annuitant. If you take one single Full Annuitization and the Annuitant dies before the end of the selected guaranteed period, we will continue to make Annuity Payments to the Payee for the rest of the guaranteed period. Alternatively, the Owner may elect to receive a lump sum payment. Under a Partial Annuitization, if the Annuitant dies before the end of the selected guaranteed period, we will make a lump sum payment to the Beneficiary. The lump sum payment is equal to the present value of the remaining guaranteed Annuity Payments as of the date we receive proof of The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 11 the Annuitant's death and a payment election form at our Service Center. For variable Annuity Payments, in most states, we base the remaining guaranteed Annuity Payments on the current value of the Annuity Units and we use the assumed investment rate to calculate the present value. For fixed payouts, in most states, we calculate the present value of the remaining guaranteed Annuity Payments using the Statutory Calendar Year Interest Rate based on the NAIC Standard Valuation Law for Single Premium Immediate Annuities corresponding to the Income Date. However, some states require us to use different interest rates for variable and fixed payouts for the present value calculation. We require proof of the Annuitant's death and return of the Contract before we will make any lump sum payment. There are no additional costs associated with a lump sum payment. OPTION 3. JOINT AND LAST SURVIVOR ANNUITY. We will make Annuity Payments during the lifetimes of the Annuitant and the joint Annuitant. Upon the death of one Annuitant, Annuity Payments to the Payee will continue during the lifetime of the surviving joint Annuitant, at a level of 100%, 75% or 50% of the previous amount, as selected by the Owner. Annuity Payments will stop with the last payment that is due before the last surviving joint Annuitant's death. If both Annuitants die shortly after the Income Date, the Payee may receive less than your investment in the Contract. This Annuity Option is not available to you under a Partial Annuitization. OPTION 4. JOINT AND LAST SURVIVOR ANNUITY WITH PAYMENTS OVER 5, 10, 15 OR 20 YEARS GUARANTEED. We will make Annuity Payments during the lifetimes of the Annuitant and the joint Annuitant. Upon the death of one Annuitant, Annuity Payments will continue to the Payee during the lifetime of the surviving joint Annuitant at 100% of the amount that was paid when both Annuitants were alive. However, if both joint Annuitants die before the end of the selected guaranteed period, we will continue to make Annuity Payments to the Payee for the rest of the guaranteed period. Alternatively, the Owner may elect to receive a lump sum payment equal to the present value of the remaining guaranteed Annuity Payments as of the date we receive proof of the last surviving joint Annuitant's death and a payment election form at our Service Center. For variable Annuity Payments, in most states, we base the remaining guaranteed Annuity Payments on the current value of the Annuity Units and we use the assumed investment rate to calculate the present value. For fixed payouts, in most states, we calculate the present value of the remaining guaranteed Annuity Payments using the Statutory Calendar Year Interest Rate based on the NAIC Standard Valuation Law for Single Premium Immediate Annuities corresponding to the Income Date. However, some states require us to use different interest rates for variable and fixed payouts for the present value calculation. We require proof of death of both joint Annuitants and return of the Contract before we will make any lump sum payment. There are no additional costs associated with a lump sum payment. This Annuity Option is not available to you under a Partial Annuitization. OPTION 5. REFUND LIFE ANNUITY. We will make Annuity Payments during the lifetime of the Annuitant, and the last payment will be the one that is due before the Annuitant's death. After the Annuitant's death, the Payee may receive a lump sum refund. For a fixed payout, the amount of the refund will equal the amount applied to this Annuity Option minus the total of all Annuity Payments made under this option. For variable Annuity Payments, the amount of the refund will depend on the current Investment Option allocation and will be the sum of refund amounts attributable to each Investment Option. We calculate the refund amount for a given Investment Option using the following formula. (A) x {[(B) x (C) x (D)/(E)] - [(D) x (F)]} where: (A)= Annuity Unit value of the subaccount for that given Investment Option when due proof of the Annuitant's death is received at our Service Center. (B)= The amount applied to variable Annuity Payments on the Income Date. (C)= Allocation percentage in a given subaccount (in decimal form) when due proof of the Annuitant's death is received at our Service Center. (D)= The number of Annuity Units used in determining each variable Annuity Payment attributable to that given subaccount when due proof of the Annuitant's death is received at our Service Center. (E)= Dollar value of first variable Annuity Payment. (F)= Number of variable Annuity Payments made since the Income Date. We will base this calculation upon the allocation of Annuity Units actually in force at the time due proof of the Annuitant's death is received at our Service Center. We will not pay a refund if the total refund determined using the above calculation is less than or equal to zero. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 12 EXAMPLE o The Contract has one Owner who is a 65-year-old male. He elects variable Annuity Payments under Annuity Option 5 based on a Contract Value of $100,000 (item "B"). o The Owner who is also the Annuitant allocates all the Contract Value to one Investment Option, so the allocation percentage in this subaccount is 100% (item "C"). o The purchase rate for the selected assumed investment rate is $6.15 per month per thousand dollars of Contract Value annuitized. Therefore, the first variable Annuity Payment is: $6.15 x ($100,000 / $1,000) = $615 (item "E"). o Assume the Annuity Unit value on the Income Date is $12, then the number of Annuity Units used in determining each Annuity Payment is: $615 / $12 = 51.25 (item "D"). o The Owner who is also the Annuitant dies after receiving 62 Annuity Payments (item "F") and the Annuity Unit value for the subaccount on the date the Service Center receives due proof of death is $15 (item "A"). WE CALCULATE THE REFUND AS FOLLOWS: (A) x {[(B) x (C) x (D)/(E)] - [(D) x (F)]} = 15 x {[100,000 x 1.00 x (51.25 / 615)] - [51.25 x 62]} = 15 x {[100,000 x 0.083333] - 3,177.50} = 15 x {8,333.33 - 3,177.50} = 15 x 5,155.83 = $77,337.50 OPTION 6. SPECIFIED PERIOD CERTAIN ANNUITY. THIS OPTION IS ONLY AVAILABLE FOR FIXED ANNUITY PAYMENTS IN THE STATE OF FLORIDA. Under this option, we will make Annuity Payments for a specified period of time. You select the specified period, which must be a whole number of years from ten to 30. If the last Annuitant dies before the end of specified period certain, then we will continue to make Annuity Payments to the Payee for the rest of the period certain. This Annuity Option is not available to you under a Partial Annuitization. NOTE FOR OWNERS THAT ARE YOUNGER THAN AGE 59 1/2: Your Annuity Payments under Annuity Option 6 may be subject to a 10% federal penalty tax if the specified period certain you select is less than your life expectancy. ANNUITY PAYMENTS Annuity Payments offer a guaranteed income stream with certain tax advantages and are designed for Owners who are not concerned with continued access to Contract Value. You can request Annuity Payments under Annuity Options 1-5 as: o a variable payout, o a fixed payout, or o a combination of both. If you do not choose an Annuity Option before the Income Date, we will make variable Annuity Payments to the Payee under Annuity Option 2 with ten years of guaranteed monthly payments. Under a fixed payout, all of the Annuity Payments will be the same dollar amount (equal installments) except as provided under Annuity Option 3. If you choose a variable payout, you can continue to invest in up to 15 of the available Investment Options. We may change this in the future, but we will always allow you to invest in at least five Investment Options. If you do not tell us otherwise, we will base variable Annuity Payments on the investment allocations that were in place on the Income Date. We will not allow you to apply amounts of less than $5,000 to an Annuity Option. If your Contract Value, adjusted for any applicable MVA is less than $5,000 on the Income Date, we will refund that amount to you. Currently, it is our business practice that the initial Annuity Payment exceed $50. We will contact you to discuss alternate payment arrangements if the initial Annuity Payment would be $50 or less. Guaranteed fixed Annuity Payments are based on an interest rate and mortality table specified in your Contract. The payout rates for fixed Annuity Payments provided by your Contract are guaranteed and in no event will we use lower fixed payout rates to calculate your fixed Annuity Payments. However, we may use higher fixed payout rates to calculate fixed Annuity Payments than the guaranteed rates provided by your Contract. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 13 If you choose to have any portion of the Annuity Payments based on the investment performance of the Investment Option(s), the dollar amount of the payments will depend upon the following factors. o The Contract Value (adjusted for any applicable MVA) on the Income Date. o The age of the Annuitant and any joint Annuitant on the Income Date. o The gender of the Annuitant and any joint Annuitant, where permitted. o The Annuity Option you select. o The assumed investment rate (AIR) you select. o The mortality table specified in the Contract. o The future performance of the Investment Option(s) you select. You can choose a 3%, 5% or 7% AIR. The 5% and 7% AIRs are not available in all states. Using a higher AIR results in a higher initial variable Annuity Payment, but later payments will increase more slowly when investment performance rises and decrease more rapidly when investment performance declines. If the actual performance of your Investment Options exceeds the AIR you selected, the variable Annuity Payments will increase. Similarly, if the actual performance is less than the AIR you selected, the variable Annuity Payments will decrease. EACH PORTION OF THE CONTRACT THAT YOU APPLY TO ANNUITY PAYMENTS WILL TERMINATE UPON THE EARLIEST OF THE FOLLOWING. o Under Annuity Options 1 and 3, the death of the last surviving Annuitant. o Under Annuity Options 2 and 4, the death of the last surviving Annuitant and expiration of the guaranteed period. If we make a lump sum payment of the remaining guaranteed Annuity Payments at the death of the last surviving Annuitant, this portion of the Contract will terminate upon payment of the lump sum. o Under Annuity Option 5, the death of the Annuitant and payment of any lump sum refund. o Under Annuity Option 6, the expiration of the specified period certain. o Contract termination. 3. PURCHASE PURCHASE PAYMENTS A Purchase Payment is the money you put into the Contract. The Purchase Payment requirements for this Contract are as follows. o You can make additional Purchase Payments of $50 or more during the Accumulation Phase. o YOU CANNOT MAKE ANY ADDITIONAL PURCHASE PAYMENTS TO THE CONTRACT AFTER THE INCOME DATE THAT YOU TAKE A FULL ANNUITIZATION (INCLUDING A REQUIRED FULL ANNUITIZATION ON THE MAXIMUM PERMITTED INCOME DATE). IN CERTAIN STATES, ADDITIONAL PURCHASE PAYMENTS CAN ONLY BE MADE DURING THE FIRST CONTRACT YEAR OR MAY BE OTHERWISE RESTRICTED. o The maximum total amount we will accept without our prior approval is $1 million (including amounts already invested in other Allianz Life variable annuities). o If we made this Contract available as an Inherited IRA, the death benefit proceeds of the previous tax-qualified investment must be directly transferred into this Contract (see section 9, Access to Your Money - The Minimum Distribution Program and Required Minimum Distribution (RMD) Payments). A beneficiary can apply the death benefit proceeds from multiple tax-qualified investments that were owned by the same owner to the purchase of an Inherited IRA Contract. We will not accept any other forms of Purchase Payment on an Inherited IRA Contract. The death benefit proceeds cannot be received by the beneficiary and then applied to an Inherited IRA Contract. For more information on Inherited IRA Contracts, see section 8, Taxes - Qualified Contracts - Inherited IRA. PURCHASE PAYMENTS TO QUALIFIED CONTRACTS MUST NOT BE GREATER THAN ALLOWED UNDER FEDERAL LAW AND MUST BE FROM EARNED INCOME OR A QUALIFIED TRANSFER. PURCHASE PAYMENTS TO QUALIFIED CONTRACTS OTHER THAN FROM A QUALIFIED TRANSFER MAY BE RESTRICTED AFTER THE OWNER REACHES AGE 70 1/2. We may, at our sole discretion, waive the minimum Purchase Payment requirements. We reserve the right to decline any Purchase Payment. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 14 AUTOMATIC INVESTMENT PLAN (AIP) The AIP is a program that allows you to make additional Purchase Payments to your Contract during the Accumulation Phase on a monthly or quarterly basis by electronic transfer of money from your savings, checking or brokerage account. You may participate in this program by completing the appropriate form. Our Service Center must receive your form by the first of the month in order for AIP to begin that same month. Investments will take place on the 20th of the month or the next Business Day if the 20th is not a Business Day. The minimum investment that you can make by AIP is $50. You may stop or change the AIP at any time. We must be notified by the first of the month in order to stop or change the AIP for that month. If the AIP is used for a Qualified Contract, you should consult your tax adviser for advice regarding maximum contributions. The AIP is not available if the Qualified Contract is funding a plan that is tax qualified under Section 401of the Internal Revenue Code. THE AIP WILL NO LONGER BE AVAILABLE TO YOU AFTER THE INCOME DATE ON WHICH YOU TAKE A FULL ANNUITIZATION. ALLOCATION OF PURCHASE PAYMENTS We do not currently accept allocation instructions from you via email, website, or other electronic communications. This service may be available to you in the future. We will allocate your Purchase Payments to the Investment Choices you select according to your instructions. We ask that you allocate your money in whole percentages. Transfers of Contract Value between Investment Choices will not change the allocation instructions for any future additional Purchase Payments. If you do not change your allocation instructions, we will allocate any additional Purchase Payments according to your most recent allocation instructions. You can only allocate up to 50% of any Purchase Payment to the FPAs during the Accumulation Phase. In some states you cannot make allocations to the FPAs and they may only be available for GPV or GAV Transfers we make. In addition, if your Contract includes the Living Guarantees, we may transfer more than 50% of the total Purchase Payments to the FPAs beginning on the second Contract Anniversary. You may provide us with new allocation instructions at any time without fee, penalty or other charge upon written notice or telephone instructions to our Service Center. The new allocation instructions will be effective for Purchase Payments received on or after the Business Day we receive your notice or instructions in good order at our Service Center. If you change your allocation instructions and you are participating in the automatic investment plan or the flexible rebalancing program, your allocation instructions must include directions for the plan/program. We reserve the right to limit the number of Investment Options that you can invest in at any one time. Currently, you can invest in up to 15 of the Investment Options at any one time. We may change this in the future; however, we will always allow you to invest in at least five Investment Options. If you make additional Purchase Payments, we will credit these amounts to the Contract within one Business Day. Our Business Day closes when regular trading on the New York Stock Exchange closes. If you submit a Purchase Payment to your registered representative, we will not begin processing the Purchase Payment until it is received at our Service Center. We consider a Purchase Payment to be "received" when it is received at our Service Center regardless of how or when you made the payment. If mandated under applicable law, we may be required to reject a Purchase Payment. We also may be required to provide information about you or your Contract to government regulators. In addition, we may be required to block an Owner's Contract and thereby refuse any request for transfers, and refuse to pay any withdrawals, surrenders, or death benefits until instructions are received from the appropriate regulator. TAX-FREE SECTION 1035 EXCHANGES Subject to certain restrictions, you can make a "tax-free" exchange under Section 1035 of the Internal Revenue Code for all or a portion of one annuity contract for another, or all of a life insurance policy for an annuity contract. Before making an exchange, you should compare both contracts carefully. Remember that if you exchange a life insurance policy or annuity contract for the Contract described in this prospectus: o you might have to pay a withdrawal charge on your previous contract, o there will be a new withdrawal charge period for this Contract, o other charges under this Contract may be higher (or lower), o the benefits may be different, and o you will no longer have access to any benefits from your previous contract. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 15 If the exchange does not qualify for Section 1035 treatment, you also may have to pay federal income tax, including a possible federal penalty tax, on the exchange. You should not exchange an existing life insurance policy or another annuity contract for this Contract unless you determine that the exchange is in your best interest and not just better for the person trying to sell you the Contract (that person will generally earn a commission on each contract sale). IF YOU CONTEMPLATE SUCH AN EXCHANGE, YOU SHOULD CONSULT A TAX ADVISER TO DISCUSS THE POTENTIAL TAX EFFECTS OF SUCH A TRANSACTION. ACCUMULATION UNITS/COMPUTING THE CONTRACT VALUE Your Contract Value in the subaccounts (Separate Account Value) will go up or down based upon the investment performance of the Investment Option(s) you choose. Your Contract Value will also be affected by the charges of the Contract, any interest you earn on any general account Investment Choices, and any MVAs made due to amounts removed from the FPAs. In order to keep track of your Separate Account Value, we use a measurement called an Accumulation Unit. If you request variable Annuity Payments during the Annuity Phase of the Contract, we call this measurement an Annuity Unit. When we receive a Purchase Payment, we credit your Contract with Accumulation Units for any portion of your Purchase Payment allocated to an Investment Option at the daily price next determined after receipt of the Purchase Payment at our Service Center. The daily purchase price is normally determined at the end of each Business Day, and any Purchase Payment received at or after the end of the current Business Day will receive the next Business Day's price. The Purchase Payments you allocate to the Investment Options are actually placed into subaccounts. Each subaccount invests exclusively in one Investment Option. We determine the number of Accumulation Units we credit to your Contract by dividing the amount of the Purchase Payment allocated to a subaccount by the value of the corresponding Accumulation Unit. Every Business Day, we determine the value of an Accumulation Unit for each subaccount by multiplying the Accumulation Unit value for the previous Business Day by the net investment factor for the current Business Day. We determine the net investment factor by: o dividing the net asset value of a subaccount at the end of the current Business Day by the net asset value of the subaccount at the end of the immediately preceding Business Day, o adding any applicable dividends or capital gains, and o multiplying this result by one minus the amount of the Separate Account annual expenses for the current Business Day, and any additional calendar days since the immediately preceding Business Day. We calculate the value of each Accumulation Unit after regular trading on the New York Stock Exchange closes each Business Day. The value of an Accumulation Unit may go up or down from Business Day to Business Day. We calculate your Separate Account Value by multiplying the Accumulation Unit value in each subaccount by the number of Accumulation Units for each subaccount and then adding those results together. (For example, the Contract Value on any Contract Anniversary will reflect the number and value of the Accumulation Units at the end of the previous Business Day.) EXAMPLE o On Wednesday, we receive at our Service Center an additional Purchase Payment of $3,000 from you before the end of the Business Day. o When the New York Stock Exchange closes on that Wednesday, we determine that the value of an Accumulation Unit based on the Investment Option you chose is $13.25. We then divide $3,000 by $13.25 and credit your Contract on Wednesday night with 226.41509 subaccount Accumulation Units for the Investment Option you chose. If the $3,000 payment had been received at or after the end of the current Business Day, it would have received the next Business Day's price. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 16 4. INVESTMENT OPTIONS The Contract offers the Investment Options listed in the following table. Each Investment Option has its own investment objective. In the future, we may add, eliminate or substitute Investment Options. Depending on market conditions, you can gain or lose value by investing in the Investment Options. YOU SHOULD READ THE INVESTMENT OPTIONS' PROSPECTUSES CAREFULLY. The Investment Options invest in different types of securities and follow varying investment strategies. There are potential risks associated with each of these types of securities and investment strategies. For example, an Investment Option's performance may be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities, initial public offerings (IPOs) or companies with relatively small market capitalizations. IPOs and other investment techniques may have a magnified performance impact on an Investment Option with a small asset base. An Investment Option may not experience similar performance as its assets grow. The operation of the Investment Options and the various risks associated with the Investment Options are described in the Investment Options' prospectuses. TO OBTAIN A CURRENT PROSPECTUS FOR ANY OF THE INVESTMENT OPTIONS, CONTACT YOUR REGISTERED REPRESENTATIVE OR CALL US AT THE TOLL FREE TELEPHONE NUMBER LISTED AT THE BACK OF THIS PROSPECTUS. We will send copies of the Investment Options' prospectuses to you when we issue the Contract. Certain Investment Options issue two or more classes of shares and certain share classes may have Rule 12b-1 fees. The classes of shares currently offered by this Contract are listed in the table of annual operating expenses for each Investment Option that appears in Appendix A. For more information about share classes, see the Investment Options' prospectuses. Currently, the Investment Options are not publicly traded mutual funds. They are available only as investment options in variable annuity contracts or variable life insurance policies issued by life insurance companies or in some cases, through participation in certain qualified pension or retirement plans. The names, investment objectives and policies of certain Investment Options may be similar to the names, investment objectives and policies of other portfolios that the same investment advisers manage. Although the names, objectives and policies may be similar, the investment results of the Investment Options may be higher or lower than the results of such portfolios. The investment advisers cannot guarantee, and make no representation, that the investment results of similar funds will be comparable even though the Investment Options have the same names, investment advisers, objectives and policies. Each of the Investment Options offered by the Allianz Variable Insurance Products Fund of Funds Trust (Allianz VIP Fund of Funds Trust), including the AZL FusionPortfolios, is a "fund of funds" and diversifies its assets by investing in the shares of several other affiliated mutual funds. The underlying funds may pay 12b-1 fees to the distributor of the Contracts, our affiliate, Allianz Life Financial Services, LLC, for distribution and/or administrative services. The underlying funds do not pay service fees or 12b-1 fees to the Allianz VIP Fund of Funds Trust and the Allianz VIP Fund of Funds Trust does not pay service fees or 12b-1 fees. The underlying funds of the Allianz VIP Fund of Funds Trust or their advisers may pay service fees to us and our affiliates for providing customer service and other administrative services to Contract Owners. The amount of such service fees may vary depending on the underlying fund. We offer other variable annuity contracts that may invest in the same Investment Options. These contracts may have different charges and may offer different benefits more appropriate to your needs. For more information about these contracts, please contact our Service Center. The following advisers and subadvisers are affiliated with us: Allianz Investment Management LLC, Nicholas-Applegate Capital Management, Oppenheimer Capital LLC and Pacific Investment Management Company LLC. The following is a list of the Investment Options available under the Contract, the investment advisers and subadvisers for each Investment Option, the investment objectives for each Investment Option, and the primary investments of each Investment Option. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 17 INVESTMENT OPTIONS
INVESTMENT NAME OF INVESTMENT OPTION ASSET CATEGORY OBJECTIVE(S) PRIMARY INVESTMENTS MANAGEMENT COMPANY (Normal market conditions) AND ADVISER/SUBADVISER AIM Managed by Allianz AZL AIM International Equity International Long-term growth of At least 80% of its assets in a diversified Investment Fund Equity capital portfolio of international equity securities Management whose issuers are considered by the fund's LLC/Invesco Aim subadviser to have strong earnings momentum. Capital Management, Inc. BLACKROCK Managed by Allianz AZL BlackRock Capital Large Growth Long-term growth of Invests at least 80% of total assets in Investment Appreciation Fund capital common and preferred stock and securities Management convertible into common and preferred stock LLC/BlackRock of mid-size and large-size companies. Capital Management, Inc. AZL BlackRock Growth Fund Large Growth Maximum long-term Invests at least 80% of total assets in capital appreciation common and preferred stock and securities with minimum long-term convertible into common and preferred stock risk to principal of mid- and large-size companies. AZL International Index Fund International Match the performance Invests at least 80% of its assets in a Equity of the MSCI statistically selected sampling of equity EAFE[{R}] securities of companies included in the Index as closely as Morgan Stanley Capital Inernational Europe, possible Australia and Far East Index (MSCI EAFE) and in derivative instruments linked to the MSCI EAFE index. Managed by Allianz AZL Money Market Fund Cash Current income Invests in a broad range of short-term, high Investment Equivalent consistent with quality U.S. dollar-denominated money market Management stability of principal instruments, including government, U.S. and LLC/BlackRock foreign bank, commercial and other Institutional obligations. During extended periods of low Management interest rates, and due in part to contract Corporation fees and expenses, the yield of the AZL Money Market Fund may also become extremely low and possibly negative. Managed by BlackRock Global Allocation Specialty High total investment Invests in both equity and debt securities BlackRock V.I. Fund return of issuers located around the world to Advisors, achieve a combination of capital growth and LLC/BlackRock income. Investment Management, LLC and BlackRock Asset Management U.K. Limited COLUMBIA Managed by Allianz AZL Columbia Mid Cap Value Mid Cap Long-term growth of Invests at least 80% of net assets in equity Investment Fund capital securities of companies that have market Management capitalizations in the range of the LLC/Columbia companies in the Russell Management Midcap[{R}] Value Index at the Advisors, LLC time of purchase that the fund's subadviser believes are undervalued and have the potential for long-term growth. AZL Columbia Small Cap Value Small Cap Long-term capital Invests at least 80% of net assets in equity Fund appreciation securities of companies with market capitalizations in the range of the companies in the Russell 2000 Value Index[{R}] at the time of purchase that the subadviser believes are undervalued. AZL Columbia Technology Fund Specialty Capital Appreciation At least 80% of its total net assets in common stocks of U.S and foreign technology companies that may benefit from technological improvements, advancements or developments. DAVIS Managed by Allianz AZL Davis NY Venture Fund Large Value Long-term growth of Invests the majority of assets in equity Investment capital securities issued by large companies with Management market capitalizations of at least LLC/Davis Selected $10 billion. Advisers, L.P. Managed by Davis Davis VA Financial Portfolio Specialty Long-term growth of At least 80% of net assets in securities Advisors capital issued by companies principally engaged in the financial services sector. DREYFUS Managed by Allianz AZL Dreyfus Equity Growth Large Growth Long-term growth of Primarily invests in common stocks of large, Investment Fund capital and income well-established and mature companies. Management Normally invests at least 80% of its net LLC/Founders Asset assets in stocks that are included in a Management LLC widely recognized index of stock market performance. May invest in non-dividend paying companies if they offer better prospects for capital appreciation. May invest up to 30% of its total assets in foreign securities. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 18 Managed by Allianz AZL S&P 500 Index Fund Large Blend Match total return of Normally invests in all 500 stocks in the Investment the S&P S&P 500[{R}] in proportion to Management LLC/The 500[{R}] their weighting in the index. Dreyfus Corporation AZL Small Cap Stock Index Small Cap Match performance of Invests in a representative sample of stocks Fund the S&P SmallCap 600 included in the S&P SmallCap 600 Index{R} Index[{R}], and in futures whose performance is related to the index, rather than attempt to replicate the index. FIRST TRUST Managed by Allianz AZL First Trust Target Double Large Blend Total Return Invests primarily in common stocks of Investment Play Fund companies that are identified by a model Management based on an allocation of 50% in two LLC/First Trust separate strategies that seek to provide Advisors L.P. above-average total return. FRANKLIN TEMPLETON Managed by Allianz AZL Franklin Small Cap Value Small Cap Long-term total return Under normal market conditions, invests at Investment Fund least 80% of its net assets in investments Management of small capitalization companies similar to LLC/Franklin those that comprise the Russell Advisory Services, 2500{trademark} Index at the time of LLC investment. Managed by Allianz AZL Franklin Templeton A "Fund of Long-term capital Invests in a combination of subportfolios or Investment Founding Strategy Plus Fund Funds" Model appreciation, with strategies, each of which is managed by an Management Portfolio income as a secondary asset manager that is part of Franklin LLC/Franklin goal Templeton. Mutual Advisers, LLC, Templeton Global Advisors Limited, and Franklin Advisers, Inc. Managed by Franklin Global Real Estate Specialty High Total Return At least 80% of net assets in investments of Franklin Templeton Securities Fund companies located anywhere in the world that Institutional, LLC operate in the real estate sector and normally invests predominantly in equity securities. Managed by Franklin Growth and Income Large Value Capital appreciation, Invests predominantly in a broadly Franklin Advisers, Securities Fund with current income as diversified portfolio of equity securities, Inc. a secondary goal including securities convertible into common stock. Franklin High Income High-Yield High current income Invests primarily to predominantly in debt Securities Fund Bonds with capital securities offering high yield and expected appreciation as a total return. secondary goal Franklin Income Securities Specialty Maximize income while Normally invests in debt and equity Fund maintaining prospects securities, including corporate, foreign and for capital U.S. Treasury bonds and stocks with dividend appreciation yields the manager believes are attractive. Franklin Large Cap Growth Large Growth Capital appreciation At least 80% of net assets in investments of Securities Fund large capitalization companies, and normally invests predominantly in equity securities. Managed by Franklin Rising Dividends Mid Cap Long-term capital At least 80% of net assets in investments of Franklin Advisory Securities Fund appreciation with companies that have paid rising dividends, Services, LLC preservation of capital and normally invests predominantly in equity as an important securities. consideration Administered by Franklin Small-Mid Cap Growth Mid Cap Long-term capital At least 80% of net assets in investments of Franklin Templeton Securities Fund growth small capitalization and mid capitalization Services, LLC companies and normally invests predominantely in equity securities. Administered by Franklin Templeton VIP Model Capital appreciation Invests equal portions in Class 1 shares of Franklin Templeton Founding Funds Allocation Portfolio with income as a the Franklin Income Securities Fund, Mutual Services, LLC Fund (Fund of secondary goal. Shares Securities Fund, and Templeton Growth Funds) Securities Fund. Managed by Franklin U.S. Government Fund Short-Term Income At least 80% of its net assets in U.S. Franklin Advisers, Bonds government securities and normally invests Inc. primarily in fixed and variable rate mortgage-backed securities. Franklin Zero Coupon Fund Intermediate- As high an investment Normally invests at least 80% of its net 2010 Term Bonds return as is consistent assets in zero coupon debt securities. The with capital fund will mature in December of 2010 and preservation will then no longer be available as an Investment Option under the Contract. For additional information regarding the maturity of the fund, please see the Franklin Zero Coupon Fund prospectus. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 19 Managed by Mutual Global Discovery International Capital appreciation Invests primarily in U.S. and foreign equity Franklin Mutual Securities Fund Equity securities that the manager believes are Advisers, undervalued. The fund also invests, to a LLC/Franklin lesser extent, in risk arbitrage securities Templeton and distressed companies. Investment Management Limited Managed by Mutual Shares Securities Fund Large Value Capital appreciation, Invests primarily in U.S. and foreign equity Franklin Mutual with income as a securities that the manager believes are Advisers, LLC secondary goal undervalued. The fund also invests, to a lesser extent, in risk arbitrage securities and distressed companies. Managed by Templeton Foreign Securities International Long-term capital Normally invests at least 80% of net assets Templeton Fund Equity growth in investments of issuers located outside Investment the U.S., including those in emerging Counsel, LLC markets, and normally invests predominantly in equity securities. Managed by Templeton Global Bond Intermediate- High current income, Normally invests at least 80% of its net Franklin Advisers, Securities Fund Term Bonds consisent with assets in bonds, which include debt Inc. preservation of securities of any maturity, such as bonds, capital, with capital notes, bills and debentures. The fund may appreciation as a invest a portion of its total assets in secondary consideration bonds rated below investment grade and a significant portion of its assets in foreign securities. Managed by Templeton Growth Securities International Long-term capital Normally invests primarily in equity Templeton Global Fund Equity growth securities of companies located anywhere in Advisors the world, including those in the U.S. and Limited/Templeton in emerging markets. Asset Management Ltd. FUND OF FUNDS Managed by Allianz AZL Allianz Global Investors A "Fund of Long-term capital Normally invests in a combination of AGI Investment Select Fund Funds" Model appreciation with Mutual Funds, with 45% to 65% of the Fund's Management LLC Portfolio preservation of capital assets allocated to equity investments and 35% to 55% allocated to fixed income investments. AZL Balanced Index Strategy A "Fund of Long-term capital Invests primarily in a combination of five Fund Funds" Model appreciation with underlying bond and equity index funds. Portfolio preservation of capital AZL Fusion Balanced Fund A "Fund of Long-term capital Allocation among the underlying investments, Funds" Model appreciation with to achieve a range generally from 40% to 60% Portfolio preservation of capital of assets in equity funds with the remaining as an important balance invested in fixed income funds. consideration AZL Fusion Conservative Fund A "Fund of Long-term capital Allocation among the underlying investments, Funds" Model appreciation with to achieve a range generally from 25% to 45% Portfolio preservation of capital of assets in equity funds with the remaining as an important balance invested in fixed income funds. consideration AZL Fusion Growth Fund A "Fund of Long-term capital Allocation among the underlying investments, Funds" Model appreciation to achieve a range generally from 70% to 90% Portfolio of assets in equity funds with the remaining balance invested in fixed income funds. AZL Fusion Moderate Fund A "Fund of Long-term capital Allocation among the underlying investments, Funds" Model appreciation to achieve a range generally from 55% to 75% Portfolio of assets in equity funds with the remaining balance invested in fixed income funds. AZL Moderate Index Strategy A "Fund of Long-term capital Invests primarily in a combination of five Fund Funds" Model appreciation underlying bond and equity index funds. Portfolio JENNISON Managed by Allianz AZL Jennison 20/20 Focus Fund Large Blend Long-term growth of At least 80% of its total assets in Investment capital approximately 40 (which may range up to 45) Management equity and equity-related securities of LLC/Jennison companies that the subadviser believes have Associates LLC strong capital appreciation potential. J.P. MORGAN Managed by Allianz AZL JPMorgan Large Cap Equity Large Blend Long-term growth of Invests at least 80% of its net assets, plus Investment Fund capital any borrowings for investment purposes, Management primarily in equity securities of large- and LLC/J.P. Morgan medium-capitalization U.S. companies. Investment Management, Inc. AZL JPMorgan U.S. Equity Fund Large Blend High total return Invests at least 80% of its net assets, plus any borrowings for investment purposes, primarily in equity securities of large- and medium-capitalization U.S. companies. NICHOLAS-APPLEGATE Managed by Allianz AZL NACM International Fund International Maximum long-term At least 80% of its net assets in securities Investment Equity capital appreciation of companies in developed countries located Management outside the U.S., represented in the Morgan LLC/Nicholas- Stanley Capital International Europe Applegate Capital Australasia Far East (MSCI EAFE) Index. Management, LLC The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 20 OPPENHEIMER CAPITAL Managed by Allianz AZL OCC Growth Fund Large Growth Long-term growth of Invests at least 65% of its assets in common Investment capital with income as stocks of "growth" companies with market Management LLC/ an incidental capitalizations of at least $5 billion. Oppenheimer consideration Capital LLC AZL OCC Opportunity Fund Small Cap Capital appreciation At least 65% of its assets in common stocks of "growth" companies with market capitalizations of less than $2 billion at the time of investment. Managed by Allianz OpCap Mid Cap Portfolio Mid Cap Long-term capital Invests at least 80% of its net assets in Global Investors appreciation equity securities of companies with market Fund Management capitalizations between $500 million and $15 LLC billion at the time of purchase that the adviser believes are undervalued in the marketplace. OPPENHEIMERFUNDS Managed by Allianz AZL Oppenheimer Global Fund International Capital appreciation Invests mainly in common stocks of mid and Investment Equity large-cap companies in the U.S. and foreign Management LLC/ countries, including countries with OppenheimerFunds, developed and emerging markets. Inc. AZL Oppenheimer International International Long-term capital Common stocks of growth companies that are Growth Fund Equity appreciation domiciled outside the U.S. or have their primary operations outside the U.S., including companies in emerging markets. Managed by Oppenheimer High Income High-Yield High level of current Invests mainly in a variety of high-yield OppenheimerFunds, Fund/VA Bonds income fixed-income securities of domestic and Inc. foreign issuers with at least 65% of total assets in high-yield, lower-grade fixed income securities commonly known as "junk" bonds. PIMCO Managed by Allianz AZL PIMCO Fundamental Large Blend Exceed the total return Invests substantially all assets in Investment IndexPLUS Total Return Fund of the FTSE derivative instruments based on the Enhanced Management RAFI{trademark} 1000 RAFI{trademark} 1000, backed by a portfolio LLC/Pacific Index of short and intermediate term fixed income Investment instruments. Management Company LLC Managed by Pacific PIMCO VIT All Asset Portfolio Specialty Maximum real return Invests in institutional class shares of the Investment (Fund of consistent with underlying PIMCO Funds and does not invest Management Company Funds) preservation of real directly in stocks or bonds of other LLC capital and prudent issuers. investment management PIMCO VIT CommodityReal Specialty Maximum real return Invests in commodity linked derivative Return[TM] Strategy Portfolio consistent with prudent instruments backed by a portfolio of investment management inflation-indexed securities and other fixed income securities. PIMCO VIT Emerging Markets Intermediate- Maximum total return, At least 80% of its assets in fixed income Bond Portfolio Term Bonds consistent with instruments of issuers that economically are preservation of capital tied to countries with emerging securities and prudent investment markets. management PIMCO VIT Global Bond Intermediate- Maximum total return, At least 80% of its assets in fixed income Portfolio (Unhedged) Term Bonds consistent with instruments of issuers in at least three preservation of capital countries (one of which may be the U.S.), and prudent investment which may be represented by futures management contracts. May invest, without limitation, in securities of issuers in emerging market countries. PIMCO VIT Global Multi-Asset A "Fund of Total return which Invests in a combination of affiliated and Portfolio Funds" Model exceeds a 60% MSCI unaffiliated funds, fixed income Portfolio World Index/40% instruments, equity securities, forwards and Barclays Capital U.S. derivatives. Typically invests 20% to 80% of Aggregate Index blend total assets in equity-related investments. PIMCO VIT High Yield High-Yield Maximum total return, At least 80% of assets in a diversified Portfolio Bonds consistent with portfolio of high-yield securities ("junk preservation of capital bonds") rated below investment grade, but at and prudent investment least Caa by Moody's or equivalently rated management by S&P or Fitch. May invest up to 20% of total asets in securities denominated in foreign currencies. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 21 PIMCO VIT Real Return Intermediate- Maximum real return, At least 80% of its net assets in inflation- Portfolio Term Bonds consistent with indexed bonds of varying maturities issued preservation of real by the U.S. and non-U.S. governments, their capital and prudent agencies or instrumentalities and investment management corporations. PIMCO VIT Large Growth Total return which Invests substantially in S&P StocksPLUS[{R}] exceeds that of the S&P 500[{R}] derivatives, backed by Growth and Income Portfolio 500[{R}] a portfolio of fixed income instruments. May invest in common stocks, options, futures, options on futures, and swaps. The fund will be liquidated on or about July 17, 2009 and will then no longer be available as an Investment Option under the Contract. For additional information regarding the liquidation, please see the PIMCO VIT StocksPLUS Growth and Income Portfolio prospectus. Any Contract Value remaining in the Investment Option at the time the fund is liquidated will be transferred to the AZL Money Market Fund. PIMCO VIT Total Return Intermediate- Maximum total return, At least 65% of total assets in a Portfolio Term Bonds consistent with diversified portfolio of fixed income preservation of capital instruments of varying maturities, which may and prudent investment be represented by forwards or derivatives management such as options, futures contracts, or swap agreements. PRUDENTIAL Managed by SP International Growth International Long-term growth of Invests primarily in equity-related Prudential Portfolio Equity capital securities of foreign issuers with at least Investments 65% of its total assets in common stocks of LLC/William Blair foreign companies operating or based in at & Company LLC and least five different countries. Marsico Capital Management LLC Managed by SP Strategic Partners Focused Large Growth Long-term growth of At least 65% of total assets in equity and Prudential Growth Portfolio capital equity-related securities of U.S. companies Investments that the adviser believes to have strong LLC/Jennison capital appreciation potential. Associates LLC and AllianceBernstein L.P. SCHRODER Managed by Allianz AZL Schroder Emerging Markets Specialty Capital appreciation Invests at least 80% of its net assets in Investment Equity Fund equity securities of companies that the Management subadviser believes to be "emerging market" LLC/Schroder issuers. May invest remainder of assets in Investment securities of issuers located anywhere in Management North the world. America Inc. AZL Schroder International International Long-term capital At least 80% of net assets in equity Small Cap Fund Equity appreciation securities of small capitalization companies located outside the U.S. (generally with market capitalizations of $3.5 billion or less at the time of investment) that it believes offer the potential for capital appreciation. TARGETPLUS PORTFOLIOS Managed by Allianz AZL TargetPLUS Balanced Fund Model Long-term capital Invests primarily in a diversified portfolio Investment Portfolio appreciation with of equity and fixed income securities with Management preservation of capital 40% to 60% allocated to the equity portfolio LLC/First Trust as an important and the balance allocated to the fixed Advisors L.P. and consideration income portfolio. May invest a significant Pacific Investment portion of its total assets in securities of Management Company non-U.S. companies. LLC Managed by Allianz AZL TargetPLUS Equity Fund Model Total return Invests at least 80% of net assets in common Investment Portfolio stocks of companies that are identified by a Management model based on an allocation of 20% of fund LLC/First Trust assets in each of five separate strategies. Advisors L.P. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 22 Managed by Allianz AZL TargetPLUS Growth Fund Model Long-term capital Invests primarily in a diversified portfolio Investment Portfolio appreciation of equity and fixed income securities with Management 70% to 90% allocated to the equity portfolio LLC/First Trust and the balance allocated to the fixed Advisors L.P. and income portfolio. May invest a significant Pacific Investment portion of its total assets in securities of Management Company non-U.S. companies. LLC AZL TargetPLUS Moderate Fund Model Long-term capital Invests primarily in a diversified portfolio Portfolio appreciation of equity and fixed income securities with 55% to 75% allocated to the equity portfolio and the balance allocated to the fixed income portfolio. May invest a significant portion of its total assets in securities of non-U.S. companies. TURNER Managed by Allianz AZL Turner Quantitative Small Small Cap Long-term growth of At least 80% of its net assets in common Investment Cap Growth Fund capital stocks and other equity securities of U.S. Management companies with small market capitalizations LLC/Turner that the subadviser believes, based on a Investment quantitative model, have strong earnings Partners, Inc. growth potential. Small capitalization companies are defined as companies with market capitalizations, at the time of purchase, in the range of companies included in the Russell[ ]2000[{R}] Growth Index. VAN KAMPEN Managed by Allianz AZL Van Kampen Comstock Fund Large Value Capital growth and Invests at least 80% of net assets in common Investment income stocks with the potential for capital growth Management LLC/Van and income. May invest up to 25% of total Kampen Asset assets in foreign securities. Management AZL Van Kampen Equity and Specialty Highest possible income Invests at least 65% of its total assets in Income Fund consistent with safety income-producing equity securities and also of principal with long- invests in investment grade quality debt term growth of capital securities. May invest up to 25% ot total as an important assets in foreign securities, including secondary objective emerging market securities. AZL Van Kampen Global International Long term capital Invests primarily in a portfolio of equity Franchise Fund Equity appreciation securities of issuers located throughout the world that it believes have, among other things, resilient business franchises and growth potential. Normally invests at least 65% of total assets in securities of issuers from at least three different countries, which may include the U.S. AZL Van Kampen Global Real Specialty Income and capital Invests at least 80% of assets in equity Estate Fund appreciation securities of companies in the real estate industry located throughout the world, including real estate investment trusts and real estate operating companies established outside the U.S. AZL Van Kampen Growth and Large Value Income and long-term Invests at least 65% of total assets in Income Fund growth of capital income-producing equity securities, including common stocks and convertible securities; also in non-convertible preferred stocks and debt securities rated "investment grade." May invest up to 25% of total assets in foreign securities, including emerging market securities. AZL Van Kampen Mid Cap Growth Mid Cap Capital growth At least 80% of net assets in common stocks Fund and other equity securities of mid capitalization growth companies.
Shares of the Investment Options may be offered in connection with certain variable annuity contracts and variable life insurance policies of various insurance companies that may or may not be affiliated with us. Certain Investment Options may also be sold directly to pension and retirement plans that qualify under Section 401 of the Internal Revenue Code. As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 23 retirement plans or their participants. Each Investment Option's Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. We may enter into certain arrangements under which we, or our affiliate Allianz Life Financial Services, LLC, the principal underwriter for the Contracts, are compensated by the Investment Options' advisers, distributors and/or affiliates for the administrative services and benefits that we provide to the Investment Options. The amount of the compensation usually is based on the aggregate assets of the Investment Options or other investment portfolios that are attributable to contracts that we issue or administer. Some advisers may pay us more or less than others. The maximum fee that we currently receive is at the annual rate of 0.25% of the average aggregate amount invested by us in the Investment Options. In addition, our affiliate Allianz Life Financial Services, LLC, may receive Rule 12b-1 fees deducted from certain Investment Option assets attributable to the Contract for providing distribution and support services to some Investment Options. Because 12b-1 fees are paid out of an Investment Option's assets on an ongoing basis, over time they will increase the cost of an investment in the Investment Option. SUBSTITUTION AND LIMITATION ON FURTHER INVESTMENTS We may substitute another Investment Option for one of the Investment Options you selected for any reason in our sole discretion. Substitutions may be made with respect to existing investments, the investment of future Purchase Payments, or both. New or substitute Investment Options may have different fees and expenses, and their availability may be limited to certain classes of purchasers. We may limit further investment in, or transfers to, an Investment Option if marketing, tax or investment considerations warrant, or for any reason in our sole discretion. We also may close Investment Options to allocations of Purchase Payments and/or Contract Value, at any time and at our sole discretion. The fund companies that sell shares of the Investment Options to us, pursuant to participation agreements, may terminate those agreements and discontinue offering their shares to us. To the extent required by the Investment Company Act of 1940 or other applicable law, we will not substitute any shares without notice to you and prior approval of the SEC. TRANSFERS You can make transfers among the Investment Choices, subject to certain restrictions. Transfers may be subject to a transfer fee. For more information, see section 7, Expenses - Transfer Fee. Also, transfers from the FPAs may be subject to an MVA. We currently allow you to make as many transfers each Contract Year as you wish. We may change this practice in the future. There is no minimum required transfer amount. This product is not designed for professional market timing organizations, other entities or persons using programmed, large, or frequent transfers, and excessive or inappropriate transfer activity may be restricted. The following applies to any transfer. o Your request for a transfer must clearly state: - which Investment Choices are involved in the transfer; and - how much you wish to transfer. o Transfers from a FPA may be subject to an MVA. o If your Contract includes the Living Guarantees, you can make transfers from the FPAs to the extent that the GPV or GAV Fixed Account Minimum is met (see section 6, Guaranteed Values Under the Living Guarantees - The GPV and GAV Fixed Account Minimums). These transfers may be subject to an MVA unless the transfers are made within 30 days before the end of the Account Period. In some states you cannot make allocations to the FPAs and they may only be available for GPV and GAV Transfers we make. o After the Income Date, you cannot make a transfer from a fixed Annuity Payment stream to a variable Annuity Payment stream. o After the Income Date, you can make a transfer from a variable Annuity Payment stream to establish a new fixed Annuity Payment stream. o Your right to make transfers is subject to modification if we determine, in our sole discretion, that exercise of the right by one or more Owners is, or may be, to the disadvantage of other Owners. For more information, see the "Excessive Trading and Market Timing" discussion in this section. o Transfer instructions apply equally to the accumulation and annuitization portions of the Contract. You cannot make transfers selectively within different portions of the Contract. o Transfers of Contract Value between Investment Options will not change the allocation instructions for any future Purchase Payments. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 24 When you make a transfer request, we will process the request based on the Accumulation Unit values and/or Annuity Unit values next determined after receipt of the request in good order at our Service Center. The Accumulation Unit values and Annuity Unit values are normally determined at the end of each Business Day and any transfer request received at or after the end of the current Business Day will receive the next Business Day's Accumulation Unit values and/or Annuity Unit values. The Investment Options may, in the future, add policies or change existing policies designed to restrict market timing activities. For example, Investment Options may impose restrictions on transfers between Investment Options in an affiliated group of Investment Options if the investment adviser to one or more of the Investment Options determines that the Owner or his or her designee requesting the transfer has engaged, or is engaging in, market timing or other abusive trading activities. In addition, an Investment Option may impose a short-term trading fee on purchases and sales within a specified period. You should review the Investment Options' prospectuses regarding any applicable transfer restrictions and the imposition of any fee to discourage short-term trading. The imposition of these restrictions would occur as a result of Investment Option restrictions and actions taken by the managers of the Investment Options. TELEPHONE AND OTHER ELECTRONIC TRANSFERS You can request transfers by telephone, fax, or by website at www.allianzlife.com. We may allow you to authorize someone else to request transfers by telephone, fax, or website on your behalf. We will accept instructions from either you or a Joint Owner unless we are instructed otherwise. We will use reasonable procedures to confirm that instructions given to us by telephone or by website are genuine. If we do not use such procedures, we may be liable for any losses due to unauthorized or fraudulent instructions. We record all telephone instructions and log all website instructions. We reserve the right to deny any transfer request submitted by telephone, website, or by fax, and to discontinue or modify the telephone, fax and/or website transfer privileges at any time and for any reason. We do not currently accept transfer instructions from you via email or via electronic communications other than by telephone, fax, or by website. This service may be available to you in the future. When you make a transfer request by telephone, fax, or by website, we will process the request based on the Accumulation Unit values next determined after receipt of the request at our Service Center. If you or your authorized representative have not given instructions to a Service Center representative before the end of the Business Day, even if due to our delay in answering your call or a delay caused by our telephone, fax and/or computer system, we will consider the request to be received at or after the end of the current Business Day and the request will receive the next Business Day's Accumulation Unit values. Please note that telephone, fax and/or the website may not always be available. Any telephone, fax and/or computer system, whether it is ours, yours, your service provider's, or your registered representative's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer by writing to our Service Center. By authorizing transfers by telephone or website, you authorize us to accept and act upon such instructions for transfers involving your Contract. There are risks associated with telephone and website transactions that do not occur if a written request is submitted. Anyone authorizing or making such requests bears those risks. You should protect your website password, because the website is available to anyone who provides your password; we will not be able to verify that the person providing electronic transfer instructions via the website is you or is authorized by you. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 25 EXCESSIVE TRADING AND MARKET TIMING Your ability to make transfers under the Contract is subject to modification if we determine, in our sole discretion, that the exercise of the transfer privilege may disadvantage or potentially harm the rights or interests of other Owners. Frequent transfers, programmed transfers, transfers into and then out of an Investment Choice in a short period of time, and transfers of large amounts at one time (collectively referred to as "potentially disruptive trading") may have harmful effects for other Owners, Annuitants and Beneficiaries. These risks and harmful effects include the following. o Dilution of the interests of long-term investors in an Investment Choice, if market timers or others transfer into the Investment Choice at prices that are below their true value or transfer out of the Investment Choice at prices that are higher than their true value. o An adverse effect on portfolio management, such as causing the Investment Choice to maintain a higher level of cash than would otherwise be the case, or causing the Investment Choice to liquidate investments prematurely. o Increased brokerage and administrative expenses. In order to attempt to protect our Owners and the Investment Choices from potentially disruptive trading, we have adopted certain excessive trading and market timing policies and procedures. Under our excessive trading and market timing policy, we could modify your transfer privileges for some or all of the Investment Choices. Unless prohibited by the terms of the Contract or applicable state law, the modifications we may apply include (but are not limited to) the following. o Limiting the frequency of transfers (for example, prohibit more than one transfer a week, or more than two a month, etc.). o Restricting the method of making a transfer (for example, requiring that all transfers be sent by first class U.S. mail and rescinding the telephone, fax or website transfer privileges). o Requiring a minimum time period between each transfer into or out of a particular Investment Choice. Our current policy, which is subject to change without notice, prohibits "round trips" with Investment Choices, other than the AZL Money Market Fund and the AZL FusionPortfolios, within 14 calendar days. Round trips are transfers into and back out of a particular Investment Choice, or transfers out of and back into a particular Investment Choice. o Not accepting transfer requests made on your behalf by an asset allocation and/or market timing service. o Limiting the dollar amount of any Purchase Payment or transfer request allocated to any Investment Choice at any one time. o Imposing redemption fees on short-term trading (or implementing and administering redemption fees imposed by one or more of the Investment Options). o Prohibiting transfers into specific Investment Choices. o Imposing other limitations or restrictions. We also reserve the right to reject any specific Purchase Payment allocation or transfer request from any person if in the investment adviser's, subadviser's or our judgment, an Investment Choice may be unable to invest effectively in accordance with its investment objectives and policies. Currently, we attempt to DETER disruptive trading as follows. If a transfer(s) is/are identified as potentially disruptive trading, we may (but are not required to) send a warning letter. If the conduct continues and we determine that it constitutes disruptive trading, we will also impose transfer restrictions. Transfer restrictions may include refusing to take orders by fax, telephone or website and requiring the submission of all transfer requests via first-class U.S. mail. We do not enter into agreements permitting market timing and would not permit activities determined to be disruptive trading to continue. We also reserve the right to impose transfer restrictions on a Contract if we determine, in our sole discretion, that the transfers are disadvantageous to other Owners. We will notify the Owner in writing if we impose transfer restrictions on the Owner. We do not include automatic transfers made under any programs we provide, or automatic transfers made under any of the Contract features, when applying our market timing policy. We have adopted these policies and procedures as a preventative measure to protect all Owners from the potential effects of disruptive trading, while also abiding by the Owners' legitimate interest in diversifying their investment and making periodic asset re-allocations based upon their personal situations or overall market conditions. We attempt to protect the Owners' interests in making legitimate transfers by providing reasonable and convenient methods of making transfers that do not harm other Owners. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 26 We may make exceptions when imposing transfer restrictions if we determine a transfer is appropriate, although it may technically violate our policies and procedures that are discussed above. In determining whether a transfer is appropriate, we may, but are not required to, take into consideration the relative size of a transaction, whether the transaction was purely a defensive transfer into the AZL Money Market Fund, and whether the transaction involved an error or similar event. We may also reinstate telephone, fax or website transfer privileges after we have revoked them, but we will not reinstate these privileges if we have reason to believe that they might be used for disruptive trading purposes in the future. We cannot guarantee the following. o Our monitoring will be 100% successful in detecting all potentially disruptive trading activity. o Revoking telephone, fax or website transfer privileges will successfully deter all potentially disruptive trading. In addition, certain of the Investment Options are available to insurance companies other than us and we do not know whether those other insurance companies have adopted policies and procedures to detect and deter potentially disruptive trading, or what their policies and procedures might be. As a result of the fact that we may not be completely successful at detecting and preventing market timing activities, and other insurance companies that offer the Investment Options may not have adopted adequate market timing procedures, there is some risk that market timing activity may occur and negatively affect other Owners. We may, without prior notice to any party, take whatever action we deem appropriate to comply with or take advantage of any state or federal regulatory requirement. In addition, orders for the purchase of an Investment Choice's shares are subject to acceptance by that Investment Choice. We reserve the right to reject, without prior notice, any transfer request into an Investment Choice or allocation of a Purchase Payment to an Investment Choice if the order to purchase the Investment Choice's shares is not accepted for any reason. We have entered into agreements required under SEC Rule 22c-2 (Rule 22c-2 agreements) whereby, upon request by an underlying fund or its designee, we are required to provide the underlying fund with information about you and your trading activities into or out of one or more Investment Options. This information will be provided to the underlying fund or its designee. Under the terms of the Rule 22c-2 agreements, we are required to: (1) provide details concerning every purchase, redemption, transfer, or exchange of Investment Options during a specified period; and (2) restrict your trading activity if the party receiving the information so requests. Under certain Rule 22c-2 agreements, if we fail to comply with a request to restrict trading activity, the underlying fund or its designee may refuse to accept transfers from us until we comply. We retain some discretion in determining what actions constitute potentially disruptive trading and in determining when and how to impose trading restrictions. Therefore, persons engaging in potentially disruptive trading may be subjected to some uncertainty as to when and in what form trading restrictions may be applied, and persons not engaging in potentially disruptive trading may not know precisely what actions will be taken against a person engaging in potentially disruptive trading. For example, if we determine a person is engaging in potentially disruptive trading, we may revoke that person's telephone, fax or website transfer privileges and require all future requests to be sent by first class U.S. mail. In the alternative, if the disruptive trading affects only a single Investment Choice, we may prohibit transfers into or allocations of Purchase Payments to that Investment Choice. We will notify the person or entity making the potentially disruptive trade when we revoke any transfer privileges. The retention of some level of discretion by us may result in disparate treatment among persons engaging in potentially disruptive trading, and it is possible that some persons could experience adverse consequences if other persons are able to engage in practices that may constitute disruptive trading, and that result in negative effects. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 27 DOLLAR COST AVERAGING (DCA) PROGRAM The DCA program allows you to systematically transfer a set amount of money each month or quarter from any one Investment Option to other Investment Options. The Investment Option you transfer from may not be the Investment Option you transfer to in this program. You cannot dollar cost average to or from a general account Investment Choice. By allocating amounts on a regularly scheduled basis, as opposed to allocating the total amount at one particular time, you may be less susceptible to the impact of market fluctuations. You may only participate in this program during the Accumulation Phase. Generally, the DCA program requires a $1,500 minimum allocation and participation for at least six months. All DCA transfers will be made on the tenth day of the month or the next Business Day if the tenth is not a Business Day. You can elect this program by properly completing the DCA form provided by us. Your participation in the program will end when any of the following occurs. o The number of desired transfers has been made. o You do not have enough money in the Investment Options to make the transfer (if less money is available, that amount will be dollar cost averaged and the program will end). o You request to terminate the program (your request must be received at our Service Center by the first of the month to terminate that month). o Contract termination. If you participate in the DCA program, there are no fees for the transfers made under this program, we do not currently count these transfers against the free transfers that we allow, and you will not be charged additional fees for participating in or terminating from this program. We reserve the right to discontinue or modify the DCA program at any time and for any reason. FLEXIBLE REBALANCING You can choose to have us rebalance your account. Once your money has been invested, the performance of the Investment Options may cause your chosen allocation to shift. Flexible rebalancing is designed to help you maintain your specified allocation mix among the different Investment Options. The general account Investment Choices are not part of the flexible rebalancing program. You can direct us to automatically readjust your balance in the Investment Options on a quarterly, semi-annual or annual basis to return to your selected Investment Option allocations. Flexible rebalancing transfers will be made on the 20th day of the month or the previous Business Day if the 20th is not a Business Day. If you participate in the flexible rebalancing program, there are no fees for the transfers made under this program, we do not currently count these transfers against any free transfers that we allow, and you will not be charged additional fees for participating in or terminating from this program. If your Contract includes the Living Guarantees, the automatic transfers that we make (GPV or GAV Transfers) in and out of the FPAs to support the Living Guarantees may affect your flexible rebalancing program. We reserve the right to discontinue or modify the flexible rebalancing program at any time and for any reason. To participate in this program, your request must be received in good order at our Service Center by the eighth of the month so that we may rebalance your account on the 20th of the month. To terminate your participation in this program, your request must also be received at our Service Center by the eighth of the month to terminate that month. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 28 FINANCIAL ADVISERS - ASSET ALLOCATION PROGRAMS If you have or establish a relationship with a personal financial adviser and the advisory agreement provides that you will pay all or a portion of your adviser's fees out of the Contract, we will, pursuant to written instructions from you in a form acceptable to us, make a partial withdrawal of the Contract Value to pay for the services of the financial adviser. We will treat any fee that is withdrawn as a withdrawal under the terms of this Contract. If the Contract is Non-Qualified, the withdrawal will be treated like any other distribution; it may be included in your gross income for federal tax purposes and, if any Owner is under age 59 1/2, it may be subject to a 10% federal penalty tax. If the Contract is Qualified, the withdrawal for the payment of fees may not be treated as a taxable distribution if certain conditions are met. You should consult a tax adviser regarding the tax treatment of the payment of financial adviser fees from your Contract. We do not set the amount of the fees charged or receive any portion of the fees from your adviser. Any fee that is charged by your adviser is in addition to the fees and expenses that apply under your Contract. We are not party to the agreement you have with your adviser. You should ask your adviser for any details about the compensation he or she receives in connection with your Contract. Please note that the adviser you engage to provide advice and/or to make transfers for you is not acting on our behalf, but is acting on your behalf. We do not review or approve the actions of any adviser, and do not assume any responsibility for these actions. However, we do reserve the right to request and review prior transaction history of any adviser prior to granting your request to allow the adviser to act on your behalf. If, in our sole discretion, we believe the adviser's trading history indicates a pattern of excessive trading, we reserve the right to deny that adviser trading authority. If an adviser is granted trading authority, that adviser is subject to the same limitations applicable to Owners as stated above. VOTING PRIVILEGES We are the legal owner of the Investment Option shares. However, when an Investment Option solicits proxies in conjunction with a shareholder vote that affects your investment, we will obtain from you and other affected Owners instructions as to how to vote those shares. When we receive those instructions, we will vote all of the shares we own including any shares that we own on our own behalf, in proportion to those instructions. Because of this proportional voting and because many Owners do not respond to our request for them to provide us with voting instructions, a small number of Owners may determine the outcome of the vote. Should we determine that we are no longer required to obtain your voting instructions, we will vote the shares in our own right. Only Owners have voting privileges under the Contract. Annuitants, Beneficiaries, Payees and other persons have no voting privileges unless they are also Owners. We determine your voting interest in an Investment Option as follows. o You are permitted to cast votes based on the dollar value of the Investment Option's shares that we hold for your Contract in the corresponding subaccount. We calculate this value based on the number of Accumulation/Annuity Units allocated to your Contract on the record date and the value of each unit on that date. We count fractional votes. o We will determine the number of shares that you can vote. o You will receive any proxy materials and a form to give us voting instructions as well as periodic reports relating to the Investment Options in which you have an interest. 5. OUR GENERAL ACCOUNT Our general account consists of all of our assets other than those in our separate accounts. We have complete ownership of all assets in our general account and we use these assets to support our insurance and annuity obligations other than those funded by our separate accounts. These assets are subject to our general liabilities from business operations. It is possible for assets invested in our general account to lose value. Subject to applicable law, we have sole discretion over the investment of the assets of our general account. We have not registered our general account as an investment company under the Investment Company Act of 1940, nor have we registered interests in our general account under the Securities Act of 1933. As a result, the SEC has not reviewed the disclosures in this prospectus relating to our general account. Currently, the only general account Investment Choices we offer under this Contract during the Accumulation Phase are the Fixed Period Accounts (FPAs). Any amounts you allocate to the FPAs, as well as any amounts we transfer to the FPAs under the Living Guarantees become part of our general account. Additionally, any amounts that you allocate to provide fixed Annuity Payments during the Annuity Phase become part of our general account. We may change the terms of the general account Investment Choices in the future. Please contact us for the most current terms. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 29 FIXED PERIOD ACCOUNTS (FPAS) FPAs are a type of Investment Choice available under our general account. We will credit any amount in the FPAs with interest. FPAs are available only during the Accumulation Phase. Money removed from an FPA may be subject to an MVA, which may increase or decrease your Contract Value and/or the amount of the withdrawal or transfer. FPAs have Account Periods of anywhere from one to ten years. An Account Period is the amount of time we expect money to remain in an FPA. Only one FPA of a specific Account Period is available for Purchase Payments or transfers in each Contract Year. You can allocate up to 50% of any Purchase Payment to an FPA. However, in some states the FPAs may only be available for GPV or GAV Transfers we make under the Living Guarantees. In addition, under the Living Guarantees we may transfer more than 50% of the total Purchase Payments to the FPAs beginning on the second Contract Anniversary. If you allocated any portion of the initial Purchase Payment to an FPA on the Issue Date, we applied that amount to an FPA with a ten-year Account Period. We will also apply any additional transfers or portions of Purchase Payments allocated to an FPA during the first Contract Year to this ten-year Account Period. Similarly, a nine-year Account Period is available for allocations in the second Contract Year, an eight-year Account Period is available in the third year, and so on. After the tenth Contract Year, there are five-year rolling Account Periods. In the 11th through the 15th Contract Years, allocations can be made to an FPA with an Account Period equal to one plus the remaining number of complete Contract Years to the end of the 15th Contract Year. For example, in the 11th Contract Year a five-year Account Period is available; in the 12th Contract Year a four-year Account Period is available, and so on until the 16th Contract Year when a new five-year Account Period is again available. Please see the following table for more information.
CONTRACT YEAR FPA ACCOUNT PERIOD CONTRACT YEAR FPA ACCOUNT PERIOD CONTRACT YEAR FPA ACCOUNT PERIOD 1 10 years 6 5 years 11 5 years 2 9 years 7 4 years 12 4 years 3 8 years 8 3 years 13 3 years 4 7 years 9 2 years 14 2 years 5 6 years 10 1 year 15 1 year
Allocations to the FPAs are credited with interest rates that vary based on the Account Period and when the allocation was made. Generally, the longer the Account Period, the higher the interest rate. The interest rate on the FPAs will be greater than zero, but it could be less than 1% and it could be less than the interest rate applied to the FPA guaranteed minimum value (see the "Market Value Adjustment (MVA)" discussion later in this section). Generally, the initial interest rate is set on the date the first allocation is made to an FPA and will remain in effect until the second Contract Anniversary following the allocation. On that Contract Anniversary, the amount initially allocated to the FPA (plus interest) is then credited with the interest rate that we declare for all FPAs with the same Account Period and duration. This interest rate remains in effect for that entire Contract Year. On every Contract Anniversary we can set a new rate for the next Contract Year for all FPAs with the same Account Period and duration. For FPAs with a one-year Account Period, the interest rate is set at the start of the Account Period and is effective for any amounts allocated to the FPAs during the Contract Year. The interest rate for new allocations to an FPA may be different from the interest rate declared for amounts already in the FPAs. For example, new transfers to an FPA later in the third Contract Year may receive a different interest rate than the rate applied to amounts that were allocated to an FPA earlier in that Contract Year. Any withdrawal or transfer (whether through your request or through the GPV or GAV Transfers we make to maintain the Living Guarantees) from an FPA may be subject to a Market Value Adjustment. Any MVA we make, whether it is upon partial withdrawal/transfer or complete withdrawal/transfer, is also subject to a minimum and a maximum. PARTIAL WITHDRAWALS DURING THE ACCUMULATION PHASE: We will first take any partial withdrawal proportionately from the Investment Options. If the Contract Value in the Investment Options is less than the partial withdrawal you request, the remaining amount will come from the FPAs on a first-in, first-out (FIFO) basis. That is, a partial withdrawal from the FPAs will reduce the Contract Value in the oldest FPA, then the next oldest, and so on. If your Contract includes the Living Guarantees and you take a partial withdrawal that eliminates your Contract Value in the Investment Options, your Contract Value will remain in the FPAs until such time as the mathematical model that supports the Living Guarantees initiates a GAV Transfer from the FPAs to the Investment Options. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 30 IF YOUR CONTRACT INCLUDES THE LIVING GUARANTEES: Your ability to make transfers from the FPAs is subject to the GPV or GAV Fixed Account Minimum. You can request a transfer from the FPAs that would reduce the Fixed Account Value in the FPAs below this minimum by resetting the GPV or GAV Benefit (see "The GPV and GAV Fixed Account Minimums" and "Resetting the GPV and GAV Benefits" discussions in section 6, Guaranteed Values Under the Living Guarantees). IF YOUR CONTRACT DOES NOT INCLUDE THE LIVING GUARANTEES: If you request a partial transfer or partial withdrawal from the FPAs and the amount you request to receive is greater than the Fixed Account Value in the FPAs after adjustment for any applicable MVA, we will treat your request as a request for a complete transfer or full withdrawal from the FPAs. Additionally, we will treat any request for a partial withdrawal from the FPAs that would reduce the Fixed Account Value in the FPAs below $1,000 as a request for a full withdrawal from the FPAs. FOR CONTRACTS ISSUED IN MINNESOTA: We hold amounts allocated to the FPAs in a nonunitized separate account that we established under Minnesota insurance law. This separate account provides an additional measure of assurance that we will make full payment of amounts due under the FPAs. State insurance law prohibits us from charging this separate account with the liabilities of any other separate account or of our general business. We own the assets of this separate account as well as any favorable investment performance of those assets. You do not participate in the performance of the assets held in this separate account. We guarantee all benefits relating to your value in the FPAs. This guarantee is based on the continued claims paying ability of Allianz Life. FOR CONTRACTS ISSUED IN ALABAMA, PENNSYLVANIA, UTAH AND WASHINGTON: The FPAs are not directly available to you and they are not subject to a Market Value Adjustment. The FPAs are only available to receive GPV or GAV Transfers that we make during the Accumulation Phase if your Contract includes the Living Guarantees. You cannot allocate Purchase Payments to the FPAs and you cannot transfer Contract Value to or from the FPAs. You also cannot request withdrawals directly from the FPAs. If your Contract includes Living Guarantees and you request a partial withdrawal, we will take the partial withdrawal proportionately from the Investment Options. If the amount in the Investment Options is less than the partial withdrawal you request, the remaining amount will come from the FPAs on a FIFO basis. MARKET VALUE ADJUSTMENT (MVA) An MVA is an adjustment we make for transfers or withdrawals from an FPA that occur at any time other than 30 days before the end of an Account Period. There will be no MVA for transfers or withdrawals that occur within 30 days before the end of the Account Period. The end of the Account Period will first occur on your tenth Contract Anniversary and then on every fifth Contract Anniversary after that (for example, the 15th Contract Anniversary, the 20th Contract Anniversary, etc.). You will receive a notice mailed at least 30 days in advance of the period in which we will not apply an MVA. We will allocate any amounts (including the GPV or GAV Fixed Account Minimum, if applicable) for which we have not received instructions at the end of the Account Period to another FPA with a five-year Account Period. We also will not apply MVAs to amounts withdrawn for withdrawal charges, the contract maintenance charge, death claims, or for amounts you receive if you return the Contract under the free look/right to examine provision. We determine any withdrawal charges based on market value adjusted withdrawals. Upon a transfer or withdrawal of Contract Value from the FPAs we will apply the MVA to the amount of the withdrawal or transfer. At the time of transfer or withdrawal, the MVA formula compares the interest rate that applies to the FPA from which amounts are being removed to the current interest rate offered on new allocations to an FPA of the same Account Period. An MVA can be either positive or negative depending on the interest rate currently offered on an FPA as shown in the following table. Any MVA we make, whether it is upon partial withdrawal/transfer or complete withdrawal/transfer, is also subject to a minimum and a maximum. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 31
IF THE INTEREST RATE ON THE FPA FROM WHICH AMOUNTS ARE BEING REMOVED IS{ellipsis} THEN THE MVA IS{ellipsis} Less than the current interest rate for new allocations to an FPA of the same Account Period negative Equal to the current interest rate for new allocations to an FPA of the same Account Period zero Greater than the current interest rate for new allocations to an FPA of the same Account Period positive
The MVA formula is [(1+I) / (1+J)][N] where: I = Current interest rate earned in the FPA from which amounts are being transferred or withdrawn. J = Current interest rate for new allocations to an FPA with an Account Period equal to the remaining term (rounded up) in the current Account Period. N = Number of days from the date of transfer/withdrawal from the FPA to the next Contract Anniversary divided by 365, plus the number of whole years remaining in the Account Period. The MVA is also subject to a minimum and a maximum. The minimum and maximum apply upon partial withdrawal/transfer or complete withdrawal/transfer. The MVA minimum is equal to the greater of (a) or (b), with the result then divided by (c), where: (a)= The FPA guaranteed minimum value. (b)= All allocations to the FPAs less previous partial withdrawals (including any withdrawal charges) and transfers from the FPAs. (c)= The Fixed Account Value. The MVA maximum is equal to (a) divided by the greater of (b) or (c), where: (a)= The Fixed Account Value. (b)= The FPA guaranteed minimum value. (c)= All allocations to the FPAs less previous partial withdrawals (including any withdrawal charges) and transfers from the FPAs. THE FPA GUARANTEED MINIMUM VALUE IS EQUAL TO: o 87.5% of all allocations to the FPAs, less all partial withdrawals (including any withdrawal charges) and transfers from the FPAs, accumulated at the FPA guaranteed minimum value interest rate (which is also the state nonforfeiture rate) specified in the Contract (which is currently 1%-3% depending on your state). PLUS o Upon a full withdrawal, the amount of the withdrawal charge that we assign to the FPAs. We base this amount on the percentage of Contract Value in the FPAs (for example, if 25% of the Contract Value is in the FPAs, then upon a full withdrawal we would assign 25% of any withdrawal charge to the FPAs). All previous partial withdrawals and transfers in this calculation of the FPA guaranteed minimum value do not reflect any MVA. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 32 MVA EXAMPLES The following examples show the effect of the MVA on a Contract. o You purchased a May 2007 Contract with an initial Purchase Payment of $100,000 on January 1. You did not select the Living Guarantees. The FPA guaranteed minimum value interest rate is 3%. o You allocate $10,000 to an FPA with a ten-year Account Period and an interest rate of 6%. o You make no additional Purchase Payments. o On July 1 of your sixth Contract Year, your Fixed Account Value in the FPA is $13,774.58. The sixth Contract Year is not a leap year. o The withdrawal charge period for your initial Purchase Payment has expired by the sixth Contract Year, so there will be no withdrawal charge on amounts withdrawn from the Contract during the sixth Contract Year. The FPA guaranteed minimum value on July 1 of the sixth Contract Year is equal to: 87.5% of all allocations to the FPAs less partial withdrawals and transfers accumulated at the FPA guaranteed minimum value interest rate for 5 years and 181 days = ((87.5% x $10,000) - $0) x 1.03[((181/365) + 5)] = ..........$10,293.43 The MVA minimum on July 1 of the sixth Contract Year is equal to: The greater of (a) the FPA guaranteed minimum value, or (b) all allocations to the FPAs less partial withdrawals and transfers, divided by (c) the Fixed Account Value = $10,293.43 / $13,774.58 = 0.747277 The MVA maximum on July 1 of the sixth Contract Year is equal to: (a) The Fixed Account Value divided by the greater of (b) the FPA guaranteed minimum value, or (c) all allocations to the FPAs less partial withdrawals and transfers = $13,774.58 / $10,293.43 = 1.338191 EXAMPLE OF A POSITIVE MVA ON FULL WITHDRAWAL FROM THE FIXED PERIOD ACCOUNT ON JULY 1 OF THE SIXTH CONTRACT YEAR: Assume that the current interest rate for an FPA with a five-year Account Period is 5%. The MVA on July 1 of the sixth Contract Year is: [1.06 / 1.05][((184/365) + 4)] = 1.043618. Because the MVA is less than the MVA maximum (1.338191), we will use the MVA to calculate the amount you will receive after we withdraw all of the Fixed Account Value from the FPA which is $13,774.58 x 1.043618 = $14,375.40. In other words, the amount we would withdraw from the FPA is $13,774.58, and the amount you would receive after application of the MVA is $14,375.40. EXAMPLE OF A NEGATIVE MVA ON A PARTIAL WITHDRAWAL OR TRANSFER FROM A FIXED PERIOD ACCOUNT ON JULY 1 OF THE SIXTH CONTRACT YEAR: Assume that the current interest rate for an FPA with a five-year Account Period is 7%. You request that we withdraw $4,000 from the FPA and send you a check. The MVA on July 1 of the sixth Contract Year is: [1.06 / 1.07][((184/365) + 4) ]= 0.958589. Because the MVA is more than the MVA minimum (0.747277), we will use the MVA to calculate the amount we will withdraw from the FPA in order to send you a check for $4,000 after we apply the MVA. The amount we would withdraw from the FPA is: $4,000 / 0.958589 = $4,172.80. In other words, we would withdraw $4,172.80 from the FPA, and you would receive $4,000 after application of the MVA. If you had instead requested we transfer $4,000 from the FPA to the Investment Option(s), we would apply the MVA to the amount transferred, instead of applying the MVA to the Fixed Account Value in the FPA. The amount we would transfer into the Investment Options is: $4,000 x 0.958589 = $3,834.36. In other words, we would transfer $4,000 out of the FPA, and we would transfer $3,834.36 into your selected Investment Option(s). NOTE REGARDING APPLICATION OF MVAS TO GAV AND GPV TRANSFERS: We will not apply MVAs to GAV or GPV Transfers out of the FPAs initiated by us, effective for all Contracts issued on or after December 1, 2006 or such later date as this change is approved in your state. For Contracts issued before this date, you can opt out of having MVAs applied to GAV or GPV Transfers from the FPAs. An opt out will be effective as of the Business Day we receive your request in good order at our Service Center. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 33 6. GUARANTEED VALUES UNDER THE LIVING GUARANTEES Your Separate Account Value will increase or decrease depending on the performance of the underlying Investment Options you selected. Depending on market conditions, you can gain or lose value in the Investment Options, including your principal. However, for Contracts with the Living Guarantees, the GPV and GAV Benefits are intended to provide a level of protection for the principal you invested five or more years ago and, if you select the GAV Benefit, to lock in any investment gains from five or more Contract Anniversaries ago. The Living Guarantees were only available at Contract issue. THE LIVING GUARANTEES CANNOT BE ADDED OR CHANGED FOR AN EXISTING CONTRACT AFTER IT IS ISSUED, OR REMOVED FROM YOUR CONTRACT. The Living Guarantees provide a long term GPV or GAV Benefit during the Accumulation Phase. Under the GPV Benefit, the guarantee is based on Purchase Payments we have had for at least five years. Under the GAV Benefit, the guarantee is based on the highest Contract Value that occurred five or more Contract Anniversaries ago. There are no additional fees or charges for selecting the Living Guarantees with the GPV Benefit. However, there is an additional M&E charge for selecting the guarantees provided by the GAV Benefit. To maintain these guarantees, we will periodically transfer amounts between your selected Investment Options and the FPAs according to a mathematical model (see the "GPV and GAV Transfers" discussion later in this section). The GPV and GAV Benefits guarantee that, beginning on your fifth Contract Anniversary (and on each subsequent Contract Anniversary until the Income Date that you take a Full Annuitization or Contract termination) your Contract Value will at least equal the GPV or GAV established five years ago, less all GPV or GAV adjusted partial withdrawals taken in the last five years. If your Contract Value is less than this guaranteed amount on the fifth and each subsequent Contract Anniversary, we will make a payment to your Contract equal to that difference. YOU DO NOT HAVE ANY PROTECTION UNDER THE GPV OR GAV BENEFITS UNLESS YOU HOLD THE CONTRACT FOR AT LEAST FIVE YEARS. YOUR PURCHASE PAYMENTS ARE NOT PROTECTED UNDER THE GPV OR GAV BENEFITS UNTIL WE HAVE HAD THEM FOR AT LEAST FIVE YEARS. Assuming no partial withdrawals, the GPV and GAV Benefits have the effect of guaranteeing that, beginning with your fifth Contract Anniversary (and on each subsequent anniversary until the Income Date that you take a Full Annuitization or Contract termination), your Contract Value will be at least equal to the initial GPV or GAV, or the GPV or GAV from any Contract Anniversary that occurred at least five years ago. This type of guarantee is sometimes referred to as a "high water mark." For example, assuming no withdrawals, on your 12th Contract Anniversary, the GPV and GAV Benefits guarantee your Contract Value will be at least the highest GPV or GAV established on the Issue Date, or on any Contract Anniversary, up to and including the seventh Contract Anniversary: that is, the "high water mark" from that period. HOWEVER, THE GPV AND GAV BENEFITS DO NOT PROVIDE ANY PROTECTION UNTIL THE FIFTH CONTRACT ANNIVERSARY. IN ADDITION, THE GPV AND GAV DO NOT LOCK IN ANY GAINS UNTIL FIVE YEARS AFTER THEY OCCUR, AND THE GPV AND GAV DO NOT AUTOMATICALLY LOCK IN ANY GAINS THAT OCCUR BETWEEN ANNIVERSARIES. As noted above, if on a Contract Anniversary, your Contract Value is less than the GPV or GAV established five years ago, we will pay into your Contract an amount equal to that difference. We will allocate this amount to your Investment Options in proportion to the amount of Separate Account Value in each of the Investment Options on the date of allocation. We refer to the application of this payment as a "True Up." Because the True Ups increase your Contract Value, they will also increase the total dollar amount (but not the percentage) of the M&E charge you pay. AN ADDITIONAL PURCHASE PAYMENT WILL IMMEDIATELY INCREASE YOUR CONTRACT VALUE, BUT DOES NOT BECOME PART OF THE VALUE GUARANTEED BY THE GPV AND GAV BENEFITS UNTIL IT IS AT LEAST FIVE YEARS OLD. THEREFORE, A LARGE ADDITIONAL PURCHASE PAYMENT MAY DIMINISH THE ADVANTAGE OF THE GPV AND GAV BENEFITS BY DECREASING THE LIKELIHOOD THAT YOU WOULD RECEIVE A TRUE UP TO YOUR CONTRACT. For example, if on the fifth Contract Anniversary your Contract Value is less than the GPV or GAV from five years ago, then we True Up your Contract Value to equal that GPV or GAV. If, however, you made a large additional Purchase Payment in the fourth Contract Year that increases your Contract Value on the fifth Contract Anniversary so that it is greater than the GPV or GAV from five years ago, then we would not make a True Up to your Contract. This example assumes you take no partial withdrawals. Any withdrawals you take may reduce the GPV or GAV by an amount greater than the withdrawal itself. IF THE CONTRACT VALUE AT THE TIME OF WITHDRAWAL IS GREATER THAN THE GPV/GAV, THE GPV/GAV WILL BE REDUCED BY THE DOLLAR AMOUNT OF THE WITHDRAWAL. IF THE CONTRACT VALUE AT THE TIME OF WITHDRAWAL IS LESS THAN THE GPV/GAV, THE GPV/GAV WILL BE REDUCED BY MORE THAN THE WITHDRAWAL AMOUNT. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 34 NOTE: YOU WILL BE REQUIRED TO TAKE A FULL ANNUITIZATION OF YOUR CONTRACT ON OR BEFORE THE MAXIMUM PERMITTED INCOME DATE. (For more information see section 2, The Annuity Phase.) Upon such a Full Annuitization the FPAs will no longer be available to you and you will no longer receive any True Ups under the Living Guarantees. CALCULATING THE GPV AND GAV The initial GPV or GAV is equal to all Purchase Payments received during the first 90 days of your Contract less any GPV or GAV adjusted partial withdrawals taken during this period. Adjusted partial withdrawals include withdrawals and any amounts applied to Partial Annuitizations. Additional Purchase Payments will increase the GPV and GAV on a dollar for dollar basis, but partial withdrawals and Partial Annuitizations will decrease the GPV and GAV proportionately. We also recalculate the GVP or GAV on every Contract Anniversary as follows. GPV BENEFIT: On the first Contract Anniversary, the GPV is equal to the initial GPV plus any additional Purchase Payments received during the remainder of the first Contract Year and minus any GPV adjusted partial withdrawals taken during the remainder of the first Contract Year. On the second and any subsequent Contract Anniversaries, the GPV is equal to the GPV from the previous Contract Anniversary plus any additional Purchase Payments received in the previous Contract Year and minus any GPV adjusted partial withdrawals you made in the previous Contract Year. GAV BENEFIT: On the first Contract Anniversary, the GAV is equal to the greater of A or B, where: A =The initial GAV, plus any additional Purchase Payments received during the remainder of the first Contract Year and minus any GAV adjusted partial withdrawals taken during the remainder of the first Contract Year. B =Your Contract Value on the first Contract Anniversary. On the second and any subsequent Contract Anniversaries, the GAV is equal to the greater of C or D, where: C =The GAV from the previous Contract Anniversary plus any additional Purchase Payments received in the previous Contract Year and minus any GAV adjusted partial withdrawals taken in the previous Contract Year. D =Your Contract Value on that Contract Anniversary. For each withdrawal or Partial Annuitization taken before the second Contract Anniversary, a GPV or GAV adjusted partial withdrawal is equal to: A X B For each withdrawal or Partial Annuitization taken on or after the second Contract Anniversary, a GVP or GAV adjusted partial withdrawal is equal to: C + ( D X B) (A) =The amount of Contract Value (before any MVA) applied to a Partial Annuitization or withdrawn (including any applicable withdrawal charge). (B) =The greater of one, or the ratio of (e) divided by (f) where: (e)=The GPV or GAV on the day of (but before) the Partial Annuitization or partial withdrawal. (f)=The Contract Value on the day of (but before) the Partial Annuitization or partial withdrawal, adjusted for any applicable MVA. (C) =The amount of the partial withdrawal (before any MVA) that, together with any other previous partial withdrawals (before any MVA) taken during the Contract Year does not exceed 10% of total Purchase Payments received (the partial withdrawal privilege). However, if you take a Partial Annuitization, the entire amount of any Contract Value (before any MVA) applied to the Partial Annuitization will be included in part (d) of this formula. (D) =The remaining amount of the partial withdrawal including any applicable withdrawal charge, but before any MVA. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 35 GAV EXAMPLE o You purchased a May 2007 Contract and selected the Living Guarantees with the GAV Benefit. You made only one initial Purchase Payment of $100,000. You make no additional Purchase Payments. Therefore, the calculations of the GAV that follows will not include reference to additional Purchase Payments. o You take no partial withdrawals or Partial Annuitizations. Therefore, the calculations of the GAV that follows will only take into account the previous GAV and the current Contract Value on the Contract Anniversary. For information on how these calculation would be effected by a partial withdrawal, please see Appendix C. o The Contract Value on the first Contract Anniversary is $120,000; on the second Contract Anniversary it is $115,000; on the third Contract Anniversary it is $119,000; and on the fourth Contract Anniversary it is $121,000. The initial GAV........................................................... $100,000 The GAV on the first Contract Anniversary equals the greater of: (A) the initial GAV, which is the initial Purchase Payment of $100,000; or (B) the Contract Value on the first Contract Anniversary, which is $120,000 $120,000 The GAV on the second Contract Anniversary equals the greater of: (C) the GAV from the first Contract Anniversary ($120,000); or (D) the Contract Value on the second Contract Anniversary, which is $115,000 $120,000 The GAV on the third Contract Anniversary equals the greater of: (C) the GAV from the second Contract Anniversary ($120,000); or (D) the Contract Value on the third Contract Anniversary, which is $119,000 $120,000 The GAV on the fourth Contract Anniversary equals the greater of: (C) the GAV from the third Contract Anniversary ($120,000); or (D) the Contract Value on the third Contract Anniversary, which is $121,000 $121,000 APPLYING THE GAV BENEFIT o On the fifth Contract Anniversary the Contract Value is $105,000. The initial GAV established five years ago is $100,000. The fifth anniversary Contract Value is greater than the initial GAV, so there is no True Up on the fifth Contract Anniversary. o On the sixth Contract Anniversary the Contract Value is $108,000. The GAV established five years ago on the first Contract Anniversary is $120,000. The sixth anniversary Contract Value is less than the GAV from the first Contract Anniversary, so we will True Up the Contract Value to equal this amount by applying $12,000 to the Investment Options on the sixth Contract Anniversary. o On the seventh Contract Anniversary the Contract Value is $122,000. The GAV from five years ago (the second Contract Anniversary) is $120,000. The seventh anniversary Contract Value is greater than the GAV established five years ago on the second Contract Anniversary so there is no True Up on the seventh Contract Anniversary. Application of the GAV Benefit in tabular form:
CONTRACT VALUE GAV CONTRACT VALUE GUARANTEED UNDER THE GAV AMOUNT OF GAV TRUE CONTRACT VALUE AFTER ANY GAV BENEFIT (DOES NOT APPLY UNTIL THE 5TH CONTRACT UP (DOES NOT APPLY TRUE UP ANNIVERSARY) UNTIL THE 5TH CONTRACT ANNIVERSARY) Issue $100,000 $100,000 - - $100,000 1st $120,000 $120,000 - - $120,000 Contract Anniversary 2nd $115,000 $120,000 - - $115,000 Contract Anniversary 3rd $119,000 $120,000 - - $119,000 Contract Anniversary 4th $121,000 $121,000 - - $121,000 Contract Anniversary 5th $105,000 $121,000 $100,000 None $105,000 Contract Anniversary 6th $108,000 $121,000 $120,000 $12,000 $120,000 Contract Anniversary 7th $122,000 $122,000 $120,000 None $122,000 Contract Anniversary
The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 36 GPV AND GAV TRANSFERS To make the GPV and GAV Benefits available, we monitor your Contract daily as it relates to the GPV or GAV and periodically transfer amounts between your selected Investment Options and the FPAs (GPV Transfers or GAV Transfers). You will still have complete discretion over the selection of and allocation to the Investment Options for any portion of your Contract Value that is not required to be in the FPAs. Selecting Investment Options that have a higher volatility is likely to result in changes to Contract Value that, if negative, will, in turn, increase the amount and/or frequency of GPV or GAV Transfers to the FPAs. We will transfer amounts between the Investment Options and the FPAs according to a mathematical model. This mathematical model will not change during the life of your Contract. We will transfer amounts to the FPAs proportionately from all of your selected Investment Options. GPV or GAV Transfers from the FPAs to the Investment Options will be allocated according to your most recent allocation instructions. During the first two Contract Years, the Fixed Account Value immediately after any GPV or GAV Transfer to the FPAs is limited to 50% of total Purchase Payments received, but we may transfer more than 50% of your total Purchase Payments to the FPAs beginning on the second Contract Anniversary. GPV and GAV Transfers are not subject to any transfer fee and do not count against any free transfers we allow. The mathematical model we use to determine GPV and GAV Transfers includes a number of interrelated factors. The following table sets forth the most influential of these factors and indicates how each one by itself could trigger a GPV or GAV Transfer.
CHANGE IN ONE FACTOR, ASSUMING ALL OTHER FACTORS REMAIN CONSTANT FACTOR DIRECTION OF THE GPV OR GAV TRANSFER Contract Value increases To the Investment Options GPV or GAV increases To the FPAS Credited interest rate on the FPAs increases To the Investment Options Time until application of the GPV or GAV Benefit decreases To the FPAS
The amount of the GPV or GAV Transfer will vary depending on the magnitude and direction of the change in these factors and their impact on your Contract Value. Most importantly, GPV or GAV Transfers out of the Investment Options into the FPAs occur as the Contract Value falls relative to the GPV or GAV, as applicable. GPV and GAV Transfers to the FPAs generally first occur when the Contract Value drops below the most recently established GPV or GAV by an amount that typically ranges between 1% to 4%. If the Contract Value continues to fall, more GPV or GAV Transfers to the FPAs will occur. THE AMOUNT OF THE FIRST GPV OR GAV TRANSFER TO THE FPAS WILL TYPICALLY BE SIGNIFICANT, and will involve a transfer to the FPAs of an amount that ranges between 39% and 44% of your Contract Value. Subsequent transfer amounts to the FPAs typically range between 6% and 10% of your Contract Value. Concentrating Contract Value in Investment Options with higher volatility is likely to result in greater changes in Contract Value relative to the GPV or GAV. If those changes are negative, they will, in turn, result in higher amounts of and/or more frequent GPV or GAV Transfers to the FPAs. In addition, as the time remaining until application of the GPV or GAV True Up shortens, the frequency and amount of GPV or GAV Transfers to the FPAs will increase, particularly in poorly performing markets. Transactions you make may also affect the number of GPV or GAV Transfers including: o additional Purchase Payments, o partial withdrawals, and o Partial Annuitizations. Additional Purchase Payments, withdrawals and Partial Annuitizations will change the Contract Value relative to the GPV or GAV, and may result in additional GPV or GAV Transfers. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 37 When a GPV or GAV Transfer occurs, we allocate the transferred Contract Value to the available FPA. In general the Contract Value allocated to the FPA will remain in the FPA until the performance of your Investment Options recovers sufficiently to support the guarantees provided by the GPV or GAV Benefits. It can be expected that, in some instances, Contract Value will transfer out of the FPAs more slowly than it was transferred in, particularly as the time until the application of the GPV or GAV True Up shortens. As this time shortens: o GPV or GAV Transfers to the FPAs become more likely, and o Contract Value relative to the GPV or GAV must increase in order for GAV Transfers from the FPAs to occur. After the second Contract Anniversary, it is possible that substantially all of your Contract Value (for example, more than 95%) will be in the FPAs, especially approaching a Contract Anniversary when we may need to True Up your Contract Value to equal the GPV or GAV. This can be true even if your Contract Value exceeds the GPV or GAV. THE DAILY REBALANCING FORMULA UNDER THE MATHEMATICAL MODEL: As noted above, to limit our exposure under the GPV or GAV Benefit, we transfer Contract Value from the Investment Options to the FPAs, to the extent called for by a mathematical model that will not change during the life of your Contract. We do this in order to minimize the need to provide a True Up (for example, we will pay into your Contract an amount by which the Contract Value falls short of the GPV or GAV as of the Contract Anniversary date when that GPV or GAV becomes available), or to reduce the amount of any True Up that is required. (Generally, amounts allocated to the Investment Options have a greater potential for gain or loss than amounts allocated to the FPAs.) We will determine a GPV or GAV for each Contract Anniversary and we may need to provide a True Up to any GPV or GAV five or more Contract Years after it was established. When a True Up becomes more likely, including when your Contract Value is less than any GPV or GAV, the mathematical model will tend to allocate more Contract Value to the FPAs. If, on the other hand, the Contract Value is much higher than each of these GPVs or GAVs, then a True Up may not be necessary, and therefore, the mathematical model will tend to allocate more Contract Value to the Investment Options. Each Business Day the mathematical model computes a "target allocation," which is the portion of the Contract Value that is to be allocated to the Investment Options. The target allocation depends on several factors - the Owner's current Contract Value as compared to the Owner's GPV or GAV, the time until the GPV or GAV becomes available, and the rate credited to the FPAs. However, as time passes, these factors change. Therefore, the target allocation changes from one Business Day to the next. The mathematical model could theoretically call for a daily reallocation of Contract Value so that the Owner's actual allocation between the Investment Options and FPAs always equals that Owner's target allocation. However, to avoid the constant reallocations that this approach would require, the model calls for a rebalancing only when the target allocation differs sufficiently from a "baseline allocation," which is the target allocation determined at issue or upon the most recent GPV or GAV Transfer. In other words, at issue, the target and baseline allocations are the same; on each Business Day going forward the target allocation will change with the Contract's changing characteristics, while the baseline allocation will not change until the first GPV or GAV Transfer. When the target allocation to the Investment Options differs from the baseline allocation to the Investment Options by more than a specified margin, a GPV or GAV Transfer takes place that makes the Owner's actual allocation equal to the target allocation, and the mathematical model establishes a new baseline allocation to the Investment Options equal to the target allocation at the time of the transfer for use in future comparisons. In practice, we find that for a newly-issued Contract, no GPV or GAV Transfer to the FPAs will occur until the target allocation to the Investment Options has fallen to about 60% of Contract Value. Therefore, the initial GPV or GAV Transfer will transfer enough Contract Value so that approximately 40% of the Contract Value will be in the FPAs after the GPV or GAV Transfer. Once the first GAV Transfer has occurred, if the target allocation to the Investment Options rises above the baseline allocation by more than the specified margin, a GPV or GAV Transfer will transfer Contract Value from the FPAs to the Investment Options. If the target allocation to the Investment Options falls below the baseline allocation by more than the specified margin, the GPV or GAV Transfer will transfer Contract Value from the Investment Options to the FPAs. As with the initial GPV or GAV Transfer, a subsequent GPV or GAV Transfer results in the establishment of a new baseline allocation equal to the target allocation at the time of the transfer for use in future comparisons. In practice, we find that GPV or GAV Transfers after the first typically range between 6% and 10% of the Contract Value. The specified margin is set on the Issue Date and cannot be changed for the life of a Contract. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 38 See the SAI for more detail regarding the workings of the mathematical model, including the formula used to compute the target allocation on a daily basis. WE WILL TRANSFER CONTRACT VALUE FROM THE INVESTMENT OPTIONS TO THE FPAS, AND FROM THE FPAS TO THE INVESTMENT OPTIONS, ACCORDING TO THE MATHEMATICAL MODEL IN ORDER TO SUPPORT THE LIVING GUARANTEES. YOU SHOULD VIEW THE GPV AND GAV BENEFITS AS A WAY TO PERMIT YOU TO INVEST IN THE INVESTMENT OPTIONS TO THE EXTENT PERMITTED BY THE MATHEMATICAL MODEL, WHILE STILL HAVING YOUR PRINCIPAL (AND SOME OF YOUR INVESTMENT GAINS) PROTECTED TO THE EXTENT PROVIDED BY THE GPV OR GAV BENEFITS. YOU SHOULD NOT VIEW THE GPV AND GAV BENEFITS AS A "MARKET TIMING" OR OTHER TYPE OF INVESTMENT PROGRAM DESIGNED TO ENHANCE YOUR EARNINGS UNDER THE CONTRACT. IF WE MAKE TRANSFERS FROM YOUR CHOSEN INVESTMENT OPTIONS TO THE FPAS DURING A MARKET DOWNTURN, LESS (OR POTENTIALLY NONE) OF YOUR CONTRACT VALUE WILL BE AVAILABLE TO PARTICIPATE IN ANY UPSIDE POTENTIAL OF THE INVESTMENT OPTIONS IF THERE IS A SUBSEQUENT RECOVERY. THIS MEANS THAT IF MOST OR ALL OF YOUR CONTRACT VALUE IS ALLOCATED TO THE FPAS, A SUBSEQUENT MARKET RECOVERY WILL BENEFIT ONLY THAT PORTION, IF ANY, OF YOUR CONTRACT VALUE WHICH REMAINS IN THE INVESTMENT OPTIONS. IF A RECOVERY IS SUSTAINED ENOUGH TO RESULT IN AMOUNTS BEING TRANSFERRED BACK FROM THE FPAS INTO YOUR SELECTED INVESTMENT OPTIONS, PROGRESSIVELY MORE OF YOUR CONTRACT VALUE MAY BE ABLE TO PARTICIPATE IN THE RECOVERY, BUT THE CONTRACT VALUE AS A WHOLE WILL ALWAYS RECOVER MORE SLOWLY THAN HAD IT BEEN MORE FULLY ALLOCATED TO THE INVESTMENT OPTIONS. THIS MAY POTENTIALLY PROVIDE LESS CONTRACT VALUE TO YOU THAN IF YOUR CONTRACT DID NOT INCLUDE THE LIVING GUARANTEES. THE GPV AND GAV FIXED ACCOUNT MINIMUMS The GPV and GAV Fixed Account Minimums are the amount we require to be kept in the FPAs to maintain the guarantee protection provided by the GPV or GAV Benefits. You can transfer amounts into or out of the FPAs subject to the GPV or GAV Fixed Account Minimums. You can only make a transfer from the FPAs that would reduce the amount in the FPAs below these minimums by resetting the GPV or GAV Benefits. If you allocate or transfer amounts to the FPAs, the amounts we need to transfer to the FPAs in order to maintain the guarantee provided by the GPV and GAV Benefits will be less. If you transfer amounts out of the FPAs (subject to the GPV and GAV Fixed Account Minimums), the amounts we need to transfer to the FPAs in order to maintain the guarantee provided by the GPV and GAV Benefits will be greater. RESETTING THE GPV AND GAV BENEFITS FOR CONTRACTS ISSUED IN ALABAMA, PENNSYLVANIA, UTAH AND WASHINGTON: The reset feature is not available. You may reset the operation of the GPV or GAV Benefits at any time, as long as the reset date is at least 90 days from any earlier reset date and the reset provision is available in your state. Upon a reset, we will transfer 100% of your Contract Value to the Investment Choices on the reset date according to your most recent allocation instructions unless you instruct us otherwise. If you reset the operation of the GPV or GAV Benefits, the first Contract Anniversary on which your Contract Value will be guaranteed under the GPV and GAV Benefits will be the Contract Anniversary occurring five years after the Contract Anniversary that occurs on or after the reset date. This means that we will not make a True Up to the Contract any time between the reset date and the sixth Contract Anniversary after the reset date (or the fifth Contract Anniversary if you reset on a Contract Anniversary). The GPV or GAV on the reset date is the greater of: o the last GPV or GAV calculated before the reset date, plus any additional Purchase Payments received on or after the last GPV/GAV calculation, and minus any GPV/GAV adjusted partial withdrawals taken on or after that calculation, or o your Contract Value. If your Contract Value on the reset date is less than the GPV or GAV at that time, the GPV or GAV Transfers to the FPAs will occur more rapidly and at a larger amount than those for a new Contract with Purchase Payments equal to the Contract Value on the reset date. This occurs because the guarantee available to you on the reset date is larger than the guarantees available for a new Contract. On the Contract Anniversary that occurs on or after the reset date, the GPV under the GPV Benefit is equal to the: o the GPV established on the reset date, o plus any additional Purchase Payments received on or after the reset date, and o minus any GPV adjusted partial withdrawals taken on or after the reset date. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 39 On the Contract Anniversary that occurs on or after the reset date, the new GAV under the GAV Benefit is equal to the greater of: o the GAV established on the reset date, plus any additional Purchase Payments received on or after the reset date, and minus any GAV adjusted partial withdrawals taken on or after the reset date; or o your Contract Value. On each subsequent Contract Anniversary, the new GPV or GAV is calculated as previously described (see the "Calculating the GPV and GAV" discussion that appears earlier in this section). OTHER INFORMATION ON THE GPV AND GAV BENEFITS Once we pay a GPV or GAV True Up to your Contract Value as a result of the GPV and GAV Benefits, the True Ups become part of your Contract Value and are available for immediate withdrawal. Also, any True Ups will be allocated proportionately to the Investment Options you chose, and will immediately begin to participate in the investment performance of those Investment Options. For tax purposes, your True Up will be treated as earnings under the Contract. However, if your Contract Value at the time of a True Up is less than your net Purchase Payments (total Purchase Payments received less any prior payments withdrawn) then we may treat some or all of the True Up as a Purchase Payment when applying the withdrawal charge if the entire Contract Value is then withdrawn. This is no different than when the Contract Value is less than your net Purchase Payments, but the Contract Value then experiences a gain immediately before you take a complete withdrawal. We assess withdrawal charges against Purchase Payments withdrawn in the manner described in section 7, Expenses - Withdrawal Charge. The GPV or GAV Benefits will terminate upon the earliest of the following. o The Income Date that you take a Full Annuitization, INCLUDING A REQUIRED FULL ANNUITIZATION ON THE MAXIMUM PERMITTED INCOME DATE. For more information, see section 2, The Annuity Phase. o Contract termination. EXAMPLE OF THE TREATMENT OF A TRUE UP UPON FULL WITHDRAWAL Assume you purchased a May 2007 Contract and selected the Living Guarantees with the GAV Benefit. You made only one initial Purchase Payment of $100,000. The initial GAV that will be available on the fifth Contract Anniversary is $100,000. On the fifth Contract Anniversary, if the Contract Value is $98,000, the GAV Benefit would provide a True Up of $2,000. Assume on the fifth anniversary that you request a full withdrawal of the entire Contract Value. For purposes of calculating the withdrawal charge we would first withdraw Purchase Payments that are beyond the withdrawal charge period, which would be the initial $100,000 payment. We need not go any further in the calculation of the withdrawal charge because you have now withdrawn the entire Withdrawal Charge Basis. In this example, when we applied the True Up to your Contract it was treated as earnings, however, for the purpose of calculating the withdrawal charge it was treated as a Purchase Payment. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 40 7. EXPENSES There are charges and other expenses associated with the Contract that will reduce your investment return. These charges and expenses are described in detail in this section. MORTALITY AND EXPENSE RISK (M&E) CHARGES Each Business Day, during the Accumulation and Annuity Phases, we make a deduction from your Separate Account assets for the mortality and expense risk (M&E) charges. We do this as part of our calculation of the value of the Accumulation and Annuity Units. The M&E charge is an annualized rate that is realized on a daily basis as a percentage of the net asset value of an Investment Option. The amount of the M&E charge during the Accumulation Phase depends on the benefit options that apply. During the Accumulation Phase, the M&E charges are as follows:
M&E CHARGES TRADITIONAL GMDB ENHANCED GMDB No Living Guarantees or Living Guarantees with the GPV Benefit 1.65% 1.85% Living Guarantees with the GAV Benefit 1.75% 1.95%
During the Annuity Phase, if you request variable Annuity Payments, the M&E charge is equal, on an annual basis, to 1.65%. Because the Contract allows Partial Annuitization, it is possible for one portion of the Contract to be in the Accumulation Phase and other portions will be in the Annuity Phase at the same time. It is also possible to have different M&E charges on different portions of the Contract at the same time if you request a variable Partial Annuitization. These charges compensate us for all the insurance benefits provided by your Contract, for example: o our contractual obligation to make Annuity Payments, o the death benefits, income benefits, withdrawal benefits and Living Guarantees under the Contract, o certain expenses related to the Contract, and o for assuming the risk (expense risk) that the current charges will be insufficient in the future to cover the cost of administering the Contract. If the M&E charges are sufficient to cover such costs and risks, any excess will be profit to us. We anticipate making such a profit, and using it to cover distribution expenses as well as the cost of providing certain features under the Contract. CONTRACT MAINTENANCE CHARGE We deduct $40 from the Contract annually as a contract maintenance charge during the Accumulation and Annuity Phases. The charge is for the expenses associated with the administration and maintenance of the Contract. We deduct this charge on the last day of each Contract Year and we deduct it proportionately from the Investment Options as set out in your Contract. If there is an insufficient amount in the Investment Options, the charge is deducted first from the Investment Options, and any remaining amount is deducted from the FPAs. During the Annuity Phase, we will collect a portion of the charge out of each Annuity Payment. During the Accumulation Phase, we will not deduct this charge if the Contract Value is at least $75,000 at the time we are to deduct the charge. If you own more than one Contract offered under this prospectus, we will determine the total value of all your Contracts. If the total value of all Contracts registered under the same social security number is at least $75,000, we will not assess the contract maintenance charge. We also will waive this charge during the Annuity Phase if the Contract Value on the Income Date is at least $75,000. If you take a full withdrawal from your Contract (other than on a Contract Anniversary), we will deduct the full contract maintenance charge. If the Contract is owned by a non-individual (for example, a qualified plan or trust), we will look to the Annuitant to determine if we will assess the charge. In some states, we are not permitted to assess the contract maintenance charge against the general account Investment Choices, during the Annuity Phase, or both. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 41 WITHDRAWAL CHARGE You can take withdrawals from the portion of the Contract that is in the Accumulation Phase. A withdrawal charge applies if all or part of the amount withdrawn is from Purchase Payments we received within four complete years before the withdrawal for the May 2007 Contract, or three complete years before the withdrawal for the Original Contract. The withdrawal charge compensates us for expenses associated with selling the Contract. We do not assess the withdrawal charge on: amounts deducted to pay the contract maintenance charge, Annuity Payments, death benefits, or amounts paid as part of a required minimum distribution payment under our minimum distribution program. (For more information, see section 9, Access to Your Money - The Minimum Distribution Program and Required Minimum Distribution (RMD) Payments.) The total amount under your Contract that is subject to a withdrawal charge is the Withdrawal Charge Basis. The Withdrawal Charge Basis is equal to the total Purchase Payments, less any Purchase Payments withdrawn (excluding any penalty- free withdrawals), and less any withdrawal charges. Amounts applied to Partial Annuitizations will reduce each Purchase Payment proportionately by the percentage of Contract Value you annuitize. WE DO NOT REDUCE THE WITHDRAWAL CHARGE BASIS FOR ANY PENALTY-FREE WITHDRAWALS OR THE DEDUCTION OF THE CONTRACT MAINTENANCE CHARGE. THIS MEANS THAT IF YOU TAKE A FULL WITHDRAWAL WHILE THE WITHDRAWAL CHARGE APPLIES, AND YOU HAVE TAKEN PENALTY-FREE WITHDRAWALS, YOU MAY BE ASSESSED A WITHDRAWAL CHARGE ON MORE THAN THE AMOUNT YOU ARE WITHDRAWING. Penalty-free withdrawals include the following amounts: withdrawals under the GWB, withdrawals under the partial withdrawal privilege, and any amounts paid as part of a required minimum distribution. We also do not adjust the Withdrawal Charge Basis for any gains or losses on your Investment Options. THIS MEANS THAT ON A FULL WITHDRAWAL, IF THE CONTRACT VALUE HAS DECLINED DUE TO POOR PERFORMANCE OF YOUR SELECTED INVESTMENT OPTIONS, THE WITHDRAWAL CHARGE MAY BE GREATER THAN THE AMOUNT AVAILABLE FOR WITHDRAWAL. BECAUSE WE ASSESS THE WITHDRAWAL CHARGE AGAINST THE WITHDRAWAL CHARGE BASIS, IN SOME INSTANCES, THE CONTRACT VALUE MAY BE POSITIVE, BUT YOU WILL NOT RECEIVE A DISTRIBUTION DUE TO THE AMOUNT OF THE WITHDRAWAL CHARGE. For more information please see the examples in Appendix E. NOTE FOR CONTRACTS ISSUED IN WASHINGTON: We reduce the Withdrawal Charge Basis for penalty-free withdrawals and the partial withdrawal privilege is available upon a full withdrawal. In Washington the Withdrawal Charge Basis is equal to the total Purchase Payments, less any withdrawals from the Contract (including any withdrawal charges). For purposes of calculating any withdrawal charge, we withdraw Purchase Payments on a "first-in-first-out" (FIFO) basis and we make withdrawals from your Contract in the following order. 1.First, we withdraw any Purchase Payments that are beyond the withdrawal charge period shown in your Contract (for example, on an Original Contract, Purchase Payments that we have had for three or more complete years). We do not assess a withdrawal charge on these Purchase Payments. 2.Then, we withdraw any Purchase Payments that are under the partial withdrawal privilege and we do not assess a withdrawal charge. However, the partial withdrawal privilege is not available if you are taking a full withdrawal. For more information, see section 9, Access to Your Money - Partial Withdrawal Privilege. 3.Next, on a FIFO basis, we withdraw Purchase Payments that are within the withdrawal charge period shown in your Contract. We do assess a withdrawal charge on these Purchase Payments, but we withdraw them on a FIFO basis, which may help reduce the total withdrawal charge you will pay because the withdrawal charge declines over time. We determine your total withdrawal charge by multiplying each of these payments by the applicable withdrawal charge percentage and then totaling the charges. 4.Finally, we withdraw any Contract earnings. We do not assess a withdrawal charge on Contract earnings. We consider any True Ups we make to your Contract Value under the GPV or GAV Benefit to be earnings. However, if the Contract Value at the time of a True Up is less than your net Purchase Payments (total Purchase Payments received less any prior payments withdrawn) some or all of the True Up may, in effect, be treated as a Purchase Payment when applying the withdrawal charge if the entire Contract Value is then withdrawn. For more information see the example in section 6, Guaranteed Values Under the Living Guarantees - Other Information on the GPV and GAV Benefits. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 42 We keep track of each Purchase Payment we receive. The amount of the withdrawal charge depends upon the length of time since we received your Purchase Payment. The charge as a percentage of each Purchase Payment withdrawn is as follows.
MAY 2007 CONTRACT ORIGINAL CONTRACT NUMBER OF COMPLETE YEARS SINCE WE RECEIVED YOUR PURCHASE CHARGE NUMBER OF COMPLETE YEARS SINCE WE RECEIVED YOUR PURCHASE CHARGE PAYMENT PAYMENT 0 8.5% 0 8% 1 7.5% 1 7% 2 5.5% 2 5% 3 3.0% 3 years or more 0% 4 years or more 0%
After we have had a Purchase Payment for four complete years (for the May 2007 Contract) or three complete years (for the Original Contract), there is no charge when you withdraw that Purchase Payment. However, withdrawals from the FPAs may be subject to an MVA. We calculate the charge at the time of each withdrawal. For a full withdrawal that is subject to a withdrawal charge, we will deduct the withdrawal charge as a percentage of the Withdrawal Charge Basis from the amount withdrawn. For a partial withdrawal that is subject to a withdrawal charge, the amount we deduct from your Contract will be the amount you request plus any applicable withdrawal charge. We apply the withdrawal charge to this total amount and we pay you the amount you requested. For partial withdrawals, we deduct the charge from the Contract Value and we deduct it proportionately from the Investment Options. However, if there is not enough Contract Value in the Investment Options, we will deduct the remaining amount of the charge proportionately from any other available Investment Choices. Partial withdrawals from a general account Investment Choice may involve an MVA, which may increase or decrease your Contract Value and/or the proceeds you receive. EXAMPLE: You purchased a May 2007 Contract with the Living Guarantees. You made an initial Purchase Payment of $30,000 and made another Purchase Payment in the first month of the second Contract Year of $70,000. In the third month of the third Contact Year, your Contract Value is $110,000 and you request a withdrawal of $52,000. There is no MVA at the time of the withdrawal. We would withdraw money from the Contract Value and compute the withdrawal charge as follows. 1)PURCHASE PAYMENTS THAT ARE BEYOND THE WITHDRAWAL CHARGE PERIOD. All payments are still within the withdrawal charge period so this does not apply. 2)AMOUNTS AVAILABLE UNDER THE PARTIAL WITHDRAWAL PRIVILEGE. You have not taken any other withdrawals this year so you can withdraw up to 10% of your total payments (or $10,000) without incurring a withdrawal charge. 3)PURCHASE PAYMENTS ON A FIFO BASIS. The total amount we deduct from the first Purchase Payment is $30,000, which is subject to a 5.5% withdrawal charge, and you will receive $28,350. We determine this amount as follows: (AMOUNT WITHDRAWN) X (1 - WITHDRAWAL CHARGE) = THE AMOUNT YOU RECEIVE, OR: $30,000 x 0.945 = $28,350. Next we determine how much we need to deduct from the second Purchase Payment. So far we have deducted $38,350 ($10,000 under the partial withdrawal privilege and $28,350 from the first Purchase Payment), so we would need to deduct $13,650 from the second Purchase Payment to get you the $52,000 you requested. The second Purchase Payment is subject to a 7.5% withdrawal charge. We calculate the total amount withdrawn and the withdrawal charge you pay on this amount as follows: (THE AMOUNT YOU RECEIVE) {divide} (1 - WITHDRAWAL CHARGE) = AMOUNT WITHDRAWN, OR: $13,650 {divide} 0.925 = $14,757 4)CONTRACT EARNINGS. As we have already withdrawn your requested amount, this does not apply. In total we withdrew $54,757 from your Contract, of which you received $52,000 and paid total withdrawal charges of $2,757. NOTE: WITHDRAWALS MAY HAVE TAX CONSEQUENCES AND, IF TAKEN BEFORE AGE 59 1/2, MAY BE SUBJECT TO A 10% FEDERAL PENALTY TAX. FOR TAX PURPOSES, UNDER NON-QUALIFIED CONTRACTS, WITHDRAWALS ARE CONSIDERED TO HAVE COME FROM THE LAST MONEY YOU PUT INTO THE CONTRACT. THUS, FOR TAX PURPOSES, EARNINGS ARE CONSIDERED TO COME OUT FIRST. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 43 REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE We may have reduced or eliminated the amount of the withdrawal charge when the Contract was sold under circumstances that reduced its sales expenses. For example, if a large group of individuals purchased the Contract, or if a purchaser already had a relationship with us. We may choose not to deduct a withdrawal charge under a Contract issued to an officer, director, or employee of Allianz Life or any of its affiliates. Also, we may reduce or waive the withdrawal charge for a Contract sold by a registered representative appointed with Allianz Life to any members of his or her immediate family, and the commission is waived. We require our prior approval for any reduction or elimination of the withdrawal charge. TRANSFER FEE You can currently make 12 free transfers every Contract Year. If you make more than 12 transfers in a Contract Year, we will deduct a transfer fee of $25 for each additional transfer. Currently, we deduct this fee only during the Accumulation Phase, but we reserve the right to deduct it during the Annuity Phase. Transfers from a FPA may be subject to an MVA, which may increase or decrease the value of your Contract and/or the amount transferred. We will deduct the transfer fee from the Investment Choice from which the transfer is made. If you transfer the entire amount in the Investment Choice, then we will deduct the transfer fee from the amount transferred. If you are transferring from multiple Investment Choices, we will treat the transfer as a single transfer and we will deduct any transfer fee proportionately from the Investment Choices if you transfer less than the entire amount that is in the Investment Choice. If the transfer is a GPV or GAV Transfer or is made under the dollar cost averaging or flexible rebalancing programs, there is no fee for the transfer and we currently do not count these transfers against any free transfers we allow. PREMIUM TAXES Some states and other governmental entities (for example, municipalities) assess a tax (premium tax) on us based on the amount of Purchase Payments we receive from you. In some states, the tax is based on the amount applied to Annuity Payments. We are responsible for the payment of these taxes. Your Contract indicates that we will deduct these charges from your Contract Value. However, it is our current practice not to make deductions from the Contract to reimburse ourselves for the premium taxes that we pay, although we reserve the right to make such a deduction in the future. Premium taxes normally range from 0% to 3.5% of the Purchase Payment, depending on the state or governmental entity. INCOME TAXES We reserve the right to deduct from the Contract any income taxes that we may incur because of the Contract. Currently, we are not making any such deductions. INVESTMENT OPTION EXPENSES There are deductions from the assets of the various Investment Options for operating expenses (including management fees) that are described in the Fee Tables and in the table of annual operating expenses for each Investment Option in Appendix A in this prospectus and in the prospectuses for the Investment Options. These charges apply during the Accumulation and Annuity Phases if you make allocations to the Investment Options. These expenses will reduce the performance of the Investment Options and, therefore, will negatively affect your Contract Value and the amounts available for withdrawals and Annuity Payments. They may also negatively impact the death benefit proceeds. The investment advisers for the Investment Options provided the fee and expense information and we did not independently verify it. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 44 8. TAXES NOTE: We have prepared the following information on taxes as a general discussion of the subject. The Contract offers flexibility regarding how distributions can be taken. Not all of these distributions (or their attendant tax consequences) are discussed in this section. This information is not intended as tax advice. You should, therefore, consult your own tax adviser about your own circumstances. We have included additional information regarding taxes in the Statement of Additional Information. For more information on the taxation of Annuity Payments made under a Partial Annuitization, see section 2, The Annuity Phase - Partial Annuitization. ANNUITY CONTRACTS IN GENERAL Annuity contracts are a means of setting aside money for future needs - usually retirement. Congress recognized how important saving for retirement was and provided special rules in the Internal Revenue Code (Code) for annuities. These rules generally provide that you will not be taxed on any earnings on the money held in your annuity until you take the money out. This is called tax deferral. There are different rules regarding how you will be taxed, depending upon how you take the money out and whether the annuity is Qualified or Non- Qualified (see the following discussion in this section). If you did not purchase the Contract under a tax qualified retirement plan, the Contract is referred to as a Non-Qualified Contract. When a Non-Qualified Contract is owned by a non-individual (for example, a corporation or certain other entities other than a trust holding the Contract as an agent for an individual), the Contract will generally not be treated as an annuity for tax purposes. This means that the Contract may not receive the benefits of tax deferral and Contract earnings may be taxed as ordinary income every year. QUALIFIED CONTRACTS If you purchased the Contract under a pension or retirement plan that is qualified under the Code, the Contract is referred to as a Qualified Contract. Qualified Contracts are subject to special rules. Adverse tax consequences may result if contributions, distributions, and transactions in connection with the Qualified Contract do not comply with the law. A Qualified Contract will not provide any necessary or additional tax deferral if it is used to fund a qualified plan that is tax deferred. However, the Contract has features and benefits other than tax deferral that may make it an appropriate investment for a qualified plan. We may have issued the following types of Qualified Contracts. o Traditional Individual Retirement Annuity. Section 408 of the Code permits eligible individuals to maintain Individual Retirement Annuities (IRAs). IRA contributions are limited each year to the lesser of a dollar amount specified in the Code or 100% of the amount of compensation included in the Owner's income. The limit on the amount contributed to an IRA does not apply to distributions from certain other types of qualified plans that are "rolled over" on a tax-deferred basis into an IRA. o Simplified Employee Pension (SEP) IRA. Employers may establish Simplified Employee Pension (SEP) IRAs under Code Section 408(k) to provide IRA contributions on behalf of their employees. In addition to all of the general rules governing IRAs, such plans are subject to additional requirements and different contribution limits. o Roth IRA. Section 408A of the Code permits certain eligible individuals to contribute to a Roth IRA. Contributions to a Roth IRA are limited each year to the lesser of a dollar amount specified in the Code or 100% of the amount of compensation included in the Owner's income and must be made in cash or as a rollover or transfer from another Roth IRA or other IRA. Distributions from a Roth IRA generally are not taxed until after the total amount distributed from the Roth IRA exceeds the amount contributed to the Roth IRA. After that, income tax and a 10% federal penalty tax may apply to distributions made: (1) before age 59 1/2 (subject to certain exceptions), or (2) during the five tax years starting with the year in which the first contribution is made to any Roth IRA. o TSAs or 403(b) Contracts. Section 403(b) of the Code allows employees of certain Section 501(c)(3) organizations and public schools to exclude from their gross income the purchase payments made, within certain limits, on a contract that will provide an annuity for the employee's retirement. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 45 o Inherited IRA. The Code permits beneficiaries of investments that were issued under certain tax-qualified pension or retirement plans to directly transfer the death benefit from that investment into a variable annuity contract (Inherited IRA Contract). If we made this Contract available as an Inherited IRA Contract, the beneficiary of the previous tax-qualified investment will become the Owner of the new Inherited IRA Contract. The ownership of the Contract must also reflect the name of the previous deceased owner. The purpose of the Inherited IRA Contract is to allow the Owner to change the investment vehicle to an annuity and receive required minimum distribution withdrawal payments instead of receiving a lump sum death benefit payment. If we made this Contract available as an Inherited IRA Contract, the death benefit proceeds must be directly transferred into this Contract; they cannot be received by the beneficiary and then applied to the Contract. A beneficiary can apply the death benefit proceeds from multiple tax-qualified investments that were owned by the same owner to the purchase of an Inherited IRA Contract. We will not accept any other forms of Purchase Payment on an Inherited IRA Contract. QUALIFIED PLANS. A qualified plan is a retirement or pension plan that meets the requirements for tax qualification under the Code. If the Contract is an investment for assets of a qualified plan under Section 401 of the Code, the plan is both the Owner and the Beneficiary. The authorized signatory or plan trustee for the plan must have made representations to us that the plan was qualified under the Code on the Issue Date and is intended to continue to be qualified for the entire Accumulation Phase of the Contract, or as long as the qualified plan owns the Contract. The qualified plan may designate a third party administrator to act on its behalf. All tax reporting will be the responsibility of the plan. In the event the qualified plan instructs us to roll the plan assets into an IRA for the Annuitant under this Contract, we will change the qualification type of the Contract to an IRA and make the Annuitant the Owner. The qualified plan will be responsible for any reporting required for the rollover transactions. MULTIPLE CONTRACTS Section 72(e)(12) of the Code provides that multiple Non-Qualified deferred annuity contracts that are issued within a calendar year period to the same owner by one company or its affiliates are treated as one annuity contract for purposes of determining the tax consequences of any distribution. Such treatment may result in adverse tax consequences, including more rapid taxation of the distributed amounts from such combination of contracts. For purposes of this rule, contracts received in a Section 1035 exchange will be considered issued in the year of the exchange. PARTIAL 1035 EXCHANGES Section 1035 of the Code provides that an annuity contract may be exchanged in a tax-free transaction for another annuity contract. Historically, it was presumed that only the exchange of an entire contract (as opposed to a partial exchange) would be accorded tax-free status. Guidance from the IRS, however, confirmed that the direct transfer of a portion of an annuity contract into another annuity contract can qualify as a non-taxable exchange. IRS guidance provides that this direct transfer can go into an existing annuity contract as well as a new annuity contract. If you perform a partial 1035 exchange, please be aware that no distributions or withdrawals can occur from the old or new annuity contract within12 months of the partial exchange, unless you qualify for an exception to this rule. IRS guidance also provides that certain partial exchanges may not qualify as tax-free exchanges. Therefore, Owners should consult their own tax advisers before entering into a partial exchange of an annuity contract. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 46 DISTRIBUTIONS - NON-QUALIFIED CONTRACTS You, as the Owner, generally will not be taxed on increases in the value of the Contract until an actual or deemed distribution occurs - either as a withdrawal (including, if available, Partial Annuitizations) or as Annuity Payments under a Full Annuitization. Section 72 of the Code governs treatment of distributions. When a withdrawal from a Non-Qualified Contract occurs, the amount received will generally be treated as ordinary income subject to tax up to an amount equal to the excess (if any) of the Contract Value immediately before the distribution over your investment in the Contract (generally, the Purchase Payments or other consideration paid for the Contract, reduced by any amount previously distributed from the Contract that was not subject to tax) at that time. Amounts received as a result of a Partial Annuitization are treated as partial withdrawals. In the case of a full withdrawal under a Non-Qualified Contract, the amount received generally will be taxable only to the extent it exceeds your investment in the Contract. If you take a Full Annuitization, different rules apply. Periodic installments (for example, Annuity Payments) scheduled to be received at regular intervals (for example, monthly) after you take a Full Annuitization should be treated as annuity payments (and not withdrawals) for tax purposes. (In this regard, we intend to make tax reporting on periodic installments scheduled to be received at regular intervals under a Partial Annuitization as annuity payments ONLY after a Contract's entire Contract Value has been applied to Annuity Payments, provided that such installments extend over a period of more than one full year from the time of the Full Annuitization. Due to the lack of guidance on whether this is the appropriate tax treatment for such payments, however, Owners should consult with a tax adviser on this issue.) After a Full Annuitization, a portion of each Annuity Payment may be treated as a partial return of your Purchase Payment and will not be taxed. The remaining portion of the payment will be treated as ordinary income. How the Annuity Payment is divided between taxable and non-taxable portions depends upon the period over which we expect to make the payments. Once we have paid out all of your Purchase Payment(s), the entire Annuity Payment is taxable as ordinary income. Section 72 of the Code further provides that any amount received under an annuity contract, which is included in income, may be subject to a federal penalty tax. The amount of the federal penalty tax is equal to 10% of the amount that is included in income. Some distributions will be exempt from the federal penalty tax. There is an exception to this 10% federal penalty tax for amounts: 1)paid on or after you reach age 59 1/2; 2)paid after you die; 3)paid if you become totally disabled (as that term is defined in Section 72(m)(7) of the Code); 4)paid in a series of substantially equal payments made annually (or more frequently) under a lifetime annuity; 5)paid as annuity payments under an immediate annuity; or 6)that come from Purchase Payments made before August 14, 1982. With respect to (4) above, if the series of substantially equal periodic payments is modified, as permitted by the Code, before the later of your attaining age 59 1/2 or the close of the five year period that began on the Income Date, then the tax for the year of the modification is increased by the 10% federal penalty tax, plus interest, for the tax years in which the exception was used. A partial withdrawal taken after a series of substantially equal periodic payments has begun may result in the modification of the series of substantially equal payments and therefore could result in the imposition of the 10% federal penalty tax and interest for the period as described above. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 47 DISTRIBUTIONS - QUALIFIED CONTRACTS Section 72 of the Code governs treatment of distributions from Qualified Contracts. Special rules may apply to withdrawals from certain types of Qualified Contracts, including Roth IRAs. You should consult with your qualified plan sponsor and tax adviser to determine how these rules affect the distribution of your benefits. Section 72(t) of the Code provides that any amount received under a Qualified Contract, which is included in income, may be subject to a federal penalty tax. The amount of the federal penalty tax is equal to 10% of the amount that is included in income. Some distributions will be exempt from the federal penalty tax. There is an exception to this 10% federal penalty tax for: 1)distributions made on or after the date you (or the Annuitant as applicable) reach age 59 1/2; 2)distributions following your death or disability (or the Annuitant as applicable) (for this purpose disability is as defined in Section 72(m)(7) of the Code); 3)after separation from service, paid in a series of substantially equal payments made annually (or more frequently) under a lifetime annuity; 4)distributions made to you to the extent such distributions do not exceed the amount allowed as a deduction under Code Section 213 for amounts paid during the tax year for medical care; 5)distributions made on account of an IRS levy upon the Qualified Contract; 6)distributions from an IRA for the purchase of medical insurance (as described in Section 213(d)(1)(D) of the Code) for you (or the Annuitant as applicable) and his or her spouse and dependents if you have received unemployment compensation for at least 12 weeks (this exception will no longer apply after you have been re-employed for at least 60 days); 7)distributions from an IRA made to you, to the extent such distributions do not exceed your qualified higher education expenses (as defined in Section 72(t)(7) of the Code) for the tax year; 8)distributions from an IRA which are qualified first-time homebuyer distributions (as defined in Section 72(t)(8) of the Code); 9)distributions made to an alternate Payee pursuant to a qualified domestic relations order (does not apply to an IRA); and 10)a reservist called to active duty during the period between September 11, 2001 and December 31, 2007, for a period in excess of 179 days (or for an indefinite period), distributions from IRAs or amounts attributable to elective deferrals under a 401(k) plan made during such active period. The exception stated in (3) above applies to an IRA without the requirement that there be a separation from service. With respect to (3) above, if the series of substantially equal periodic payments is modified as permitted by the Code, before the later of the Annuitant attaining age 59 1/2 or the close of the five year period that began on the Income Date, then the tax for the year of the modification is increased by the 10% federal penalty tax, plus interest for the tax years in which the exception was used. A partial withdrawal taken after a series of substantially equal periodic payments has begun may result in the modification of the series of substantially equal payments and therefore could result in the imposition of the 10% federal penalty tax and interest for the period as described above, unless another exception to the federal penalty tax applies. You should obtain competent tax advice before you take any partial withdrawals from your Contract. Distributions from a Qualified Contract must commence no later than the required beginning date. For IRAs, the required beginning date is April 1 of the calendar year following the year in which you attain age 70 1/2. Under a qualified plan, the required beginning date is generally April 1 of the calendar year following the later of the calendar year in which you reach age 70 1/2 or retire. Generally, required minimum distributions must be made over a period not exceeding the life or life expectancy of the individual or the joint lives or life expectancies of the individual and his or her designated Beneficiary. If the required minimum distributions are not made, a 50% federal penalty tax is imposed as to the amount not distributed. It is unclear whether a partial withdrawal taken after an Income Date will have an adverse impact on the determination of required minimum distributions. If you are attempting to satisfy these rules through partial withdrawals, the present value of future benefits provided under the Contract may need to be included in calculating the amount required to be distributed. If you are receiving Annuity Payments or are age 70 1/2 or older, you should consult with a tax adviser before taking a partial withdrawal. NOTE: The Worker, Retiree, and Employer Recovery Act of 2008 does not require minimum distributions for 2009 from a qualified retirement plan or IRA for a participant or beneficiary. This relief applies to funds held in deferred annuity contracts, but the relief does not apply to contracts that have been annuitized. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 48 ASSIGNMENTS, PLEDGES AND GRATUITOUS TRANSFERS Other than in the case of Qualified Contracts (which generally cannot be assigned or pledged), any assignment or pledge of (or agreement to assign or pledge) the Contract Value is treated for federal income tax purposes as a full withdrawal. The investment in the Contract is increased by the amount includible as income with respect to such amount or portion, though it is not affected by any other aspect of the assignment or pledge (including its release). If an Owner transfers a Contract without adequate consideration to a person other than the Owner's spouse (or to a former spouse incidental to divorce), the Owner will be taxed on the difference between his or her Contract Value and the investment in the Contract at the time of transfer and for each subsequent year until the assignment is released. In such case, the transferee's investment in the Contract will be increased to reflect the increase in the transferor's income. The transfer or assignment of ownership of the Contract, the designation of an Annuitant, the selection of certain Income Dates, or the exchange of the Contract may result in certain other tax consequences that are not discussed here. An Owner contemplating any such transfer, assignment, or exchange should consult a tax adviser as to the tax consequences. DEATH BENEFITS Any death benefits paid under the Contract are taxable to the recipient as ordinary income. The rules governing the taxation of payments from an annuity contract generally apply to the payment of death benefits and depend on whether the death benefits are paid as a lump sum or as Annuity Payments. Estate taxes may also apply. WITHHOLDING Annuity distributions are generally subject to withholding for the recipient's federal income tax liability. Recipients can, however, generally elect not to have tax withheld from distributions unless they are subject to mandatory state withholding. "Eligible rollover distributions" from qualified plans are subject to a mandatory federal income tax withholding of 20%. An eligible rollover distribution is any distribution to an employee (or employee's spouse or former spouse as Beneficiary or alternate Payee) from such a plan, except certain distributions such as distributions required by the Code, distributions in a specified annuity form, or hardship distributions. The 20% withholding does not apply, however, to nontaxable distributions or if the employee chooses a "direct rollover" from the Contract plan to a qualified plan, IRA, TSA or 403(b) plan, or to a governmental Section 457 plan that agrees to separately account for rollover contributions. FEDERAL ESTATE TAXES While no attempt is being made to discuss the federal estate tax implications of the Contract, an Owner should keep in mind that the value of an annuity contract owned by a decedent and payable to a Beneficiary by virtue of surviving the decedent is included in the decedent's gross estate. Depending on the terms of the annuity contract, the value of the annuity included in the gross estate may be the value of the lump sum payment payable to the designated Beneficiary or the actuarial value of the payments to be received by the Beneficiary. Consult an estate planning adviser for more information. GENERATION-SKIPPING TRANSFER TAX Under certain circumstances, the Code may impose a "generation-skipping transfer tax" when all or part of an annuity contract is transferred to, or a death benefit is paid to, an individual two or more generations younger than the Owner. Regulations issued under the Code may require us to deduct the tax from your Contract, or from any applicable payment, and pay it directly to the IRS. FOREIGN TAX CREDITS We may benefit from any foreign tax credits attributable to taxes paid by certain funds to foreign jurisdictions to the extent permitted under the federal tax law. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 49 ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS The preceding discussion provides general information regarding federal income tax consequences to Owners that are U.S. citizens or residents. Owners that are not U.S. citizens or residents will generally be subject to federal withholding tax on taxable distributions from annuity contracts at a 30% rate, unless a lower treaty rate applies. In addition, Owners may be subject to state and/or municipal taxes and taxes that may be imposed by the Owners' country of citizenship or residence. In Revenue Ruling 2004-75, 2004-31 I.R.B. 109, the IRS announced that income received by residents of Puerto Rico under life insurance policies or annuity contracts issued by a Puerto Rico branch of a United States life insurance company is U.S. source income that is generally subject to United States federal income tax. POSSIBLE TAX LAW CHANGES Although the likelihood of legislative or regulatory changes is uncertain, there is always the possibility that the tax treatment of the Contract could change by legislation, regulation or otherwise. Consult a tax adviser with respect to legislative or regulatory developments and their effect on the Contract. We have the right to modify the Contract in response to legislative or regulatory changes that could otherwise diminish the favorable tax treatment that annuity owners currently receive. We make no guarantee regarding the tax status of any contract and do not intend the above discussion as tax advice. DIVERSIFICATION The Code provides that the underlying investments for a Non-Qualified variable annuity must satisfy certain diversification requirements in order to be treated as an annuity contract. We believe that the Investment Options are being managed so as to comply with the requirements. In some circumstances, owners of variable annuities who retain excessive control over the investment of the underlying separate account assets may be treated as the owners of those assets and may be subject to tax on income produced by those assets. Although published guidance in this area does not address certain aspects of the policies, we believe that the Owner should not be treated as the owner of the Separate Account assets. We reserve the right to modify the Contract to bring it into conformity with applicable standards should such modification be necessary to prevent Owners from being treated as the owners of the underlying Separate Account assets. REQUIRED DISTRIBUTIONS Section 72(s) of the Code requires that, to be treated as an annuity contract for federal income tax purposes, a Non-Qualified Contract must contain certain provisions specifying how amounts will be distributed in the event of the death of an Owner of the Contract. Specifically, Section 72(s) requires that: (a) if any Owner dies on or after you take a Full Annuitization, but before the time the entire interest in the Contract has been distributed, the entire interest in the Contract must be distributed at least as rapidly as under the method of distribution being used as of the date of the Owner's death; and (b) if any Owner dies before you take a Full Annuitization, the entire interest in the Contract must be distributed within five years after the date of the Owner's death. These requirements will be considered satisfied as to any portion of an Owner's interest that is payable to or for the benefit of a designated Beneficiary and that is distributed over the life of such designated Beneficiary, or over a period not extending beyond the life expectancy of that Beneficiary, provided that such distributions begin within one year of the Owner's death. The designated Beneficiary refers to an individual designated by the Owner as a Beneficiary and to whom ownership of the Contract passes by reason of death. However, if the designated Beneficiary is the surviving spouse of the deceased Owner, the Contract may be continued with the surviving spouse as the new Owner. Non-Qualified Contracts contain provisions that are intended to comply with these Code requirements, although no regulations interpreting these requirements have yet been issued. When such requirements are clarified by regulation or otherwise, we intend to review such provisions and modify them, as necessary, to assure that they comply with the applicable requirements. Other rules may apply to Qualified Contracts. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 50 9. ACCESS TO YOUR MONEY The money in the Contract is available under the following circumstances: o by taking a withdrawal (including GWB withdrawals); o by receiving Annuity Payments; or o when we pay a death benefit. You can only take withdrawals during the Accumulation Phase. When you make a withdrawal request, we will process the request based on the Accumulation Unit values next determined after receipt of the request at our Service Center. The Accumulation Unit values are normally determined at the end of each Business Day. Any withdrawal request received at or after the end of the current Business Day will receive the next Business Day's Accumulation Unit values. When you take a full withdrawal, we will process the withdrawal on the Business Day we receive the request in good order at our Service Center: o based upon the number of Accumulation Units held by the Contract on that Business Day and valued at the next available daily price, o adjusted for any applicable MVA, o less any applicable withdrawal charge, and o less any contract maintenance charge. See the Fee Tables and section 7, Expenses for a discussion of the charges. There is no minimum associated with requesting a partial withdrawal and there is no minimum amount of Contract Value that we require to remain in the Contract after requesting a partial withdrawal for as long as you hold the Contract. In the future, if we require a minimum amount of Contract Value to remain in the Contract, we reserve the right to treat a request for a partial withdrawal that would reduce the Contract Value below this minimum as a request for a full withdrawal of the Contract. Unless you instruct us otherwise, we will deduct any partial withdrawal (including any withdrawal charge) proportionately from the Investment Options. If the amount in the Investment Options is less than the partial withdrawal, then the remaining amount will come proportionately from any other available Investment Choices. Partial withdrawals from a general account Investment Choice may involve an MVA, which may increase or decrease your Contract Value and/or the proceeds you receive. We will pay the amount of any withdrawal from the Investment Options within seven days of when we receive your request in good order, unless the suspension of payments or transfers provision is in effect (see the "Suspension of Payments or Transfers" discussion later in this section). Upon withdrawal, we assess the withdrawal charge against the Withdrawal Charge Basis. Penalty-free withdrawals and amounts withdrawn to pay the contract maintenance charge do not reduce the Withdrawal Charge Basis,* but any other withdrawals of Purchase Payments will reduce the Withdrawal Charge Basis. Penalty-free withdrawals include the following amounts: withdrawals under the GWB, withdrawals under the partial withdrawal privilege, and any amounts paid as part of a required minimum distribution. We also do not adjust the Withdrawal Charge Basis for any gains or losses on your Investment Options. THIS MEANS THAT IF YOU TAKE A FULL WITHDRAWAL WHILE THE WITHDRAWAL CHARGE APPLIES AND YOU HAVE TAKEN PENALTY-FREE WITHDRAWALS OR YOU HAVE HAD LOSSES IN YOUR INVESTMENT OPTIONS, YOU MAY BE ASSESSED A WITHDRAWAL CHARGE ON MORE THAN THE AMOUNT YOU ARE WITHDRAWING. IN SOME INSTANCES, YOU WILL NOT RECEIVE A DISTRIBUTION DUE TO THE AMOUNT OF THE WITHDRAWAL CHARGE. For more information, please see section 7, Expenses - Withdrawal Charge and the examples in Appendix E. * For Contracts issued in Washington, we do reduce the Withdrawal Charge Basis for penalty-free withdrawals. ORDINARY INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL YOU TAKE. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 51 PARTIAL WITHDRAWAL PRIVILEGE The partial withdrawal privilege for each Contract Year is equal to 10% of your total Purchase Payments, less previous withdrawals taken under the partial withdrawal privilege, GWB, or as an RMD payment in the same Contract Year, and before any MVA. We will not deduct a withdrawal charge from amounts withdrawn under the partial withdrawal privilege, but an MVA may apply to amounts withdrawn from a FPA. Any unused partial withdrawal privilege in one Contract Year does not carry over to the next Contract Year. THERE IS NO PARTIAL WITHDRAWAL PRIVILEGE DURING THE ANNUITY PHASE. If you withdraw Purchase Payments that are beyond the withdrawal charge period, those withdrawals are not subject to a withdrawal charge and they will not reduce your partial withdrawal privilege. If you withdraw a Purchase Payment that is subject to a withdrawal charge and the withdrawal is more than the partial withdrawal privilege, the excess amount will be subject to the withdrawal charge and it will reduce the Withdrawal Charge Basis unless the excess amount is part of a penalty-free withdrawal. If you take a full withdrawal, we will assess the withdrawal charge with no reduction for the partial withdrawal privilege. Amounts withdrawn under the partial withdrawal privilege do not reduce the Withdrawal Charge Basis.* * For Contracts issued in Washington, we do reduce the Withdrawal Charge Basis for amounts withdrawn under the partial withdrawal privilege and the partial withdrawal privilege is available upon a full withdrawal. The minimum distribution program allows you to take withdrawals without the deduction of the withdrawal charge under certain circumstances. For more information, see "The Minimum Distribution Program and Required Minimum Distribution (RMD) Payments" discussion later in this section. GUARANTEED WITHDRAWAL BENEFIT (GWB) Contracts with Living Guarantees will include the GWB. The Living Guarantees were only available at Contract issue. THE LIVING GUARANTEES CANNOT BE ADDED OR CHANGED FOR AN EXISTING CONTRACT AFTER IT IS ISSUED, OR REMOVED FROM YOUR CONTRACT. There is no additional charge for the GWB. However, we monitor your Contract Value daily and systematically transfer amounts between your selected Investment Options and the FPAs to support the Living Guarantees. This benefit provides guaranteed income through partial withdrawals regardless of your Contract Value beginning on the second Contract Anniversary. THE GWB IS NOT AVAILABLE BEFORE THE SECOND CONTRACT ANNIVERSARY. The GWB value is equal to total Purchase Payments less GWB adjusted partial withdrawals. The maximum amount available for GWB withdrawals each Contract Year is the lesser of: o 10% of your total Purchase Payments before any MVA (the partial withdrawal privilege amount), or o the remaining GWB value. We will not deduct a withdrawal charge from amounts withdrawn under the GWB, but an MVA may apply to amounts withdrawn from a FPA. Amounts withdrawn under the GWB will not reduce the Withdrawal Charge Basis,* but withdrawals in excess of the maximum amount available annually under the GWB will be subject to a withdrawal charge and will reduce the Withdrawal Charge Basis. Amounts withdrawn under the GWB will count against the partial withdrawal privilege. Any unused GWB withdrawal amount in one Contract Year does not carry over to the next Contract Year. GWB withdrawals will be treated as withdrawals for tax purposes and if any Owner is younger than age 59 1/2, the GWB withdrawal may also be subject to a 10% federal penalty tax. * For Contracts issued in Washington, amounts withdrawn under the GWB will reduce the Withdrawal Charge Basis. WITHDRAWALS AND PARTIAL ANNUITIZATIONS YOU TAKE IN EXCESS OF THE MAXIMUM ALLOWABLE GWB WITHDRAWAL IN A CONTRACT YEAR MAY REDUCE THE GWB VALUE BY MORE THAN THE AMOUNT WITHDRAWN OR ANNUITIZED. If the Contract Value at the time of withdrawal or annuitization is less than the remaining GWB value, the GWB value may be reduced by more than the amount withdrawn or annuitized. For each withdrawal* or Partial Annuitization taken before the second Contract Anniversary, a GWB adjusted partial withdrawal is equal to: PW X GWBV. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 52 For each withdrawal* or Partial Annuitization taken on or after the second Contract Anniversary, a GWB adjusted partial withdrawal is equal to: GWBA + (RPWA X GWBV). * Includes any amounts paid as part of a required minimum distribution. PW = The amount of Contract Value (before any MVA) applied to a Partial Annuitization or withdrawn (including any applicable withdrawal charge). GWBA = The amount of the partial withdrawal* (before any MVA) that, together with any previous partial withdrawals* taken during the Contract Year, does not exceed the maximum allowable GWB withdrawal for the Contract Year. However, if you take a Partial Annuitization the entire amount of any Contract Value (before any MVA) applied to the Partial Annuitization will be included in the RPWA portion of this formula. * Includes GWB withdrawals. RPWA = The remaining amount of the partial withdrawal including any applicable withdrawal charge, but before any MVA. GWBV = The greater of one, or the ratio of (a) divided by (b) where: (a)=The remaining GWB value on the day of (but before) the Partial Annuitization or partial withdrawal. (b)=The Contract Value on the day of (but before) the Partial Annuitization or partial withdrawal adjusted for any applicable MVA. You can continue to take GWB withdrawals until you have withdrawn all of the GWB value. This means that under the GWB, if you have no remaining Contract Value, your Contract will continue until you have withdrawn all the Purchase Payments less GWB adjusted partial withdrawals. NOTE: YOU WILL BE REQUIRED TO TAKE A FULL ANNUITIZATION OF YOUR CONTRACT ON OR BEFORE THE MAXIMUM PERMITTED INCOME DATE. (For more information see section 2, The Annuity Phase.) Upon such a Full Annuitization the Guaranteed Withdrawal Benefit will no longer be available to you. The GWB will terminate upon the earliest of the following. o Contract termination. o The Income Date that you take a Full Annuitization, INCLUDING A REQUIRED FULL ANNUITIZATION ON THE MAXIMUM PERMITTED INCOME DATE. For more information, see section 2, The Annuity Phase. o The GWB value is zero. o The death of the Owner (unless the spouse continues the Contract as the new Owner). The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 53 GWB ADJUSTED PARTIAL WITHDRAWAL EXAMPLE o You purchased a May 2007 Contract and selected the Living Guarantees with the GAV Benefit. You made only one initial Purchase Payment of $100,000. o The GWB value at issue is equal to the total Purchase Payments less GWB adjusted partial withdrawals, which is $100,000. o The maximum amount you can withdraw under the GWB after the second Contract Anniversary is 10% of the total Purchase Payments before any MVA, which is 0.10 x $100,000 = $10,000. o During the third Contract Year you take a partial withdraw of $11,000 (including any withdrawal charge) when the Contract Value on the day (but before) the withdrawal is $95,000. There is no MVA on the partial withdrawal. We calculate the GWB adjusted partial withdrawal as: GWBA + (RPWA x GWBV), where: GWBA = The amount of the partial withdrawal that does not exceed th...........................................e maximum allowable GWB withdrawal for the Contract Year ...........................$10,000 RPWA =The remaining amount of the partial withdrawal (including any w............................................ithdrawal charge) = $11,000 - $10,000 = ..........................................+ ($1,000 GWBV =The greater of one, or the ratio of (a) divided by (b), w.................................................here: (a) The remaining GWB value on the day of (but before) the partial withdrawal ....................................$100,000 (b) The Contract Value on the day of (but before) the partial withdrawal................................... / $95,000 1.052632 GWBV..................................................x 1.052632) GWB adjusted partial withdrawal.................................$11,053 After this partial withdrawal, the remaining GWB value is $100,000 - $11,053 = ......................................................$88,947 o During the fourth Contract Year you take another partial withdrawal of $12,000 (including any withdrawal charge) when the Contract Value on the day (but before) the withdrawal is $92,500. There is no MVA on the partial withdrawal. We calculate the GWB adjusted partial withdrawal as: GWBA + (RPWA x GWBV), where: GWBA = The amount of the partial withdrawal that does not exceed th...........................................e maximum allowable GWB withdrawal for the Contract Year ...........................$10,000 RPWA =The remaining amount of the partial withdrawal (including any w............................................ithdrawal charge) = $12,000 - $10,000 =...........................................+ ($2,000 GWBV =The greater of one, or the ratio of (a) divided by (b), w.................................................here: (a) The remaining GWB value on the day of (but before) the partial withdrawal .....................................$88,947 (b) The Contract Value on the day of (but before) the partial withdrawal................................... / $92,500 0.961589 GWBV...................................................x 1) GWB adjusted partial withdrawal.................................$12,000 After this partial withdrawal, the remaining GWB value is $88,947 - $12,000 = ......................................................$76,947 SYSTEMATIC WITHDRAWAL PROGRAM If your Contract Value is at least $25,000, the systematic withdrawal program provides automatic monthly or quarterly payments to you. The minimum amount you can withdraw under this program is $500. There is no restriction on the maximum you may withdraw under this program if your Purchase Payments are no longer subject to the withdrawal charge. While the withdrawal charge is in effect, the systematic withdrawal program is subject to the partial withdrawal privilege. The total systematic withdrawals that you can take each Contract Year without incurring a withdrawal charge is limited to your partial withdrawal privilege amount for that Contract Year. With the exception of penalty-free withdrawals, any withdrawals in a Contract Year (including systematic withdrawals) will be subject to any applicable withdrawal charge. For more information, see section 7, Expenses - Withdrawal Charge and the "Partial Withdrawal Privilege" discussion that appears earlier in this section. All systematic withdrawals will be made on the ninth day of the month or the previous Business Day if the ninth is not a Business Day. You will not be charged additional fees for participating in or terminating from this program. ORDINARY INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO SYSTEMATIC WITHDRAWALS. YOU CANNOT PARTICIPATE IN THE SYSTEMATIC WITHDRAWAL PROGRAM AND THE MINIMUM DISTRIBUTION PROGRAM AT THE SAME TIME. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 54 THE MINIMUM DISTRIBUTION PROGRAM AND REQUIRED MINIMUM DISTRIBUTION (RMD) PAYMENTS If you own a Qualified Contract, you may participate in the minimum distribution program during the Accumulation Phase of the Contract. Under this program, we will make payments to you from your Contract that are designed to meet the applicable minimum distribution requirements imposed by the Code for this Qualified Contract. We can make payments to you on a monthly, quarterly, or annual basis. However, we will only make annual payments if your Contract Value is less than $25,000. RMD payments from this Contract will not be subject to a withdrawal charge and will not reduce the Withdrawal Charge Basis.* However, they will count against your partial withdrawal privilege. You cannot aggregate RMD payments between this Contract and other qualified contracts that you own. Any RMD payments from this Contract that exceed the RMD amount calculated for this Contract will be subject to any applicable withdrawal charge. If your Contract includes Living Guarantees, RMD payments will also count against the maximum amount available for GWB withdrawals. If you take any additional withdrawals that are not penalty-free withdrawals while you are receiving RMD payments, these withdrawals will be subject to any applicable withdrawal charge. RMD payments will reduce your GPV, GAV, GWB value, GMDB value, GMIB value, MAV (if applicable) and amounts available under your partial withdrawal privilege. * For Contracts issued in Washington, we do reduce the Withdrawal Charge Basis for RMD payments. YOU CANNOT PARTICIPATE IN THE SYSTEMATIC WITHDRAWAL AND THE MINIMUM DISTRIBUTION PROGRAMS AT THE SAME TIME. INHERITED IRA CONTRACTS. If you (the Owner) were the spouse of the deceased owner of the previous tax-qualified investment, and your spouse had not yet reached the date at which he/she was required to begin receiving required minimum distribution (RMD) payments, then you can wait to begin receiving RMD payments until the year that your spouse would have reached age 70 1/2. Alternatively, if the deceased owner of the previous tax-qualified investment had already reached the date at which he/she was required to begin receiving RMD payments, you can begin RMD payments based on your single life expectancy in the year following the deceased owner's death, or (if longer) the deceased previous owner's life expectancy in the year of his/her death reduced by one. You must begin to receive these RMD payments by December 31 of the year following the year of the deceased previous owner's death. SUSPENSION OF PAYMENTS OR TRANSFERS We may be required to suspend or postpone payments for withdrawals or transfers for any period when: o the New York Stock Exchange is closed (other than customary weekend and holiday closings); o trading on the New York Stock Exchange is restricted; o an emergency (as determined by the SEC) exists as a result of which disposal of the Investment Option shares is not reasonably practicable or we cannot reasonably value the Investment Option shares; or o during any other period when the SEC, by order, so permits for the protection of Owners. We reserve the right to defer payment for a withdrawal or transfer from any general account Investment Choice for the period permitted by law, but not for more than six months. 10.ILLUSTRATIONS In order to help you understand how your Contract Values vary over time and under different sets of assumptions, we may provide you with certain personalized illustrations upon request and free of charge. These illustrations may provide hypothetical depictions of either the Accumulation Phase or the Annuity Phase. You can request an illustration free of charge by contacting your registered representative. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 55 11.DEATH BENEFIT At Contract issue, you were asked to select one of two death benefit options. If you did not make a selection, you received the Traditional GMDB. The Enhanced GMDB carries an additional M&E charge, and does not provide any additional benefit before the first Contract Anniversary and the benefit values are limited after age 81. THE DEATH BENEFIT PROVIDED BY THE ENHANCED GMDB WILL NEVER BE LESS THAN THE DEATH BENEFIT PROVIDED BY THE TRADITIONAL GMDB, BUT THEY MAY BE EQUAL. THE DEATH BENEFIT IS ONLY AVAILABLE DURING THE ACCUMULATION PHASE OF THE CONTRACT. ONCE YOU SELECT A DEATH BENEFIT, YOU CANNOT CHANGE OR CANCEL IT. The use of the term "you" in this section refers to the Annuitant if the Contract is owned by a non-individual; otherwise it refers to the Owner. We will process the death benefit based on the Accumulation Unit values next determined after receipt in good order at our Service Center of both due proof of death and an election of the death benefit payment option. WE CONSIDER DUE PROOF OF DEATH TO BE ANY OF THE FOLLOWING: a copy of the certified death certificate, a decree of court of competent jurisdiction as to the finding of death, or any other proof that we consider to be satisfactory. The Accumulation Unit values are normally determined at the end of each Business Day and due proof of death and an election of the death benefit payment option received at or after the end of the current Business Day will receive the next Business Day's Accumulation Unit values. Any part of the death benefit amount that had been invested in the Investment Options remains in the Investment Options until distribution begins. From the time the death benefit is determined until we make a complete distribution, any amount in the Investment Options will continue to be subject to investment risk that will be borne by the recipient. TRADITIONAL GUARANTEED MINIMUM DEATH BENEFIT (TRADITIONAL GMDB) If the Traditional GMDB applies, the amount of the death benefit will be the greater of 1 or 2. 1.The Contract Value, determined as of the end of the Business Day during which we receive in good order at our Service Center both due proof of death and an election of the death benefit payment option. 2.The Traditional GMDB value, which is the total of all Purchase Payments received, reduced for each GMDB adjusted partial withdrawal taken. ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (ENHANCED GMDB) If the Enhanced GMDB applies, the amount of the death benefit will be the greater of 1, 2 or 3. 1.The Contract Value, determined as of the end of the Business Day during which we receive in good order at our Service Center both due proof of death and an election of the death benefit payment option. 2.The Traditional GMDB value, which is the total of all Purchase Payments received, reduced for each GMDB adjusted partial withdrawal taken. 3.The Enhanced GMDB value, which is the Maximum Anniversary Value (MAV). We determine the MAV as of the end of the Business Day during which we receive in good order at our Service Center both due proof of death and an election of the death benefit payment option. MAXIMUM ANNIVERSARY VALUE (MAV) We only calculate the MAV until the date of any Owner's death. The MAV on the Issue Date is equal to your initial Purchase Payment received on the Issue Date. On each Business Day other than a Contract Anniversary, the MAV is equal to: o its value on the immediately preceding Business Day, o plus any additional Purchase Payments received that day, and o reduced for each GMDB adjusted partial withdrawal taken that day. On each Contract Anniversary before the older Owner's 81st birthday (or the Annuitant's 81st birthday if the Contract is owned by a non-individual) the MAV is equal to the greater of its value on the immediately preceding Business Day, or the Contract Value that occurs on that Contract Anniversary before we process any transactions. We then process any transactions received on that Contract Anniversary (such as additional Purchase Payments, withdrawals and Partial Annuitizations) in the same way that we do on each Business Day other than a Contract Anniversary. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 56 Beginning with the Contract Anniversary that occurs on or after the older Owner's 81st birthday (or the Annuitant's 81st birthday if the Contract is owned by a non-individual) we calculate the MAV in the same way that we do on each Business Day other than a Contract Anniversary. GMDB ADJUSTED PARTIAL WITHDRAWAL FORMULA For each withdrawal or Partial Annuitization taken, a GMDB adjusted partial withdrawal is equal to: (A) X (B) (A) =The amount of Contract Value (before any MVA) applied to a Partial Annuitization or withdrawn (including any applicable withdrawal charge). (B) =The greater of one, or the ratio of (c) divided by (d) where: (c)= The death benefit on the day of (but before) the Partial Annuitization or partial withdrawal. (d)= The Contract Value on the day of (but before) the Partial Annuitization or partial withdrawal, adjusted for any applicable MVA. ANY WITHDRAWALS OR PARTIAL ANNUITIZATIONS YOU TAKE IN A CONTRACT YEAR MAY REDUCE THE GMDB VALUE BY MORE THAN THE AMOUNT WITHDRAWN OR ANNUITIZED. If the Contract Value at the time of withdrawal or annuitization is less than the death benefit, we will deduct more than the amount withdrawn or annuitized from the GMDB value. Please see Appendix D for examples of calculations of the death benefit. TERMINATION OF THE DEATH BENEFIT THE GMDB THAT APPLIES TO YOUR CONTRACT WILL TERMINATE UPON THE EARLIEST OF THE FOLLOWING. o The Business Day before the Income Date that you take a Full Annuitization, INCLUDING A REQUIRED FULL ANNUITIZATION ON THE MAXIMUM PERMITTED INCOME DATE. For more information, see section 2, The Annuity Phase. o The Business Day that the GMDB value and Contract Value are both zero. o Contract termination. DEATH OF THE OWNER UNDER INHERITED IRA CONTRACTS Upon the death of the Owner under an Inherited IRA Contract, the Beneficiary can either: o continue to receive the required minimum distribution payments based on the remaining life expectancy of the deceased Owner and the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and the appropriately completed election form; or o receive a lump sum payment based on the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and the appropriately completed election form. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 57 DEATH OF THE OWNER AND/OR ANNUITANT UNDER ALL OTHER CONTRACTS The following tables are intended to help you better understand what happens upon the death of any Owner and/or Annuitant under the different portions of the Contract. FOR QUALIFIED CONTRACTS, THERE CAN BE ONLY ONE OWNER AND THE OWNER MUST BE THE ANNUITANT, UNLESS THE CONTRACT IS A QUALIFIED CONTRACT OWNED BY A QUALIFIED PLAN OR IS PART OF A CUSTODIAL ARRANGEMENT. PARTIAL ANNUITIZATIONS ARE NOT AVAILABLE TO JOINT OWNERS. IF YOU TAKE A PARTIAL ANNUITIZATION, THERE CAN BE ONLY ONE OWNER; THE OWNER MUST BE THE ANNUITANT, AND WE WILL NOT ALLOW THE OWNER TO ADD A JOINT ANNUITANT. DESIGNATING DIFFERENT PERSONS AS OWNER(S) AND ANNUITANT(S) CAN HAVE AN IMPORTANT IMPACT ON WHETHER A DEATH BENEFIT IS PAID, AND ON WHO WOULD RECEIVE IT. USE CARE WHEN DESIGNATING OWNERS AND ANNUITANTS, AND CONSULT YOUR REGISTERED REPRESENTATIVE IF YOU HAVE QUESTIONS. UPON THE DEATH OF A SOLE OWNER ACTION UNDER THE PORTION OF THE CONTRACT THAT IS IN THE ACCUMULATION PHASE o We will pay a death benefit to the Beneficiary.* For a description of the payout options, see the "Death Benefit Payment Options" discussion later in this section. o If the GWB was in effect, it will terminate unless the deceased Owner's spouse continues the Contract. ACTION UNDER ANY PORTION OF THE CONTRACT APPLIED TO ANNUITY PAYMENTS o The Beneficiary becomes the Owner. o If the deceased was not an Annuitant, Annuity Payments to the Payee will continue. No death benefit is payable. o If the deceased was the only surviving Annuitant, Annuity Payments to the Payee will continue until that portion of the Contract terminates and will be paid at least as rapidly as they were being paid at the Annuitant's death. For more information on when any portion of the Contract applied to Annuity Payments terminates, see section 2, The Annuity Phase. No death benefit is payable under Annuity Options 1 through 4, or Annuity Option 6. However, there may be a lump sum refund due to the Payee under Annuity Option 5. For more information, see section 2, The Annuity Phase - Annuity Options. o If the deceased was an Annuitant and there is a surviving joint Annuitant, Annuity Payments to the Payee will continue during the lifetime of the surviving joint Annuitant. No death benefit is payable. * If the Beneficiary is the spouse of the deceased Owner, the spouse who is also the Beneficiary may be able to continue the Contract instead of receiving a death benefit payout. If the Contract continues, we will increase the Contract Value to equal the death benefit if that amount is greater than the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and an election to continue the Contract on the death claim form. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 58 UPON THE DEATH OF A JOINT OWNER (NOTE: WE DO NOT ALLOW JOINT OWNERS TO TAKE PARTIAL ANNUITIZATIONS) ACTION UNDER THE PORTION OF THE CONTRACT THAT IS IN THE ACCUMULATION PHASE o The surviving Joint Owner is the sole primary Beneficiary. If the Joint Owners were spouses there may also be contingent Beneficiaries. o We will pay a death benefit to the surviving Joint Owner.* For a description of the payout options available, see the "Death Benefit Payment Options" discussion later in this section. o If the GWB was in effect, it will terminate unless the Joint Owners were spouses and the surviving spouse who is also the Joint Owner continues the Contract. ACTION UNDER ANY PORTION OF THE CONTRACT APPLIED TO ANNUITY PAYMENTS o The surviving Joint Owner becomes the sole Owner. o If the deceased was not an Annuitant, Annuity Payments to the Payee will continue. No death benefit is payable. o If the deceased was the only surviving Annuitant, Annuity Payments to the Payee will continue until that portion of the Contract terminates and will be paid at least as rapidly as they were being paid at the Annuitant's death. For more information on when any portion of the Contract applied to Annuity Payments terminates, see section 2, The Annuity Phase. No death benefit is payable under Annuity Options 1 through 4, or Annuity Option 6. However, there may be a lump sum refund due to the Payee under Annuity Option 5. For more information, see section 2, The Annuity Phase - Annuity Options. o If the deceased was an Annuitant and there is a surviving joint Annuitant, Annuity Payments to the Payee will continue during the lifetime of the surviving joint Annuitant. No death benefit is payable. * If the surviving Joint Owner is the spouse of the deceased Owner, the spouse who is also the surviving Joint Owner may be able to continue the Contract instead of receiving a death benefit payout. If the Contract continues, we will increase the Contract Value to equal the death benefit if that amount is greater than the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and an election to continue the Contract on the death claim form. If both spousal Joint Owners die before we pay the death benefit, we will pay any contingent Beneficiaries or the estate of the Joint Owner who died last if there are no contingent Beneficiaries. If the Joint Owners were not spouses and they both die before we pay the death benefit, for tax reasons, we will pay the estate of the Joint Owner who died last. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 59 UPON THE DEATH OF THE ANNUITANT AND THERE IS NO SURVIVING JOINT ANNUITANT ACTION UNDER THE PORTION OF THE CONTRACT THAT IS IN THE ACCUMULATION PHASE o If the Contract is owned by a non-individual (for example a qualified plan or a trust), we will treat the death of the Annuitant as the death of an Owner; we will pay the Beneficiary* a death benefit, and a new Annuitant cannot be named. If the GWB was in effect, it will terminate unless the deceased Owner's spouse continues the Contract. o If the deceased Annuitant was not an Owner, and the Contract is owned only by an individual(s), no death benefit is payable. The Owner can name a new Annuitant subject to our approval. If the GWB was in effect, it will continue. o If the deceased Annuitant was a sole Owner, we will pay the Beneficiary* a death benefit. If the GWB was in effect, it will terminate unless the deceased Owner's spouse continues the Contract. o If the deceased Annuitant was a Joint Owner and there is a surviving Joint Owner, the surviving Joint Owner is the sole primary Beneficiary. If the Joint Owners were spouses, there may also be contingent Beneficiaries. We will pay a death benefit to the surviving Joint Owner.** If the GWB was in effect, it will terminate unless the Joint Owners were spouses and the surviving spouse who is also the Joint Owner continues the Contract. o For a description of the payout options, see the "Death Benefit Payment Options" discussion later in this section. ACTION UNDER ANY PORTION OF THE CONTRACT APPLIED TO ANNUITY PAYMENTS o Annuity Payments to the Payee will continue until that portion of the Contract terminates and will be paid at least as rapidly as they were being paid at the Annuitant's death. For more information on when any portion of the Contract applied to Annuity Payments terminates, see section 2, The Annuity Phase. No death benefit is payable under Annuity Options 1 through 4, or Annuity Option 6. However, there may be a lump sum refund due to the Payee under Annuity Option 5. For more information, see section 2, The Annuity Phase - Annuity Options. o If the deceased was a sole Owner, the Beneficiary will become the Owner if the Contract continues. o If the deceased was a Joint Owner, the surviving Joint Owner becomes the sole Owner if the Contract continues. * If the Beneficiary is the spouse of the deceased Owner, the spouse who is also the Beneficiary may be able to continue the Contract instead of receiving a death benefit payout. If the Contract continues, we will increase the Contract Value to equal the death benefit if that amount is greater than the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and an election to continue the Contract on the death claim form. **If the surviving Joint Owner is the spouse of the deceased Owner, the spouse who is also the surviving Joint Owner may be able to continue the Contract instead of receiving a death benefit payout. If the Contract continues, we will increase the Contract Value to equal the death benefit if that amount is greater than the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and an election to continue the Contract on the death claim form. If both spousal Joint Owners die before we pay the death benefit, we will pay any contingent Beneficiaries or the estate of the Joint Owner who died last if there are no contingent Beneficiaries. If the Joint Owners were not spouses and they both die before we pay the death benefit, for tax reasons, we will pay the estate of the Joint Owner who died last. UPON THE DEATH OF THE ANNUITANT AND THERE IS A SURVIVING JOINT ANNUITANT (NOTE: WE DO NOT ALLOW JOINT ANNUITANTS UNDER A PARTIAL ANNUITIZATION AND WE DO NOT ALLOW JOINT ANNUITANTS DURING THE ACCUMULATION PHASE, SO THIS CAN ONLY OCCUR UNDER A FULL ANNUITIZATION) o Only Annuity Options 3 and 4 allow joint Annuitants. Under Annuity Options 3 and 4, Annuity Payments to the Payee will continue during the lifetime of the surviving joint Annuitant and, for Annuity Option 4, during any remaining specified period of time. For more information, see section 2, The Annuity Phase - Annuity Options. o No death benefit is payable. o If the deceased was a sole Owner, the Beneficiary will become the Owner. o If the deceased was a Joint Owner, the surviving Joint Owner becomes the sole Owner. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 60 DEATH BENEFIT PAYMENT OPTIONS If you have not previously designated a death benefit payment option, a Beneficiary must request the death benefit be paid under one of the death benefit payment options below. If the Beneficiary is the spouse of the deceased Owner, he/she can choose to continue the Contract in his/her own name. An election by the spouse to continue the Contract must be made on the death claim form before we pay the death benefit. If the Contract continues, we will increase the Contract Value to equal the death benefit if that amount is greater than the Contract Value as of the Business Day we receive in good order at our Service Center both due proof of death and an election of the death benefit payment option. If the surviving spouse continues the Contract, he or she may exercise all of the Owner's rights under this Contract, including naming a new Beneficiary or Beneficiaries. If the surviving spouse continues the Contract, any optional benefits will also continue. If a lump sum payment is requested, we will pay the amount within seven days of our receipt of proof of death and a valid election of a death benefit payment option, including any required governmental forms, unless the suspension of payments or transfers provision is in effect. Payment of the death benefit may be delayed, pending receipt of any applicable tax consents and/or state forms. OPTION A: Lump sum payment of the death benefit. We will not deduct the contract maintenance charge at the time of a full withdrawal if the distribution is due to death. OPTION B: Payment of the entire death benefit within five years of the date of any Owner's death. We will assess the full contract maintenance charge on each Beneficiary's portion on each Contract Anniversary. However, we will waive the contract maintenance charge if the Contract Value at the time we are to deduct the charge is at least $75,000. OPTION C: If the Beneficiary is an individual, payment of the death benefit under an Annuity Option over the lifetime of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary. Distribution under this option must begin within one year of the date of any Owner's death. We will continue to assess the full contract maintenance charge on each Beneficiary's portion proportionately over the Annuity Payments. However, we will waive the contract maintenance charge if the Contract Value at the time we are to deduct the charge is at least $75,000. Any portion of the death benefit not applied to an Annuity Option within one year of the date of the Owner's death must be distributed within five years of the date of death. If the Contract is owned by a non-individual, then we treat the death of any Annuitant as the death of an Owner for purposes of the Internal Revenue Code's distribution at death rules, which are set forth in Section 72(s) of the Code. In all events, notwithstanding any provision to the contrary in the Contract or this prospectus, the Contract will be interpreted and administered in accordance with Section 72(s) of the Code. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 61 12.OTHER INFORMATION ALLIANZ LIFE Allianz Life is a stock life insurance company organized under the laws of the state of Minnesota in 1896. Our address is 5701 Golden Hills Drive, Minneapolis, MN 55416. We offer fixed and variable annuities, individual and group life insurance, and long-term care insurance. We are licensed to do direct business in 49 states and the District of Columbia. We are a subsidiary of Allianz SE, a provider of integrated financial services. THE SEPARATE ACCOUNT We established Allianz Life Variable Account B (the Separate Account) as a separate account under Minnesota insurance law on May 31, 1985. The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. The SEC does not supervise our management of the Separate Account. The Separate Account holds the assets that underlie the Contracts, except assets allocated to our general account. We keep the Separate Account assets separate from the assets of our general account and other separate accounts. The Separate Account is divided into subaccounts, each of which invests exclusively in a single Investment Option. We own the assets of the Separate Account. We credit gains to or charge losses against the Separate Account, whether or not realized, without regard to the performance of other investment accounts. The Separate Account's assets may not be used to pay any of our liabilities, other than those arising from the Contracts. If the Separate Account's assets exceed the required reserves and other liabilities, we may transfer the excess to our general account. Amounts transferred to our general account will represent seed money invested by us or earned fees and charges. The obligations of the Separate Account are not generalized obligations of Allianz Life. The obligations under the Contracts are obligations of Allianz Life. DISTRIBUTION Allianz Life Financial Services, LLC (Allianz Life Financial), a wholly-owned subsidiary of Allianz Life Insurance Company of North America, serves as principal underwriter for the Contracts. Allianz Life Financial, a limited liability company organized in Minnesota, is located at 5701 Golden Hills Drive, Minneapolis, MN 55416. Allianz Life Financial is registered as a broker/dealer with the SEC under the Securities Exchange Act of 1934 (the 1934 Act), as well as with the securities commissions in the states in which it operates, and is a member of the Financial Industry Regulatory Authority (FINRA). Allianz Life Financial is not a member of Securities Investors Protection Corporation. More information about Allianz Life Financial is available at http://www.finra.org or by calling 1-800-289-9999. You also can obtain an investor brochure from FINRA describing its Public Disclosure Program. We have entered into a distribution agreement with our affiliate Allianz Life Financial for the distribution and sale of the Contracts. Allianz Life Financial also may perform various administrative services on our behalf. Allianz Life Financial does not itself sell the Contracts on a retail basis. Rather, Allianz Life Financial enters into selling agreements with other broker/dealers registered under the 1934 Act (selling firms) for the sale of the Contracts. These selling firms include third party broker/dealers and Questar Capital Corporation, an affiliated broker/dealer. We pay sales commissions to the selling firms and their registered representatives. Investment Options that assess Rule 12b-1 fees make payments of the fees to Allianz Life Financial as consideration for providing certain services and incurring certain expenses permitted under the Investment Option's plan. These payments typically equal 0.25% of an Investment Option's average daily net assets for the most recent calendar year. The investment adviser and/or subadviser (and/or their affiliates) of an Investment Option may from time to time make payments for administrative services to Allianz Life Financial or its affiliates. The maximum commission payable to the selling firms for Contract sales is expected to not exceed 5.50% of Purchase Payments. Sometimes, we enter into an agreement with a selling firm to pay commissions as a combination of a certain amount of the commission at the time of sale and a trail commission which, when totaled, could exceed 5.50% of Purchase Payments. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 62 We may fund Allianz Life Financial's operating and other expenses, including: overhead; legal and accounting fees; registered representative training; compensation for the Allianz Life Financial management team; and other expenses associated with the Contracts. Registered representatives and their managers are also eligible for various benefits, such as production incentive bonuses, insurance benefits, and non-cash compensation items that we may provide jointly with Allianz Life Financial. Non-cash items include conferences, seminars and trips (including travel, lodging and meals in connection therewith), entertainment, awards, merchandise and other similar items. Selling firms and their registered representatives and managers may receive other payments from us for administrative issues and for services that do not directly involve the sale of the Contracts, including payments made for the recruitment and training of personnel, production of promotional literature and similar services. In addition, certain firms and their representatives may receive compensation for distribution and administrative services when acting in a wholesaling capacity and working with retail firms. We and/or Allianz Life Financial may pay certain selling firms additional marketing support allowances for: o marketing services and increased access to registered representatives; o sales promotions relating to the Contracts; o costs associated with sales conferences and educational seminars for their registered representatives; o the cost of client meetings and presentations; and o other sales expenses incurred by them. We retain substantial discretion in determining whether to grant a marketing support payment to a particular broker/dealer firm and the amount of any such payment. However, we do consider a number of specific factors in determining marketing support payments, which may include a review of the following: o the level of existing sales and assets held in contracts issued by us that are sold through the broker/dealer firm and the potential for new or additional sales; o the organizational "fit" between the broker/dealer firm and the type of wholesaling and marketing force we operate; o whether the broker/dealer firm's operational, IT, and support services structure and requirements are compatible with our method of operation; o whether the broker/dealer firm's product mix is oriented toward our core markets; o whether the broker/dealer firm has a structure facilitating a marketing support arrangement, such as frequent registered representative meetings and training sessions; o the potential return on investment of investing in a particular firm's system; o our potential ability to obtain a significant level of the market share in the broker/dealer firm's distribution channel; o the broker/dealer firm's registered representative and customer profiles; and o the prominence and reputation of the broker/dealer firm in its marketing channel. We may also make payments for marketing and wholesaling support to broker/dealer affiliates of Investment Options that are available through the variable annuities we offer. Additional information regarding marketing support payments can be found in the Distributor section of the Statement of Additional Information. We and/or Allianz Life Financial may make bonus payments to certain selling firms based on aggregate sales of our variable insurance contracts (including this Contract) or persistency standards, or as part of a special promotion. These additional payments are not offered to all selling firms, and the terms of any particular agreement governing the payments may vary among selling firms. In some instances, the amount paid may be significant. A portion of the payments made to selling firms may be passed on to their registered representatives in accordance with their internal compensation programs. Those programs may also include other types of cash and non-cash compensation and other benefits. Ask your registered representative for further information about what your registered representative and the selling firm for which he or she works may receive in connection with your purchase of a Contract. We intend to recover commissions and other sales expenses through fees and charges imposed under the Contract. Commissions paid on the Contract, including other incentives or payments, are not charged directly to the Owners or the Separate Account. We offer the Contracts to the public on a continuous basis. We anticipate continuing to offer the Contracts but reserve the right to discontinue the offering. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 63 ADDITIONAL CREDITS FOR CERTAIN GROUPS We may credit additional amounts to a Contract instead of modifying charges because of special circumstances that result in lower sales or administrative expenses or better than expected mortality or persistency experience. ADMINISTRATION/ALLIANZ SERVICE CENTER The Allianz Service Center performs certain administrative services regarding the Contracts and is located at 5701 Golden Hills Drive, Minneapolis, Minnesota. The Service Center mailing address and telephone number are listed at the back of this prospectus. The administrative services performed by our Service Center include: o issuance and maintenance of the Contracts, o maintenance of Owner records, o processing and mailing of account statements and other mailings to Owners, and o routine customer service including: - responding to Owner correspondence and inquiries, - processing of Contract changes, - processing withdrawal requests (both partial and total) and - processing annuitization requests. To reduce expenses, only one copy of most financial reports and prospectuses, including reports and prospectuses for the Investment Options, will be mailed to your household, even if you or other persons in your household have more than one contract issued by us or our affiliate. Call us at the toll-free number listed at the back of this prospectus if you need additional copies of financial reports, prospectuses, or annual and semiannual reports, or if you would like to receive one copy for each contract in future mailings. LEGAL PROCEEDINGS We and our subsidiaries, like other life insurance companies, from time to time are involved in legal proceedings of various kinds, including regulatory proceedings and individual and class action lawsuits. In some legal proceedings involving insurers, substantial damages have been sought and/or material settlement payments have been made. Although the outcome of any such proceedings cannot be predicted with certainty, we believe that, at the present time, there are no pending or threatened legal proceedings to which we, the Separate Account, or Allianz Life Financial is a party that are reasonably likely to materially affect the Separate Account, our ability to meet our obligations under the Contracts, or Allianz Life Financial's ability to perform its obligations. FINANCIAL STATEMENTS The consolidated financial statements of Allianz Life and the financial statements of the Separate Account have been included in the Statement of Additional Information. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 64 13.GLOSSARY This prospectus is written in plain English to make it as understandable as possible. However, there are some technical words or terms that are defined below and are capitalized in the prospectus. The following is a list of common abbreviations used in this prospectus: FPA = FIXED PERIOD ACCOUNT GWB = GUARANTEED WITHDRAWAL BENEFIT GAV = GUARANTEED ACCOUNT VALUE MAV = MAXIMUM ANNIVERSARY VALUE GPV = GUARANTEED PRINCIPAL VALUE MVA = MARKET VALUE ADJUSTMENT GMDB = GUARANTEED MINIMUM DEATH BENEFIT ACCOUNT PERIOD - the length of time for a Fixed Period Account. Account Periods range from one to ten years. ACCUMULATION PHASE - the period of time before you apply the entire Contract Value to Annuity Payments. Subject to certain restrictions, you can make additional Purchase Payments during this time. The Accumulation Phase may occur at the same time as the Annuity Phase if you take Partial Annuitizations. ACCUMULATION UNIT - the units into which we convert amounts invested in the subaccounts that invest in the Investment Options during the Accumulation Phase. ANNUITANT - the individual upon whose life we base the Annuity Payments. Subject to our approval, the Owner designates the Annuitant and can add a joint Annuitant for the Annuity Phase if they take a Full Annuitization. ANNUITY OPTIONS - the income options available to you under the Contract. ANNUITY PAYMENTS - payments made by us to the Payee pursuant to the Annuity Option chosen. Annuity Payments may be variable, fixed, or a combination of both variable and fixed. ANNUITY PHASE - the phase the Contract is in once Annuity Payments begin. This may occur at the same time as the Accumulation Phase if you take a Partial Annuitization. ANNUITY UNIT - the units into which we convert amounts invested in the subaccounts that invest in the Investment Options during the Annuity Phase. BENEFICIARY - the person(s) or entity the Owner designates to receive any death benefit. BUSINESS DAY - each day on which the New York Stock Exchange is open for trading, except when an Investment Option does not value its shares. Allianz Life is open for business on each day that the New York Stock Exchange is open. Our Business Day closes when regular trading on the New York Stock Exchange closes, which is usually at 4:00 p.m. Eastern Time. CONTRACT - the deferred annuity contract described by this prospectus that allows you to accumulate money tax deferred by making one or more Purchase Payments. It provides for lifetime or other forms of Annuity Payments beginning on the Income Date. CONTRACT ANNIVERSARY - a 12-month anniversary of the Issue Date of your Contract. If the Contract Anniversary does not occur on a Business Day, we will consider it to occur on the next Business Day. CONTRACT VALUE - on any Business Day it is equal to the sum of the values in your selected Investment Choices. It does not include amounts applied to Annuity Payments. CONTRACT YEAR - any period of 12 months commencing on the Issue Date and on each Contract Anniversary thereafter. FIXED ACCOUNT VALUE - the portion of your Contract Value that is in our general account during the Accumulation Phase. FPAS (FIXED PERIOD ACCOUNTS) - a type of Investment Choice under our general account that earns interest and is only available during the Accumulation Phase. FPAs have Account Periods of anywhere from one to ten years and only one FPA is available for Purchase Payments or transfers in each Contract Year. You can only allocate up to 50% of any Purchase Payment to the FPAs during the Accumulation Phase. However, in some states the FPAs may only be available for GPV and GAV Transfers we make if your Contract includes the Living Guarantees. In addition, if your Contract includes the Living Guarantees, we may transfer more than 50% of the total Purchase Payments received to the FPAs beginning on the second Contract Anniversary. Withdrawals/transfers out of an FPA may be subject to a Market Value Adjustment, which may increase or decrease your Contract Value and/or the amount of the withdrawal/transfer. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 65 FULL ANNUITIZATION - the application of the entire Contract Value to Annuity Payments. YOU WILL BE REQUIRED TO TAKE A FULL ANNUITIZATION OF YOUR CONTRACT ON OR BEFORE THE MAXIMUM PERMITTED INCOME DATE IF, AT THAT TIME, YOUR CONTRACT VALUE HAS NOT BEEN REDUCED TO ZERO. Upon Full Annuitization you will no longer have a Contract Value, any periodic withdrawal or income payments (other than Annuity Payments) will stop, and the death benefit will terminate. In addition, if your Contract includes the Living Guarantees, the FPAs and the Guaranteed Withdrawal Benefit will no longer be available to you and you will no longer receive any True Ups. GAV (GUARANTEED ACCOUNT VALUE) BENEFIT - an optional benefit under the Living Guarantees that provides a level of protection for the principal you have invested in the Contract as well as locking in investment gains from prior anniversaries. GMDB (GUARANTEED MINIMUM DEATH BENEFIT) - you were asked to select one of two GMDBs at Contract issue that may provide different guaranteed death benefit values. GPV (GUARANTEED PRINCIPAL VALUE) BENEFIT - an optional benefit under the Living Guarantees that provides a level of protection for the principal you have invested in the Contract. GPV AND GAV FIXED ACCOUNT MINIMUMS - if your Contract includes the Living Guarantees, this is the minimum amount of Contract Value that we determine must be allocated to an FPA to support the GPV or GAV Benefits. GPV AND GAV TRANSFERS - if your Contract includes the Living Guarantees, these are the transfers we make between your selected Investment Options and the FPAs as a result of our monitoring your daily Contract Value in order to support the GPV and GAV Benefits. GWB (GUARANTEED WITHDRAWAL BENEFIT) - a benefit under the Living Guarantees that provides a guaranteed income through partial withdrawals, regardless of your Contract Value, beginning on the second Contract Anniversary. INCOME DATE - the date we begin making Annuity Payments to the Payee from the Contract. This date must be the first day of a calendar month. Because the Contract allows for Partial Annuitizations there may be multiple Income Dates. INVESTMENT CHOICES - the Investment Options and any general account Investment Choices available under the Contract for Purchase Payments or transfers. We may add, substitute or remove Investment Choices in the future. INVESTMENT OPTIONS - the variable Investment Choices available under the Separate Account. You may invest in up to 15 of the Investment Options at any one time. ISSUE DATE - the date shown on the Contract that starts the first Contract Year. Contract Anniversaries and Contract Years are measured from the Issue Date. JOINT OWNERS - two Owners who own a Non-Qualified Contract. We do not allow Joint Owners to take Partial Annuitizations. LIVING GUARANTEES - an optional benefit package that includes either the GPV or GAV Benefit and the GWB. These benefits were not available individually. THE LIVING GUARANTEES CANNOT BE ADDED OR CHANGED FOR AN EXISTING CONTRACT AFTER IT IS ISSUED, OR REMOVED FROM YOUR CONTRACT. There are no additional fees or charges for the Living Guarantees with the GPV Benefit. However, there is an additional M&E charge for the guarantees provided by the GAV Benefit. MAV (MAXIMUM ANNIVERSARY VALUE) - a calculation used in determining the Enhanced GMDB value. MAY 2007 CONTRACT - this Contract replaced the Original Contract in most states. The primary difference between the May 2007 and Original Contracts is that the May 2007 Contract has a four-year withdrawal charge schedule. Unless specifically indicated otherwise, all prospectus language applies equally to both Original and May 2007 Contracts. MVA (MARKET VALUE ADJUSTMENT) - a positive or negative adjustment to amounts withdrawn or transferred from an FPA unless they are made within 30 days of the end of an Account Period. NON-QUALIFIED CONTRACT - a Contract that is not purchased under a pension or retirement plan qualified under sections of the Internal Revenue Code. ORIGINAL CONTRACT - this Contract first became available on April 29, 2005 and was replaced in most states by the May 2007 Contract. The primary difference between the Original and May 2007 Contracts is that the Original Contract has a three-year withdrawal charge schedule. Unless specifically indicated otherwise, all prospectus language applies equally to both Original and May 2007 Contracts. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 66 OWNER - "you," "your" and "yours." The person or entity (or persons or entities if there are Joint Owners) named in the Contract who may exercise all rights granted by the Contract. The Owner was designated at Contract issue. PARTIAL ANNUITIZATION - the application of only part of the Contract Value to Annuity Payments. If you take a Partial Annuitization, the Accumulation Phase and Annuity Phase of the Contract may occur at the same time. You can take one Partial Annuitization every 12 months. The maximum number of annuitizations we allow at any one time is five. Partial Annuitizations are not available to Joint Owners. If you take a Partial Annuitization, there can be only one Owner, the Owner must be the Annuitant, and we will not allow the Owner to designate a joint Annuitant. PAYEE - the person or entity you designate (subject to our approval) to receive Annuity Payments during the Annuity Phase. If you do not designate a Payee by the Income Date, we will make Annuity Payments to the Owner. PURCHASE PAYMENT - the money you put in the Contract. QUALIFIED CONTRACT - a Contract purchased under a pension or retirement plan qualified under sections of the Internal Revenue Code (for example, 401(k) and H.R. 10 plans), Individual Retirement Annuities (IRAs), or Tax-Sheltered Annuities (referred to as TSA or 403(b) contracts). Qualified Contracts may include, but are not limited to Roth IRAs, Traditional IRAs, Simplified Employee Pension (SEP) IRAs and Inherited IRAs. SEPARATE ACCOUNT - Allianz Life Variable Account B is the Separate Account that issues your Contract. It is a separate investment account of Allianz Life. The Separate Account holds the assets invested in the Investment Options that underlie the Contracts. The Separate Account is divided into subaccounts, each of which invests exclusively in a single Investment Option. SEPARATE ACCOUNT VALUE - the portion of your Contract Value that is in the subaccounts of the Separate Account during the Accumulation Phase. We calculate the Separate Account Value by multiplying the Accumulation Unit value in each subaccount by the number of Accumulation Units for each subaccount and then adding those results together. SERVICE CENTER - the Allianz Service Center. Our Service Center address and telephone number are listed at the back of this prospectus. TRUE UP - an amount we may pay into your Contract under the GAV/GPV Benefits. On the fifth and subsequent Contract Anniversaries, we will compare your Contract Value to the GPV/GAV established five years ago, adjusted for any partial withdrawals taken in the last five Contract Years. If your Contract Value on these occasions is less than this amount, we will pay into your Contract an amount equal to that difference. We will allocate this amount to your Investment Options in proportion to the amount of Separate Account Value in each of the Investment Options on the date of allocation. We refer to this payment as a True Up. WITHDRAWAL CHARGE BASIS - the total amount under your Contract that is subject to a withdrawal charge. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 67 14.TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION (SAI) ALLIANZ LIFE......................2 EXPERTS...........................2 LEGAL OPINIONS....................2 DISTRIBUTOR.......................2 REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE3 FEDERAL TAX STATUS................3 General.........................3 Diversification.................4 Owner Control...................4 Contracts Owned by Non-Individuals5 Income Tax Withholding..........5 Required Distributions..........5 Qualified Contracts.............5 GUARANTEED PRINCIPAL VALUE (GPV) AND GUARANTEED ACCOUNT VALUE (GAV) TRANSFERS7 ANNUITY PROVISIONS...............14 Annuity Units/Calculating Annuity Payments14 MORTALITY AND EXPENSE RISK GUARANTEE14 FINANCIAL STATEMENTS.............14 APPENDIX - CONDENSED FINANCIAL INFORMATION15 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 68 15.PRIVACY AND SECURITY STATEMENT MARCH 2009 Your privacy is a high priority for Allianz. Our pledge to protect your privacy is reflected in our Privacy and Security Statement. This statement outlines our principles for collecting, using and protecting information that we gather about you. This statement applies to all of the companies within the Allianz family of companies that issue insurance policies. The law allows us to share your information among our insurance companies. The law does not allow you to prevent these disclosures. A list of our companies can be found at the end of this notice. ALLIANZ DOES NOT SELL YOUR INFORMATION TO ANYONE We do not share your information with anyone for their own marketing purposes. For this reason, we are not required to obtain an "opt-in election," an "opt-out election" or an authorization from you. We also do not share your information with any of our affiliated companies outside of the Allianz family of companies. INFORMATION ABOUT YOU THAT ALLIANZ COLLECTS Allianz collects information about you so that we can process the insurance transactions you request. We limit the amount of your information collected to what we feel is needed to maintain your account. We may collect your information from the following sources: o From you, either directly or through your agent. This may include information on your insurance application or other forms you may complete, such as your name, address and telephone number. o From others, through the process of handling a claim. This may include information from medical or accident reports. o From your doctor or during a home visit by a health assessment professional. This may include medical information about you gathered with your written authorization. o From your relationship with us, such as the number of years you have been a customer or the types of insurance products you purchased. o From a consumer reporting agency such as a medical, credit, or motor vehicle report. The information in these reports may be kept by the agency and shared with others. If you visit one of our websites, we may use "cookies" (small text files sent from our site to your hard drive). These cookies help us to recognize repeat visitors and allow easy access to and use of the site. We do not use cookies to gather your information. The cookies only enable you to use our website more easily. INFORMATION ABOUT YOU THAT ALLIANZ SHARES Allianz does not share information about current or former customers with anyone, except as "allowed by law." "Allowed by law" means that we may share your information, such as your name, address, and policy information, as follows: o With consumer reporting agencies to obtain a medical report, credit report, or motor vehicle report. These reports are used to determine eligibility for coverage or to process your requested transactions. o With your insurance agent so that they can perform services for you. o With medical professionals in order to process your claim. o With a state Department of Insurance in order to examine our records or business practices. o With a state or federal law enforcement agency, as required by law or to report suspected fraud activities. o With research groups to conduct studies on claims results. No individual is identified in any study or report. We advise the vendors with whom we legally share your information of our privacy policy. We make every effort to use vendors whose privacy policy reflects our own. ALLIANZ POLICIES AND PRACTICES REGARDING SECURITY OF YOUR INFORMATION Allianz uses computer hardware and software tools to maintain physical and electronic safeguards. These safeguards comply with applicable federal and state regulations. We restrict access to information about you to those employees who need the information to service your policy. Allianz works to ensure that our websites are secure. We use state of the art technology to protect the information that may be shared over these sites. YOUR ABILITY TO ACCESS AND CORRECT YOUR INFORMATION You have the right to access and get a copy of your information. This does not include the right to access and copy your information related to a claim or civil or criminal proceeding. If you wish to review your information, please write us at the address below. Provide your full name, address and policy number(s). For your protection, please have your request notarized. This will ensure the identity of the person requesting your information. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 69 Within 30 working days of our receipt of your written request, you may see and get a copy of your information in person. If you prefer, we will send you a copy of your information. If medical information is contained in your file, we may request that you name a medical professional to whom we will send your information. If you believe any of your information is incorrect, notify us in writing at the address below. Within 30 working days, we will let you know if our review has resulted in a correction of your information. If we do not agree there is an error, you may file a statement disputing our finding. We will attach the statement to your file. We will send any corrections we make, or your statement, to anyone we shared your information with over the past two years, and to anyone who may receive your information from us in the future. We do not control the information about you obtained from a consumer reporting agency or a Department of Motor Vehicles. We will provide you with the names and addresses of these agencies so that you can contact them directly. MONTANA RESIDENTS: You may write to us and also ask for a record of any disclosure of your medical information made within the last three years. NOTIFICATION OF CHANGE Your trust is one of our most important assets. If we revise our privacy practices in the future, we will notify you prior to introducing any changes. This Privacy and Security Statement is also displayed on our website (www.allianzlife.com). FOR MORE INFORMATION OR IF YOU HAVE QUESTIONS If you have any questions or concerns about our privacy policies or procedures, please call the Corporate Compliance Department at 800.328.5600, write us at the following address, or visit www.allianzlife.com. Allianz Life Insurance Company of North America PO Box 1344 Minneapolis, MN 55440-1344 Allianz family of companies: o Allianz Life Insurance Company of North America o Allianz Life Financial Services, LLC o Allianz Life and Annuity Company M40018 (R-3/2009) The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 70 APPENDIX A - ANNUAL OPERATING EXPENSES FOR EACH INVESTMENT OPTION This table describes, in detail, the annual expenses for each of the Investment Options. We show the expenses as a percentage of an Investment Option's average daily net assets for the most recent calendar year. Except for the AZL Funds, the PIMCO VIT portfolios, and the Premier VIT OpCap Mid Cap Portfolio, neither the Investment Options nor their advisers are affiliated with Allianz Life. Expenses may vary in current and future years. The investment advisers for the Investment Options provided the fee and expense information and we did not independently verify it. See the Investment Options' prospectuses for further information regarding the expenses you may expect to pay.
INVESTMENT OPTION MANAGEMENT RULE SERVICE OTHER ACQUIRED TOTAL ANNUAL OPERATING AMOUNT OF TOTAL ANNUAL OPERATING FEES 12B-1 FEES EXPENSES FUND FEES EXPENSES BEFORE CONTRACTUAL EXPENSES AFTER FEES* AND CONTRACTUAL FEE WAIVERS FEE WAIVERS CONTRACTUAL FEE WAIVERS EXPENSES OR EXPENSE REIMBURSEMENTS AND OR EXPENSE REIMBURSEMENTS REIMBURSEMENTS AIM AZL AIM .90 .25 - .20 - 1.35 - 1.35 International Equity Fund[(1)] BLACKROCK AZL BlackRock .80 .25 - .14 - 1.19 - 1.19 Capital Appreciation Fund[(1)] AZL BlackRock .85 .25 - .12 - 1.22 - 1.22 Growth Fund[(1)] AZL International .35 .25 - .10 - .70 - .70 Index Fund[(1),(13)] AZL Money Market .35 .25 - .09 - .69 - .69 Fund[(1)] BlackRock Global .65 .25 - .13 - 1.03 - 1.03 Allocation V.I. Fund - Class 3 COLUMBIA AZL Columbia Mid .75 .25 - .12 - 1.12 - 1.12 Cap Value Fund[(1)] AZL Columbia Small .90 - - .32 - 1.22 .12 1.10 Cap Value Fund - Class 1[(1),(7),(8)] AZL Columbia Small .90 .25 - .32 - 1.47 .12 1.35 Cap Value Fund - Class 2[(1),(7)] AZL Columbia .81 .25 - .15 - 1.21 - 1.21 Technology Fund[(1)] DAVIS AZL Davis NY .75 - - .10 - .85 - .85 Venture Fund - Class 1[(1),(7),(8)] AZL Davis NY .75 .25 - .10 - 1.10 - 1.10 Venture Fund - Class 2[(1),(7)] Davis VA Financial .75 - - .13 - .88 - .88 Portfolio[(6)] DREYFUS AZL Dreyfus Equity .77 .25 - .07 - 1.09 - 1.09 Growth Fund[(1)] AZL S&P 500 Index .17 - - .21 - .38 .14 .24 Fund - Class 1[(1),(7),(8)] AZL S&P 500 Index .17 .25 - .21 - .63 .14 .49 Fund - Class 2[(1),(7)] AZL Small Cap .26 .25 - .24 - .75 .17 .58 Stock Index Fund - Class 2[(1)] FIRST TRUST AZL First Trust .60 .25 - .13 - .98 .19 .79 Target Double Play Fund[(1)] FRANKLIN TEMPLETON AZL Franklin Small .75 .25 - .10 - 1.10 - 1.10 Cap Value Fund[(1)] AZL Franklin .70 .25 - .25 - 1.20 - 1.20 Templeton Founding Strategy Plus Fund - Class 2[(1),(13)] Franklin Global .80 .25 - .30 - 1.35 .32 1.03 Real Estate Securities Fund - Class 2[(4)] Franklin Growth .50 .25 - .05 - .80 - .80 and Income Securities Fund - Class 2[(3) ] Franklin High .57 .25 - .09 - .91 - .91 Income Securites Fund - Class 2[(3)] Franklin Income .45 .25 - .02 - .72 - .72 Securities Fund - Class 2[(3)] Franklin Large Cap .73 .25 - .04 - 1.02 - 1.02 Growth Securities Fund - Class 2[(3)] Franklin Rising .60 .25 - .02 .01 .88 .01 .87 Dividends Securities Fund - Class 2[(3),(5)] The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 71 Franklin Small-Mid .50 .25 - .28 .02 1.05 .02 1.03 Cap Growth Securities Fund - Class 2[(5)] Franklin Templeton .00 .25 - .13 .65 1.03 .03 1.00 VIP Founding Funds Allocation Fund - Class 2[(9)] Franklin U.S. .49 .25 - .04 - .78 - .78 Government Fund - Class 2[(3)] Franklin Zero .60 - - .08 - .68 - .68 Coupon Fund 2010 - Class 1[(3)] Mutual Global .80 .25 - .18 - 1.23 - 1.23 Discovery Securities Fund - Class 2 Mutual Shares .60 .25 - .13 - .98 - .98 Securities Fund - Class 2 Templeton Foreign .64 .25 - .15 .02 1.06 .02 1.04 Securities Fund - Class 2[(5)] Templeton Global .47 .25 - .11 - .83 - .83 Bond Securities Fund - Class 2[(3)] Templeton Growth .74 .25 - .04 - 1.03 - 1.03 Securities Fund - Class 2[(3)] JENNISON AZL Jennison 20/20 .75 .25 - .10 - 1.10 - 1.10 Focus Fund[(1)] J.P. MORGAN AZL JPMorgan Large .75 .25 - .10 - 1.10 - 1.10 Cap Equity Fund[(1)] AZL JPMorgan U.S. .80 - - .23 - 1.03 .08 .95 Equity Fund - Class 1[(1),(7),(8)] AZL JPMorgan U.S. .80 .25 - .23 - 1.28 .08 1.20 Equity Fund - Class 2[(1),(7)] NICHOLAS- APPLEGATE AZL NACM .85 .25 - .35 - 1.45 - 1.45 International Fund[(1)] OPPENHEIMER CAPITAL AZL OCC Growth .75 .25 - .20 - 1.20 - 1.20 Fund[(1),(13)] AZL OCC .85 .25 - .14 - 1.24 - 1.24 Opportunity Fund[(1)] OpCap Mid Cap .80 - - .18 - .98 - .98 Portfolio[(10)] OPPENHEIMER FUNDS AZL Oppenheimer .90 - - .22 - 1.12 - 1.12 Global Fund - Class 1[(1),(7),(8)] AZL Oppenheimer .90 .25 - .22 - 1.37 - 1.37 Global Fund - Class 2[(1),(7)] AZL Oppenheimer .75 .25 - .17 - 1.17 - 1.17 International Growth Fund[(1)] Oppenheimer High .74 - - .06 - .80 - .80 Income Fund/VA - Non Service Class[ (6)] PIMCO AZL PIMCO .75 .25 - .22 - 1.22 .02 1.20 Fundamental IndexPLUS Total Return Fund[(1)] PIMCO VIT All .425 - .15 - .76 1.335 .02 1.315 Asset Portfolio - Admin. Class[(6),(11),(12)] PIMCO VIT .74 - .15 .17 .09 1.15 .09 1.06 CommodityRealReturn Strategy Portfolio - Admin. Class[(2),(6),(12)] PIMCO VIT Emerging .85 - .15 .13 - 1.13 - 1.13 Markets Bond Portfolio - Admin. Class[(6)] PIMCO VIT Global .75 - .15 .07 - .97 - .97 Bond Portfolio (Unhedged) - Admin. Class[(6)] PIMCO VIT Global .95 - .15 .09 .66 1.85 .75 1.10 Multi-Asset Portfolio - Admin. Class[(13)] PIMCO VIT High .60 - .15 - - .75 - .75 Yield Portfolio - Admin. Class[(6)] PIMCO VIT Real .50 - .15 .06 - .71 - .71 Return Portfolio - Admin. Class[(6)] The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 72 PIMCO VIT .35 - .15 .34 - .84 - .84 StocksPLUS[{R}] Growth and Income Portfolio - Admin. Class[(6)] PIMCO VIT Total .50 - .15 .23 - .88 - .88 Return Portfolio - Admin. Class[(6)] PRUDENTIAL SP International .85 .25 - .29 - 1.39 - 1.39 Growth Portfolio - Class 2[(6)] SP Strategic .90 .25 - .48 - 1.63 - 1.63 Partners Focused Growth Portfolio - Class 2[(6)] SCHRODER AZL Schroder 1.23 .25 - .45 - 1.93 .28 1.65 Emerging Markets Equity Fund[(1)] AZL Schroder 1.00 .25 - .28 - 1.53 - 1.53 International Small Cap Fund[(1)] TARGETPLUS PORTFOLIOS AZL TargetPLUS .52 .25 - .53 - 1.30 .41 .89 Balanced Fund[(1)] AZL TargetPLUS .60 .25 - .24 - 1.09 .30 .79 Equity Fund[(1)] AZL TargetPLUS .52 .25 - .36 - 1.13 .24 .89 Growth Fund[(1)] AZL TargetPLUS .52 .25 - .44 - 1.21 .32 .89 Moderate Fund[(1)] TURNER AZL Turner .85 .25 - .14 - 1.24 - 1.24 Quantitative Small Cap Growth Fund[(1)] VAN KAMPEN AZL Van Kampen .73 .25 - .09 - 1.07 - 1.07 Comstock Fund[(1)] AZL Van Kampen .75 .25 - .13 - 1.13 - 1.13 Equity and Income Fund[(1)] AZL Van Kampen .95 .25 - .14 - 1.34 - 1.34 Global Franchise Fund[(1)] AZL Van Kampen .90 .25 - .27 - 1.42 .07 1.35 Global Real Estate Fund[(1)] AZL Van Kampen .76 .25 - .11 - 1.12 - 1.12 Growth and Income Fund[(1)] AZL Van Kampen Mid .80 .25 - .09 - 1.14 - 1.14 Cap Growth Fund[(1)]
* The 12b-1 fees cover certain distribution and shareholder support services provided by the companies selling Contracts. Our principal underwriter, Allianz Life Financial Services, LLC, will receive 12b-1 fees, except for those classes of shares that do not pay a 12b-1 fee, as identified by footnote (7). The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 73 (1)Allianz Investment Management LLC (AZL), the Investment Option's investment adviser, and the Investment Option have entered into a written contract limiting operating expenses to the "after waiver" amount listed above through April 30, 2010. The operating expenses covered by the expense limitation agreement include fees deducted from Investment Option assets such as audit fees and payments to independent trustees, but do not include the operating expenses of other investment companies in which the Investment Option may invest (acquired fund fees and expenses). The Investment Option is authorized to reimburse AZL for management fees previously waived and/or for the cost of other expenses paid by AZL provided that such reimbursement will not cause the Investment Option to exceed the expense limits in effect at the time of such reimbursement. The Investment Option's ability to reimburse AZL in this manner only applies to fees paid or reimbursement made by AZL within the three fiscal years prior to the date of such reimbursement. (2)PIMCO has contractually agreed to waive the management fee and the administration fee it receives from the Portfolio in an amount equal to the management fee paid to PIMCO by the subsidiary. This waiver may not be terminated by PIMCO and will remain in effect for as long as PIMCO's contract with the subsidiary is in place. (3)The Fund administration fee is paid indirectly through the management fee. (4)The manager and administrator have contractually agreed in advance to waive or limit their respective fees so that the increase in investment management and fund administration fees paid by the Fund are phased in over a five year period, with there being no increase in the rate of such fees for the first year ending April 30, 2008. For each of the four years thereafter through April 30, 2012, the manager and administrator will receive one-fifth of the increase in the rate of fees. Beginning May 1, 2012, the full new investment management and administration fees will then be in effect. It is estimated that the increase for the year ending April 30, 2010 will be 0.14%. In future years the fee rates will vary in accordance with the fee rate schedules and fund assets. (5)The manager has agreed in advance to reduce its fee from assets invested by the Fund in a Franklin Templeton money market fund (the acquired fund) to the extent that the Fund's fees and expenses are due to those of the acquired fund. This reduction is required by the Trust's board of trustees and an exemptive order of the Securities and Exchange Commission (SEC); this arrangement will continue as long as the exemptive order is relied upon. (6)We may enter into certain arrangements under which we, or our affiliate Allianz Life Financial Services, LLC, the principal underwriter for the Contracts, are compensated by the Investment Options' advisers, distributors and/or affiliates for the administrative services and benefits which we provide to the Investment Options. The amount of the compensation usually is based on the aggregate assets of the Investment Options of other investment portfolios from contracts that we issue or administer. Some advisers may pay us more or less than others, however, the maximum fee that we currently receive is at the annual rate of 0.25% of the average aggregate amount invested by us in the Investment Options. (7)The Investment Option has both Class 1 shares and Class 2 shares. Class 2 shares pay a 12b-1 fee of up to 0.25% of its average daily assets. Class 1 shares do not pay a 12b-1 fee. (8)Not currently available. (9)The Fund's administrator has contractually agreed to waive or limit its fee and to assume as its own expense certain expenses of the Fund, so that common annual operating expenses of the fund do not exceed 0.10% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2010. The Fund does not pay management fees but will indirectly bear its proportionate share of any management fees and other expenses paid by the underlying funds (or "acquired funds") in which it invests. Acquired funds' estimated fees and expenses are based on the acquired funds' expenses for the fiscal year ended December 31, 2008. (10)OpCap Advisors has contractually agreed to reduce the total annual portfolio operating expenses to the extent they would exceed 1.00% (net of any expenses offset by earnings credits from the custodian bank) of the Portfolio's average daily net assets. This reduction of annual portfolio operating expenses is guaranteed by OpCap Advisors through December 31, 2015. Net portfolio operating expenses do not reflect a reduction of custody expenses offset by custody credits earned on cash balances at the custodian bank. (11)Acquired fund fees and expenses (underlying fund expenses) for the Portfolio are based upon an allocation of the Portfolio's assets among the underlying funds and upon the total annual operating expenses of the institutional class shares of these underlying funds. Acquired fund fees and expenses will vary with changes in the expenses of the underlying funds, as well as allocation of the Portfolio's assets, and may be higher or lower than those shown above. (12)PIMCO has contractually agreed to waive or reduce the advisory fee and/or administration fee. PIMCO may recoup these waivers in future periods, not exceeding three years, provided total expenses, including such recoupment, does not exceed the annual expense limit. See the Investment Option prospectus for further information. (13)The Investment Option commenced operations under this Contract as of April 27, 2009. Therefore, the expenses shown are estimated for the current calendar year. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 74 This table describes, in detail, the annual expenses for each of the AZL Fund of Funds. We show the expenses as a percentage of an Investment Option's average daily net assets. The underlying funds may pay 12b-1 fees to the distributor of the Contracts for distribution and/or administrative services. The underlying funds do not pay service fees or 12b-1 fees to the AZL Fund of Funds and the AZL Fund of Funds do not pay service fees or 12b-1 fees. The underlying funds of the AZL Fund of Funds may pay service fees to the insurance companies issuing variable contracts, or their affiliates, for providing customer service and other administrative services to contract purchasers. The amount of such service fees may vary depending on the underlying fund.
INVESTMENT OPTION MANAGEMENT RULE OTHER TOTAL ACQUIRED FUND TOTAL ANNUAL OPERATING AMOUNT OF TOTAL ANNUAL OPERATING FEES 12B-1 EXPENSES FEES AND EXPENSES BEFORE CONTRACTUAL EXPENSES AFTER FEES* EXPENSES[(2)] CONTRACTUAL FEE WAIVERS FEE WAIVERS CONTRACTUAL FEE WAIVERS OR EXPENSE REIMBURSEMENTS AND OR EXPENSE REIMBURSEMENTS REIMBURSEMENTS FUND OF FUNDS AZL Allianz .05 - .15 .20 1.06 1.26 - 1.26 Global Investors Select Fund[(1),(4)] AZL Balanced .05 - .15 .20 .63 .83 - .83 Index Strategy Fund[(1),(4)] AZL Fusion .20 - .04 .24 1.25 1.49 - 1.49 Balanced Fund[(1),(3)] AZL Fusion .20 - .20 .40 .91 1.31 .05 1.26 Conservative Fund[(1),(3),(4)] AZL Fusion Growth .20 - .03 .23 1.36 1.59 - 1.59 Fund[(1),(3)] AZL Fusion .20 - .04 .24 1.29 1.53 - 1.53 Moderate Fund[(1),(3)] AZL Moderate .05 - .15 .20 .61 .81 - .81 Index Strategy Fund[(1),(4)]
* The 12b-1 fees cover certain distribution and shareholder support services provided by the companies selling Contracts. Our principal underwriter, Allianz Life Financial Services, LLC, will receive 12b-1 fees. (1)Allianz Investment Management LLC (AZL), the Investment Option's investment adviser, and the Investment Option have entered into a written contract limiting operating expenses (excluding certain fund expenses including, but not limited to, any taxes, interest, brokerage fees or extraordinary expenses) from exceeding 0.35% for the AZL Fusion Conservative Fund, 0.30% for the other three Fusion Funds, and 0.20% for the AZL Allianz Global Investors Select Fund, AZL Balanced Index Strategy Fund, and the AZL Moderate Index Strategy Fund, through at least April 30, 2010. The operating expenses covered by the expense limitation include fees deducted from fund assets such as audit fees and payments to outside trustees, but do not include the operating expenses of other investment companies in which the funds may invest (acquired fund fees and expenses). Acquired fund fees and expenses are incurred indirectly by the Investment Option(s) through the Investment Option's investment in permitted underlying funds. Accordingly, acquired fees and expenses affect the Investment Option's total returns. The Investment Option is authorized to reimburse AZL for fees previously waived and/or for the cost of other expenses paid by AZL provided that such reimbursement will not cause the Investment Option to exceed the expense limits in effect at the time of such reimbursement. AZL may request and receive reimbursement of fees waived or limited and other reimbursements made by AZL. The Investment Option's ability to reimburse AZL in this manner only applies to fees paid or reimbursement made by AZL within the three fiscal years prior to the date of such reimbursement. (2)Persons with Contract Value allocated to the AZL Fund of Funds will also indirectly pay the expenses of the underlying funds. The underlying fund fees and expenses are an estimate. These expenses will vary, depending upon the allocation of assets to individual underlying funds. In addition, it can be expected that underlying funds may be added or deleted as investments, with a resulting change in expenses. The investment advisers to the underlying funds or their affiliates may pay "service fees" to Allianz Life or its affiliates for providing customer service and other administrative services to Contract purchasers. The amount of such fees may vary by underlying fund. The underlying funds may also pay Rule 12b-1 distribution fees to the distributor of the Contracts. The underlying funds do not pay service fees or 12b-1 fees to the AZL Fund of Funds and the AZL Fund of Funds do not pay service fees or 12b-1 fees. (3)Effective December 1, 2008, (effective April 27, 2009, for AZL Fusion Conservative Fund) the Manager and the Fund entered into a written agreement whereby the Manager has voluntarily reduced the management fee to 0.15% through April 30, 2010. If this voluntary fee reduction were reflected in the table, the net annual operating expenses would be lower. (4)The Investment Option commenced operations under this Contract as of April 27, 2009. Therefore the expenses shown are estimated for the current calendar year. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 75 APPENDIX B - CONDENSED FINANCIAL INFORMATION The consolidated financial statements of Allianz Life Insurance Company of North America and the financial statements of Allianz Life Variable Account B may be found in the Statement of Additional Information. Accumulation Unit value (AUV) information corresponding to the highest and lowest combination of charges for the Contract described by this prospectus is listed in the tables below. You can find AUV information corresponding to additional combinations of charges in the appendix to the Statement of Additional Information. This information should be read in conjunction with the financial statements and related notes of the Separate Account included in the Statement of Additional Information. The Statement of Additional Information is available without charge by contacting us at the telephone number or address listed at the back of this prospectus.
* KEY TO BENEFIT OPTION M&E CHARGES Allianz High Five L with the Traditional GMDB and No Living Guarantees or Living Guarantees with the GPV Benefit........... 1.65% Allianz High Five L with the Enhanced GMDB and Living Guarantees with the GAV Benefit........... 1.95%
The following Investment Options commenced operations under this Contract after December 31, 2008. Therefore, no AUV information is shown for them: AZL Allianz Global Investors Select Fund; AZL Balanced Index Strategy Fund; AZL[ ]Franklin Templeton Founding Strategy Plus Fund; AZL Fusion Conservative Fund; AZL International Index Fund; AZL Moderate Index Strategy Fund; AZL OCC Growth Fund; and PIMCO VIT Global Multi-Asset Portfolio. (Number of Accumulation Units in thousands)
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL AIM International Equity Fund 1.65% 12/31/2005 N/A 13.877 27 12/31/2006 13.877 17.342 122 12/31/2007 17.342 19.551 145 12/31/2008 19.551 11.248 52 1.95% 12/31/2005 N/A 13.725 16 12/31/2006 13.725 17.101 106 12/31/2007 17.101 19.221 144 12/31/2008 19.221 11.025 64 AZL BlackRock Capital Appreciation Fund 1.65% 12/31/2005 N/A 11.947 26 12/31/2006 11.947 11.937 70 12/31/2007 11.937 13.023 86 12/31/2008 13.023 8.150 49 1.95% 12/31/2005 N/A 11.923 38 12/31/2006 11.923 11.877 57 12/31/2007 11.877 12.918 54 12/31/2008 12.918 8.061 29 AZL BlackRock Growth Fund 1.65% 12/31/2005 N/A 11.749 14 12/31/2006 11.749 11.638 46 12/31/2007 11.638 13.166 200 12/31/2008 13.166 5.089 146 1.95% 12/31/2005 N/A 11.620 13 12/31/2006 11.620 11.476 55 12/31/2007 11.476 12.944 159 12/31/2008 12.944 4.988 93
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Columbia Mid Cap Value Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.060 24 12/31/2007 10.060 10.276 52 12/31/2008 10.276 4.836 22 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.040 12 12/31/2007 10.040 10.224 58 12/31/2008 10.224 4.798 43 AZL Columbia Small Cap Value Fund 1.65% 12/31/2005 N/A 12.243 26 12/31/2006 12.243 13.657 69 12/31/2007 13.657 12.326 113 12/31/2008 12.326 8.233 51 1.95% 12/31/2005 N/A 12.182 8 12/31/2006 12.182 13.548 46 12/31/2007 13.548 12.191 44 12/31/2008 12.191 8.119 13 AZL Columbia Technology Fund 1.65% 12/31/2005 N/A 8.096 24 12/31/2006 8.096 8.167 35 12/31/2007 8.167 9.860 106 12/31/2008 9.860 4.788 32 1.95% 12/31/2005 N/A 7.995 8 12/31/2006 7.995 8.042 12 12/31/2007 8.042 9.680 63 12/31/2008 9.680 4.686 30 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 76
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Davis NY Venture Fund 1.65% 12/31/2005 N/A 11.629 116 12/31/2006 11.629 13.030 333 12/31/2007 13.030 13.347 450 12/31/2008 13.347 7.811 198 1.95% 12/31/2005 N/A 11.484 91 12/31/2006 11.484 12.830 202 12/31/2007 12.830 13.103 270 12/31/2008 13.103 7.645 155 AZL Dreyfus Equity Growth Fund 1.65% 12/31/2005 N/A 9.552 13 12/31/2006 9.552 10.611 47 12/31/2007 10.611 11.350 264 12/31/2008 11.350 6.516 100 1.95% 12/31/2005 N/A 9.433 6 12/31/2006 9.433 10.448 28 12/31/2007 10.448 11.142 126 12/31/2008 11.142 6.377 81 AZL First Trust Target Double Play Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.582 124 12/31/2008 10.582 4.824 145 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.550 129 12/31/2008 10.550 4.795 92 AZL Franklin Small Cap Value Fund 1.65% 12/31/2005 N/A 16.185 52 12/31/2006 16.185 18.375 151 12/31/2007 18.375 17.282 238 12/31/2008 17.282 11.265 99 1.95% 12/31/2005 N/A 16.056 48 12/31/2006 16.056 18.173 119 12/31/2007 18.173 17.042 136 12/31/2008 17.042 11.075 55 AZL Fusion Balanced Fund 1.65% 12/31/2005 N/A 10.612 273 12/31/2006 10.612 11.429 561 12/31/2007 11.429 12.041 1042 12/31/2008 12.041 8.593 504 1.95% 12/31/2005 N/A 10.590 230 12/31/2006 10.590 11.372 338 12/31/2007 11.372 11.944 500 12/31/2008 11.944 8.499 381
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Fusion Growth Fund 1.65% 12/31/2005 N/A 11.087 355 12/31/2006 11.087 12.237 1009 12/31/2007 12.237 12.728 1867 12/31/2008 12.728 7.644 907 1.95% 12/31/2005 N/A 11.064 417 12/31/2006 11.064 12.175 1017 12/31/2007 12.175 12.626 1485 12/31/2008 12.626 7.560 637 AZL Fusion Moderate Fund 1.65% 12/31/2005 N/A 10.790 559 12/31/2006 10.790 11.751 1200 12/31/2007 11.751 12.313 1935 12/31/2008 12.313 8.144 706 1.95% 12/31/2005 N/A 10.768 529 12/31/2006 10.768 11.692 997 12/31/2007 11.692 12.215 1614 12/31/2008 12.215 8.055 606 AZL Jennison 20/20 Focus Fund 1.65% 12/31/2005 N/A 12.225 61 12/31/2006 12.225 13.563 132 12/31/2007 13.563 14.772 181 12/31/2008 14.772 8.702 97 1.95% 12/31/2005 N/A 12.201 54 12/31/2006 12.201 13.496 149 12/31/2007 13.496 14.654 175 12/31/2008 14.654 8.607 77 AZL JPMorgan Large Cap Equity Fund 1.65% 12/31/2005 N/A 11.857 85 12/31/2006 11.857 12.446 200 12/31/2007 12.446 11.483 257 12/31/2008 11.483 5.095 70 1.95% 12/31/2005 N/A 11.710 81 12/31/2006 11.710 12.255 118 12/31/2007 12.255 11.273 122 12/31/2008 11.273 4.987 47 AZL JPMorgan U.S. Equity Fund 1.65% 12/31/2005 N/A 11.141 14 12/31/2006 11.141 12.559 41 12/31/2007 12.559 12.821 59 12/31/2008 12.821 7.733 39 1.95% 12/31/2005 N/A 11.086 20 12/31/2006 11.086 12.459 46 12/31/2007 12.459 12.681 51 12/31/2008 12.681 7.625 20 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 77
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Money Market Fund 1.65% 12/31/2005 N/A 10.299 182 12/31/2006 10.299 10.581 572 12/31/2007 10.581 10.907 1505 12/31/2008 10.907 10.990 1315 1.95% 12/31/2005 N/A 10.118 116 12/31/2006 10.118 10.364 384 12/31/2007 10.364 10.651 570 12/31/2008 10.651 10.700 486 AZL NACM International Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.455 12 12/31/2008 9.455 5.123 12 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.436 1 12/31/2008 9.436 5.098 3 AZL OCC Opportunity Fund 1.65% 12/31/2005 N/A 13.971 3 12/31/2006 13.971 15.348 22 12/31/2007 15.348 16.437 45 12/31/2008 16.437 8.544 33 1.95% 12/31/2005 N/A 13.818 11 12/31/2006 13.818 15.134 27 12/31/2007 15.134 16.159 46 12/31/2008 16.159 8.374 15 AZL Oppenheimer Global Fund 1.65% 12/31/2005 N/A 12.687 40 12/31/2006 12.687 14.513 110 12/31/2007 14.513 15.096 239 12/31/2008 15.096 8.753 95 1.95% 12/31/2005 N/A 12.624 18 12/31/2006 12.624 14.398 89 12/31/2007 14.398 14.931 114 12/31/2008 14.931 8.631 29 AZL Oppenheimer International Growth Fund 1.65% 12/31/2005 N/A 14.408 23 12/31/2006 14.408 18.281 102 12/31/2007 18.281 20.190 173 12/31/2008 20.190 11.092 71 1.95% 12/31/2005 N/A 14.229 17 12/31/2006 14.229 18.000 76 12/31/2007 18.000 19.820 110 12/31/2008 19.820 10.856 54
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL PIMCO Fundamental IndexPLUS Total Return Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 11.063 4 12/31/2007 11.063 11.606 8 12/31/2008 11.606 6.751 32 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 11.040 2 12/31/2007 11.040 11.547 10 12/31/2008 11.547 6.697 6 AZL S&P 500 Index Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.865 142 12/31/2008 9.865 6.053 187 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.846 17 12/31/2008 9.846 6.023 42 AZL Schroder Emerging Markets Equity Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.454 69 12/31/2007 10.454 13.399 162 12/31/2008 13.399 6.341 109 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.433 31 12/31/2007 10.433 13.332 117 12/31/2008 13.332 6.290 74 AZL Schroder International Small Cap Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.227 8 12/31/2008 9.227 4.939 8 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.209 13 12/31/2008 9.209 4.915 15 AZL Small Cap Stock Index Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.314 17 12/31/2008 9.314 6.326 79 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.295 6 12/31/2008 9.295 6.294 52 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 78
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL TargetPLUS Balanced Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.100 32 12/31/2008 10.100 7.510 38 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.079 13 12/31/2008 10.079 7.472 46 AZL TargetPLUS Equity Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.498 61 12/31/2008 10.498 5.315 101 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.466 166 12/31/2008 10.466 5.283 100 AZL TargetPLUS Growth Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.923 31 12/31/2008 9.923 5.917 67 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.903 44 12/31/2008 9.903 5.887 61 AZL TargetPLUS Moderate Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.063 40 12/31/2008 10.063 6.694 99 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.043 34 12/31/2008 10.043 6.660 45 AZL Turner Quantitative Small Cap Growth Fund 1.65% 12/31/2005 N/A 11.106 24 12/31/2006 11.106 12.161 51 12/31/2007 12.161 12.687 48 12/31/2008 12.687 7.069 20 1.95% 12/31/2005 N/A 11.084 25 12/31/2006 11.084 12.100 61 12/31/2007 12.100 12.585 46 12/31/2008 12.585 6.992 23
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Van Kampen Comstock Fund 1.65% 12/31/2005 N/A 11.122 128 12/31/2006 11.122 12.665 190 12/31/2007 12.665 12.181 288 12/31/2008 12.181 7.646 106 1.95% 12/31/2005 N/A 10.968 73 12/31/2006 10.968 12.452 165 12/31/2007 12.452 11.939 306 12/31/2008 11.939 7.472 157 AZL Van Kampen Equity and Income Fund 1.65% 12/31/2005 N/A 11.332 28 12/31/2006 11.332 12.543 127 12/31/2007 12.543 12.715 265 12/31/2008 12.715 9.515 116 1.95% 12/31/2005 N/A 11.276 75 12/31/2006 11.276 12.443 181 12/31/2007 12.443 12.575 335 12/31/2008 12.575 9.382 186 AZL Van Kampen Global Franchise Fund 1.65% 12/31/2005 N/A 14.852 44 12/31/2006 14.852 17.715 129 12/31/2007 17.715 19.135 234 12/31/2008 19.135 13.445 87 1.95% 12/31/2005 N/A 14.734 67 12/31/2006 14.734 17.521 195 12/31/2007 17.521 18.868 262 12/31/2008 18.868 13.218 138 AZL Van Kampen Global Real Estate Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 12.032 74 12/31/2007 12.032 10.806 167 12/31/2008 10.806 5.758 80 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 12.007 77 12/31/2007 12.007 10.752 127 12/31/2008 10.752 5.711 74 AZL Van Kampen Growth and Income Fund 1.65% 12/31/2005 N/A 12.212 37 12/31/2006 12.212 13.922 107 12/31/2007 13.922 14.055 147 12/31/2008 14.055 9.282 122 1.95% 12/31/2005 N/A 12.042 43 12/31/2006 12.042 13.687 134 12/31/2007 13.687 13.776 182 12/31/2008 13.776 9.071 104 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 79
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
AZL Van Kampen Mid Cap Growth Fund 1.65% 12/31/2005 N/A 12.335 37 12/31/2006 12.335 13.251 115 12/31/2007 13.251 15.925 261 12/31/2008 15.925 8.064 99 1.95% 12/31/2005 N/A 12.163 39 12/31/2006 12.163 13.028 152 12/31/2007 13.028 15.609 267 12/31/2008 15.609 7.880 132 BlackRock Global Allocation V.I. Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A N/A N/A 12/31/2008 N/A 7.906 132 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A N/A N/A 12/31/2008 N/A 7.890 176 Davis VA Financial Portfolio 1.65% 12/31/2005 N/A 14.409 18 12/31/2006 14.409 16.797 45 12/31/2007 16.797 15.522 87 12/31/2008 15.522 8.189 61 1.95% 12/31/2005 N/A 14.156 21 12/31/2006 14.156 16.452 52 12/31/2007 16.452 15.157 38 12/31/2008 15.157 7.972 43 Franklin Global Real Estate Securities Fund 1.65% 12/31/2005 N/A 55.341 18 12/31/2006 55.341 65.643 26 12/31/2007 65.643 51.094 21 12/31/2008 51.094 28.951 4 1.95% 12/31/2005 N/A 52.624 24 12/31/2006 52.624 62.235 39 12/31/2007 62.235 48.295 26 12/31/2008 48.295 27.283 5 Franklin Growth and Income Securities Fund 1.65% 12/31/2005 N/A 33.716 19 12/31/2006 33.716 38.723 36 12/31/2007 38.723 36.674 38 12/31/2008 36.674 23.395 9 1.95% 12/31/2005 N/A 30.530 11 12/31/2006 30.530 34.959 18 12/31/2007 34.959 33.009 25 12/31/2008 33.009 20.994 9
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
Franklin High Income Securities Fund 1.65% 12/31/2005 N/A 22.287 24 12/31/2006 22.287 23.976 76 12/31/2007 23.976 24.222 136 12/31/2008 24.222 18.255 56 1.95% 12/31/2005 N/A 21.193 16 12/31/2006 21.193 22.731 35 12/31/2007 22.731 22.895 51 12/31/2008 22.895 17.203 23 Franklin Income Securities Fund 1.65% 12/31/2005 N/A 38.980 125 12/31/2006 38.980 45.337 426 12/31/2007 45.337 46.266 747 12/31/2008 46.266 32.012 289 1.95% 12/31/2005 N/A 37.066 76 12/31/2006 37.066 42.983 207 12/31/2007 42.983 43.732 314 12/31/2008 43.732 30.167 137 Franklin Large Cap Growth Securities Fund 1.65% 12/31/2005 N/A 17.967 18 12/31/2006 17.967 19.599 45 12/31/2007 19.599 20.478 58 12/31/2008 20.478 13.187 20 1.95% 12/31/2005 N/A 17.453 19 12/31/2006 17.453 18.982 36 12/31/2007 18.982 19.773 39 12/31/2008 19.773 12.695 13 Franklin Rising Dividends Securities Fund 1.65% 12/31/2005 N/A 32.335 36 12/31/2006 32.335 37.254 71 12/31/2007 37.254 35.656 56 12/31/2008 35.656 25.567 14 1.95% 12/31/2005 N/A 31.011 34 12/31/2006 31.011 35.621 62 12/31/2007 35.621 33.990 51 12/31/2008 33.990 24.300 11 Franklin Small-Mid Cap Growth Securities Fund 1.65% 12/31/2005 N/A 21.000 23 12/31/2006 21.000 22.453 49 12/31/2007 22.453 24.566 48 12/31/2008 24.566 13.895 10 1.95% 12/31/2005 N/A 20.369 17 12/31/2006 20.369 21.713 17 12/31/2007 21.713 23.685 15 12/31/2008 23.685 13.357 3 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 80
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
Franklin Templeton VIP Founding Funds Allocation Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.235 115 12/31/2008 9.235 5.825 379 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.221 60 12/31/2008 9.221 5.799 142 Franklin U.S. Government Fund 1.65% 12/31/2005 N/A 24.413 30 12/31/2006 24.413 24.979 74 12/31/2007 24.979 26.192 89 12/31/2008 26.192 27.717 63 1.95% 12/31/2005 N/A 22.106 18 12/31/2006 22.106 22.551 28 12/31/2007 22.551 23.574 54 12/31/2008 23.574 24.872 42 Franklin Zero Coupon Fund 2010 1.65% 12/31/2005 N/A 35.338 4 12/31/2006 35.338 35.704 10 12/31/2007 35.704 38.144 17 12/31/2008 38.144 40.331 17 1.95% 12/31/2005 N/A 33.603 20 12/31/2006 33.603 33.850 20 12/31/2007 33.850 36.055 22 12/31/2008 36.055 38.007 12 Mutual Global Discovery Securities Fund 1.65% 12/31/2005 N/A 21.805 60 12/31/2006 21.805 26.394 223 12/31/2007 26.394 29.036 456 12/31/2008 29.036 20.433 205 1.95% 12/31/2005 N/A 21.214 63 12/31/2006 21.214 25.602 167 12/31/2007 25.602 28.080 227 12/31/2008 28.080 19.701 103 Mutual Shares Securities Fund 1.65% 12/31/2005 N/A 19.832 221 12/31/2006 19.832 23.094 758 12/31/2007 23.094 23.505 1217 12/31/2008 23.505 14.540 461 1.95% 12/31/2005 N/A 19.295 100 12/31/2006 19.295 22.402 335 12/31/2007 22.402 22.731 502 12/31/2008 22.731 14.019 200
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
OpCap Mid Cap Portfolio 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.992 35 12/31/2007 9.992 10.539 101 12/31/2008 10.539 6.046 72 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.972 16 12/31/2007 9.972 10.486 24 12/31/2008 10.486 5.998 29 Oppenheimer High Income Fund/VA 1.65% 12/31/2005 N/A 12.042 0 12/31/2006 12.042 12.962 0 12/31/2007 12.962 12.735 1 12/31/2008 12.735 2.672 2 1.95% 12/31/2005 N/A 11.830 0 12/31/2006 11.830 12.695 0 12/31/2007 12.695 12.436 0 12/31/2008 12.436 2.601 0 PIMCO VIT All Asset Portfolio 1.65% 12/31/2005 N/A 12.391 101 12/31/2006 12.391 12.757 224 12/31/2007 12.757 13.592 140 12/31/2008 13.592 11.251 87 1.95% 12/31/2005 N/A 12.329 58 12/31/2006 12.329 12.655 78 12/31/2007 12.655 13.443 55 12/31/2008 13.443 11.094 82 PIMCO VIT CommodityRealReturn Strategy Portfolio 1.65% 12/31/2005 N/A 11.018 53 12/31/2006 11.018 10.502 128 12/31/2007 10.502 12.730 171 12/31/2008 12.730 7.038 130 1.95% 12/31/2005 N/A 10.996 38 12/31/2006 10.996 10.450 98 12/31/2007 10.450 12.629 103 12/31/2008 12.629 6.961 70 PIMCO VIT Emerging Markets Bond Portfolio 1.65% 12/31/2005 N/A 10.909 29 12/31/2006 10.909 11.727 49 12/31/2007 11.727 12.205 64 12/31/2008 12.205 10.253 29 1.95% 12/31/2005 N/A 10.887 18 12/31/2006 10.887 11.668 34 12/31/2007 11.668 12.108 36 12/31/2008 12.108 10.140 17 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 81
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
PIMCO VIT Global Bond Portfolio (Unhedged) 1.65% 12/31/2005 N/A 9.333 23 12/31/2006 9.333 9.608 95 12/31/2007 9.608 10.371 145 12/31/2008 10.371 10.114 87 1.95% 12/31/2005 N/A 9.314 16 12/31/2006 9.314 9.560 41 12/31/2007 9.560 10.288 93 12/31/2008 10.288 10.003 53 PIMCO VIT High Yield Portfolio 1.65% 12/31/2005 N/A 12.363 33 12/31/2006 12.363 13.269 94 12/31/2007 13.269 13.509 126 12/31/2008 13.509 10.159 72 1.95% 12/31/2005 N/A 12.146 22 12/31/2006 12.146 12.997 34 12/31/2007 12.997 13.192 39 12/31/2008 13.192 9.891 25 PIMCO VIT Real Return Portfolio 1.65% 12/31/2005 N/A 11.296 88 12/31/2006 11.296 11.191 168 12/31/2007 11.191 12.181 219 12/31/2008 12.181 11.136 115 1.95% 12/31/2005 N/A 11.206 71 12/31/2006 11.206 11.068 118 12/31/2007 11.068 12.011 134 12/31/2008 12.011 10.948 79 PIMCO VIT StocksPLUS Growth and Income Portfolio 1.65% 12/31/2005 N/A 9.186 0 12/31/2006 9.186 10.383 2 12/31/2007 10.383 10.912 2 12/31/2008 10.912 6.158 1 1.95% 12/31/2005 N/A 9.025 0 12/31/2006 9.025 10.170 0 12/31/2007 10.170 10.656 0 12/31/2008 10.656 5.995 0 PIMCO VIT Total Return Portfolio 1.65% 12/31/2005 N/A 13.092 104 12/31/2006 13.092 13.374 259 12/31/2007 13.374 14.306 348 12/31/2008 14.306 14.747 180 1.95% 12/31/2005 N/A 12.861 47 12/31/2006 12.861 13.099 94 12/31/2007 13.099 13.970 151 12/31/2008 13.970 14.358 132
BENEFIT PERIOD OR YEAR AUV AT BEGINNING OF AUV AT END OF NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF OPTION * ENDED PERIOD PERIOD PERIOD INVESTMENT OPTION
SP International Growth Portfolio 1.65% 12/31/2005 N/A 7.226 0 12/31/2006 7.226 8.542 6 12/31/2007 8.542 10.008 100 12/31/2008 10.008 4.874 1 1.95% 12/31/2005 N/A 7.118 0 12/31/2006 7.118 8.389 4 12/31/2007 8.389 9.799 14 12/31/2008 9.799 4.758 2 SP Strategic Partners Focused Growth Portfolio 1.65% 12/31/2005 N/A 7.272 10 12/31/2006 7.272 7.074 2 12/31/2007 7.074 7.979 6 12/31/2008 7.979 4.823 4 1.95% 12/31/2005 N/A 7.163 0 12/31/2006 7.163 6.947 0 12/31/2007 6.947 7.812 0 12/31/2008 7.812 4.708 0 Templeton Foreign Securities Fund 1.65% 12/31/2005 N/A 22.812 20 12/31/2006 22.812 27.252 67 12/31/2007 27.252 30.946 83 12/31/2008 30.946 18.148 22 1.95% 12/31/2005 N/A 21.877 16 12/31/2006 21.877 26.057 36 12/31/2007 26.057 29.501 38 12/31/2008 29.501 17.248 11 Templeton Global Bond Securities Fund 1.65% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 30.931 65 12/31/2008 30.931 32.312 41 1.95% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 29.282 16 12/31/2008 29.282 30.497 13 Templeton Growth Securities Fund 1.65% 12/31/2005 N/A 23.679 152 12/31/2006 23.679 28.372 493 12/31/2007 28.372 28.560 899 12/31/2008 28.560 16.203 341 1.95% 12/31/2005 N/A 22.855 49 12/31/2006 22.855 27.303 180 12/31/2007 27.303 27.401 313 12/31/2008 27.401 15.498 149 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 82 APPENDIX C - GAV CALCULATION EXAMPLE o You purchased a May 2007 Contract with an initial Purchase Payment of $100,000. You selected the Living Guarantees with the GAV Benefit. You make no additional Purchase Payments, therefore, the calculations of the GAV that follows will not include reference to additional Purchase Payments. o The Contract Value on the first Contract Anniversary is $120,000; on the second Contract Anniversary it is $135,000; on the third Contract Anniversary it is $150,000; and on the fourth Contract Anniversary it is $135,000. o You take a partial withdrawal of $20,000 (including the withdrawal charge) in the third Contract Year when the Contract Value on the date of (but before) the partial withdrawal is $160,000. There is no MVA at the time of the partial withdrawal. You take no other partial withdrawals. The initial GAV........................................................... $100,000 The GAV on the first Contract Anniversary equals the greater of A or B: (A)the initial GAV = $100,000 (B)the Contract Value on the first Contract Anniversary = $120,000 The GAV on the first Contract Anniversary......................$120,000 The GAV on the second Contract Anniversary equals the greater of C or D: (C)the GAV from the first Contract Anniversary = $120,000 (D)the Contract Value on the second Contract Anniversary = $135,000 The GAV on the second Contract Anniversary.....................$135,000 Calculating the GAV adjusted partial withdrawal taken in the third Contract Year: The amount of the partial withdrawal subject to the partial withdrawal privilege (10% of total Purchase Payments) = 0.10 x $100,000 =..$10,000 PLUS The remaining amount of the partial withdrawal (including any withdrawal charge)................................+ (10,000 Multiplied by the greater of a) or b) where: (a)one, or (b)the GAV divided by the Contract Value on the date of (but before) the partial withdrawal = $135,000/$160,000 = 0.84........................x 1) Total GAV adjusted partial withdrawal.................$20,000 The GAV on the third Contract Anniversary equals the greater of C or D: (C)the GAV from the second Contract Anniversary, minus the GAV adjusted partial withdrawal taken in the third Contract Year = $135,000 - $20,000 = $115,000 (D)the Contract Value on the third Contract Anniversary = $150,000 The GAV on the third Contract Anniversary......................$150,000 The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 83 APPLYING THE GAV BENEFIT: o On the fifth Contract Anniversary, the Contract Value is $105,000. The initial GAV is $100,000. We subtract all the GAV adjusted partial withdrawals taken in the last five years ($20,000), for a total of $80,000. The fifth anniversary Contract Value is greater than the initial GAV adjusted for the partial withdrawal taken in the third year, so there is no True Up on the fifth Contract Anniversary. o On the sixth Contract Anniversary, the Contract Value is $108,000. The GAV established five years ago on the first Contract Anniversary is $120,000. We subtract all the GAV adjusted partial withdrawals taken in the last five years ($20,000), for a total of $100,000. The sixth anniversary Contract Value is greater than the GAV from the first Contract Anniversary adjusted for the partial withdrawal taken in the third year, so there is no True Up on the sixth Contract Anniversary. o On the seventh Contract Anniversary, the Contract Value is $110,000. The GAV established five years ago on the second Contract Anniversary is $135,000. We subtract all the GAV adjusted partial withdrawals taken in the last five years ($20,000), for a total of $115,000. The seventh anniversary Contract Value is less than the GAV from the second Contract Anniversary adjusted for the partial withdrawal taken in the third year, so we will True Up the Contract Value to equal this amount by applying $5,000 to the Investment Options on the seventh Contract Anniversary. Application of the GAV Benefit in tabular form:
CONTRACT VALUE GAV CONTRACT VALUE GUARANTEED UNDER THE GAV BENEFIT (DOES NOT GAV TRUE UP (DOES NOT CONTRACT APPLY UNTIL THE 5TH CONTRACT ANNIVERSARY) APPLY UNTIL THE 5TH VALUE CONTRACT ANNIVERSARY) AFTER GAV TRUE UP Initial $100,000 $100,000 - - - 1st $120,000 $120,000 - - - Contract Anniversary 2nd $135,000 $135,000 - - - Contract Anniversary 3rd $150,000 $150,000 - - - Contract Anniversary 4th $135,000 $150,000 - - - Contract Anniversary 5th $105,000 $150,000 $ 80,000 None $105,000 Contract Anniversary 6th $108,000 $150,000 $100,000 None $108,000 Contract Anniversary 7th $110,000 $150,000 $115,000 $5,000 $115,000 Contract Anniversary
The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 84 APPENDIX D - DEATH BENEFIT CALCULATION EXAMPLES o You purchased a May 2007 Contract with an initial Purchase Payment of $100,000. You chose not to include the Living Guarantees and you allocated your entire Purchase Payment to the Investment Options. You are the only Owner and are age 69 or younger on the Issue Date. You make no additional Purchase Payments. o You take a partial withdrawal of $20,000 in the tenth Contract Year when the Contract Value on the date of (but before the partial withdrawal) is $160,000. The withdrawal charge period on the initial Purchase Payment has expired so there is no withdrawal charge on this partial withdrawal. o The Contract Value on the tenth Contract Anniversary is $140,000. NOTE: We calculate the MAV only for Contracts with the Enhanced GMDB. The M&E charges are higher for Contracts with the Enhanced GMDB than for Contracts with the Traditional GMDB. If the differences in these charges were reflected in these examples, the Contract Values would be lower for Contracts with the Enhanced GMDB than for Contracts with the Traditional GMDB. IF YOU SELECTED THE TRADITIONAL GMDB: We calculate the death benefit on the tenth Contract Anniversary as the greater of: 1)Contract Value............................................................ $140,000 2)The Traditional GMDB value: Total Purchase Payments received.................................$100,000 Reduced by the GMDB adjusted partial withdrawal..............- 20,000 .............................................................$ 80,000 The GMDB adjusted partial withdrawal for (2) above is equal to: The amount of the partial withdrawal................... $ 20,000 Multiplied by the greater of a) or b) where: a)is one, and b)is the ratio of the death benefit divided by the Contract Value on the date of (but before) the partial withdrawal = $160,000/$160,000 = 1..............................x 1 Total GMDB adjusted partial withdrawal..................$ 20,000 Therefore, the death benefit that would be payable as of the tenth Contract Anniversary is the $140,000 Contract Value. IF YOU SELECTED THE OPTIONAL ENHANCED GMDB: The following details how we calculate the MAV on the first nine Contract Anniversaries: CONTRACT VALUE MAV ------------------------- 1st Contract Anniversary $110,000 $110,000 2nd Contract Anniversary $118,000 $118,000 3rd Contract Anniversary $116,000 $118,000 4th Contract Anniversary $122,000 $122,000 5th Contract Anniversary $120,000 $122,000 6th Contract Anniversary $141,000 $141,000 7th Contract Anniversary $147,000 $147,000 8th Contract Anniversary $155,000 $155,000 9th Contract Anniversary $162,000 $162,000 o On the Issue Date, the MAV is equal to total Purchase Payments ($100,000). o On the first Contract Anniversary the Contract Value is $110,000, which is greater than the MAV from the immediately preceding Business Day ($100,000), so the MAV increases to $110,000. o On the second Contract Anniversary the Contract Value is $118,000, which is greater than the MAV from the immediately preceding Business Day ($110,000), so the MAV increases to $118,000. o On the third Contract Anniversary the Contract Value is $116,000, which is less than the MAV from the immediately preceding Business Day ($118,000), so the MAV does not change. o On the fourth Contract Anniversary the Contract Value is $122,000, which is greater than the MAV from the immediately preceding Business Day ($118,000), so the MAV increases to $122,000. o On the fifth Contract Anniversary the Contract Value is $120,000, which is less than the MAV from the immediately preceding Business Day ($122,000), so the MAV does not change. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 85 o On the sixth, seventh, eighth and ninth Contract Anniversaries the Contract Value is greater than the MAV from the immediately preceding Business Day, so the MAV increases to equal the Contract Value. We calculate the death benefit on the tenth Contract Anniversary as the greater of: 1)Contract Value............................................................ $140,000 2)The Traditional GMDB value: Total Purchase Payments received..................................$100,000 Reduced by the GMDB adjusted partial withdrawal...............- 20,250 .........................................................$ 79,750 3)The Enhanced GMDB value: The MAV on the ninth Contract Anniversary.........................$162,000 Reduced by the GMDB adjusted partial withdrawal...............- 20,250 .........................................................$141,750 The GMDB adjusted partial withdrawal for (2) and (3) above is equal to: The amount of the partial withdrawal....................$ 20,000 Multiplied by the greater of a) or b) where: a)is one, and b)is the ratio of the death benefit divided by the Contract Value on the date of (but before) the partial withdrawal = $162,000/$160,000 = 1.0125.........................x 1.0125 Total GMDB adjusted partial withdrawal..................$ 20,250 Therefore, the death benefit that would be payable as of the tenth Contract Anniversary is the $141,750 MAV. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 86 APPENDIX E - WITHDRAWAL CHARGE EXAMPLES All of the following examples assume you purchased a May 2007 Contract with an initial Purchase Payment of $100,000, you selected the Living Guarantees with the GAV Benefit, and you made no additional Purchase Payments. The partial withdrawal privilege for each Contract Year is 10% of your total Purchase Payments, less previous withdrawals taken under the partial withdrawal privilege, GWB, or as a RMD payment in the same Contract Year, and before any MVA. Any unused partial withdrawal privilege in one Contract Year does not carry over to the next Contract Year. This means at the beginning of each Contract Year, there would be at least $10,000 available under the partial withdrawal privilege. The maximum amount available under the GWB is the lesser of the partial withdrawal privilege ($10,000) or the remaining GWB value (total Purchase Payments less GWB adjusted partial withdrawals). There is no MVA to any of the withdrawals in the following examples. FULL WITHDRAWAL WHEN THE CONTRACT VALUE HAS DECLINED DUE TO A LOSS IN YOUR SELECTED INVESTMENT OPTIONS: o You take a full withdrawal in the third Contract Year when the Contract Value is $90,000 and the withdrawal charge is 5.5%. You have taken no other withdrawals from the Contract. o There are no Purchase Payments that are beyond the withdrawal charge period and the partial withdrawal privilege does not apply upon a full withdrawal. Because this is a full withdrawal, we assess the withdrawal charge against the entire Withdrawal Charge Basis. We calculate the withdrawal charge as follows: The Withdrawal Charge Basis is total Purchase Payments, less any Purchase Payments withdrawn (excluding any penalty-free withdrawals), less any withdrawal charges = $100,000 - $0 - $0 = $100,000 Multiplied by the withdrawal charge........................x 5.5% .....................................................$ 5,500 Therefore, we would withdraw $90,000 from the Contract and pay you $84,500 ($90,000 less the $5,500 withdrawal charge). The full withdrawal will reduce the total amount available under the GWB to zero. PARTIAL WITHDRAWAL UNDER THE PARTIAL WITHDRAWAL PRIVILEGE FOLLOWED BY A FULL WITHDRAWAL: o You take a partial withdrawal of $9,000 in the third Contract Year. The total amount available under the partial withdrawal privilege at this time is $10,000. The $9,000 withdrawn is not subject to a withdrawal charge and will not reduce the Withdrawal Charge Basis. The partial withdrawal will reduce the total amount available under the GWB by $9,000. o You take a full withdrawal in the fourth Contract Year when the Contract Value is $90,000 and the withdrawal charge is 3%. At this time there are no Purchase Payments that are beyond the withdrawal charge period. Because this is a full withdrawal the partial withdrawal privilege does not apply and we will assess the withdrawal charge against the entire Withdrawal Charge Basis. We calculate the withdrawal charge for the full withdrawal as follows: The Withdrawal Charge Basis is total Purchase Payments, less any Purchase Payments withdrawn (excluding any penalty-free withdrawals), less any withdrawal charges = $100,000 - $0 - $0 = $100,000 Multiplied by the withdrawal charge.......................x 3% .....................................................$ 3,000 Therefore, upon the full withdrawal, we would withdraw $90,000 from the Contract and pay you $87,000 ($90,000 less the $3,000 withdrawal charge). In this example, your total distributions from the Contract after deducting the withdrawal charges are $96,000. The full withdrawal will reduce the total amount available under the GWB to zero. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 87 PARTIAL WITHDRAWAL IN EXCESS OF THE PARTIAL WITHDRAWAL PRIVILEGE FOLLOWED BY A FULL WITHDRAWAL: o You take a partial withdrawal of $15,000 in the third Contract Year when the withdrawal charge is 5.5%. The total amount available under the partial withdrawal privilege at this time is $10,000, so $5,000 of the withdrawal is subject to a withdrawal charge and will reduce the Withdrawal Charge Basis. We calculate the withdrawal charge for the partial withdrawal as follows: The amount you will receive that is subject to a withdrawal charge$5,000........................................................ Divided by (1 minus the withdrawal charge percentage).{divide} 0.945 Total amount withdrawn........................................$5,291 Total withdrawal charge (amount withdrawn minus the amount requested) = $5,291 - $5,000 =.........................................$ 291 Therefore, we would withdraw $15,291 from the Contract and pay you $15,000. The partial withdrawal will reduce the GWB by a minimum of $15,291. The reduction will be greater if the Contract Value on the day of (but before) the partial withdrawal is less than $100,000. o Continuing the example, assume you take a full withdrawal in the fourth Contract Year when the Contract Value is $90,000 and the withdrawal charge is 3%. At this time there are no Purchase Payments that are beyond the withdrawal charge period. Because this is a full withdrawal, the partial withdrawal privilege does not apply and we will assess the withdrawal charge against the entire Withdrawal Charge Basis. We calculate the withdrawal charge for the full withdrawal as follows: The Withdrawal Charge Basis is total Purchase Payments, less any Purchase Payments withdrawn (excluding any penalty-free withdrawals), less any withdrawal charges = $100,000 - $5,000 - $291 = $94,709 Multiplied by the withdrawal charge........................x 3% .......................................................$ 2,841 Therefore, upon the full withdrawal, we would withdraw $90,000 from the Contract and pay you $87,159 ($90,000 less the $2,841 withdrawal charge). In this example, your total distributions from the Contract after deducting the withdrawal charges are $102,159. The full withdrawal will reduce the total amount available under the GWB to zero. A SERIES OF PARTIAL WITHDRAWALS UNDER THE PARTIAL WITHDRAWAL PRIVILEGE FOLLOWED BY A FULL WITHDRAWAL: o You take the maximum amount available under the partial withdrawal privilege each year in the third, fourth, fifth and sixth Contract Years (total distributions = $40,000). The $40,000 withdrawn is not subject to a withdrawal charge and will not reduce the Withdrawal Charge Basis. However, the initial Purchase Payment will be beyond its withdrawal charge period beginning on the fourth Contract Anniversary, so from that point forward the Withdrawal Charge Basis is zero. These partial withdrawals are guaranteed by the GWB, and will reduce the GWB by $40,000. The total amount available under the GWB after these partial withdrawals is equal to $100,000 - $40,000 = $60,000. o In the seventh Contract Year, the Contract Value is $9,000 and the maximum amount available under the GWB is $10,000. If you withdraw $10,000 under the GWB in the seventh Contract Year, your Contract Value would drop to zero, but you could continue to take $10,000 each year for the next five years without incurring a withdrawal charge. The Allianz High Five[{R}] L Variable Annuity Contract Prospectus - April 27, 2009 88 FOR SERVICE OR MORE INFORMATION In order to help you understand how your Contract Values vary over time and under different sets of assumptions, we will provide you with certain personalized illustrations upon request and free of charge. You can request illustrations by contacting your registered representative. Illustrations demonstrate how your Contract Value, cash surrender value and death benefits change based on the investment experience of the Investment Options or the hypothetical rate of return. The illustrations are hypothetical and may not be used to project or predict investment results. You can review and copy information about us, the Separate Account, the prospectus and the SAI at the SEC's Public Reference Room in Washington, D.C. You may obtain information about the operation of the Public Reference Room by calling (202) 551-8090. The SEC also maintains a website (http://www.sec.gov). The prospectus, the SAI and other information about the Contract are available on the EDGAR database on the SEC's website. If you do not have access to the website, you can get copies of information from the website upon payment of a duplication fee by writing to: PUBLIC REFERENCE SECTION OF THE COMMISSION 100 F Street, NE Washington, DC 20549 You can contact us at: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA 5701 Golden Hills Drive Minneapolis, MN 55416 (800) 624-0197 If you need service (such as changes in Contract information, inquiry into Contract Values, to request a withdrawal, etc.), please contact our Service Center: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA P.O. Box 561 Minneapolis, MN 55440-0561 (800) 624-0197 PART B - SAI 1 STATEMENT OF ADDITIONAL INFORMATION ALLIANZ HIGH FIVE[TM] L INDIVIDUAL FLEXIBLE PURCHASE PAYMENT VARIABLE DEFERRED ANNUITY CONTRACT ISSUED BY ALLIANZ LIFE(R) VARIABLE ACCOUNT B (THE SEPARATE ACCOUNT) AND ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA (ALLIANZ LIFE, WE, US, OUR) APRIL 27, 2009 This is not a prospectus. This Statement of Additional Information (SAI) should be read in conjunction with the prospectus for the Contract, which is dated the same date as this SAI. Definitions of capitalized terms can be found in the glossary in the prospectus. The prospectus is incorporated in this SAI by reference. The prospectus for the Contract concisely sets forth information that a prospective investor ought to know before investing. For a copy of the Contract's prospectus, call or write us at: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA 5701 Golden Hills Drive Minneapolis, MN 55416 (800) 624-0197 TABLE OF CONTENTS ALLIANZ LIFE.............................................2 EXPERTS..................................................2 LEGAL OPINIONS...........................................2 DISTRIBUTOR..............................................2 REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE........3 FEDERAL TAX STATUS.......................................3 General................................................3 Diversification........................................4 Owner Control..........................................4 Contracts Owned by Non-Individuals.....................5 Income Tax Withholding.................................5 Required Distributions.................................5 Qualified Contracts....................................5 GUARANTEED PRINCIPAL VALUE (GPV) AND GUARANTEED ACCOUNT VALUE (GAV) TRANSFERS..............................................7 ANNUITY PROVISIONS......................................14 Annuity Units/Calculating Variable Annuity Payments...14 MORTALITY AND EXPENSE RISK GUARANTEE....................14 FINANCIAL STATEMENTS....................................14 APPENDIX - CONDENSED FINANCIAL INFORMATION..............15 HIGHFIVELSAI-0409 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 2 ALLIANZ LIFE Allianz Life is a stock life insurance company organized under the laws of the state of Minnesota in 1896. We are a subsidiary of Allianz of America, Inc. (AZOA), a financial holding company. AZOA is a subsidiary of Allianz SE, a provider of integrated financial services. Allianz SE is headquartered in Munich, Germany, and has sales outlets throughout the world. We offer fixed and variable annuities, individual and group life insurance, and long-term care insurance. Allianz Life does not have a separate custodian for the assets owned through the Separate Account. Most mutual fund shares are not in certificated form, and as such, Allianz Life in effect acts as self custodian for the non-certificated shares we own through the Separate Account. EXPERTS The financial statements of Allianz Life Variable Account B as of and for the year or period ended December 31, 2008 (including the statements of changes in net assets for each of the years or periods in the two year period then ended and the financial highlights for each of the periods presented) and the consolidated financial statements and supplemental schedules of Allianz Life Insurance Company of North America as of December 31, 2008 and 2007 and for each of the years in the three-year period ended December 31, 2008, included in this SAI in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audit report covering the December 31, 2008 financial statements and supplemental schedules of Allianz Life Insurance Company of North America refers to an adoption of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, effective January 1, 2008. The principal business address of KPMG LLP is 4200 Wells Fargo Center, Minneapolis, MN. LEGAL OPINIONS Stewart D. Gregg, Senior Securities Counsel of Allianz Life, has provided legal advice on certain matters in connection with the issuance of the Contracts. DISTRIBUTOR Allianz Life Financial Services, LLC (Allianz Life Financial (previously USAllianz Investor Services, LLC)), a wholly owned subsidiary of Allianz Life Insurance Company of North America, acts as the distributor. Allianz Life Financial does not sell the Contracts on a retail basis. Rather, Allianz Life Financial enters into selling agreements with other third-party broker/dealers registered under the Securities Exchange Act of 1934 (selling firms) for the sale of the Contracts. We pay commissions for sales of the Contracts. Allianz Life Financial passes through most of the commissions it receives to selling firms for their sales. Allianz Life Financial received sales compensation with respect to the Contracts issued under Allianz Life Variable Account B in the following amounts during the last three calendar years:
CALENDAR YEAR AGGREGATE AMOUNT OF AGGREGATE AMOUNT OF COMMISSIONS RETAINED BY ALLIANZ LIFE FINANCIAL AFTER PAYMENTS TO COMMISSIONS PAID TO SELLING FIRMS ALLIANZ LIFE FINANCIAL 2006 $207,968,987.55 $0 2007 $218,444,880.80 $0 2008 $198,319,091.42 $0
We may fund Allianz Life Financial's operating and other expenses including: overhead; legal and accounting fees; registered representative training; deferred compensation and insurance benefits for registered representatives; compensation for the Allianz Life Financial management team; and other expenses associated with the Contracts. We also pay for Allianz Life Financial's operating and other expenses, including overhead, legal and accounting fees. As described above, Allianz Life Financial sells its Contracts primarily through "wholesaling", in which Allianz Life Financial sells contracts through a large group of mostly non-affiliated broker/dealer firms. Currently, Allianz Life Financial has agreements with approximately 1,112 retail broker/dealers to sell its Contracts. All of the broker/dealer firms except one are non-affiliated. As described in the prospectus, Allianz Life Financial may pay marketing support payments to certain of these firms for providing marketing support services in the sale of the Contracts. Currently, Allianz Life Financial makes marketing support payments to approximately 47 firms. These payments vary in amount. In 2008, the five firms receiving the largest payments, ranging from $522,495 to $2,345,992, are listed below. Marketing support The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 3 payments may also be made to managers of Investment Options or their affiliates for providing Investment Option information and marketing support. FIRM NAME ---------------------------------- 1 LPL Financial Network 2 AIG Advisor Group 3 National Planning Holdings 4 H D Vest Investment Services 5 Wachovia Securities REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE We may reduce or eliminate the amount of the withdrawal charge on the Contracts when Contract sales are made to individuals or to a group of individuals in a manner that results in savings of sales expenses. We will determine the entitlement to a reduction of the withdrawal charge after examination of the following factors: o the size of the group; o the total amount of Purchase Payments expected to be received from the group; o the nature of the group for which the Contracts are purchased, and the persistency expected in that group (for example, the expectation that the Owners will continue to hold the Contracts for a certain period of time); o the purpose for which the Contracts are purchased and whether that purpose makes it likely that expenses will be reduced; and o any other circumstances which we believe to be relevant to determining whether reduced sales or administrative expenses may be expected. None of these reductions are contractually guaranteed. We may eliminate the withdrawal charge when the Contracts are issued to an officer, director or employee of Allianz Life or any of its affiliates. We may reduce or eliminate the withdrawal charge when the Contract is sold by a registered representative appointed with Allianz Life to any members of his or her immediate family and the commission is waived. In no event will any reduction or elimination of the withdrawal charge be permitted where the reduction or elimination will be unfairly discriminatory to any person. FEDERAL TAX STATUS NOTE: The following description is based upon our understanding of current federal income tax law applicable to annuities in general. We cannot predict the probability that any changes in such laws will be made. Purchasers are cautioned to seek competent tax advice regarding the possibility of such changes. We do not guarantee the tax status of the Contracts. Purchasers bear the complete risk that the Contracts may not be treated as "annuity contracts" under federal income tax laws. It should be further understood that the following discussion is not exhaustive and that special rules not described herein may be applicable in certain situations. Moreover, no attempt has been made to consider any applicable state or other tax laws. GENERAL Section 72 of the Internal Revenue Code of 1986, as amended (the Code) governs taxation of annuities in general. An Owner is generally not taxed on increases in the value of a Contract until distribution occurs, either in the form of a lump sum payment or as Annuity Payments. For a lump sum payment received as a full withdrawal (total redemption) or death benefit, the recipient is taxed on the portion of the payment that exceeds the cost basis of the Contract (your investment). For Non-Qualified Contracts, this cost basis is generally the Purchase Payments, while for Qualified Contracts there may be no cost basis. The taxable portion of the lump sum payment is taxed at ordinary income tax rates. A partial withdrawal results in tax on any gain in the Contract (for example, the difference, if any, between the Contract Value immediately before the withdrawal, unreduced by any charges, and the Contract's cash basis). Lump sum withdrawals, whether partial or full, may also be subject to a federal penalty tax equal to 10% of the taxable amount. For Annuity Payments, the portion of each payment included in income equals the excess of the payment over the exclusion amount. The exclusion amount for Annuity Payments based on a variable Annuity Option is determined by dividing the investment in the Contract (adjusted for any period certain or refund guarantee) by the number of years over which the annuity is expected to be paid (which is determined by Treasury Regulations). The exclusion amount for Annuity Payments based on a fixed Annuity Option is determined by multiplying the Annuity Payment by the ratio that the investment in the Contract (adjusted for any period certain or refund guarantee) bears to the expected return under the The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 4 Contract. Annuity Payments received after the investment in the Contract has been recovered (for example, when the total of the excludable amounts equal the investment in the Contract) are fully taxable. The taxable portion of an Annuity Payment is taxed at ordinary income tax rates. Partial Annuitizations are taxed as partial withdrawals, not as Annuity Payments, until the entire Contract Value has been applied to Annuity Payments. For certain types of Qualified Contracts there may be no cost basis in the Contract within the meaning of Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts should seek competent financial advice about the tax consequences of any distributions. We are taxed as a life insurance company under the Code. For federal income tax purposes, the Separate Account is not a separate entity from us, and its operations form a part of Allianz Life. Although the likelihood of legislative changes is uncertain, there is always the possibility that the tax treatment of the Contract could change by legislation or otherwise. Consult a tax adviser with respect to legislative developments and their effect on the Contract. We have the right to modify the Contract in response to legislative changes that could otherwise diminish the favorable tax treatment that annuity Owners currently receive. We make no guarantee regarding the tax status of any contract and do not intend the above discussion as tax advice. DIVERSIFICATION Section 817(h) of the Code imposes certain diversification standards on the underlying assets of variable annuity contracts. The Code provides that a variable annuity contract will not be treated as an annuity contract for any period (and any subsequent period) for which the investments are not adequately diversified in accordance with regulations prescribed by the United States Treasury Department (Treasury Department). Disqualification of the Contract as an annuity contract would result in the imposition of federal income tax to the Owner with respect to earnings allocable to the Contract before the receipt of Annuity Payments under the Contract. The Code contains a safe harbor provision which provides that annuity contracts, such as the Contract, meet the diversification requirements if, as of the end of each quarter, the underlying assets meet the diversification standards for a regulated investment company and no more than 55% of the total assets consist of cash, cash items, U.S. government securities and securities of other regulated investment companies. On March 2, 1989, the Treasury Department issued regulations (Treas. Reg. 1.817- 5) which established diversification requirements for the Investment Options underlying variable contracts such as the Contract. The regulations amplify the diversification requirements for variable contracts set forth in the Code and provide an alternative to the safe harbor provision described above. Under these regulations, an Investment Option will be deemed adequately diversified if: o no more than 55% of the value of the total assets of the Investment Option is represented by any one investment; o no more than 70% of the value of the total assets of the Investment Option is represented by any two investments; o no more than 80% of the value of the total assets of the Investment Option is represented by any three investments; and o no more than 90% of the value of the total assets of the Investment Option is represented by any four investments. The Code provides that for purposes of determining whether or not the diversification standards imposed on the underlying assets of variable contracts by Section 817(h) of the Code have been met, "each United States government agency or instrumentality shall be treated as a separate issuer." We intend that all Investment Options underlying the Contracts will be managed by the investment advisers in such a manner as to comply with these diversification requirements. OWNER CONTROL The Treasury Department has indicated that the diversification regulations do not provide guidance regarding the circumstances in which Owner control of the investments of the Separate Account will cause the Owner to be treated as the owner of the assets of the Separate Account, thereby resulting in the loss of favorable tax treatment for the Contract. In certain circumstances, owners of variable annuity contracts have been considered for federal income tax purposes to be the owners of the assets of the separate account, supporting their contracts due to their ability to exercise investment control over those assets. When this is the case, the contract owners have been currently taxed on income and gains attributable to the variable account assets. There is little guidance in this area, and some features of our Contracts, such as the flexibility of an Owner to allocate Purchase Payments and transfer amounts among the investment divisions of the Separate Account, have not been explicitly addressed in published rulings. While we believe that the Contracts do not The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 5 give Owners investment control over Separate Account assets, we reserve the right to modify the Contracts as necessary to prevent an Owner from being treated as the owner of the Separate Account assets supporting the Contract. CONTRACTS OWNED BY NON-INDIVIDUALS Under Section 72(u) of the Code, the investment earnings on Purchase Payments for the Contracts will be taxed currently to the Owner if the Owner is a non- individual, for example, a corporation or certain other entities. Such Contracts generally will not be treated as annuities for federal income tax purposes. However, this treatment is not applied to Contracts held by a trust or other entity as an agent for an individual or to Contracts held by qualified retirement plans. Purchasers should consult a tax adviser before purchasing a Contract to be owned by a non-individual. INCOME TAX WITHHOLDING All distributions or the portion thereof which is included in the gross income of the Owner are subject to federal income tax withholding. Generally, amounts are withheld from periodic payments at the same rate as wages and at the rate of 10% from non-periodic payments. However, the Owner, in most cases, may elect not to have taxes withheld or to have withholding done at a different rate. Certain distributions from retirement plans qualified under Section 401 of the Code, which are not directly rolled over to another eligible retirement plan or individual retirement account or Individual Retirement Annuity, are subject to a mandatory 20% withholding for federal income tax. The 20% withholding requirement generally does not apply to: o a series of substantially equal payments made at least annually for the life or life expectancy of the participant or joint and last survivor expectancy of the participant and a designated Beneficiary, or for a specified period of ten years or more; or o distributions which are required minimum distributions; or o the portion of the distributions not included in gross income (for example, returns of after-tax contributions); or o hardship withdrawals. Participants should consult a tax adviser regarding withholding requirements. REQUIRED DISTRIBUTIONS In order to be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires any non-qualified contract to contain certain provisions specifying how your interest in the contract will be distributed in the event of the death of an owner. Specifically, with regard to this Contract, Section 72(s) requires that: o if any Owner dies on or after the Income Date, but before the time the entire interest in the Contract has been distributed, the entire interest in the Contract will be distributed at least as rapidly as under the method of distribution being used as of the date of such Owner's death; and o if any Owner dies before the Income Date, the entire interest in the Contract will be distributed within five years after the date of such Owner's death. These requirements will be considered satisfied as to any portion of an Owner's interest which is payable to or for the benefit of a designated Beneficiary and which is distributed over the life of such designated Beneficiary or over a period not extending beyond the life expectancy of that Beneficiary, provided that such distributions begin within one year of the Owner's death. The designated Beneficiary refers to an individual designated by the Owner as a Beneficiary and to whom ownership of the Contract passes by reason of death. However, if the designated Beneficiary is the surviving spouse of the deceased Owner, the Contract may be continued with the surviving spouse as the new Owner. If the Owner is a non-individual, then the death or change of an Annuitant is treated as the death of the Owner. Non-Qualified Contracts contain provisions that are intended to comply with these Code requirements, although no regulations interpreting these requirements have yet been issued. We intend to review such provisions and modify them if necessary to assure that they comply with the applicable requirements when such requirements are clarified by regulation or otherwise. Other rules may apply to Qualified Contracts. QUALIFIED CONTRACTS The Contract is designed to be suitable for use under various types of qualified plans. Because of the minimum Purchase Payment requirements, these Contracts may not be appropriate for some periodic payment retirement plans. Taxation of participants in each Qualified Contract varies with the type of plan and terms and conditions of each specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits under a Qualified Contract may be subject to the terms The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 6 and conditions of the plan regardless of the terms and conditions of the Contracts issued pursuant to the plan. Some retirement plans are subject to distribution and other requirements that are not incorporated into our administrative procedures. We are not bound by the terms and conditions of such plans to the extent such terms conflict with the terms of a Contract, unless we specifically consent to be bound. Owners, participants and Beneficiaries are responsible for determining that contributions, distributions and other transactions with respect to the Contracts comply with applicable law. General descriptions of the types of qualified plans with which the Contracts may be used can be found in the prospectus. Such descriptions are not exhaustive and are for general informational purposes only. The tax rules regarding qualified plans are very complex and will have differing applications, depending on individual facts and circumstances. Each purchaser should obtain competent tax advice before purchasing a Contract issued under a qualified plan. On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v. Norris that optional annuity benefits provided under an employer's deferred compensation plan could not, under Title VII of the Civil Rights Act of 1964, vary between men and women. The Contracts sold by us in connection with qualified plans may utilize annuity tables that do not differentiate on the basis of sex. These annuity tables will also be available for use in connection with certain non-qualified deferred compensation plans. Qualified plans include special provisions restricting Contract provisions that may otherwise be available and described in this SAI. Generally, Contracts issued pursuant to qualified plans are not transferable except upon withdrawal or annuitization. Various penalty and excise taxes may apply to contributions or distributions made in violation of applicable limitations. Furthermore, certain withdrawal penalties and restrictions may apply to withdrawals from Qualified Contracts. Many withdrawals from Qualified Contracts can be rolled over to an IRA or another qualified retirement plan. If you receive a withdrawal from a Qualified Contract that could be rolled over and you do not elect to make a direct rollover of that amount to an IRA or qualified plan, by law 20% of the taxable amount must be withheld by us for taxes. In situations where this mandatory tax withholding does not apply, other tax amounts may be withheld unless you elect out of the withholding. You may request more detailed information about income tax withholding at the time of a withdrawal. For more information see prospectus section 8, Taxes - Distributions - Qualified Contracts. PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code permit employers, including self-employed individuals, to establish various types of retirement plans for employees. These retirement plans may permit the purchase of the Contracts to provide benefits under the plan. Contributions to the plan for the benefit of employees will not be included in the gross income of the employee until distributed from the plan. The tax consequences to participants may vary, depending upon the particular plan design. However, the Code places limitations and restrictions on all plans, including on such items as: amount of allowable contributions; form, manner and timing of distributions; transferability of benefits; vesting and nonforfeitability of interests; nondiscrimination in eligibility and participation; and the tax treatment of distributions and withdrawals. Participant loans are not allowed under the Contracts purchased in connection with these plans. For more information see prospectus section 8, Taxes - Qualified Contracts. Purchasers of Contracts for use with pension or profit-sharing plans should obtain competent tax advice as to the tax treatment and suitability of such an investment. We may choose not to allow pension or profit-sharing plans to purchase this Contract. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 7 GUARANTEED PRINCIPAL VALUE (GPV) AND GUARANTEED ACCOUNT VALUE (GAV) TRANSFERS To make the GPV and GAV Benefits available we monitor your Contract Value daily and periodically transfer amounts between your selected Investment Options and the FPAs. We determine the amount and timing of GPV or GAV Transfers between the Investment Options and the FPAs according to a mathematical model. The mathematical model uses the following formula to compute d, the percentage of Contract Value to be allocated to the Investment Options: d = N{[ln (C / G) + (r + s[2] / 2) X t] / [s X {radical}t]} where: NOTATION DESCRIPTION C Contract Value G Adjusted Guarantee r Credited Rate s Adjusted Volatility t Time Remaining d Percentage of Contract Value in Investment Options N Cumulative Standard Normal Distribution function ln Natural Logarithm function Following is a more detailed discussion of the values used in the formula. The CONTRACT VALUE includes Contract Value both in the Investment Options and in the FPAs. The ADJUSTED GUARANTEE for a given GPV or GAV, is the dollar value of the GPV or GAV adjusted upward to reflect the current anticipated price of the guarantee. This adjustment takes into account the following factors: the time (in years) until the guarantee (the GPV or GAV) becomes available; the rate currently credited to the FPAs; and the current Contract Value as compared to the GPV or GAV. In mathematical terms, the adjusted guarantee (G) equals g multiplied by w, where g represents the dollar value of the GPV or GAV, and w is a factor that we use to incorporate the current anticipated price of the guarantee into the GPV or GAV Benefit. o w is based upon a guarantee ratio, m, that we use to measure how "low" a Contract Value is relative to the GPV or GAV. o m is the ratio of (a) the difference of the GPV or GAV minus the Contract Value, and (b) the difference of the GPV or GAV minus the present value of the GPV or GAV, discounted for the time (in years) until the GPV or GAV becomes available, at the interest rate credited to the FPAs. In mathematical terms, m = (g - C) / [g - (g / (1 + r)[t])]. The value of w and the corresponding guarantee ratio, m, are presented in Table 1 which appears later in this section. The values for w set forth in Table 1 are established on the Issue Date and are not changed for the life of the Contract. The values for w may change, however, for new Contracts issued in the future. The CREDITED RATE is the interest rate credited to the currently available FPA. The interest rate will never be less than the guaranteed rate stated in your Contract. The ADJUSTED VOLATILITY represents the volatility of the returns of Contract Value for all in force Contracts - that is, all Separate Account assets plus all general account assets that are allocated to the FPAs. This number is fixed at Contract issue and will not change for the duration of the Contract. However we may change the number for new Contracts issued in the future. You may contact our Service Center to find out the Adjusted Volatility number that applies to your Contract. The TIME REMAINING for a given GPV or GAV is the number of years (including any fraction) which remain until that GPV or GAV is applied and any True Up based on that GPV or GAV is made. The PERCENTAGE OF CONTRACT VALUE to be allocated to the Investment Options is computed for each future GPV or GAV. Ultimately the allocation for a Contract takes into account each future GPV or GAV, the limit on allocations to the FPAs during the first two Contract Years, and whether the allocation materially differs from previously computed allocations. The CUMULATIVE STANDARD NORMAL DISTRIBUTION function assumes that random events are distributed according to the classic bell curve. For a given value it computes the percentage of such events which can be expected to be less than that value. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 8 The NATURAL LOGARITHM function for a given value, computes the power to which e must be raised, in order to result in that value. Here, e is the base of the natural logarithms, or approximately 2.718282. The mathematical model uses d as follows. If you have not reset the GPV or GAV, then during the first Contract Year there is one GPV or GAV available on the fifth Contract Anniversary, during the second Contract Year there is a second GPV or GAV available on sixth Contract Anniversary, and so on. Beginning with the fifth Contract Year there are five future GPVs or GAVs, each available on a different Contract Anniversary. We compute d for each future GPV or GAV (which can be as many as five). We take the smallest of these ds and execute a GPV or GAV Transfer based on the following. o Whether the allocation differs sufficiently from the allocation we previously computed according to a specified margin that is set on the issue date and cannot be changed for the life of the Contract. (You may contact our Service Center to find out the margin that applies to your Contract.) o Whether a GPV or GAV Transfer would exceed the limit of 50% of Purchase Payments that exists in the first two Contract Years. o The number of transfers which have already occurred. If you have not reset the GPV or GAV, then: o At issue we compute d and use it as a baseline for comparison with allocations we compute on subsequent Business Days. o After issue, and before the first GPV or GAV Transfer to the FPAs, on each Business Day we compute d and will execute a GPV or GAV Transfer to the FPAs if d is lower than the baseline by more than the specified margin. o After issue, and after the first GPV or GAV Transfer to the FPAs has already occurred, on each Business Day we compute d and execute a GPV or GAV Transfer to the FPAs if d is lower than or higher than the baseline by the specified margin. If d is sufficiently below the baseline, the GPV or GAV Transfer will be to the FPAs. If d is sufficiently above the baseline, the GPV or GAV Transfer will be to the Investment Options. If you have reset the GPV or GAV, then: o On the reset date we compute d and use it as a baseline for comparison with allocations we compute on subsequent Business Days. o After the reset date, and before the first GPV or GAV Transfer to the FPAs that occurs after the reset date, on each Business Day we compute d and execute a GPV or GAV Transfer to the FPAs if d is lower than the baseline by more than the specified margin. o After the reset date, and after the first GPV or GAV Transfer to the FPAs that occurs after the reset date, on each Business Day we compute d and execute a GPV or GAV Transfer to the FPAs if d is lower than or higher than the baseline by the specified margin. If d is sufficiently below the baseline, the GPV or GAV Transfer will be to the FPAs. If d is sufficiently above the baseline, the GPV or GAV Transfer will be to the Investment Options. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 9 EXAMPLE 1: At issue, establish the baseline. You purchase a May 2007 Contract with a single Purchase Payment of $100,000 and select the Living Guarantees and the GAV Benefit. The first GAV is $100,000, which will become available on the fifth anniversary. Assume the following additional values. o The interest rate credited to the ten-year FPA is 3%. o The adjusted volatility of the Investment Options you selected is 16%. o The specified margin is 5%. For this example we have: VARIABLE VALUE DESCRIPTION C $100,000 Contract Value g $100,000 The dollar value of the GAV r 0.03 Credited Rate s 0.16 Adjusted Volatility t 5 Time Remaining First, we compute m and w and G as follows. m = (g - C) / [g - (g / (1 + r)[t])] = ($100,000 - $100,000) / [$100,000 - ($100,000 / (1 + 0.03)[5])] = 0 / [$100,000 - ($100,000 / 1.159274)] = 0 / [$100,000 - $86,260.88] = 0 / $13,739.12 = 0 We use the value of m (which is zero) to look up this value of w in Table 1 (which appears later in this section) and find that w is 1.08. The Adjusted Guarantee G is w X g; or 1.08 X $100,000 = $108,000. Now, we compute d as follows. d = N{[ln (C / G) + (r + s[2 ]/ 2) X t] / [s X {radical}t]} = N{[ln ($100,000 / $108,000) + (0.03 + 0.16[2 ]/ 2) X 5] / [0.16 X {radical}5]} = N{[ln (0.925926) + 0.0428 X 5] / [0.16 X 2.236068]} = N{[-0.076961 + 0.214] / [0.357771]} = N{0.383036} = 0.649153 (approximately 65%). Thus, at issue, the mathematical model has established a baseline allocation to the Investment Options of about 65% of Contract Value. Starting at issue we compute d daily and compare it to the baseline allocation. Before the first GAV Transfer, the mathematical model will call for no allocation to the FPAs until d on a given day falls below the baseline by more than the specified margin of 5%. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 10 EXAMPLE 2: The first GAV Transfer to the FPAs. Continuing Example 1, assume that 6 months after issue there have been no GAV Transfers and that the Contract Value has fallen to $96,990. Since there have been no GAV Transfers, the baseline remains 0.649153 (approximately 65%) as computed in Example 1. For this example we have: VARIABLE VALUE DESCRIPTION C $96,990 Contract Value g $100,000 The dollar value of the GAV r 0.03 Credited Rate s 0.16 Adjusted Volatility t 4.5 Time Remaining First, we compute m and w and G as follows. m = (g - C) / [g - (g / (1 + r)[t])] = ($100,000 - $96,990) / [$100,000 - ($100,000 / (1 + 0.03)[4.5])] = $3,010 / [$100,000 - ($100,000 / 1.142267)] = $3,010 / [$100,000 - $87,543.23] = $3,010 / $12,454.77 = 0.241674 We we use the value of m (which is 0.241674) to look up this value of w in Table 1 and find that w is 1.08. The Adjusted Guarantee G is w X g; or 1.08 X $100,000 = $108,000. Now we compute d as follows. d = N{[ln (C / G) + (r + s[2] / 2) X t] / [s X {radical}t]} = N{[ln ($96,990 / $108,000) + (0.03 + 0.16[2] / 2) X 4.5] / [0.16 X {radical}4.5]} = N{[ln (0.898056) + 0.0428 X 4.5] / [0.16 X 2.121320]} = N{[-0.107523 + 0.1926] / [0.339411]} = N{0.250659} = 0.598961 (approximately 60%). As computed, d is less than the baseline by 0.598961 - 0.649153 = -0.050192, or approximately -5.02%. Since there have been no previous GAV Transfers, and since d is lower than the baseline by more than the specified margin of 5%, the mathematical model calls for an first GAV Transfer to the FPAs. The amount of the transfer will be such that, after the transfer, the percentage Contract Value in the variable Investment Options is d, approximately 60%. The mathematical model calls for 0.598961 X $96,990 = $58,093.26 to be allocated to the Investment Options and the remaining Contract Value ($96,990 - $58,093.26 = $38,896.74) to be allocated to the FPAs. The GAV Transfer to the FPAs in the amount of $38,896.74 represents approximately 40.10% (i.e., $38,896.74 / $96,990) of Contract Value. We establish a new baseline allocation for this Contract equal to d, or 0.598961. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 11 EXAMPLE 3: An additional GAV Transfer to the Investment Options. Continuing Examples 1 and 2, assume that 10 months after issue the Contract has experienced only the single GAV Transfer of Example 2 (no additional GAV Transfers have occurred) and that the Contract Value has risen to $102,470. Because there have been no GAV Transfers since that of Example 2, the baseline remains at 0.598961. In this example we have: VARIABLE VALUE DESCRIPTION C $102,470 Contract Value g $100,000 The dollar value of the GAV r 0.03 Credited Rate s 0.16 Adjusted Volatility t 4.166667 Time Remaining First, we compute m and w and G as follows. m = (g - C) / [g - (g / (1 + r)[t])] = ($100,000 - $102,470) / [$100,000 - ($100,000 / ( 1 + 0.03)[4.166667])] = -$2,470 / [$100,000 - ($100,000 / 1.131067)] = -$2,470 / [$100,000 - $88,412.07] = -$2,470 / $11,587.93 = -0.213153 We use the value of m (which is - 0.213153) to look up this value of w in Table 1 and find that w is 1.08. The Adjusted Guarantee G is w X g, or 1.08 X $100,000 = $108,000. d = N{[ln (C / G) + (r + s[2] / 2) X t] / [s X {radical}t]} = N{[ln($102,470 / $108,000) + (0.03 + 0.16[2] / 2) X 4.166667] / [0.16 X {radical}4.166667]} = N{[ln (0.948796) + 0.0428 X 4.166667] / [0.16 X 2.041241]} = N{[-0.052561 + 0.178333] / [0.326599]} = N{0.385097} = 0.649917 (approximately 65%). As computed, d differs from the baseline by 0.649917 - 0.598961 = 0.050956 or approximately 5.10%. Because d differs from the baseline by more than the specified margin of 5%, the mathematical model calls for a GAV Transfer. Because d is higher than the baseline, the GAV Transfer will be to the Investment Options. The amount of the transfer will be such that after the transfer the percentage of Contract Value in the variable Investment Options is d, namely 64.99%. The mathematical model calls for 0.649917 X $102,470 = $66,597.02 to be allocated to the Investment Options and the remaining $102,470 - $66,597.02 = $35,872.98 to be allocated to the FPAs. As four months have passed since the GAV Transfer into the FPAs, the amount of Contract Value in the FPAs is $38,896.74 X 1.03[4/12 ]= $39,281.88. The GAV Transfer to the Investment Options in the amount of $39,281.88 - $35,872.98 = $3,408.90 represents approximately 3.33% (i.e., $3,408.90 / $102,470) of Contract Value. We establish a new baseline allocation for this Contract equal to d, or 0.649917. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 12 EXAMPLE 4: Expanding on the computation of w. In the first three examples w has always been 1.08. This example shows how w may differ from 1.08. Assume the following: VARIABLE VALUE DESCRIPTION --------- ------------- ---------------------- C $85,111 Contract Value g $100,000 The dollar value of the GAV r 0.03 Credited Rate t 2 Time Remaining In this example we compute m and w and G as follows. m = (g - C) / [g - (g / (1 + r)[t])] = ($100,000 - $85,111) / [$100,000 - ($100,000 / (1 + 0.03)[2])] = $14,889 / [$100,000 - ($100,000 / 1.060900)] = $14,889 / [$100,000 - 94,259.59] = $14,889 / $5,740.41 = 2.593718 This value of m falls between 2.55 and 2.60 in Table 1. Therefore w will fall between the two corresponding values of w, namely 2.0958 and 2.1558. Linear interpolation reveals w to be approximately 2.148261. The Adjusted Guarantee G is w X g, or 2.148261 X $100,000 = $214,826.10. d = N{[ln (C / G) + (r + s[2 ]/ 2) X t] / [s X {radical}t]} = N{[ln ($85,111 / $214,826.10) + (0.03 + 0.16[2 ]/ 2) X 2] / [0.16 X {radical}2]} = N{[ln (0.396186) + 0.0428 X 2] / [0.16 X 1.414214]} = N{[ -0.925873 + 0.085600] / [0.226274]} = N{-3.713515} = 0.000102 (approximately 0%). This low value of d results both because the Contract Value of $84,111 is substantially lower than the initial GAV of $100,000, and only two years remain before this GAV becomes available. Therefore the mathematical model calls for an allocation of 0.01% of Contract Value to the Investment Options, and an allocation of 99.99% of Contract Value to the FPAs. Note that the model will not call for a GAV Transfer unless d differs from the previously established baseline by more than the specified margin (in these examples, 5%). Note also that GAV Transfers to the FPAs will happen more often and there may be more Contract Value allocated to the FPAs, than if we had not applied the adjustment. In practice it is unlikely that the Contract Value would fall so far below the GAV, because as a Contract Value falls toward and below the GAV, the mathematical model calls for increasing allocations to the FPAs. Such allocations mitigate the decline in the Contract Value relative to the decline in the values of the Investment Options. However, in the event of a one-day market crash, a Contract Value may fall precipitously relative to the guarantee and such a low d could result. Additionally, when there is very little time remaining until the GAV becomes available, such a low d may result even if the Contract Value is not much lower than the guarantee. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 13 TABLE 1 We compute the Adjusted Guarantee to be the product of the guarantee times w: G = g X w where w is derived from the following table based on m. In turn m is given by: m = (g - C) / [g - (g / (1 + r)[t])] where: NOTATION DESCRIPTION ---------------------------------------------------- w Worth Adjustment Applied to the Guarantee m Guarantee Ratio G Adjusted Guarantee C Contract Value g The dollar value of the GAV r Credited Rate t Time Remaining For any m less than 0.725, use w = 1.08. For any m greater than five, use w = 8.6650. M W M W M W --------------------------------------- 0.000 1.0800 1.50 1.2893 3.5 3.6812 0.700 1.0800 1.55 1.3114 3.6 3.9095 --------------- -- 0.725 1.0800 1.60 1.3349 3.7 4.1510 0.750 1.0827 1.65 1.3597 3.8 4.4060 0.775 1.0867 1.70 1.3860 3.9 4.6751 0.800 1.0909 1.75 1.4137 4.0 4.9584 -------------------------- 0.825 1.0951 1.80 1.4430 4.1 5.2565 0.850 1.0996 1.85 1.4738 4.2 5.5696 0.875 1.1042 1.90 1.5062 4.3 5.8983 0.900 1.1089 1.95 1.5402 4.4 6.2428 0.925 1.1139 2.00 1.5760 4.5 6.6036 -------------------------- 0.950 1.1190 2.05 1.6135 4.6 6.9811 0.975 1.1243 2.10 1.6529 4.7 7.3755 1.000 1.1298 2.15 1.6940 4.8 7.7874 --------------- -- 1.025 1.1355 2.20 1.7371 4.9 8.2171 1.050 1.1414 2.25 1.7821 5.0 8.6650 --------------- 1.075 1.1475 2.30 1.8291 1.100 1.1538 2.35 1.8782 --------------- -- 1.125 1.1604 2.40 1.9294 1.150 1.1671 2.45 1.9826 1.175 1.1742 2.50 2.0381 --------------- 1.200 1.1814 2.55 2.0958 --------------- -- 1.225 1.1889 2.60 2.1558 1.250 1.1966 2.65 2.2182 1.275 1.2046 2.70 2.2829 1.300 1.2129 2.75 2.3500 ---------------------------- 1.325 1.2214 2.80 2.4196 1.350 1.2303 2.85 2.4918 1.375 1.2394 2.90 2.5665 1.400 1.2487 2.95 2.6438 --------------- -- 1.425 1.2584 3.00 2.7238 --------------- 1.450 1.2684 3.05 2.8065 1.475 1.2787 3.10 2.8920 1.500 1.2893 3.15 2.9803 3.20 3.0714 3.25 3.1655 --------------- 3.30 3.2625 3.35 3.3626 3.40 3.4657 3.45 3.5718 3.50 3.6812 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 14 ANNUITY PROVISIONS We base Annuity Payments upon the following: o Whether you request fixed payments, variable payments, or a combination of both fixed and variable Annuity Payments. o The adjusted Contract Value (Contract Value adjusted for any MVA) on the Income Date. o The Annuity Option you select. o The age of the Annuitant and any joint Annuitant. o The sex of the Annuitant and any joint Annuitant where allowed. We guarantee fixed Annuity Payments as to dollar amount and the amount does not vary with the investment experience of an Investment Option. If you request fixed Annuity Payments, the amount of adjusted Contract Value that you apply to fixed Annuity Payments will be placed in our general account and it will not participate in the investment experience of the Investment Options. Variable payments are not predetermined as to dollar amount and will vary in amount with the investment experience of the Investment Option(s) you select. We use Annuity Units to determine the amount of any variable Annuity Payments you elect to receive. ANNUITY UNITS/CALCULATING VARIABLE ANNUITY PAYMENTS The first Annuity Payment is equal to the amount of Contract Value you are applying to variable Annuity Payments on the Income Date, divided first by $1,000 and then multiplied by the appropriate variable annuity payout factor for each $1,000 of value for the Annuity Option you selected. We will then purchase a fixed number of Annuity Units on the Income Date for each subaccount of the Investment Options you select. We do this by dividing the amount of the first Annuity Payment among the subaccounts for your selected Investment Options according to your most recent allocation instructions. We then divide the amount in each subaccount by the Annuity Unit value for each subaccount on the Income Date. We determine the Annuity Unit value on each Business Day as follows: o multiply the Annuity Unit value for the immediately preceding Business Day by the net investment factor for the current Business Day; and o divide by the assumed net investment factor for the current Business Day. The assumed net investment factor for the current Business Day is one plus the annual AIR adjusted to reflect the number of calendar days that have elapsed since the immediately preceding Business Day. We will allow an AIR of 3%, 5% or 7% based on your selection and applicable law. Thereafter, the number of Annuity Units in each subaccount generally remains unchanged unless you make a transfer. However, the number of Annuity Units will change if Annuity Option 3 is in effect, one Annuitant dies, and the Owner requests Annuity Payments at 75% or 50% of the previous payment amount. All calculations will appropriately reflect the payment frequency you selected. The Annuity Payment on each subsequent payment date is equal to the sum of the Annuity Payments for each subaccount. We determine the Annuity Payment for each subaccount by multiplying the number of Annuity Units allocated to the subaccount by the Annuity Unit value for that subaccount on the payment date. MORTALITY AND EXPENSE RISK GUARANTEE Allianz Life guarantees that the dollar amount of each Variable Annuity Payment after the first Annuity Payment will not be affected by variations in mortality and expense experience. FINANCIAL STATEMENTS The audited consolidated financial statements of Allianz Life as of and for the year ended December 31, 2008 included herein should be considered only as bearing upon the ability of Allianz Life to meet its obligations under the Contracts. The audited financial statements of the Separate Account as of and for the year ended December 31, 2008 are also included herein. The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 15 APPENDIX - CONDENSED FINANCIAL INFORMATION The consolidated financial statements of Allianz Life Insurance Company of North America and the financial statements of Allianz Life Variable Account B are found in this SAI. Accumulation Unit value (AUV) information corresponding to the highest and lowest combination of charges for Contracts is found in Appendix B to the prospectus. AUV information listing the additional combinations of charges is found below. This information should be read in conjunction with the financial statements and related notes of the Separate Account included in this SAI.
KEY TO BENEFIT OPTION* M&E CHARGES HI5L 2 Allianz High Five L - Contract with the Enhanced GMDB and No Living Guarantees or 1.85% Living Guarantees with the GPV Benefit...................... HI5L 3 Allianz High Five L - Contract with the Traditional GMDB and Living Guarantees with the 1.75% GAV Benefit.................................................
The following Investment Options commenced operations under this Contract after December 31, 2008. Therefore, no AUV information is shown for them: AZL Allianz Global Investors Select Fund; AZL Balanced Index Strategy Fund; AZL Franklin Templeton Founding Strategy Plus Fund; AZL Fusion Conservative Fund; AZL International Index Fund; AZL Moderate Index Strategy Fund; AZL OCC Growth Fund; and PIMCO VIT Global Multi-Asset Portfolio. (Number of Accumulation Units in thousands) Number of AUV Accumulation Period at Units or AUV at End Outstanding Benefit Year Beginning of at End of Option * Ended of Period Period Period ---------------------------------------------- Investment Option ---------------------------------------------- AZL AIM International Equity Fund HI5L 2 1.85% 12/31/2005 N/A 13.772 1 12/31/2006 13.772 17.176 21 12/31/2007 17.176 19.325 23 12/31/2008 19.325 11.096 7 HI5L 3 1.75% 12/31/2005 N/A 13.815 26 12/31/2006 13.815 17.248 133 12/31/2007 17.248 19.425 235 12/31/2008 19.425 11.164 127 AZL BlackRock Capital Appreciation Fund HI5L 2 1.85% 12/31/2005 N/A 11.931 0 12/31/2006 11.931 11.897 6 12/31/2007 11.897 12.953 10 12/31/2008 12.953 8.091 4 HI5L 3 1.75% 12/31/2005 N/A 11.939 22 12/31/2006 11.939 11.917 79 12/31/2007 11.917 12.988 106 12/31/2008 12.988 8.120 75 AZL BlackRock Growth Fund HI5L 2 1.85% 12/31/2005 N/A 11.660 2 12/31/2006 11.660 11.527 7 12/31/2007 11.527 13.014 17 12/31/2008 13.014 5.020 12 HI5L 3 1.75% 12/31/2005 N/A 11.697 30 12/31/2006 11.697 11.575 83 12/31/2007 11.575 13.081 203 12/31/2008 13.081 5.051 208 AZL Columbia Mid Cap Value Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.046 2 12/31/2007 10.046 10.241 3 12/31/2008 10.241 4.810 2 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.053 66 12/31/2007 10.053 10.259 126 12/31/2008 10.259 4.823 63 AZL Columbia Small Cap Value Fund HI5L 2 1.85% 12/31/2005 N/A 12.199 1 12/31/2006 12.199 13.581 3 12/31/2007 13.581 12.232 4 12/31/2008 12.232 8.154 8 HI5L 3 1.75% 12/31/2005 N/A 12.212 25 12/31/2006 12.212 13.610 80 12/31/2007 13.610 12.271 84 12/31/2008 12.271 8.188 51 AZL Columbia Technology Fund HI5L 2 1.85% 12/31/2005 N/A 8.026 0 12/31/2006 8.026 8.081 1 12/31/2007 8.081 9.737 11 12/31/2008 9.737 4.718 4 HI5L 3 1.75% 12/31/2005 N/A 8.056 6 12/31/2006 8.056 8.119 25 12/31/2007 8.119 9.792 100 12/31/2008 9.792 4.750 52 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 16 AZL Davis NY Venture Fund HI5L 2 1.85% 12/31/2005 N/A 11.529 20 12/31/2006 11.529 12.893 37 12/31/2007 12.893 13.180 45 12/31/2008 13.180 7.698 11 HI5L 3 1.75% 12/31/2005 N/A 11.571 112 12/31/2006 11.571 12.953 360 12/31/2007 12.953 13.255 451 12/31/2008 13.255 7.749 340 AZL Dreyfus Equity Growth Fund HI5L 2 1.85% 12/31/2005 N/A 9.470 0 12/31/2006 9.470 10.499 2 12/31/2007 10.499 11.208 18 12/31/2008 11.208 6.422 6 HI5L 3 1.75% 12/31/2005 N/A 9.505 21 12/31/2006 9.505 10.548 81 12/31/2007 10.548 11.271 235 12/31/2008 11.271 6.464 167 AZL First Trust Target Double Play Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.561 16 12/31/2008 10.561 4.804 10 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.571 185 12/31/2008 10.571 4.814 354 AZL Franklin Small Cap Value Fund HI5L 2 1.85% 12/31/2005 N/A 16.094 9 12/31/2006 16.094 18.235 24 12/31/2007 18.235 17.117 26 12/31/2008 17.117 11.135 6 HI5L 3 1.75% 12/31/2005 N/A 16.129 67 12/31/2006 16.129 18.293 229 12/31/2007 18.293 17.188 268 12/31/2008 17.188 11.192 153 AZL Fusion Balanced Fund HI5L 2 1.85% 12/31/2005 N/A 10.598 3 12/31/2006 10.598 11.391 22 12/31/2007 11.391 11.976 61 12/31/2008 11.976 8.530 36 HI5L 3 1.75% 12/31/2005 N/A 10.605 466 12/31/2006 10.605 11.410 986 12/31/2007 11.410 12.009 1208 12/31/2008 12.009 8.561 633 AZL Fusion Growth Fund HI5L 2 1.85% 12/31/2005 N/A 11.072 42 12/31/2006 11.072 12.196 125 12/31/2007 12.196 12.660 136 12/31/2008 12.660 7.588 23 HI5L 3 1.75% 12/31/2005 N/A 11.079 885 12/31/2006 11.079 12.216 2624 12/31/2007 12.216 12.694 2976 12/31/2008 12.694 7.616 1228 AZL Fusion Moderate Fund HI5L 2 1.85% 12/31/2005 N/A 10.775 20 12/31/2006 10.775 11.711 57 12/31/2007 11.711 12.248 88 12/31/2008 12.248 8.085 29 HI5L 3 1.75% 12/31/2005 N/A 10.783 1134 12/31/2006 10.783 11.731 2537 12/31/2007 11.731 12.280 3976 12/31/2008 12.280 8.114 1817 AZL Jennison 20/20 Focus Fund HI5L 2 1.85% 12/31/2005 N/A 12.209 5 12/31/2006 12.209 13.518 17 12/31/2007 13.518 14.693 18 12/31/2008 14.693 8.638 8 HI5L 3 1.75% 12/31/2005 N/A 12.217 79 12/31/2006 12.217 13.541 194 12/31/2007 13.541 14.733 251 12/31/2008 14.733 8.670 255 AZL JPMorgan Large Cap Equity Fund HI5L 2 1.85% 12/31/2005 N/A 11.756 7 12/31/2006 11.756 12.315 15 12/31/2007 12.315 11.340 18 12/31/2008 11.340 5.021 7 HI5L 3 1.75% 12/31/2005 N/A 11.798 99 12/31/2006 11.798 12.372 233 12/31/2007 12.372 11.404 244 12/31/2008 11.404 5.055 137 AZL JPMorgan U.S. Equity Fund HI5L 2 1.85% 12/31/2005 N/A 11.101 2 12/31/2006 11.101 12.489 3 12/31/2007 12.489 12.724 5 12/31/2008 12.724 7.659 2 HI5L 3 1.75% 12/31/2005 N/A 11.114 24 12/31/2006 11.114 12.515 91 12/31/2007 12.515 12.764 150 12/31/2008 12.764 7.691 57 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 17 AZL Money Market Fund HI5L 2 1.85% 12/31/2005 N/A 10.175 9 12/31/2006 10.175 10.433 59 12/31/2007 10.433 10.733 148 12/31/2008 10.733 10.793 132 HI5L 3 1.75% 12/31/2005 N/A 10.230 368 12/31/2006 10.230 10.500 648 12/31/2007 10.500 10.812 1375 12/31/2008 10.812 10.884 1543 AZL NACM International Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.443 0 12/31/2008 9.443 5.106 0 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.449 24 12/31/2008 9.449 5.115 22 AZL OCC Opportunity Fund HI5L 2 1.85% 12/31/2005 N/A 13.865 1 12/31/2006 13.865 15.201 4 12/31/2007 15.201 16.247 7 12/31/2008 16.247 8.428 1 HI5L 3 1.75% 12/31/2005 N/A 13.909 15 12/31/2006 13.909 15.264 39 12/31/2007 15.264 16.331 64 12/31/2008 16.331 8.480 32 AZL Oppenheimer Global Fund HI5L 2 1.85% 12/31/2005 N/A 12.642 2 12/31/2006 12.642 14.432 19 12/31/2007 14.432 14.982 28 12/31/2008 14.982 8.669 6 HI5L 3 1.75% 12/31/2005 N/A 12.656 51 12/31/2006 12.656 14.463 155 12/31/2007 14.463 15.029 184 12/31/2008 15.029 8.705 91 AZL Oppenheimer International Growth Fund HI5L 2 1.85% 12/31/2005 N/A 14.285 1 12/31/2006 14.285 18.088 13 12/31/2007 18.088 19.937 21 12/31/2008 19.937 10.931 7 HI5L 3 1.75% 12/31/2005 N/A 14.337 26 12/31/2006 14.337 18.172 105 12/31/2007 18.172 20.050 221 12/31/2008 20.050 11.004 101 AZL PIMCO Fundamental IndexPLUS Total Return Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 11.048 0 12/31/2007 11.048 11.567 0 12/31/2008 11.567 6.715 0 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 11.055 12 12/31/2007 11.055 11.586 22 12/31/2008 11.586 6.733 26 AZL S&P 500 Index Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.852 1 12/31/2008 9.852 6.033 7 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.859 45 12/31/2008 9.859 6.043 264 AZL Schroder Emerging Markets Equity Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.440 5 12/31/2007 10.440 13.354 22 12/31/2008 13.354 6.307 5 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 10.447 76 12/31/2007 10.447 13.377 209 12/31/2008 13.377 6.324 214 AZL Schroder International Small Cap Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.215 0 12/31/2008 9.215 4.923 0 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.221 16 12/31/2008 9.221 4.931 32 AZL Small Cap Stock Index Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.301 0 12/31/2008 9.301 6.305 12 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.307 20 12/31/2008 9.307 6.316 153 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 18 AZL TargetPLUS Balanced Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.086 1 12/31/2008 10.086 7.485 1 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.093 19 12/31/2008 10.093 7.497 82 AZL TargetPLUS Equity Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.476 25 12/31/2008 10.476 5.294 8 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.919 0 12/31/2007 9.919 10.487 207 12/31/2008 10.487 5.304 218 AZL TargetPLUS Growth Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.909 0 12/31/2008 9.909 5.897 4 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.916 90 12/31/2008 9.916 5.907 195 AZL TargetPLUS Moderate Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.049 0 12/31/2008 10.049 6.671 1 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 10.056 237 12/31/2008 10.056 6.683 113 AZL Turner Quantitative Small Cap Growth Fund HI5L 2 1.85% 12/31/2005 N/A 11.091 5 12/31/2006 11.091 12.120 6 12/31/2007 12.120 12.619 6 12/31/2008 12.619 7.017 1 HI5L 3 1.75% 12/31/2005 N/A 11.099 28 12/31/2006 11.099 12.140 66 12/31/2007 12.140 12.653 67 12/31/2008 12.653 7.043 34 AZL Van Kampen Comstock Fund HI5L 2 1.85% 12/31/2005 N/A 11.016 13 12/31/2006 11.016 12.519 31 12/31/2007 12.519 12.016 43 12/31/2008 12.016 7.527 16 HI5L 3 1.75% 12/31/2005 N/A 11.062 142 12/31/2006 11.062 12.584 314 12/31/2007 12.584 12.090 471 12/31/2008 12.090 7.581 268 AZL Van Kampen Equity and Income Fund HI5L 2 1.85% 12/31/2005 N/A 11.292 16 12/31/2006 11.292 12.473 32 12/31/2007 12.473 12.618 36 12/31/2008 12.618 9.424 17 HI5L 3 1.75% 12/31/2005 N/A 11.304 60 12/31/2006 11.304 12.500 192 12/31/2007 12.500 12.658 284 12/31/2008 12.658 9.463 178 AZL Van Kampen Global Franchise Fund HI5L 2 1.85% 12/31/2005 N/A 14.769 13 12/31/2006 14.769 17.581 42 12/31/2007 17.581 18.951 38 12/31/2008 18.951 13.289 12 HI5L 3 1.75% 12/31/2005 N/A 14.801 57 12/31/2006 14.801 17.636 182 12/31/2007 17.636 19.030 324 12/31/2008 19.030 13.358 163 AZL Van Kampen Global Real Estate Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 12.015 11 12/31/2007 12.015 10.770 17 12/31/2008 10.770 5.727 6 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 12.024 147 12/31/2007 12.024 10.788 251 12/31/2008 10.788 5.742 131 AZL Van Kampen Growth and Income Fund HI5L 2 1.85% 12/31/2005 N/A 12.095 3 12/31/2006 12.095 13.761 10 12/31/2007 13.761 13.865 14 12/31/2008 13.865 9.138 4 HI5L 3 1.75% 12/31/2005 N/A 12.145 73 12/31/2006 12.145 13.832 166 12/31/2007 13.832 13.950 231 12/31/2008 13.950 9.204 128 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 19 AZL Van Kampen Mid Cap Growth Fund HI5L 2 1.85% 12/31/2005 N/A 12.217 1 12/31/2006 12.217 13.098 12 12/31/2007 13.098 15.709 26 12/31/2008 15.709 7.939 12 HI5L 3 1.75% 12/31/2005 N/A 12.268 53 12/31/2006 12.268 13.166 180 12/31/2007 13.166 15.806 349 12/31/2008 15.806 7.996 204 BlackRock Global Allocation V.I. Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A N/A N/A 12/31/2008 N/A 7.895 35 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A N/A N/A 12/31/2008 N/A 7.901 271 Davis VA Financial Portfolio HI5L 2 1.85% 12/31/2005 N/A 14.236 2 12/31/2006 14.236 16.562 4 12/31/2007 16.562 15.274 4 12/31/2008 15.274 8.042 6 HI5L 3 1.75% 12/31/2005 N/A 14.313 5 12/31/2006 14.313 16.668 30 12/31/2007 16.668 15.387 31 12/31/2008 15.387 8.110 58 Franklin Global Real Estate Securities Fund HI5L 2 1.85% 12/31/2005 N/A 53.500 4 12/31/2006 53.500 63.334 4 12/31/2007 63.334 49.197 4 12/31/2008 49.197 27.821 1 HI5L 3 1.75% 12/31/2005 N/A 54.377 21 12/31/2006 54.377 64.435 44 12/31/2007 64.435 50.103 24 12/31/2008 50.103 28.362 5 Franklin Growth and Income Securities Fund HI5L 2 1.85% 12/31/2005 N/A 31.038 2 12/31/2006 31.038 35.576 4 12/31/2007 35.576 33.626 3 12/31/2008 33.626 21.408 0 HI5L 3 1.75% 12/31/2005 N/A 31.546 18 12/31/2006 31.546 36.195 43 12/31/2007 36.195 34.245 43 12/31/2008 34.245 21.824 15 Franklin High Income Securities Fund HI5L 2 1.85% 12/31/2005 N/A 21.546 0 12/31/2006 21.546 23.133 2 12/31/2007 23.133 23.323 8 12/31/2008 23.323 17.542 3 HI5L 3 1.75% 12/31/2005 N/A 21.899 21 12/31/2006 21.899 23.535 141 12/31/2007 23.535 23.753 186 12/31/2008 23.753 17.883 79 Franklin Income Securities Fund HI5L 2 1.85% 12/31/2005 N/A 37.683 9 12/31/2006 37.683 43.742 25 12/31/2007 43.742 44.549 41 12/31/2008 44.549 30.762 11 HI5L 3 1.75% 12/31/2005 N/A 38.301 147 12/31/2006 38.301 44.503 528 12/31/2007 44.503 45.369 885 12/31/2008 45.369 31.359 405 Franklin Large Cap Growth Securities Fund HI5L 2 1.85% 12/31/2005 N/A 17.618 4 12/31/2006 17.618 19.180 13 12/31/2007 19.180 20.000 8 12/31/2008 20.000 12.854 2 HI5L 3 1.75% 12/31/2005 N/A 17.780 25 12/31/2006 17.780 19.376 74 12/31/2007 19.376 20.224 82 12/31/2008 20.224 13.011 21 Franklin Rising Dividends Securities Fund HI5L 2 1.85% 12/31/2005 N/A 31.438 4 12/31/2006 31.438 36.147 6 12/31/2007 36.147 34.528 6 12/31/2008 34.528 24.708 1 HI5L 3 1.75% 12/31/2005 N/A 31.862 47 12/31/2006 31.862 36.672 94 12/31/2007 36.672 35.064 74 12/31/2008 35.064 25.117 16 Franklin Small-Mid Cap Growth Securities Fund HI5L 2 1.85% 12/31/2005 N/A 20.572 2 12/31/2006 20.572 21.951 3 12/31/2007 21.951 23.969 5 12/31/2008 23.969 13.530 1 HI5L 3 1.75% 12/31/2005 N/A 20.771 19 12/31/2006 20.771 22.186 41 12/31/2007 22.186 24.250 28 12/31/2008 24.250 13.702 6 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 20 Franklin Templeton VIP Founding Funds Allocation Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.225 0 12/31/2008 9.225 5.808 8 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 9.230 96 12/31/2008 9.230 5.816 295 Franklin U.S. Government Fund HI5L 2 1.85% 12/31/2005 N/A 22.474 4 12/31/2006 22.474 22.949 6 12/31/2007 22.949 24.015 5 12/31/2008 24.015 25.362 4 HI5L 3 1.75% 12/31/2005 N/A 22.842 34 12/31/2006 22.842 23.348 79 12/31/2007 23.348 24.457 132 12/31/2008 24.457 25.855 196 Franklin Zero Coupon Fund 2010 HI5L 2 1.85% 12/31/2005 N/A 34.163 0 12/31/2006 34.163 34.448 0 12/31/2007 34.448 36.728 2 12/31/2008 36.728 38.756 2 HI5L 3 1.75% 12/31/2005 N/A 34.722 5 12/31/2006 34.722 35.047 7 12/31/2007 35.047 37.405 12 12/31/2008 37.405 39.510 21 Mutual Global Discovery Securities Fund HI5L 2 1.85% 12/31/2005 N/A 21.404 6 12/31/2006 21.404 25.857 19 12/31/2007 25.857 28.387 56 12/31/2008 28.387 19.937 23 HI5L 3 1.75% 12/31/2005 N/A 21.589 89 12/31/2006 21.589 26.107 317 12/31/2007 26.107 28.691 484 12/31/2008 28.691 20.170 223 Mutual Shares Securities Fund HI5L 2 1.85% 12/31/2005 N/A 19.467 37 12/31/2006 19.467 22.624 77 12/31/2007 22.624 22.980 66 12/31/2008 22.980 14.187 22 HI5L 3 1.75% 12/31/2005 N/A 19.636 268 12/31/2006 19.636 22.843 953 12/31/2007 22.843 23.225 1470 12/31/2008 23.225 14.353 694 OpCap Mid Cap Portfolio HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.979 6 12/31/2007 9.979 10.504 3 12/31/2008 10.504 6.014 2 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A 9.986 19 12/31/2007 9.986 10.521 74 12/31/2008 10.521 6.030 143 Oppenheimer High Income Fund/VA HI5L 2 1.85% 12/31/2005 N/A 11.897 0 12/31/2006 11.897 12.780 0 12/31/2007 12.780 12.532 0 12/31/2008 12.532 2.624 0 HI5L 3 1.75% 12/31/2005 N/A 11.961 0 12/31/2006 11.961 12.862 0 12/31/2007 12.862 12.625 0 12/31/2008 12.625 2.646 7 PIMCO VIT All Asset Portfolio HI5L 2 1.85% 12/31/2005 N/A 12.346 9 12/31/2006 12.346 12.685 15 12/31/2007 12.685 13.489 10 12/31/2008 13.489 11.143 6 HI5L 3 1.75% 12/31/2005 N/A 12.360 544 12/31/2006 12.360 12.713 732 12/31/2007 12.713 13.531 611 12/31/2008 13.531 11.189 274 PIMCO VIT CommodityRealReturn Strategy Portfolio HI5L 2 1.85% 12/31/2005 N/A 11.003 12 12/31/2006 11.003 10.467 18 12/31/2007 10.467 12.662 19 12/31/2008 12.662 6.987 6 HI5L 3 1.75% 12/31/2005 N/A 11.011 76 12/31/2006 11.011 10.485 240 12/31/2007 10.485 12.696 368 12/31/2008 12.696 7.012 213 PIMCO VIT Emerging Markets Bond Portfolio HI5L 2 1.85% 12/31/2005 N/A 10.895 5 12/31/2006 10.895 11.687 4 12/31/2007 11.687 12.140 7 12/31/2008 12.140 10.178 4 HI5L 3 1.75% 12/31/2005 N/A 10.902 44 12/31/2006 10.902 11.707 117 12/31/2007 11.707 12.172 129 12/31/2008 12.172 10.215 36 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 21 PIMCO VIT Global Bond Portfolio (Unhedged) HI5L 2 1.85% 12/31/2005 N/A 9.321 5 12/31/2006 9.321 9.576 21 12/31/2007 9.576 10.315 15 12/31/2008 10.315 10.040 2 HI5L 3 1.75% 12/31/2005 N/A 9.327 38 12/31/2006 9.327 9.592 109 12/31/2007 9.592 10.343 248 12/31/2008 10.343 10.077 134 PIMCO VIT High Yield Portfolio HI5L 2 1.85% 12/31/2005 N/A 12.215 1 12/31/2006 12.215 13.083 3 12/31/2007 13.083 13.293 5 12/31/2008 13.293 9.977 2 HI5L 3 1.75% 12/31/2005 N/A 12.281 38 12/31/2006 12.281 13.167 128 12/31/2007 13.167 13.392 193 12/31/2008 13.392 10.061 82 PIMCO VIT Real Return Portfolio HI5L 2 1.85% 12/31/2005 N/A 11.233 6 12/31/2006 11.233 11.106 8 12/31/2007 11.106 12.064 13 12/31/2008 12.064 11.007 7 HI5L 3 1.75% 12/31/2005 N/A 11.257 119 12/31/2006 11.257 11.141 221 12/31/2007 11.141 12.114 305 12/31/2008 12.114 11.064 204 PIMCO VIT StocksPLUS Growth and Income Portfolio HI5L 2 1.85% 12/31/2005 N/A 9.076 0 12/31/2006 9.076 10.237 0 12/31/2007 10.237 10.738 0 12/31/2008 10.738 6.047 0 HI5L 3 1.75% 12/31/2005 N/A 9.125 0 12/31/2006 9.125 10.303 0 12/31/2007 10.303 10.818 0 12/31/2008 10.818 6.098 0 PIMCO VIT Total Return Portfolio HI5L 2 1.85% 12/31/2005 N/A 12.934 22 12/31/2006 12.934 13.187 26 12/31/2007 13.187 14.078 30 12/31/2008 14.078 14.482 17 HI5L 3 1.75% 12/31/2005 N/A 13.004 134 12/31/2006 13.004 13.271 347 12/31/2007 13.271 14.182 449 12/31/2008 14.182 14.604 354 SP International Growth Portfolio HI5L 2 1.85% 12/31/2005 N/A 7.152 0 12/31/2006 7.152 8.437 10 12/31/2007 8.437 9.866 10 12/31/2008 9.866 4.795 0 HI5L 3 1.75% 12/31/2005 N/A 7.184 0 12/31/2006 7.184 8.484 0 12/31/2007 8.484 9.930 26 12/31/2008 9.930 4.831 2 SP Strategic Partners Focused Growth Portfolio HI5L 2 1.85% 12/31/2005 N/A 7.197 0 12/31/2006 7.197 6.987 0 12/31/2007 6.987 7.865 0 12/31/2008 7.865 4.745 0 HI5L 3 1.75% 12/31/2005 N/A 7.230 0 12/31/2006 7.230 7.026 0 12/31/2007 7.026 7.916 0 12/31/2008 7.916 4.781 0 Templeton Foreign Securities Fund HI5L 2 1.85% 12/31/2005 N/A 22.179 1 12/31/2006 22.179 26.442 2 12/31/2007 26.442 29.967 4 12/31/2008 29.967 17.539 1 HI5L 3 1.75% 12/31/2005 N/A 22.478 28 12/31/2006 22.478 26.826 86 12/31/2007 26.826 30.432 87 12/31/2008 30.432 17.829 31 Templeton Global Bond Securities Fund HI5L 2 1.85% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 29.822 5 12/31/2008 29.822 31.090 4 HI5L 3 1.75% 12/31/2005 N/A N/A N/A 12/31/2006 N/A N/A N/A 12/31/2007 N/A 30.371 37 12/31/2008 30.371 31.695 66 Templeton Growth Securities Fund HI5L 2 1.85% 12/31/2005 N/A 23.120 11 12/31/2006 23.120 27.648 25 12/31/2007 27.648 27.775 38 12/31/2008 27.775 15.725 15 HI5L 3 1.75% 12/31/2005 N/A 23.382 187 12/31/2006 23.382 27.989 680 12/31/2007 27.989 28.146 1057 12/31/2008 28.146 15.952 504 The Allianz High Five(R) L Variable Annuity Contract SAI - April 27, 2009 [KPMG Logo] ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA FINANCIAL STATEMENTS DECEMBER 31, 2008 (WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THEREON) [KPMG Logo] KPMG LLP 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Report of Independent Registered Public Accounting Firm The Board of Directors of Allianz Life Insurance Company of North America and Contract Owners of Allianz Life Variable Account B: We have audited the accompanying statements of assets and liabilities of the sub-accounts of Allianz Life Variable Account B (the Variable Account) as of December 31, 2008, and the related statements of operations for the year or period then ended, the statements of changes in net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody for the benefit of the Variable Account were confirmed to us by the transfer agents of the underlying mutual funds. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the sub-accounts of Allianz Life Variable Account B as of December 31, 2008, the results of their operations, the changes in their net assets, and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Minneapolis, Minnesota March 30, 2009 KPMG, LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative 2
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements Statements of Assets and Liabilities December 31, 2008 (In thousands) Alger Alger Alger AIM V.I. AIM V.I. AIM V.I. American American American Capital Core International Capital LargeCap MidCap Appreciation Equity Growth Appreciation Growth Growth Fund Fund Fund Portfolio Portfolio Portfolio ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $4,594 2,884 1,221 1,750 2,797 2,941 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 4,594 2,884 1,221 1,750 2,797 2,941 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $4,594 2,884 1,221 1,750 2,797 2,941 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 4,588 2,884 1,218 1,719 2,788 2,941 Contracts in Annuity Payment Period (Note 2) 6 - 3 31 9 - ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $4,594 2,884 1,221 1,750 2,797 2,941 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 272 146 63 58 106 418 Investments at Cost $7,145 3,653 1,141 2,946 5,720 7,536
See Accompanying Notes to Financial Statements 3
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) Alger AZL American AZL AIM BlackRock AZL AZL AZL SmallCap International Capital Columbia Columbia Columbia Growth Equity Appreciation Mid Cap Small Cap Technology Portfolio Fund Fund Value Fund Value Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $479 133,883 42,814 25,031 34,886 38,287 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 479 133,883 42,814 25,031 34,886 38,287 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $479 133,883 42,814 25,031 34,886 38,287 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 479 133,872 42,814 25,031 34,876 38,286 Contracts in Annuity Payment Period (Note 2) - 11 - - 10 1 ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $479 133,883 42,814 25,031 34,886 38,287 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 27 12,986 4,944 4,996 5,005 8,010 Investments at Cost $660 208,588 56,797 43,803 52,993 68,454
See Accompanying Notes to Financial Statements 4
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL Dreyfus AZL First AZL Davis Founders Trust AZL AZL AZL NY Equity Target Franklin Fusion Fusion Venture Growth Double Small Cap Balanced Growth Fund Fund Play Fund Value Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $326,971 121,848 55,560 142,496 286,477 610,094 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 326,971 121,848 55,560 142,496 286,477 610,094 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $326,971 121,848 55,560 142,496 286,477 610,094 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 326,904 121,821 55,560 142,487 286,415 610,089 Contracts in Annuity Payment Period (Note 2) 67 27 - 9 62 5 ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $326,971 121,848 55,560 142,496 286,477 610,094 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 40,417 20,793 11,224 13,821 34,350 83,119 Investments at Cost $389,593 204,892 98,316 213,597 364,054 934,517
See Accompanying Notes to Financial Statements 5
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL AZL AZL Legg AZL LMP Fusion Jennison Mason AZL Legg Large Cap AZL Money Moderate 20/20 Growth Mason Growth Market Fund Focus Fund Fund Value Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $419,531 162,427 132,498 57,418 - 968,860 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 419,531 162,427 132,498 57,418 - 968,860 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $419,531 162,427 132,498 57,418 - 968,860 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 419,531 162,415 132,469 57,397 - 968,701 Contracts in Annuity Payment Period (Note 2) - 12 29 21 - 159 ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $419,531 162,427 132,498 57,418 - 968,860 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 54,273 19,245 26,185 11,507 - 968,860 Investments at Cost $592,655 243,405 198,552 116,719 - 968,862
See Accompanying Notes to Financial Statements 6
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL AZL AZL Oppenheimer Oppenheimer AZL NACM AZL OCC Oppenheimer International Main International Opportunity AZL OCC Global Growth Street Fund Fund Value Fund Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $6,463 66,668 - 93,043 100,915 60,030 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 6,463 66,668 - 93,043 100,915 60,030 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $6,463 66,668 - 93,043 100,915 60,030 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 6,463 66,664 - 93,043 100,910 60,030 Contracts in Annuity Payment Period (Note 2) - 4 - - 5 - ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $6,463 66,668 - 93,043 100,915 60,030 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 1,262 9,565 - 11,347 9,703 9,454 Investments at Cost $9,492 124,345 - 139,655 163,251 97,958
See Accompanying Notes to Financial Statements 7
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL PIMCO AZL AZL Fundamental Schroder Schroder AZL IndexPLUS Emerging Emerging Schroder Total AZL S&P Markets Markets International AZL Small Return 500 Index Equity Equity Small Cap Cap Stock Fund Fund Fund CL 1 Fund CL 2 Fund Index Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $9,303 183,421 32,104 146,807 12,122 116,150 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 9,303 183,421 32,104 146,807 12,122 116,150 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $ $9,303 183,421 32,104 146,807 12,122 116,150 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 9,303 183,421 32,036 146,806 12,122 116,150 Contracts in Annuity Payment Period (Note 2) - - 68 1 - - ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $9,303 183,421 32,104 146,807 12,122 116,150 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 1,538 29,822 7,040 32,195 2,439 18,263 Investments at Cost $12,850 243,166 27,520 205,534 18,058 163,880
See Accompanying Notes to Financial Statements 8
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL Turner AZL AZL AZL AZL QuantitativeAZL Van TargetPLUS TargetPLUS TargetPLUS TargetPLUS Small Cap Kampen Balanced Equity Growth Moderate Growth Comstock Fund Fund Fund Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $47,834 55,753 63,851 52,043 17,898 236,303 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 47,834 55,753 63,851 52,043 17,898 236,303 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $47,834 55,753 63,851 52,043 17,898 236,303 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 47,834 55,753 63,851 52,043 17,897 236,291 Contracts in Annuity Payment Period (Note 2) - - - - 1 12 ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $47,834 55,753 63,851 52,043 17,898 236,303 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 6,302 10,249 10,606 7,665 3,054 38,299 Investments at Cost $52,857 93,896 89,694 63,925 31,278 388,596
See Accompanying Notes to Financial Statements 9
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) AZL Van AZL Van AZL Van Kampen AZL Van Kampen Kampen AZL Van Equity Kampen Global Growth Kampen BlackRock and Global Real and Mid Cap Global Income Franchise Estate Income Growth Allocations Fund Fund Fund Fund Fund V.I. Fund ----------- ----------- ----------- ----------- ----------- ----------- Assets: Investments at Net Asset Value $133,400 202,363 45,174 156,857 184,718 129,553 ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 133,400 202,363 45,174 156,857 184,718 129,553 ----------- ----------- ----------- ----------- ----------- ----------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $133,400 202,363 45,174 156,857 184,718 129,553 ----------- ----------- ----------- ----------- ----------- ----------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 133,400 202,350 45,174 156,829 184,717 129,553 Contracts in Annuity Payment Period (Note 2) - 13 - 28 1 - ----------- ----------- ----------- ----------- ----------- ----------- Total Contract Owners' Equity $133,400 202,363 45,174 156,857 184,718 129,553 ----------- ----------- ----------- ----------- ----------- ----------- Investment Shares 14,822 15,847 8,274 19,730 26,966 11,465 Investments at Cost $167,093 253,575 81,744 217,116 333,786 136,748
See Accompanying Notes to Financial Statements 10
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) Dreyfus Franklin Davis VA IP Small Global Davis VA Real Davis VA Cap Stock Dreyfus Communications Financial Estate Value Index Stock Securities Portfolio Portfolio Portfolio Portfolio Index Fund Fund ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $48,716 684 67,417 - - 106,966 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 48,716 684 67,417 - - 106,966 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $48,716 684 67,417 - - 106,966 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 48,712 684 67,391 - - 106,724 Contracts in Annuity Payment Period (Note 2) 4 - 26 - - 242 ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $48,716 684 67,417 - - 106,966 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 6,842 118 8,162 - - 15,945 Investments at Cost $78,122 1,470 80,406 - - 197,261
See Accompanying Notes to Financial Statements 11
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) Franklin Growth Franklin Franklin and High Franklin Large Cap Franklin Income Income Income Growth Money Franklin Securities Securities Securities Securities Market Real Estate Fund Fund Fund Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $210,956 107,397 633,722 128,233 24,004 114,219 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 210,956 107,397 633,722 128,233 24,004 114,219 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $210,956 107,397 633,722 128,233 24,004 114,219 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 210,179 107,264 633,009 128,108 23,796 114,059 Contracts in Annuity Payment Period (Note 2) 777 133 713 125 208 160 ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $210,956 107,397 633,722 128,233 24,004 114,219 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 24,314 23,201 55,528 12,145 24,004 10,694 Investments at Cost $363,972 151,345 855,559 179,573 24,004 243,426
See Accompanying Notes to Financial Statements 12
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) Franklin Franklin Templeton Franklin Franklin Small-Mid VIP Rising Small Cap Cap Founding Franklin Dividends Value Growth Funds U.S. Franklin Securities Securities Securities Allocation Government Zero Coupon Fund Fund Fund Fund Fund Fund 2010 ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $265,219 64,002 102,678 114,681 438,305 116,167 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 265,219 64,002 102,678 114,681 438,305 116,167 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $265,219 64,002 102,678 114,681 438,305 116,167 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 264,720 63,878 102,550 114,681 437,728 116,108 Contracts in Annuity Payment Period (Note 2) 499 124 128 - 577 59 ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $265,219 64,002 102,678 114,681 438,305 116,167 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 19,196 6,051 8,636 20,442 33,576 6,964 Investments at Cost $299,114 84,575 156,530 154,542 427,042 112,761
See Accompanying Notes to Financial Statements 13
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) J.P. Morgan J.P. U.S. Morgan Large Cap Jennison Mutual Mutual International Core 20/20 Discovery Shares OpCap Mid Opportunitity Equity Focus Securities Securities Cap Portfolio Portfolio Portfolio Fund Fund Portfolio ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $179 322 - 463,812 497,934 30,318 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 179 322 - 463,812 497,934 30,318 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets 322 - 463,812 497,934 30,318 $179 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 179 322 - 463,666 497,655 30,318 Contracts in Annuity Payment Period (Note 2) - - - 146 279 - ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $179 322 - 463,812 497,934 30,318 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 23 31 - 29,183 42,168 3,501 Investments at Cost $251 444 - 527,144 704,710 45,725
See Accompanying Notes to Financial Statements 14
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) PIMCO VIT PIMCO VIT Oppenheimer Oppenheimer Oppenheimer Commodity Emerging Global High Main PIMCO VIT RealReturn Markets Securities Income Street All Asset Strategy Bond Fund/VA Fund/VA Fund/VA Portfolio Portfolio Portfolio ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $81,580 9,566 58,515 114,617 85,230 33,044 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 81,580 9,566 58,515 114,617 85,230 33,044 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $81,580 9,566 58,515 114,617 85,230 33,044 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 81,485 9,566 58,478 114,603 85,230 33,044 Contracts in Annuity Payment Period (Note 2) 95 - 37 14 - - ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $81,580 9,566 58,515 114,617 85,230 33,044 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 4,037 6,054 4,019 12,458 12,176 3,202 Investments at Cost $98,717 23,504 72,778 139,487 154,120 41,326
See Accompanying Notes to Financial Statements 15
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) PIMCO VIT StocksPLUS PIMCO VIT PIMCO VIT PIMCO VIT Growth PIMCO VIT Seligman Global High Real and Total Global Bond Yield Return Income Return Technology Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $75,572 96,790 210,471 7,623 492,177 1,245 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 75,572 96,790 210,471 7,623 492,177 1,245 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $75,572 96,790 210,471 7,623 492,177 1,245 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 75,570 96,767 210,399 7,623 492,003 1,245 Contracts in Annuity Payment Period (Note 2) 2 23 72 - 174 - ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $75,572 96,790 210,471 7,623 492,177 1,245 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 6,169 17,101 18,692 1,292 47,738 113 Investments at Cost $78,983 128,988 234,170 11,111 493,355 1,892
See Accompanying Notes to Financial Statements 16
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) SP Strategic Templeton Seligman Partners SP Templeton Developing Templeton Small-Cap Focused International Asset Markets Foreign Value Growth Growth Strategy Securities Securities Portfolio Portfolio Portfolio Fund Fund Fund ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $53,475 10,121 8,551 9,555 - 192,585 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 53,475 10,121 8,551 9,555 - 192,585 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $53,475 10,121 8,551 9,555 - 192,585 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 53,446 10,121 8,551 9,538 - 192,327 Contracts in Annuity Payment Period (Note 2) 29 - - 17 - 258 ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $53,475 10,121 8,551 9,555 - 192,585 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 11,164 2,195 2,537 1,107 - 17,711 Investments at Cost $104,571 15,006 16,652 17,729 - 261,790
See Accompanying Notes to Financial Statements 17
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Assets and Liabilities (continued) December 31, 2008 (In thousands) Van Van Kampen Templeton Kampen Van LIT Global Templeton LIT Kampen Growth Income Growth Capital LIT and Securities Securities Growth Enterprise Income Total All Fund Fund Portfolio Portfolio Portfolio Funds ----------- ----------- ----------- ----------- ----------- ------------- Assets: Investments at Net Asset Value $124,761 351,451 1,424 99 632 11,283,535 ----------- ----------- ----------- ----------- ----------- ------------- Total Assets 124,761 351,451 1,424 99 632 11,283,535 ----------- ----------- ----------- ----------- ----------- ------------- Liabilities: Accrued Mortality and Expense Risk and Administrative Charges - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Total Liabilities - - - - - - ----------- ----------- ----------- ----------- ----------- ------------- Net Assets $124,761 351,451 1,424 99 632 11,283,535 ----------- ----------- ----------- ----------- ----------- ------------- Contract Owners' Equity: (Note 6) Contracts in Accumulation Period 124,614 351,021 1,421 68 608 11,277,384 Contracts in Annuity Payment Period (Note 2) 147 430 3 31 24 6,151 ----------- ----------- ----------- ----------- ----------- ------------- Total Contract Owners' Equity $124,761 351,451 1,424 99 632 11,283,535 ----------- ----------- ----------- ----------- ----------- ------------- Investment Shares 7,266 42,646 84 10 46 2,195,273 Investments at Cost $117,289 557,121 2,314 181 778 15,160,453
See Accompanying Notes to Financial Statements 18
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations For the year ended December 31, 2008 (In thousands) Alger Alger Alger AIM V.I. AIM V.I. AIM V.I. American American American Capital Core International Capital LargeCap MidCap Appreciation Equity Growth Appreciation Growth Growth Fund Fund Fund Portfolio Portfolio Portfolio ----------- ----------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $ - 84 10 - 10 10 ----------- ----------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 113 72 32 41 69 100 ----------- ----------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net (113) 12 (22) (41) (59) (90) ----------- ----------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - - 23 - - 2,033 Realized Gains (Losses) on Sales of Investments, Net (133) 35 128 (105) (340) (423) ----------- ----------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (133) 35 151 (105) (340) 1,610 ----------- ----------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (3,548) (1,477) (1,076) (1,478) (2,270) (6,220) ----------- ----------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (3,681) (1,442) (925) (1,583) (2,610) (4,610) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(3,794) (1,430) (947) (1,624) (2,669) (4,700) ----------- ----------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 19
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) Alger AZL American AZL AIM BlackRock AZL AZL AZL SmallCap International Capital Columbia Columbia Columbia Growth Equity AppreciationMid Cap Small Cap Technology Portfolio Fund Fund Value Fund Value Fund Fund ----------- ----------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $ - 1,018 - 201 281 - ----------- ----------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 13 4,467 1,048 718 960 1,372 ----------- ----------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net (13) (3,449) (1,048) (517) (679) (1,372) ----------- ----------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 11 22,132 - - 4,927 6,938 Realized Gains (Losses) on Sales of Investments, Net 157 (16,252) (4,399) (4,546) (10,652) (12,646) ----------- ----------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net 168 5,880 (4,399) (4,546) (5,725) (5,708) ----------- ----------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (630) (119,437) (19,459) (18,633) (13,302) (40,210) ----------- ----------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (462) (113,557) (23,858) (23,179) (19,027) (45,918) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From $(475) (117,006) (24,906) (23,696) (19,706) (47,290) Operations ----------- ----------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 20
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL Dreyfus AZL First Founders Trust AZL AZL AZL AZL Davis Equity Target Franklin Fusion Fusion NY Venture Growth Double Small Cap Balanced Growth Fund Fund Play Fund Value Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $2,964 582 600 2,488 8,205 13,304 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 6,160 4,003 1,514 4,393 6,668 18,409 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net (3,196) (3,421) (914) (1,905) 1,537 (5,105) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 7,976 17,243 10 10,578 11,130 50,629 Realized Gains (Losses) on Sales of Investments, Net (14,139) (21,509) (13,718) (24,380) (23,757) (66,069) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (6,163) (4,266) (13,708) (13,802) (12,627) (15,440) ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (126,101) (97,602) (42,470) (70,307) (102,824) (412,444) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (132,264) (101,868) (56,178) (84,109) (115,451) (427,884) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(135,460) (105,289) (57,092) (86,014) (113,914) (432,989) ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 21
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL Jennison AZL Legg AZL LMP AZL Fusion 20/20 Mason AZL Legg Large Cap AZL Money Moderate Focus Growth Mason Growth Market Fund Fund Fund Value Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $14,532 217 - - 245 17,472 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 12,459 3,586 2,747 2,141 2,056 14,237 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net 2,073 (3,369) (2,747) (2,141) (1,811) 3,235 ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 33,571 9,221 4,662 7,942 6,700 - Realized Gains (Losses) on Sales of Investments, Net (53,824) (25,088) (24,702) (23,302) (40,859) - ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (20,253) (15,867) (20,040) (15,360) (34,159) - ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (237,537) (98,887) (76,394) (67,522) (22,671) (1) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (257,790) (114,754) (96,434) (82,882) (56,830) (1) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(255,717) (118,123) (99,181) (85,023) (58,641) 3,234 ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 22
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL AZL AZL Oppenheimer Oppenheimer AZL NACM AZL OCC Oppenheimer International Main International Opportunity AZL OCC Global Growth Street Fund Fund Value Fund Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $ 157 - 8,171 1,198 1,775 943 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 123 2,332 5,150 3,119 3,433 1,945 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net 34 (2,332) 3,021 (1,921) (1,658) (1,002) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - 13,193 39,607 9,968 13,638 13,889 Realized Gains (Losses) on Sales of Investments, Net (1,356) (20,179) (277,861) (9,694) (13,479) (10,737) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (1,356) (6,986) (238,254) 274 159 3,152 ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (2,713) (62,707) 28,734 (79,167) (95,153) (48,227) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (4,069) (69,693) (209,520) (78,893) (94,994) (45,075) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(4,035) (72,025) (206,499) (80,814) (96,652) (46,077) ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 23
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL AZL AZL PIMCO Schroder Schroder AZL Fundamental AZL S&P Emerging Emerging Schroder IndexPLUS 500 Markets Markets International AZL Small Total Index Equity Equity Small Cap Cap Stock Return Fund Fund Fund CL 1 Fund CL 2 Fund Index Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $ - 3 1 198 241 589 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 181 1,497 51 2,523 242 886 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net (181) (1,494) (50) (2,325) (1) (297) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - 3 59 30,054 - 25 Realized Gains (Losses) on Sales of Investments, Net (1,307) (17,246) 36 (21,792) (2,966) (14,386) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (1,307) (17,243) 95 8,262 (2,966) (14,361) ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (3,249) (59,104) 4,592 (76,510) (5,506) (46,896) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (4,556) (76,347) 4,687 (68,248) (8,472) (61,257) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(4,737) (77,841) 4,637 (70,573) (8,473) (61,554) ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 24
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL Turner AZL AZL AZL AZL Quantitative AZL Van TargetPLUS TargetPLUS TargetPLUS TargetPLUS Small Cap Kampen Balanced Equity Growth Moderate Growth Comstock Fund Fund Fund Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $ - 13 - - - 8,106 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 494 1,468 1,174 717 531 7,871 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net (494) (1,455) (1,174) (717) (531) 235 ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - - - - 5,421 45,493 Realized Gains (Losses) on Sales of Investments, Net (2,395) (11,782) (6,072) (3,490) (4,620) (48,562) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (2,395) (11,782) (6,072) (3,490) 801 (3,069) ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (4,898) (36,233) (25,000) (11,331) (15,073) (173,263) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (7,293) (48,015) (31,072) (14,821) (14,272) (176,332) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(7,787) (49,470) (32,246) (15,538) (14,803) (176,097) ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 25
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) AZL Van AZL Van AZL Van Kampen Kampen AZL Van AZL Van Kampen Global Growth Kampen BlackRock Kampen Global Real and Mid Cap Global Equity and Franchise Estate Income Growth Allocations Income Fund Fund Fund Fund Fund V.I. Fund (A) ------------ ---------- ----------- ----------- ----------- ----------- Investment Income: Dividends Reinvested in Fund Shares $5,000 6,177 1,245 5,052 982 3,296 ------------ ---------- ----------- ----------- ----------- ----------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 3,637 6,101 1,337 4,637 6,569 1,202 ------------ ---------- ----------- ----------- ----------- ----------- Investment Income (Loss), Net 1,363 76 (92) 415 (5,587) 2,094 ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 6,096 20,462 4,258 14,614 42,837 619 Realized Gains (Losses) on Sales of Investments, Net (10,756) (9,070) (15,011) (15,495) (31,978) (3,911) ------------ ---------- ----------- ----------- ----------- ----------- Realized Gains (Losses) on Investments, Net (4,660) 11,392 (10,753) (881) 10,859 (3,292) ------------ ---------- ----------- ----------- ----------- ----------- Net Change in Unrealized Appreciation (Depreciation) on Investments (51,339) (123,200) (29,504) (95,787) (208,600) (7,195) ------------ ---------- ----------- ----------- ----------- ----------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (55,999) (111,808) (40,257) (96,668) (197,741) (10,487) ------------ ---------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets From Operations $(54,636) (111,732) (40,349) (96,253) (203,328) (8,393) ------------ ---------- ----------- ----------- ----------- -----------
See Accompanying Notes to Financial Statements 26
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) Dreyfus Franklin Davis VA IP Small Global Davis VA Real Davis VA Cap Stock Dreyfus Communications Financial Estate Value Index Stock Securities Portfolio Portfolio Portfolio Portfolio Index Fund Fund ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $- 20 997 1,482 2,160 287 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 1,447 21 2,230 2,537 3,593 3,131 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net (1,447) (1) (1,233) (1,055) (1,433) (2,844) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 2,801 13 1,811 25,641 - - Realized Gains (Losses) on Sales of Investments, Net (9,055) (58) 5,028 1,921 22,557 (12,227) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net (6,254) (45) 6,839 27,562 22,557 (12,227) ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (37,060) (613) (63,566) (30,559) (65,587) (96,227) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (43,314) (658) (56,727) (2,997) (43,030) (108,454) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(44,761) (659) (57,960) (4,052) (44,463) (111,298) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 27
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) Franklin Franklin Franklin Growth and High Franklin Large Cap Franklin Income Income Income Growth Money Franklin Securities Securities Securities Securities Market Real Estate Fund Fund Fund Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $11,434 15,988 54,615 3,004 400 2,504 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 5,343 2,761 16,703 3,835 356 3,933 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net 6,091 13,227 37,912 (831) 44 (1,429) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 29,418 - 22,562 14,277 - 60,572 Realized Gains (Losses) on Sales of Investments, Net (31,311) (14,788) (64,064) (8,031) - (50,127) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net (1,893) (14,788) (41,502) 6,246 - 10,445 ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (143,342) (37,897) (332,045) (94,568) (44) (117,235) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (145,235) (52,685) (373,547) (88,322) (44) (106,790) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(139,144) (39,458) (335,635) (89,153) - (108,219) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 28
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) Franklin Franklin Franklin Templeton Franklin Small Small-Mid VIP Rising Cap Cap Founding Franklin Dividends Value Growth Funds U.S. Franklin Securities Securities Securities Allocation Government Zero Coupon Fund Fund Fund Fund Fund Fund 2010 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $8,100 1,359 - 3,074 20,457 4,554 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 7,292 2,156 3,083 1,777 7,491 1,863 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net 808 (797) (3,083) 1,297 12,966 2,691 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 3,310 9,093 22,356 3,049 - - Realized Gains (Losses) on Sales of Investments, Net (972) (1,168) (6,210) (8,054) (280) 920 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net 2,338 7,925 16,146 (5,005) (280) 920 ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (135,242) (48,425) (105,047) (39,333) 11,376 1,714 ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (132,904) (40,500) (88,901) (44,338) 11,096 2,634 ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(132,096) (41,297) (91,984) (43,041) 24,062 5,325 ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 29
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) J.P. Morgan J.P. U.S. Morgan Large Jennison Mutual Mutual International Cap Core 20/20 Discovery Shares OpCap Mid Opportunitie Equity Focus Securities Securities Cap Portfolio Portfolio Portfolio Fund Fund Portfolio ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $ 7 6 - 15,485 25,125 139 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 6 8 1,380 12,605 14,833 674 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net 1 (2) (1,380) 2,880 10,292 (535) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 63 - 5,952 28,497 35,086 3,366 Realized Gains (Losses) on Sales of Investments, Net (7) (7) 2,268 11,210 (48,856) (6,584) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net 56 (7) 8,220 39,707 (13,770) (3,218) ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (233) (182) (19,261) (280,116) (373,104) (15,726) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (177) (189) (11,041) (240,409) (386,874) (18,944) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From $ (176) (191) (12,421) (237,529) (376,582) (19,479) Operations ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 30
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) PIMCO VIT PIMCO VIT Oppenheimer Oppenheimer Oppenheimer Commodity Emerging Global High Main PIMCO VIT RealReturn Markets Securities Income Street All Asset Strategy Bond Fund/VA Fund/VA Fund/VA Portfolio Portfolio Portfolio ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $ 2,376 1,540 1,612 8,957 7,677 2,835 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 2,712 410 1,909 3,024 3,388 854 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net (336) 1,130 (297) 5,933 4,289 1,981 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 10,442 - 7,005 373 1,292 1,743 Realized Gains (Losses) on Sales of Investments, Net 3,964 (5,542) 1,348 (13,290) (16,016) (3,560) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net 14,406 (5,542) 8,353 (12,917) (14,724) (1,817) ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (85,443) (13,076) (54,983) (25,021) (78,367) (8,017) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (71,037) (18,618) (46,630) (37,938) (93,091) (9,834) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(71,373) (17,488) (46,927) (32,005) (88,802) (7,853) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 31
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) PIMCO VIT StocksPLUS PIMCO VIT PIMCO PIMCO VIT Growth PIMCO VIT Seligman Global VIT High Real and Total Global Bond Yield Return Income Return Technology Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $3,090 10,435 9,866 913 22,652 - ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 1,811 2,610 5,413 234 9,622 33 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net 1,279 7,825 4,453 679 13,030 (33) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - 290 326 - 9,329 - Realized Gains (Losses) on Sales of Investments, Net (2,413) (12,304) (9,043) (46) 1,729 (23) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net (2,413) (12,014) (8,717) (46) 11,058 (23) ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (5,507) (30,843) (23,895) (7,400) (11,347) (869) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (7,920) (42,857) (32,612) (7,446) (289) (892) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(6,641) (35,032) (28,159) (6,767) 12,741 (925) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 32
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) SP Strategic Templeton Seligman Partners SP Templeton Developing Templeton Small-Cap Focused International Asset Markets Foreign Value Growth Growth Strategy Securities Securities Portfolio Portfolio Portfolio Fund Fund Fund ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $ - - 311 1,333 6,313 8,177 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 1,684 378 430 174 3,919 5,290 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net (1,684) (378) (119) 1,159 2,394 2,887 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds 28,134 1,553 4,875 1,622 45,910 31,224 Realized Gains (Losses) on Sales of Investments, Net (5,049) (443) (6,212) (978) (83,034) 801 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net 23,085 1,110 (1,337) 644 (37,124) 32,025 ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments (66,014) (9,406) (11,813) (5,440) (132,011) (195,626) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments (42,929) (8,296) (13,150) (4,796) (169,135) (163,601) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $(44,613) (8,674) (13,269) (3,637) (166,741) (160,714) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 33
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Operations (continued) For the year ended December 31, 2008 (In thousands) Van Van Kampen Templeton Kampen Van LIT Global Templeton LIT Kampen Growth Income Growth Capital LIT and Securities Securities Growth Enterprise Income Total All Fund Fund Portfolio Portfolio Portfolio Funds ------------ ---------- ----------- ----------- ----------- ------------- Investment Income: Dividends Reinvested in Fund Shares $4,754 11,555 5 1 17 380,986 ------------ ---------- ----------- ----------- ----------- ------------- Expenses: Mortality and Expense Risk and Administrative Charges (Note 2) 2,221 10,500 46 2 13 300,333 ------------ ---------- ----------- ----------- ----------- ------------- Investment Income (Loss), Net 2,533 1,055 (41) (1) 4 80,653 ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Investments: Realized Capital Gain Distributions on Mutual Funds - 43,430 - - 29 911,406 Realized Gains (Losses) on Sales of Investments, Net 575 (57,640) (15) (12) - (1,359,730) ------------ ---------- ----------- ----------- ----------- ------------- Realized Gains (Losses) on Investments, Net 575 (14,210) (15) (12) 29 (448,324) ------------ ---------- ----------- ----------- ----------- ------------- Net Change in Unrealized Appreciation (Depreciation) on Investments 89 (312,302) (1,595) (57) (353) (5,911,447) ------------ ---------- ----------- ----------- ----------- ------------- Total Realized Gains (Losses) & Changes in Appreciation (Depreciation) on Investments 664 (326,512) (1,610) (69) (324) (6,359,771) ------------ ---------- ----------- ----------- ----------- ------------- Net Increase (Decrease) in Net Assets From Operations $3,197 (325,457) (1,651) (70) (320) (6,279,118) ------------ ---------- ----------- ----------- ----------- -------------
See Accompanying Notes to Financial Statements 34
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets For the year ended December 31, 2008 and 2007 (In thousands) AIM V.I. AIM V.I. Capital AIM V.I. Core Equity International Growth Appreciation Fund Fund Fund ----------- ----------- ---------- ----------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ----------- ---------- ----------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (113) (175) 12 (77) (22) (67) Realized Gains (Losses) on Investments, Net (133) 261 35 232 151 436 Net Change in Unrealized Appreciation (Depreciation) on Investments (3,548) 943 (1,477) 187 (1,076) (62) ----------- ----------- ---------- ----------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (3,794) 1,029 (1,430) 342 (947) 307 ----------- ----------- ---------- ----------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments - 13 - - - 7 Transfers Between Funds (Note 2) (280) (1,137) (220) (212) (112) (250) Surrenders and Terminations (717) (2,299) (662) (1,571) (212) (600) Rescissions - - - - - - Bonus (Recapture) - - - - - - Contract Maintenance Charge (Note 2) (5) (14) (3) (4) (1) (8) ----------- ----------- ---------- ----------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (1,002) (3,437) (885) (1,787) (325) (851) ----------- ----------- ---------- ----------- ----------- ---------- Increase (Decrease) in Net Assets (4,796) (2,408) (2,315) (1,445) (1,272) (544) Net Assets at Beginning of Period 9,390 11,798 5,199 6,644 2,493 3,037 ----------- ----------- ---------- ----------- ----------- ---------- Net Assets at End of Period $ 4,594 9,390 2,884 5,199 1,221 2,493 ----------- ----------- ---------- ----------- ----------- ----------
See Accompanying Notes to Financial Statements 35
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Alger American Alger American Alger American Capital Appreciation LargeCap Growth MidCap Growth Portfolio Portfolio Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (41) (56) (59) (77) (90) (158) Realized Gains (Losses) on Investments, Net (105) (53) (340) (472) 1,610 1,584 Net Change in Unrealized Appreciation (Depreciation) on Investments (1,478) 1,136 (2,270) 1,660 (6,220) 906 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (1,624) 1,027 (2,669) 1,111 (4,700) 2,332 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments - 1 - - - - Transfers Between Funds (Note 2) (108) (115) (237) (434) (521) (1,021) Surrenders and Terminations (397) (552) (646) (1,427) (790) (1,780) Rescissions - - - - - - Bonus (Recapture) - - - - - - Contract Maintenance Charge (Note 2) (2) (3) (3) (3) (3) (5) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (507) (669) (886) 1,864) (1,314) (2,806) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (2,131) 358 (3,555) (753) (6,014) (474) Net Assets at Beginning of Period 3,881 3,523 6,352 7,105 8,955 9,429 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $1,750 3,881 2,797 6,352 2,941 8,955 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 36
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Alger American AZL AIM SmallCap Growth AZL AIM Basic Value International Equity Portfolio Fund Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(13) (18) - (1,520) (3,449) (3,873) Realized Gains (Losses) on Investments, Net 168 40 - 43,775 5,880 32,023 Net Change in Unrealized Appreciation (Depreciation) on Investments (630) 126 - (36,617) (119,437) (1,918) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (475) 148 - 5,638 (117,006) 26,232 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments - - - 7,524 41,399 53,138 Transfers Between Funds (Note 2) (60) (8) - (182,712) (74,617) 21,678 Surrenders and Terminations (62) (81) - (10,725) (15,302) (18,915) Rescissions - - - (90) (2,009) (1,665) Bonus (Recapture) - - - 104 633 996 Contract Maintenance Charge (Note 2) - (1) - (28) (53) (64) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (122) (90) - (185,927) (49,949) 55,168 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (597) 58 - (180,289) (166,955) 81,400 Net Assets at Beginning of Period 1,076 1,018 - 180,289 300,838 219,438 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 479 1,076 - - 133,883 300,838 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 37
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL BlackRock Capital Appreciation AZL Columbia Mid Cap AZL Columbia Small Fund Value Fund Cap Value Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(1,048) (1,020) (517) (741) (679) (1,225) Realized Gains (Losses) on Investments, Net (4,399) 1,612 (4,546) 334 (5,725) 5,843 Net Change in Unrealized Appreciation (Depreciation) on Investments (19,459) 3,416 (18,633) (1,154) (13,302) (11,696) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (24,906) 4,008 (23,696) (1,561) (19,706) (7,078) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 17,754 11,602 14,409 14,515 8,443 11,921 Transfers Between Funds (Note 2) (7,081) (577) (3,818) 10,317 (7,495) (14,785) Surrenders and Terminations (2,984) (3,002) (1,489) (2,206) (3,357) (3,892) Rescissions (370) (170) (308) (322) (180) (419) Bonus (Recapture) 175 154 153 211 88 185 Contract Maintenance Charge (Note 2) (13) (11) (7) (4) (13) (12) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 7,481 7,996 8,940 22,511 (2,514) (7,002) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (17,425) 12,004 (14,756) 20,950 (22,220) (14,080) Net Assets at Beginning of Period 60,239 48,235 39,787 18,837 57,106 71,186 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 42,814 60,239 25,031 39,787 34,886 57,106 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 38
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Columbia AZL Davis NY Venture AZL Dreyfus Founders Technology Fund Fund Equity Growth Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(1,372) (1,327) (3,196) (5,884) (3,421) (3,192) Realized Gains (Losses) on Investments, Net (5,708) 3,458 (6,163) 18,048 (4,266) 9,510 Net Change in Unrealized Appreciation (Depreciation) on Investments (40,210) 7,414 (126,101) (4,716) (97,602) 1,200 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (47,290) 9,545 (135,460) 7,448 (105,289) 7,518 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 13,792 11,434 57,015 56,546 19,855 22,751 Transfers Between Funds (Note 2) (24,865) 37,625 34,789 (32,228) (60,641) 154,630 Surrenders and Terminations (4,875) (5,256) (23,057) (24,990) (19,106) (15,713) Rescissions (421) (379) (2,194) (1,144) (562) (425) Bonus (Recapture) 251 255 526 654 182 331 Contract Maintenance Charge (Note 2) (18) (43) (91) (64) (63) (56) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (16,136) 43,636 66,988 (1,226) (60,335) 161,518 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (63,426) 53,181 (68,472) 6,222 (165,624) 169,036 Net Assets at Beginning of Period 101,713 48,532 395,443 389,221 287,472 118,436 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 38,287 101,713 326,971 395,443 121,848 287,472 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 39
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL First Trust Target Double Play AZL Franklin Small AZL Fusion Balanced Fund Cap Value Fund Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 (B) 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (914) (810) (1,905) (4,907) 1,537 (1,608) Realized Gains (Losses) on Investments, Net (13,708) (292) (13,802) 23,082 (12,627) 10,785 Net Change in Unrealized Appreciation (Depreciation) on Investments (42,470) (286) (70,307) (39,216) (102,824) 5,567 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (57,092) (1,388) (86,014) (21,041) (113,914) 14,744 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 42,319 41,733 31,569 59,874 134,234 83,096 Transfers Between Funds (Note 2) (11,624) 48,684 (70,214) (63,272) (59,126) 12,499 Surrenders and Terminations (4,466) (1,470) (15,138) (19,363) (30,297) (21,368) Rescissions (1,023) (1,099) (1,043) (1,274) (3,555) (1,556) Bonus (Recapture) 354 653 405 791 1,253 1,060 Contract Maintenance Charge (Note 2) (17) (4) (62) (7) (73) (35) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 25,543 88,497 (54,483) (23,251) 42,436 73,696 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (31,549) 87,109 (140,497) (44,292) (71,478) 88,440 Net Assets at Beginning of Period 87,109 - 282,993 327,285 357,955 269,515 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $55,560 87,109 142,496 282,993 286,477 357,955 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 40
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Fusion Growth AZL Fusion Moderate AZL Jennison 20/20 Fund Fund Focus Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(5,105) (15,829) 2,073 (7,157) (3,369) (3,065) Realized Gains (Losses) on Investments, Net (15,440) 39,924 (20,253) 27,034 (15,867) 13,129 Net Change in Unrealized Appreciation (Depreciation) on Investments (412,444) 4,456 (237,537) 8,200 (98,887) 2,077 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (432,989) 28,551 255,717) 28,077 (118,123) 12,141 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 231,627 316,144 162,682 214,906 48,108 40,601 Transfers Between Funds (Note 2) (239,071) (67,113) (247,181) (23,219) 47,189 1,438 Surrenders and Terminations (48,850) (54,147) (45,875) (41,839) (11,600) (9,547) Rescissions (6,634) (9,133) (5,042) (4,493) (1,623) (725) Bonus (Recapture) 3,249 5,237 1,553 2,150 456 391 Contract Maintenance Charge (Note 2) (254) (102) (175) (190) (47) (56) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (59,933) 190,886 (134,038) 147,315 82,483 32,102 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (492,922) 219,437 (389,755) 175,392 (35,640) 44,243 Net Assets at Beginning of Period 1,103,016 883,579 809,286 633,894 198,067 153,824 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 610,094 1,103,016 419,531 809,286 162,427 198,067 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 41
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Legg Mason AZL Legg Mason Value AZL LMP Large Cap Growth Fund Fund Growth Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(2,747) (2,507) (2,141) (3,939) (1,811) (3,191) Realized Gains (Losses) on Investments, Net (20,040) 7,216 (15,360) 12,082 (34,159) 6,493 Net Change in Unrealized Appreciation (Depreciation) on Investments (76,394) 4,069 (67,522) (23,925) (22,671) 916 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (99,181) 8,778 (85,023) (15,782) (58,641) 4,218 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 30,556 34,289 11,858 22,718 5,044 7,668 Transfers Between Funds (Note 2) 22,142 60,468 (34,707) (39,286) (83,046) (20,127) Surrenders and Terminations (9,029) (8,964) (7,696) (14,722) (10,095) (11,736) Rescissions (1,308) (735) (435) (448) (123) (183) Bonus (Recapture) 441 512 147 314 64 105 Contract Maintenance Charge (Note 2) (36) (9) (35) (15) (30) (43) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 42,766 85,561 (30,868) (31,439) (88,186) (24,316) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (56,415) 94,339 (115,891) (47,221) (146,827) (20,098) Net Assets at Beginning of Period 188,913 94,574 173,309 220,530 146,827 166,925 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $132,498 188,913 57,418 173,309 - 146,827 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 42
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL NACM AZL OCC Opportunity AZL Money Market Fund International Fund Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 (B) 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $3,235 14,696 34 (27) (2,332) (3,258) Realized Gains (Losses) on Investments, Net - - (1,356) (67) (6,986) 27,955 Net Change in Unrealized Appreciation (Depreciation) on Investments (1) 1 (2,713) (316) (62,707) (16,027) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations 3,234 14,697 (4,035) (410) (72,025) 8,670 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 453,325 342,462 4,925 2,954 13,149 17,033 Transfers Between Funds (Note 2) 111,641 9,768 (161) 3,990 (29,872) (3,468) Surrenders and Terminations (167,065) (170,998) (363) (282) (8,166) (10,977) Rescissions (13,417) (10,485) (223) (15) (461) (440) Bonus (Recapture) 5,136 3,561 41 43 164 310 Contract Maintenance Charge (Note 2) (141) (166) (1) - (35) (35) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 389,479 174,142 4,218 6,690 (25,221) 2,423 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets 392,713 188,839 183 6,280 (97,246) 11,093 Net Assets at Beginning of Period 576,147 387,308 6,280 - 163,914 152,821 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $968,860 576,147 6,463 6,280 66,668 163,914 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 43
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL OCC Renaissance AZL Oppenheimer Fund AZL OCC Value Fund Global Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $- (1,691) 3,021 (2,998) (1,921) (3,274) Realized Gains (Losses) on Investments, Net - 53,020 (238,254) 23,320 274 18,630 Net Change in Unrealized Appreciation (Depreciation) on Investments - (28,368) 28,734 64,919) (79,167) (8,185) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations - 22,961 (206,499) (44,597) (80,814) 7,171 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments - 14,436 5,968 14,847 20,733 32,905 Transfers Between Funds (Note 2) - 353,604) (206,511) 249,680 (49,384) (29,776) Surrenders and Terminations - (20,947) (27,785) (24,887) (8,784) (9,894) Rescissions - (443) (372) (350) (860) (1,142) Bonus (Recapture) - 141 53 192 261 463 Contract Maintenance Charge (Note 2) - (58) (91) (62) (45) (27) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions - (360,475) (228,738) 239,420 (38,079) (7,471) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets - (337,514) (435,237) 194,823 (118,893) (300) Net Assets at Beginning of Period - 337,514 435,237 240,414 211,936 212,236 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $- - - 435,237 93,043 211,936 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 44
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL PIMCO AZL Oppenheimer Fundamental International Growth AZL Oppenheimer Main IndexPLUS Total Fund Street Fund Return Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(1,658) (2,935) (1,002) (1,946) (181) 416 Realized Gains (Losses) on Investments, Net 159 18,309 3,152 11,425 (1,307) 36 Net Change in Unrealized Appreciation (Depreciation) on Investments (95,153) 598 (48,227) (7,781) (3,249) (263) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (96,652) 15,972 (46,077) 1,698 (4,737) 189 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 37,702 49,687 13,176 20,461 4,523 2,591 Transfers Between Funds (Note 2) (68,680) 30,635 (35,289) (4,677) 2,990 260 Surrenders and Terminations (11,255) (13,094) (6,241) (6,709) (410) (428) Rescissions (1,346) (1,542) (419) (687) (189) (177) Bonus (Recapture) 641 834 212 360 53 54 Contract Maintenance Charge (Note 2) (43) (25) (28) (24) (2) (1) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (42,981) 66,495 (28,589) 8,724 6,965 2,299 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (139,633) 82,467 (74,666) 10,422 2,228 2,488 Net Assets at Beginning of Period 240,548 158,081 134,696 124,274 7,075 4,587 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 100,915 240,548 60,030 134,696 9,303 7,075 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 45
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Schroder AZL Schroder AZL S&P 500 Index Emerging Markets Emerging Markets Fund Equity Fund CL 1 Equity Fund CL 2 ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 (B) 2008 2007 (B) 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(1,494) 75 (50) (3) (2,325) (1,780) Realized Gains (Losses) on Investments, Net (17,243) (24) 95 35 8,262 5,892 Net Change in Unrealized Appreciation (Depreciation) on Investments (59,104) (641) 4,592 (8) (76,510) 12,515 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (77,841) (590) 4,637 24 (70,573) 16,627 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 37,536 13,299 508 82 35,163 39,102 Transfers Between Funds (Note 2) 201,960 14,960 27,195 145 20,630 73,579 Surrenders and Terminations (5,471) (410) (569) 97 (6,927) (5,130) Rescissions (586) (82) - (3) (1,281) (1,331) Bonus (Recapture) 521 154 - 1 513 655 Contract Maintenance Charge (Note 2) (28) (1) (2) (11) (31) (317) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 233,932 27,920 27,132 311 48,067 106,558 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets 156,091 27,330 31,769 335 (22,506) 123,185 Net Assets at Beginning of Period 27,330 - 335 - 169,313 46,128 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $183,421 27,330 32,104 335 146,807 169,313 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 46
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Schroder International Small AZL Small Cap Stock AZL TargetPLUS Cap Fund Index Fund Balanced Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 (B) 2008 2007 (B) 2008 2007 (B) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (1) (71) (297) 154 (494) 120 Realized Gains (Losses) on Investments, Net (2,966) (168) (14,361) 9 (2,395) (7) Net Change in Unrealized Appreciation (Depreciation) on Investments (5,506) (430) (46,896) (996) (4,898) (125) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (8,473) (669) (61,554) (833) (7,787) (12) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 10,108 6,778 14,384 7,623 45,425 6,767 Transfers Between Funds (Note 2) 495 4,479 154,950 4,904 1,665 4,085 Surrenders and Terminations (353) (87) (2,939) (75) (1,008) 6 Rescissions (260) (141) (398) (138) (1,758) (84) Bonus (Recapture) 133 114 140 104 490 48 Contract Maintenance Charge (Note 2) (2) - (18) - (3) - ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 10,121 11,143 166,119 12,418 44,811 10,822 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets 1,648 10,474 104,565 11,585 37,024 10,810 Net Assets at Beginning of Period 10,474 - 11,585 - 10,810 - ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $12,122 10,474 116,150 11,585 47,834 10,810 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 47
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL TargetPLUS AZL TargetPLUS AZL TargetPLUS Equity Fund Growth Fund Moderate Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 (B) 2008 2007 (B) 2008 2007 (B) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $(1,455) (147) (1,174) 155 (717) 169 Realized Gains (Losses) on Investments, Net (11,782) (17) (6,072) (211) (3,490) (177) Net Change in Unrealized Appreciation (Depreciation) on Investments (36,233) (1,910) (25,000) (843) (11,331) (550) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (49,470) (2,074) (32,246) (899) (15,538) (558) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 38,788 38,767 64,227 34,373 51,407 14,086 Transfers Between Funds (Note 2) (13,861) 50,148 (3,446) 5,094 (2,340) 9,707 Surrenders and Terminations (3,457) (2,161) (1,612) (350) (2,638) (422) Rescissions (1,168) (798) (1,760) (978) (2,118) (575) Bonus (Recapture) 473 587 904 560 874 163 Contract Maintenance Charge (Note 2) (17) (4) (10) (6) (4) (1) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 20,758 86,539 58,303 38,693 45,181 22,958 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (28,712) 84,465 26,057 37,794 29,643 22,400 Net Assets at Beginning of Period 84,465 - 37,794 - 22,400 - ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 55,753 84,465 63,851 37,794 52,043 22,400 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 48
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Turner AZL Van Kampen Quantitative Small Aggressive Growth AZL Van Kampen Cap Growth Fund Fund Comstock Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (531) (761) - (1,543) 235 (2,652) Realized Gains (Losses) on Investments, Net 801 2,520 - 26,584 (3,069) 36,121 Net Change in Unrealized Appreciation (Depreciation) on Investments (15,073) (647) - (10,590) (173,263) (63,244) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (14,803) 1,112 - 14,451 (176,097) (29,775) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 5,988 6,825 - 7,992 22,188 45,591 Transfers Between Funds (Note 2) (5,215) (8,321) - (115,230) (134,542) 66,912 Surrenders and Terminations (1,328) (1,737) - (5,481) (39,002) (45,751) Rescissions (140) (211) - (184) (677) (1,108) Bonus (Recapture) 69 85 - 143 198 528 Contract Maintenance Charge (Note 2) (6) (11) - (17) (132) (74) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (632) (3,370) - (112,777) (151,967) 66,098 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (15,435) (2,258) - (98,326) (328,064) 36,323 Net Assets at Beginning of Period 33,333 35,591 - 98,326 564,367 528,044 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $17,898 33,333 - - 236,303 564,367 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 49
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Van Kampen AZL Van Kampen Equity and Income AZL Van Kampen Global Real Estate Fund Global Franchise Fund Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 1,363 (775) 76 (8,250) (92) (1,352) Realized Gains (Losses) on Investments, Net (4,660) 13,066 11,392 33,896 (10,753) 1,756 Net Change in Unrealized Appreciation (Depreciation) on Investments (51,339) (10,511) (123,200) 2,872 (29,504) (14,183) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (54,636) 1,780 (111,732) 28,518 (40,349) (13,779) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 39,995 54,967 44,269 75,664 18,476 43,645 Transfers Between Funds (Note 2) (79,130) (23,017) (113,849) (59,289) (13,786) (3,123) Surrenders and Terminations (14,190) (13,981) (21,493) (23,354) (3,435) (4,329) Rescissions (1,304) (1,237) (1,440) (2,157) (790) (1,166) Bonus (Recapture) 347 610 396 773 219 601 Contract Maintenance Charge (Note 2) (45) (46) (80) (73) (17) (12) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (54,327) 17,296 (92,197) (8,436) 667 35,616 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (108,963) 19,076 (203,929) 20,082 (39,682) 21,837 Net Assets at Beginning of Period 242,363 223,287 406,292 386,210 84,856 63,019 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $133,400 242,363 202,363 406,292 45,174 84,856 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 50
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) AZL Van Kampen Growth and Income AZL Van Kampen Mid AZL Van Kampen Fund Cap Growth Fund Strategic Growth Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 415 (2,498) (5,587) (6,202) - (2,335) Realized Gains (Losses) on Investments, Net (881) 34,345 10,859 31,252 - 46,305 Net Change in Unrealized Appreciation (Depreciation) on Investments (95,787) (29,641) (208,600) 24,763 - (24,325) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (96,253) 2,206 (203,328) 49,813 - 19,645 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 22,766 37,293 53,960 53,080 - 9,035 Transfers Between Funds (Note 2) (67,353) (50,392) (103,414) 142,745 - (186,137) Surrenders and Terminations (24,891) (29,922) (25,194) (21,342) - (8,939) Rescissions (944) (925) (2,695) (1,336) - (191) Bonus (Recapture) 227 451 708 778 - 120 Contract Maintenance Charge (Note 2) (70) (102) (89) (77) - (26) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (70,265) (43,597) (76,724) 173,848 - (186,138) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (166,518) (41,391) (280,052) 223,661 (166,493) - Net Assets at Beginning of Period 323,375 364,766 464,770 241,109 - 166,493 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 156,857 323,375 184,718 464,770 - - ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 51
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) BlackRock Global Davis VA Financial Davis VA Real Estate Allocations V.I. Fund Portfolio Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 (A) 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 2,094 - (1,447) (1,185) (1) 35 Realized Gains (Losses) on Investments, Net (3,292) - (6,254) 16,227 (45) 704 Net Change in Unrealized Appreciation (Depreciation) on Investments (7,195) - (37,060) (23,864) (613) (1,093) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (8,393) - (44,761) (8,822) (659) (354) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 92,699 - 13,680 12,849 - - Transfers Between Funds (Note 2) 48,237 - (11,239) (26,607) (147) (111) Surrenders and Terminations (1,397) - (6,651) (10,897) (115) (413) Rescissions (2,222) - (378) (234) - - Bonus (Recapture) 634 - 163 176 - - Contract Maintenance Charge (Note 2) (5) - (23) (9) - - ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 137,946 - (4,448) (24,722) (262) (524) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets 129,553 - (49,209) (33,544) (921) (878) Net Assets at Beginning of Period - - 97,925 131,469 1,605 2,483 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 129,553 - 48,716 97,925 684 1,605 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 52
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Davis VA Value Dreyfus IP Small Cap Dreyfus Stock Index Portfolio Stock Index Portfolio Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (1,233) (1,547) (1,055) (4,083) (1,433) (1,622) Realized Gains (Losses) on Investments, Net 6,839 21,268 27,562 27,858 22,557 25,175 Net Change in Unrealized Appreciation (Depreciation) on Investments (63,566) (14,321) (30,559) (28,325) (65,587) (10,806) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (57,960) 5,400 (4,052) (4,550) (44,463) 12,747 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 669 1,427 1,773 15,009 2,020 16,875 Transfers Between Funds (Note 2) (27,614) (16,660) (209,849) (53,361) (265,090) (66,741) Surrenders and Terminations (14,262) (20,392) (11,313) (16,840) (21,748) (31,112) Rescissions (13) (24) (55) (598) (165) (461) Bonus (Recapture) 8 12 12 154 9 132 Contract Maintenance Charge (Note 2) (38) (48) (36) (10) (56) (163) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (41,250) (35,685) (219,468) (55,646) (285,030) (81,470) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (99,210) (30,285) (223,520) (60,196) (329,493) (68,723) Net Assets at Beginning of Period 166,627 196,912 223,520 283,716 329,493 398,216 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 67,417 166,627 - 223,520 - 329,493 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 53
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Franklin Global Franklin Growth and Communications Income Securities Franklin High Income Securities Fund Fund Securities Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (2,844) (4,109) 6,091 3,996 13,227 10,919 Realized Gains (Losses) on Investments, Net (12,227) 4,036 (1,893) 37,418 (14,788) (1,728) Net Change in Unrealized Appreciation (Depreciation) on Investments (96,227) 45,281 (143,342) (63,994) (37,897) (7,638) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (111,298) 45,208 (139,144) (22,580) (39,458) 1,553 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 15,708 22,770 4,983 17,642 16,349 28,435 Transfers Between Funds (Note 2) (53,937) 25,643 (49,397) (40,808) (45,460) (29,980) Surrenders and Terminations (18,154) (27,173) (44,664) (69,802) (17,652) (23,361) Rescissions (539) (904) (236) (406) (676) (430) Bonus (Recapture) 286 524 29 203 192 351 Contract Maintenance Charge (Note 2) (100) (176) (152) (252) (55) (101) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (56,736) 20,684 (89,437) (93,423) (47,302) (25,086) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (168,034) 65,892 (228,581) (116,003) (86,760) (23,533) Net Assets at Beginning of Period 275,000 209,108 439,537 555,540 194,157 217,690 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 106,966 275,000 210,956 439,537 107,397 194,157 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 54
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Franklin Large Cap Franklin Income Growth Securities Franklin Money Securities Fund Fund Market Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 37,912 22,662 (831) (3,215) 44 873 Realized Gains (Losses) on Investments, Net (41,502) 38,782 6,246 16,886 - - Net Change in Unrealized Appreciation (Depreciation) on Investments (332,045) (42,106) (94,568) 2,235 (44) - ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (335,635) 19,338 (89,153) 15,906 - 873 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 141,658 271,558 3,196 10,944 5 7 Transfers Between Funds (Note 2) (308,052) (66,393) (56,958) (40,730) (440) (810) Surrenders and Terminations (95,961) (108,671) (22,506) (33,550) (2,527) (4,658) Rescissions (5,198) (6,391) (282) (285) - - Bonus (Recapture) 1,072 2,265 21 104 - - Contract Maintenance Charge (Note 2) (311) (335) (82) (168) (14) (15) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (266,792) 92,033 (76,611) (63,685) (2,976) (5,476) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (602,427) 111,371 (165,764) (47,779) (2,976) (4,603) Net Assets at Beginning of Period 1,236,149 1,124,778 293,997 341,776 26,980 31,583 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period 633,722 1,236,149 128,233 293,997 24,004 26,980 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 55
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Franklin Rising Franklin Real Estate Dividends Securities Franklin Small Cap Fund Fund Value Securities Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (1,429) 2,461 808 4,692 (797) (2,269) Realized Gains (Losses) on Investments, Net 10,445 49,531 2,338 47,818 7,925 27,492 Net Change in Unrealized Appreciation (Depreciation) on Investments (117,235) (155,934) (135,242) (77,137) (48,425) (30,984) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (108,219) (103,942) (132,096) (24,627) (41,297) (5,761) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 2,164 8,125 2,956 14,048 820 2,274 Transfers Between Funds (Note 2) (63,531) (98,967) (105,581) (94,045) (32,132) (29,812) Surrenders and Terminations (22,534) (46,942) (49,254) (68,098) (12,428) (19,262) Rescissions (85) (250) (185) (294) (124) (79) Bonus (Recapture) 24 66 8 46 8 38 Contract Maintenance Charge (Note 2) (81) (84) (151) (158) (37) (36) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (84,043) (138,052) (152,207) (148,501) (43,893) (46,877) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (192,262) (241,994) (284,303) (173,128) (85,190) (52,638) Net Assets at Beginning of Period 306,481 548,475 549,522 722,650 149,192 201,830 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 114,219 306,481 265,219 549,522 64,002 149,192 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 56
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Franklin Small-Mid Franklin Templeton Cap Growth VIP Founding Funds Franklin U.S. Securities Fund Allocation Fund Government Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 (B) 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (3,083) (4,666) 1,297 (90) 12,966 14,340 Realized Gains (Losses) on Investments, Net 16,146 36,515 (5,005) (57) (280) (3,628) Net Change in Unrealized Appreciation (Depreciation) on Investments (105,047) (6,906) (39,333) (528) 11,376 10,372 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (91,984) 24,943 (43,041) (675) 24,062 21,084 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 1,510 3,139 130,046 18,368 43,958 25,101 Transfers Between Funds (Note 2) (29,439) (22,709) (7,937) 24,944 (5,617) (19,576) Surrenders and Terminations (19,793) (32,635) (3,382) (274) (52,182) (55,910) Rescissions (72) (86) (4,280) (571) (1,898) (291) Bonus (Recapture) 30 23 1,308 186 398 231 Contract Maintenance Charge (Note 2) (73) (126) (10) (1) (136) (194) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (47,837) (52,394) 115,745 42,652 (15,477) (50,639) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (139,821) (27,451) 72,704 41,977 8,585 (29,555) Net Assets at Beginning of Period 242,499 269,950 41,977 - 429,720 459,275 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 102,678 242,499 114,681 41,977 438,305 429,720 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 57
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) J.P. Morgan International J.P. Morgan U.S. Franklin Zero Coupon Opportunities Large Cap Core Fund 2010 Portfolio Equity Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 2,691 2,817 1 (3) (2) (4) Realized Gains (Losses) on Investments, Net 920 (423) 56 24 (7) 17 Net Change in Unrealized Appreciation (Depreciation) on Investments 1,714 3,409 (233) 16 (182) (11) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations 5,325 5,803 (176) 37 (191) 2 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 13,898 5,206 - - - - Transfers Between Funds (Note 2) 19,166 (105) (100) (23) - (40) Surrenders and Terminations (12,462) (8,481) (36) (46) (83) (71) Rescissions (773) (187) - - - - Bonus (Recapture) 128 72 - - - - Contract Maintenance Charge (Note 2) (26) (17) - - - - ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 19,931 (3,512) (136) (69) (83) (111) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets 25,256 2,291 (312) (32) (274) (109) Net Assets at Beginning of Period 90,911 88,620 491 523 596 705 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 116,167 90,911 179 491 322 596 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 58
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Jennison 20/20 Focus Mutual Discovery Mutual Shares Portfolio Securities Fund Securities Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (1,380) (2,176) 2,880 (2,771) 10,292 (3,157) Realized Gains (Losses) on Investments, Net 8,220 22,051 39,707 70,456 (13,770) 97,207 Net Change in Unrealized Appreciation (Depreciation) on Investments (19,261) (10,668) (280,116) 8,728 (373,104) (80,557) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (12,421) 9,207 (237,529) 76,413 (376,582) 13,493 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 664 1,651 91,756 125,184 106,763 257,489 Transfers Between Funds (Note 2) (92,904) (17,803) (219,054) (25,247) (304,737) (108,156) Surrenders and Terminations (6,388) (8,649) (61,506) (69,851) (83,642) (104,919) Rescissions (24) (52) (4,322) (2,487) (5,052) (6,829) Bonus (Recapture) 1 30 912 1,538 893 2,467 Contract Maintenance Charge (Note 2) (18) (30) (191) (256) (253) (272) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (98,669) (24,853) (192,405) 28,881 (286,028) 39,780 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (111,090) (15,646) (429,934) 105,294 (662,610) 53,273 Net Assets at Beginning of Period 111,090 126,736 893,746 788,452 1,160,544 1,107,271 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ - 111,090 463,812 893,746 497,934 1,160,544 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 59
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) OpCap Mid Cap Oppenheimer Global Oppenheimer High Portfolio Securities Fund/VA Income Fund/VA ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (535) (419) (336) (1,184) 1,130 1,938 Realized Gains (Losses) on Investments, Net (3,218) 1,306 14,406 32,378 (5,542) (180) Net Change in Unrealized Appreciation (Depreciation) on Investments (15,726) (391) (85,443) (20,473) (13,076) (2,414) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (19,479) 496 (71,373) 10,721 (17,488) (656) ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 16,520 15,115 901 2,154 105 321 Transfers Between Funds (Note 2) 4,316 1,983 (36,176) (24,242) (76) (4,312) Surrenders and Terminations (1,683) (845) (17,209) (24,652) (2,687) (3,888) Rescissions (654) (331) (62) (69) - (4) Bonus (Recapture) 189 222 10 20 2 5 Contract Maintenance Charge (Note 2) (8) (6) (44) (135) (7) (8) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions 18,680 16,138 (52,580) (46,924) (2,663) (7,886) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (799) 16,634 (123,953) (36,203) (20,151) (8,542) Net Assets at Beginning of Period 31,117 14,483 205,533 241,736 29,717 38,259 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 30,318 31,117 81,580 205,533 9,566 29,717 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 60
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) PIMCO VIT Commodity Oppenheimer Main PIMCO VIT All Asset RealReturn Strategy Street Fund/VA Portfolio Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (297) (1,369) 5,933 10,490 4,289 2,507 Realized Gains (Losses) on Investments, Net 8,353 10,885 (12,917) 581 (14,724) (671) Net Change in Unrealized Appreciation (Depreciation) on Investments (54,983) (5,099) (25,021) 231 (78,367) 14,960 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (46,927) 4,417 (32,005) 11,302 (88,802) 16,796 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 981 1,636 35,539 15,673 54,044 15,508 Transfers Between Funds (Note 2) (22,577) (13,137) (55,935) (37,988) 20,586 445 Surrenders and Terminations (11,898) (18,083) (12,978) (13,842) (11,806) (4,530) Rescissions (94) (30) (814) (562) (1,954) (393) Bonus (Recapture) 5 15 547 288 767 237 Contract Maintenance Charge (Note 2) (39) (54) (39) (49) (38) (18) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (33,622) (29,653) (33,680) (36,480) 61,599 11,249 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (80,549) (25,236) (65,685) (25,178) (27,203) 28,045 Net Assets at Beginning of Period 139,064 164,300 180,302 205,480 112,433 84,388 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 58,515 139,064 114,617 180,302 85,230 112,433 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 61
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) PIMCO VIT Emerging Markets Bond PIMCO VIT Global PIMCO VIT High Yield Portfolio Bond Portfolio Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 1,981 1,546 1,279 596 7,825 9,900 Realized Gains (Losses) on Investments, Net (1,817) 951 (2,413) 244 (12,014) 347 Net Change in Unrealized Appreciation (Depreciation) on Investments (8,017) (1,092) (5,507) 2,227 (30,843) (7,396) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (7,853) 1,405 (6,641) 3,067 (35,032) 2,851 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 13,894 10,332 28,439 11,309 14,557 15,773 Transfers Between Funds (Note 2) (14,006) (944) 6,180 14,109 (41,815) (31,201) Surrenders and Terminations (3,042) (2,061) (7,253) (2,201) (13,770) (15,650) Rescissions (340) (317) (1,199) (225) (557) (494) Bonus (Recapture) 187 174 283 205 160 231 Contract Maintenance Charge (Note 2) (9) (3) (18) (5) (38) (38) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (3,316) 7,181 26,432 23,192 (41,463) (31,379) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (11,169) 8,586 19,791 26,259 (76,495) (28,528) Net Assets at Beginning of Period 44,213 35,627 55,781 29,522 173,285 201,813 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 33,044 44,213 75,572 55,781 96,790 173,285 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 62
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) PIMCO VIT StocksPLUS PIMCO VIT Real Growth and Income PIMCO VIT Total Return Portfolio Portfolio Return Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 4,453 7,084 679 1,143 13,030 14,974 Realized Gains (Losses) on Investments, Net (8,717) (3,537) (46) 1,242 11,058 (2,161) Net Change in Unrealized Appreciation (Depreciation) on Investments (23,895) 16,616 (7,400) (1,346) (11,347) 19,947 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (28,159) 20,163 (6,767) 1,039 12,741 32,760 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 51,311 18,775 125 181 85,638 51,922 Transfers Between Funds (Note 2) (39,008) (24,751) (1,604) (1,984) (50,819) (22,574) Surrenders and Terminations (21,748) (17,777) (2,446) (2,281) (59,458) (48,315) Rescissions (1,978) (447) (28) (1) (2,706) (1,039) Bonus (Recapture) 686 206 - 3 1,088 860 Contract Maintenance Charge (Note 2) (69) (50) (6) (12) (138) (123) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (10,806) (24,044) (3,959) (4,094) (26,395) (19,269) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (38,965) (3,881) (10,726) (3,055) (13,654) 13,491 Net Assets at Beginning of Period 249,436 253,317 18,349 21,404 505,831 492,340 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 210,471 249,436 7,623 18,349 492,177 505,831 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 63
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) SP Strategic Seligman Global Seligman Small-Cap Partners Focused Technology Portfolio Value Portfolio Growth Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (33) (47) (1,684) (2,882) (378) (591) Realized Gains (Losses) on Investments, Net (23) 45 23,085 24,738 1,110 2,749 Net Change in Unrealized Appreciation (Depreciation) on Investments (869) 344 (66,014) (17,213) (9,406) 1,111 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (925) 342 (44,613) 4,643 (8,674) 3,269 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments - - 651 1,170 259 370 Transfers Between Funds (Note 2) (76) (194) (18,630) (20,010) (6,303) (4,819) Surrenders and Terminations (161) (691) (10,661) (18,945) (1,905) (2,835) Rescissions - - (10) (36) - (2) Bonus (Recapture) - - 7 12 4 5 Contract Maintenance Charge (Note 2) (1) (3) (34) (48) (6) (11) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (238) (888) (28,677) (37,857) (7,951) (7,292) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (1,163) (546) (73,290) (33,214) (16,625) (4,023) Net Assets at Beginning of Period 2,408 2,954 126,765 159,979 26,746 30,769 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 1,245 2,408 53,475 126,765 10,121 26,746 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 64
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Templeton Developing SP International Templeton Asset Markets Securities Growth Portfolio Strategy Fund Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (119) (349) 1,159 2,576 2,394 1,948 Realized Gains (Losses) on Investments, Net (1,337) 5,479 644 3,572 (37,124) 73,177 Net Change in Unrealized Appreciation (Depreciation) on Investments (11,813) (1,916) (5,440) (4,781) (132,011) 4,432 ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (13,269) 3,214 (3,637) 1,367 (166,741) 79,557 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 212 263 7 3 2,561 7,803 Transfers Between Funds (Note 2) (6,061) 5,978 (360) (462) (159,531) (62,469) Surrenders and Terminations (1,728) (1,875) (1,467) (2,844) (18,240) (33,336) Rescissions (76) (2) - - (414) (112) Bonus (Recapture) 1 3 - - 16 77 Contract Maintenance Charge (Note 2) (5) (5) (5) (5) (65) (107) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (7,657) 4,362 (1,825) (3,308) (175,673) (88,144) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (20,926) 7,576 (5,462) (1,941) (342,414) (8,587) Net Assets at Beginning of Period 29,477 21,901 15,017 16,958 342,414 351,001 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 8,551 29,477 9,555 15,017 - 342,414 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 65
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Templeton Global Templeton Foreign Income Securities Templeton Growth Securities Fund Fund Securities Fund ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 2,887 2,090 2,533 192 1,055 (2,756) Realized Gains (Losses) on Investments, Net 32,025 51,002 575 995 (14,210) 71,050 Net Change in Unrealized Appreciation (Depreciation) on Investments (195,626) 5,188 89 2,249 (312,302) (66,815) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (160,714) 58,280 3,197 3,436 (325,457) 1,479 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 2,627 17,459 43,547 16,305 78,480 195,669 Transfers Between Funds (Note 2) (55,926) (35,142) 5,248 42,634 (210,750) (89,312) Surrenders and Terminations (37,006) (55,227) (10,417) (5,874) (58,374) (79,585) Rescissions (88) (665) (1,256) (352) (3,117) (4,416) Bonus (Recapture) 34 133 389 221 668 1,719 Contract Maintenance Charge (Note 2) (128) (214) (30) (13) (213) (291) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (90,487) (73,656) 37,481 52,921 (193,306) 23,784 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (251,201) (15,376) 40,678 56,357 (518,763) 25,263 Net Assets at Beginning of Period 443,786 459,162 84,083 27,726 870,214 844,951 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 192,585 443,786 124,761 84,083 351,451 870,214 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 66
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Van Kampen LIT Van Kampen LIT Capital Growth Van Kampen LIT Growth and Income Portfolio Enterprise Portfolio Portfolio ----------- ---------- ----------- ---------- ----------- ---------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ (41) (78) (1) (2) 4 - Realized Gains (Losses) on Investments, Net (15) 181 (12) (14) 29 61 Net Change in Unrealized Appreciation (Depreciation) on Investments (1,595) 496 (57) 34 (353) (47) ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets From Operations (1,651) 599 (70) 18 (320) 14 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions-All Products (Note 5) Purchase Payments 4 - 42 - 30 - Transfers Between Funds (Note 2) (356) (736) (10) (23) (10) (18) Surrenders and Terminations (590) (1,038) (12) (32) (43) (64) Rescissions - - - - - - Bonus (Recapture) - - - - - - Contract Maintenance Charge (Note 2) (2) (2) - - - - ----------- ---------- ----------- ---------- ----------- ---------- Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (944) (1,776) 20 (55) (23) (82) ----------- ---------- ----------- ---------- ----------- ---------- Increase (Decrease) in Net Assets (2,595) (1,177) (50) (37) (343) (68) Net Assets at Beginning of Period 4,019 5,196 149 186 975 1,043 ----------- ---------- ----------- ---------- ----------- ---------- Net Assets at End of Period $ 1,424 4,019 99 149 632 975 ----------- ---------- ----------- ---------- ----------- ----------
See Accompanying Notes to Financial Statements 67
ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Financial Statements (continued) Statements of Changes in Net Assets (continued) For the year ended December 31, 2008 and 2007 (In thousands) Total All Funds ----------------- ------------------ 2008 2007 ----------------- ------------------ Increase (Decrease) in Net Assets: Operations: Investment Income (Loss), Net $ 80,653 (11,931) Realized Gains (Losses) on Investments, Net (448,324) 1,447,938 Net Change in Unrealized Appreciation (Depreciation) on Investments (5,911,447) (867,050) ----------------- ------------------ Net Increase (Decrease) in Net Assets From Operations (6,279,118) 568,957 ----------------- ------------------ Contract Transactions-All Products (Note 5) Purchase Payments 3,047,102 3,258,668 Transfers Between Funds (Note 2) (3,731,722) (1,282,366) Surrenders and Terminations (1,528,500) (1,816,227) Rescissions (103,362) (82,542) Bonus (Recapture) 33,882 39,790 Contract Maintenance Charge (Note 2) (4,734) (5,608) ----------------- ------------------ Net Increase (Decrease) in Net Assets Resulting From Contract Transactions (2,287,334) 111,715 ----------------- ------------------ Increase (Decrease) in Net Assets (8,566,452) 680,672 Net Assets at Beginning of Period 19,849,987 19,169,315 ----------------- ------------------ Net Assets at End of Period $11,283,535 $19,849,987 ----------------- ------------------
(A) Period from May 1, 2008 (fund commencement) to December 31, 2008 (B) Period from May 1, 2007 (fund commencement) to December 31, 2007 See Accompanying Notes to Financial Statements 68 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements December 31, 2008 1. ORGANIZATION Allianz Life Variable Account B (Variable Account) is a segregated investment account of Allianz Life Insurance Company of North America (Allianz Life) and is registered with the Securities and Exchange Commission as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940 (as amended). The Variable Account was established on May 31, 1985 and commenced operations January 24, 1989. Accordingly, it is an accounting entity wherein all segregated account transactions are reflected. The Variable Account's assets are the property of Allianz Life and are held for the benefit of the owners and other persons entitled to payments under variable annuity contracts issued through the Variable Account and underwritten by Allianz Life. The assets of the Variable Account, equal to the reserves and other liabilities of the Variable Account, are not chargeable with liabilities that arise from any other business, which Allianz Life may conduct. The Variable Account's sub-accounts invest, at net asset values, in one or more of select portfolios of AIM Variable Insurance Funds, Inc., The Alger American Fund, Allianz Investment Management, LLC, BlackRock Advisors, Inc., Davis Variable Account Fund, Inc., Dreyfus Service Corporation, Franklin Templeton Variable Insurance Products Trust (formerly, Franklin Valuemark Funds), J.P. Morgan Series Trust II, OpCap Advisors, LLC, Oppenheimer Variable Account Funds, Pacific Investment Management Company, Prudential Investments Fund Management, LLC, Seligman Portfolios, Inc., LLC, Van Kampen Life Investment Trust and William Blair & Company LLC, in accordance with the selection made by the contract owner. Not all portfolios are available as investment options for the products, which comprise the Variable Account. The investment advisers and Specialist Manager for each portfolio are listed in the following table.
Portfolio Investment Adviser Specialist Manager/Adviser ----------- ----------------------- --------------------------- AIM V.I. Capital Appreciation Fund Invesco AIM Advisors, Inc. N/A AIM V.I. Core Equity Fund Invesco AIM Advisors, Inc. N/A AIM V.I. International Growth Fund Invesco AIM Advisors, Inc. N/A Alger American Capital Appreciation Portfolio Fred Alger Management, Inc. N/A Alger American LargeCap Growth Portfolio Fred Alger Management, Inc. N/A Alger American MidCap Growth Portfolio Fred Alger Management, Inc. N/A Alger American SmallCap Growth Portfolio Fred Alger Management, Inc. N/A AZL AIM International Equity Fund * t Allianz Investment Management, LLC Invesco Aim Capital Management, Inc. AZL BlackRock Capital Appreciation Fund * t Allianz Investment Management, LLC BlackRock Capital Management, Inc. AZL Columbia Mid Cap Value Fund t Allianz Investment Management, LLC Columbia Management Advisors, LLC AZL Columbia Small Cap Value Fund t Allianz Investment Management, LLC Columbia Management Advisors, LLC AZL Columbia Technology Fund * t Allianz Investment Management, LLC Columbia Management Advisors, LLC AZL Davis NY Venture Fund * t Allianz Investment Management, LLC Davis Selected Advisers, L.P. AZL Dreyfus Founders Equity Growth Fund * t Allianz Investment Management, LLC Founders Asset Management, LLC AZL First Trust Target Double Play Fund t Allianz Investment Management, LLC First Trust Adivsors L.P. AZL Franklin Small Cap Value Fund * t Allianz Investment Management, LLC Franklin Advisory Services LLC AZL Fusion Balanced Fund t Allianz Investment Management, LLC Allianz Investment Management, LLC AZL Fusion Growth Fund t Allianz Investment Management, LLC Allianz Investment Management, LLC AZL Fusion Moderate Fund t Allianz Investment Management, LLC Allianz Investment Management, LLC AZL Jennison 20/20 Focus Fund * t Allianz Investment Management, LLC Jennison Associates LLC AZL Legg Mason Growth Fund * t Allianz Investment Management, LLC Legg Mason Funds Management, Inc. AZL Legg Mason Value Fund * t Allianz Investment Management, LLC Legg Mason Funds Management, Inc. AZL Money Market Fund * t Allianz Investment Management, LLC BlackRock Institutional Management Corporation AZL NACM International Fund t Allianz Investment Management, LLC Nicholas Applegate Capital Management, Inc. AZL OCC Opportunity Fund * t Allianz Investment Management, LLC Oppenheimer Capital, LLC AZL Oppenheimer Global Fund * t Allianz Investment Management, LLC OppenheimerFunds, Inc. AZL Oppenheimer International Growth Fund * Allianz Investment Management, LLC OppenheimerFunds, Inc. AZL Oppenheimer Main Street Fund * t Allianz Investment Management, LLC OppenheimerFunds, Inc. AZL PIMCO Fundamental IndexPLUS Total Return Allianz Investment Management, LLC Pacific Investment Management Company LLC AZL S&P 500 Index Fund t Allianz Investment Management, LLC The Dreyfus Corporation AZL Schroder Emerging Markets Equity Fund Cl1 Allianz Investment Management, LLC Schroder Investment Management NA Inc. AZL Schroder Emerging Markets Equity Fund Cl2 Allianz Investment Management, LLC Schroder Investment Management NA Inc. AZL Schroder International Small Cap Fund t Allianz Investment Management, LLC Schroder Investment Management NA Inc. AZL Small Cap Stock Index Fund t Allianz Investment Management, LLC The Dreyfus Corporation AZL TargetPLUS Balanced Fund t Allianz Investment Management, LLC First Trust Adivsors L.P./PacificInvstMgmtCoLLC AZL TargetPLUS Equity Fund t Allianz Investment Management, LLC First Trust Adivsors L.P.
69 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 1. ORGANIZATION (CONTINUED)
Portfolio Investment Adviser Specialist Manager/Adviser --------- --------------------- -------------------------- AZL TargetPLUS Growth Fund t Allianz Investment Management, LLC FirstTrustAdivsorsL.P./PacificInvst MgmtCoLLC AZL TargetPLUS Moderate Fund t Allianz Investment Management, LLC FirstTrustAdivsorsL.P./PacificInvst MgmtCoLLC AZL Turner Quantitative Small Cap Growth Fund Allianz Investment Management, LLC Turner Investment Partners, Inc. AZL Van Kampen Comstock Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. AZL Van Kampen Equity and Income Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. AZL Van Kampen Global Franchise Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. AZL Van Kampen Global Real Estate Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. AZL Van Kampen Growth and Income Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. AZL Van Kampen Mid Cap Growth Fund * t Allianz Investment Management, LLC Van Kampen Asset Management, Inc. BlackRock Global Allocations V.I. Fund BlackRock Investment Management,LLC N/A Davis VA Financial Portfolio Davis Selected Advisers, LP N/A Davis VA Real Estate Portfolio Davis Selected Advisers, LP N/A Davis VA Value Portfolio Davis Selected Advisers, LP N/A Franklin Global Communications Securities Fund Franklin Advisers, Inc. N/A Franklin Growth and Income Securities Fund * Franklin Advisers, Inc. N/A Franklin High Income Securities Fund * Franklin Advisers, Inc. N/A Franklin Income Securities Fund * Franklin Advisers, Inc. N/A Franklin Large Cap Growth Securities Fund * Franklin Advisers, Inc. N/A Franklin Money Market Fund * Franklin Advisers, Inc. N/A Franklin Real Estate Fund * Franklin Templeton Institutional, N/A Franklin Rising Dividends Securities Fund * Franklin Advisory Services, LLC N/A Franklin Small Cap Value Securities Fund * Franklin Advisory Services, LLC N/A Franklin Small-Mid Cap Growth Securities Fund Franklin Advisers, Inc. N/A Franklin Templeton VIP Founding Funds Allocation FranklindTempleton Services, LLC N/A Franklin U.S. Government Fund * Franklin Advisers, Inc. N/A Franklin Zero Coupon Fund 2010 Franklin Advisers, Inc. N/A J.P. Morgan International Opportunities Port J.P.oMorgan Investment Management N/A J.P. Morgan U.S. Large Cap Core Equity Portfolio J.P. Morgan Investment Management N/A Mutual Discovery Securities Fund * Franklin Mutual Advisers, LLC N/A Mutual Shares Securities Fund * Franklin Mutual Advisers, LLC N/A OpCap Mid Cap Portfolio t Allianz Global Invsetors Fund Mana N/A Oppenheimer Global Securities Fund/VA OppenheimerFunds, Inc. N/A Oppenheimer High Income Fund/VA OppenheimerFunds, Inc. N/A Oppenheimer Main Street Fund/VA OppenheimerFunds, Inc. N/A PIMCO VIT All Asset Portfolio t Pacific Investment Management Comp N/A PIMCO VIT CommodityRealReturn Strategy Portf Pacific Investment Management Comp N/A PIMCO VIT Emerging Markets Bond Portfolio t Pacific Investment Management Comp N/A PIMCO VIT Global Bond Portfolio t Pacific Investment Management Comp N/A PIMCO VIT High Yield Portfolio t Pacific Investment Management Comp N/A PIMCO VIT Real Return Portfolio t Pacific Investment Management Comp N/A PIMCO VIT StocksPLUS Growth and Income Portf Pacific Investment Management Comp N/A PIMCO VIT Total Return Portfolio t Pacific Investment Management Comp N/A Seligman Global Technology Portfolio J & W Seligman & Co. Inc. N/A Seligman Small-Cap Value Portfolio J & W Seligman & Co. Inc. N/A SP Strategic Partners Focused Growth Portfolio Prudential Investments LLC N/A SP International Growth Portfolio * Prudential Investments LLC N/A Templeton Asset Strategy Fund * Templeton Investment Counsel, LLC N/A
70 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 1. ORGANIZATION (CONTINUED)
Portfolio Investment Adviser Specialist Manager/Adviser ----------- ----------------------------- -------------------------- Templeton Foreign Securities Fund * Templeton Investment Counsel, LLC N/A Templeton Global Income Securities Fund * Franklin Advisers, Inc. N/A Templeton Growth Securities Fund * Templeton Global Advisors Limited N/A Van Kampen LIT Capital Growth Portfolio Van Kampen Asset Management, Inc. N/A Van Kampen LIT Enterprise Portfolio Van Kampen Asset Management, Inc. N/A Van Kampen LIT Growth and Income Portfolio Van Kampen Asset Management, Inc. N/A
* Portfolio contains class 2 shares which assess 12b-1 fees. {t} The investment adviser of this fund is an affiliate of Allianz Life and is paid an investment management fee by the fund. 2.SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS Investments of the Variable Account are valued each day the markets are open at fair value using net asset values provided by the investment advisers of the portfolios after the 4 PM Eastern market close. On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" - This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The changes to current GAAP from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and expanded disclosures about fair value measurements. Various inputs are used in determining the value of a Funds' investments under SFAS No. 157 guidance. The inputs are summarized into three broad categories. Level 1 includes valuations based on quoted prices of identical securities in active markets. Level 2 includes valuations for which all significant inputs are observable, either directly or indirectly. Direct observable inputs include closing prices of similar securities in active markets or closing prices for identical or similar securities in non-active markets. Indirect observable inputs include factors such as interest rates, yield curves, prepayment speeds, and credit risks. Level 3 includes valuations based on inputs that are unobservable and significant to the fair value measurement including a Funds' own assumptions in determining the fair value of the investment. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. As of December 31, 2008, all of the Separate Account's investments are in funds for which quoted prices are available in an active market. Therefore, all investments have been categorized as Level 1. The characterization of the underlying securities held by the funds in accordance with SFAS No. 157 differs from the characterization of an investment in the fund. Realized gains on investments include realized gain distributions received from the respective portfolios and gains on the sale of portfolio shares as determined by the average cost method. Realized gain distributions are reinvested in the respective portfolios. Dividend distributions received from the portfolios are reinvested in additional shares of the portfolios and are recorded as income to the Variable Account on the ex-dividend date. Three Fixed Account investment options are available to deferred annuity contract owners. A Flexible Fixed Option is available to Valuemark II, Valuemark III, Allianz Valuemark IV, Allianz Rewards, and Allianz Alterity deferred annuity contract owners. Fixed Period Accounts are available to Allianz High Five and Allianz High Five Bonus contract owners. A Dollar Cost Averaging Option is available to Allianz Valuemark II, Allianz Valuemark III, Allianz Valuemark IV, Allianz Rewards, Allianz Alterity, Allianz High Five, Allianz High Five Bonus, and Allianz Vision deferred annuity contract owners. These accounts are comprised of equity and fixed income investments which are part of the general assets of Allianz Life. The liabilities of the Fixed Accounts, including the guaranteed minimum rate of return on the Fixed Account of 3%, are part of the general obligations of Allianz Life and are not included in the Variable Account. Certain of the sub-accounts invest in Investment Options that invest in various forms of fixed income securities, including mortgage backed securities. These types of securities may present a variety of potential risks, including credit risk, extension and prepayment risk, and interest rate risk. Recently, certain types of mortgage backed securities, such as structured investment vehicles (SIVs), subprime mortgage backed bonds, and commercial paper backed by mortgage backed securities have experienced losses as a result of defaults on underlying mortgages and a lack of liquidity. These securities have also been subject to price declines resulting from lack of a trading market for the securities. As a result of the lack of liquidity, it is possible that certain securities may become more difficult to value. It is possible that these types of securities may continue to experience price declines as a result of defaults and lack of liquidity. 71 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) Available investment options, including the date the investment option became available for each product, as of December 31, 2008 are listed in the following table.
Allianz Allianz Allianz High Allianz Valuemark Allianz Allianz Allianz High Five High Allianz II and Valuemark Allianz Portfolio Alterity Connections Five Bonus Five L Rewards III IV Vision --------- ---------- -------- --------- -------- --------- --------- --------- ------- AZL AIM International 5/1/2002 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/1/2002 5/1/2002 5/1/2002 5/1/2007 Equity Fund AZL BlackRock Capital Appreciation Fund 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 AZL Columbia Mid Cap Value Fund 5/1/2006 11/12/2007 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2007 AZL Columbia Small Cap Value Fund 5/3/2004 11/12/2007 5/3/2004 5/3/2004 5/2/2005 5/3/2004 5/3/2004 5/3/2004 5/1/2007 AZL Columbia Technology Fund 11/6/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL Davis NY Venture Fund 11/6/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL Dreyfus Founders Equity Growth Fund 11/6/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL First Trust Target Double Play Fund 12/28/2006 11/12/2007 12/28/2006 12/28/2006 12/28/2006 12/28/2006 12/28/2006 12/28/20065/1/2007 AZL Franklin Small Cap Value Fund 5/1/2003 11/12/2007 5/1/2003 5/3/2004 5/2/2005 5/1/2003 5/1/2003 5/1/2003 5/1/2007 AZL Fusion Balanced Fund 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 AZL Fusion Growth Fund 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 AZL Fusion Moderate Fund 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 AZL Jennison 20/20 Focus Fund 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 AZL Legg Mason Growth Fund 5/1/2002 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/1/2002 5/1/2002 5/1/2002 5/1/2007 AZL Legg Mason Value Fund 11/6/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL Money Market Fund 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL NACM International Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL OCC Opportunity Fund 5/1/2002 11/12/2007 5/1/2002 5/1/2004 5/2/2005 5/1/2002 5/1/2002 5/1/2002 5/1/2007 AZL Oppenheimer Global Fund 5/3/2004 11/12/2007 5/3/2004 5/3/2004 5/2/2005 5/3/2004 5/3/2004 5/3/2004 5/1/2007 AZL Oppenheimer International Growth Fund 11/6/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 11/5/2001 11/5/2001 5/1/2007 AZL Oppenheimer Main Street Fund 5/3/2004 11/12/2007 5/3/2004 5/3/2004 5/2/2005 5/3/2004 5/3/2004 5/3/2004 5/1/2007 AZL PIMCO Fundamental IndexPLUS Total Return Fund 5/1/2006 11/12/2007 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2007 AZL S&P 500 Index Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL Schroder Emerging Markets Equity Fund CL 2 5/1/2006 11/12/2007 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2007 AZL Schroder International Small Cap Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL Small Cap Stock Index Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL TargetPLUS Balanced Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL TargetPLUS Equity Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL TargetPLUS Growth Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 AZL TargetPLUS Moderate Fund 5/1/2007 11/12/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007 5/1/2007
72 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED)
Allianz Allianz Allianz High Allianz Valuemark Allianz Allianz Allianz High Five High Allianz II and Valuemark Allianz Portfolio Alterity Connections Five Bonus Five L Rewards III IV Vision -------- ---------- --------- -------- -------- -------- -------- --------- ------- AZL Turner Quantitative 5/2/2005 11/12/2007 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 Small Cap Growth Fund AZL Van Kampen Comstock Fund 5/1/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/1/2001 5/1/2001 5/1/2001 5/1/2007 AZL Van Kampen Equity and Income Fund 5/3/2004 11/12/2007 5/3/2004 5/3/2004 5/2/2005 5/3/2004 5/3/2004 5/3/2004 5/1/2007 AZL Van Kampen Global Franchise Fund 5/1/2003 11/12/2007 5/1/2003 5/3/2004 5/2/2005 5/1/2003 5/1/2003 5/1/2003 5/1/2007 AZL Van Kampen Global Real Estate Fund 5/1/2006 11/12/2007 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2007 AZL Van Kampen Growth and Income Fund 5/1/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/1/2001 5/1/2001 5/1/2001 5/1/2007 AZL Van Kampen Mid Cap Growth Fund 5/1/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/1/2001 5/1/2001 5/1/2001 5/1/2007 BlackRock Global Allocations V.I. Fund 5/1/2008 5/1/2008 5/1/2008 5/1/2008 5/1/2008 5/1/2008 5/1/2008 5/1/2008 5/1/2008 Davis VA Financial Portfolio 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 5/1/2002 5/1/2002 5/1/2007 Franklin Global Communications Securities Fund 11/5/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 1/24/1989 2/3/1997 5/1/2007 Franklin High Income Securities Fund 11/5/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 1/24/1989 2/3/1997 5/1/2007 Franklin Income Securities Fund 11/5/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 1/24/1989 2/3/1997 5/1/2007 Franklin Templeton VIP Founding Funds Allocation Fund 9/25/2007 11/12/2007 9/25/2007 9/25/2007 9/25/2007 9/25/2007 9/25/2007 9/25/2007 5/1/2007 Franklin U.S. Government Fund 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 3/14/1989 2/3/1997 5/1/2007 Franklin Zero Coupon Fund 2010 11/5/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 3/14/1989 2/3/1997 5/1/2007 Mutual Discovery Securities Fund 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 11/8/1996 2/3/1997 5/1/2007 Mutual Shares Securities Fund 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 11/8/1996 2/3/1997 5/1/2007 OpCap Mid Cap Portfolio 5/1/2006 11/12/2007 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2006 5/1/2007 PIMCO VIT All Asset Portfolio 5/3/2004 11/12/2007 5/3/2004 5/3/2004 5/2/2005 5/3/2004 5/3/2004 5/3/2004 5/1/2007 PIMCO VIT CommodityRealReturn Strategy Portfolio 5/2/2005 11/12/2007 5/2/2005 5/2/2006 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 PIMCO VIT Emerging Markets Bond Portfolio 5/2/2005 11/12/2007 5/2/2005 5/2/2006 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 PIMCO VIT Global Bond Portfolio 5/2/2005 11/12/2007 5/2/2005 5/2/2006 5/2/2005 5/2/2005 5/2/2005 5/2/2005 5/1/2007 PIMCO VIT High Yield Portfolio 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 11/5/2001 11/5/2001 5/1/2007 PIMCO VIT Real Return Portfolio 5/1/2003 11/12/2007 5/1/2003 5/3/2004 5/2/2005 5/1/2003 5/1/2003 5/1/2003 5/1/2007 PIMCO VIT Total Return Portfolio 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 11/5/2001 11/5/2001 5/1/2007 Templeton Global Income Securities Fund 11/5/2001 11/12/2007 10/25/2002 5/3/2004 5/2/2005 11/5/2001 1/27/1992 2/3/1997 5/1/2007 Templeton Growth Securities Fund 2/1/2000 11/12/2007 10/25/2002 5/3/2004 5/2/2005 5/5/2000 3/15/1994 2/3/1997 5/1/2007
73 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) During the years ended December 31, 2008 and 2007, several portfolios changed their name as summarized with the effective date of the change, in the following table.
Current Portfolio Name Prior Portfolio Name Effective Date ------------------------ ------------------------ ----------------------- AZL Turner Quantitative Small Cap Growth Fund AZL LMP Small Cap Growth Fund June 26, 2007 AZL Schroder Emerging Markets Equity Fund CL 2 AZL Oppenheimer Developing Markets Fund December 7, 2007 Alger American Capital Appreciation Portfolio Alger American Leveraged AllCap Portfolio May 1, 2008 Alger American LargeCap Growth Portfolio Alger American Growth Portfolio May 1, 2008 Alger American SmallCap Growth Portfolio Alger American Small Capitalization PortfolioMay 1, 2008 Van Kampen LIT Capital Growth Portfolio Van Kampen LIT Strategic Growth Portfolio May 1, 2008 AZL Columbia Small Cap Value Fund AZL Dreyfus Premier Small Cap Value Fund September 20, 2008 AZL BlackRock Capital Appreciation fund AZL Jennison Growth fund November 21, 2008 AZL Columbia Mid Cap Value Fund AZL Neuberger Regency Fund November 21, 2008
During the years ended December 31, 2008 and 2007, no portfolios were closed to new money. During the years ended December 31, 2008 and 2007, several portfolios merged or replaced. The portfolio names and effective date of the mergers or replacements are summarized in the following table.
Closed Portfolio Receiving Portfolio Date Merged -------------------- -------------------------- --------------------- AZL AIM Basic Value Fund AZL Van Kampen Comstock Fund September 21, 2007 AZL Van Kampen Strategic Equity Growth Fund AZL Dreyfus Founders Equity Growth Fund September 21, 2007 AZL OCC Renaissance Fund AZL OCC Value Fund September 21, 2007 AZL Van Kampen Aggressive Growth Fund AZL Van Kampen Mid Growth Fund September 21, 2007 Jennison 20/20 Focus Portfolio AZL Jennison 20/20 Fucus Fund September 20, 2008 Dreyfus Stock Index Fund AZL S&P 500 Index Fund September 20, 2008 Dreyfus IP Small Cap Stock Index Portfolio AZL Small Cap Stock Index Fund September 20, 2008 AZL LMP Large Cap Growth Fund AZL Legg Mason Growth Fund November 21, 2008 AZL OCC Value Fund AZL Davis NY Venture Fund November 21, 2008 Templeton Developing Markets Securities Fund AZL Schroder Emerging Markets Equity Fund CL November 21, 2008 Templeton Developing Markets Securities Fund AZL Schroder Emerging Markets Equity Fund CL November 21, 2008
CONTRACTS IN ANNUITY PAYMENT PERIOD Annuity reserves are computed for currently payable contracts according to the 1983 and 2000 Individual Annuity Mortality Tables, using an assumed investment return (AIR) equal to the AIR of the specific contracts, either 3%, 5%, or 7%. Charges to annuity reserves for mortality and risk expense are reimbursed to Allianz Life if the reserves required are less than originally estimated. If additional reserves are required, Allianz Life reimburses the account. 74 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREMIUM BONUS A premium bonus is awarded to the contract owner of the Allianz Rewards, Allianz High Five Bonus and Allianz Vision Bonus products at the time of deposit. The bonus paid is based on the following schedule.
Allianz Rewards Allianz High Five Bonus Allianz Vision Bonus Net Deposit Bonus Paid Bonus Paid Bonus Paid ----------- ---------- ------------ ----------- $0 to $14,999 0% 0% 6% $15,000 to $24,999 4% 3% 6% $25,000 to $99,000 5% 4% 6% $100,000 to $999,999 6% 5% 6% $1,000,000 to $4,999,999 7% 6% 6% $5,000,000 or more 8% 7% 6%
The bonus is vested over three years; therefore, if the contract owner surrenders the policy before the full vesting period, a portion of the bonus can be lost. The accumulated gain/loss on the bonus is 100% vested as it is earned. The vesting rates are presented in the following schedule.
Allianz Rewards Allianz High Five Bonus Allianz Vision Bonus Months Following Deposit Amount Vested Amount Vested Amount Vested ------------------------ -------------- ------------- ------------------- 0 to 12 0% 0% 0% 13 to 24 35% 35% 35% 25 to 36 70% 70% 70% 37+ 100% 100% 100%
The M&E charge and administrative charge for Allianz Alterity can be summarized as follows: The currently offered Allianz Alterity Base Contract provides a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB), where the death benefit is the greater of current contract value or total purchase payments adjusted for partial withdrawals. If an owner so chooses, they can instead select either the Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB), or the Earnings Protection Guaranteed Minimum Death Benefit (Earnings Protection GMDB). Under the Enhanced GMDB, the death benefit is the current contract value or the greater of: a) the highest contract anniversary value, or (b) total purchase payments adjusted for partial withdrawals increased annually by 3%. Under the Earnings Protection GMDB, the death benefit is the current contract value or the greater of: a) total purchase payments adjusted for partial withdrawals, or b) contract value plus an additional amount based on the owner's age and the lesser of total purchase payments or contract value. The currently offered Allianz Alterity Contract also provides an optional PRIME Plus Benefit, which includes a Guaranteed Minimum Income Benefit (GMIB) and a Guaranteed Partial Withdrawal Benefit (GPWB). The PRIME Plus Benefit provides a guaranteed minimum fixed income stream and is designed for owners who want flexibility in the way they access income. The guaranteed income is based on the greater of: (a) current contract value, (b) the highest contract anniversary value, or (c) total purchase payments adjusted for partial withdrawals increased annually by 7%. 75 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) There are also two older versions of the Allianz Alterity Contract that are no longer offered for sale. The May 2003 Contract was replaced by the currently offered Contract in May 2006. The primary difference between May 2003 Contract and the currently offered Contract is the May 2003 Contracts offered a choice of either the Traditional PRIME Benefit (where the guaranteed value is based on total purchase payments adjusted for partial withdrawals) or the Enhanced PRIME Benefit [where the guaranteed values are based on the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%]. Both PRIME Benefits included a GMIB and a GPWB. The Original Contract was first offered in January 2000 and was replaced by the May 2003 Contract. The Original Contract automatically provided a Traditional GMIB (where the guaranteed value is based on total purchase payments adjusted for partial withdrawals), or owners could select the optional Enhanced GMIB for an additional charge [where the guaranteed values are based on the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 5%].
Charges during the Original Original Currently Offered May 2003 Currently Offered Contract with the PRIME Plus Accumulation Phase Contract Contract Base Contract and Contract with Benefit and May 2003 Contract with the Enhanced (includes 0.15% of (which with May 2003 Contract the PRIME Benefit administrative includes the Enhanced without a PRIME Traditional charge) Traditional GMIB Benefit PRIME Benefit GMIB) ------------------------------------------------------------------------------------------------------------------------------------ Traditional GMDB 1.40% 1.70% 1.50% 1.70% 2.20% (Traditional (Optional (Traditional - (Traditional (Traditional - Option 5) - Option 1) - Option Option 3) - Option 4) 1) Earnings Protection 1.60% 1.90% 1.80% 2.00% 2.45% GMDB (Traditional (Optional (Optional - Option (Optional - (Optional - Option 5) -Option 2) - Option 3) Option 4) 2) Enhanced GMDB 1.70% 1.90% 1.80% 1.95% 2.40% (Optional - (Enhanced - (Enhanced - (Enhanced - Option 5) Option 1) (Enhanced Option 3) Option 4) - Option 1)
The charges during the Annuity Phase if the owner takes variable annuity payments are 1.50% for the currently offered Allianz Alterity Contract and the May 2003 Contract; and the charges are 1.40% for the Original Contract. The M&E charge and administrative charge for Allianz Rewards can be summarized as follows: The currently offered Allianz Rewards Base Contract automatically provides a bonus of 4% to 8% on each purchase payment received before age 81. The bonus is subject to a three-year vesting schedule. The currently offered Allianz Rewards Base Contract provides a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB), where the death benefit is the greater of current contract value or total purchase payments adjusted for partial withdrawals. If an owner so chooses, they can instead select the Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB). Under the Enhanced GMDB, the death benefit is the current contract value or the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%. The currently offered Allianz Rewards Contract also provides an optional PRIME Plus Benefit, which includes a Guaranteed Minimum Income Benefit (GMIB) and a Guaranteed Partial Withdrawal Benefit (GPWB). The PRIME Plus Benefit provides a guaranteed minimum fixed income stream and is designed for owners who want flexibility in the way they access income. The guaranteed income is based on the greater of: (a) current contract value, (b) the highest contract anniversary value, or (c) total purchase payments adjusted for partial withdrawals increased annually by 7%. There are also three older versions of the Allianz Rewards Contract that are no longer offered for sale. The Original Contract was first offered in May 2000. The primary difference between the Original Contract and the currently offered Contract is the mortality and expense risk (M&E) charge for the Original Contract without any optional benefits is lower than the currently offered Contract, and the Original Contract also offered a choice of either the Traditional PRIME Benefit (where the guaranteed value is based on total purchase payments adjusted for partial withdrawals) or Enhanced PRIME Benefit [where the guaranteed values are based on the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%]. Both PRIME Benefits included a GMIB and a GPWB. The September 2002 Contract without any optional benefits had the same M&E charge as the Original Contract, but the September 2002 Contract only offered an Enhanced GMIB for an additional charge [where the guaranteed values are based on the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 5%], but did not offer a PRIME Benefit. The May 2003 Contract replaced both the Original Contract and the September 2002 Contract. The May 2003 Contract also offered a choice of either the Traditional PRIME Benefit or Enhanced PRIME Benefit that were available on the Original Contract, but the charge for these features was higher than for the Original Contract. 76 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED)
Charges Original Contract Original Original September 2002 September 2002 Currently Offered during the without a PRIME Contract with Contract with Contract without the Contract with the Base Contract and Accumulation Benefit the the Enhanced GMIB Enhanced GMIB May 2003 Contract Phase (includes Traditional PRIME Benefit without a PRIME 0.15% of PRIME Benefit Benefit administrative charge) ------------------------------------------------------------------------------------------------------------------------------------ Traditional 1.65% 1.85% 2.35% 1.65% 1.95% 1.70% GMDB (Traditional-Option (Traditional- (Traditional- (Traditional-Option (Traditional-Option (Traditional-Option 1) Option 7) Option 8) 1) 2) 4) Enhanced GMDB 1.85% 2.05% 2.55% 1.95% (Enhanced- 2.15% 2.00% (Enhanced- (Enhanced-Option 1) (Enhanced- (Enhanced- Option 2) (Enhanced-Option 3) Option 4) Option 7) Option 8)
Charges May 2003 Currently during the Contract with Offered Accumulation the Contract with Phase (includes Traditional the PRIME 0.15% of PRIME Benefit Plus Benefit administrative and a May charge) 2003 Contract with the Enhanced PRIME Benefit --------------------------------------------- Traditional 1.90% 2.40% GMDB (Traditional- (Traditional- Option 5) Option 6) Enhanced GMDB 2.15% 2.60% (Enhanced- (Enhanced- Option 5) Option 6) The charges during the Annuity Phase if the owner takes variable annuity payments are 1.70% for the currently offered Allianz Rewards Contract and the May 2003 Contract; and the charges are 1.65% for the Original Contract and the September 2002 Contract. The M&E charge and administrative charge for Allianz Charter can be summarized as follows: Allianz Charter was launched in January 1999 and sales were discontinued in May 2003. The Charter contract automatically provided a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments less partial withdrawals. For an additional charge, the owner could instead select the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) where the death benefit is the current contract value or the greater of: a) total purchase payments less partial withdrawals, or b) the highest contract anniversary value.
Charges during the Accumulation Charges during the Annuity Phase if the owner takes variable annuity Phase (includes a 0.15% administrative payments (includes a 0.15% administrative charge) charge) Traditional 1.15% 1.15% GMDB Enhanced 1.35% 1.15% GMDB
The M&E charge for Allianz Charter II can be summarized as follows: Allianz Charter II was launched in May 2003 and sales were discontinued in May 2005. The Charter II contract automatically provided a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional charge, the owner could instead select either the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB), or the optional Earnings Protections Guaranteed Minimum Death Benefit (Earnings Protection GMDB). Under the Enhanced GMDB, the death benefit is the current contract value or the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%. Under the Earnings Protection GMDB, the death benefit is the current contract value or the greater of: a) total purchase payments adjusted for partial withdrawals, or b) contract value plus an additional amount based on the owner's age and the lesser of total purchase payments or contract value. The Charter II contract also offered a choice of the Traditional PRIME Benefit (where the guaranteed value is based on total purchase payments adjusted for partial withdrawals) or Enhanced PRIME Benefit [where the guaranteed values are based on the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3% and 7%]. The PRIME Benefits include a Guaranteed Partial Withdrawal Benefit (GPWB) and a Guaranteed Minimum Income Benefit (GMIB). The PRIME Benefits provide guarantees on future income that can be accessed through partial withdrawals under the GPWB or through annuity payments under the GMIB. 77 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED)
M&E charges during the Accumulation Phase Contracts without a PRIME Contracts with the Traditional PRIME Contracts with the Enhanced PRIME Benefit Benefit Benefit ----------------------------------------------------------------------------------------------------------------------------------- Traditional GMDB 1.75% 1.95% 2.45% (Option 1) (Option 4) (Option 7) Enhanced GMDB 2.05% 2.20% 2.65% (Option 2) (Option 5) (Option 8) Earnings Protection 2.05% 2.25% 2.70% GMDB (Option 3) (Option 6) (Option 9)
The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.75%. The M&E charge for Allianz Dimensions can be summarized as follows: Allianz Dimensions was launched in March 2001 and sales were discontinued in May 2002. The Dimensions contract automatically provided a Return of Principal Guaranteed Minimum Death Benefit (Return of Principal GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. In all states except Washington, the owner could instead select either the optional Double Principal Guaranteed Minimum Death Benefit (Double Principal GMDB), or the Earnings Protection Guaranteed Minimum Death Benefit (Earnings Protection GMDB) for an additional charge. Under the Double Principal, GMDB the death benefit is the greater of: a) current contract value, b) the highest contract anniversary value, or c) after the fifth Contract Anniversary, double total purchase payments adjusted for partial withdrawals. Under the Earnings Protection GMDB, the death benefit is the current contract value or the greater of: a) the Return of Principal GMDB, or b) contract value plus an additional amount based on the owner's age and the lesser of either total purchase payments or contract value less total purchase payments. In the state of Washington, the owner could instead select the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) for an additional charge. Under the Enhanced GMDB, the death benefit is the greater of: a) current contract value, b) the highest contract anniversary value, or c) total purchase payments adjusted for partial withdrawals increased annually by 3%. The Dimensions contract also automatically included the Guaranteed Value Protection (GVP) through the Guaranteed Principal Protector Benefit (GPP Benefit), or the owner could instead select the Guaranteed Performance Accumulator Benefit (GPA Benefit) that was available under the GVP for an additional charge. However, if the contract was owned by a non-individual or trust, the GVP was not available. The GPP Benefit guaranteed the return of principal adjusted for withdrawals. The GPA Benefit locked in the highest contract value every ten years, with the minimum guarantee of two times the total purchase payments adjusted for partial withdrawals at the 20th Contract Anniversary.
M&E charges during the Accumulation Return of Principal Double Principal Earnings Protection GMDB or the Enhanced Phase GMDB GMDB GMDB ------------------------------------------------------------------------------------------------------------------------------------ GPP Benefit or no GVP 1.50% 1.80% 1.70% (Option 1) (Option 3) (Option 5) GPA Benefit 1.70% 2.00% 1.90% (Option 2) (Option 4) (Option 6)
The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.50%. 78 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) The M&E charge for Allianz Elite can be summarized as follows: Allianz Elite was launched in September of 2006 and sales were discontinued December 31, 2007. Allianz Elite featured a decreasing M&E charge. The M&E charge decreases 0.05% each year for three years beginning in the third contract year, until it has decreased by a total of 0.15% by the fifth contract year. Allianz Elite also offered the optional Short Withdrawal Charge Option that reduced the withdrawal charge period from seven years to four years. The Short Withdrawal Charge Option carried an additional M&E charge of 0.35% for the first seven contract years. Allianz Elite automatically provided a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional 0.30% M&E charge, the owner could instead select the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) where the death benefit is the current contract value or the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%. Allianz Elite also offered the optional PRIME Plus Benefit which carried an additional M&E charge. The PRIME Plus Benefit is the only optional benefit that can be selected after the contract is issued and it includes a Guaranteed Partial Withdrawal Benefit (GPWB) and a Guaranteed Minimum Income Benefit (GMIB). The PRIME Plus Benefit provides a guaranteed minimum fixed income stream and is designed for owners who want flexibility in the way they access income. The guaranteed income is based on the greater of: (a) current contract value, (b) the highest contract anniversary value, or (c) total purchase payments adjusted for partial withdrawals increased annually by 7%.
M&E charges during the Accumulation Phase Contracts Contracts with the Short Withdrawal Charge Contracts Contracts with Short Withdrawal Charge with no Option with the Option and the PRIME Plus Benefit* optional PRIME Plus benefits Benefit* ------------------------------------------------------------------------------------------------------------------------------------ Traditional GMDB 1.15% 1.50% decreasing to 1.35% by the 5[th] 1.85% 2.20% decreasing to 2.05% by the 5[th] decreasing contract anniversary and then decreasing to decreasing contract anniversary and then decreasing to to 1.00% by 1.00% by the 7[th] contract anniversary to 1.70% by 1.70% by the 7[th] contract anniversary the 5[th] the 5[th] contract contract anniversary anniversary Enhanced GMDB 1.45% 1.80% decreasing to 1.65% by the 5[th] 2.05% 2.40% decreasing to 2.25% by the 5[th] decreasing contract anniversary and then decreasing to decreasing contract anniversary and then decreasing to to 1.30% by 1.30% by the 7[th] contract anniversary to 1.90% by 1.90% by the 7[th] contract anniversary the 5[th] the 5[th] contract contract anniversary anniversary
*Assumes the PRIME Plus Benefit is selected at contract issue. The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.00%. The M&E charge for Allianz Custom Income can be summarized as follows: Allianz Custom Income was launched in January 2006 and sales were discontinued on December 31, 2007. Allianz Custom Income automatically provided a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) for no additional charge where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. Allianz Custom Income also automatically provides the Total Income Package (TIP) of benefits for an additional M&E charge unless the owner elects otherwise at Contract issue. The TIP includes the Increasing Withdrawals Benefit (IWB), the Withdrawals Plus Benefit (WPB), and the Lifetime Income Benefit (LIB). The IWB guarantees a minimum amount of income in the form of partial withdrawals, and the maximum amount that you are able to withdraw can increase each year. The WPB guarantees a minimum amount of lifetime income in the form of partial withdrawals and continued access to Contract Value. The LIB provides lifetime income in the form of Annuity Payments that are guaranteed never to be less than the initial payment we make, and the payment amount can increase based on the performance of the Investment Options as frequently as every year. The LIB also provides a Liquidation Value that is available for Excess Withdrawals and/or payment of a death benefit for a limited period of time. 79 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED)
M&E charges For Contracts with the TIP For Contracts without the TIP --------------------------------------------------------- During the Accumulation Phase 2.20% 1.45% During the Annuity Phase under the LIB 2.20% During the Annuity Phase under Traditional Annuity Payments 1.45% 1.45%
The M&E charge for Allianz High Five can be summarized as follows: The currently offered Allianz High Five February 2007 Contract automatically provides a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional charge, the owner can instead select the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) where the death benefit is the greater of: a) current contract value, b) total purchase payments adjusted for partial withdrawals, or c) the highest contract anniversary value. The February 2007 Contract also automatically provides Living Guarantees unless the owner elects otherwise at Contract issue. The Living Guarantees include the Guaranteed Account Value Benefit (GAV Benefit), the Guaranteed Minimum Income Benefit (GMIB) and the Guaranteed Withdrawal Benefit (GWB). There are no additional fees or charges associated with the Living Guarantees. However, we monitor the contract value daily and systematically transfer amounts between the selected investment options and the Fixed Period Accounts (FPAs) to support the Living Guarantees. Owners that transfer or withdraw contract value from a FPA may have the value of the withdrawal or transfer adjusted based on a formula called a Market Value Adjustment (MVA). The MVA formula compares the interest rates credited at the time of investment, to interest rates being credited when the withdrawal or transfer is made. The amount of any MVA can be either positive or negative, depending on the rates that are currently being credited on the FPAs. The GAV Benefit guarantees that beginning on your fifth contract anniversary, and on each subsequent contract anniversary until the contract terminates or you begin receiving annuity payments, your contract value will be at least equal to an amount we call the Guaranteed Account Value (GAV) from five years ago, reduced by subsequent withdrawals. The GAV is initially equal to the purchase payments received within 90 days of contract issue. The GAV is recalculated on each contract anniversary to equal the greater of: a) the previous GAV adjusted for subsequent purchase payments and partial withdrawals, or b) the current contract value. The GAV Benefit does not provide any protection until the fifth and subsequent contract anniversaries, and does not lock in any investment gains until at least five years after they occur. The GMIB guarantees a minimum level of income through annuity payments after the fifth contract year. The GWB guarantees a minimum level of income through partial withdrawals. There are also three older versions of the Allianz High Five Contract. The Original Contract first became available on September 20, 2002. The Original Contract issued before June 22, 2007 is no longer offered for sale; however, the Original Contract issued on or after June 22, 2007 is still for sale in the state of Washington. The primary difference between the February 2007 Contract and the Original Contract is the Original Contract had fewer restrictions on the availability of certain features and benefits. The May 2005 Contract was replaced by the February 2007 Contract. The primary difference between the February 2007 Contract and the May 2005 Contract is the M&E charge.
M&E charges during the Accumulation February 2007 Contract and May 2005 Contract and Phase Original Contract issued on or after June 22, Original Contract issued before June 22, 2007 2007 ------------------------------------------------------------------------------------------- Traditional GMDB 1.25% 1.40% Enhanced GMDB 1.45% 1.60%
The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.25%. 80 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) The M&E charge and administrative charge for Allianz High Five Bonus can be summarized as follows: The Allianz High Five Bonus May 2007 Contract automatically provides a bonus of 3% to 7% on each purchase payment received before age 81. The bonus is subject to a three-year vesting schedule. The High Five Bonus Contracts also automatically provides a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional charge, the owner can instead elect the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) where the death benefit is the greater of: a) current contract value, b) total purchase payments adjusted for partial withdrawals, or c) the highest contract anniversary value. Allianz High Five Bonus also automatically provides Living Guarantees. The Living Guarantees include the Guaranteed Account Value Benefit (GAV Benefit), the Guaranteed Minimum Income Benefit (GMIB) and the Guaranteed Withdrawal Benefit (GWB). There are no additional fees or charges associated with the Living Guarantees. However, we monitor the contract value daily and systematically transfer amounts between your selected Investment Options and the Fixed Period Accounts (FPAs) to support the Living Guarantees. Owners that transfer or withdraw contract value from a FPA may have the value of the withdrawal or transfer adjusted based on a formula called a Market Value Adjustment (MVA). The MVA formula compares the interest rates credited at the time of investment, to interest rates being credited when the withdrawal or transfer is made. The amount of any MVA can be either positive or negative, depending on the rates that are currently being credited on the FPAs. The GAV Benefit guarantees that beginning on your fifth contract anniversary, and on each subsequent contract anniversary until the contract terminates or you begin receiving annuity payments, your contract value will be at least equal to an amount we call the Guaranteed Account Value (GAV) from five years ago, reduced by subsequent withdrawals. The GAV is initially equal to the purchase payments received within 90 days of Contract issue. The GAV is recalculated on each Contract Anniversary to equal the greater of: a) the previous GAV adjusted for subsequent purchase payments and partial withdrawals, or b) the current contract value. The GAV Benefit does not provide any protection until the fifth and subsequent contract anniversaries, and does not lock in any investment gains until at least five years after they occur. The GMIB guarantees a minimum level of income through annuity payments after the fifth contract year. The GWB guarantees a minimum level of income through partial withdrawals. There are also two older versions of the Allianz High Five Bonus Contract. The Original Contract first became available on April 30, 2004 and was replaced in nearly all states by the May 2005 Contract. The May 2005 Contract is being replaced by the May 2007 Contract. The primary difference between the May 2007 Contract and the Original and May 2005 Contracts are the length of the withdrawal charge period. Original and May 2005 Contracts have a ten-year withdrawal charge period and the May 2007 Contract has a nine-year withdrawal charge period. The primary difference between the Original Contract and May 2005 Contract is that Original Contracts have no waiting period on the exercise of the GWB and there are no restrictions on allocations of Purchase Payments to the FPAs.
Charges during the Accumulation Phase (includes a 0.15% administrative charge) Charges ----------------------------------------------------------------------------------------- Traditional GMDB 1.70% Enhanced GMDB 1.90%
The charges during the Annuity Phase if the owner takes variable annuity payments are 1.70%. The M&E charge for Allianz High Five L can be summarized as follows: Allianz High Five L May 2007 Contract automatically provides a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional charge, the owner can instead elect the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB) where the death benefit is the greater of: a) current contract value, b) total purchase payments adjusted for partial withdrawals, or c) the highest contract anniversary value. 81 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Allianz High Five L also offers optional Living Guarantees. The Living Guarantees include the Guaranteed Withdrawal Benefit (GWB) and either the Guaranteed Principal Value Benefit (GPV Benefit) or the Guaranteed Account Value Benefit (GAV Benefit). There is no additional fee or charge for the Living Guarantees with the GPV Benefit; however, there is an additional M&E charge for selecting the GAV Benefit. In addition, we monitor the contract value daily and systematically transfer amounts between your selected investment options and the Fixed Period Accounts (FPAs) to support the Living Guarantees. Owners that transfer or withdraw contract value from a FPA may have the value of the withdrawal or transfer adjusted based on a formula called a Market Value Adjustment (MVA). The MVA formula compares the interest rates credited at the time of investment, to interest rates being credited when the withdrawal or transfer is made. The amount of any MVA can be either positive or negative, depending on the rates that are currently being credited on the FPAs. The GPV and GAV Benefits guarantee that beginning on your fifth contract anniversary, and on each subsequent contract anniversary until the contract terminates or you begin receiving annuity payments, your contract value will be at least equal to an amount we call the Guaranteed Principal Value (GPV) or Guaranteed Account Value (GAV) from five years ago, reduced by subsequent withdrawals. The GPV and GAV are initially equal to the purchase payments received within 90 days of contract issue. The GPV is recalculated on each contract anniversary to equal the previous GPV adjusted for subsequent Purchase Payments and partial withdrawals. The GAV is recalculated on each contract anniversary to equal the greater of: a) the previous GAV adjusted for subsequent Purchase Payments and partial withdrawals, or b) the current contract value. The GPV and GAV Benefits do not provide any protection until the fifth and subsequent contract anniversaries, and the GAV does not lock in any investment gains until at least five years after they occur. The GWB guarantees a minimum level of income through partial withdrawals. There is also an older version of the Allianz High Five L Contract that is still available in some states. The Original Contract first became available on April 29, 2005. The primary difference between the May 2007 Contract and the Original Contract is the length of the withdrawal charge period. The Original Contract had a three-year withdrawal charge period and the May 2007 Contract has a four- year withdrawal charge period. M&E charges during the Accumulation Phase
Traditional GMDB Enhanced GMDB No Living Guarantees or Living Guarantees with the GPV Benefit 1.65% 1.85% Living Guarantees with the GAV Benefit 1.75% 1.95%
The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.65%. The M&E charge and administrative charge for Allianz Valuemark II and Allianz Valuemark III can be summarized as follows: Allianz Valuemark II was launched in January 1989 and sales were discontinued in June 1994. Allianz Valuemark III was launched in June 1994 and sales were discontinued in February 1997. The Valuemark II and Valuemark III Contracts automatically provided a death benefit of the contract value less any withdrawal charge or contract maintenance charge, or the greater of: a) total purchase payments less partial withdrawals increased by 5% each year, or b) the highest Contract Value from any sixth Contract Anniversary.
Charges during the Accumulation Phase and during the Annuity Phase if the owner takes variable annuity payments (includes a 0.15% administrative charge) ------------------------------------------------------------------------------------------------------------------ Valuemark 1.40% II and Valuemark III
82 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) The M&E charge and administrative charge for Allianz Valuemark IV can be summarized as follows: The Valuemark IV Original Contract was launched in February of 1997 and was replaced by the May 2003 Contract. For Original Contracts that did not have an Enhanced Death Benefit Endorsement (EDB Endorsement), the death benefit was the contract value. Before July 1999, Original Contracts with an EDB Endorsement included Death Benefit Option 1 (DB Option 1). If owners are age 80 or older, the death benefit under DB Option 1 is based on the greater of contract value or purchase payments less withdrawals. If owners are age 79 or younger, the death benefit under DB Option 1 is based on the contract value or the greater of: a) total purchase payments adjusted for partial withdrawals increased annually by 5%, or b) the highest contract value from any sixth contract anniversary. Beginning in July 1999, the owner could instead select Death Benefit Option 2 (DB Option 2). If owners are age 80 or older, the death benefit under DB Option 2 is based on the greater of contract value or purchase payments less withdrawals. If owners are age 79 or younger, the death benefit under DB Option 2 is based on the contract value or the greater of: a) total purchase payments less partial withdrawals, or b) the highest contract anniversary value. Beginning in November 2001, the owner could select for an additional charge the Earnings Protections Guaranteed Minimum Death Benefit (Earnings Protection GMDB) where the death benefit is the greater of: a) current contract value, b) total purchase payments adjusted for partial withdrawals, or c) contract value plus an additional amount based on the owner's age and the lesser of total purchase payments or contract value. The Original Contract also offered a choice of optional Guaranteed Minimum Income Benefits (GMIBs) for an additional charge. The GMIBs provide guaranteed minimum annuity payments during the annuity phase. GMIB Option 1 provided a GMIB value of the greater of: a) total purchase payments adjusted for partial withdrawals increased annually by 5%, or b) the highest contract value from any sixth contract anniversary. GMIB Option 2 provided a GMIB value of the greater of: a) total purchase payments adjusted for partial withdrawals, or b) the highest contract anniversary value. The May 2003 Contract was launched in May 2003 and sales were discontinued in May 2007. The May 2003 Contract automatically provided a Traditional Guaranteed Minimum Death Benefit (Traditional GMDB) where the death benefit is based on the greater of contract value or total purchase payments adjusted for partial withdrawals. For an additional charge, the owner could instead select either the optional Enhanced Guaranteed Minimum Death Benefit (Enhanced GMDB), or the Earnings Protections Guaranteed Minimum Death Benefit (Earnings Protection GMDB). Under the Enhanced GMDB the death benefit is the current contract value or the greater of: a) the highest contract anniversary value, or b) total purchase payments adjusted for partial withdrawals increased annually by 3%. Under the Earnings Protection, GMDB the death benefit is the current contract value or the greater of: a) total purchase payments adjusted for partial withdrawals, or b) contract value plus an additional amount based on the owner's age and the lesser of total purchase payments or contract value. The May 2003 Contract also offered an optional Traditional GMIB for an additional charge where the GMIB value is total purchase payments adjusted for partial withdrawals.
Charges during the Accumulation Phase (includes a 0.15% Original Original May 2003 Contracts May 2003 Contracts administrative charge Contracts Contracts without the Traditional with the Traditional without a with a GMIB GMIB ------------------------------------------------------------------------------------------------------------------------------------ GMIB GMIB Without the EDB Endorsement, or with DB Option 1 or DB 1.49% 1.79% - - Option 2 Traditional GMDB - - 1.75% 1.90% Enhanced GMDB - - 2.05% 2.15% Earnings Protection GMDB 1.59% 1.89% 2.05% 2.20%
The charges during the Annuity Phase if the owner takes variable annuity payments under the May 2003 Contract are 1.75%, and under the Original Contract the charges are 1.40%. 83 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) The M&E charge and administrative charge for Allianz Valuemark Income Plus can be summarized as follows: Allianz Valuemark Income Plus was launched in July 1994 and sales were discontinued in May 2006. The Valuemark Income Plus was an immediate single payment annuity. Charges if the owner took variable annuity payments (includes a 0.15% administrative charge) ------------------------------------------------- Valuemark Income Plus 1.40% The M&E charge for Allianz Vision can be summarized as follows: The Allianz Vision Base Contract provides a Traditional Death Benefit or the owner can instead select the Quarterly Value Death Benefit for an additional M&E charge, which locks in the highest contract value from any quarterly anniversary. The Contract also allows the owner to select at issue for an additional M&E charge either: a) a Bonus Option that provides a 6% bonus that is subject to a three year vesting schedule and increases the withdrawal charge period from seven years to nine years, b) a Short Withdrawal Charge Option that shortens the withdrawal charge period from seven years to four years, or c) a No Withdrawal Charge Option that eliminates the withdrawal charge. The Contract also offers selection of either the Target Date Retirement Benefit, Lifetime Plus Benefit, Lifetime Plus II Benefit or Lifetime Plus 10 Benefit. However, if the owner selected the No Withdrawal Charge Option, they must also select one of these four benefits. The Target Date Retirement Benefit provides a future guarantee of contract value based on the greater of total purchase payments, adjusted for partial withdrawals or the highest contract anniversary value. All the Lifetime Plus Benefits are designed for those who want lifetime income and continued access to both Contract Value and a death benefit for a period of time, as opposed to Annuity Payments that provide higher periodic lifetime income payments but eliminate both contract value and a death benefit for a period of time. The Lifetime Plus Benefit has potentially lower charges than the other two Lifetime Benefits, the ability to begin payments before age 65, and allows owners to reset the guaranteed value to equal the contract value if that would provide a greater guarantee, but the reset eliminates the previous guaranteed amount. The Lifetime Plus II Benefit is very similar to the Lifetime Plus Benefit, but it offers more potential to increase your initial Lifetime Plus Payment because resets of the guaranteed value are automatic and do not eliminate any previous guarantees. The Lifetime Plus 10 Benefit offers the maximum potential initial payment and automatic resets but the resets, do eliminate the previous guaranteed amount, and payments cannot begin until age 65. 84 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Quarterly Traditional Value Death M&E charges during the Accumulation Phase Death Benefit t Benefit ------------------------------------------- --------------- ---------------- Base Contract 1.40% 1.70% (Base Option (Base Option 2) 1) Contract with the Bonus Option 1.70% 2.00% (Bonus Option (Bonus Option 1) 2) Contract with the Short Withdrawal Charge 1.65% 1.95% Option (L Option 1) (L Option 2) Contract with the Target Date Retirement 1.80% 2.10% Benefit (Base Option (Base Option 11) 12) Contract with the Lifetime Plus Benefit 2.10% 2.40% (single Lifetime Plus Payments) (Base Option (Base Option 4) 3) Contract with the Lifetime Plus Benefit 2.25% 2.55% (joint Lifetime Plus Payments) (Base Option (Base Option 6) 5) Contract with single Lifetime Plus 2.20% 2.50% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Base Option (Base Option 8) 7) Contract with joint Lifetime Plus 2.35% 2.65% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Base Option (Base Option 9) 10) Contract with single Lifetime Plus 2.10% 2.40% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Base Option (Base Option 4) 3) Contract with joint Lifetime Plus 2.25% 2.55% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Base Option (Base Option 6) 5) Contract with the Bonus Option and Target 2.10% 2.40% Date Retirement Benefit (Bonus Option (Bonus Option 11) 12) Contract with the Bonus Option and 2.40% 2.70% Lifetime Plus Benefit (single Lifetime Plus Payments) (Bonus Option (Bonus Option 3) 4) Contract with the Bonus Option and 2.55% 2.85% Lifetime Plus Benefit (joint Lifetime Plus Payments) (Bonus Option (Bonus Option 5) 6) Contract with the Bonus Option and single 2.50% 2.80% Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Bonus Option (Bonus Option 7) 8) Contract with the Bonus Option and joint 2.65% 2.95% Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Bonus Option (Bonus Option 9) 10) Contract with the Bonus Option and single 2.40% 2.70% Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Bonus Option (Bonus Option 3) 4) Contract with the Bonus Option and joint 2.55% 2.85% Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Bonus Option (Bonus Option 5) 6) The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.40% for a Contract without the Bonus Option, and 1.70% for a Contract with the Bonus Option. 85 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Quarterly Traditional Value Death M&E charges during the Accumulation Phase Death Benefit t Benefit ------------------------------------------- --------------- ---------------- Contract with the Short Withdrawal Charge 2.05% 2.35% Option and Target Date Retirement Benefit (L Option 11) (L Option 12) Contract with the Short Withdrawal Charge 2.35% 2.65% Option and Lifetime Plus Benefit (single Lifetime Plus Payments) L Option 3) (L Option 4) Contract with the Short Withdrawal Charge 2.50% 2.80% Option and Lifetime Plus Benefit (joint Lifetime Plus Payments) (L Option 5) (L Option 6) Contract with the Short Withdrawal Charge 2.45% 2.75% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (L Option 7) (L Option 8) Contract with the Short Withdrawal Charge 2.60% 2.90% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (L Option 9) (L Option 10) Contract with the Short Withdrawal Charge 2.35% 2.65% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin L Option 3) (L Option 4) Contract with the Short Withdrawal Charge 2.50% 2.80% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (L Option 5) (L Option 6) Contract with the No Withdrawal Charge 2.15% 2.45% Option and Target Date Retirement Benefit (C Option 5) (C Option 6) Contract with the No Withdrawal Charge 2.45% 2.75% Option and Lifetime Plus Benefit (single Lifetime Plus Payments) (C Option 1) (C Option 2) Contract with the No Withdrawal Charge 2.60% 2.90% Option and Lifetime Plus Benefit (joint Lifetime Plus Payments) (C Option 3) (C Option 4) Contract with the No Withdrawal Charge 2.55% 2.85% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (C Option 5) (C Option 6) Contract with the No Withdrawal Charge 2.70% 3.00% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (C Option 7) (C Option 8) Contract with the No Withdrawal Charge 2.45% 2.75% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (C Option 1) (C Option 2) Contract with the No Withdrawal Charge 2.60% 2.90% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (C Option 3) (C Option 4) 86 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) The M&E charge for Allianz Connections can be summarized as follows: The Allianz Connections Base Contract provides a Traditional Death Benefit or the owner can instead select the Quarterly Value Death Benefit for an additional M&E charge, which locks in the highest contract value from any quarterly anniversary. The Contract also allows the owner to select at issue for an additional M&E charge either: a) a Short Withdrawal Charge Option that shortens the withdrawal charge period from seven years to four years, or b) a No Withdrawal Charge Option that eliminates the withdrawal charge. The Contract also offers selection of either the Target Date Retirement Benefit, Lifetime Plus II Benefit or Lifetime Plus 10 Benefit. However, if the owner selected the No Withdrawal Charge Option, they must also select one of these three benefits. The Target Date Retirement Benefit provides a future guarantee of contract value based on the greater of total purchase payments adjusted for partial withdrawals or the highest contract anniversary value. All the Lifetime Plus Benefits are designed for those who want lifetime income and continued access to both Contract Value and a death benefit for a period of time, as opposed to Annuity Payments that provide higher periodic lifetime income payments, but eliminate both contract value and a death benefit for a period of time. The Lifetime Plus II Benefit offers a higher payment percentage than the Lifetime Plus 10 Benefit, and offers the ability to begin payments before age 65. The Lifetime Plus 10 Benefit offers the maximum potential initial payment, but payments cannot begin until age 65. Traditional Quarterly Value M&E charges during the Accumulation Phase Death Benefit t Death Benefit ------------------------------------------ ------------------ ------------------ Base Contract 1.15% 1.45% (Option 1) (Option 2) Short Withdrawal Charge Option 1.60% 1.90% (Option 13) (Option 14) Contract with the Target Date Retirement 1.55% 1.85% Benefit (Option 11) (Option 12) Contract with single Lifetime Plus 1.95% 2.25% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 3) (Option 4) Contract with joint Lifetime Plus 2.10% 2.40% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 5) (Option 6) Contract with single Lifetime Plus 1.85% 2.15% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 7) (Option 8) Contract with joint Lifetime Plus 2.00% 2.30% Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 9) (Option 10) Contract with the Short Withdrawal 2.40% 2.70% Charge Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 15) (Option 16) Contract with the Short Withdrawal 2.55% 2.85% Charge Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 17) (Option 18) Contract with the Short Withdrawal 2.30% 2.60% Charge Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 19) (Option 20) 87 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Quarterly Traditional Value Death M&E charges during the Accumulation Phase Death Benefit t Benefit ------------------------------------------- --------------- ---------------- Contract with the Short Withdrawal Charge 2.45% 2.75% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 21) (Option 22) Contract with the No Withdrawal Charge 2.55% 2.85% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 25) (Option 26) Contract with the No Withdrawal Charge 2.70% 3.00% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, before payments begin (Option 27) (Option 28) Contract with the No Withdrawal Charge 2.45% 2.75% Option and single Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 29) (Option 30) Contract with the No Withdrawal Charge 2.60% 2.90% Option and joint Lifetime Plus Payments under either the Lifetime Plus II Benefit or Lifetime Plus 10 Benefit, once payments begin (Option 31) (Option 32) The M&E charges during the Annuity Phase if the owner takes variable annuity payments are 1.15%. A contract maintenance charge is paid by the contract owner annually from each deferred annuity contract by liquidating accumulation units at the end of the contract year and at the time of full surrender. During the annuity phase, we deduct a portion of this charge from each annuity payment. The amount of the charge is $30 each year for Valuemark II, Valuemark III, and Allianz Valuemark IV contracts; $40 for Allianz Alterity, Allianz Charter, Allianz Dimensions, Allianz High Five, Allianz High Five Bonus, Allianz High Five L and Allianz Rewards contracts; and $50 for Allianz Charter II, Allianz Elite, Allianz Connections and Allianz Vision contracts. Contract maintenance charges paid by the owners during the years ended December 31, 2008 and 2007 were $4,734,000 and $5,608,000, respectively. These charges are reflected in the Statements of Changes in Net Assets as contract maintenance charges. A withdrawal charge is deducted at the time of withdrawal for withdrawals taken during the Accumulation Phase on Allianz Alterity, Allianz Charter II, Allianz Dimensions, Allianz Elite, Allianz High Five, Allianz High Five Bonus, Allianz High Five L, Allianz Rewards, Allianz Valuemark II, Allianz Valuemark III, Allianz Valuemark IV, and Allianz Vision deferred annuity contracts. If the withdrawal is a partial withdrawal the charge is deducted from the Contract Value. If the withdrawal is a full withdrawal, the charge is deducted from the amount withdrawn. The amount of the withdrawal charge is shown below. Allianz Alterity and Allianz Dimensions use the number of complete contract years since a purchase payment was received to determine the withdrawal charge percentage; all other products use the number of complete calendar years since a purchase payment was received. In certain states, the withdrawal charge may be different than what is indicated in the following table. 88 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Withdrawal Charge
Complete Years Since Allianz Allianz Allianz Allianz High Five Allianz High Allianz Allianz Payment Alterity[(1)] Connections[(2)] High Five Bonus[(3)] Five L[(4)] Rewards Vision[(5)] ------------------------------------------------------------------------------------------------------------------------------------ 0 7% 8.50% 8% 8.50% 8.5% 8.50% 8.50% 1 6% 8.50% 8% 8.50% 7.5% 8.50% 8.50% 2 5% 7.50% 7% 8.50% 5.5% 8.50% 7.50% 3 4% 6.50% 6% 8% 3% 8.50% 6.50% 4 3% 5% 5% 7% 0% 8% 5% 5 2% 4% 4% 6% 0% 7% 4% 6 0% 3% 3% 5% 0% 6% 3% 7 0% 0% 0% 4% 0% 5% 0% 8 0% 0% 0% 3% 0% 4% 0% 9 0% 0% 0% 0% 0% 3% 0% 10 + 0% 0% 0% 0% 0% 0% 0%
(1)This is the withdrawal charge for the Current Contract and the May 2003 Contract. The withdrawal charge for the Original Contract is six years, and the charge is 7%, 6%, 5%, 4%, 3%, and 0%. (2)This is the withdrawal charge for the Base Contract. The withdrawal charge for the a Contract with the Short Withdrawal Charge Option is 8.5%, 7.5%, 5.5%, 3%, and 0%. There is no withdrawal charge for a Contract with the No Withdrawal Charge Option. (3)This is the withdrawal charge for the Current Contract. The withdrawal charge for the Original Contract and the May 2005 Contract is ten years and the charge is 8.5%, 8.5%, 8.5%, 8.5%, 8%, 7%, 6%, 5%, 4%, 3%, and 0%. (4)This is the withdrawal charge for the May 2007 Contract. The withdrawal charge for the Original Contract is three years, and the charge is 8%, 7%, 5%, and 0%. (5)This is the withdrawal charge for the Base Contract. The withdrawal charge for the a Contract with the Bonus Option is 8.5%, 8.5%, 8.5%, 8%, 7%, 6%, 5%, 4%, 3%, and 0%. The withdrawal charge for the a Contract with the Short Withdrawal Charge Option is 8.5%, 7.5%, 5.5%, 3%, and 0%. There is no withdrawal charge for a Contract with the No Withdrawal Charge Option.
Complete Years Since Allianz Allianz Allianz Allianz Allianz Allianz Allianz Custom Payment Valuemark II Valuemark III Valuemark IV Elite[(6][)] Charter II Dimensions Income ------------------------------------------------------------------------------------------------------------------------------- 0 5% 6% 6% 8.5% 8% 8% 8% 1 5% 5% 6% 8.5% 7% 7% 8% 2 4% 4% 6% 7.5% 0% 7% 7% 3 3% 3% 5% 6.5% 0% 6% 6% 4 1.50% 1.50% 4% 5% 0% 5% 5% 5 0% 0% 3% 4% 0% 4% 4% 6 0% 0% 2% 3% 0% 3% 3% 7 0% 0% 0% 0% 0% 0% 0% 8 0% 0% 0% 0% 0% 0% 0% 9 0% 0% 0% 0% 0% 0% 0% 10 + 0% 0% 0% 0% 0% 0% 0%
(6)This is the withdrawal charge for the Base Contract. The withdrawal charge for the a Contract with the Short Withdrawal Charge Option is 8.5%, 7.5%, 5.5%, 3%, and 0%. Total withdrawal charges paid by owners during the years ended December 31, 2008 and 2007 were $48,313,008 and $34,201,903, respectively. 89 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Allianz Dimensions, Allianz Valuemark IV, Allianz Elite, Allianz Alterity, Allianz High Five, Allianz Vision, and Allianz Connections all include a waiver of withdrawal charge benefit for nursing home confinement and/or diagnosis of a terminal illness. A free withdrawal privilege (or partial withdrawal privilege) is available that allows owners to withdraw a portion of their total purchase payments each year during the Accumulation Phase without incurring a withdrawal charge under the Allianz Valuemark II, Allianz Valuemark III, Allianz Valuemark IV, Allianz Alterity, Allianz Rewards, Allianz High Five Bonus, Allianz High Five, Allianz High Five L, Allianz Dimensions, Allianz Elite, Allianz Vision, Allianz Connections, and Allianz Custom Income contracts that do not include the TIP. The amount that can be withdrawn differs between the contracts. For Allianz Valuemark II, Allianz Valuemark III each year the owner can withdraw 15% of total purchase payments, less any previous withdrawals taken during the year that were not subject to a withdrawal charge. For Allianz Valuemark IV, each year the owner can withdraw 15% of the previous contract anniversaries contract value, less any previous withdrawals taken during the current year that were not subject to a withdrawal charge. For Allianz Dimensions, each year during the first five contract years the owner can withdraw up to 10% of total purchase payments, and the owner can withdraw up to 20% of total purchase payments each year after that. For Allianz Alterity, each year the owner can withdraw 12% of total purchase payments, less any previous withdrawals taken during the year that were not subject to a withdrawal charge. For Allianz Rewards and Allianz High Five Bonus, each year the owner can withdraw 10% of total purchase payments, not including any bonus, less any previous withdrawals taken during the year that were not subject to a withdrawal charge. For Allianz High Five and Allianz Vision, each year the owner can withdraw 12% of total purchase payments, less any amount previously withdrawn under the partial withdrawal privilege in the same year. For Allianz Elite, Allianz Custom Income, Allianz High Five L and Allianz Connections each year the owner can withdraw 10% of total purchase payments, less any amount previously withdrawn under the partial withdrawal privilege in the same year. On Allianz Alterity and Allianz Rewards, under annuity options 2 or 4, partial liquidations of up to 75% of the total liquidation value (less any previously liquidated amounts) are available during the lifetime of the annuitant(s) while the number of variable traditional annuity payments made is less than the guaranteed number of payments selected. On Allianz High Five Original Contracts, Allianz Charter II and Allianz Dimensions, under annuity options 2 or 4, partial liquidations of up to 75% of the total liquidation value (less any previously liquidated amounts) are available once each year beginning five years after the income date during the lifetime of the annuitant(s) while the number of variable traditional annuity payments made is less than the guaranteed number of payments selected. On Allianz Valuemark Income Plus, under annuity options 2 or 4, partial liquidations of up to 75% of the total withdrawal value (less any previously liquidated amounts) are available once each year after the first contract year during the lifetime of the annuitant(s) while the number of variable traditional annuity payments made is less than the guaranteed number of payments selected. On Allianz Valuemark Income Plus under annuity option 6 owners may also take a liquidation once each year after the fist contract year of up to 100% of the total withdrawal value (less any previously liquidated amounts). The total liquidation value (or total withdrawal value) is equal to the present value of the remaining guaranteed variable traditional annuity payments, to the end of the guaranteed period, using the selected assumed investment rate as the interest rate for the present value calculation, less a commutation fee. Commutation fee during the Annuity Phase under annuity option 2, 4 or 6
Complete Years Since Allianz Allianz Allianz High Five Original Allianz Allianz Allianz Valuemark Income Date Alterity Rewards Contracts Charter II Dimensions Income Plus ----------------------------------------------------------------------------------------------------------------------------- 0 5% 7% - - - 5% 1 4% 6% - - - 5% 2 3% 5% - - - 4% 3 2% 4% - - - 3% 4 1% 3% - - - 2% 5 1% 2% 4% 4% 7% 1% 6 1% 1% 3% 3% 6% 1% 7 1% 1% 2% 2% 5% 1% 8 1% 1% 1% 1% 4% 1% 9 1% 1% 1% 1% 3% 1% 10 1% 1% 1% 1% 2% 1% 11+ 1% 1% 1% 1% 1% 1%
On Allianz Alterity and Allianz High Five Original Contracts a withdrawal charge is deducted for liquidations taken during the Annuity Phase under annuity option 6. 100% of the total liquidation value is available annually on Allianz Alterity and Allianz High Five Original Contracts and the withdrawal charge is based on the number of contract years since the payment was received. On Allianz Dimensions a withdrawal charge is deducted for liquidations taken during the Annuity Phase under annuity option 6. 100% of the total liquidation value is available annually beginning on the fifth Contract Anniversary on Allianz Dimensions. 90 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Withdrawal charge during the Annuity Phase under annuity option 6
Complete Years Since Payment/ Allianz Alterity Allianz High Five Allianz Dimensions Issue Date Original Contracts ----------------------------------------------------------------------------------------------------- 0 7% 8% - 1 6% 8% - 2 5% 7% - 3 4% 6% - 4 3% 5% - 5 2% 4% 4% 6 0% 3% 3% 7+ 0% 0% 0%
Currently, twelve free transfers are permitted each contract year. Thereafter, the fee is $25 per transfer for all products (or 2% of the amount transferred, if less, for Allianz Valuemark II, Allianz Valuemark III, Allianz Valuemark IV, and Allianz Charter). If the transfer is made under the dollar cost averaging program, flexible rebalancing program, GAV or GPV Transfers under the Living Guarantees for any of the High Five products, or the allocation and transfer restrictions for the Target Date Retirement Benefit of one of the Lifetime Benefits for the Vision or Connections products, there is no fee for the transfer, and we currently do not count these transfers against any free transfers. Total transfer fees paid by the contract owners during the years ended December 31, 2008 and 2007 were $15,578 and $7,035, respectively. Net transfers (to)/from the Fixed Accounts during the years ended December 31, 2008 and 2007 were $(3,731,722,000) and $(1,282,366,000), respectively. Allianz Dimensions has an optional Increased Annuity Payment Benefit that carries an additional charge per $100 of the basic annuity payment, depending on the annuitant's age and gender; the maximum charge ranges from $0.95 to $9.97. Allianz Dimensions also offers optional Guaranteed Value Protection Benefits (GVPs), which offers either the Guaranteed Principal Protector Benefit or the Guaranteed Performance Accumulator Benefit. During the Accumulation Phase, the GVPs carry an additional charge based on the contract anniversary value that is deducted on the last day of each contract year. If the Dimensional Asset Allocation Model requirements are met, the GVP charge will not be more than 2% for the first ten contract years; otherwise, the GVP charge will not be more than 3% for the first ten contract years. On and after the tenth contract anniversary, we can increase the GVP charge to 5%. Premium taxes or other taxes payable to a state or other governmental entity will be charged against the contract values. Allianz Life may, in its sole discretion, pay taxes when due and deduct that amount from the contract value at a later date. Payment at an earlier date does not waive any right Allianz Life may have to deduct such amounts at a later date. A rescission is defined as a contract that is returned to the Company by the contract owner and canceled within the free-look period, which is generally 10 days. CAPITALIZATION Allianz Life may provide seed capital for the establishment of new portfolios as investment options of the Variable Account. The capitalization transactions were as follows during the years ended December 31, 2007.
Portfolio Capitalization Amount Date of Capitalization -------------- ----------------------- ------------------------- AZL S&P 500 Index Fund $ 20,000,000 5/1/2007 AZL Small Cap Stock Index Fund 20,000,000 5/1/2007 AZL NACM International Fund 10,000,000 5/1/2007 AZL Schroder International Small Cap Fund 10,000,000 5/1/2007 AZL TargetPlus Balanced Fund 4,000,000 5/1/2007 AZL TargetPlus Moderate Fund 6,000,000 5/1/2007 AZL TargetPlus Growth Fund 10,000,000 5/1/2007
91 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXPENSES (CONTINUED) Allianz Life will generally begin to recapture seed capital after the investment option reaches $3,000,000 in market value, excluding seed money. A specific percentage of daily net premium that exceeds the $3,000,000 will be recaptured, so long as the trade activity for the day is in a buy position. The seed capital recapture activity was as follows during the two year period ended December 31, 2008.
Portfolio Seed Capital Recaptured Realized Gain\Loss on Remaining Seed Capital Recapture ------------------------------------------------------------------- AZL S&P 500 Index Fund $ 20,000,000 $ 154,680 $ - AZL Small Cap Stock Index Fund 20,000,000 (1,164,410) - AZL NACM International Fund 10,000,000 (1,097,471) - AZL Schroder International Small Cap Fund 10,000,000 (377,423) - AZL TargetPlus Balanced Fund 4,000,000 16,737 - AZL TargetPlus Moderate Fund 6,000,000 84,889 - AZL TargetPlus Growth Fund 10,000,000 255,346 - ------------------------------------------------------------------- Total $ 80,000,000 $ (2,127,652) $ - -------------------------------------------------------------------
3. FEDERAL INCOME TAXES Operations of the Separate Account form a part of the Company, which is taxed as a life insurance company under the Internal Revenue Code (the Code). Under current law, no federal income taxes are payable with respect to the Separate Account. Under the principles set forth in Internal Revenue Service Ruling 81- 225 and Section 817(h) of the Code and regulations thereunder, the Company understands that it will be treated as owner of the assets invested in the Separate Account for federal income tax purposes, with the result that earnings and gains, if any, derived from those assets will not be included in an annuitant's gross income until amounts are received pursuant to an annuity. 92 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 4. PURCHASES AND SALES OF INVESTMENTS (IN THOUSANDS) The cost of purchases and proceeds from sales of investments for the year ended December 31, 2008 were as follows: Cost of Proceeds from Purchases Sales ------------ -------------- AIM V.I. Capital Appreciation Fund 4 1,119 AIM V.I. Core Equity Fund 69 942 AIM V.I. International Growth Fund 32 356 Alger American Capital Appreciation Portfolio - 548 Alger American LargeCap Growth Portfolio 13 958 Alger American MidCap Growth Portfolio 2,029 1,400 Alger American SmallCap Growth Portfolio 920 1,044 AZL AIM International Equity Fund 104,776 136,042 AZL BlackRock Capital Appreciation Fund 44,400 37,967 AZL Columbia Mid Cap Value Fund 35,932 27,509 AZL Columbia Small Cap Value Fund 37,138 35,404 AZL Columbia Technology Fund 53,184 63,754 AZL Davis NY Venture Fund 232,835 161,067 AZL Dreyfus Founders Equity Growth Fund 54,666 101,179 AZL First Trust Target Double Play Fund 77,853 53,214 AZL Franklin Small Cap Value Fund 90,016 135,826 AZL Fusion Balanced Fund 277,453 222,383 AZL Fusion Growth Fund 381,377 395,786 AZL Fusion Moderate Fund 273,787 372,205 AZL Jennison 20/20 Focus Fund 226,764 138,429 AZL Legg Mason Growth Fund 155,633 110,952 AZL Legg Mason Value Fund 38,712 63,779 AZL LMP Large Cap Growth Fund 27,182 110,479 AZL Money Market Fund 1,150,336 757,622 AZL NACM International Fund 9,077 4,824 AZL OCC Opportunity Fund 47,759 62,119 AZL OCC Value Fund 75,419 261,529 AZL Oppenheimer Global Fund 48,956 78,988 AZL Oppenheimer International Growth Fund 82,202 113,203 AZL Oppenheimer Main Street Fund 38,337 54,039 AZL PIMCO Fundamental IndexPLUS Total Return Fund 14,534 7,750 AZL S&P 500 Index Fund 307,581 75,140 AZL Schroder Emerging Markets Equity Fund CL 1 28,085 944 AZL Schroder Emerging Markets Equity Fund CL 2 186,929 111,133 AZL Schroder International Small Cap Fund 32,978 22,858 AZL Small Cap Stock Index Fund 213,829 47,982 AZL TargetPLUS Balanced Fund 63,879 19,563 AZL TargetPLUS Equity Fund 63,343 44,040 AZL TargetPLUS Growth Fund 87,303 30,174 AZL TargetPLUS Moderate Fund 67,087 22,623 AZL Turner Quantitative Small Cap Growth Fund 22,055 17,797 AZL Van Kampen Comstock Fund 102,662 208,901 AZL Van Kampen Equity and Income Fund 74,589 121,457 AZL Van Kampen Global Franchise Fund 113,146 184,805 AZL Van Kampen Global Real Estate Fund 47,549 42,716 AZL Van Kampen Growth and Income Fund 68,586 123,822 AZL Van Kampen Mid Cap Growth Fund 159,812 199,286 BlackRock Global Allocations V.I. Fund 173,003 28,558 93 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 4. PURCHASES AND SALES OF INVESTMENTS (IN THOUSANDS) (CONTINUED) The cost of purchases and proceeds from sales of investments for the year ended December 31, 2008 were as follows: Cost of Proceeds from Purchases Sales ----------- --------------- Davis VA Financial Portfolio 40,955 44,049 Davis VA Real Estate Portfolio 41 291 Davis VA Value Portfolio 6,427 47,099 Dreyfus IP Small Cap Stock Index Portfolio 37,858 232,740 Dreyfus Stock Index Fund 19,725 306,188 Franklin Global Communications Securities Fund 47,469 107,049 Franklin Growth and Income Securities Fund 50,078 104,006 Franklin High Income Securities Fund 64,311 98,386 Franklin Income Securities Fund 291,097 497,415 Franklin Large Cap Growth Securities Fund 29,632 92,798 Franklin Money Market Fund 63 3,042 Franklin Real Estate Fund 77,366 102,266 Franklin Rising Dividends Securities Fund 28,191 176,280 Franklin Small Cap Value Securities Fund 19,497 55,094 Franklin Small-Mid Cap Growth Securities Fund 32,112 60,676 Franklin Templeton VIP Founding Funds Allocation Fund 170,670 50,600 Franklin U.S. Government Fund 196,414 198,925 Franklin Zero Coupon Fund 2010 80,063 57,441 J.P. Morgan International Opportunities Portfolio 70 142 J.P. Morgan U.S. Large Cap Core Equity Portfolio 6 91 Jennison 20/20 Focus Portfolio 40,519 134,616 Mutual Discovery Securities Fund 192,490 353,595 Mutual Shares Securities Fund 203,783 444,433 OpCap Mid Cap Portfolio 51,341 29,830 Oppenheimer Global Securities Fund/VA 17,578 60,052 Oppenheimer High Income Fund/VA 21,166 22,847 Oppenheimer Main Street Fund/VA 11,789 38,703 PIMCO VIT All Asset Portfolio 116,402 143,776 PIMCO VIT CommodityRealReturn Strategy Portfolio 238,559 171,379 PIMCO VIT Emerging Markets Bond Portfolio 35,484 35,076 PIMCO VIT Global Bond Portfolio 135,950 108,239 PIMCO VIT High Yield Portfolio 62,233 95,581 PIMCO VIT Real Return Portfolio 224,686 230,713 PIMCO VIT StocksPLUS Growth and Income Portfolio 1,584 4,864 PIMCO VIT Total Return Portfolio 263,474 267,510 Seligman Global Technology Portfolio - 271 Seligman Small-Cap Value Portfolio 31,672 33,899 SP Strategic Partners Focused Growth Portfolio 5,713 12,489 SP International Growth Portfolio 17,639 20,540 Templeton Asset Strategy Fund 2,963 2,007 Templeton Developing Markets Securities Fund 74,969 202,338 Templeton Foreign Securities Fund 52,450 108,826 Templeton Global Income Securities Fund 133,626 93,612 Templeton Growth Securities Fund 155,212 304,033 Van Kampen LIT Capital Growth Portfolio 13 998 Van Kampen LIT Enterprise Portfolio 43 24 Van Kampen LIT Growth and Income Portfolio 77 67 94 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AIM V.I. AIM V.I. Capital AIM V.I. Core International Growth Appreciation Fund Equity Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - - - - - - Transfers between funds (43) (147) (22) (19) (11) (22) Surrenders and terminations (107) (287) (65) (139) (23) (51) Rescissions - - - - - - Bonus - - - - - - Contract Maintenance Charges (1) (1) - - - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (151) (435) (87) (158) (34) (73) ----------- ---------- ----------- ---------- ----------- ---------- Alger American Alger American Alger American Capital Appreciation LargeCap Growth MidCap Growth Portfolio Portfolio Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - - - - - - Transfers between funds (11) (11) (31) (50) (41) (71) Surrenders and terminations (41) (51) (77) (158) (65) (123) Rescissions - - - - - - Bonus - - - - - - Contract Maintenance Charges - - - - - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (52) (62) (108) (208) (106) (194) ----------- ---------- ----------- ---------- ----------- ---------- Alger American AZL AIM SmallCap Growth AZL AIM Basic Value International Equity Portfolio Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - - - 594 2,701 2,846 Transfers between funds (7) (1) - (14,535) (5,054) 1,040 Surrenders and terminations (11) (10) - (843) (954) (1,006) Rescissions - - - (7) (124) (90) Bonus - - - 8 41 54 Contract Maintenance Charges - - - (2) (4) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (18) (11) - (14,785) (3,394) 2,842 ----------- ---------- ----------- ---------- ----------- ----------
95 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AZL BlackRock Capital Appreciation AZL Columbia Mid AZL Columbia Small Fund Cap Value Fund Cap Value Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 1,761 929 1,970 1,382 871 869 Transfers between funds (784) (81) (422) 856 (898) (1,124) Surrenders and terminations (280) (240) (177) (211) (293) (287) Rescissions (37) (14) (40) (31) (17) (31) Bonus 17 12 20 20 9 13 Contract Maintenance Charges (1) (1) (1) - (1) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 676 605 1,350 2,016 (329) (561) ----------- ---------- ----------- ---------- ----------- ---------- AZL Dreyfus AZL Columbia AZL Davis NY Founders Equity Technology Fund Venture Fund Growth Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 1,980 1,220 5,630 4,237 2,323 2,054 Transfers between funds (3,558) 3,862 9,710 (2,482) (6,789) 13,868 Surrenders and terminations (682) (575) (2,072) (1,866) (2,022) (1,409) Rescissions (57) (43) (203) (86) (67) (38) Bonus 35 27 50 50 21 30 Contract Maintenance Charges (3) (1) (9) (5) (7) (3) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (2,285) 4,490 13,106 (152) (6,541) 14,502 ----------- ---------- ----------- ---------- ----------- ---------- AZL First Trust Target Double Play AZL Franklin Small AZL Fusion Balanced Fund Cap Value Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 5,425 3,911 2,252 3,171 13,394 7,047 Transfers between funds (1,436) 4,523 (4,829) (3,489) (6,273) 1,008 Surrenders and terminations (557) (140) (999) (1,038) (2,907) (1,809) Rescissions (119) (103) (71) (67) (342) (131) Bonus 46 61 29 43 126 91 Contract Maintenance Charges (2) - (4) (3) (7) (4) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 3,357 8,252 (3,622) (1,383) 3,991 6,202 ----------- ---------- ----------- ---------- ----------- ----------
96 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AZL Fusion Growth AZL Fusion Moderate AZL Jennison 20/20 Fund Fund Focus Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 22,791 24,989 15,937 17,701 4,105 2,831 Transfers between funds (24,031) (5,546) (24,925) (2,080) 2,409 99 Surrenders and terminations (4,587) (4,264) (4,308) (3,439) (948) (662) Rescissions (641) (721) (498) (374) (134) (51) Bonus 315 416 153 179 38 27 Contract Maintenance Charges (26) (13) (17) (10) (4) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (6,179) 14,861 (13,658) 11,977 5,466 2,242 ----------- ---------- ----------- ---------- ----------- ---------- AZL Legg Mason AZL Legg Mason AZL LMP Large Cap Growth Fund Value Fund Growth Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 3,348 2,581 1,557 1,837 553 665 Transfers between funds 9,970 4,394 (4,327) (3,242) (12,586) (1,806) Surrenders and terminations (885) (695) (902) (1,079) (1,037) (1,034) Rescissions (139) (57) (56) (37) (12) (16) Bonus 46 40 17 27 7 10 Contract Maintenance Charges (5) (2) (5) (3) (3) (3) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 12,335 6,261 (3,716) (2,497) (13,078) (2,184) ----------- ---------- ----------- ---------- ----------- ---------- AZL Money Market AZL NACM AZL OCC Opportunity Fund International Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 42,828 31,970 694 300 1,091 1,043 Transfers between funds 11,198 1,287 (12) 391 (2,511) (305) Surrenders and terminations (15,426) (16,087) (55) (29) (661) (671) Rescissions (1,259) (987) (28) (2) (35) (27) Bonus 499 340 6 4 13 19 Contract Maintenance Charges (13) (9) - - (3) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 37,827 16,514 605 664 (2,106) 57 ----------- ---------- ----------- ---------- ----------- ----------
97 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AZL OCC Renaissance AZL Oppenheimer Fund AZL OCC Value Fund Global Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - 946 544 950 1,790 2,188 Transfers between funds - (22,730) (28,436) 15,550 (4,346) (2,021) Surrenders and terminations - (1,353) (2,398) (1,618) (711) (657) Rescissions - (30) (33) (22) (71) (76) Bonus - 9 5 12 22 31 Contract Maintenance Charges - (4) (8) (4) (4) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions - (23,162) (30,326) 14,868 (3,320) (537) ----------- ---------- ----------- ---------- ----------- ---------- AZL PIMCO AZL Oppenheimer Fundamental International Growth AZL Oppenheimer IndexPLUS Total Fund Main Street Fund Return Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 2,426 2,523 1,332 1,581 524 226 Transfers between funds (4,418) 1,538 (3,408) (366) 321 20 Surrenders and terminations (687) (667) (596) (522) (51) (37) Rescissions (83) (79) (40) (54) (18) (15) Bonus 42 43 21 28 6 5 Contract Maintenance Charges (3) (2) (3) (2) - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (2,723) 3,356 (2,694) 665 782 199 ----------- ---------- ----------- ---------- ----------- ---------- AZL Schroder AZL Schroder AZL S&P 500 Index Emerging Markets Emerging Markets Fund Equity Fund CL 1 Equity Fund CL 2 ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 4,988 1,323 6 6 3,489 3,181 Transfers between funds 23,517 1,483 4,928 11 8,092 5,561 Surrenders and terminations (756) (41) (17) (1) (720) (407) Rescissions (81) (8) - - (130) (109) Bonus 61 15 - - 48 53 Contract Maintenance Charges (4) - - - (4) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 27,725 2,772 4,917 16 10,775 8,278 ----------- ---------- ----------- ---------- ----------- ----------
98 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AZL Schroder International Small AZL Small Cap Stock AZL TargetPLUS Cap Fund Index Fund Balanced Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 1,437 701 1,907 773 5,514 671 Transfers between funds - 447 15,759 485 80 402 Surrenders and terminations (80) (9) (388) (9) (108) 1 Rescissions (39) (15) (53) (14) (198) (8) Bonus 18 12 19 11 61 5 Contract Maintenance Charges - - (3) - - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 1,336 1,136 17,241 1,246 5,349 1,071 ----------- ---------- ----------- ---------- ----------- ---------- AZL TargetPLUS AZL TargetPLUS AZL TargetPLUS Equity Fund Growth Fund Moderate Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 4,875 3,597 8,052 3,400 6,412 1,391 Transfers between funds (1,847) 4,688 (660) 486 (356) 917 Surrenders and terminations (427) (203) (215) (35) (303) (42) Rescissions (152) (74) (224) (96) (246) (57) Bonus 60 55 112 55 112 16 Contract Maintenance Charges (2) - (1) - (1) - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 2,507 8,063 7,064 3,810 5,618 2,225 ----------- ---------- ----------- ---------- ----------- ---------- AZL Turner AZL Van Kampen Quantitative Small Aggressive Growth AZL Van Kampen Cap Growth Fund Fund Comstock Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 656 540 - 832 2,254 3,557 Transfers between funds (588) (682) - (11,245) (13,732) 5,006 Surrenders and terminations (131) (138) - (563) (3,785) (3,594) Rescissions (15) (17) - (19) (72) (86) Bonus 7 7 - 15 20 42 Contract Maintenance Charges (1) - - (2) (14) (9) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (72) (290) - (10,982) (15,329) 4,916 ----------- ---------- ----------- ---------- ----------- ----------
99 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
AZL Van Kampen AZL Van Kampen AZL Van Kampen Equity and Income Global Franchise Global Real Estate Fund Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 3,617 4,285 2,768 4,065 2,214 3,551 Transfers between funds (7,195) (1,831) (7,468) (3,241) (1,705) (502) Surrenders and terminations (1,222) (1,088) (1,302) (1,255) (394) (362) Rescissions (119) (96) (91) (116) (90) (96) Bonus 31 48 26 42 26 50 Contract Maintenance Charges (4) (3) (5) (3) (2) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (4,892) 1,315 (6,072) (508) 49 2,640 ----------- ---------- ----------- ---------- ----------- ---------- AZL Van Kampen AZL Van Kampen Growth and Income AZL Van Kampen Mid Strategic Growth Fund Cap Growth Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 2,023 2,622 4,574 3,583 - 1,041 Transfers between funds (5,901) (3,640) (8,589) 9,235 - (20,111) Surrenders and terminations (2,061) (2,107) (1,965) (1,428) - (1,016) Rescissions (84) (64) (212) (91) - (22) Bonus 20 32 58 53 - 15 Contract Maintenance Charges (6) (5) (8) (4) - (3) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (6,009) (3,162) (6,142) 11,348 - (20,096) ----------- ---------- ----------- ---------- ----------- ---------- BlackRock Global Allocations V.I. Davis VA Financial Davis VA Real Fund Portfolio Estate Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 11,279 - 1,290 788 - - Transfers between funds 5,094 - (1,015) (1,634) (5) (3) Surrenders and terminations (236) - (534) (666) (5) (12) Rescissions (272) - (39) (15) - - Bonus 74 - 15 11 - - Contract Maintenance Charges (1) - (2) (2) - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 15,938 - (285) (1,518) (10) (15) ----------- ---------- ----------- ---------- ----------- ----------
100 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
Dreyfus IP Small Davis VA Value Cap Stock Index Dreyfus Stock Index Portfolio Portfolio Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 57 102 114 1,004 166 1,270 Transfers between funds (2,549) (1,211) (15,172) (3,592) (23,394) (5,009) Surrenders and terminations (1,205) (1,467) (828) (1,122) (1,654) (2,312) Rescissions (2) (2) (4) (40) (13) (35) Bonus 1 1 1 10 1 11 Contract Maintenance Charges (3) (3) (3) (3) (5) (6) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (3,701) (2,580) (15,892) (3,743) (24,899) (6,081) ----------- ---------- ----------- ---------- ----------- ---------- Franklin Global Franklin Growth and Franklin High Communications Income Securities Income Securities Securities Fund Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 724 853 89 423 819 1,195 Transfers between funds (2,442) 948 (1,777) (1,116) (2,048) (1,279) Surrenders and terminations (727) (950) (1,188) (1,700) (765) (944) Rescissions (25) (35) (9) (11) (32) (18) Bonus 13 20 1 6 11 16 Contract Maintenance Charges (4) (4) (5) (4) (2) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (2,461) 832 (2,889) (2,402) (2,017) (1,032) ----------- ---------- ----------- ---------- ----------- ---------- Franklin Large Cap Franklin Income Growth Securities Franklin Money Securities Fund Fund Market Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 3,796 5,854 175 537 - - Transfers between funds (7,889) (1,434) (3,499) (1,990) (26) (49) Surrenders and terminations (2,183) (2,258) (1,109) (1,571) (129) (279) Rescissions (135) (139) (19) (14) - - Bonus 29 52 1 6 - - Contract Maintenance Charges (8) (5) (5) (4) (1) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (6,390) 2,070 (4,456) (3,036) (156) (329) ----------- ---------- ----------- ---------- ----------- ----------
101 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
Franklin Rising Franklin Small Cap Franklin Real Dividends Securities Value Securities Estate Fund Fund Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 53 134 94 373 53 121 Transfers between funds (1,578) (1,732) (3,581) (2,570) (2,224) (1,621) Surrenders and terminations (515) (771) (1,448) (1,779) (752) (1,023) Rescissions (3) (4) (6) (8) (9) (4) Bonus 1 1 - 1 1 2 Contract Maintenance Charges (2) (2) (5) (4) (2) (2) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (2,044) (2,374) (4,946) (3,987) (2,933) (2,527) ----------- ---------- ----------- ---------- ----------- ---------- Franklin Small-Mid Franklin Templeton Cap Growth VIP Founding Funds Franklin U.S. Securities Fund Allocation Fund Government Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 73 130 17,286 1,970 1,843 1,040 Transfers between funds (1,565) (949) (1,115) 2,649 57 (802) Surrenders and terminations (903) (1,303) (458) (31) (2,040) (2,279) Rescissions (4) (4) (582) (61) (79) (12) Bonus 2 1 169 19 18 10 Contract Maintenance Charges (4) (3) (2) - (5) (5) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (2,401) (2,128) 15,298 4,546 (206) (2,048) ----------- ---------- ----------- ---------- ----------- ---------- J.P. Morgan International J.P. Morgan U.S. Franklin Zero Opportunities Large Cap Core Coupon Fund 2010 Portfolio Equity Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 387 147 - - - - Transfers between funds 562 7 (11) (2) - (4) Surrenders and terminations (315) (232) (4) (4) (11) (8) Rescissions (21) (5) - - - - Bonus 3 2 - - - - Contract Maintenance Charges (1) (1) - - - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 615 (82) (15) (6) (11) (12) ----------- ---------- ----------- ---------- ----------- ----------
102 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
Jennison 20/20 Mutual Discovery Mutual Shares Focus Portfolio Securities Fund Securities Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 41 101 3,730 4,359 5,542 10,659 Transfers between funds (6,298) (1,105) (9,111) (948) (16,040) (4,695) Surrenders and terminations (395) (524) (2,135) (2,335) (3,744) (4,174) Rescissions (2) (3) (176) (90) (264) (285) Bonus - 2 39 57 50 107 Contract Maintenance Charges (1) (1) (8) (6) (13) (9) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (6,655) (1,530) (7,661) 1,037 (14,469) 1,603 ----------- ---------- ----------- ---------- ----------- ---------- OpCap Mid Cap Oppenheimer Global Oppenheimer High Portfolio Securities Fund/VA Income Fund/VA ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 2,069 1,431 75 139 12 25 Transfers between funds 287 173 (3,073) (1,606) 1,578 (332) Surrenders and terminations (196) (80) (1,343) (1,609) (244) (300) Rescissions (77) (31) (5) (4) - - Bonus 24 21 1 2 - - Contract Maintenance Charges (1) - (4) (3) (1) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions 2,106 1,514 (4,349) (3,081) 1,345 (608) ----------- ---------- ----------- ---------- ----------- ---------- PIMCO VIT Oppenheimer Main PIMCO VIT All Asset CommodityRealReturn Street Fund/VA Portfolio Strategy Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 110 149 2,990 1,220 4,447 1,394 Transfers between funds (2,706) (1,231) (4,833) (2,944) (36) (142) Surrenders and terminations (1,312) (1,666) (1,001) (1,051) (895) (406) Rescissions (12) (3) (69) (43) (155) (35) Bonus 1 2 44 23 60 22 Contract Maintenance Charges (5) (4) (3) (2) (3) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (3,924) (2,753) (2,872) (2,797) 3,418 832 ----------- ---------- ----------- ---------- ----------- ----------
103 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
PIMCO VIT Emerging Markets Bond PIMCO VIT Global PIMCO VIT High Portfolio Bond Portfolio Yield Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 1,225 869 2,732 1,150 1,218 1,175 Transfers between funds (1,318) (90) 220 1,404 (3,281) (2,350) Surrenders and terminations (262) (173) (691) (224) (1,091) (1,161) Rescissions (30) (27) (115) (23) (45) (36) Bonus 16 15 27 21 13 18 Contract Maintenance Charges (1) - (2) - (3) (3) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (370) 594 2,171 2,328 (3,189) (2,357) ----------- ---------- ----------- ---------- ----------- ---------- PIMCO VIT PIMCO VIT Real StocksPLUS Growth PIMCO VIT Total Return Portfolio and Income Portfolio Return Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 4,365 1,634 12 17 5,955 3,769 Transfers between funds (3,787) (2,163) (194) (186) (3,342) (1,614) Surrenders and terminations (1,782) (1,555) (259) (212) (3,978) (3,546) Rescissions (167) (39) (3) - (191) (77) Bonus 60 18 - - 77 62 Contract Maintenance Charges (6) (4) (1) (1) (10) (8) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (1,317) (2,109) (445) (382) (1,489) (1,414) ----------- ---------- ----------- ---------- ----------- ---------- SP Strategic Seligman Global Seligman Small-Cap Partners Focused Technology Portfolio Value Portfolio Growth Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - - 30 42 39 52 Transfers between funds (12) (28) (888) (718) (1,008) (668) Surrenders and terminations (26) (97) (471) (669) (284) (385) Rescissions - - - (1) - - Bonus - - - 1 1 1 Contract Maintenance Charges - - (2) (1) (1) (1) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (38) (125) (1,331) (1,346) (1,253) (1,001) ----------- ---------- ----------- ---------- ----------- ----------
104 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows:
Templeton SP International Templeton Asset Developing Markets Growth Portfolio Strategy Fund Securities Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 27 29 - - 129 348 Transfers between funds (981) 571 (18) (21) (12,151) (2,727) Surrenders and terminations (214) (202) (30) (121) (817) (1,370) Rescissions (11) - - - (18) (5) Bonus - - - - 1 4 Contract Maintenance Charges (1) (1) - - (3) (3) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (1,180) 397 (48) (142) (12,859) (3,753) ----------- ---------- ----------- ---------- ----------- ---------- Templeton Global Templeton Foreign Income Securities Templeton Growth Securities Fund Fund Securities Fund ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments 108 637 1,509 542 3,480 6,667 Transfers between funds (2,359) (1,247) 196 1,373 (9,449) (3,187) Surrenders and terminations (1,315) (1,826) (325) (147) (2,161) (2,545) Rescissions (4) (24) (44) (11) (142) (154) Bonus 1 6 15 8 31 63 Contract Maintenance Charges (5) (4) (1) - (10) (6) ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (3,574) (2,458) 1,350 1,765 (8,251) 838 ----------- ---------- ----------- ---------- ----------- ---------- Van Kampen LIT Van Kampen LIT Capital Growth Van Kampen LIT Growth and Income Portfolio Enterprise Portfolio Portfolio ---------------------- ---------------------- ---------------------- 2008 2007 2008 2007 2008 2007 ----------- ---------- ----------- ---------- ----------- ---------- Contract Transactions Purchase payments - - - - - - Transfers between funds (48) (93) (2) (3) (1) (1) Surrenders and terminations (87) (130) (2) (4) (3) (4) Rescissions - - - - - - Bonus - - - - - - Contract Maintenance Charges - - - - - - ----------- ---------- ----------- ---------- ----------- ---------- Total Net Contract Transactions (135) (223) (4) (7) (4) (5) ----------- ---------- ----------- ---------- ----------- ----------
105 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 5. CONTRACT TRANSACTIONS - ALL PRODUCTS ACCUMULATION UNIT ACTIVITY (IN THOUSANDS) (CONTINUED) Transactions in units for each subaccount, excluding units for annuitized contracts, for the years ended December 31, 2008 and 2007 were as follows: Total All Funds ------------------------------------------ 2008 2007 --------------------- -------------------- Contract Transactions Purchase payments 270,756 212,059 Transfers between funds (244,097) (70,194) Surrenders and terminations (100,527) (102,581) Rescissions (8,714) (5,475) Bonus 3,065 2,747 Contract Maintenance Charges (334) (222) --------------------- -------------------- Total Net Contract Transactions (79,851) 36,334 --------------------- -------------------- 106 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** AIM V.I. Capital Appreciation Fund 2008 981 $4.31 to $4.89 4,594 0.00% 1.15% to 2.55% -43.94% to -43.15% 2007 1,132 $7.69 to $8.60 9,390 0.00% 1.15% to 2.55% 9.18% to 10.73% 2006 1,568 $7.05 to $7.77 11,798 0.05% 1.15% to 2.55% 3.63% to 5.09% 2005 762 $6.80 to $7.39 5,430 0.05% 1.15% to 2.55% 6.10% to 7.59% 2004 971 $6.41 to $6.87 6,470 0.00% 1.15% to 2.55% 3.93% to 5.40% AIM V.I. Core Equity Fund 2008 364 $7.74 to $8.04 2,884 2.01% 1.15% to 2.55% -31.90% to -30.94% 2007 451 $11.37 to $11.64 5,199 1.02% 1.15% to 2.55% 5.38% to 6.87% 2006 609 $10.85 to $10.95 6,644 1.59% 1.15% to 2.55% 9.03% to 9.56% 2005 1,110 $6.41 to $6.97 7,473 0.79% 1.15% to 2.55% 3.00% to 4.45% 2004 1,334 $6.23 to $6.67 8,648 0.44% 1.15% to 2.55% 3.10% to 4.56% AIM V.I. International Growth Fund 2008 168 $6.85 to $7.62 1,221 0.54% 1.15% to 2.55% -41.88% to -41.06% 2007 202 $11.76 to $12.93 2,493 0.37% 1.15% to 2.55% 11.82% to 13.40% 2006 275 $10.45 to $11.51 3,037 0.98% 1.15% to 2.55% 25.01% to 26.77% 2005 326 $8.28 to $8.99 2,826 0.65% 1.15% to 2.55% 14.97% to 16.58% 2004 365 $7.20 to $7.71 2,731 0.65% 1.15% to 2.55% 20.87% to 22.58% Alger American LargeCap Growth Portfolio 2008 536 $4.74 to $5.38 2,797 0.22% 1.15% to 2.55% -47.51% to -46.77% 2007 644 $9.02 to $10.11 6,352 0.35% 1.15% to 2.55% 16.91% to 18.57% 2006 852 $7.72 to $8.53 7,105 0.13% 1.15% to 2.55% 2.51% to 3.95% 2005 1,088 $7.53 to $8.20 8,756 0.24% 1.15% to 2.35% 9.44% to 10.76% 2004 1,394 $6.96 to $7.41 10,168 0.00% 1.15% to 2.35% 3.04% to 4.29% Alger American Capital Appreciation Portfolio 2008 266 $6.23 to $6.56 1,750 0.00% 1.15% to 2.55% -46.52% to -45.76% 2007 318 $11.58 to $12.11 3,881 0.00% 1.15% to 2.55% 30.15% to 32.00% 2006 380 $8.44 to $9.33 3,523 0.00% 1.15% to 2.55% 16.27% to 17.90% 2005 461 $7.55 to $7.81 3,627 0.00% 1.35% to 1.90% 12.30% to 12.92% 2004 642 $6.51 to $6.92 4,466 0.00% 1.35% to 2.55% 5.46% to 6.73% Alger American MidCap Growth Portfolio 2008 431 $6.34 to $7.18 2,941 0.17% 1.15% to 2.55% -59.41% to -58.83% 2007 537 $15.62 to $17.45 8,955 0.00% 1.15% to 2.55% 28.23% to 30.05% 2006 732 $12.18 to $13.42 9,429 0.00% 1.15% to 2.55% 7.38% to 8.88% 2005 944 $11.34 to $12.32 11,240 0.00% 1.15% to 2.55% 7.07% to 8.57% 2004 1,135 $10.59 to $11.35 12,515 0.00% 1.15% to 2.55% 10.19% to 11.75%
107 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** Alger American SmallCap Growth Portfolio 2008 99 $4.47 to $4.98 479 0.00% 1.15% to 2.55% -47.95% to -47.21% 2007 117 $8.59 to $9.60 1,076 0.00% 1.15% to 2.55% 14.27% to 15.89% 2006 128 $7.52 to $8.28 1,018 0.00% 1.15% to 2.55% 17.00% to 18.65% 2005 164 $6.42 to $6.98 1,108 0.00% 1.15% to 2.55% 13.95% to 15.55% 2004 188 $5.64 to $6.04 1,103 0.00% 1.15% to 2.55% 13.63% to 15.23% AZL AIM International Equity Fund 2008 12,283 $10.31 to $11.63 133,883 0.47% 1.00% to 3.00% -43.24% to -42.09% 2007 15,677 $18.42 to $20.11 300,838 0.53% 1.00% to 2.95% 11.27% to 13.48% 2006 12,836 $16.51 to $17.88 219,438 0.22% 1.00% to 2.70% 13.31% to 23.67% 2005 8,473 $13.35 to $14.13 116,487 0.25% 1.15% to 2.70% 13.27% to 15.04% 2004 4,677 $11.79 to $12.29 56,469 0.00% 1.15% to 2.70% 18.86% to 20.73% AZL BlackRock Capital Appreciation Fund 2008 5,342 $7.76 to $8.30 42,814 0.00% 1.00% to 3.00% -38.26% to -37.01% 2007 4,666 $12.70 to $13.16 60,239 0.00% 1.00% to 2.95% 7.68% to 9.81% 2006 4,061 $11.75 to $12.07 48,235 0.00% 1.00% to 2.60% -1.03% to 9.57% 2005(2) 3,038 $11.87 to $11.97 36,245 0.00% 1.40% to 2.60% 18.74% to 19.68% AZL Columbia Mid Cap Value Fund 2008 5,241 $4.66 to $4.90 25,031 0.56% 1.00% to 3.00% -53.57% to -52.63% 2007 3,891 $10.11 to $10.36 39,787 0.01% 1.00% to 2.95% 0.82% to 2.82% 2006 1,876 $10.00 to $10.10 18,837 0.61% 1.00% to 2.60% 10.18% to 10.79% AZL Columbia Small Cap Value Fund 2008 4,359 $5.77 to $8.43 34,886 0.60% 1.00% to 3.00% -34.10% to -32.77% 2007 4,688 $11.86 to $12.55 57,106 0.25% 1.00% to 2.95% -10.92% to -9.16% 2006 5,250 $13.28 to $13.90 71,186 0.07% 1.00% to 2.70% 10.39% to 12.01% 2005 4,551 $12.03 to $12.29 55,521 0.00% 1.40% to 2.70% 0.64% to 1.96% 2004 2,551 $11.95 to $12.06 30,731 0.20% 1.40% to 2.70% 18.84% to 19.87% AZL Columbia Technology Fund 2008 8,281 $4.35 to $4.96 38,287 0.00% 1.00% to 3.00% -52.10% to -51.13% 2007 10,566 $9.24 to $10.17 101,713 0.00% 1.00% to 2.95% 19.16% to 21.52% 2006 6,075 $7.74 to $8.45 48,532 0.00% 1.00% to 2.70% -0.17% to 11.26% 2005 5,916 $7.77 to $8.27 47,113 0.00% 1.15% to 2.65% -1.92% to -0.45% 2004 5,891 $7.91 to $8.30 47,555 0.00% 1.15% to 2.70% -6.88% to -5.42% AZL Davis NY Venture Fund 2008 43,169 $7.12 to $8.10 326,971 0.94% 1.00% to 3.00% -42.26% to -41.10% 2007 30,063 $12.51 to $13.77 395,443 0.44% 1.00% to 2.95% 1.11% to 3.11% 2006 30,217 $12.34 to $13.47 389,221 0.29% 1.00% to 2.70% 9.24% to 10.88% 2005 23,999 $11.13 to $11.87 276,557 0.13% 1.15% to 2.70% 6.77% to 8.43% 2004 13,974 $10.43 to $10.95 149,818 0.23% 1.15% to 2.70% 7.60% to 9.29%
108 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 --------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** AZL Dreyfus Founders Equity Growth Fund 2008 19,264 $5.92 to $6.75 121,848 0.29% 1.00% to 3.00% -43.36% to -42.21% 2007 25,805 $10.64 to $11.71 287,472 0.06% 1.00% to 2.95% 5.57% to 7.67% 2006 11,304 $10.05 to $10.97 118,436 0.00% 1.00% to 2.70% 9.93% to 10.63% 2005 9,188 $9.14 to $9.75 86,799 0.28% 1.15% to 2.70% 1.78% to 3.37% 2004 8,196 $8.98 to $9.43 75,508 0.00% 1.15% to 2.70% 4.84% to 6.48% AZL First Trust Target Double Play Fund 2008 11,609 $4.70 to $4.87 55,560 0.77% 1.00% to 3.00% -55.03% to -54.12% 2007(4) 8,252 $10.48 to $10.62 87,109 0.00% 1.00% to 2.95% 3.84% to 5.75% AZL Franklin Small Cap Value Fund 2008 12,991 $10.43 to $11.59 142,496 1.14% 1.00% to 3.00% -35.69% to -34.39% 2007 16,613 $16.45 to $17.69 282,993 0.50% 1.00% to 2.95% -7.17% to -5.33% 2006 17,997 $17.68 to $18.82 327,285 0.28% 1.00% to 2.70% 10.54% to 12.35% 2005 14,272 $15.74 to $16.29 229,386 0.54% 1.40% to 2.70% 4.19% to 5.55% 2004 8,311 $15.10 to $15.44 127,319 0.00% 1.40% to 2.70% 19.81% to 21.38% AZL Fusion Balanced Fund 2008 33,864 $8.18 to $8.75 286,477 2.37% 1.00% to 3.00% -29.59% to -28.17% 2007 29,873 $11.74 to $12.20 357,955 1.37% 1.00% to 2.95% 3.98% to 6.04% 2006 23,672 $11.25 to $11.55 269,515 0.33% 1.00% to 2.60% 6.68% to 6.82% 2005(2) 10,884 $10.54 to $10.63 115,359 0.00% 1.40% to 2.60% 5.47% to 6.31% AZL Fusion Growth Fund 2008 81,307 $7.27 to $7.79 610,094 1.49% 1.00% to 3.00% -40.75% to -39.55% 2007 87,486 $12.41 to $12.90 1,103,016 0.48% 1.00% to 2.95% 2.66% to 4.70% 2006 72,625 $12.04 to $12.37 883,579 0.07% 1.00% to 2.60% 9.33% to 10.05% 2005(2) 30,467 $11.02 to $11.11 337,345 0.00% 1.40% to 2.60% 10.18% to 11.06% AZL Fusion Moderate Fund 2008 52,489 $7.75 to $8.30 419,531 2.29% 1.00% to 3.00% -34.92% to -33.60% 2007 66,147 $12.00 to $12.48 809,286 0.95% 1.00% to 2.95% 3.43% to 5.48% 2006 54,177 $11.57 to $11.88 633,894 0.22% 1.00% to 2.60% 7.88% to 8.25% 2005(2) 27,565 $10.72 to $10.81 296,907 0.00% 1.40% to 2.60% 7.24% to 8.09% AZL Jennison 20/20 Focus Fund 2008 18,959 $8.28 to $8.86 162,427 0.12% 1.00% to 3.00% -41.88% to -40.71% 2007 13,493 $14.36 to $14.97 198,067 0.19% 1.00% to 2.95% 7.50% to 9.63% 2006 11,386 $13.35 to $13.71 153,824 0.00% 1.00% to 2.60% 9.90% to 10.78% 2005(2) 6,387 $12.15 to $12.25 77,994 0.24% 1.40% to 2.60% 21.50% to 22.47%
109 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** AZL Legg Mason Growth Fund 2008 26,857 $4.67 to $5.26 132,498 0.00% 1.00% to 3.00% -61.87% to -61.09% 2007 14,522 $12.44 to $13.54 188,913 0.00% 1.00% to 2.95% 11.66% to 13.87% 2006 8,260 $11.08 to $12.00 94,574 0.00% 1.00% to 2.70% -1.98% to 13.92% 2005 6,801 $11.30 to $11.97 78,816 0.00% 1.15% to 2.70% 8.11% to 9.79% 2004 4,610 $10.46 to $10.90 49,005 0.00% 1.15% to 2.70% 5.19% to 6.84% AZL Legg Mason Value Fund 2008 11,652 $4.64 to $5.28 57,418 0.00% 1.00% to 3.00% -56.23% to -55.34% 2007 15,368 $10.76 to $11.84 173,309 0.00% 1.00% to 2.95% -8.93% to -7.13% 2006 17,865 $11.79 to $12.87 220,530 0.00% 1.00% to 2.70% 3.87% to 14.97% 2005 17,146 $11.35 to $12.11 202,687 0.00% 1.15% to 2.70% 3.44% to 5.05% 2004 6,954 $10.97 to $11.52 78,239 0.40% 1.15% to 2.70% 12.08% to 13.83% AZL Money Market Fund 2008 91,349 $9.74 to $11.49 968,860 2.35% 1.00% to 3.00% -0.59% to 1.42% 2007 53,522 $10.04 to $11.35 576,147 4.71% 1.00% to 2.95% 1.74% to 3.75% 2006 37,014 $9.84 to $11.07 387,308 4.42% 1.00% to 2.70% 1.30% to 1.67% 2005 30,862 $9.68 to $10.61 314,957 2.56% 1.15% to 2.70% -0.15% to 1.40% 2004 22,705 $9.69 to $10.46 229,969 0.70% 1.15% to 2.70% -2.01% to -0.48% AZL NACM International Fund 2008 1,270 $5.02 to $5.17 6,463 2.45% 1.00% to 3.00% -46.54% to -45.46% 2007(4) 665 $9.40 to $9.48 6,280 0.41% 1.00% to 2.95% -6.26% to -5.03% AZL OCC Opportunity Fund 2008 8,082 $7.83 to $8.83 66,668 0.00% 1.00% to 3.00% -48.72% to -47.68% 2007 10,188 $15.49 to $16.91 163,914 0.00% 1.00% to 2.95% 5.70% to 7.80% 2006 10,132 $14.61 to $15.82 152,821 0.00% 1.00% to 2.70% 8.71% to 15.05% 2005 9,449 $13.44 to $14.23 130,378 0.00% 1.15% to 2.70% 2.29% to 3.88% 2004 9,047 $13.14 to $13.70 121,339 0.00% 1.15% to 2.70% 4.89% to 6.53% AZL Oppenheimer Global Fund 2008 10,884 $8.22 to $8.96 93,043 0.78% 1.00% to 3.00% -42.80% to -41.64% 2007 14,204 $14.53 to $15.32 211,936 0.50% 1.00% to 2.95% 2.67% to 4.70% 2006 14,742 $14.11 to $14.77 212,236 0.06% 1.00% to 2.70% 12.10% to 13.20% 2005 11,685 $12.47 to $12.74 147,589 0.00% 1.40% to 2.70% 9.63% to 11.06% 2004(1) 6,766 $11.37 to $11.47 77,384 0.00% 1.40% to 2.70% 13.75% to 14.73% AZL Oppenheimer International Growth Fund 2008 9,416 $10.07 to $11.50 100,915 1.05% 1.00% to 3.00% -45.80% to -44.70% 2007 12,139 $18.92 to $20.82 240,548 0.59% 1.00% to 2.95% 9.01% to 11.17% 2006 8,782 $17.32 to $18.90 158,081 0.00% 1.00% to 2.70% 16.85% to 25.56% 2005 4,896 $13.79 to $14.71 69,842 0.00% 1.15% to 2.70% 11.14% to 12.88% 2004 2,956 $12.41 to $13.03 37,771 0.34% 1.15% to 2.70% 11.43% to 13.17%
110 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** AZL Oppenheimer Main Street Fund 2008 7,955 $7.28 to $7.92 60,030 1.00% 1.00% to 3.00% -40.50% to -39.29% 2007 10,649 $12.34 to $13.06 134,696 0.53% 1.00% to 2.95% 0.76% to 2.76% 2006 9,984 $12.21 to $12.78 124,274 0.54% 1.00% to 2.70% 8.92% to 11.55% 2005 8,614 $10.95 to $11.19 95,465 0.00% 1.40% to 2.70% 2.65% to 3.99% 2004(1) 5,977 $10.67 to $10.76 64,069 1.08% 1.40% to 2.70% 6.68% to 7.60% AZL PIMCO Fundamental IndexPLUS Total Return Fund 2008 1,395 $6.52 to $6.82 9,303 0.00% 1.00% to 3.00% -42.61% to -41.45% 2007 613 $11.42 to $11.68 7,075 9.28% 1.00% to 2.95% 3.55% to 5.60% 2006(3) 415 $10.99 to $11.11 4,587 5.34% 1.00% to 2.60% 9.76% to 10.37% AZL S&P 500 Index Fund 2008 30,497 $4.97 to $6.10 183,421 0.00% 1.00% to 3.00% -39.47% to -38.24% 2007(4) 2,772 $8.16 to $9.90 27,330 2.43% 1.00% to 2.95% -2.20% to -0.91% AZL Schroder Emerging Markets Equity Fund CL 1 2008 4,941 $6.40 to $6.49 32,104 0.03% 1.40% to 2.20% -52.87% to -52.49% 2007(4) 24 $13.59 to $13.65 335 0.00% 1.40% to 2.20% 20.41% to 21.05% AZL Schroder Emerging Markets Equity Fund CL 2 2008 23,473 $5.62 to $6.43 146,807 0.16% 1.00% to 3.00% -53.31% to -52.37% 2007 12,698 $12.00 to $13.51 169,313 0.01% 1.00% to 2.95% 15.62% to 29.01% 2006(3) 4,421 $10.39 to $10.50 46,128 0.19% 1.00% to 2.60% 17.97% to 18.63% AZL Schroder International Small Cap Fund 2008 2,472 $4.83 to $4.98 12,122 1.92% 1.00% to 3.00% -47.19% to -46.12% 2007(4) 1,136 $9.17 to $9.26 10,474 0.00% 1.00% to 2.95% -8.52% to -7.32% AZL Small Cap Stock Index Fund 2008 18,486 $6.18 to $6.38 116,150 1.30% 1.00% to 3.00% -32.99% to -31.63% 2007(4) 1,245 $9.25 to $9.34 11,585 1.09% 1.00% to 2.95% -7.67% to -6.45% AZL TargetPLUS Balanced Fund 2008 6,419 $7.34 to $7.57 47,834 0.00% 1.00% to 3.00% -26.64% to -25.16% 2007(4) 1,070 $10.04 to $10.13 10,810 3.32% 1.00% to 2.95% 0.23% to 1.54% AZL TargetPLUS Equity Fund 2008 10,569 $5.18 to $5.37 55,753 0.02% 1.00% to 3.00% -50.05% to -49.04% 2007(4) 8,062 $10.40 to $10.55 84,465 1.03% 1.00% to 2.95% 3.11% to 5.01% AZL TargetPLUS Growth Fund 2008 10,875 $5.78 to $5.97 63,851 0.00% 1.00% to 3.00% -41.17% to -39.98% 2007(4) 3,811 $9.86 to $9.96 37,794 2.12% 1.00% to 2.95% -1.63% to -0.34% AZL TargetPLUS Moderate Fund 2008 7,844 $6.54 to $6.75 52,043 0.00% 1.00% to 3.00% -34.37% to -33.05% 2007(4) 2,226 $10.00 to $10.10 22,400 2.93% 1.00% to 2.95% -0.24% to 1.07%
111 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** AZL Turner Quantitative Small Cap Growth Fund 2008 2,581 $6.74 to $7.20 17,898 0.00% 1.00% to 3.00% -45.03% to -43.91% 2007 2,653 $12.37 to $12.86 33,333 0.00% 1.00% to 2.95% 2.97% to 5.01% 2006 2,943 $11.97 to $12.29 35,591 0.00% 1.00% to 2.60% 8.46% to 13.97% 2005(2) 1,890 $11.04 to $11.12 20,959 0.00% 1.40% to 2.60% 10.38% to 11.26% AZL Van Kampen Comstock Fund 2008 31,962 $6.92 to $7.94 236,303 2.04% 1.00% to 3.00% -38.08% to -36.82% 2007 47,291 $11.36 to $12.59 564,367 1.45% 1.00% to 2.95% -5.08% to -3.20% 2006 42,375 $11.93 to $13.14 528,044 1.04% 1.00% to 2.70% 9.38% to 12.69% 2005 43,085 $10.59 to $11.39 473,191 0.41% 1.15% to 2.70% 1.16% to 2.74% 2004 34,900 $10.47 to $11.08 378,088 0.42% 1.15% to 2.70% 13.99% to 15.77% AZL Van Kampen Equity and Income Fund 2008 14,294 $8.95 to $9.74 133,400 2.66% 1.00% to 3.00% -26.17% to -24.68% 2007 19,186 $12.23 to $12.95 242,363 1.55% 1.00% to 2.95% 0.05% to 2.03% 2006 17,873 $12.20 to $12.76 223,287 1.02% 1.00% to 2.70% 7.23% to 9.53% 2005 14,278 $11.14 to $11.38 161,504 0.00% 1.40% to 2.70% 3.91% to 5.27% 2004(1) 7,557 $10.72 to $10.81 81,460 0.94% 1.40% to 2.70% 7.18% to 8.11% AZL Van Kampen Global Franchise Fund 2008 15,447 $12.45 to $13.83 202,363 2.02% 1.00% to 3.00% -30.68% to -29.28% 2007 21,519 $18.22 to $19.59 406,292 0.00% 1.00% to 2.95% 6.61% to 8.72% 2006 22,029 $17.05 to $18.14 386,210 1.55% 1.00% to 2.70% 7.55% to 18.03% 2005 17,131 $14.44 to $14.95 252,646 0.00% 1.40% to 2.70% 8.68% to 10.10% 2004 9,069 $13.29 to $13.58 122,121 0.00% 1.40% to 2.70% 9.21% to 10.64% AZL Van Kampen Global Real Estate Fund 2008 7,936 $5.55 to $5.84 45,174 1.84% 1.00% to 3.00% -47.44% to -46.37% 2007 7,887 $10.64 to $10.90 84,856 0.49% 1.00% to 2.95% -11.35% to -9.59% 2006(3) 5,248 $11.96 to $12.08 63,019 1.20% 1.00% to 2.60% 18.32% to 18.98% AZL Van Kampen Growth and Income Fund 2008 17,428 $8.37 to $9.65 156,857 2.14% 1.00% to 3.00% -34.85% to -33.53% 2007 23,437 $13.10 to $14.53 323,375 1.23% 1.00% to 2.95% -0.36% to 1.62% 2006 26,601 $13.12 to $14.44 364,766 0.82% 1.00% to 2.70% 9.56% to 12.82% 2005 25,803 $11.63 to $12.50 311,483 0.35% 1.15% to 2.70% 6.33% to 7.99% 2004 20,145 $10.93 to $11.58 227,029 0.35% 1.15% to 2.70% 10.78% to 12.51% AZL Van Kampen Mid Cap Growth Fund 2008 23,754 $7.27 to $8.38 184,718 0.30% 1.00% to 3.00% -50.04% to -49.03% 2007 29,896 $14.85 to $16.47 464,770 0.03% 1.00% to 2.95% 18.62% to 20.97% 2006 18,548 $12.49 to $13.75 241,109 0.00% 1.00% to 2.70% 6.31% to 13.18% 2005 16,140 $11.74 to $12.63 196,210 0.00% 1.15% to 2.70% 14.42% to 16.20% 2004 8,449 $10.26 to $10.87 89,260 0.00% 1.15% to 2.70% 18.00% to 19.84%
112 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** BlackRock Global Allocations V.I. Fund 2008(5) 15,938 $7.83 to $13.67 129,553 5.77% 1.15% to 3.00% -21.81% to -20.83% Davis VA Financial Portfolio 2008 6,185 $7.29 to $8.56 48,716 0.00% 1.00% to 3.00% -47.95% to -46.90% 2007 6,470 $14.28 to $16.15 97,925 0.97% 1.00% to 2.95% -8.79% to -6.99% 2006 7,986 $15.62 to $17.57 131,469 0.66% 1.00% to 2.70% 13.42% to 15.36% 2005 7,369 $13.54 to $14.84 104,401 0.52% 1.15% to 2.70% 5.50% to 7.15% 2004 6,719 $12.83 to $13.85 89,662 0.42% 1.15% to 2.70% 7.37% to 9.05% Davis VA Real Estate Portfolio 2008 45 $14.05 to $15.57 684 1.66% 1.15% to 2.55% -48.25% to -47.52% 2007 55 $27.16 to $29.75 1,605 3.41% 1.15% to 2.55% -17.62% to -16.45% 2006 71 $32.97 to $36.32 2,483 2.95% 1.15% to 2.55% 31.00% to 32.84% 2005 97 $25.17 to $26.94 2,565 3.15% 1.40% to 2.55% 10.29% to 11.56% 2004 120 $22.82 to $24.45 2,851 3.14% 1.15% to 2.55% 29.96% to 31.80% Davis VA Value Portfolio 2008 8,426 $7.47 to $8.58 67,417 0.84% 1.15% to 2.70% -41.92% to -41.01% 2007 12,127 $12.86 to $14.54 166,627 1.04% 1.15% to 2.70% 1.84% to 3.43% 2006 14,707 $12.63 to $14.06 196,912 0.75% 1.15% to 2.70% 11.95% to 13.69% 2005 16,693 $11.28 to $12.37 197,991 0.95% 1.15% to 2.70% 6.54% to 8.20% 2004 18,681 $10.59 to $11.43 206,291 0.84% 1.15% to 2.70% 9.33% to 11.04% Franklin Global Communications Securities Fund 2008 6,757 $12.10 to $17.49 106,966 0.16% 1.00% to 3.00% -47.75% to -46.69% 2007 9,218 $24.56 to $32.86 275,000 0.00% 1.00% to 2.95% 19.62% to 23.00% 2006 8,387 $20.31 to $26.84 209,108 0.31% 1.00% to 2.70% 18.07% to 21.25% 2005 7,872 $16.75 to $21.73 162,884 2.70% 1.15% to 2.70% 12.71% to 14.51% 2004 8,345 $14.86 to $18.98 152,822 1.00% 1.15% to 2.70% 11.13% to 13.06% Franklin Growth and Income Securities Fund 2008 9,292 $18.10 to $24.59 210,956 3.47% 1.00% to 2.70% -36.88% to -35.79% 2007 12,181 $28.67 to $38.36 439,537 2.39% 1.00% to 2.70% -6.29% to -4.67% 2006 14,586 $30.60 to $40.54 555,540 2.51% 1.00% to 2.70% 9.40% to 13.65% 2005 16,366 $26.92 to $34.92 543,927 2.72% 1.15% to 2.70% 0.76% to 2.33% 2004 17,158 $26.72 to $34.12 563,821 2.56% 1.15% to 2.70% 7.66% to 9.36%
113 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 --------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** Franklin High Income Securities Fund 2008 6,104 $14.08 to $20.15 107,397 10.38% 1.00% to 3.00% -25.65% to -24.14% 2007 8,121 $19.89 to $26.61 194,157 6.81% 1.00% to 2.95% -0.19% to 1.69% 2006 9,155 $19.89 to $26.29 217,690 6.24% 1.00% to 2.70% 5.18% to 6.46% 2005 9,108 $18.69 to $24.24 203,114 5.98% 1.15% to 2.70% 0.57% to 2.29% 2004 9,464 $18.58 to $23.73 209,279 5.95% 1.15% to 2.70% 6.94% to 8.61% Franklin Income Securities Fund 2008 20,324 $24.44 to $35.34 633,722 5.67% 1.00% to 3.00% -31.74% to -30.36% 2007 26,714 $37.99 to $50.82 1,236,149 3.51% 1.00% to 2.95% 0.83% to 2.72% 2006 24,645 $37.62 to $49.71 1,124,778 3.48% 1.00% to 2.70% 7.12% to 15.10% 2005 20,445 $32.68 to $42.39 811,292 3.53% 1.15% to 2.70% -1.10% to 0.45% 2004 16,383 $33.05 to $42.20 661,455 3.11% 1.15% to 2.70% 10.81% to 12.55% Franklin Large Cap Growth Securities Fund 2008 9,914 $11.54 to $14.05 128,233 1.42% 1.00% to 2.70% -36.28% to -35.18% 2007 14,370 $18.12 to $21.71 293,997 0.81% 1.00% to 2.70% 3.39% to 5.17% 2006 17,410 $17.52 to $21.01 341,776 0.81% 1.00% to 2.70% 7.95% to 9.49% 2005 19,427 $16.23 to $18.86 350,975 0.64% 1.15% to 2.70% -1.63% to -0.09% 2004 18,002 $16.50 to $18.87 330,333 0.51% 1.15% to 2.70% 5.05% to 6.72% Franklin Money Market Fund 2008 1,419 $16.52 to $17.22 24,004 1.57% 1.15% to 1.49% -0.06% to 0.14% 2007 1,575 $16.51 to $17.19 26,980 4.47% 1.15% to 1.49% 2.85% to 3.06% 2006 1,905 $16.03 to $16.68 31,583 4.29% 1.15% to 1.49% 2.84% to 2.93% 2005 2,450 $15.59 to $16.21 39,365 2.48% 1.15% to 1.49% 1.04% to 1.13% 2004 3,203 $15.43 to $16.03 50,808 0.71% 1.15% to 1.49% -0.76% to -0.67% Franklin Real Estate Fund 2008 4,126 $23.52 to $31.96 114,219 1.18% 1.15% to 2.70% -43.93% to -43.03% 2007 6,170 $41.95 to $56.12 306,481 2.40% 1.15% to 2.70% -22.98% to -21.76% 2006 8,543 $54.47 to $71.74 548,475 1.99% 1.15% to 2.70% 17.38% to 19.21% 2005 9,882 $46.40 to $60.18 537,862 1.44% 1.15% to 2.70% 10.46% to 12.18% 2004 8,516 $42.01 to $53.65 419,936 1.82% 1.15% to 2.70% 28.28% to 30.34% Franklin Rising Dividends Securities Fund 2008 10,583 $21.40 to $27.69 265,219 1.97% 1.15% to 2.70% -29.05% to -27.93% 2007 15,529 $30.16 to $38.42 549,522 2.48% 1.15% to 2.70% -5.29% to -3.78% 2006 19,516 $31.84 to $39.95 722,650 1.12% 1.15% to 2.70% 14.01% to 15.79% 2005 21,765 $27.93 to $34.50 701,663 0.95% 1.15% to 2.70% 0.68% to 2.25% 2004 20,424 $27.74 to $33.74 652,269 0.68% 1.15% to 2.70% 8.03% to 9.73%
114 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** Franklin Small Cap Value Securities Fund 2008 5,689 $10.40 to $12.27 64,002 1.22% 1.15% to 2.70% -34.81% to -33.78% 2007 8,622 $15.95 to $18.53 149,192 0.70% 1.15% to 2.70% -4.99% to -3.50% 2006 11,149 $16.78 to $19.20 201,830 0.65% 1.15% to 2.70% 13.87% to 15.65% 2005 13,411 $14.74 to $16.60 211,689 0.81% 1.15% to 2.70% 5.88% to 7.53% 2004 12,800 $13.92 to $15.44 189,938 0.19% 1.15% to 2.70% 20.44% to 22.36% Franklin Small-Mid Cap Growth Securities Fund 2008 7,460 $12.10 to $14.79 102,678 0.00% 1.15% to 2.70% -44.03% to -43.15% 2007 9,861 $21.62 to $26.02 242,499 0.00% 1.15% to 2.70% 8.26% to 9.96% 2006 11,991 $19.97 to $23.66 269,950 0.00% 1.15% to 2.70% 5.81% to 7.45% 2005 14,051 $18.87 to $22.02 296,641 0.00% 1.15% to 2.70% 2.00% to 3.63% 2004 14,994 $18.50 to $21.26 308,650 0.00% 1.15% to 2.70% 8.50% to 10.20% Franklin Templeton VIP Founding Funds Allocation Fund 2008 19,846 $5.71 to $5.87 114,681 3.51% 1.00% to 3.00% -37.77% to -36.51% 2007(4) 4,548 $9.19 to $9.26 41,977 0.00% 1.00% to 2.95% -8.25% to -7.36% Franklin U.S. Government Fund 2008 17,117 $20.45 to $29.14 438,305 4.83% 1.00% to 3.00% 4.40% to 6.52% 2007 17,323 $20.48 to $27.40 429,720 4.94% 1.00% to 2.95% 2.32% to 5.54% 2006 19,375 $19.74 to $26.07 459,275 4.44% 1.00% to 2.70% 1.25% to 1.85% 2005 21,379 $19.49 to $25.28 497,400 4.33% 1.15% to 2.70% -0.32% to 1.24% 2004 21,258 $19.55 to $24.97 495,079 5.03% 1.15% to 2.70% 0.71% to 2.29% Franklin Zero Coupon Fund 2010 2008 3,066 $30.86 to $44.52 116,167 4.54% 1.00% to 3.00% 4.31% to 6.42% 2007 2,451 $31.32 to $41.90 90,911 4.96% 1.00% to 2.95% 5.45% to 7.54% 2006 2,533 $29.63 to $40.08 88,620 3.96% 1.00% to 2.70% -0.02% to 1.26% 2005 2,783 $29.63 to $38.43 96,876 4.24% 1.15% to 2.70% -1.16% to 0.38% 2004 2,118 $29.98 to $38.29 74,368 4.72% 1.15% to 2.70% 1.92% to 3.52% J.P. Morgan International Opportunities Portfolio 2008 26 $6.78 to $7.09 179 2.00% 1.15% to 2.55% -42.83% to -42.03% 2007 41 $11.78 to $12.26 491 1.00% 1.15% to 2.55% 6.56% to 8.08% 2006 47 $10.50 to $11.57 523 1.18% 1.15% to 2.55% 18.97% to 20.65% 2005 64 $9.17 to $9.45 593 0.86% 1.40% to 1.90% 8.61% to 9.16% 2004 72 $8.44 to $8.66 615 0.53% 1.40% to 1.90% 16.14% to 16.72% J.P. Morgan U.S. Large Cap Core Equity Portfolio 2008 54 $5.86 to $6.27 322 1.29% 1.15% to 2.55% -35.65% to -34.74% 2007 65 $9.05 to $9.60 596 1.08% 1.15% to 2.55% -0.91% to 0.49% 2006 76 $8.67 to $9.56 705 1.02% 1.15% to 2.55% 13.65% to 15.24% 2005 107 $7.93 to $8.29 861 1.26% 1.15% to 1.90% -0.55% to 0.19% 2004 130 $7.98 to $8.28 1,049 0.75% 1.15% to 1.90% 7.42% to 8.23%
115 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 --------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** Mutual Discovery Securities Fund 2008 23,470 $17.32 to $21.69 463,812 2.28% 1.00% to 3.00% -30.57% to -29.17% 2007 31,131 $25.83 to $30.67 893,746 1.50% 1.00% to 2.95% 8.58% to 10.73% 2006 30,097 $23.70 to $24.92 788,452 1.03% 1.00% to 2.70% 9.77% to 19.79% 2005 26,246 $19.81 to $22.76 571,760 1.31% 1.15% to 2.70% 12.89% to 14.66% 2004 20,002 $17.55 to $19.85 385,579 1.08% 1.15% to 2.70% 15.04% to 16.90% Mutual Shares Securities Fund 2008 35,119 $12.33 to $15.46 497,934 3.06% 1.00% to 3.00% -38.97% to -37.74% 2007 49,588 $20.91 to $24.87 1,160,544 1.51% 1.00% to 2.95% 0.45% to 2.44% 2006 47,987 $20.76 to $24.65 1,107,271 1.30% 1.00% to 2.70% 9.03% to 15.23% 2005 39,133 $18.02 to $20.78 781,296 0.94% 1.15% to 2.70% 7.62% to 9.29% 2004 30,814 $16.74 to $19.01 571,473 0.82% 1.15% to 2.70% 9.62% to 11.34% OpCap Mid Cap Portfolio 2008 5,070 $5.83 to $6.13 30,318 0.40% 1.00% to 3.00% -43.40% to -42.26% 2007 2,964 $10.37 to $10.61 31,117 0.15% 1.00% to 2.95% 4.10% to 6.16% 2006 1,451 $9.93 to $10.04 14,483 0.00% 1.00% to 2.60% 10.29% to 10.90% Oppenheimer Global Securities Fund/VA 2008 9,271 $8.25 to $9.47 81,580 1.69% 1.15% to 2.70% -41.79% to -40.87% 2007 13,620 $14.17 to $16.02 205,533 1.40% 1.15% to 2.70% 3.47% to 5.10% 2006 16,707 $13.70 to $15.25 241,736 1.06% 1.15% to 2.70% 14.56% to 16.35% 2005 19,339 $11.95 to $13.10 242,446 1.06% 1.15% to 2.70% 11.27% to 13.00% 2004 21,679 $10.74 to $11.60 242,223 1.22% 1.15% to 2.70% 15.98% to 17.80% Oppenheimer High Income Fund/VA 2008 3,715 $2.43 to $2.79 9,566 7.21% 1.15% to 2.70% -79.24% to -78.92% 2007 2,370 $11.72 to $13.25 29,717 7.52% 1.15% to 2.70% -2.78% to -1.25% 2006 2,977 $12.05 to $13.42 38,259 7.81% 1.15% to 2.70% 6.52% to 8.18% 2005 3,291 $11.32 to $12.40 39,330 6.94% 1.15% to 2.70% -0.40% to 1.15% 2004 4,150 $11.36 to $12.26 49,485 6.60% 1.15% to 2.70% 6.06% to 7.72% Oppenheimer Main Street Fund/VA 2008 9,230 $5.94 to $6.82 58,515 1.63% 1.15% to 2.70% -40.11% to -39.17% 2007 13,154 $9.92 to $11.22 139,064 1.04% 1.15% to 2.70% 1.63% to 3.22% 2006 15,908 $9.76 to $10.87 164,300 1.17% 1.15% to 2.70% 11.97% to 13.71% 2005 18,526 $8.72 to $9.56 169,622 1.39% 1.15% to 2.70% 3.16% to 4.77% 2004 21,503 $8.45 to $9.12 189,299 0.82% 1.15% to 2.70% 6.53% to 8.20% PIMCO VIT All Asset Portfolio 2008 10,475 $9.97 to $11.52 114,617 5.55% 1.00% to 3.00% -18.34% to -16.68% 2007 13,347 $12.67 to $13.84 180,302 7.29% 1.00% to 2.95% 5.27% to 7.24% 2006 16,148 $12.40 to $12.98 205,480 5.38% 1.00% to 2.70% 1.59% to 1.88% 2005 17,865 $12.18 to $12.44 222,032 4.74% 1.40% to 2.70% 3.41% to 4.76%
116 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** PIMCO VIT CommodityRealReturn Strategy Portfolio 2008 12,315 $6.70 to $7.94 85,230 4.50% 1.00% to 3.00% -45.46% to -44.35% 2007 8,897 $12.41 to $12.87 112,433 4.81% 1.00% to 2.95% 19.64% to 22.01% 2006 8,067 $10.34 to $10.62 84,388 4.62% 1.00% to 2.60% -5.58% to -5.58% 2005(2) 4,475 $10.95 to $11.04 49,229 2.57% 1.40% to 2.60% 9.31% to 10.18% PIMCO VIT Emerging Markets Bond Portfolio 2008 3,274 $9.77 to $10.44 33,044 6.48% 1.00% to 3.00% -17.13% to -15.45% 2007 3,644 $11.90 to $12.37 44,213 5.82% 1.00% to 2.95% 2.73% to 4.76% 2006 3,050 $11.54 to $11.85 35,627 5.36% 1.00% to 2.60% 5.08% to 6.48% 2005(2) 2,030 $10.84 to $10.93 22,123 3.65% 1.40% to 2.60% 8.32% to 9.19% PIMCO VIT Global Bond Portfolio 2008 7,579 $9.62 to $14.54 75,572 3.31% 1.00% to 3.00% -3.78% to -1.84% 2007 5,408 $10.11 to $10.51 55,781 3.33% 1.00% to 2.95% 6.54% to 8.65% 2006 3,080 $9.46 to $9.71 29,522 3.33% 1.00% to 2.60% 1.02% to 1.97% 2005(2) 1,350 $9.27 to $9.35 12,591 1.98% 1.40% to 2.60% -7.18% to -6.43% PIMCO VIT High Yield Portfolio 2008 9,789 $9.25 to $11.02 96,790 7.78% 1.00% to 3.00% -25.81% to -24.30% 2007 12,978 $12.43 to $14.58 173,285 7.03% 1.00% to 2.95% 0.59% to 2.48% 2006 15,336 $12.34 to $13.88 201,813 6.93% 1.00% to 2.70% 4.88% to 6.21% 2005 16,429 $11.62 to $13.21 202,567 6.57% 1.15% to 2.70% 1.36% to 2.94% 2004 15,047 $11.46 to $12.84 182,237 6.55% 1.15% to 2.70% 6.64% to 8.31% PIMCO VIT Real Return Portfolio 2008 19,352 $10.31 to $16.01 210,471 3.53% 1.00% to 3.00% -9.81% to -7.98% 2007 20,669 $11.55 to $12.41 249,436 4.72% 1.00% to 2.95% 7.43% to 9.56% 2006 22,779 $10.72 to $11.46 253,317 4.25% 1.00% to 2.70% -1.96% to -1.53% 2005 25,016 $10.94 to $11.37 281,377 2.82% 1.40% to 2.70% -0.61% to 0.68% 2004 18,257 $11.00 to $11.29 204,910 1.07% 1.40% to 2.70% 6.01% to 7.40% PIMCO VIT StocksPLUS Growth and Income Portfolio 2008 1,258 $5.66 to $6.44 7,623 7.11% 1.15% to 2.70% -44.16% to -43.29% 2007 1,703 $10.12 to $11.35 18,349 7.46% 1.15% to 2.70% 4.00% to 5.63% 2006 2,085 $9.66 to $10.75 21,404 4.87% 1.15% to 2.70% 11.85% to 13.59% 2005 2,427 $8.68 to $9.46 22,100 2.25% 1.15% to 2.60% 0.84% to 2.31% 2004 2,975 $8.61 to $9.25 26,672 1.68% 1.15% to 2.60% 7.96% to 9.54%
117 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** PIMCO VIT Total Return Portfolio 2008 34,157 $13.43 to $15.85 492,177 4.47% 1.00% to 3.00% 1.70% to 3.76% 2007 35,646 $13.16 to $15.29 505,831 4.85% 1.00% to 2.95% 5.69% to 7.67% 2006 37,062 $12.44 to $13.99 492,340 4.44% 1.00% to 2.70% 1.09% to 1.62% 2005 36,408 $12.30 to $13.85 474,744 3.44% 1.15% to 2.70% -0.27% to 1.29% 2004 31,550 $12.34 to $13.67 409,277 1.89% 1.15% to 2.70% 2.09% to 3.69% Seligman Global Technology Portfolio 2008 282 $4.30 to $4.58 1,245 0.00% 1.15% to 2.55% -41.76% to -40.93% 2007 320 $7.34 to $7.76 2,408 0.00% 1.15% to 2.55% 12.52% to 14.12% 2006 446 $6.27 to $6.91 2,954 0.00% 1.15% to 2.55% 14.96% to 16.58% 2005 537 $5.52 to $5.86 3,070 0.00% 1.35% to 2.35% 5.63% to 6.69% 2004 735 $5.18 to $5.55 3,959 0.00% 1.15% to 2.55% 1.35% to 2.79% Seligman Small-Cap Value Portfolio 2008 3,341 $15.00 to $17.23 53,475 0.00% 1.15% to 2.70% -41.15% to -40.23% 2007 4,672 $25.49 to $28.82 126,765 0.00% 1.15% to 2.70% 1.35% to 2.95% 2006 6,020 $25.15 to $28.00 159,979 0.00% 1.15% to 2.70% 18.03% to 19.86% 2005 7,502 $21.31 to $23.36 167,646 9.61% 1.15% to 2.70% -6.53% to -5.07% 2004 9,464 $22.80 to $24.60 224,465 0.00% 1.15% to 2.70% 16.75% to 18.58% SP Strategic Partners Focused Growth Portfolio 2008 2,176 $4.45 to $5.02 10,121 0.00% 1.15% to 2.70% -40.18% to -39.25% 2007 3,429 $7.44 to $8.26 26,746 0.00% 1.15% to 2.70% 11.60% to 13.36% 2006 4,431 $6.64 to $7.29 30,769 0.00% 1.15% to 2.70% -3.74% to -2.24% 2005 5,876 $6.90 to $7.46 42,142 0.00% 1.15% to 2.70% 11.77% to 13.52% 2004 4,978 $6.17 to $6.57 31,717 0.00% 1.15% to 2.70% 6.97% to 8.64% SP International Growth Portfolio 2008 1,826 $4.48 to $5.07 8,551 1.45% 1.15% to 2.70% -51.81% to -51.05% 2007 3,006 $9.29 to $10.37 29,477 0.45% 1.15% to 2.70% 15.93% to 17.76% 2006 2,608 $8.02 to $8.80 21,901 1.58% 1.15% to 2.70% 16.98% to 18.80% 2005 2,982 $6.85 to $7.41 21,271 0.24% 1.15% to 2.70% 12.72% to 14.47% 2004 3,563 $6.08 to $6.47 22,395 0.00% 1.15% to 2.70% 13.02% to 14.79% Templeton Asset Strategy Fund 2008 551 $17.17 to $20.79 9,555 10.71% 1.15% to 1.49% -26.10% to -25.96% 2007 599 $23.23 to $28.86 15,017 17.69% 1.15% to 1.49% 8.53% to 8.78% 2006 742 $21.37 to $26.53 16,958 7.31% 1.15% to 1.49% 19.60% to 19.73% 2005 897 $17.87 to $22.16 17,048 3.91% 1.15% to 1.49% 2.17% to 2.41% 2004 1,066 $17.46 to $21.65 19,700 2.98% 1.15% to 1.49% 14.16% to 14.39%
118 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) A summary of units outstanding (thousands), unit values, net assets (thousands), ratios, and total returns for variable annuity contracts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:
At December 31 For the years ended December 31 -------------------------------------- -------------------------------------------------- Units Unit Fair Value Net Investment Expense Ratio Total Return Outstanding Assets Income lowest to lowest to **** lowest to highest **** Ratio* highest** highest*** Templeton Foreign Securities Fund 2008 10,526 $15.19 to $19.75 192,585 2.58% 1.00% to 2.70% -41.97% to -40.97% 2007 14,100 $26.18 to $33.50 443,786 2.13% 1.00% to 2.70% 12.36% to 14.30% 2006 16,562 $23.30 to $30.02 459,162 1.33% 1.00% to 2.70% 10.98% to 18.22% 2005 17,208 $19.71 to $24.44 402,655 1.25% 1.15% to 2.70% 7.24% to 8.94% 2004 16,757 $18.38 to $22.44 365,141 1.14% 1.15% to 2.70% 15.36% to 17.22% Templeton Global Income Securities Fund 2008 4,025 $24.89 to $35.86 124,761 3.84% 1.00% to 3.00% 3.06% to 5.15% 2007 2,675 $26.00 to $34.15 84,083 1.99% 1.00% to 2.95% 7.83% to 9.96% 2006 909 $29.91 to $31.13 27,726 3.17% 1.15% to 1.49% 11.47% to 11.48% 2005 1,092 $26.83 to $27.92 29,837 6.41% 1.15% to 1.49% -4.37% to -4.18% 2004 1,345 $28.05 to $29.14 38,359 11.07% 1.15% to 1.49% 13.19% to 13.49% Templeton Growth Securities Fund 2008 22,126 $13.25 to $17.43 351,451 1.93% 1.00% to 3.00% -44.03% to -42.90% 2007 30,377 $24.71 to $30.58 870,214 1.41% 1.00% to 2.95% -0.64% to 1.32% 2006 29,543 $24.80 to $30.81 844,951 1.34% 1.00% to 2.70% 11.80% to 18.57% 2005 26,041 $20.92 to $25.07 626,812 1.16% 1.15% to 2.70% 5.97% to 7.62% 2004 20,998 $19.74 to $23.29 478,645 1.20% 1.15% to 2.70% 12.93% to 14.70% Van Kampen LIT Capital Growth Portfolio 2007 327 $4.09 to $4.55 1,424 0.19% 1.15% to 2.55% -50.40% to -49.70% 2006 462 $8.24 to $9.04 4,019 0.00% 1.15% to 2.55% 13.69% to 15.30% 2005 685 $7.25 to $7.84 5,196 0.00% 1.15% to 2.55% 0.05% to 1.45% 2004 863 $7.24 to $7.73 6,486 0.01% 1.15% to 2.55% 4.93% to 6.41% 2003 1,047 $6.90 to $7.27 7,455 0.00% 1.15% to 2.55% 4.08% to 5.55% Van Kampen LIT Enterprise Portfolio 2008 16 $4.08 to $4.27 99 0.84% 1.15% to 2.55% -44.39% to -43.60% 2007 20 $7.29 to $7.58 149 0.61% 1.15% to 2.55% 9.83% to 11.39% 2006 28 $6.30 to $6.94 186 0.52% 1.15% to 2.55% 4.39% to 5.86% 2005 35 $6.27 to $6.46 226 0.87% 1.40% to 1.90% 6.12% to 6.65% 2004 45 $5.91 to $6.06 269 0.36% 1.40% to 1.90% 2.09% to 2.60% Van Kampen LIT Growth and Income Portfolio 2008 55 $10.85 to $11.60 632 2.10% 1.15% to 2.55% -33.75% to -32.81% 2007 59 $16.27 to $17.27 975 1.66% 1.15% to 2.55% 0.20% to 1.62% 2006 64 $15.42 to $16.99 1,043 1.29% 1.15% to 2.55% 13.32% to 14.91% 2005 82 $14.15 to $14.79 1,183 1.14% 1.15% to 1.90% 7.92% to 8.73% 2004 99 $13.11 to $13.60 1,313 1.00% 1.15% to 1.90% 12.22% to 13.07%
119 ALLIANZ LIFE VARIABLE ACCOUNT B OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Notes to the Financial Statements (continued) December 31, 2008 6. FINANCIAL HIGHLIGHTS (CONTINUED) * These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense risk and administrative charges that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. Net Investment income ratios may be calculated by applying applicable expense ratios. ** These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense risk and administrative charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying funds are excluded. *** These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect contract expenses of the separate account. The total return does not include any expenses assessed through the redemption of units. Inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. As the total return is presented as a range of minimum to maximum values, based on the product grouping representing the minimum and maximum expense ratio amounts, some individual contract returns are not within the ranges presented and is not annualized. **** Units Outstanding excludes units for annuitized contracts. Total Net Assets includes the net assets of the annuitized contracts. Total net assets of annuitized contracts at December 31, 2008 and 2007 were $6,649 and $9,641, respectively. 1. Period from May 3, 2004 (fund commencement) to December 31, 2004 2. Period from May 2, 2005 (fund commencement) to December 31, 2005 3. Period from May 2, 2006 (fund commencement) to December 31, 2006 4. Period from May 1, 2007 (fund commencement) to December 31, 2007 5. Period from May 1, 2008 (fund commencement) to December 31, 2008 120 [KPMG Logo] ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Financial Statements and Supplemental Schedules December 31, 2008 and 2007 (With Report of Independent Registered Public Accounting Firm Thereon) [KPMG Logo] KPMG LLP 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder Allianz Life Insurance Company of North America: We have audited the accompanying consolidated balance sheets of Allianz Life Insurance Company of North America and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allianz Life Insurance Company of North America and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company has adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements, effective January 1, 2008. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary information included in Schedules I, II, and III is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. /s/ KPMG LLP Minneapolis, Minnesota March 24, 2009 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2008 and 2007 (In thousands, except share data) Assets 2008 2007 ------------------- ------------------- Investments: Fixed-maturity securities, at fair value: Fixed-maturity securities, available-for-sale (amortized cost of $35,521,222 and $33,257,432, respectively) $ 36,726,068 $ 34,391,322 Fixed-maturity securities, trading (amortized cost of $5,635,460 and $6,061,923, respectively) 5,162,034 6,027,093 Mortgage loans on real estate, net 4,838,373 4,402,214 Short-term securities 1,496,911 737,039 Derivatives 631,315 379,855 Real estate (net of accumulated depreciation of $39,686 and $30,777, respectively) 322,418 327,967 Loans to affiliates 723,802 725,826 Policy loans 174,599 169,058 Equity securities, at fair value: Equity securities, available-for-sale (cost of $84 and $17,601, respectively) 75 16,719 Equity securities, trading (cost of $13,360 and $25,079, respectively) 9,527 29,325 Other invested assets 3,462 21,063 ------------------- ------------------- Total investments 50,088,584 47,227,481 Cash 73,073 92,177 Accrued investment income 542,323 496,523 Receivables (net of allowance for uncollectible accounts of $4,839 and $4,819, respectively) 168,147 172,251 Reinsurance recoverables and receivables 4,096,285 4,126,276 Deferred acquisition costs 8,253,502 5,575,492 Other assets 2,601,858 1,846,105 ------------------- ------------------- Assets, exclusive of separate account assets 65,823,772 59,536,305 Separate account assets 11,791,728 20,541,717 ------------------- ------------------- Total assets $ 77,615,500 $ 80,078,022 =================== =================== See accompanying notes to consolidated financial statements.
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2008 and 2007 (In thousands, except share data) Liabilities and Stockholder's Equity 2008 2007 ------------------- ------------------- Policyholder liabilities: Policy and contract account balances $ 56,585,189 $ 50,806,811 Future policy benefit reserves 4,154,491 3,047,274 Policy and contract claims 300,221 318,105 Unearned premiums 271,756 217,407 Other policyholder funds 203,355 214,548 ------------------- ------------------- Total policyholder liabilities 61,515,012 54,604,145 Derivative liability 535,481 229,351 Mortgage notes payable 129,075 134,123 Other liabilities 580,734 718,199 ------------------- ------------------- Liabilities, exclusive of separate account liabilities 62,760,302 55,685,818 Separate account liabilities 11,791,728 20,541,717 ------------------- ------------------- Total liabilities 74,552,030 76,227,535 ------------------- ------------------- Stockholder's equity: Common stock, $1 par value, 40,000,000 shares authorized; 20,000,001 shares issued and outstanding at December 31, 2008 and 2007 20,000 20,000 Class A, Series A preferred stock, $1 par value, 8,909,195 shares authorized, issued, and outstanding; liquidation preference of $189,366 and $189,366 at December 31, 2008 and 2007, respectively 8,909 8,909 Class A, Series B preferred stock, $1 par value, 10,000,000 shares authorized; 9,994,289 shares issued and outstanding; liquidation preference of $199,167 and $199,167 at December 31, 2008 and 2007, respectively 9,994 9,994 Loan to affiliate (205,731) (250,000) Additional paid-in capital 2,553,371 2,273,371 Retained earnings 344,690 1,439,086 Accumulated other comprehensive income, net of tax 332,237 349,127 ------------------- ------------------- Total stockholder's equity 3,063,470 3,850,487 ------------------- ------------------- ------------------- ------------------- Total liabilities and stockholder's equity $ 77,615,500 $ 80,078,022 =================== =================== See accompanying notes to consolidated financial statements.
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2008, 2007, and 2006 (In thousands) 2008 2007 2006 ------------------- ------------------- --------------- Revenue: Premiums $ 300,014 $ 368,306 $ 597,903 Policy fees 1,016,656 766,367 582,285 Premiums and annuity considerations, ceded (190,033) (255,816) (320,950) ------------------- ------------------- --------------- Net premiums and considerations 1,126,637 878,857 859,238 Interest and similar income, net 2,908,894 2,565,331 2,142,843 Derivative (loss) income (1,004,023) (251,392) 643,231 Realized investment losses, net (3,918,259) (710,978) (557,413) Fee and commission revenue 164,335 199,356 160,294 Other (loss) revenue (13,846) 133,575 104,644 ------------------- ------------------- --------------- Total (loss) revenue (736,262) 2,814,749 3,352,837 ------------------- ------------------- --------------- Benefits and expenses: Policyholder benefits 818,681 495,082 711,725 Change in fair value of annuity embedded derivatives 696,809 622,509 1,344,949 Benefit recoveries (329,106) (429,631) (403,765) Net interest credited to policyholder account values 1,098,143 1,031,830 725,296 ------------------- ------------------- --------------- Net benefits 2,284,527 1,719,790 2,378,205 Commissions and other agent compensation 807,565 913,444 1,035,765 General and administrative expenses 657,096 772,992 625,188 Change in deferred acquisition costs, net (2,784,064) (650,735) (1,049,646) ------------------- ------------------- --------------- Total benefits and expenses 965,124 2,755,491 2,989,512 ------------------- ------------------- --------------- (Loss) income from operations before income tax (1,701,386) 59,258 363,325 ------------------- ------------------- --------------- Income tax (benefit) expense: Current 47,043 64,245 80,922 Deferred (654,033) (60,259) 27,879 ------------------- ------------------- --------------- Total income tax (benefit) expense (606,990) 3,986 108,801 ------------------- ------------------- --------------- ------------------- ------------------- --------------- Net (loss) income $ (1,094,396)$ 55,272 $ 254,524 =================== =================== =============== See accompanying notes to consolidated financial statements.
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) Years ended December 31, 2008, 2007, and 2006 (In thousands) 2008 2007 2006 ------------- -------------- -------------- Net (loss) income $ (1,094,396)$ 55,272 $ 254,524 Foreign currency translation adjustments, net of tax (7,922) 6,520 130 Unrealized losses on post-retirement obligation: Unrealized net actuarial (losses) gains arising during the period, net of tax benefit of $966, $0, and $0 in 2008, 2007, and 2006, respectively (1,794) 78 - Decrease (increase) in unrealized prior service cost arising during the period, net of tax (expense) benefit of $(280), $606, and $0 in 2008, 2007, and 2006, respectively 521 (1,190) - ------------- -------------- -------------- Total unrealized post-retirement obligation losses (1,273) (1,112) - Unrealized (losses) gains on fixed-maturity and equity securities: Unrealized holding losses arising during the period, net of effect of shadow adjustments of $(107,983), $(361,836), and $(90,188) in 2008, 2007, and 2006, respectively, and net of tax benefit of $1,375,544 $137,044, and $194,881 in 2008, 2007, and 2006, respectively (2,554,563) (253,995) (362,437) Decrease in unrealized holding losses due to reclassification adjustment for realized losses included in net (loss) income, net of tax (expense) of $(1,371,391), $(248,842) and $(195,095), in 2008, 2,546,868 462,135 362,318 2007, and 2006, respectively ------------- -------------- -------------- Total unrealized holding (losses) gains (7,695) 208,140 (119) ------------- -------------- -------------- ------------- -------------- -------------- Total other comprehensive (loss) income (16,890) 213,548 11 ------------- -------------- -------------- ------------- -------------- -------------- Total comprehensive (loss) income $ (1,111,286)$ 268,820 $ 254,535 ============= ============== ============== See accompanying notes to consolidated financial statements.
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Statements of Stockholder's Equity Years ended December 31, 2008, 2007, and 2006 (In thousands) Accumulated Additional other Total Common Preferred Loan to paid-in Retained comprehensive stockholder's stock stock affiliate capital earnings income equity -------- -------- ---------- ---------- ----------- ----------------- --------- 2006: Balance, beginning of year $ 20,000 $ 18,903 $ (250,000) $2,123,371 $ 1,259,705 $ 133,146 $ 3,305,125 Comprehensive income: Net income - - - - 254,524 - 254,524 Net unrealized loss on investments, net of shadow adjustments and deferred taxes - - - - - (119) (119) Net unrealized gain on foreign currency translation, net of deferred taxes - - - - - 130 130 ------------- Total comprehensive income 254,535 Adjustment to initially apply SFAS No. 158, net of tax - - - - - 2,422 2,422 Dividends paid - - - - (130,000) - (130,000) -------- -------- ---------- ---------- ----------- ----------- ------------- Balance, end of year $ 20,000 $ 18,903 $ (250,000) $2,123,371 $ 1,384,229 $ 135,579 $ 3,432,082 ======== ======== ========== ========== =========== =========== ============= 2007: Balance, beginning of year $ 20,000 $ 18,903 $ (250,000) $2,123,371 $ 1,384,229 $ 135,579 $ 3,432,082 Comprehensive income: Net income - - - - 55,272 - 55,272 Net unrealized gain on investments, net of shadow adjustments and deferred taxes - - - - - 208,140 208,140 Net unrealized loss on post-retirement obligation, net of deferred taxes - - - - - (1,112) (1,112) Net unrealized gain on foreign currency translation, net of deferred taxes - - - - - 6,520 6,520 ------------- Total comprehensive income 268,820 Adjustment to initially apply EITF 06-5 net of tax - - - - (415) - (415) Capital contribution - - - 150,000 - - 150,000 -------- -------- ---------- ---------- ----------- ----------- ------------- Balance, end of year $ 20,000 $ 18,903 $ (250,000) $2,273,371 $ 1,439,086 $ 349,127 $ 3,850,487 ======== ======== ========== ========== =========== =========== ============= 2008: Balance, beginning of year $ 20,000 $ 18,903 $ (250,000) $2,273,371 $ 1,439,086 $ 349,127 $ 3,850,487 Comprehensive loss: Net loss - - - - (1,094,396) - (1,094,396) Net unrealized loss on investments, net of shadow adjustments and deferred taxes - - - - - (7,695) (7,695) Net unrealized loss on post-retirement obligation, net of deferred taxes - - - - - (1,273) (1,273) Net unrealized loss on foreign currency translation, net of deferred taxes - - - - - (7,922) (7,922) ------------- Total comprehensive loss (1,111,286) Capital contribution - - - 280,000 - - 280,000 Payment received on loan - - 44,269 - - - 44,269 -------- -------- ---------- ---------- ----------- ----------- ------------- Balance, end of year $ 20,000 $ 18,903 $ (205,731) $2,553,371 $ 344,690 $ 332,237 $ 3,063,470 ======== ======== ========== ========== =========== =========== ============= See accompanying notes to consolidated financial statements.
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2008, 2007, and 2006 (In thousands) 2008 2007 2006 ------------------- ------------------- -------------- Cash flows provided by (used in) operating activities: Net (loss) income $ (1,094,396)$ 55,272 $ 254,524 ------------------- ------------------- -------------- Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Realized investment losses 3,918,259 711,088 555,195 Purchases of trading securities (840,996) (2,196,297) (1,345,475) Sale and other redemptions of trading securities 1,277,531 558,380 198,668 Unrealized loss on annuity-related options and gross reserves (9,261) 347,575 912,662 Deferred income tax (benefit) expense (654,033) (60,259) 27,879 Charges to policy account balances (94,450) (73,808) (69,941) Gross interest credited to policy account balances 1,228,477 1,041,726 730,546 Amortization of (discount) premium, net (71,591) (4,942) 111,697 Impairment of goodwill 1,175 - - Change in: Accrued investment income (45,800) (57,254) (72,326) Receivables 4,104 103,102 (106,654) Reinsurance recoverable 29,991 59,201 (84,138) Deferred acquisition costs (2,784,064) (650,735) (1,049,646) Future policy benefit reserves 1,107,217 183,321 139,631 Policy and contract claims (17,884) (86,869) 8,944 Other policyholder funds (11,193) 21,034 (66,312) Unearned premiums 47,933 (15,566) 20,243 Other assets and liabilities (236,367) (130,342) 32,512 Other, net 11,618 (83,644) (24,779) ------------------- ------------------- -------------- Total adjustments 2,860,666 (334,289) (81,294) ------------------- ------------------- -------------- Net cash provided by (used in) operating activities $ 1,766,270 $ (279,017)$ 173,230 ------------------- ------------------- --------------
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2008, 2007, and 2006 (In thousands) 2008 2007 2006 ------------------- ------------------- ------------------- Cash flows provided by (used in) operating activities $ 1,766,270 $ (279,017) $ 173,230 ------------------- ------------------- ------------------- Cash flows used in investing activities: Purchase of available-for-sale fixed-maturity securities (8,247,931) (5,081,265) (10,363,440) Purchase of available-for-sale equity securities - (80,172) (34,641) Purchase of derivative securities (2,350,592) (990,171) (847,025) Purchase of real estate (3,360) (6,667) (152,003) Funding of mortgage loans on real estate (570,887) (1,296,133) (1,434,435) Sale and other redemptions of available-for-sale fixed-maturity securities 2,399,795 2,092,453 6,748,812 Matured fixed-maturity securities 217,406 434,999 517,786 Sale of equity securities, tax-free exchanges, and spin-offs 14,906 68,230 510,179 Sale of derivative securities 1,368,782 407,686 452,654 Sale of real estate - 157,179 57,912 Change in securities held under agreements to repurchase - - (559,615) Repayment of mortgage loans on real estate 130,544 255,996 178,323 Net change in short-term securities (760,154) 246,611 (839,436) Purchase of home office property and equipment (2,324) (6,638) (75,775) Purchase of interest in equity method investees (3,079) (12,847) (75,026) Sale of interest in equity method investee - - 23,588 Purchase of subsidiary, net of cash acquired - (11,655) - Change in loan to affiliate 11,600 (507,273) 11,447 Options written 958,790 603,961 699,877 Other, net 12,961 2,545 (14,964) ------------------- ------------------- ------------------- Net cash used in investing activities (6,823,543) (3,723,161) (5,195,782) ------------------- ------------------- ------------------- Cash flows provided by financing activities: Policyholders' deposits to account balances 5,503,872 5,858,335 7,201,051 Policyholders' withdrawals from account balances (4,493,703) (3,309,471) (2,563,981) Policyholders' net transfers between account balances 3,741,384 1,278,775 363,919 Change in amounts drawn in excess of bank balances (32,605) 73,617 (23,476) Capital contribution from parent company 280,000 150,000 - Payment received on loan to affiliate classified in equity 44,269 - - Change in mortgage notes payable (5,048) (12,777) 40,236 ------------------- ------------------- ------------------- Net cash provided by financing activities 5,038,169 4,038,479 5,017,749 ------------------- ------------------- ------------------- Net change in cash (19,104) 36,301 (4,803) Cash at beginning of year 92,177 55,876 60,679 ------------------- ------------------- ------------------- Cash at end of year $ 73,073 $ 92,177 $ 55,876 =================== =================== =================== Supplemental data: Noncash investing and financing activity: Dividend to parent company $ - $ - $ (130,000) See accompanying notes to consolidated financial statements.
8 ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (1) ORGANIZATION Allianz Life Insurance Company of North America is a wholly owned subsidiary of Allianz of America, Inc. (AZOA), which is a wholly owned subsidiary of Allianz Societas Europaea (Allianz SE), a European company incorporated in Germany. Allianz Life Insurance Company of North America and its wholly owned subsidiaries are referred to as the Company. The Company is a life insurance company licensed to sell annuity, group accident and health, and group and individual life policies in the United States, Canada, and several U.S. territories. Based on 2008 statutory net premium written, 96%, 2%, and 2% of the Company's business is annuity, life insurance, and accident and health, respectively. The annuity business is comprised of fixed-indexed, variable, five-year deferred, and one-year deferred annuities representing 51%, 37%, 7%, and 5% of 2008 statutory net premium written, respectively. Life business is comprised of both traditional and group life. Life business includes products with guaranteed premiums and benefits and consists principally of term insurance policies, universal life policies, limited payment contracts, and certain annuity products with life contingencies. Accident and health business is comprised primarily of long-term care (LTC) insurance. The Company exited most other health insurance business in 2006 (see note 14). The Company's primary distribution channels are through independent agents, broker/dealers, banks, and third-party marketing organizations. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION The Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), which vary in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The accounts of the Company's primary subsidiary, Allianz Life Insurance Company of New York, and other less significant subsidiaries have been consolidated. All significant intercompany balances and transactions have been eliminated in consolidation. (b) USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect reported amounts of assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used in the Consolidated Financial Statements. Such changes in estimates are recorded in the period they are determined. (c) INVESTMENT PRODUCTS AND UNIVERSAL LIFE BUSINESS Investment products consist primarily of fixed-indexed, variable, and deferred annuity products. Premium receipts are reported as deposits to the contractholders' accounts. Policy fees on the Consolidated Statements of Operations represent asset fees, cost of insurance charges, administrative fees, charges for guarantees on investment products, and surrender charges for investment products and universal life insurance. These fees have been earned and assessed against contractholders on a daily or monthly basis throughout the contract period and are recognized as revenue when assessed and earned. Amounts assessed that represent compensation to the Company for services to be provided in future periods are not earned in the period assessed. Such amounts are reported as unearned premiums, which include unearned revenue reserves (URR), and recognized in operations over the period benefited using the same assumptions and factors used to amortize capitalized acquisition costs. Surrender charges are recognized upon surrender of a contract in 9 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) accordance with contractual terms. The change in fair value of embedded derivatives in fixed-indexed and variable products is included in change in fair value of annuity embedded derivatives on the Consolidated Statements of Operations. Benefits consist of interest credited to contractholders' accounts and claims incurred in excess of the contractholders' account balance and are included in net interest credited to policyholder account values and policyholder benefits, respectively, on the Consolidated Statements of Operations. (d) LIFE AND ACCIDENT AND HEALTH INSURANCE Premiums on traditional life products are recognized as earned when due. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contracts. This association is accomplished by establishing provisions for future policy benefits and deferring and amortizing related acquisition costs. Accident and health premiums are recognized as earned on a pro-rata basis over the risk coverage periods. Benefits and expenses are recognized as incurred. (e) GOODWILL Goodwill is the excess of the amount paid to acquire a company over the fair value of its tangible net assets, value of business acquired (VOBA), other identifiable intangible assets, and valuation adjustments (such as impairments), if any. Goodwill is reported in other assets on the Consolidated Balance Sheets. Goodwill is evaluated annually for impairment at the reporting unit level. Goodwill of a reporting unit is also tested for impairment on an interim basis if an event occurs or circumstances change. The goodwill impairment test follows a two step process as defined in Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). In the first step, the fair value of a reporting unit is compared to its carrying value. This process requires judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value; discount rates; expected levels of cash flows; and expected revenues and earnings. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal to that excess. The carrying value will be reduced to its fair value with a corresponding charge to operations. (f) VALUE OF BUSINESS ACQUIRED AND OTHER INTANGIBLE ASSETS The value of insurance in-force purchased is recorded as the VOBA. VOBA is reported in other assets on the Consolidated Balance Sheets. The initial value was determined by an actuarial study using the present value of future profits in calculating the value of the insurance purchased. An accrual of interest is added to the unamortized balance using the rates credited to the policyholder accounts. The balance is amortized in relation to the present value of expected future gross profits in the same manner as deferred acquisition costs (DAC). The amortization period is expected to be approximately 20 years from the date the business was acquired; however, the Company continually monitors this assumption. If estimated gross profits differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate. Adjustments to VOBA are made to reflect the estimated corresponding impact on the present value of expected future gross profits from unrealized gains and losses on available-for-sale investments used to support 10 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) policyholder liabilities (commonly known as shadow VOBA). These adjustments are included in accumulated other comprehensive income and are explained further in the Investments section of this note. The recoverability of VOBA is evaluated annually, or earlier if factors warrant, based on estimates of future earnings related to the insurance in-force purchased. If the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, are not sufficient to recover VOBA, the difference, if any, is charged to expense through accelerated VOBA amortization. Intangible assets are identified by the Company in accordance with SFAS 142, which requires an identifiable intangible asset to be recognized apart from goodwill when it arises from contractual or legal rights or it is capable of being separated and valued then sold, transferred, licensed, rented, or exchanged. The Company determines the useful life and amortization period for each intangible asset identified at acquisition, and continually monitors these assumptions. An intangible asset with a determinable life is amortized over that period, while an intangible asset with an indefinite useful life is not amortized. The Company's intangible assets include trademarks, agent lists, and noncompete agreements that were acquired as a result of the Company's ownership in field marketing organizations. Intangible assets are reported in other assets on the Consolidated Balance Sheets. These intangible assets were assigned values using the present value of projected future cash flows as a base and are generally amortized over five years using the straight-line method. Also included in the Company's intangible assets is the trade name and service mark of a broker-dealer acquired during 2005, and state insurance licenses acquired in 2007. The trade name, service mark, and state insurance licenses were valued using the present value of future cash flows and were determined to have an indefinite useful life. Recoverability of the value of the amortizing intangible assets is assessed under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which states that long-lived assets shall be tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Recoverability of the value of the nonamortizing intangible assets is assessed under SFAS 142, which states that nonamortizing intangible assets shall be tested for recoverability annually or earlier if events or changes in circumstances indicate the carrying amount may not be recoverable. (g) DEFERRED ACQUISITION COSTS Acquisition costs, consisting of commissions and other costs that vary with and are primarily related to production of new business, are deferred to the extent recoverable from future policy revenues and gross profits. For interest-sensitive products and variable annuity contracts, acquisition costs are amortized in relation to the present value of expected future gross profits from investment margins and mortality, morbidity, and expense charges. Acquisition costs for accident and health insurance policies are deferred and amortized over the lives of the policies in the same manner as premiums are earned. For traditional life and group life products, such costs are amortized over the projected earnings pattern of the related policies using the same actuarial assumptions used in computing future policy benefit reserves. Deferred acquisition costs (DAC) is reviewed for recoverability, at least annually, and adjusted when necessary. Recoverability is evaluated separately for fixed-indexed annuities, variable annuities, and life insurance products. Recoverability is a two-step process where current policy year issues are evaluated, and then in-force policies are evaluated. Before assessing recoverability, DAC is capped such that the balance can not exceed the original capitalized costs plus interest. 11 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Adjustments to DAC are made to reflect the corresponding impact on the present value of expected future gross profits from unrealized gains and losses on available-for-sale investments used to support policyholder liabilities (commonly known as shadow DAC). These adjustments are included in accumulated other comprehensive income and are explained further in the Investments section of this note. Changes in assumptions can have an impact on the amount of DAC reported for annuity and life insurance products and their related amortization patterns. In the event experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense (DAC unlocking). In general, increases in the estimated investment spreads and fees result in increased expected future profitability and may lower the rate of DAC amortization, while increases in costs of product guarantees, and lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. The Company formally evaluates the appropriateness of the best-estimate assumptions on an annual basis. If the economic environment or policyholder behavior changes quickly and substantially, assumptions will be reviewed more frequently to affirm best estimates. Any resulting DAC unlocking is reflected prospectively on the Consolidated Statements of Operations. Adjustments may also be made to the estimated gross profits related to DAC that correspond with deferred annuities and universal life products for investment activity, such as bond defaults on fixed-maturity securities, write-downs on other-than-temporarily impaired fixed-maturity securities, and trading gains and losses. Management action may include assumption changes in the DAC models, such as adjustments to expected future gross profits used, as well as inforce management action such as crediting rate changes or index rate cap adjustments. This approach applies to fixed-maturity securities purchased at investment grade only and not noninvestment grade items that were purchased with other yield considerations. See further discussion of DAC unlocking in note 9. The Company assesses internal replacements on insurance contracts to determine whether such modifications significantly change the contract terms. An internal replacement represents a modification in product benefits, features, rights, or coverages that occurs by the exchange of an insurance contract for a new insurance contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. If the modification substantially changes the contract, the remaining DAC on the original contract are immediately expensed and any new DAC on the replacement contract are deferred. If the contract modification does not substantially change the contract, DAC amortization on the original contract continues and any new acquisition costs associated with the modification are immediately expensed. (h) DEFERRED SALES INDUCEMENTS Sales inducements are product features that enhance the investment yield to the contractholder on the contract. The Company offers two types of sales inducements on certain universal life and annuity contracts. The first type, an immediate bonus, increases the account value at inception, and the second type, a persistency bonus, increases the account value at the end of a specified period. Annuity sales inducements are deferred as paid or credited to contractholders and life sales inducements are deferred and recognized as part of the liability for policy benefits. Deferred sales inducements (DSI) are reported in other assets in the Consolidated Balance Sheets. They are amortized over the expected life of the contract in a manner similar to DAC and are reviewed annually for recoverability. Amortization is recorded in policyholder benefits on the Consolidated Statements of Operations. DSI capitalization related to a persistency 12 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) and immediate bonus on non-indexed annuities are recorded in policyholder benefits on the Consolidated Statements of Operations at policy issuance. DSI capitalization related to an immediate bonus on fixed-indexed annuities is recorded in policy fees on the Consolidated Statements of Operations at policy issuance. Adjustments to DSI are made to reflect the estimated corresponding impact on the present value of expected future gross profits from unrealized gains and losses on available-for-sale investments used to support policyholder liabilities (commonly known as shadow DSI). These adjustments are included in accumulated other comprehensive income and are explained further in the Investments section of this note. Adjustments may also be made to DSI related to deferred annuities for investment activity, such as defaults on fixed-maturity securities, write-downs on other-than-temporarily impaired fixed-maturity securities, and trading gains and losses. Management action may include assumption changes in the DSI models, such as adjustments to expected future gross profits used, as well as policyholder changes, such as credited rate changes. This approach applies to fixed-maturity securities purchased at investment grade only and not noninvestment grade items that were purchased with other yield considerations. (i) FUTURE POLICY BENEFIT RESERVES Future policy benefit reserves on traditional life products are computed by the net level premium method based upon estimated future investment yield, mortality, and withdrawal assumptions, commensurate with the Company's experience, modified as necessary to reflect anticipated trends, including possible unfavorable deviations. Most life reserve interest assumptions range from 2.5% to 6.0%. (j) POLICY AND CONTRACT ACCOUNT BALANCES Policy and contract account balances for interest-sensitive products, which include universal life and fixed deferred annuities, are generally carried at accumulated contract values. For fixed-indexed annuity products, the policyholder obligation is divided into two parts - one part representing the value of the underlying base contract (host contract) and the second part representing the fair value of the expected index benefit over the life of the contract. The host contract is valued using principles consistent with similar deferred annuity contracts without an index benefit. The index benefit is valued at fair value using current capital market assumptions, such as index and volatility, to estimate future index levels. The index benefit valuation is also dependent upon estimates of future policyholder behavior. The Company must include provisions for the Company's own credit risk and for risk that the Company's assumptions about policyholder activity could differ from actual experience. The fair value determination of the index benefit is sensitive to the economic market and interest rate environment, as it is discounted at current market interest rates. There is volatility in this liability due to these external market sensitivities. Certain two-tier fixed annuity products provide for benefits payable upon annuitization such as period-certain and life-contingent payout options. An additional annuitization reserve is established using assumptions consistent with those used in estimating gross profits for purposes of amortizing DAC. Policy and contract account balances for variable annuity products are carried at accumulated contract values. Additional reserves for any death and income benefits that may exceed the accumulated contract values are established using a range of economic scenarios and are accrued for using assumptions consistent with those used in estimating gross profits for purposes of amortizing DAC. Additional reserves for accumulation and withdrawal benefits that may exceed account values are established using capital market assumptions, such as 13 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) index and volatility, along with estimates of future policyholder behavior. These additional reserves are reflected in future policy benefit reserves on the Consolidated Balance Sheets. (k) POLICY AND CONTRACT CLAIMS Policy and contract claims include the liability for claims reported but not yet paid, claims incurred but not yet reported (IBNR), and claim settlement expenses as of December 31 on the Company's accident and health business. Development methods are generally used in the determination of IBNR liabilities. In cases of limited experience or lack of credible claims data, loss ratios are used to determine an appropriate IBNR liability. Claim and IBNR liabilities of a short-term nature are not discounted, but those claim liabilities resulting from disability income or long-term care benefits include interest and mortality discounting. (l) REINSURANCE The Company assumes and cedes business with other insurers. Reinsurance premium and benefits paid or provided are accounted for in a manner consistent with the basis used in accounting for original policies issued and the terms of the reinsurance contracts. Insurance liabilities are reported before the effects of reinsurance. Future policy benefit reserves, policy and contract account balances, and policy and contract claims covered under reinsurance contracts are recorded as a reinsurance recoverable. Amounts paid or deemed to have been paid for claims covered by reinsurance contracts are recorded as a reinsurance receivable. Reinsurance recoverables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts. Amounts due to other insurers on assumed business are recorded as a reinsurance payable, and are included in other liabilities on the Consolidated Balance Sheets. A gain recognized when the Company enters into a coinsurance agreement with a third-party reinsurer is deferred and recorded in other liabilities on the Consolidated Balance Sheets. Such gains are amortized into operations over either the revenue-producing period or the claims run-off period, as appropriate, of the related reinsured policies. These amortized gains are recorded in other (loss) revenue on the Consolidated Statements of Operations. (m) INVESTMENTS The Company classifies certain fixed-maturity and equity securities as "available-for-sale." Accordingly, the securities are carried at fair value, and related unrealized gains and losses are credited or charged directly to accumulated other comprehensive income in stockholder's equity, net of tax and related adjustments to DAC, DSI, VOBA, and reserves (commonly referred to as shadow adjustments). The adjustments to DAC, DSI, and VOBA represent the change in amortization that would have been required as a charge or credit to operations had such unrealized amounts been realized. The adjustment to reserves represents the increase or decrease in the reserve balance that would have been required as a charge or credit to operations had such unrealized amounts been realized. The Company has portfolios of certain fixed-maturity and equity securities classified as "trading," and accordingly, the securities are carried at fair value, and related unrealized gains and losses are reflected as realized investment gains and losses within the Consolidated Statements of Operations. The primary trading portfolio is used to attempt to match the change in value associated with embedded derivative liabilities related to fixed-indexed annuities. This match is not effective to the extent there are credit related factors impacting the value of the securities in this trading portfolio. The Company also has other trading portfolios that are actively managed. In accordance with the investment policy, the Company invests primarily in high-grade marketable securities. Dividends are accrued on the date they are declared. Interest is accrued as earned. 14 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) In 2007, the Company began to utilize derivatives within certain actively managed investment portfolios. Within these portfolios, derivatives can be used for hedging, replication, and income generation only. The financial instruments are valued and carried at fair value and the unrealized gains and losses on the derivatives are reflected in derivative (loss) income within the Consolidated Statements of Operations as they do not meet the requirements for an accounting hedge. In 2008, the Company purchased a $694,950 notional value of fixed- maturity securities held as available-for-sale with variable interest rates. The Company entered into interest rate swaps with notional amounts equal to the par value of the fixed-maturity securities and maturity dates, in order to attempt to hedge changes in cash flows of the hedged items due to interest rate risk. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in fair value or cash flow of the hedged item. At hedge inception, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction. The documentation process includes linking derivatives that are designated as cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheets and defining the effectiveness and ineffectiveness testing methods to be used. The Company also formally assesses both at the hedge's inception and ongoing on a quarterly basis, whether the derivatives that are used in hedging transactions have been and are expected to continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge effectiveness is assessed using qualitative and quantitative methods. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include analysis of changes in fair value or cash flows associated with the hedge relationship. Hedge effectiveness is measured using the dollar offset method. The dollar offset method compares changes in cash flows of the hedging instrument with changes in the cash flows of the hedged item attributable to the hedged risk. Random changes in interest rate movements are assumed. Related changes in the cash flows of the hedging instrument are expected to offset the changes in the cash flows of the hedged item as the notional/par amounts, reset dates, interest rate indices, and business day conventions are the same for both the bond and the swap. The cumulative amount of unrealized gains and losses of the hedging instrument is recognized in accumulated other comprehensive income on the Consolidated Balance Sheets. The ineffective portion of the change in the fair value of the hedging instrument is recognized in realized investment losses in the Consolidated Statements of Operations. Forward commitments are also carried at fair value. Mortgage-backed securities and structured securities are amortized using anticipated prepayments. Prepayment assumptions for loan-backed securities are obtained from various external sources or internal estimates. The Company believes these assumptions are consistent with those a market participant would use. Premiums or discounts on fixed-maturity securities are amortized using the constant yield method. Short-term securities, which include certificates of deposit, are carried at amortized cost. Policy loans are reflected at unpaid principal balances. For mortgage-backed securities and structured securities, the Company recognizes income using a constant effective yield method based on prepayment assumptions and the estimated economic life of the securities. When estimated prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments using the retrospective method. Any resulting adjustment is included in interest and similar income, net on the Consolidated Statements of Operations. 15 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Mortgage loans on real estate are reflected at unpaid principal balances adjusted for an allowance for uncollectible balances. Interest on mortgage loans is accrued on a monthly basis and recorded in interest and similar income, net on the Consolidated Statements of Operations. The Company analyzes loan impairment at least annually when assessing the adequacy of the allowance for uncollectible balances. The Company evaluates the mortgage loan reserve to ensure that the estimate is based on the most recent available industry default and loss studies and historical default rates for the Company as compared with default rates for the industry group. The Company does not accrue interest on impaired loans and accounts for interest income on such loans on a cash basis. The Company's intent is to hold mortgage loans until paid in full. Loans to affiliates are carried at cost. Interest on the loans is accrued monthly, with payments received semi-annually. Real estate is carried at cost less accumulated depreciation and amortized over 39 years at acquisition, and improvements and additions are depreciated using the straight-line method over the remaining life of the real estate. At December 31, 2008, partnerships are accounted for at cost on the Consolidated Balance Sheets. The partnerships are accounted for at cost as the Company did not have a significant ownership percentage to require equity basis accounting. At December 31, 2007, partnerships were recorded at the contracted sale value, which represents fair value of the partnerships. The partnerships were recorded at the contracted sale value as the Company was actively selling the partnerships. Partnerships are recorded in other assets on the Consolidated Balance Sheets. Changes in carrying value are included in interest and similar income, net on the Consolidated Statements of Operations. The fair value of fixed-maturity securities and equity securities is obtained from third-party pricing sources whenever possible, except for short-term securities that are priced at amortized cost. Prices obtained from third-party pricing sources are analytically reviewed by AZOA portfolio managers for reasonableness. In certain cases, including private assets as well as certain difficult-to-price securities, internal pricing models may be used that are based on market proxies. The internal pricing models use yield spreads versus U.S. Treasury Bonds to estimate a market price. Also, the models use market yields of corporate securities with credit and maturity characteristics similar to the security being priced to derive a spread to treasuries. All prices that are not supplied by pricing vendors are reviewed and approved by the AZOA Head of Fixed Income and further reviewed and approved by the AZOA Chief Operating Officer or AZOA Compliance Officer. The fair value of mortgage loans on real estate has been calculated using discounted cash flows using market interest rates as of year-end representative of those that a market participant would use. Credit risk was considered in this calculation implicitly within the discount rate used. The fair value of the options is derived internally, by calculating their expected discounted cash flows, using a set of calibrated, risk-neutral stochastic scenarios, including a market data monitor, a market data model generator, a stochastic scenario calibrator, and the actual asset pricing calculator. Fair value of loans to affiliates is calculated by management using the market price of a financial instrument with similar characteristics. Short-term securities, which include certificates of deposit, are carried at amortized cost, which approximates fair value. Policy loan balances, which are supported by the underlying cash value of the policies, approximate fair value. Realized gains and losses are computed based on the sale lots with the highest cost basis on the trade date. Those lots are sold first. The Company adjusts DAC, DSI, and VOBA for unrealized gains and losses on available-for-sale investments that support policyholder liabilities. Changes in the fair value of available-for-sale investments are reflected as a direct charge or credit to accumulated other comprehensive income in stockholder's equity, net of related adjustments for DAC, DSI, VOBA, and deferred taxes that would have been recorded if these investments had been sold as of the balance sheet date. Changes in the fair value of trading investments are recorded as realized investment losses on the Consolidated Statements of Operations. 16 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The Company reviews the entire available-for-sale investment portfolio each quarter to determine whether or not declines in fair value are other-than-temporary. For the year ended December 31, 2006, the Company adopted Financial Accounting Standards Board (FASB), FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP FAS 115-1). The Company continues to evaluate factors in addition to average cost and fair value, including credit quality, the extent and duration of the decline, market analysis, current events, recent price declines, likelihood of recovery in a reasonable period of time, and management's judgment, to determine whether fixed-income securities are considered other-than-temporarily impaired. In addition, FSP FAS 115-1 requires that the Company evaluate other-than-temporary impairments on available-for-sale fixed-maturity securities based on additional factors. Specifically, declines in value resulting from changes in risk-free interest rates must also be considered. If a fixed-maturity security's fair market value is less than its amortized cost value, an impairment loss must be recorded unless management can assert its ability and intent to hold until recovery. The Company's absence of control over the investment manager's decision to sell (or hold) renders the Company unable to assert ability to hold to recovery and will therefore require the Company to classify all impairments as other-than-temporary and recognize an impairment loss in the period of the decline. For other-than-temporarily impaired securities where the Company is unable to assert intent and ability to hold, but otherwise expects the security to recover, in periods subsequent to the recognition of an other-than-temporary impairment loss, these impaired fixed-maturity securities are accounted for as if they had been purchased on the date of the impairment. That is, the discount or reduced premium recorded from the fixed-maturity securities would be accreted over their remaining life in a prospective manner. For securities that are impaired due to issuer default or due to the Company otherwise not expecting the security to recover, there is no accretion of the impaired amounts. The Company views equity securities that have a fair value of at least 20% below average cost at the end of a quarter or are in an unrealized loss position for nine consecutive months as other-than-temporarily impaired. However, other factors, including market analysis, current events, recent price declines, and management's judgment, are also used to determine whether equity securities are considered other-than-temporarily impaired and may result in an equity security being impaired. All previously impaired equity securities will incur additional impairments should the fair value fall below the book value. Impairments in the value of securities held by the Company, considered to be other-than-temporary, are recorded as a reduction of the cost of the security, and a corresponding realized loss is recognized on the Consolidated Statements of Operations. The Company adjusts DAC, DSI, and VOBA for impairments on fixed-maturity securities, as discussed in their respective sections of this note. (n) INVESTMENTS RECORDED USING THE EQUITY METHOD The Company uses the equity method of accounting for organizations in which the Company holds a minority interest. The Company's proportionate share of gains or losses is reflected in other (loss) revenue on the Consolidated Statements of Operations. (o) ACCOUNTING FOR OPTION AND FUTURES CONTRACTS The Company provides additional benefits through certain life and annuity products, which are linked to the growth in the Standard and Poor's (S&P) 500 index, the NASDAQ 100 index, the Financial Times Stock Exchange (FTSE) 100, and an index comprised of a blend of the Dow Jones Industrial Average, FTSE 100, Barclays Capital US Aggregate, and the Russell 2000. In addition, certain variable annuity contracts provide minimum guaranteed benefits. The Company has analyzed the characteristics of these benefits and has entered 17 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) into over-the-counter (OTC) option contracts and exchange-traded futures contracts tied to an appropriate underlying index with similar characteristics with the objective to economically hedge these risks. The Company uses exchange-traded futures contracts with the objective to increase the effectiveness of the economic hedge. Management monitors in-force amounts and option and futures contract values to ensure satisfactory matching and to identify unsatisfactory mismatches. If persistency assumptions were to deviate significantly from anticipated rates, management would purchase or sell option and futures contracts as deemed appropriate or take other actions. The OTC option contracts are reported at fair value as derivatives on the Consolidated Balance Sheets. The fair value of the options is derived internally and deemed by management to be reasonable. The process of deriving internal derivative prices requires the Company to calibrate Monte Carlo scenarios to actual market information. The calibrated scenarios are applied to derivative cash flow models to calculate fair value prices for the derivatives. The liability for the benefits is reported in policy and contract account balances on the Consolidated Balance Sheets. Changes in unrealized gains and losses on the option contracts are recorded net of changes in the related policyholder balances for benefits and are included in derivative (loss) income on the Consolidated Statements of Operations. Incremental gains and losses from expiring options are included in derivative (loss) income on the Consolidated Statements of Operations. Futures contracts do not require an initial cash outlay and the Company has agreed to daily net settlement based on movements of the representative index. Therefore, no asset or liability is recorded on the Consolidated Balance Sheets. Gains and/or losses on futures contracts are included in derivative (loss) income on the Consolidated Statements of Operations. (p) SECURITIES LENDING The Company accounts for its securities lending transactions as secured borrowings, in which the collateral received and the related obligation to return the collateral are recorded on the Consolidated Balance Sheets as securities held as collateral and securities lending collateral, respectively. Securities on loan remain on the Company's Consolidated Balance Sheets and interest and dividend income earned by the Company on loaned securities is recognized in interest and similar income, net on the Consolidated Statements of Operations. There were no securities lending transactions outstanding at December 31, 2008 or 2007. The Company participates in restricted securities lending arrangements whereby specific securities are loaned to other institutions for short periods of time. U.S. Treasury Note securities were lent under a triparty agreement between the Company, broker-dealers (Goldman Sachs, Morgan Stanley), and the Bank of New York. The collateral is defined by the agreement to be at least equal to U.S. government, U.S. government agency, or U.S. government agency mortgage-backed securities. The Company began participating in unrestricted arrangements whereby the Company may use collateral for general purposes. However, the Company suspended securities lending activity in 2008. See note 16 for further discussion of this affiliated securities lending with Dresdner Klienwort Wasserstein. (q) RECEIVABLES Receivable balances (contractual amount less allowance for doubtful accounts) approximate estimated fair values. This is based on pertinent information available to management as of year-end, including the financial condition and creditworthiness of the parties underlying the receivables. Receivable balances are monitored and allowances for doubtful accounts are maintained based on the nature of the receivable, and the Company's 18 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) assessment of collectibility. The allowance is estimated by aging the balances of the parties and setting up an allowance for any balances that are more than 90 days old. (r) HOME OFFICE PROPERTY AND EQUIPMENT Property and equipment consist of furniture, office equipment, leasehold improvements, and computer hardware. Property and equipment are reported in other assets on the Consolidated Balance Sheets. Major upgrades and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives (3 - 7 years, depending on the asset) of depreciable assets using the straight-line method. The cost and accumulated depreciation for home office property and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in general and administrative expenses on the Consolidated Statements of Operations. The Company's accumulated depreciation was $81,986 and $70,030 as of December 31, 2008, and 2007, respectively. Pre-operating and start-up costs incurred in connection with the construction of the Company's headquarters were capitalized until the facility became operational. Interest was also capitalized in connection with the construction and recorded as part of the asset. These costs are being amortized, using the straight-line method, over a 39-year period. The amount of capitalized costs amortized, including interest, during 2008, 2007, and 2006 was $2,275, $2,274, and $2,268, respectively. An addition to the Company's headquarters was put into operation on November 1, 2006. Total amortization related to this addition was $2,104, $2,016, and $351 for the years ended December 31, 2008, 2007, and 2006, respectively. (s) INCOME TAXES The Company and its subsidiaries, with the exception of Allianz Life and Annuity Company (ALAC), file a consolidated federal income tax return with AZOA and all of its wholly owned subsidiaries. The consolidated tax allocation agreement stipulates that each company participating in the return will bear its share of the tax liability pursuant to certain tax allocation elections under the Internal Revenue Code and its related regulations and then reimbursement will be in accordance with an intercompany tax reimbursement arrangement. The Company, each of its insurance subsidiaries except ALAC, and Questar Capital Corporation generally will be paid for the tax benefit on their losses and any other tax attributes to the extent they could have obtained a benefit against their post-1990 separate return tax liability. The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded on the Consolidated Balance Sheets. Any such change could significantly affect the amounts reported on the Consolidated Statements of Operations. Management uses best estimates to establish reserves based on current facts and circumstances regarding tax exposure items where the ultimate deductibility is open to interpretation. Quarterly, management evaluates the appropriateness of such reserves based on any new developments specific to their fact patterns. Information considered includes results of completed tax examinations, Technical Advice Memorandums, and other rulings issued by the Internal Revenue Service (IRS) or the tax courts. The Company utilizes the asset and liability method of accounting for income tax. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial 19 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully realized or that the related temporary differences, such as other-than-temporary impairments, will not reverse over time (see further discussion in note 15). (t) STOCKHOLDER'S EQUITY, LOAN TO AFFILIATE The Company entered into an agreement during 2002 to lend AZOA $250,000 (see further discussion in note 16). This agreement was executed in close proximity to a capital contribution from AZOA of $650,000 in the form of preferred stock of an affiliate. The unamortized loan balance is recorded as contra-equity in accordance with the FASB Emerging Issues Task Force (EITF) Issue No. 85-1, Classifying Notes Received for Capital Stock. (u) STOCKHOLDER'S EQUITY, ACCUMULATED UNREALIZED FOREIGN CURRENCY Foreign currency translation adjustments are related to the conversion of foreign currency upon the consolidation of a foreign subsidiary (see further discussion in note 21). The net assets of the Company's foreign operations are translated into U.S. dollars using exchange rates in effect at each year-end. Translation adjustments arising from differences in exchange rates from period to period are included in the accumulated foreign currency translation adjustment net of tax reported as a separate component of comprehensive income on the Consolidated Statements of Comprehensive Income (Loss). (v) SEPARATE ACCOUNTS AND ANNUITY PRODUCT GUARANTEES The Company issues variable annuity and life contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company recognizes gains or losses on transfers from the general account to the separate accounts at fair value to the extent of contractholder interests in separate accounts, which are offset by changes in contractholder liabilities. The Company also issues variable annuity and life contracts through its separate accounts where the Company provides certain contractual guarantees to the contractholder. These guarantees are in the form of a guaranteed minimum death benefit (GMDB), a guaranteed minimum income benefit (GMIB), a guaranteed minimum accumulation benefit (GMAB), and a guaranteed minimum withdrawal benefit (GMWB). These guarantees provide for benefits that are payable to the contractholder in the event of death, annuitization, or at specified dates during the accumulation period. Separate account assets supporting variable annuity contracts represent funds for which investment income and investment gains and losses accrue directly to contractholders. Each fund has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account assets and liabilities are reported as summary totals on the Consolidated Balance Sheets. Amounts charged to the contractholders for mortality and contract maintenance are included in policy fees on the Consolidated Statements of Operations. Administrative and other services are included in fee and commission revenue on the Consolidated Statements of Operations. These fees have been earned and assessed against contractholders on a daily or monthly basis throughout the contract period and are recognized as revenue when assessed and earned. Changes in GMDB and GMIB are calculated in accordance with Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, 20 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (SOPO3-1) and are included in policyholder benefits on the Consolidated Statements of Operations. GMAB and GMWB are considered to be embedded derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and the changes in these embedded derivatives are included in change in fair value of annuity embedded derivatives on the Consolidated Statements of Operations. The GMDB net amount at risk is defined as the guaranteed amount that would be paid upon death, less the current accumulated policyholder account value. The GMIB net amount at risk is defined as the current amount that would be needed to fund expected future guaranteed payments less the current policyholder account value, assuming that all benefit selections occur as of the valuation date. The GMAB net amount at risk is defined as the current amount that would be added to the contracts less the current policyholder account value. The GMWB net amount at risk is defined as the current accumulated benefit base amount less the current policyholder account value. The GMDB provides a specified minimum return upon death. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract. The Company's GMDB options have the following features: o Return of Premium - Provides the greater of account value or total deposits made to the contract, less any partial withdrawals and assessments. o Reset - Provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to age 81) account value adjusted for withdrawals. o Ratchet - Provides the greater of a return of premium death benefit or the highest specified "anniversary" account value (prior to age 81), adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: quarterly - evaluated quarterly, annual - evaluated annually, and six-year - evaluated every sixth year. o Rollup - Provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated with a compound interest rate. There are two variations of rollup interest rates: 5% with no cap and 3% with a cap of 150% of premium. This GMDB locks in at age 81. o Earnings Protection Rider - Provides a death benefit equal to the contract value plus a specified percentage of the earnings on the contract at the date of death. The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB features are: o Return of Premium - Provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments. o Ratchet - Provides an annuitization value equal to the greater of account value, net premiums, or the highest one-year anniversary account value (prior to age 81), adjusted for withdrawals. o Rollup - Provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated with a compound interest rate. The GMDB and GMIB liabilities are determined each period by estimating the expected future claims in excess of the associated account balances. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to policyholder benefits on the Consolidated 21 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Statements of Operations, if actual experience or other evidence suggests that earlier assumptions should be revised. The following assumptions were used to determine the GMDB and GMIB liabilities as of December 31, 2008 and 2007: o 100 stochastically generated investment performance scenarios. o Mean investment performance assumption was 7.96%. o Volatility assumption was 13.69%. o Mortality is assumed to be 50% and 60% of the 1994 MGDB Mortality Table as of December 31, 2008 and 2007, respectively. o Lapse rates vary by contract type and duration. As of December 31, 2008, spike rates could approach 40%, with an ultimate rate around 15%. As of December 31, 2007, spike rates could approach 45%, with an ultimate rate around 20%. o GMIB contracts have dynamic lapse and benefit utilization assumptions. For example, if the contract is projected to have a large additional benefit, then it becomes more likely to elect the GMIB benefit and less likely to lapse. o Discount rates vary by contract type and are equal to an assumed long-term investment return (8.6%) less the applicable mortality and expense rate. The GMAB is a living benefit that provides the contractholder with a guaranteed value that was established at least five years prior at each contract anniversary. This benefit is first available at the fifth contract anniversary. Depending on the contractholder's selection at issue, this value may be either a return of premium or may reflect market gains, adjusted at least proportionately for withdrawals. The contractholder also has the option to reset this benefit. The GMWB is a living benefit that provides the contractholder with a guaranteed amount of income in the form of partial withdrawals. The benefit is payable provided the covered person is between the ages of 50 and 90. The benefit is a fixed rate (depending on the age of the covered person) multiplied by the benefit base in the first year the benefit is taken and contract value in following years. The benefit does not decrease if the contract value decreases due to market losses. The benefit can decrease if the contract value is reduced by withdrawals. The benefit base used to calculate the initial benefit is the maximum of the contract value, the quarterly anniversary value, or the 5% annual increase of purchase payments (capped at twice the total purchase payments). The GMAB and GMWB liabilities are determined each period as the difference between expected future claims and the expected future profits. One result of this calculation is that these liabilities can be negative (contra-liability). The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to change in fair value of annuity embedded derivatives on the Consolidated Statements of Operations, if actual experience or other evidence suggests that earlier assumptions should be revised. Products featuring GMWB benefits were first issued in 2007. In the calendar year that a product launches, the reserves are set to zero, until the policy's first anniversary date. 22 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The following assumptions were used to determine the GMAB and GMWB liabilities as of December 31, 2008 and 2007: o 200 stochastically generated investment performance scenarios. o Market volatility assumption of 23.3% applied to an aggregate separate account funds beta of 58.0%. o Mortality is assumed to be 50% and 60% of the 1994 MGDB Mortality Table as of December 31, 2008 and 2007, respectively. o Lapse rates vary by contract type and duration. As of December 31, 2008, spike rates could approach 40%, with an ultimate rate around 15%. As of December 31, 2007, spike rates could approach 45%, with an ultimate rate around 20%. o Discount rates vary by contract type and are equal to an assumed long-term investment return (8.6%) less the applicable mortality and expense rate. Beginning in 2008, the Company also issued fixed-indexed annuities with a GMWB as an optional rider. The GMWB has a roll-up feature. The net amount at risk is partially limited because the policyholder account value has an annual credit that is floored at zero. Since the account value can not decrease, in contrast to a variable annuity, the difference between the withdrawal value and the account value will not diverge to the degree that is possible in a variable annuity. (w) PERMITTED STATUTORY ACCOUNTING PRACTICES The Company is required to file annual statements with insurance regulatory authorities, which are prepared on an accounting basis prescribed or permitted by such authorities. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. The Company currently does not have any permitted practices. (x) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ADOPTED In January 2009, the FASB issued FSP EITF No. 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). The FSP amends the impairment guidance of EITF No. 99-20, Recognition of Interest Income and Impairment of Purchased Beneficial Interest and Beneficial Interest that Continue to Be Held by a Transferor in Securitized Financial Assets, by removing the exclusive reliance upon market participant assumptions about future cash flows when evaluating impairment of securities within its scope. FSP EITF 99-20-1 requires companies to follow the impairment guidance in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), which permits the use of reasonable management judgment of the probability that the holder will be unable to collect all amounts due. The FSP is effective prospectively for interim and annual reporting periods ending after December 15, 2008. The Company adopted the FSP on December 31, 2008 and the adoption did not have a material impact on the Company's Consolidated Financial Statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). For financial statement elements currently required to be measured at fair value, this statement defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. 23 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 provides guidance on how to measure fair value when required under existing accounting standards. The Company adopted this Statement as of January 1, 2008. Adopting SFAS 157 required changes to the methods for valuing liabilities for equity- indexed and guaranteed benefits provided in the Company's fixed-indexed and variable annuity products, which are currently accounted for under SFAS 133. As required by SFAS 157, the fair valuation models for these financial liabilities reflect components relating to the Company's own credit standing and risk margin. The consideration of these additional elements resulted in a decrease in future policy benefit reserves on the Company's Consolidated Balance Sheets of $96,106 as of January 1, 2008. The pre-tax income impact of this change, net of the related adjustments to amortization of DAC and DSI was $40,427. In February 2008, the FASB issued FSP SFAS No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 157-1). FSP FAS 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases (SFAS 13), and other accounting pronouncements that address fair value measurements under SFAS 13. The Company adopted this FSP as of January 1, 2008. The adoption did not impact the Company's Consolidated Financial Statements. In February 2008, the FASB issued FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 delays the effective date of SFAS 157 to fiscal years beginning after December 15, 2008 for certain nonfinancial assets and nonfinancial liabilities within the scope of the FSP. As a result of the issuance of FSP FAS 157-2, the Company did not apply the provisions of FAS 157 to the nonfinancial assets and liabilities within the scope of FAS 157-2. In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP states that the objective of a fair value measurement is to estimate the price that would be received to sell an asset currently (an exit price) in an orderly transaction that is not a forced liquidation or a distress sale, even if there is little or no market activity for the asset at the measurement date. Further, when relevant observable market information is not available, an approach that incorporates management's judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The FSP was effective when issued. Adoption of this FSP did not have a material impact on the Company's Consolidated Financial Statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides companies with an option to report selected financial assets and liabilities at fair value, with the associated changes in fair value reflected in the Consolidated Statements of Operations. This statement was effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Company adopted this statement as of January 1, 2008. The Company did not elect to apply the fair value option to any financial assets or financial liabilities upon adoption. In September 2008, the FASB issued FSP SFAS No. 133-1 and FASB Interpretation (FIN) No. 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1). This FSP amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit 24 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) derivatives embedded in a hybrid instrument. This Statement was effective for fiscal years ending after November 15, 2008. The Company adopted this FSP as of December 31, 2008. In September 2006, the FASB issued EITF Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance With FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5). EITF 06-5 requires that the Company consider contractual terms in determining the amount that can be realized under a corporate-owned life insurance policy. In addition, a policyholder should determine the amount that could be realized under the insurance contract assuming the surrender certificate by certificate in a group policy. EITF 06-5 was effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-5 on January 1, 2007. Adoption of EITF 06-5 resulted in a cumulative effect adjustment of $415 (net of income tax of $223) to retained earnings as of January 1, 2007. In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosure. Upon adoption, the cumulative effect of applying FIN 48 is reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the balance sheet). This pronouncement was adopted January 1, 2007 and did not have a material impact on the Consolidated Financial Statements. In May 2007, the FASB issued FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). The FSP addresses whether it is appropriate for a company to recognize a previously unrecognized tax benefit when the only factor that has changed, since determining that a benefit should not be recognized, was the completion of an examination or audit by a taxing authority. The FSP is effective January 1, 2007, the date of the Company's initial adoption of FIN 48. The adoption of this interpretation did not have a material impact on the Consolidated Financial Statements. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment to SFAS No. 140 (SFAS 156). SFAS 156 requires that servicing assets or liabilities be initially measured at fair value, with subsequent changes in value reported based on either a fair value or amortized cost approach for each class of servicing asset or liability. Under previous guidance, such servicing assets or liabilities were initially measured at historical cost and the amortized cost method was required for subsequent reporting. The Company adopted this guidance effective January 1, 2007. The adoption of this interpretation did not have a material impact on the Consolidated Financial Statements. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends FASB Statements No. 133 and No. 140. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Recognition and Measurement of Derivatives: Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company adopted this guidance effective January 1, 2007. The adoption of this interpretation did not have a material impact on the Consolidated Financial Statements. 25 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) In September 2005, the AcSEC issued SOP No. 05-1, Deferred Acquisition Costs (DAC) on Internal Replacements (SOP 05-1), which expands the definition of internal replacements and changes the accounting for DAC on replacements in connection with modifications or exchanges of insurance contracts. An internal replacement, as defined in the guidance, is a policy revision that changes the nature of the investment rights or insurance risk between the Company and the contractholder. If an internal replacement substantially changes a contract, then DAC is written off immediately through income. This Statement was effective for fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 on January 1, 2007 and the adoption did not have a material impact on the Consolidated Financial Statements. In September 2006, the Securities and Exchange Commission (SEC) published Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This Bulletin addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. This Bulletin is effective for fiscal years ending after November 15, 2006. The adoption of this SAB did not have a material impact on the Consolidated Financial Statements. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158), which improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This was effective for public companies with fiscal years ending after December 15, 2006. The Company did have an impact from the adoption as disclosed in note 17. The Statement also requires that an employer measure the funded status of a plan as of the date of its year-end. This is effective for fiscal years ending after December 15, 2008. The Company adopted this guidance on December 31, 2008. Changing from a September 30 measurement date to a December 31 measurement date did not have a material impact on the Company's Consolidated Financial Statements. In November 2005, the FASB issued FSP FAS 115-1, The Meaning of Other Than temporary Impairments and its Application to Certain Investments, effective for reporting periods beginning after December 15, 2005. The FSP provides guidance on when an investment is considered impaired, whether that impairment is other-than-temporary, subsequent recognition of other-than-temporary impairment, and disclosures about unrealized losses. The Company adopted the FSP effective December 31, 2006, which resulted in realizing $612,635 of additional losses from interest-related impairments on investments managed by a third party where the investment manager has the discretion to sell securities in a loss position. The realized investment losses impact the current and estimated future gross profits and assessments used in determining the amortization of DAC, DSI, VOBA, URR, and the AAR. The investment losses were offset by increases of $322,676 in DAC, $34,424 in DSI, $7,472 in VOBA, $39,323 in URR, and a reduction of $19,715 in the AAR. 26 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and SFAS No. 3. This statement was effective for fiscal years beginning after December 15, 2005 and applies to voluntary accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It also applies to changes required by new accounting pronouncements if the pronouncement does not include specific transition provisions. The statement requires retrospective application of changes in accounting principle, unless it is impracticable to determine either the period-specific effect of an accounting change or the cumulative effect of the change. Adoption of this Statement did not have a material impact on the Consolidated Financial Statements. (y) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - TO BE ADOPTED In December 2008, the FASB issued FSP FAS No. 132(R)-1, Employers' Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)- 1). This FSP amends SFAS No. 132(R), Employers' Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by FSP FAS 132(R)-1 will be provided for fiscal years ending after December 15, 2009. The FSP will not have a financial impact on the Company's Consolidated Financial Statements. In November 2008, the FASB issued EITF Issue No. 08-6, Equity Method Investment Accounting Considerations (EITF 08-6). The EITF applies to all investments accounted for under the equity method. The EITF addresses certain questions that have been raised about the application of the equity method in light of changes in accounting for business combinations and noncontrolling interests under SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)), and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB 51 (SFAS 160). Other-than-temporary impairment testing need only be performed at the overall investment level rather than the individual asset level. When an equity method investee issues new shares, the investor will recognize a gain or loss associated with its corresponding change in ownership interest. The EITF is effective on a prospective basis in fiscal years beginning on or after December 15, 2008. The Company does not expect EITF 08-6 to have a material impact upon adoption. In April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). The FSP applies to all recognized intangible assets and provides guidance on estimating the useful life of recognized intangible assets. The FSP requires that an entity should consider its own historical experience with similar arrangements when developing assumptions about renewal or extension. In the absence of historical experience, an entity should consider the assumptions that market participants would use. The assumptions should be adjusted for entity specific factors such as the entity's expected use of the asset. The FSP also adds new disclosures relating to the renewal or extension of recognized intangible assets. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect FSP FAS 142-3 to have a material impact upon adoption. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - An amendment of FASB Statement No. 133. This Statement requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company plans to adopt this guidance effective January 1, 2009. This Statement will not have a financial impact on the Consolidated Financial Statements. 27 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) In December 2007, the FASB issued SFAS 141(R). This Statement creates greater consistency in the accounting and financial reporting of business combinations. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This Statement is to be applied prospectively to business combinations for which the acquisition date is on or after the first annual period beginning after December 15, 2008. The Company will apply SFAS 141(R) to business combinations with acquisition dates on or after January 1, 2009. In December 2007, the FASB issued SFAS 160. This Statement provides requirements for accounting for noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 also requires that accounting for transactions between an entity and noncontrolling interests be treated as equity transactions. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. This Statement is to be applied prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively for all periods presented. The Company does not expect SFAS 160 to have a material financial impact upon adoption. (z) RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. During 2008, the Company changed its method of presentation for the market value liability option (MVLO) reserve releases by reclassifying portions of this activity to premiums and benefits on the Consolidated Statements of Operations (Adjustment 1). This change was made to better match surrenders, annuitizations, and death payments with the related reserve release, and isolated the change in fair value of the MVLO embedded derivative, resulting in more meaningful and representative benefit margins and other disclosures. The second reclassification (Adjustment 2) splits net investment income, as reported in prior years, into three separate report lines: interest and similar income, derivative income, and change in fair value of annuity embedded derivatives. The change in fair value of annuity embedded derivatives now includes the change in fair value of the MVLO and the change in fair value of GMWB and GMAB. The third reclassification (Adjustment 3) is to reclassify changes in GMWB and GMAB from policyholder benefits into the change in fair value of annuity embedded derivatives. The fourth reclassification (Adjustment 4) is to move the presentation of equity earnings amounts to be above the income from operations before income taxes line as the amounts are not material for separate line disclosure. This reclassification caused a change in deferred income tax expense (benefit) which is also presented on the Consolidated Statements of Cash Flows within net cash (used in) provided by operating activities. 28 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The reclassifications resulted in adjustments to the Consolidated Statements of Operations as presented in the following tables:
For the year ended December 31, 2007 -------------------------------------------------------------------------------- As originally Adjustment Adjustment Adjustment Adjustment reported 1 2 3 4 As adjusted ----------- ------------ ------------ ------------ ------------ ----------- Revenue: Premiums $ 368,306 $ - $ - $ - $ - $ 368,306 Policy fees 342,347 424,020 - - - 766,367 Premiums and annuity considerations, ceded (255,394) (422) - - - (255,816) ----------- ------------ ------------ ------------ ------------ ----------- Net premiums and considerations 455,259 423,598 - - - 878,857 Net investment income 2,161,560 (473,652) (1,687,908) - - - Interest and similar income, net - - 2,565,331 - - 2,565,331 Derivative loss - - (251,392) - - (251,392) Realized investment losses, net (710,978) - - - - (710,978) Fee and commission revenue 199,356 - - - - 199,356 Other (loss) revenue 133,686 - - - (111) 133,575 ----------- ------------ ------------ ------------ ------------ ----------- Total revenue 2,238,883 (50,054) 626,031 - (111) 2,814,749 ----------- ------------ ------------ ------------ ------------ ----------- Benefits and expenses: Policyholder benefits 541,638 (50,078) - 3,522 - 495,082 Change in fair value of annuity embedded derivatives - - 626,031 (3,522) - 622,509 Benefit recoveries (429,655) 24 - - - (429,631) Net interest credited to policyholder account values 1,031,830 - - - - 1,031,830 ----------- ------------ ------------ ------------ ------------ ----------- Net benefits 1,143,813 (50,054) 626,031 - - 1,719,790 Commissions and other agent compensation 913,444 - - - - 913,444 General and administrative expen772,992 - - - - 772,992 Change in deferred acquisition costs, net (650,735) - - - - (650,735) ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total benefits and expenses2,179,514 (50,054) 626,031 - - 2,755,491 Income from operations before income taxes 59,369 - - - (111) 59,258 ----------- ------------ ------------ ------------ ------------ ----------- Income tax expense (benefit): Current 64,494 - - - (249) 64,245 Deferred (60,705) - - - 446 (60,259) ----------- ------------ ------------ ------------ ------------ ----------- Total income tax expense 3,789 - - - 197 3,986 ----------- ------------ ------------ ------------ ------------ ----------- Income before equity earnings 55,580 - - - (308) 55,272 Equity in earnings of equity method investees, net of tax (308) - - - 308 - ----------- ------------ ------------ ------------ ------------ ----------- Net income $ 55,272 $ - $ - $ - $ - $ 55,272 =========== ============ ============ ============ ============ ===========
29 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities)
For the year ended December 31, 2006 ----------------------------------------------------------------------------------- As originally Adjustment Adjustment Adjustment Adjustment reported 1 2 3 4 As adjusted ------------- ------------ ------------ ------------ ----------- ------------- Revenue: Premiums $ 597,903 $ - $ - $ - $ - $ 597,903 Policy fees 358,630 223,655 - - - 582,285 Premiums and annuity considerations, ceded (320,596) (354) - - - (320,950) ------------- ------------ ------------ ------------ ----------- ------------- Net premiums and 635,937 223,301 - - - 859,238 considerations Net investment income 1,689,688 (256,689) (1,432,999) - - - Interest and similar income, net - - 2,142,843 - - 2,142,843 Derivative income - - 643,231 - - 643,231 Realized investment losses, net (557,413) - - - - (557,413) Fee and commission revenue 160,294 - - - - 160,294 Other (loss) revenue 102,731 - - - 1,913 104,644 ------------- ------------ ------------ ------------ ----------- ------------- Total revenue 2,031,237 (33,388) 1,353,075 - 1,913 3,352,837 ------------- ------------ ------------ ------------ ----------- ------------- Benefits and expenses: Policyholder benefits 737,001 (33,402) - 8,126 - 711,725 Change in fair value of annuity embedded derivatives - - 1,353,075 (8,126) - 1,344,949 Benefit recoveries (403,779) 14 - - - (403,765) Net interest credited to policyholder account values 725,296 - - - - 725,296 ------------- ------------ ------------ ------------ ----------- ------------- Net benefits 1,058,518 (33,388) 1,353,075 - - 2,378,205 Commissions and other agent compensation 1,035,765 - - - - 1,035,765 General and administrative expens625,188 - - - - 625,188 Change in deferred acquisition costs, net (1,049,646) - - - - (1,049,646) ------------- ------------ ------------ ------------ ----------- ------------- Total benefits and expenses 1,669,825 (33,388) 1,353,075 - - 2,989,512 Income from operations before income taxes 361,412 - - - 1,913 363,325 ------------- ------------ ------------ ------------ ----------- ------------- Income tax expense (benefit): Current 81,510 - - - (588) 80,922 Deferred 28,558 - - - (679) 27,879 ------------- ------------ ------------ ------------ ----------- ------------- Total income tax expense 110,068 - - - (1,267) 108,801 ------------- ------------ ------------ ------------ ----------- ------------- ------------- ------------ ------------ ------------ ----------- ------------- Income before equity earnings 251,344 - - - 3,180 254,524 Equity in earnings of equity method investees, net of tax 3,180 - - - (3,180) - ------------- ------------ ------------ ------------ ----------- ------------- Net income $ 254,524 $ - $ - $ - $ - $ 254,524 ============= ============ ============ ============ =========== =============
30 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The reclassifications resulted in adjustments to the Consolidated Statements of Cash Flows as presented in the following tables:
For the year ended December 31, 2007 ----------------------------------------------------------------------------------------- As originally Adjustment Adjustment Adjustment Adjustment reported 1 2 3 4 As adjusted ------------ ------------- ------------- ------------ ------------- ------------- Cash flows provided by (used in) operating activities: Net (loss) income $ 55,272 $ - $ - $ - $ - $ 55,272 ------------ ------------- ------------- ------------ ------------- ------------- Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Realized investment losses 711,088 - - - - 711,088 Purchases of trading securities (2,196,297) - - - - (2,196,297) Sale and other redemptions of trading securities 558,380 - - - - 558,380 Unrealized loss on annuity-related options and gross reserves 347,575 - - - - 347,575 Deferred income tax (benefit) expense (60,705) - - - 446 (60,259) Charges to policy account balances (73,808) - - - - (73,808) Gross interest credited to policy account balances 1,041,726 - - - - 1,041,726 Amortization of (discount) premium, net (4,942) - - - - (4,942) Equity in earnings of equity method investees 111 - - - (111) - Change in: Accrued investment income (57,254) - - - - (57,254) Receivables 103,102 - - - - 103,102 Reinsurance recoverable 59,201 - - - - 59,201 Deferred acquisition costs (650,735) - - - - (650,735) Future policy benefit reserves 183,321 - - - - 183,321 Policy and contract claims (86,869) - - - - (86,869) Other policyholder funds 21,034 - - - - 21,034 Unearned premiums (15,566) - - - - (15,566) Other assets and liabilities (130,342) - - - - (130,342) Other, net (83,309) - - - (335) (83,644) ------------ ------------- ------------- ------------ ------------- ------------- Total adjustments (334,289) - - - - (334,289) ------------ ------------- ------------- ------------ ------------- ------------- Net cash provided by (used in) operating activities $ (279,017)$ - $ - $ - $ - $ (279,017) ============ ============= ============= ============ ============= =============
31 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities)
----------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2006 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- As originally Adjustment Adjustment Adjustment Adjustment As ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- reported 1 2 3 4 Adjusted ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Cash flows provided by (used in) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- operating activities: ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ 254,524 $ - $ - $ - $ - $ 254,524 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net (loss) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- income to net cash provided by ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- (used in) operating activities: ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Realized investment losses 555,195 - - - - 555,195 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Purchases of trading securities (1,345,475) - - - - (1,345,475) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Sale and other redemptions of ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- trading securities 198,668 - - - - 198,668 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Unrealized loss on annuity-related ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- options and gross reserves 912,662 - - - - 912,662 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Deferred income tax (benefit) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- expense 28,558 - - - (679) 27,879 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Charges to policy account balances (69,941) - - - - (69,941) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Gross interest credited to policy ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- account balances 730,546 - - - - 730,546 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Amortization of (discount) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- premium, net 111,697 - - - - 111,697 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Equity in earnings of equity ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- method investees (1,913) - - - 1,913 - ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Change in: ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Accrued investment income (72,326) - - - - (72,326) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Receivables (106,654) - - - - (106,654) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Reinsurance recoverable (84,138) - - - - (84,138) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Deferred acquisition costs (1,049,646) - - - - (1,049,646) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Future policy benefit reserves 139,631 - - - - 139,631 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Policy and contract claims 8,944 - - - - 8,944 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Other policyholder funds (66,312) - - - - (66,312) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Unearned premiums 20,243 - - - - 20,243 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Other assets and liabilities 32,512 - - - - 32,512 ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Other, net (23,545) - - - (1,234) (24,779) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments (81,294) - - - - (81,294) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- operating activities $173,230 $ - $ - $ - $ - $ 173,230 --------------------- ----------------==============--============--=============--============--============--=============-------
32 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (3) RISK DISCLOSURES The following is a description of the significant risks facing the Company and how it attempts to mitigate those risks: (a) CREDIT RISK The risk that issuers of fixed rate and variable rate income securities, mortgages on commercial real estate, or transactions with other parties, such as reinsurers and derivative counterparties, default on their contractual obligations. This risk has significantly increased in 2008 caused by the overall decline in U.S. economic conditions resulting in higher security credit spreads and related declines in investment value. The Company is at risk of economically realizing these losses if it is required to sell investments to meet its cash flow needs. The Company attempts to mitigate this risk by adhering to investment policies that provide portfolio diversification on an asset class, creditor, and industry basis, and by complying with investment limitations governed by state insurance laws and regulations, as applicable. The Company considers all relevant objective information available in estimating the cash flows related to structured securities. The Company actively monitors and manages exposures, and determines whether any securities are impaired. The aggregate credit risk taken in the investment portfolio is influenced by management's risk/return preferences, the economic and credit environment, and the relationship of credit risk in the asset portfolio to liabilities. The Company also has an asset-liability management strategy to align cash flows and duration of the investment portfolio with policyholder liability cash flows and duration. For derivative counterparties, the Company attempts to minimize credit risk by establishing relationships with counterparties rated A- and higher. The Company has executed Credit Support Annexes (CSA) with all active counterparties and requires a CSA from all new counterparties added to the counterparty pool. The CSA agreement further limits credit risk by requiring counterparties to post collateral to a trust account based on their current credit rating. The Company reviews the credit rating of the counterparties at least monthly. (b) CREDIT CONCENTRATION RISK The risk of increased exposure to major asset defaults (of a single security issuer or class of security issuers); economic conditions (if business is concentrated in a certain industry sector or geographic area); or adverse regulatory or court decisions (if concentrated in a single jurisdiction) affecting credit. This risk has increased in 2008 and early 2009 due to the merger of financial institutions for which the Company holds related investments. The Company's Asset Liability Management Committee (ALCO) recommends an investment policy to both the Allianz of America Finance Committee (AZOA FiCo), and subsequently the Board of Directors for Allianz Life Insurance Company of North America (Allianz Life BOD). The investment policy and accompanying investment mandates specify asset allocation among major asset classes and the degree of asset manager flexibility for each asset class. The investment policy complies, at a minimum, with state statutes. Compliance with the policy is monitored by ALCO who is responsible for implementing internal controls and procedures. Deviations from the policy are monitored and addressed. AZOA FiCo and subsequently the Allianz Life BOD review the policy and mandates at least annually. 33 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Mitigation controls include a monthly report from the asset manager that shows the fixed income risk profile, including sector allocation, credit rating distribution, and other credit statistics. The Company performs a quarterly calculation to ensure compliance with the State of Minnesota basket clause. (c) LIQUIDITY RISK The risk that unexpected timing or amounts of cash needed will require liquidation of assets in a market that will result in loss of realized value or an inability to sell certain classes of assets such that an insurer will be unable to meet its obligations and contractual guarantees. Market or Company conditions may preclude access to, or cause disruption of, outside sources of liquidity (e.g., through borrowing, affiliate advances, reinsurance, or securitization) upon which an insurance company typically relies in the normal course of business. Additionally, the Company may not be able to sell large blocks of assets at current market prices, especially in the current investment environment. Liquidity risk also arises from uncertain or unusual cash demands from catastrophic events. The Company attempts to manage liquidity within three specific domains: monitoring product development, product management, business operations, and the investment portfolio; setting asset/liability management (ALM) strategies; and managing the daily ALM and cash requirements. (d) INTEREST RATE RISK The risk that interest rates will change and cause a decrease in the value of an insurer's investments relative to the value of its liabilities and/or an unfavorable change in prepayment activity, resulting in compressed interest margins. This is also the risk that interest rates will change and cause an increase in the value of variable annuity guarantees, including GMWB, GMAB, GMIB, and GMDB. The Company attempts to mitigate this risk by offering products that transfer interest rate risk to the policyholder and by attempting to approximately match the maturity schedule of its assets with the expected payouts of its liabilities, both at inception and on an ongoing basis. The transfer of interest rate risk exposure to policyholders is based on risk free rates versus changes in effective yield of the investment portfolio. Asset and liability matching models are used by the Company to mitigate interest rate risk due to the close relationship between its interest rate sensitive assets and liabilities. The Company considers both the maturity and duration of the asset portfolio as compared with the expected duration of the liability reserves. The Company also attempts to mitigate interest rate risk through asset/liability risk controls, including product development and pricing, product management, and investment asset management. The Company attempts to limit interest rate risk on variable annuity guarantees through product development and pricing and product management. In certain situations, the Company accepts some interest rate risk in exchange for a higher yield on the investment. (e) EQUITY MARKET RISK The risk that movements in the equity markets will result in losses to assets held by the Company or that product features tied to equity markets will increase in value by more than held assets. Fixed-indexed annuity products increase the policy value based on the growth of market indexes. The Company attempts to hedge this exposure with a combination of OTC and exchange-traded derivatives. 34 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) An additional risk is that variable annuity products have guarantees, GMWB, GMIB, and GMDB, which provide a guaranteed level of payments irrespective of market movements. The risk here is of a market downturn or an increase in hedging costs due to greater market volatility, both of which were realized in 2008. The Company has adopted an economic hedging program using derivative instruments to attempt to manage the delta (equity market) risk and provide for these excess guarantee payments in those situations when the separate account assets are not sufficient to provide for them. The Company does not have a vega (market volatility) hedge but attempts to manage risk prospectively through product development and pricing. Equity market risk is also partially mitigated by separate account fund allocation restrictions. For products with GMAB, policyholder contracts allow the Company to employ an automatic investment allocation process to move policyholder funds into fixed accounts during a market downturn to help mitigate this risk. The Company also implemented a delta hedge on the GMAB benefit in November 2008. (f) LEGAL/REGULATORY RISK The risk that changes in the legal or regulatory environment in which the Company operates may result in reduced demand for its products or additional expenses not assumed in product pricing. Additionally, the Company is exposed to risk related to how the Company conducts itself in the market and the suitability of its product sales to contractholders. The Company attempts to mitigate this risk by offering a broad range of annuity products and by operating throughout the U.S. The Company actively monitors all market-related exposure and has members that participate in national and international discussions relating to legal, regulatory, and accounting changes that may impact the business. The Company also has defined suitability standards that are at least as rigorous as, and usually exceeding, the requirements of regulators. (g) RATINGS RISK The risk that rating agencies change their outlook or rating of the Company or a subsidiary of the Company. The rating agencies generally utilize proprietary capital adequacy models in the process of establishing ratings for the Company. The Company is at risk of changes in these models and the impact that changes in the underlying business that it is engaged in can have on such models. In an attempt to mitigate this risk, the Company maintains regular communications with the rating agencies and evaluates the impact of significant transactions on such capital adequacy models and considers the same in the design of transactions to minimize the adverse impact of this risk. Stress tests are performed at least quarterly to assess how rating agency capital adequacy models would be impacted by severe economic events. (h) MORTALITY RISK The risk that life expectancy assumptions used by the Company to price its life insurance business are too aggressive (i.e. insureds live shorter than expected lives). The Company mitigates this risk primarily through reinsurance. Approximately 90% of the Company's mortality risk on its life business is reinsured to third parties. The Company also reviews its mortality assumptions at least annually, reviews mortality experience periodically, and uses conservative underwriting methods relative to the industry. (i) REINSURANCE RISK The risk that reinsurance companies default on their obligation where the Company has ceded a portion of its insurance risk. The Company uses reinsurance to limit its risk exposure in its life and long-term care business and to divest of blocks of business no longer considered core to the Company. The Company has established controls to mitigate reinsurance risk. Counterparty ratings must meet certain thresholds or a trust is required to 35 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) be established. All arrangements are regularly monitored to determine if trusts or letters of credit are sufficient to support the ceded liabilities. The Company also diversifies its exposure across a minimum of three reinsurers for a single life product. Also, the Company reviews the financial standings and ratings of its reinsurance counterparties at least quarterly. (4) ACQUISITION OF BUSINESS On April 1, 2007, the Company purchased 100% of all issued and outstanding shares of common stock of Templeton Funds Annuity Company (TFAC) from Franklin Agency, Inc., a wholly owned subsidiary of Franklin Resources, Inc. (FRI). TFAC was subsequently renamed Allianz Life and Annuity Company (ALAC). The results of operations and financial condition of ALAC, which are not material, have been included in the Consolidated Financial Statements since April 1, 2007. ALAC is a life insurance company licensed in forty-five states and the District of Columbia. It has existing variable annuity insurance contracts and is not actively selling or marketing any of the existing products. The primary reason for this acquisition was to obtain the variable annuity licenses. The Company acquired ALAC for a purchase price of $14,542. The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Company has assigned $11,276 to tangible net assets, and $2,050 to identifiable intangible assets consisting of insurance licenses. These intangible assets have indefinite lives and are not amortized but are instead subject to impairment tests. The excess of the purchase price over the estimated fair values of net assets acquired was recorded as goodwill in the amount of $1,216. The goodwill and intangible assets are nondeductible for tax purposes. This acquisition was accounted for using the purchase method. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of April 1, 2007: Cash $ 2887 Other current assets 9700 Intangible assets 2050 Goodwill 1216 Separate account assets 9338 ------- Total assets acquired 25191 ------- Current liabilities 1311 Separate account liabilities 9338 ------- Total liabilities assumed 10649 ------- Net assets acquired $ 14542 ------- 36 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (5) INVESTMENTS At December 31, 2008 and 2007, the amortized cost or cost, gross unrealized gains, gross unrealized losses, and estimated fair values of available-for-sale securities are as shown in the following table:
Amortized Gross Gross Estimated cost unrealized unrealized fair or cost gains losses value ---------------- ---------------- ---------------- ---------------- 2008: Fixed-maturity securities: U.S. government $ 697,066 $ 189,040 $ - $ 886,106 Agencies not backed by the full faith and credit of the U.S. government 119,797 11,743 - 131,540 States and political subdivisions 301,441 8,335 - 309,776 Foreign government 203,776 22,354 - 226,130 Public utilities 1,727,221 55,899 - 1,783,120 Corporate securities 20,220,773 425,890 - 20,646,663 Mortgage-backed securities 12,210,356 486,660 - 12,697,016 Collateralized mortgage obligations 40,792 4,925 - 45,717 ---------------- ---------------- ---------------- ---------------- Total fixed-maturity securities 35,521,222 1,204,846 - 36,726,068 Equity securities 84 - 9 75 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Total available-for-sale securities $ 35,521,306 $ 1,204,846 $ 9 $ 36,726,143 ================ ================ ================ ================ 2007: Fixed-maturity securities: U.S. government $ 1,929,269 $ 168,500 $ - $ 2,097,769 Agencies not backed by the full faith and credit of the U.S. government 33,726 2,404 - 36,130 States and political subdivisions 289,978 17,711 - 307,689 Foreign government 215,739 13,756 - 229,495 Public utilities 1,451,535 38,805 - 1,490,340 Corporate securities 19,015,811 547,864 - 19,563,675 Mortgage-backed securities 10,276,194 342,603 - 10,618,797 Collateralized mortgage obligations 45,180 2,247 - 47,427 ---------------- ---------------- ---------------- ---------------- Total fixed-maturity securities 33,257,432 1,133,890 - 34,391,322 Equity securities 17,601 222 1,104 16,719 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Total available-for-sale securities $ 33,275,033 $ 1,134,112 $ 1,104 $ 34,408,041 ================ ================ ================ ================
37 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The net unrealized gains (losses) on available-for-sale securities and cash flow hedges consist of the following at December 31:
2008 2007 2006 ------------------ ------------------ ------------------ Available-for-sale: Fixed maturities $ 1,204,846 $ 1,133,890 $ 450,887 Equities (9) (882) 347 Cash flow hedges 24,306 - - Adjustments for: DAC (705,203) (599,149) (258,680) VOBA (21,239) (23,332) (9,013) DSI (58,587) (60,981) (24,405) URR 56,976 63,392 33,862 Deferred taxes (175,376) (179,529) (67,729) ------------------ ------------------ ------------------ Net unrealized gains $ 325,714 $ 333,409 $ 125,269 ================== ================== ==================
The changes in net unrealized gains on available-for-sale fixed-maturity securities before adjustments for deferred taxes, DAC, VOBA, DSI, and URR were $70,956, $683,003, and $185,451 for the years ended December 31, 2008, 2007, and 2006, respectively. The changes in net unrealized gains (losses) on available-for-sale equity securities, before adjustments for deferred taxes, were $873, $(1,229), and $(95,167) for the years ended December 31, 2008, 2007, and 2006, respectively. The amortized cost and estimated fair value of available-for-sale fixed-maturity securities at December 31, 2008, by contractual maturity, are shown below.
Amortized Estimated cost fair value ------------------- ------------------- Available-for-sale: Due in one year or less $ 200,915 $ 203,943 Due after one year through five years 3,280,962 3,316,346 Due after five years through ten years 10,653,615 10,849,689 Due after ten years 9,134,582 9,613,357 Mortgage-backed securities and collateralized mortgage obligations 12,251,148 12,742,733 ------------------- ------------------- ------------------- ------------------- Total available-for-sale fixed-maturity securities$ 35,521,222 $ 36,726,068 =================== ===================
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost of fixed-maturity securities with rights to call or prepay without penalty is $14,117,682 as of December 31, 2008. 38 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Unrealized losses on available-for-sale securities and the related fair value for the respective years ended December 31 are shown below:
12 months or less Greater than 12 months Total ----------------------- ----------------------- ----------------------- Unrealized Unrealized Unrealized Fair value losses Fair value losses Fair value losses ----------- ----------- ---------- ----------- ---------- ---------- 2008: Equity securities $ 75 $ 9 $ - $ - $ 75 $ 9 ----------- ----------- ---------- ----------- ---------- ---------- Total temporarily impaired available-for-sale securities 75 9 $ - $ - $ 75 $ 9 =========== =========== ========== =========== ========== ========== 2007: Equity securities $ 16,174 $ 1,104 $ - $ - $ 16,174 $ 1,104 ----------- ----------- ---------- ----------- ---------- ---------- Total temporarily impaired available-for-sale securities 16,174 1,104 $ - $ - $ 16,174 $ 1,104 =========== =========== ========== =========== ========== ==========
As of December 31, 2008 and 2007, there were no available-for-sale investment holdings that were in an unrealized loss position for fixed-maturity securities; for equity securities, there were 23 and 3, respectively. Proceeds from sales of available-for-sale and trading investments are presented in the following table:
---------------------------------------------------------------------------------------------------------------------- Years ended December 31, ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- 2008 2007 2006 ---------------------------------------------------------------------------------------------------------------------- Available-for-sale: ---------------------------------------------------------------------------------------------------------------------- Fixed-maturity securities ---------------------------------------------------------------------------------------------------------------------- Proceeds from sales $ 1,413,235 $ 1,118,979 $ 5,636,908 ---------------------------------------------------------------------------------------------------------------------- Proceeds from tax-free and taxable exchanges - - 1,160 ---------------------------------------------------------------------------------------------------------------------- Equity securities ---------------------------------------------------------------------------------------------------------------------- Proceeds from sales 14,906 68,229 506,311 ---------------------------------------------------------------------------------------------------------------------- Proceeds from tax-free exchanges, ---------------------------------------------------------------------------------------------------------------------- redemptions and spin-offs - - 3,868 ---------------------------------------------------------------------------------------------------------------------- Trading: ---------------------------------------------------------------------------------------------------------------------- Fixed-maturity securities ---------------------------------------------------------------------------------------------------------------------- Proceeds from sales 1,244,445 556,061 172,653 ---------------------------------------------------------------------------------------------------------------------- Proceeds from tax-free and taxable exchanges - - 5,240 ---------------------------------------------------------------------------------------------------------------------- Equity securities ---------------------------------------------------------------------------------------------------------------------- Proceeds from sales 17,540 3,560 5,894 ----------------------------------------------------------------------------------------------------------------------
Trading forward commitments of $10,943, $0, and $0 were purchased and $10,943, $0, and $0 were sold by the Company during 2008, 2007 and 2006, respectively. There were no gains or losses realized in 2008, 2007, or 2006 from these securities. Available-for-sale forward commitments of $943,124, $0, and $0 were purchased and $943,124, $0, and $0 were sold by the Company during 2008, 2007 and 2006, respectively. There were no gains or losses realized in 2008, 2007, or 2006 from these securities. As of December 31, 2008 and 2007, investments with a carrying value of $85,741 and $91,063, respectively, were held on deposit with various insurance departments and in other trusts as required by statutory regulations. 39 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) As of December 31, 2008 and 2007, the Company held options purchased (asset) and options sold (liability) with the following amortized cost, fair value, and notional amounts: 2008 2007 --------------- ---------------- Options Purchased (asset) Amortized cost $ 484,060 $ 482,639 Fair value 524,827 379,855 Notional 11,427,185 21,245,193 Sold (liability) Basis $ 316,248 $ 304,351 Fair value 518,778 218,108 Notional 7,708,902 18,497,585 The Company utilizes option contracts with the objective to economically hedge certain fixed-indexed annuity and life products tied to the S&P 500 index or NASDAQ 100 index as well as the objective to economically hedge certain variable annuity guaranteed benefits. The Company also utilizes futures to economically hedge fixed-indexed annuity and life and variable annuity guarantees. The following table presents the net realized gains (losses), gains (losses) on exercise of options, and corresponding changes in the policy and contract account balance being hedged.
Years ended December 31, 2008 2007 2006 Options to economically hedge certain fixed-indexed annuity and life products: Net realized (losses) gains $ (143,402) $ (211,217)$ 127,367 Gains on exercise of options 417,573 10,743 80,182 Decrease (increase) in policy and contract account balance 107,202 (152,379) (1,096,386) Options to economically hedge certain variable annuity guaranteed benefits: Net realized gains (losses) $ - $ 15,502 $ (2,976) Losses on exercise of options - (24,484) (20,388) Increase in future policy benefit reserves (1,082,368) (62,135) (5,116) Futures to economically hedge fixed-indexed annuity and life and variable annuity guarantees: Net realized (losses) gains $ (1,305,738)$ (46,340)$ 459,046
Increase in future policy benefit reserves of ($489,054) for the year ended December 31, 2008 in the table above is related to certain GMAB guarantees that were hedged primarily with an automatic investment allocation process as described in note 3. As of December 31, 2008 and 2007, the Company held futures contracts, which do not require an initial investment; therefore, no asset or liability is recorded. The Company is required to settle cash daily based on movements of the 40 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) representative index. The Company is also required to post collateral for futures contracts by the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), and London International Financial Futures Exchange (LIFFE). The Company retains ownership of the collateral, but the collateral resides in an account designated by the exchange. The collateral is subject to specific exchange rules regarding rehypothecation. Collateral posted at December 31, 2008 and 2007 had a fair value of $435,024 and $889,043, respectively, and is included in fixed-maturity securities on the Consolidated Balance Sheets. As of December 31, 2008, the derivatives used to hedge the fixed-maturity securities with variable interest rates were deemed 100% effective, with $24,306 of unrealized gains reported on the Consolidated Balance Sheets. The following is a summary of net unrealized gains related to cash flow hedging activity, net of tax:
YEARS ENDED DECEMBER 31, 2008 2007 2006 Net unrealized derivatives gains at January 1 $ - $ - $ - Holding gains, net of tax of $8,507, $0, and $0, respectively 15,799 - - Reclassification of realized (gains) losses, net of tax of $0, $0, and $0, respectively - - - Net unrealized derivatives gains at December 31 $ 15,799 $ - $ -
At December 31, 2008, the Company does not expect to reclassify any pre-tax gains or losses on cash flow hedges into earnings during the next 12 months. In the event that cash flow hedge accounting is no longer applied because the derivative is dedesignated as a hedge or the hedge is not considered to be highly effective, the reclassification from accumulated other comprehensive income into earnings may be accelerated. The Company also enters into contracts with Allianz SE with the objective to economically hedge risk associated with Allianz SE's stock based compensation plan. The contracts are recorded at fair value on the Consolidated Balance Sheets with the change in fair value recorded in derivative income on the Consolidated Statements of Operations. The (decreases) increases in fair value of these contracts were $(7,202), $(9,746), and $8,788 for the years ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008 and 2007, the Company owned 110,177 and 113,830 contracts with a cost of $8,981 and $9,019, respectively, and a fair value of $3,920 and $11,161, respectively. See further discussion of the stock based compensation plan in note 17. The Company will only enter into option contracts with counterparties rated A- or better and the option contracts are not used for speculative or income generating purposes. At December 31, 2008, there were six counterparties with a net receivable exposure to the Company of $161,997. At December 31, 2008, $26,187 of that exposure was not covered by collateral held. At December 31, 2007, there were 11 counterparties with a net receivable exposure to the Company of $193,936. At December 31, 2007, $128,548 of that exposure was not covered by collateral held. At December 31, 2008 and 2007, respectively, the Company also had net liability positions to certain counterparties of $114,374 and $32,647 that was not covered by collateral posted to counterparties. This resulted in a total net (liability) receivable of ($106,669) and $95,901 as of December 31, 2008 and 2007, respectively. Dresdner Bank Aktiengesellschaft (Dresdner Bank), a related party, accounted for 0% and 1.1% of contractual net exposure held at December 31, 2008 and 2007, respectively. During 2008, the Company established an allowance of $1,500 due to the bankruptcy of a derivative counterparty. The related receivable balance was $7,139 at December 31, 2008. Management believes that no significant credit risk exists. 41 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) In 2007, the Company began to utilize derivatives within certain actively managed investment portfolios that were a net asset of $1,216 at December 31, 2008 and a net liability of $11,806 at December 31, 2007. Within these portfolios, derivatives can be used for hedging, replication, and income generation only. The Company enters into credit default swaps that assume credit risk from a single entity or referenced index for the purpose of synthetically replicating investment transactions. The Company will only need to pay on the contract if a credit event occurs. Credit events include bankruptcy of the reference and failure to pay by the reference. The notional amount is equal to the maximum potential future loss amount. The table below presents the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type, and average credit ratings for the credit derivatives in which the Company is assuming credit risk as of December 31, 2008:
Weighted Average Years Credit Derivative Type by to Derivative Risk Exposure Notionale Amount Fair Value Maturity AveragetCredit Rating ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Single name credit default swaps: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Investment grade risk: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Emerging markets sovereign credit $ 6,100 $ (1,658) 8 A- ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- U.S. corporate credit 1,860 (10) 5 AAA ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Below investment grade risk: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Emerging markets sovereign credit 2,600 (1,366) 9 B+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- European Union corporate credit 200 (74) 4 B+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- U.S. corporate credit 100 (12) 2 CAA+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Basket credit default swaps: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Investment grade risk: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- U.S. corporate credit 8,177 (154) 5 BAA+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- U.S. asset-backed securities 1,000 (945) 29 AA ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Below investment grade risk: ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Emerging markets sovereign credit 16,800 (2,534) 5 BA+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- European Union corporate credit 2,300 (677) 3 B+ ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- U.S. corporate credit 14,570 (2,421) 4 B- ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Total $ 53,707 $ (9,852) -------------------------------------------------------------------------------------------------------------------------
The Company has posted $11,700 of collateral in the form of cash related to the liabilities above. 42 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Gross and net realized investment gains (losses) for the years ended December 31, 2008, 2007, and 2006 are summarized as follows:
----------------------------------------------------------------------------------------------------------------- Years ended December 31, 2008 2007 2006 ----------------------------------------------------------------------------------------------------------------- Available-for-sale: Fixed-maturity securities: Gross gains on sales and exchanges $ 113,791 $ 43,633 $ 44,105 Gross losses on sales and exchanges (350) (42,273) (55,714) Total 113,441 1,360 (11,609) Other-than-temporary impairments (3,580,665) (773,279) (612,766) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net losses on fixed-maturity securities (3,467,224) (771,919) (624,375) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Equity securities: ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross gains on sales and exchanges - 1,410 102,652 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross losses on sales and exchanges (2,611) (617) (6,875) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Other-than-temporary impairments - (76) (29) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net (losses) gains on equity securities (2,611) 717 95,748 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net losses on available-for-sale securities (3,469,835) (771,202) (528,627) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Trading: ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Fixed-maturity securities: ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross gains on sales and exchanges 36,472 4,039 4 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross losses on sales and exchanges (29,872) (7,243) (1,326) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net gains (losses) on fixed-maturity securities 6,600 (3,204) (1,322) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Equity securities: ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross gains on sales and exchanges 890 223 6 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross losses on sales and exchanges (1,081) (3) (248) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net (losses) gains on equity securities (191) 220 (242) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Fixed-maturity and equity securities: ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross gains due to market appreciation 122,841 53,246 17,319 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gross losses due to market depreciation (568,774) (5,820) (74,512) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net (losses) gains due to market appreciation (445,933) 47,426 (57,193) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net (losses) gains on trading securities (439,524) 44,442 (58,757) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Provision for mortgage loans on real estate (4,183) (9,884) (11,935) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gain on real estate sales - 33,320 21,451 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Gain on sale of Life Sales - - 22,451 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Other (4,717) (7,654) (1,996) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Net realized investment losses $ (3,918,259) $ (710,978) $ (557,413) ----------------------------------------------------------------==============----============----============--- ----------------------------------------------------------------==============----============----============--- -----------------------------------------------------------------------------------------------------------------
In 2006, the Company sold its interest in Life Sales, a third-party marketing organization. This resulted in a pre-tax gain of $22,451, which is included in the realized investment losses, net on the Consolidated Statements of Operations. 43 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The OTTI listed above are limited due to the recognition of OTTI on the securities in prior periods. The increase in other-than-temporary impairments in 2008 is related to the general U.S. economic downturn and related credit issues and increasing credit spreads on fixed-maturity securities. Major categories of interest and similar income, net and derivative income for the respective years ended December 31 are shown below. Interest and similar income related to securities held under repurchase agreements is shown with fixed-maturity securities, and was $0, $0, and $5,512 in 2008, 2007, and 2006, respectively.
2008 2007 2006 ---------------- -------------- --------------- Interest and similar income, net: Available-for-sale fixed-maturity securities $ 2,218,194 $ 1,912,421 $ 1,657,920 Investment income on trading securities 328,900 298,908 188,468 Mortgage loans on real estate 281,586 239,081 176,235 Interest on loans to affiliates 47,038 27,871 35,030 Short-term securities 27,123 44,910 76,047 Rental income on real estate 24,407 34,116 36,780 Policy loans 11,978 11,384 9,182 Other invested assets 5,879 42,530 20,227 Interest on assets held by reinsurers 3,609 3,817 4,054 Dividends from available-for-sale common stock - 173 335 ---------------- -------------- --------------- Total 2,948,714 2,615,211 2,204,278 Less: Investment expenses 39,820 49,880 61,435 ---------------- -------------- --------------- ---------------- -------------- --------------- Total interest and similar income, net $ 2,908,894 $ 2,565,331 $ 2,142,843 ================ ============== =============== Derivative (loss) income: Change in fair value of equity-indexed annuity and guaranteed benefit-related options $ (143,403)$ (195,715) $ 124,391 Gain (loss) on exercise of equity-indexed annuity and guaranteed benefit-related options 417,573 (13,741) 59,794 (Loss) gain on exercise of equity-indexed annuity and guaranteed benefit-related futures (1,305,738) (43,820) 459,046 Change in fair value and gain (loss) on exercise of other derivatives 27,545 1,884 - ---------------- -------------- --------------- Total derivative (loss) income $ (1,004,023)$ (251,392) $ 643,231 ================ ============== ===============
44 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The Company's investment in mortgage loans on real estate at December 31, 2008 and 2007 is summarized as follows:
2008 2007 ------------------ ------------------ Mortgage loans on real estate: Commerical $ 4,883,265 $ 4,442,855 Residential 1,505 1,573 Valuation allowances (46,397) (42,214) ------------------ ------------------ Total mortgage loans on real estate $ 4,838,373 $ 4,402,214 ================== ==================
At December 31, 2008, mortgage loans on real estate in CA and TX exceeded the 10% concentration level by state with concentrations of 42.3% or $2,068,676, and 10.1% or $493,416, respectively. At December 31, 2007, mortgage loans on real estate in CA and TX exceeded the 10% concentration level by state with concentrations of 41.0% or $1,823,506, and 11.8% or $523,516, respectively. Interest rates on investments in new mortgage loans ranged from a minimum of 5.74% to a maximum of 6.72%. The maximum percentage of the loan to the value of the related real estate of any one loan was 80%. The valuation allowances on mortgage loans on real estate at December 31, 2008, 2007, and 2006 and the changes in the allowance for the years then ended are summarized as follows:
2008 2007 2006 ------------------- ------------------- ------------------- Balance, beginning of year $ 42,214 $ 32,330 $ 20,395 Charged to operations 4,183 9,884 11,935 ------------------- ------------------- ------------------- Balance, end of year $ 46,397 $ 42,214 $ 32,330 =================== =================== ===================
The Company's investment portfolio includes mortgage-backed securities and collateralized mortgage obligations. Due to the high quality of these investments and the lack of sub-prime loans within the securities, the Company does not have a material exposure to sub-prime mortgages. (6) FAIR VALUE MEASUREMENTS The following financial instruments are carried at fair value on a recurring basis in the Company's Consolidated Financial Statements: fixed-maturity securities, freestanding and embedded derivatives, equity securities, corporate-owned life insurance, and separate accounts assets. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used in the valuation techniques to measure fair value. Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 - Valuations derived from techniques that utilize observable inputs, other than quoted prices included in Level 1, which are observable for the asset or liability either directly or indirectly, such as: (a)Quoted prices for similar assets or liabilities in active markets. (b)Quoted prices for identical or similar assets or liabilities in markets that are not active. 45 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (c)Inputs other than quoted prices that are observable. (d)Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 - Valuations derived from techniques in which the significant inputs are unobservable. Level 3 fair values reflect the Company's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). The Company has analyzed the valuation techniques and related inputs, evaluated its assets and liabilities reported at fair value, and determined an appropriate SFAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each valuation was classified into Level 1, 2, or 3. The following table presents the assets and liabilities measured at fair value on a recurring basis and their corresponding level in the fair value hierarchy at December 31, 2008:
Total Level 1 Level 2 Level 3 --------------- ---------------- ---------------- --------------- --------------- ---------------- ---------------- --------------- Assets accounted for at fair value: Fixed-maturity securities (1) $ 41,887,964 $ 1,609,382 $ 38,250,019 $ 2,028,563 Derivative investments (2) 621,784 14,961 568,239 38,584 Equity securities 9,602 9,602 - - Corporate owned life insurance (3) 86,388 - 86,388 - Separate account assets (4) 11,791,728 11,791,728 - - --------------- ---------------- ---------------- --------------- --------------- ---------------- ---------------- --------------- Total assets accounted for at fair value $ 54,397,466 $ 13,425,673 $ 38,904,646 $ 2,067,147 =============== ================ ================ =============== =============== ================ ================ =============== Liabilities accounted for at fair value: Derivative liabilities $ 535,481 $ 2,059 $ 533,422 $ - Annuity embedded derivative liabilities (5) 7,058,370 - - 7,058,370 --------------- ---------------- ---------------- --------------- --------------- ---------------- ---------------- --------------- Total liabilities accounted for at fair value $ 7,593,851 $ 2,0$9 533,422 $ 7,058,370 =============== ================ ================ =============== =============== ================ ================ =============== (1)Fixed-maturity securities differ from amount reported on the Consolidated Balance Sheets due to $138 of held-to-maturity securities that are carried at amortized cost and not included here. (2)Derivative investments are net of a $9,531 embedded derivative liability reported within loans to affiliates on the Consolidated Balance Sheets. (3)Corporate owned life insurance is reported in other invested assets on the Consolidated Balance Sheets. (4)In accordance with SOP 03-1, the value of separate account liabilities is set to equal the fair value of separate account assets. (5)Annuity embedded derivative liabilities are reported in future policy benefit reserves and policy and contract account balances on the Consolidated Balance Sheets.
The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above table. These fair values represent an exit price (i.e., what a buyer in the market place would pay for an asset in a current sale or charge to transfer a liability). 46 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) VALUATION OF FIXED-MATURITY SECURITIES AND EQUITY SECURITIES The fair value of fixed-maturity securities and equity securities is based on quoted market prices in active markets when available. Based on the market data, the securities are categorized into asset class, and based on the asset class of the security, appropriate pricing applications, models, and related methodology and standard inputs are utilized to determine what a buyer in the marketplace would pay for the security in a current sale. When quoted prices are not readily available or in an inactive market, standard inputs used in the valuation models, listed in approximate order of priority, include, but are not limited to, benchmark yields, reported trades, municipal securities rulemaking board (MSRB) reported trades, nationally recognized municipal securities information repository (NRMSIR) material event notices, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In certain cases including private placement securities as well as certain difficult-to-price securities, internal pricing models may be used that are based on market proxies. Generally, treasury securities and exchange traded stocks are included in Level 1. Most bonds for which prices are provided by third-party pricing sources are included in Level 2 because the inputs used are market observable. Bonds for which prices were obtained from broker quotes and private placement securities that are internally priced are included in Level 3. At December 31, 2008, private placement securities of $1,493,372 were included in Level 3. Internal pricing models based on market proxy securities are used to value these holdings. AZOA portfolio managers monitor the proxies used on a monthly basis for reasonableness. This includes ensuring there are no significant credit events impacting the proxy security and that the spreads used are still reasonable under the circumstances. VALUATION OF DERIVATIVES The fair value of option assets and liabilities are derived internally, by calculating their expected discounted cash flows, using a set of calibrated, risk-neutral stochastic scenarios, including a market data monitor, a market data model generator, a stochastic scenario calibrator, and the actual asset pricing calculator. The fair value of forwards and swaps are based on quoted market prices. Exchange traded options and futures are generally included in Level 1. Options that are internally priced are included in Level 2 because they use market observable inputs. VALUATION OF CORPORATE OWNED LIFE INSURANCE (COLI) The policy value of COLI is recorded at fair value on the Consolidated Balance Sheets. Its fair value is tied to the S&P 500 market index at the measurement date. COLI is included in Level 2 because although its fair value is tied to its underlying assets and is market observable, the exit markets are different. VALUATION OF SEPARATE ACCOUNT ASSETS Separate account assets are carried at fair value and reported as a summarized total on the Consolidated Balance Sheets. The fair value of the separate account assets is based on the fair value of the underlying assets. Funds in the separate accounts are primarily invested in mutual funds with the following investment types - bond, domestic equity, international equity, or specialty. The separate account funds also hold certain money market funds. Mutual fund investments are generally included in Level 1. The remaining investments are categorized similar to the 47 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) investments held by the Company in the general account (e.g., if the separate account invested in corporate bonds or other fixed-maturity securities, that portion could be considered a Level 2 or Level 3). EMBEDDED DERIVATIVES Embedded derivatives principally include the equity-indexed features contained in fixed-indexed annuity products and certain variable annuity riders. Embedded derivatives are recorded in the Consolidated Financial Statements at fair value with changes in fair value adjusted through net (loss) income. Fair values of the embedded derivative liabilities are calculated based on internally developed models because active, observable markets do not exist for these liabilities. Fair value is derived from techniques in which one or more significant inputs are unobservable and are included in Level 3. These fair values represent the Company's best estimate of an amount that could be realized in a current market exchange absent actual market exchanges. The fair value of the embedded derivative contained in the fixed-indexed annuity products is the sum of the current year's option value projected stochastically, the projection of future index growth at the option budget, and the historical interest/equity-indexed credits. A separate amount is reserved for the GMWB rider on some fixed-indexed annuity products. Effective January 1, 2008 upon adoption of SFAS 157, the valuation of the embedded derivative now includes an adjustment for the Company's own credit standing and a risk margin for non-capital market inputs. The Company's own credit adjustment is determined by taking into consideration publicly available information on industry default risk with considerations for the Company's own credit profile. Risk margin is incorporated into the valuation model to capture the non-capital market risks of the instrument, which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of certain actuarial assumptions including surrenders, annuitization, and future equity index caps or participation rates. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility, changes in the Company's own credit standing, and variations in actuarial assumptions regarding policyholder behavior and risk margin related to non-capital market inputs may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net (loss) income. The Company issues certain variable annuity products with guaranteed minimum benefit riders. These include GMWB and GMAB riders. GMWB and GMAB riders are embedded derivatives, which are measured at fair value separately from the host variable annuity contract, with changes in fair value reported in change in fair value of annuity embedded derivatives on the Consolidated Statements of Operations. These embedded derivatives are classified within future policy benefit reserves on the Consolidated Balance Sheets. The fair value for these riders is estimated using the present value of future benefits minus the present value of future fees using actuarial and capital market assumptions related to the projected cash flows over the expected lives of the contracts. A risk neutral valuation methodology is used under which the cash flows from the riders are projected under multiple capital market scenarios using observable risk free rates. Effective January 1, 2008, upon adoption of SFAS 157, the valuation of these riders now includes an adjustment for the Company's own credit standing and a risk margin for non-capital market inputs. The Company's own credit adjustment is determined taking into consideration publicly available information relating to the Company's claims paying ability. Risk margin is established to capture the non-capital market risks of the instrument, which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of certain actuarial assumptions including surrenders, annuitization, and premium persistency. The establishment of the risk margin requires the use of significant management judgment. These riders may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility, changes in the Company's own credit standing, and variations in actuarial assumptions regarding policyholder 48 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) behavior and risk margins related to non-capital market inputs may result in significant fluctuations in the fair value of the riders that could materially affect net (loss) income. The Company issues equity-indexed universal life policies, which contain an embedded derivative similar to the fixed-indexed annuity products. The embedded derivative was not significant in the prior year. An estimate of $3,794 was recorded as a reduction of reserves at December 31, 2008 and the Company will continue to refine this calculation in 2009. This amount is not included in the total for Level 3 liabilities in the tables within this note. The Company also has an embedded derivative asset related to a modified coinsurance agreement with Transamerica. This agreement results in a credit derivative based on the difference between the LIBOR and Corporate A- spread as of an average portfolio purchase date. This derivative is on a closed block of business and is not significant to the ongoing results of the Company. The following table provides a reconciliation of the beginning and ending balances for the Company's Level 3 assets and liabilities measured at fair value on a recurring basis.
Fixed-maturity Derivative Embedded Derivative Securities Assets Liabilities ------------------------------------------------------------------- Balance January 1, 2008 $ 2,690,291 $46 (6,247,943) Total realized/unrealized (losses) gains included in: Net (loss) income (323,508) 38,538 (117,160) Other comprehensive loss (19,128) - - Purchases, sales, issuances, and settlements 1,010,536 - (693,267) Transfer in and/or out of Level 3, net (1,329,628) - - ------------------- ------------- ------------------------- Balance December 31, 2008 $ 2,028,563 $38,584 $ (7,058,370) =================== ============= ========================= Realized (losses) gains included in net (loss) income related to financial instruments still held at December 31, 2008 $ (327,646 $38,538 $ (697,508) =================== ============= =========================
TRANSFERS The Company reviews its fair value hierarchy classifications annually. This review could reveal that previously observable inputs for specific assets or liabilities are no longer available or reliable. For example, the market for a Level 1 asset becomes inactive. In this case, the Company may need to adopt a valuation technique that relies on unobservable components causing the asset to be transferred to Level 2 or Level 3. Alternatively, if the market for a Level 3 asset or liability becomes active, the Company will report a transfer out of Level 3. Transfers in and/or out of Level 3 are reported as of the beginning of the period in which the change occurs. The net transfers out of Level 3 for the year ended December 31, 2008 are a result of observable inputs becoming available for certain fixed maturity securities. 49 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) NON-RECURRING FAIR VALUE MEASUREMENTS Occasionally, certain assets and liabilities are measured at fair value on a non-recurring basis (e.g., impaired assets). At December 31, 2008, there were no assets or liabilities reported at fair value on a nonrecurring basis required to be disclosed under SFAS 157. 50 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the carrying amounts and fair values of financial assets and liabilities at December 31, 2008 and 2007.
----------------------------------------------------------------------------------------------------------------- 2008 2007 ----------------------------- ----------------------------- Carrying Fair Carrying Fair amount value amount value ------------- ------------- ------------- ------------- Financial assets: Available for sale: Fixed-maturity securities: U.S. government $ 886,106 $ 886,106 $ 2,097,769 $ 2,097,769 Agencies not backed by the full faith and credit of the U.S. government 131,540 131,540 36,130 36,130 States and political subdivisions 309,776 309,776 307,689 307,689 Foreign governments 226,130 226,130 229,495 229,495 Public utilities 1,783,120 1,783,120 1,490,340 1,490,340 Corporate securities 20,646,663 20,646,663 19,563,675 19,563,675 Mortgage-backed securities 12,697,016 12,697,016 10,618,797 10,618,797 Collateralized mortgage obligations 45,717 45,717 47,427 47,427 Equity securities 75 75 16,719 16,719 Trading: Fixed-maturity securities: U.S. government 723,276 723,276 1,208,702 1,208,702 Agencies not backed by the full faith and credit of the U.S. government 23,944 23,944 21,169 21,169 States and political subdivisions 57,974 57,974 57,363 57,363 Foreign governments 47,671 47,671 41,508 41,508 Public utilities 305,806 305,806 299,256 299,256 Corporate securities 3,237,355 3,237,355 3,460,176 3,460,176 Mortgage-backed securities 758,357 758,357 897,377 897,377 Collateralized mortgage obligations 7,651 7,651 41,542 41,542 Equity securities 9,527 9,527 29,325 29,325 Mortgage loans on real estate 4,838,373 4,701,641 4,402,214 4,384,442 Short-term securities 1,496,911 1,496,911 737,039 737,039 Derivatives 631,315 631,315 379,855 379,855 Loans to affiliates 723,802 725,464 725,826 731,283 Policy loans 174,599 174,599 169,058 169,058 Cash 73,073 73,073 92,177 92,177 Separate account assets 11,791,728 11,791,728 20,541,717 20,541,717 Financial liabilities: Investment contracts $ 56,171,396 $ 44,717,497 $ 43,751,194 $ 35,154,322 Derivative liability 535,481 535,481 229,351 229,351 Mortgage notes payable 129,075 114,143 134,123 141,958 Separate account liabilities 11,791,728 11,791,728 20,541,717 11,791,728
51 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The fair value of mortgage loans on real estate has been calculated using discounted cash flows using market interest rates as of year-end representative of those that a market participant would use. Credit risk was considered in this valuation implicitly within the discount rate used. The fair value of loans to affiliates is calculated by management using the market price of a financial instrument with similar characteristics. Investment contracts include certain reserves related to deferred annuity products. These reserves are included in the future policy benefit reserves and the policy and contract claims balances on the Consolidated Balance Sheets. Fair values of investment contracts, which include deferred annuities and other annuities without significant mortality risk, are determined by testing amounts payable on demand against discounted cash flows using market interest rates commensurate with the risks involved, including consideration of the Company's own credit standing and a risk margin for non-capital market inputs. Fair value of mortgage notes payable is the present value of future payment amounts, calculated using market interest rates as of year- end representative of those a market participant would use. Fair values of separate account liabilities are equal to the fair value of the separate account assets that support them. Changes in market conditions subsequent to year-end may cause fair values calculated subsequent to year-end to differ from the amounts presented herein. (7) GOODWILL Goodwill at December 31, 2008, 2007, and 2006, and the changes in the balance for the years then ended are as follows:
2008 2007 2006 ------------------- ------------------- ------------------- Balance, beginning of year $ 502,640 $ 495,243 $ 428,323 Increased ownership in partially owned field marketing organizations - 6,181 66,920 Purchase of assets 1,879 - - Acquisition of TFAC - 1,216 - Release of tax reserve of ALAC (41) - - Impairment of goodwill on ALAC (1,175) - - ------------------- ------------------- ------------------- Balance, end of year $ 503,303 $ 502,640 $ 495,243 =================== =================== ===================
The increase in goodwill for 2008 is the result of an asset purchase including intangible assets of a field marketing organization of $2,000. The purchase price was allocated as follows: tangible assets received $30; intangible asset for non-compete agreement $140; deferred tax liability ($49); and goodwill $1,879. Increase in goodwill in 2007 and 2006 is the result of the exercise of put options by minority-owned field marketing organizations requiring the Company to purchase part or all of the stock or member interests of the organizations. In addition, part of the 2007 increase in goodwill was related to the acquisition of TFAC. See notes 4 and 19 for further information. The release of the tax reserve of ALAC was the result of state tax statutes expiring. At the time of acquisition, the seller had recorded a tax contingency reserve. SFAS 109 dictates that releases of tax contingency reserves that are on the books at time of acquisition be credited against goodwill as they reverse. 52 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The value of goodwill for ALAC was based on estimated future profits from issuing new insurance products. An impairment evaluation of goodwill was based on the Company's evaluation of a change in likelihood of issuing new insurance products. Since acquisition, ALAC has not issued any products and has no immediate plan to do so in the near future. As a result, the Company determined that goodwill has no value and it was impaired to reflect this decision. The impairment is included in general and administrative expenses on the 2008 Consolidated Statement of Operations. There were no goodwill impairments in 2007 or 2006. (8) VALUE OF BUSINESS ACQUIRED AND OTHER INTANGIBLE ASSETS VOBA at December 31, 2008, 2007, and 2006, and the changes in the balance for the years then ended are as follows:
2008 2007 2006 ------------------ ------------------ ------------------- Balance, beginning of year $ 28,312 $ 53,844 $ 66,373 Interest 1,169 1,137 1,313 Amortization (2,379) (12,350) (9,338) Change in shadow VOBA 2,093 (14,319) (4,504) ------------------ ------------------ ------------------- Balance, end of year $ 29,195 $ 28,312 $ 53,844 ================== ================== ===================
The net amortization of the VOBA in each of the next five years is expected to be: 2009 $ 6397 2010 5459 2011 4382 2012 4096 2013 3563 Intangible assets at December 31, 2008, 2007, and 2006 and the changes in the balance for the years then ended are as follows:
2008 2007 2006 ------------------- ------------------- ------------------ Balance, beginning of year $ 10,302 $ 10,489 $ 39,519 Addition 140 2,482 5,390 Amortization (2,615) (2,669) (4,770) Impairment - - (29,650) ------------------- ------------------- ------------------ Balance, end of year $ 7,827 $ 10,302 $ 10,489 =================== =================== ==================
53 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Amortization of intangible assets in each of the next five years is expected to be: 2009 $ 2352 2010 1587 2011 630 2012 43 2013 0 During 2006, an impairment of the contractual right intangible asset totaling $29,650 was recorded associated with the anticipated sale of a subsidiary that served as the administrator of the Company's variable annuity business. The impairment was determined based on the offers received from potential buyers for the subsidiary, although the subsidiary was never sold. The impairment is included in general and administrative expenses on the 2006 Consolidated Statement of Operations. During 2008 and 2007, there were no other events or changes in circumstances, other than as described above, that warranted recoverability testing for intangible assets. Accumulated amortization of VOBA and other intangible assets was $215,115 and $210,121 as of December 31, 2008, and 2007, respectively. (9) DEFERRED ACQUISITION COSTS DAC at December 31, 2008, 2007, and 2006 and the changes in the balance for the years then ended are as follows:
2008 2007 2006 ------------------- ------------------- ------------------- Balance, beginning of year $ 5,575,492 $ 5,265,226 $ 4,326,771 Capitalization 865,521 919,445 1,166,321 Interest 186,410 177,153 161,169 Amortization 1,732,133 (445,863) (277,844) Change in shadow DAC (106,054) (340,469) (111,191) ------------------- ------------------- ------------------- Balance, end of year $ 8,253,502 $ 5,575,492 $ 5,265,226 =================== =================== ===================
The negative DAC amortization in 2008 is due primarily to a significant increase in other-than-temporary impairments, an increase in variable annuity guarantee reserves, and losses on investment portfolios classified as trading. These significant losses caused estimated gross profits to increase, which caused amortization to be negative. The Company reviews its best estimate assumptions each year and records "unlocking" as appropriate. During 2008, the Company completed a comprehensive study of assumptions underlying estimated gross profits, resulting in an "unlocking". This study was based on recent changes in the organization and businesses of the Company and actual and expected performance of in-force policies. The study included all assumptions, including mortality, lapses, expenses, and separate account returns. The revised best estimate assumptions were applied to the current in-force policies to project future gross profits. 54 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The pre-tax impact on the Company's assets and liabilities as a result of the unlocking during 2008 and 2007 was as follows:
2008 2007 ------------------- ------------------- Assets: DAC $ (117,331)$ (185,748) DSI 3,368 (20,290) ------------------- ------------------- Total asset decrease (113,963) (206,038) ------------------- ------------------- Liabilities: Policy and contract account balances (166,800) (478,733) Future policy benefit reserves (18,886) (7,810) ------------------- ------------------- Total liabilities decrease (185,686) (486,543) ------------------- ------------------- Net increase 71,723 280,505 Deferred income tax expense 25,103 98,177 ------------------- ------------------- Net increase $ 46,620 $ 182,328 =================== ===================
The 2006 unlocking was immaterial to the Consolidated Financial Statements. (10) DEFERRED SALES INDUCEMENTS DSI at December 31, 2008, 2007, and 2006 and the changes in the balance for years then ended are as follows:
2008 2007 2006 ------------------ ------------------ ------------------ Balance, beginning of year $ 767,916 $ 721,322 $ 590,537 Capitalization 128,056 118,863 152,416 Amortization 169,359 (64,013) (36,343) Interest 30,081 28,320 23,067 Change in shadow DSI 2,394 (36,576) (8,355) ------------------ ------------------ ------------------ Balance, end of year $ 1,097,806 $ 767,916 $ 721,322 ================== ================== ==================
The negative DSI amortization in 2008 is due primarily to a significant increase in other-than-temporary impairments, an increase in variable annuity guarantee reserves, and losses on investment portfolios classified as trading. These significant losses caused estimated gross profits to increase, which caused amortization to be negative. 55 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (11)SEPARATE ACCOUNTS AND ANNUITY PRODUCT GUARANTEES Guaranteed minimums for the respective years ended December 31 are summarized as follows (note that the amounts listed are not mutually exclusive, as many products contain multiple guarantees):
December 31, 2008 December 31, 2007 ----------------------------------- ------------------------------------ Account Net amount Weighted Account Net amount Weighted value at risk age (years) value at risk age (years) ----------- ----------- --------- ----------- ----------- ---------- Guaranteed Minimum Death Benefits (GMDB): ----------------------------------- Return of premium $ 9,775,969 $ 1,301,530 62.7 $ 10,990,304 $ 9,710 62.0 Ratchet and return of premium 3,231,730 689,316 64.4 3,384,951 45,106 63.6 Ratchet and rollup 4,624,497 2,087,297 66.1 7,654,982 239,775 65.3 Ratchet and earnings protection rider 4,872 4,702 73.8 7,594 3,709 70.9 Reset 117,766 25,980 72.4 - - n/a Earnings protection rider 291,895 69,780 62.7 473,903 37,050 61.8 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total $ 18,046,729 $ 4,178,605 $ 22,511,734 $ 335,350 =========== =========== =========== =========== Guaranteed Minimum Income Benefits (GMIB): ----------------------------------- Return of premium $ 188,077 $ 14,806 62.7 $ 3,473,115 $ 215 62.6 Ratchet and return of premium 5,704,906 468,852 64.1 143,597 1,402 63.2 Ratchet and rollup 5,596,569 2,334,522 64.0 10,901,098 18,625 64.7 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total $ 11,489,552 $ 2,818,180 $ 14,517,810 $ 20,242 =========== =========== =========== =========== Guaranteed Minimum Accumulation Benefits (GMAB): ----------------------------------- Five years $ 7,603,356 $ 803,248 63.3 $ 8,930,675 $ 73,131 n/a Ten years 5,831 533 71.5 9,030 1 n/a ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total $ 7,609,187 $ 803,781 $ 8,939,705 $ 73,132 =========== =========== =========== =========== Guaranteed Minimum Withdrawal Benefits (GMWB): ----------------------------------- No living benefit $ 292,313 $ 27,854 60.1 $ 32,212 $ - n/a Life benefit with optional reset 737,999 349,615 67.3 545,563 - n/a Life benefit with automatic reset 660,914 203,764 60.1 66,839 - n/a Life benefit with 8% rollup 6,396 2,004 65.6 - - n/a Life benefit with 10% rollup 183,973 2,787 60.4 - - n/a ----------- ----------- ----------- ----------- ----------- ----------- Total $ 1,881,595 $ 586,024 $ 644,614 $ - =========== =========== =========== ===========
The net amount at risk has increased in 2008 due to the current economic environment. Account values have dropped due to the underperformance of the markets, which causes the guarantee reserves to significantly increase. 56 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) At December 31, 2008 and 2007, variable annuity account balances were invested in separate account funds with the following investment objectives. Balances are presented at fair value:
Investment type 2008 2007 -------------------------------------------- ------------------ ------------------ Mutual funds: Bond $ 1,638,747 $ 1,828,328 Domestic equity 3,950,854 8,408,134 International equity 1,688,463 3,694,314 Specialty 3,361,889 5,797,564 ------------------ ------------------ Total mutual funds 10,639,953 19,728,340 Money market funds 1,050,780 627,393 Other 100,995 185,984 ------------------ ------------------ Total $ 11,791,728 $ 20,541,717 ================== ==================
The following table summarizes the liabilities for variable contract guarantees that are reflected in the general account and shown in future policy benefit reserves on the Consolidated Balance Sheets:
GMDB GMIB GMAB GMWB Totals ------------- ------------- ------------- ------------- ------------ Balance as of December 31, 2006 $ 35,306 $ 28,280 $ 9,315 $ - $ 72,901 Incurred guaranteed benefits 7,481 12,893 (3,522) - 16,852 Paid guaranteed benefits (4,802) - - - (4,802) ------------- ------------- ------------- ------------- ------------ Balance as of December 31, 2007 37,985 41,173 5,793 - 84,951 Incurred guaranteed benefits 107,231 216,386 491,482 312,590 1,127,689 Paid guaranteed benefits (20,414) - (10) - (20,424) ------------- ------------- ------------- ------------- ------------ Balance as of December 31, 2008 $ 124,802 $ 257,559 $ 497,265 $ 312,590 $ 1,192,216 ============= ============= ============= ============= ============
(12)MORTGAGE NOTES PAYABLE In April 2005, the Company entered into a loan agreement with Wells Fargo National Bank (Wells Fargo), not to exceed $95,000, as short-term financing for the construction of an addition to the Company's headquarters. In June 2006, the loan was paid in full. In July 2004, the Company obtained an $80,000 mortgage loan from Northwestern Mutual Life Insurance Company (Northwestern) for the Company's headquarters. In 2005, the Company agreed to enter into a separate loan agreement with Northwestern in conjunction with the construction of an addition to the Company's headquarters of $65,000. This loan was funded in June 2006 and combined with the existing mortgage. As of December 31, 2008 and 2007, the combined loan had a balance of $129,075 and $134,123, respectively. This 20-year, fully amortizing loan has an interest rate of 5.52%, with a maturity date of August 1, 2024. The level principal and interest payments are made monthly. The loan allows for prepayment; however, it is accompanied by a make-whole provision. The proceeds of 57 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) this mortgage were used to pay off a floating rate construction loan from Wells Fargo that the Company used to finance the acquisition of property for, and construction of, the Company's headquarters. The Company had long-term debt in the form of a mortgage on an investment in real estate. This loan was paid in full in August 2007. Interest expense for all loans was $7,258, $7,942, and $5,352 in 2008, 2007, and 2006, respectively, and is presented in general and administrative expenses on the Consolidated Statements of Operations. The future principal payments required under the Northwestern loan are as follows: 2009 $ 5334 2010 5636 2011 5955 2012 6292 2013 and beyond 105858 Total $ 129075 (13)ACCIDENT AND HEALTH CLAIM RESERVES Accident and health claim reserves are based on estimates that are subject to uncertainty. Uncertainty regarding reserves of a given accident year is gradually reduced as new information emerges each succeeding year, thereby allowing more reliable re-evaluations of such reserves. While management believes that reserves as of December 31, 2008 are appropriate, uncertainties in the reserving process could cause such reserves to develop favorably or unfavorably in the near term as new or additional information emerges. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Movements in reserves, which are small relative to the amount of such reserves, could significantly impact the Company's future reported earnings. 58 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Activity in the accident and health claim reserves is summarized as follows:
2008 2007 2006 ------------------ ----------------- ----------------- Balance at January 1, net of reinsurance recoverables of $234,740, $329,398, and $215,327, respectively $ 63,413 $ 60,189 $ 155,552 Adjustment primarily related to commutation and assumption reinsurance on blocks of business (2,710) (98) (18,564) Incurred related to: Current year 13,763 10,998 80,336 Prior years 2,179 3,925 (3,962) ------------------ ----------------- ----------------- Total incurred 15,942 14,923 76,374 ------------------ ----------------- ----------------- Paid related to: Current year 1,748 1,690 33,308 Prior years 16,039 9,911 119,865 ------------------ ----------------- ----------------- Total paid 17,787 11,601 153,173 ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Balance at December 31, net of reinsurance recoverables of $221,620, $234,740, and $329,398, respectively $ 58,858 $ 63,413 $ 60,189 ================== ================= =================
Prior year incurreds for 2008 reflect unanticipated claim development with the LTC business partially offset by commutation activity on the reinsurance assumed business. Prior year incurreds for 2007 reflect unanticipated claim development with reinsurance assumed and LTC business. Prior year incurreds in 2006 reflect the commutation activity on the reinsurance assumed business and the release of the health claim handling reserve. The significant decrease in total incurred and total paid claims from 2006 to 2007 is a result of the exiting of the Health Products business on October 1, 2006 as discussed in note 14. (14)REINSURANCE The Company primarily enters into reinsurance agreements to manage risk resulting from its life and accident and health businesses, as well as businesses the Company has chosen to exit. In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks under excess yearly renewal term (YRT) coverage and first dollar quota share coinsurance and YRT contracts. The Company retains a maximum of $10,000 coverage per individual life. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. A contingent liability exists to the extent that the Company's reinsurers are unable to meet their contractual obligations under reinsurance contracts. Management is of the opinion that no liability will accrue to the Company with respect to this contingency. Included in reinsurance recoverables at December 31, 2008 are $1,580,404, $955,742, $429,912, $357,988, and $280,702 of claim-related recoverables from five insurers who, as of December 31, 2008, were rated A- or higher by A.M. Best's Insurance Reports. The Company attempts to mitigate risk by arranging trust accounts or letters of credit 59 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) with certain insurers. Insurers with ratings lower than A-, and without a trust account or letter of credit account for less than 5% of the total reinsurance recoverable as of December 31, 2008. The Company has reinsurance recoverables and receivables with affiliates. Total affiliated reinsurance recoverables and receivables were $640 and $765 as of December 31, 2008, and 2007, respectively, and are included in reinsurance recoverables and receivables on the Consolidated Balance Sheets. Of the amounts ceded to others, the Company ceded accident and health premiums earned to the Company's ultimate parent, Allianz SE, of $0, $37, and $387 in 2008, 2007, and 2006, respectively. Effective June 30, 2006, the Company recaptured certain health business previously ceded to R.W. Morey. Related to this transaction, the Company paid a ceding commission of $14,800 for the recapture of $37,873 in reserves. During 2006, the Company made the decision to exit the health products business. On October 1, 2006, the Company entered into a 100% quota share agreement with an unrelated insurance company, Houston Casualty Company (HCC), to reinsure the health block of business. Related to this transaction, the Company received a ceding commission of $140,000 for the recapture of $151,507 in reserves. In addition, the Company recorded a deferred gain of $136,803, which is being amortized into operations through 2009. The Company amortized $7,593, $84,039, and $44,857 for 2008, 2007, and 2006, respectively, which are included in other (loss) revenue on the Consolidated Statements of Operations. The remaining deferred gain was $313 and $7,906 as of December 31, 2008 and 2007, respectively. Offsetting the deferred gain, total incremental expenses of $24,859 were incurred in 2006 including $14,898 for commutation of certain reinsurance agreements in contemplation of the agreement with HCC, $7,565 for employee-related termination benefits, and $2,396 for write-off of capitalized software costs. The commutation of reinsurance agreements expense is included in benefit recoveries and the other incremental expenses are included in general and administrative expenses on the Consolidated Statements of Operations. As of December 31, 2008, all of these incremental costs were paid. Throughout 2008, 2007, and 2006, the Company entered into reinsurance arrangements with unrelated insurance companies to reinsure additional accident and health business, as well as group life and accident and health business that the Company decided to exit. In connection with these agreements, the Company had ceded premiums of $5,701, $71,549, and $75,981 in 2008, 2007, and 2006, respectively, and received expense allowances of $1,006, $3,505, and $3,539 in 2008, 2007, and 2006, respectively. Prior to 2000, the Company entered into various 100% coinsurance agreements with unrelated insurance companies to coinsure certain blocks of life and annuity business. Deferred gain on reinsurance resulting from these transactions is being amortized over the projected earnings patterns of the related reinsured policies. During 2008, 2007, and 2006, $9,876, $11,652, and $12,659, respectively, were amortized and included in other (loss) revenue on the Consolidated Statements of Operations. Deferred gain on reinsurance remaining as of December 31, 2008 and 2007 was $44,150 and $54,026, respectively, and was included in other liabilities on the Consolidated Balance Sheets. During 1999, the Company acquired all of the outstanding stock of LifeUSA Holding, Inc. (LifeUSA). As a result of the merger, the Company became party to reinsurance agreements entered into to limit exposure to loss and preserve surplus in a high-growth environment. Reinsurance recoverables of $2,354,444 and $2,346,440 were recorded as of December 31, 2008 and 2007, respectively, in connection with these agreements. During 2003, the Company exited the traditional life reinsurance business via a 100% coinsurance agreement with an unrelated insurance company, Reinsurance Group of America, Inc. (RGA). In 2004, the majority of the in-force business that was coinsured with RGA was novated. At December 31, 2008 and 2007, the remaining deferred gain 60 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) after the novation was $5,466 and $6,841, respectively, and was included in other liabilities on the Consolidated Balance Sheets. Deferred gain amortization was $1,375, $1,689, and $1,890 during 2008, 2007, and 2006, respectively, and was included in other (loss) revenue on the Consolidated Statements of Operations. (15)INCOME TAXES (a) Income Tax (Benefit) Expense Total income tax (benefit) expense for the years ended December 31 is as follows:
2008 2007 2006 --------------- -------------- -------------- Income tax (benefit) expense attributable to operations: Current tax expense $ 47,043 $ 64,245 $ 80,922 Deferred tax (benefit) expense (654,033) (60,259) 27,879 --------------- -------------- -------------- Total income tax (benefit) expense attributable to net (loss) income (606,990) 3,986 108,801 Income tax effect on equity: Income tax (benefit) expense allocated to stockholder's equity: Attributable to unrealized (losses) and gains on investments (4,153) 111,800 213 Attributable to unrealized (losses) and gains on post-retirement obligation (686) (564) 1,304 Attributable to unrealized (losses) gains and on foreign exchange (4,265) 3,512 68 --------------- -------------- -------------- --------------- -------------- -------------- Total income tax effect on equity $ (616,094)$ 118,734 $ 110,386 =============== ============== ==============
(b) COMPONENTS OF INCOME TAX (BENEFIT) EXPENSE Income tax (benefit) expense computed at the statutory rate of 35% varies from income tax (benefit) expense reported on the Consolidated Statements of Operations for the respective years ended December 31 as follows:
2008 2007 2006 ------------ ------------ ------------ Income tax (benefit) expense computed at the statutory rate $ (595,485)$ 20,779 $ 126,494 Dividends-received deductions and tax-exempt interest (29,999) (18,259) (19,798) Accrual (release) of tax contingency reserve 1,048 (2,361) 4,400 Foreign tax, net (1,414) 688 389 Corporate owned life insurance 17,965 (2,450) (6,123) Other 895 5,589 3,439 ------------ ------------ ------------ Income tax (benefit) expense as reported $ (606,990)$ 3,986 $ 108,801 ============ ============ ============
61 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (c) COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES ON THE CONSOLIDATED BALANCE SHEETS Tax effects of temporary differences giving rise to the significant components of the net deferred tax asset (liability), which is included in other assets and liabilities, respectively, on the Consolidated Balance Sheets, at December 31 are as follows:
2008 2007 ------------------- ------------------- Deferred tax assets: Policy reserves $ 2,033,475 $ 1,710,145 Coinsurance deferred income 20,187 28,424 Expense accruals 73,551 84,972 Other-than-temporarily impaired assets 1,574,293 466,525 Investment income 90,727 - Provision for post-retirement benefits 10,164 2,442 Other 509 154 ------------------- ------------------- Total deferred tax assets 3,802,906 2,292,662 ------------------- ------------------- Deferred tax liabilities: Deferred acquisition costs (2,712,318) (1,778,976) Investment income - (103,761) Depreciation/amortization (16,354) (24,276) Value of business acquired (10,218) (9,924) Deferred intercompany gain (7,858) (7,858) Net unrealized gain on investments and foreign exchange (433,688) (404,312) Other (527) (4,599) ------------------- ------------------- Total deferred tax liabilities (3,180,963) (2,333,706) ------------------- ------------------- ------------------- ------------------- Net deferred tax asset (liability) $ 621,943 $ (41,044) =================== ===================
Although realization is not assured, the Company believes it is not necessary to establish a valuation allowance for ordinary deferred tax assets, as it is more likely than not the deferred tax assets will be realized principally through future reversals of existing ordinary taxable temporary differences and future ordinary taxable income. For deferred tax assets that are capital in nature, considering all objective evidence and the available tax planning strategy, it is more likely than not the deferred tax assets that are capital in nature will be realized and no valuation allowance is required. The amount of the ordinary and capital deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future reversals of existing taxable temporary differences and future ordinary and capital taxable income are reduced. Income taxes (received) paid by the Company were $(125,812), $143,000, and $83,896 in 2008, 2007, and 2006, respectively. At December 31, 2008 and 2007, respectively, the Company had a tax payable (receivable) from AZOA of $70,639 and $(103,550), reported in other assets on the Consolidated Balance Sheets. At December 31, 2008 and 2007, the Company had a tax (receivable) payable separate from the agreement with AZOA in the amount of $(2,568) and $236, respectively. These amounts are for foreign taxes and taxes on a majority owned subsidiary. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The IRS has surveyed 2003 through 2005 and has 62 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) informed the Company that they do not intend to do any further review of those years. During 2008, the IRS reviewed the credit taken for the Telephone Excise Tax on AZOA and Subsidiaries' 2006 consolidated return. The IRS had no issues while on site and informed the Company that final closure on the issue should be forthcoming during the first quarter of 2009. At this time, the Company is not aware of any adjustments that may be proposed by the IRS. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $21,578 increase in the liability for unrecognized tax benefits, which was accounted for as an increased current tax liability and an increased deferred tax asset as of January 1, 2007. It is reasonably expected that the amount of unrecognized tax benefits will increase in 2009 by approximately the same amount as it did in year 2008. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2008 2007 ----------------- ----------------- Balance at January 1 $ 22,961 $ 21,578 Additions based on tax positions related to the current year 5,198 1,383 ----------------- ----------------- Balance at December 31 $ 28,159 $ 22,961 ================= =================
Included in the balance at December 31, 2008 are $28,159 of tax positions for which the deductibility is more likely than not; however, there is uncertainty with respect to the timing of the deduction. Because of the impact of deferred tax accounting, other than interest and penalty, the disallowance would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in federal income tax expense. During the years ended December 31, 2008, 2007, and 2006, the Company recognized expense (benefits) of $1,037, $(2,361), and $4,400, respectively, in interest and penalties. The Company had $3,076 and $2,039, for the payment of interest and penalties accrued at December 31, 2008 and 2007, respectively. (16)RELATED-PARTY TRANSACTIONS (a) LOANS TO AFFILIATES The Company held related-party invested assets of $723,802 and $725,826 at December 31, 2008 and 2007, respectively, representing 1.4% and 1.5% of total invested assets and 23.6% and 18.7% of capital for the respective years. The Company does not foresee a credit risk with these investments given the financial strength of Allianz SE, which currently has an A.M. Best rating of A+ and a Standard & Poor's rating of AA. In December 2003, the Company entered into an agreement to lend Allianz SE $350,000. On November 30, 2004, the Company transferred, in the form of a dividend, a portion of the loan to AZOA with a carrying value of $90,000. On December 27, 2006, the Company transferred, in the form of a dividend, an additional portion of the loan to AZOA with a carrying amount of $130,000. The remaining loan balance was $130,000 at December 31, 2008 and 2007, and will be repaid, plus interest over ten years; semi-annual interest payments for the first five years and amortized semi-annual payments of principal and accrued interest over the last five years. The interest rate is 5.18%. Interest of $6,734, $6,734, and $13,056 was earned during 2008, 2007, and 63 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) 2006, respectively, and is included in interest and similar income, net on the Consolidated Statements of Operations. The loan was collateralized by a *100,000 Buoni Poliennali Del Tes Government Bond with a fair value of $145,460 at December 31, 2008. Effective January 26, 2001, the Company entered into an agreement to lend AZOA $100,000. The remaining loan balance was $63,089 and $76,270 as of December 31, 2008 and 2007, respectively. The loan plus interest will be repaid over twelve years, semi-annual interest payments for the first five years, and level semi-annual payments of principal and accrued interest over the last seven years. Repayment of this loan started in 2006 with year-to-date principal payments received through December 31, 2008 and 2007, in the amount of $13,181 and $12,283, respectively. The interest rate is a fixed rate of 7.18%. AZOA pledged as collateral a security interest in shares of the common stock outstanding of Allianz Global Risks US Insurance Company (AGR), which had a statutory book value as of the date of the loan equal to 125% of the loan. Interest of $5,238, $6,137, and $6,974 was earned during 2008, 2007, and 2006, respectively, and is included in interest and similar income, net on the Consolidated Statements of Operations. In January 2007, the Company, in an effort to optimize investment returns, entered into an agreement with Dresdner Kleinwort Pfandbriefe Investments (DKPII), a wholly owned subsidiary of Allianz SE, to manage a portfolio of German Pfandbriefe (PFs) or other European covered bonds with a credit rating of at least "AA" by S&P or Moody's. AZL PF Investments, Inc. (AZLPF), a wholly owned subsidiary of the Company, entered into a $500,000 prepaid forward agreement to purchase common stock of DKPII in five years from a wholly owned subsidiary of Dresdner Bank, Dresdner Bank Luxembourg. The effect of the agreement is a Reference Portfolio whereby DKPII designates a portfolio of assets in accordance with pre-established investment guidelines. The value of this forward agreement was $540,244 and $519,510 at December 31, 2008 and 2007, respectively, and is included in loans to affiliates on the Consolidated Balance Sheets. The interest earned in 2008 and 2007 was $20,734 and $19,510, respectively, and is included in interest and similar income, net on the Consolidated Statements of Operations. There is an embedded credit derivative in this agreement relating to the PFs' values with a balance of $(9,531) and $46 at December, 31, 2008 and 2007, respectively, and is reported in loans to affiliates. (Loss) income on the embedded credit derivative in 2008 and 2007 was $(9,577) and $46, respectively, and is included in derivative (loss) income on the Consolidated Statements of Operations. AZLPF is contractually protected from counterparty exposure to Dresdner Bank. Dresdner Bank pledges high-quality fixed income securities as collateral, based on 101% of the current market value of the AZLPF position in the investment. Refer to note 22 for discussion of the subsequent sale of Dresdner Bank and its subsidiaries. (b) LOAN TO AFFILIATE - STOCKHOLDER'S EQUITY In December 2002, the Company entered into an agreement to lend AZOA $250,000. The loan plus interest will be repaid over ten years, semi-annual interest payments for the first five years and level semi-annual payments of principal and accrued interest over the last five years. The interest rate is a fixed rate of 6%. The loan is not collateralized. Repayment of this loan started in 2008 with year-to- date principal payments received through December 31, 2008 in the amount of $44,269. The fair value of the loan was $210,300 and $256,950 at December 31, 2008 and 2007, respectively. The outstanding loan balance is included as a component of stockholder's equity on the Consolidated Balance Sheets. Interest of $14,332, $15,000, and $15,000 was earned during 2008, 2007, and 2006 and is included in interest and similar income, net on the Consolidated Statements of Operations. 64 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) (c) SECURITIES LENDING Beginning in 2005, the Company began participating in securities lending arrangements whereby specific securities are loaned to other institutions for short periods of time. The agent for the Company is an affiliate, Dresdner Klienwort Wasserstein. The Company had $0 and $177 in fair value of loaned securities outstanding as of December 31, 2008 and 2007, respectively. The fair value of collateral accepted that can be sold or repledged amounted to $0 and $199, of which none was sold or repledged as of December 31, 2008 or 2007, respectively. The Company earned fee revenue of $5,552, $5,190, and $4,451 for the years ended December 31, 2008, 2007, and 2006, respectively, in connection with these arrangements, which is reported in interest and similar income, net on the Consolidated Statements of Operations. (d) OPTIONS The Company purchases and writes option contracts with Dresdner Bank as part of a derivative hedging strategy (see further discussion in note 5). At December 31, 2008 and 2007, options purchased were $0 and $1,772, respectively. (e) REAL ESTATE The Company has real estate investment properties leased to affiliates. The Company reported $1,073, $4,064, and $3,993 in 2008, 2007, and 2006, respectively, for rental income which is included in interest and similar income, net on the Consolidated Statements of Operations. The Company has an agreement to sublease office space to a related party, Fireman's Fund Insurance Company (FFIC), a sister company wholly owned by the same parent company, AZOA. The Company received rental income of $811, $86, and $24 in 2008, 2007, and 2006, respectively. In addition, the Company leases office space from FFIC pursuant to a sublease agreement. In connection with this subleasing arrangement, the Company has incurred rent expense of $190, $157, and $150 in 2008, 2007, and 2006, respectively, which is included in general and administrative expenses on the Consolidated Statements of Operations. (f) SERVICE FEES The Company incurred fees for services provided by affiliated companies. The Company incurred fees of $39,980, $50,929, and $19,779 in 2008, 2007, and 2006, respectively. The Company's liability for these expenses was $1,576 and $11,906 at December 31, 2008 and 2007, respectively, and is included in other liabilities on the Consolidated Balance Sheets. On a quarterly basis, the Company pays the amount due through cash settlement. The Company provides various services to affiliated companies. The Company earned $7,157, $5,330, and $1,779 in 2008, 2007, and 2006, respectively, for related administrative expenses incurred. The receivable for these expenses was $18 and $1,261 for 2008 and 2007, respectively. On a quarterly basis, the Company receives payment through cash settlement. The Company has agreements with its affiliates Pacific Investment Management Company (PIMCO), Oppenheimer Capital LLC (OpCap), Allianz Global Distributors LLC (AGID), and Nicholas Applegate Capital, and with certain other related parties whereby (1) specific investment options managed by PIMCO and OpCap are made available through the Company's separate accounts to holders of the Company's variable annuity products, (2) the Company receives compensation for providing administrative and recordkeeping services relating to the investment options managed by PIMCO and OpCap, and (3) the Company compensates AGID for providing services in connection with the distribution of variable products that offer investment 65 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) options managed by PIMCO. Income recognized by the Company from these affiliates for distribution and in-force related costs as a result of providing investment options to the policyholders was $1,499, $3,874, and $2,699 during 2008, 2007, and 2006, respectively, which is included in other (loss) revenue on the Consolidated Statements of Operations. At December 31, 2008 and 2007, $(147) and $669, respectively, were included for these fees in receivables on the Consolidated Balance Sheets. Expenses incurred to these affiliates for management of sub-advised investment options were $3,027, $4,097, and $3,347 during 2008, 2007, and 2006, respectively, which are included in general and administrative expenses on the Consolidated Statements of Operations. The related payable to these affiliates was $108 and $315 at December 31, 2008 and 2007, respectively, which is included in other liabilities on the Consolidated Balance Sheets. (g) FINANCIAL GUARANTEE On October 6, 2008, Allianz SE invested $2,500,000 in The Hartford Financial Services Group, Inc. (Hartford) using funds from their subsidiaries. The Company had a $130,000 invested portion of the transaction. In connection with the Company's investment, Allianz SE has issued a financial guarantee of the notional amount in 10% fixed- to-floating rate junior subordinated notes of Hartford. The Company records the guarantee as the difference between par value and the market value of the bond. If at any time during the fixed rate period of the notes (ending October 15, 2018), the rating attributed by any one of S&P or Moody's falls below investment grade, or Hartford is subject to an event of default with its obligations under the notes, the Company has the right to sell the notes to Allianz SE. The consideration to be delivered by Allianz SE will be equal to the notional amount of the notes. At the option of Allianz SE, such consideration will be paid either in cash or senior notes of Allianz SE or one of its financial subsidiaries. See note 22 for more details. (h) CAPITAL CONTRIBUTIONS The Company received capital contributions in 2008 and 2007 from AZOA of $280,000 and $150,000, respectively. (i) MEMBERSHIP INTEREST TRANSFER Allianz Individual Insurance Group, LLC (AZIIG), a wholly owned subsidiary of the Company, sold its 50% membership interest in Life Sales on February 1, 2006 for $23,587. AZIIG transferred its interest in Life Sales to FFIC. As a result of this sale, the Company recognized a gain on the sale net of tax of $14,593. (17)EMPLOYEE BENEFIT PLANS The Company participates in the Allianz Asset Accumulation Plan (AAAP), a defined contribution plan sponsored by AZOA. Eligible employees are immediately enrolled in the AAAP upon their first day of employment. The AAAP will accept participants' pre-tax or after-tax contributions up to 80% of the participants' eligible compensation, although contributions remain subject to annual limitations set by the Employee Retirement Income Security Act (ERISA). Under the eligible employees' provisions, the Company will match 100% of contributions up to a maximum of 6%. Participants are 100% vested in the Company's matching contribution after three years of service. The Company may decide to declare a profit-sharing contribution under the AAAP based on the discretion of Company management. Although the Company has recorded an accrual, management has not yet determined if there will be a profit-sharing contribution under the AAAP for the plan year ended December 31, 2008. The Company declared a profit-sharing contribution of 1.5% of employees' salaries for the plan years ended December 31, 2007 and 2006, reported in general and administrative expenses on the accompanying Consolidated Statements of 66 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Operations and funded in 2008 and 2007, respectively. Employees are not required to participate in the AAAP to be eligible for the profit-sharing contribution. The expenses of administration of the AAAP and the trust fund, including all fees of the trustee, investment manager, and auditors, are payable from the trust fund but may, at the Company's discretion, be paid by the Company. Any counsel fees are not paid from the trust fund, but are instead paid by the Company. It is the Company's policy to fund the AAAP costs as incurred. The Company has expensed $8,271, $9,960, and $12,679 in 2008, 2007, and 2006, respectively, toward the AAAP matching contributions and administration expenses. A defined group of highly compensated employees are eligible to participate in the AZOA Deferred Compensation Plan adopted January 1, 2008, which replaced the Allianz Life Deferred Compensation Plan. The purpose of the plan is to provide tax planning opportunities, as well as supplemental funds upon retirement. The plan is unfunded, meaning no assets of the Company have been segregated or defined to represent the liability for accrued assets under the plan. Employees are 100% vested upon enrollment in the plan for funds they have deferred. Employees' funds are invested on a pay period basis and are immediately invested. Participants and the Company share the administrative fee. The accrued liability of $8,405 and $14,776 as of December 31, 2008 and 2007, respectively, is recorded in other liabilities on the Consolidated Balance Sheets. The Company sponsors a nonqualified deferred compensation plan for a defined group of agents. The Company may decide to make discretionary contributions to the plan in the form and manner the Company determines. Discretionary contributions are currently determined based on production. The accrued liability of $6,733 and $11,067 as of December 31, 2008 and 2007, respectively, is recorded in other liabilities on the Consolidated Balance Sheets. The Company participates in a stock-based compensation plan sponsored by Allianz SE, which awards certain employees Stock Appreciation Rights (SARs) and Restricted Stock Units (RSUs) that are tied to Allianz SE stock. Allianz SE determines the number of SARs and RSUs granted to each participant. The Company records expense equal to the change in fair value of the units during the reporting period. A change in value of $(2,324), $4,326, and $10,980 was recorded in 2008, 2007, and 2006, respectively, and is included in general and administrative expenses on the Consolidated Statements of Operations. The related liability of $2,360 and $6,192 as of December 31, 2008 and 2007, respectively, is recorded in other liabilities on the Consolidated Balance Sheets. The Company is participating in an Employee Stock Purchase Plan sponsored by AZOA that is designed to provide eligible employees with an opportunity to purchase American Depository Shares of Allianz SE at a discounted price. An aggregate amount of 250,000 American Depository Shares are reserved for this plan. Allianz SE determines the purchase price of the share based on the closing price of an Ordinary Share of Allianz SE on the Frankfurt stock exchange on the date of each purchase. Employees are given the opportunity to purchase these shares quarterly on predetermined dates set by Allianz SE. Employees are not allowed to sell or transfer the shares for a one-year period following the purchase date. The difference between the market price and the discount price, or the discount, is paid by the Company and amounted to $215, $457, and $281 in 2008, 2007, and 2006, respectively. In 2005, the Company started an Employee Severance Pay Plan for the benefit of eligible employees. The plan may provide severance benefits on account of an employee's termination of employment from the Company. To become a participant in the plan, an employee must be involuntarily terminated. In addition, the Company must determine that it wishes to provide the employee with a severance payment and must issue a written Severance Pay Award. The plan is unfunded, meaning no assets of the Company have been segregated or defined to represent the liability for payments under the plan. Effective June 1, 2008, the Company adopted the AZOA Severance Allowance Plan, which replaced the Employee Severance Pay Plan. Under the AZOA Severance Allowance Plan, all employees who are 67 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) involuntarily terminated due to job elimination or reduction in force are eligible to receive benefits. The Company expensed $8,247, $5,712, and $5,135 in 2008, 2007, and 2006, respectively, toward severance payments. The Company offers certain benefits to eligible employees, including a comprehensive medical, dental, and vision plan and a flexible spending plan. Associated with these plans, the Company provides certain post-retirement benefits to employees who retired on or before December 31, 1988 or who were hired before December 31, 1988 and who have at least ten years of service when they reach age 55. Employees of the Company hired or rehired after December 31, 1988 or who became employees of the Company as a result of a merger or acquisition after January 1, 1989 are not eligible for retiree medical or life insurance coverage. The Company's plan obligation at December 31, 2008 and 2007 was $7,905 and $6,978, respectively. This liability is included in other liabilities on the Consolidated Balance Sheets. The Company began pre-funding its post-retirement liability in 2005 and plans to continue pre-funding in the future. The Company's plan assets at December 31, 2008 and 2007 were $16,720 and $14,503, respectively. In 2006, the Company adopted SFAS 158 and the amounts recognized in accumulated other comprehensive income, net of tax consist of:
2008 2007 2006 ------------------ ------------------ ------------------ Net actuarial gain (loss) $ 521 $ 78 $ (2,763) Prior service (cost) credit (1,794) (1,190) 5,185 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total $ (1,273) $ (1,112) $ 2,422 ================== ================== ==================
Over the next fiscal year, the estimated actuarial loss and estimated prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost are $306 and $(898), respectively. No plan assets are expected to be returned to the Company during the next 12-month period. (18)STATUTORY FINANCIAL DATA AND DIVIDEND RESTRICTIONS Statutory accounting practices prescribed or permitted by the Company's state of domicile are directed toward insurer solvency and protection of policyholders. Accordingly, certain items recorded in financial statements prepared under GAAP are excluded or vary in calculation in determining statutory policyholders' surplus and gain from operations. Currently, these items include, among others, DAC, furniture and fixtures, deferred taxes, and accident and health premiums receivable which are more than 90 days past due, reinsurance, certain investments, and undeclared dividends to policyholders. Additionally, future policy benefit reserves and policy and contract account balances calculated for statutory reporting do not include provisions for withdrawals. The statutory capital and surplus of the Company reported in the statutory annual statement filed with the State of Minnesota as of December 31, 2008 and 2007 was $2,009,309 and $2,441,338, respectively. Refer to note 22 for discussion of a capital contribution received from AZOA subsequent to December 31, 2008. The Company is required to meet minimum statutory capital and surplus requirements. The Company's statutory capital and surplus as of December 31, 2008 and 2007 were in compliance with these requirements. The maximum amount of dividends that can be paid by Minnesota insurance companies to stockholders without prior approval of the Commissioner of Commerce is subject to restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the statutory annual statement. In accordance with Minnesota Statutes, the Company may declare and 68 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) pay from its surplus cash dividends of not more than the greater of 10% of its beginning-of-the-year statutory surplus, or the net gain from operations of the insurer, not including realized gains, for the 12-month period ending the 31st day of the next preceding year. Ordinary dividends of $244,134 can be paid in 2008 without prior approval of the Commissioner of Commerce. REGULATORY RISK-BASED CAPITAL An insurance enterprise's state of domicile imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of an enterprise's regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. This ratio for the Company was 411% and 555% as of December 31, 2008 and 2007, respectively. Regulatory action against a company may begin when this ratio falls below 200%. (19)COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are involved in various pending or threatened legal proceedings, including putative and certified class action proceedings, arising from the conduct of their business. The Company also owns a registered retail broker-dealer that is subject to a putative class action proceeding and individual arbitration proceedings. For each of the above mentioned lawsuits, the company cannot predict the potential outcome at this state of the proceedings. In November 2007, the Company settled one of the pending class action lawsuits. Individuals claims agreed to under the settlement are still being processed, so uncertainty remains on the Company's ultimate obligation. The Company recognizes legal costs for defending itself as incurred. The Company is contingently liable for possible future assessments under regulatory requirements pertaining to insolvencies and impairments of unaffiliated insurance companies. Provision has been made for assessments currently received and assessments anticipated for known insolvencies. The financial services industry, including mutual fund, variable and fixed annuity, life insurance, and distribution companies, has been the subject of increasing scrutiny by regulators, legislators, and the media over the past few years. Federal and state regulators are investigating various selling practices in the annuity industry, including suitability reviews, product exchanges, and sales to seniors. In certain instances, these investigations have led to regulatory enforcement proceedings. Included in these proceedings are several lawsuits brought by the Minnesota Attorney General's Office against insurance companies that offer annuities. One of these lawsuits was filed against the Company in January 2007 alleging unsuitable sales of fixed annuities to seniors. That lawsuit was settled in October 2007. While the Company expressly denied the allegations, the Company agreed to adopt certain modifications to the Company's suitability review process and to offer a review process to Minnesota seniors who had purchased deferred fixed annuities since 2001. The Company is also subject to ongoing market conduct examinations and investigations by several state insurance regulators. In some instances, these examinations may lead to enforcement proceedings, which could result in modifications to the Company's business processes, remediation, and/or penalties. In February 2008, the Company agreed to a settlement with the California Department of Insurance arising out of a market conduct examination report and related enforcement proceeding issued in 2006. While denying the Department's allegations, the Company agreed to adopt additional modifications to the Company's suitability review process, to certain enhancements to the Company's existing processes and to payment of certain 69 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) penalties, contributions, and costs. The impact of these settlements was not material to the Consolidated Financial Statements. In December 2008, the SEC adopted a rule having the effect of categorizing most fixed-indexed annuity products as securities. This rule, when effective, will subject issuers of fixed-indexed annuity products to SEC jurisdiction for purposes of registration and disclosure, advertising and marketing, suitability, and requirements as to the distribution of products through registered broker-dealers. The rule will also have the effect of subjecting distribution and advertising of fixed-indexed annuity products to the jurisdiction of the Financial Industry Regulatory Authority. The rule, which was published in the Federal Register on January 8, 2009, is expected to be effective in January of 2011. Several insurance companies issuing fixed-indexed annuity products have filed a lawsuit challenging the validity of the rule. As a result, there is not complete certainty as to whether, when, or in what form the rule will finally become effective. It can be expected that annuity sales practices will be an ongoing source of litigation and rulemaking. Similarly, private litigation regarding sales practices is ongoing against a number of insurance companies. This could result in legal precedents and new industry-wide legislation, rules, and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. It is unclear at this time whether any such litigation or regulatory actions will have a material adverse effect on the Company in the future. The Company has acquired minority equity interests in certain field marketing organizations. Certain provisions within stockholders' agreements, member agreements, and first refusal and put agreements require the Company to purchase part or all of the stock or member interests in the entities to which these agreements pertain, if and when principals of the field marketing organizations choose to exercise certain available options. The exercise period for the various put options ranges from one to eight years, the latest of which expires in 2016. If all put options were exercised, requiring the Company to purchase all of the stock or member interests in the entities, the total purchase price that would be paid by the Company based on current calculations would be $24,755. The Company has limited partnership investments that do not require a commitment of capital. The Company had capital commitments of $0 and $68,818, of which $0 and $53,394 has been funded, at December 31, 2008 and 2007, respectively. The Company has private placement investments that do not require a commitment of capital. The Company had capital commitments of $0 and $33,000 at December 31, 2008 and 2007, respectively. 70 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The Company has commercial mortgage loan investments that require commitments of capital within the next year. The Company had capital commitments of $118,900 and $182,360 at December 31, 2008 and 2007, respectively. These commercial mortgage loan commitments were funded in January and February 2009. The Company leases office space and certain furniture and equipment pursuant to operating leases. Expense for all operating leases was $4,980, $5,454, and $9,739 in 2008, 2007, and 2006, respectively. A partial buyout of an operating lease during 2006 and the subsequent refinancing as a capital lease reduced future minimum lease payments required under these leases. The future minimum lease payments required under operating leases are as follows: 2009 $ 3,649 2010 2,425 2011 1,605 2012 1,222 2013 and beyond 2,298 ------------------- Total $ 11,199 =================== During 2006, the Company entered into capital leases to finance furniture and equipment for the addition to the Company's headquarters. Expense for all capital leases was $2,717, $3,120, and $64 in 2008, 2007, and 2006, respectively. The future minimum lease payments and present value of the net minimum lease payments are as follows: 2009 $ 2,731 2010 886 2011 886 2012 886 2013 and beyond 831 ------------ Total minimum lease payments 6,220 Less executory costs (estimated) 390 ------------ Net minimum lease payments 5,830 Less imputed interest 339 ------------ ------------ Present value of net minimum lease payments $ 5,491 ============ 71 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) The Company owns numerous commercial and real estate investment properties leased to various tenants. The typical lease period is five to ten years, with some leases containing renewal options. Under net leases, in addition to their base rent, the tenants are directly responsible for the payment of property taxes, insurance, and maintenance costs relating to the leased property. Under gross leases, the tenants pay a rent amount grossed up to include the cost of taxes, insurance, and maintenance. Future minimum lease receipts under noncancelable leasing arrangements as of December 31, 2008 are as follows: 2009 $ 19,792 2010 15,658 2011 14,629 2012 13,027 2013 and beyond 23,201 ------------------- Total $ 86,307 =================== (20)CAPITAL STRUCTURE The Company is authorized to issue three types of capital stock, as outlined in the table below:
Authorized, Voluntary or issued, and Par value, involuntary outstanding per share Redemption rights liquidation rights ---------------- --------------- -------------------------- -------------------------- Common stock 40,000,000 $ 1.00 None None 20,000,001 20,000,001 Preferred stock: Class A 200,000,000 $ 1.00 Designated by Board Designated by Board 18,903,484 for each series issued for each series issued 18,903,484 Class A, Series A 8,909,195 $ 1.00 $35.02 per share plus $35.02 per share plus 8,909,195 an amount to yield a an amount to yield a 8,909,195 compounded annual compounded annual return of 6%, after return of 6%, after actual dividends paid actual dividends paid Class A, Series B 10,000,000 $ 1.00 $35.02 per share plus $35.02 per share plus 9,994,289 an amount to yield a an amount to yield a 9,994,289 compounded annual compounded annual return of 6%, after return of 6%, after actual dividends paid actual dividends paid Class B 400,000,000 $ 1.00 Designated by Board Designated by Board - for each series issued for each series issued -
72 (Continued) ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2008, 2007, and 2006 (In thousands, except share data and security holdings quantities) Holders of Class A preferred stock and of common stock are entitled to one vote per share with respect to all matters presented to or subject to the vote of shareholders. Holders of Class B preferred stock have no voting rights. All issued and outstanding shares are owned by AZOA. See note 1 for further discussion. Each share of Class A preferred stock is convertible into one share of the Company's common stock. The Company may redeem any or all of the Class A preferred stock at any time. Dividends will be paid to each class of stock only when declared by the Board of Directors. In the event a dividend is declared, dividends must be paid to holders of Class A preferred stock, Class B preferred stock, and common stock, each in that order. As discussed in notes 2 and 16 to these Consolidated Financial Statements, the Company carried out various capital transactions with related parties during 2008, 2007, and 2006. (21)FOREIGN CURRENCY TRANSLATION An analysis of foreign currency translation, net of tax, (as described in note 2) for the respective years ended December 31 follows:
2008 2007 2006 ------------------ ------------------ ------------------ Beginning amount of cumulative translation adjustments $ 14,409 $ 7,889 $ 7,759 Aggregate adjustment for the period resulting from translation adjustments (12,187) 10,032 198 Amount of income tax benefit (expense) for the period related to aggregate adjustment 4,265 (3,512) (68) ------------------ ------------------ ------------------ Net aggregate translation included in equity (7,922) 6,520 130 ------------------ ------------------ ------------------ Ending amount of cumulative translation adjustments $ 6,487 $ 14,409 $ 7,889 ================== ================== ================== Canadian foreign exchange rate at end of year 0.81004 1.01322 0.85933
(22)SUBSEQUENT EVENTS On January 12, 2009, Allianz SE closed the sale of 100% of the outstanding stock of Dresdner Bank, including its subsidiaries discussed in note 16, to Commerzbank AG. The effect of the sale is that Dresdner bank is no longer an affiliate of the Company. The sale did not have an impact on the Company's Consolidated Financial Statements and is not expected to have an impact in the future. The Hartford Notes referenced in note 16 were downgraded by Standard & Poor's on March 3, 2009 from BBB- to BB+, which is below investment grade. This gives the Company the right to sell the bonds to Allianz SE at par value. The Company has chosen not to exercise the right at this time. The Company received a capital contribution on February 25, 2009 from AZOA for $300,000. On a Statutory basis, the Company was granted approval from the Minnesota Department of Commerce to record this as a receivable and capital contribution as of December 31, 2008. See note 18 for information about the Company's statutory capital and surplus. On March 23, 2009, the Company announced suspension of sales of the living benefit riders on its primary variable annuity product family, effective March 31, 2009. 73
Schedule I ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Summary of Investments - Other Than Investments in Related Parties December 31, 2008 Amount at which shown in the Consolidated Type of investment Cost (1) Fair value Balance Sheet ------------------------------------------------------------- ------------------- ------------------- ------------------- Fixed-maturity securities: Available-for-sale fixed-maturity securities: U.S. government $ 697,066 $ 886,106 $ 886,106 Agencies not backed by the full faith and credit of the U.S. government 119,797 131,540 131,540 States and political subdivisions 301,441 309,776 309,776 Foreign government 203,776 226,130 226,130 Public utilities 1,727,221 1,783,120 1,783,120 Corporate securities 20,220,773 20,646,663 20,646,663 Mortgage-backed securities 12,210,356 12,697,016 12,697,016 Collateralized mortgage obligations 40,792 45,717 45,717 ------------------- ------------------- ------------------- Total available-for-sale fixed-maturity securities 35,521,222 36,726,068 36,726,068 ------------------- ------------------- ------------------- Trading fixed-maturity securities: U.S. government 579,993 723,276 723,276 Agencies not backed by the full faith and credit of the U.S. government 20,602 23,944 23,944 States and political subdivisions 59,963 57,974 57,974 Foreign government 45,516 47,671 47,671 Public utilities 319,609 305,806 305,806 Corporate securities 3,653,831 3,237,355 3,237,355 Mortgage-backed securities 945,816 758,357 758,357 Collateralized mortgage obligations 10,130 7,651 7,651 ------------------- ------------------- ------------------- Total trading fixed-maturity securities 5,635,460 5,162,034 5,162,034 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- Total fixed-maturity securities 41,156,682 41,888,102 41,888,102 ------------------- ------------------- ------------------- Equity securities: Available-for-sale equity securities: Common stocks: Industrial and miscellaneous 84 75 75 Trading equity securities: Common stocks: Industrial and miscellaneous 13,360 9,527 9,527 ------------------- ------------------- ------------------- Total equity securities 13,444 $ 9,602 9,602 ------------------- =================== ------------------- Other investments: Mortgage loans on real estate 4,838,373 4,838,373 Short-term securities 1,496,911 1,496,911 Derivatives 631,315 631,315 Real estate 322,418 322,418 Loans to affiliates 723,802 723,802 Policy loans 174,599 174,599 Partnerships 2,437 2,437 Investment in equity method investees 1,025 1,025 ------------------- ------------------- Total other investments 8,190,880 8,190,880 ------------------- ------------------- ------------------- ------------------- Total investments $ 49,361,006 $ 50,088,584 =================== =================== (1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual discounts. See accompanying report of independent registered public accounting firm.
74
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Supplementary Insurance Information Schedule II December 31, Year ended December 31, --------------------------------------------------------------- ------------------------------------------------------------------ Future benefit reserves Net premium and policy Policy revenue Interest Net change Net change Deferred Deferred and contract and and other and in deferred in policy Other Acquisition sales account Unearned contract contract similar Net sales acquisition operating costs inducements balances premiums claims considerations income,net benefits inducements* costs** expenses ------------------------------------------------------------------------------------------------------------------------------------ 2008 Life $ 238,049 $ (636) $ 2,133,880 $ 5,670 $ 19,593 $ 86,037 $ 45,538 $ 53,206 $ 108 $(52,701)$ 113,165 ------------------------------------------------------------------------------------------------------------------------------------ Annuities 7,912,800 1,098,442 57,349,485 197,912 150 916,525 2,837,141 2,471,795 (327,604) (2,731,925) 1,312,587 ------------------------------------------------------------------------------------------------------------------------------------ Accident and health 102,653 - 1,256,315 68,174 280,478 124,075 25,593 87,022 - 562 38,909 ------------------------------------------------------------------------------------------------------------------------------------ $8,253,502 $1,097,806 $60,739,680 $271,756 $300,221 $1,126,637 $2,908,272 $2,612,023 $(327,496) $(2,784,064)$1,464,661 -------------===========-=========--===========--========-==========-==========-==================================================-- ------------------------------------------------------------------------------------------------------------------------------------ 2007 Life $ 188,301 $ (264) $ 2,055,549 $ 186 $ 19,952 $ 70,955 $ 43,857 $ 61,244 $ 8,046 $ (23,490)$ 83,638 ------------------------------------------------------------------------------------------------------------------------------------ Annuities 5,283,977 768,180 50,737,462 149,998 - 679,317 2,503,764 1,658,779 (91,216) (609,862) 1,532,096 ------------------------------------------------------------------------------------------------------------------------------------ Accident and health 103,214 - 1,061,074 67,223 298,153 128,585 19,866 82,937 - (17,383) 70,702 ------------------------------------------------------------------------------------------------------------------------------------ $5,575,492 $ 767,916 $53,854,085 $217,407 $318,105 $ 878,857 $2,567,487 $1,802,960 $ (83,170) $(650,735) $1,686,436 -------------===========-=========--===========--========-==========-==========-==================================================-- ------------------------------------------------------------------------------------------------------------------------------------ 2006 Life $ 170,869 $ 8,393 $ 1,934,148 $ 190 $ 15,215 $ 61,008 $ 38,414 $ 46,474 $ (5,930) $(24,179) $ 72,942 ------------------------------------------------------------------------------------------------------------------------------------ Annuities 5,008,526 712,929 45,909,869 201,549 - 504,556 2,087,182 2,224,837 (133,209) (998,281) 1,467,394 ------------------------------------------------------------------------------------------------------------------------------------ Accident and health 85,831 - 879,263 60,765 389,587 293,674 17,247 246,033 - (27,186) 120,617 ------------------------------------------------------------------------------------------------------------------------------------ $5,265,226 $ 721,322 $48,723,280 $262,504 $404,802 $ 859,238 $2,142,843 $2,517,344 $ (139,139) $(1,049,646) $1,660,953 -------------===========-=========--===========--========-==========-==========-==================================================--
* See note 10 for aggregate gross amortization of deferred sales inducements. **See note 9 for aggregate gross amortization of deferred acquisition costs. See accompanying report of independent registered public accounting firm 75 ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Reinsurance
Schedule III ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND SUBSIDIARIES Reinsurance Percentage Ceded Assumed of amount Direct to other from other Net assumed Years ended amount companies companies amount to net --------------------------------- ------------------ --------------- ------------------- ------------ ---------------- December 31, 2008: Life insurance in force $ 23,565,296 $ 23,343,902 $ 8,722,528 $ 8,943,922 97.5% ------------------ --------------- ------------------- ------------ ---------------- Premiums: Life $ 128,994 $ 66,024 $ 22,941 $ 85,911 26.7% Annuities 919,284 2,004 (754) 916,526 (0.1) Accident and health 227,905 122,005 18,300 124,200 14.7 ------------------ --------------- ------------------- ------------ ---------------- Total premiums $ 1,276,183 $ 190,033 $ 40,487 $ 1,126,637 3.6% ================== =============== =================== ============ ================ December 31, 2007: Life insurance in force $ 21,558,390 $ 21,380,158 $ 9,487,390 $ 9,665,622 98.2% ------------------ --------------- ------------------- ------------ ---------------- Premiums: Life $ 121,600 $ 75,160 $ 24,515 $ 70,955 34.6% Annuities 677,832 (2,258) (774) 679,316 (0.1) Accident and health 259,045 182,914 52,455 128,586 40.8 ------------------ --------------- ------------------- ------------ ---------------- Total premiums $ 1,058,477 $ 255,816 $ 76,196 $ 878,857 8.7% ================== =============== =================== ============ ================ December 31, 2006: Life insurance in force $ 19,670,790 $ 21,512,211 $ 10,097,563 $ 8,256,142 122.3% ------------------ --------------- ------------------- ------------ ---------------- Premiums: Life $ 110,030 $ 71,272 $ 22,250 $ 61,008 36.5% Annuities 504,051 (1,663) (1,158) 504,556 (0.2) Accident and health 404,556 251,341 140,459 293,674 47.8 ------------------ --------------- ------------------- ------------ ---------------- Total premiums $ 1,018,637 $ 320,950 $ 161,551 $ 859,238 18.8% ================== =============== =================== ============ ================ See accompanying report of independent registered public accounting firm.
76 PART C - OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS a. Financial Statements
The following financial statements of the Company are included in Part B hereof: 1. Report of Independent Registered Public Accounting Firm. 2. Consolidated Balance Sheets as of December 31, 2008 and 2007. 3. Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006. 4. Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006. 5. Consolidated Statements of Stockholder's Equity for the years ended December 31, 2008, 2007 and 2006. 6. Consolidated Statements of Cash Flows for the years ended December 31,2008, 2007 and 2006. 7. Notes to Consolidated Financial Statements - December 31, 2008, 2007 and 2006. 8. Supplemental Schedules: - Schedule I - Summary of Investments - Other Than Investments in Related Parties. - Schedule III - Supplemental Insurance Information. - Schedule IV - Reinsurance The following financial statements of the Variable Account are included in Part B hereof: 1. Report of Independent Registered Public Accounting Firm. 2. Statements of Assets and Liabilities as of December 31, 2008. 3. Statements of Operations for the year or period ended December 31, 2008. 4. Statements of Changes in Net Assets for the years or periods ended December 31, 2008 and 2007. 5. Notes to Financial Statements - December 31, 2008. b. Exhibits 1. Resolution of Board of Directors of the Company authorizing the establishment of the Separate Account, dated May 31, 1985(1) incorporated by reference as exhibit EX-99.B1. 2. Not Applicable 3.a. Principal Underwriter Agreement by and between North American Life and Casualty Company on behalf of NALAC Financial Plans, Inc. dated September 14, 1988.(2) incorporated by reference as exhibit EX-99.B3.a. (North American Life and Casualty Company is the predecessor to Allianz Life Insurance Company of North America. NALAC Financial Plans, Inc., is the predecessor to USAllianz Investor Services, LLC, which is the predecessor to Allianz Life Financial Services, LLC.) b. Copy of Broker-Dealer Agreement between North American Life and Casualty Company and NALAC Financial Plans, Inc. dated November 19, 1987; Amendment #1 dated April 12, 2000; Amendment #2 dated September 30, 2002; Amendment #3 dated October 1, 2003(13) incorporated by reference as exhibit EX-99.B3.b. (North American Life and Casualty Company is the predecessor to Allianz Life Insurance Company of North America. NALAC Financial Plans, Inc, is the predecessor to USAllianz Investor Services, LLC, which is the predecessor to Allianz Life Financial Services, LLC.) c. Form of General Agency Agreement with Allianz Life Financial Services, LLC.(11) incorporated by reference as exhibit EX-99.B3.b. 4.a. Individual Variable Annuity Contract - L40432(6) incorporated by reference as exhibit EX-99.B4.a. b. Contract Schedule Page - S40694(8) incorporated by reference as exhibit EX-99.B4.b. c. GAV Benefit Endorsement - S40693(8) incorporated by reference as exhibit EX-99.B4.c. d. GPV Benefit Endorsement - S40692(8) incorporated by reference as exhibit EX-99.B4.d. e. Fixed Account with a MVA Endorsement - S40695(8) incorporated by reference as exhibit EX-99.B4.e. f. Traditional GMDB Endorsement - S40251(6) incorporated by reference as exhibit EX-99.B4.d. g. Enhanced GMDB Endorsement - S40250(6) incorporated by reference as exhibit EX-99.B4.e. h. GWB Endorsement - S40254(8) incorporated by reference as exhibit EX-99.B4.h. i. Contract Amendment Endorsement - S40697(9) incorporated by reference as exhibit EX-99.B4.i. j. MVA Amendment Endorsement - S40740(14) incorporated by reference as exhibit EX-99.B4.j. 5.a. Application for Individual Variable Annuity Contract - F40456(8) incorporated by reference as exhibit EX-99.B5.a. 6.(i)Copy of Certificate of the Amendment of Charter of the Company dated October 5, 1988 and the Declaration of Intention and Charter dated August 26, 1996(11) incorporated by reference as exhibit EX-99.B6.(i). (ii)Copy of the Restated Bylaws of the Company (as amended October 2, 1996)(11) incorporated by reference as exhibit EX-99.B6.(ii). 7. Not Applicable 8.a. 22c-2 Agreements (15)incorporated by reference as exhibit EX-99.B8.a. b. 22c-2 Agreement-BlackRock Distributors, Inc.(16)incorporated by reference as exhibit EX-99.B8.b. c. Copy of Participation Agreement between BlackRock Series Fund, Inc., BlackRock Distributors, Inc., Allianz Life Insurance Co. of North America, and Allianz Life Financial Services, LLC (16)incorporated by reference as exhibit EX-99.B8.c. d. Copy of Adminstrative Service Agreement between BlackRock Advisors, LLC and Allianz Life (16)incorporated by reference as exhibit EX-99.B8.d. e. Copy of Participation Agreement between Davis Variable Account Fund, Inc., Davis Distributors, LLC and Allianz Life Insurance Company of North America, dated 11/1/1999(3) incorporated by reference as exhibit EX-99.B8.e. f. Copy of Amendment to Participation Agreement between Davis Variable Account Fund, Inc., Davis Distributors, LLC and Allianz Life Insurance Company of North America dated 5/1/08(16) incorporated by reference as exhibit EX-99.B8.f. g. Copy of Administrative Services Agreement between The Dreyfus Corporation and Allianz Life Insurance Company of North America, dated 5/1/2002(13) incorporated by reference as exhibit EX-99.B8.f. h. Copy of Amendments to Administrative Services Agreement between The Dreyfus Corporation and Allianz Life Insurance Company of North America, dated 8/7/02, 10/16/06(13) incorporated by reference as exhibit EX-99.B8.g. i. Copy of Disribution/12 b-1 Letter Agreement between Dreyfus Service Corporation and USAllianz Investor Services, LLC (predecessor to Allianz Life Financial Services, LLC.), dated 5/1/2002(13) incorporated by reference as exhibit EX-99.B8.h. j. Copy of Fund Participation Agreement between Allianz Life Insurance Company of North America, Dreyfus Investment Portfolios and The Dreyfus Life and Annuity Index Fund, dated 5/1/2002(5) incorporated by reference as exhibit EX-99.B8.h. k. Copy of Amendment to Fund Participation Agreement between Allianz Life Insurance Company of North America, Dreyfus Investment Portfolios and the Dreyfus Stock Index Fund, Inc., dated 5/1/2007(15) incorporated by reference as exhibit EX-99.B8.j. l. Copy of Administrative Services Agreement between Franklin Templeton Services LLC and Allianz Life Insurance Company of North America, dated 10/1/2003(10) incorporated by reference as exhibit EX-99.B8.ac. m. Copy of Amendment to Administrative Services Agreement between Franklin Templeton Services LLC and Allianz Life Insurance Company of North America, dated 8/8/2008(16) incorporated by reference as exhibit EX-99.B8.h. n. Copy of Participation Agreement between Franklin Templeton Variable Insurance Products Trust, Franklin/Templeton Distributors, Inc., Allianz Life Insurance Company of North America and USAllianz Investor Services, LLC (the predecessor to Allianz Life Financial Services, LLC.), and dated 10/1/2003(10) incorporated by reference as exhibit EX-99.B8.h. o. Copy of Amendment to Participation Agreement between Franklin Templeton Variable Insurance Products Trust, Franklin/Templeton Distributors, Inc., Allianz Life Insurance Company of North America and USAllianz Investor Services, LLC (the predecessor to Allianz Life Financial Services, LLC.), dated 5/1/08(16) incorporated by reference as exhibit EX-99.B8.j. p. Copy of Participation Agreement between Premier VIT, Allianz Life Insurance Company of North America and Allianz Global Investors Distributors LLC, dated 5/1/2006(12) incorporated by reference as exhibit EX-99.B8.ai. q. Copy of Administrative Service Agreement between OpCap Advisors LLC and Allianz Life Insurance Company of North America, dated 5/1/2006(12) incorporated by reference as exhibit EX-99.B8.aj. r. Copy of Administrative Support Service Agreement between OppenheimerFunds, Inc. and Allianz Life Insurance Company of North America, dated 12/1/1999(7) incorporated by reference as exhibit EX-99.B8.u. s. Copy of Amendment to Administrative Support Service Agreement between OppenheimerFunds, Inc. and Allianz Life Insurance Company of North America, dated 2/1/00(13) incorporated by reference as exhibit EX-99.B8.r. t. Copy of Participation Agreement between Oppenheimer Variable Account Funds, OppenheimerFunds, Inc. and Allianz Life Insurance Company of North America, dated 12/1/1999(3) incorporated by reference as exhibit EX-99.B8.h. u. Copy of Amendments to Participation Agreement between Oppenheimer Variable Account Funds, OppenheimerFunds, Inc. and Allianz Life Insurance Company of North America, dated 2/1/00, 5/1/02, 4/30/04, 4/29/05, 5/1/06(13) incorporated by reference as exhibit EX-99.B8.t. v. Copy of Amended and Restated Services Agreement between Pacific Investment Management Company LLC and Allianz Life Insurance Company of North America, dated 01/01/2007(13) incorporated by reference as exhibit EX-99.B8.u. w. Copy of Participation Agreement between Allianz Life Insurance Company of North America, PIMCO Variable Insurance Trust, and PIMCO Funds Distributors LLC, dated 12/1/1999(3) incorporated by reference as exhibit EX-99.B8.i. x. Copy of Amendments to Participation Agreement between Allianz Life Insurance Company of North America, PIMCO Variable Insurance Trust, and PIMCO Funds Distributors LLC, dated 4/1/00, 11/5/01, 5/1/02, 5/1/03, 4/30/04, 4/29/05(13) incorporated by reference as exhibit EX-99.B8.w. y. Copy of Distribution Services Agreement between Allianz Life Insurance Company of North America and Allianz Global Investors Distributors, LLC, dated 01/01/2007(13) incorporated by reference as exhibit EX-99.B8.x. z. Copy of Services Agreement between Prudential Investment Management Services LLC and Allianz Life Insurance Company of North America, dated 12/15/2000(7) incorporated by reference as exhibit EX-99.B8.w. aa. Copy of Amendment to Services Agreement between Prudential Investment Management Services LLC and Allianz Life Insurance Company of North America, dated 9/9/2002(13) incorporated by reference as exhibit EX-99.B8.z. ab. Copy of Fund Participation Agreement between Allianz Life Insurance Company of North America, The Prudential Series Fund, Inc., Prudential Investments Fund Management LLC, and Prudential Investment Management Services, LLC, dated 12/15/2000(4) incorporated by reference as exhibit EX-99.B8.k. 9. Opinion and Consent of Counsel* 10. Consent of Independent Registered Public Accounting Firm* 11. Not Applicable 12. Not Applicable 13. Power of Attorney(16) incorporated by reference as exhibit EX-99.B13.
* Filed herewith (1) Incorporated by reference from Registrant's Form N-4 (File Nos. 333-06709 and 811-05618) electronically filed on June 25, 1996. (2) Incorporated by reference to Pre-Effective Amendment No. 1 to Registrant's Form N-4 (File Nos. 333-06709 and 811-05618) electronically filed on December 13, 1996. (3) Incorporated by reference from Pre-Effective Amendment No. 1 to Registrant's Form N-4 (File Nos. 333-82329 and 811-05618) electronically filed December 30, 1999. (4) Incorporated by reference from Post-Effective Amendment No. 2 to Registrant's Form N-4 (File Nos. 333-82329 and 811-05618) electronically filed on December 15, 2000. (5) Incorporated by reference from Post-Effective Amendment No. 3 to Registrant's Allianz Life Variable Account A's Form N-6 (File Nos. 333-60206 and 811-04965) electronically filed on January 6, 2003. (6) Incorporated by reference from Pre-Effective Amendment No. 1 to Registrant's Form N-4 (File Nos. 333-90260 and 811-05618) electronically filed on September 9, 2002. (7) Incorporated by reference from Post-Effective Amendment No. 12 to Registrant's Form N-4 (File Nos. 333-95729 and 811-05618) electronically filed on April 26, 2004. (8) Incorporated by reference from Registrant's Form N-4 (File Nos. 333-120181 and 811-05618) electronically filed on November 3, 2004. (9) Incorporated by reference from Pre-Effective Amendment No.1 to Registrant's Form N-4 (File Nos. 333-120181 and 811-05618) electronically filed on December 28, 2004. (10)Incorporated by reference from Pre-Effective Amendment No.2 to Registrant's Form N-4 (File Nos. 333-120181 and 811-05618) electronically filed on March 30, 2005. (11)Incorporated by reference from the Initial Registration Statement to Registrant's Form N-4 (file Nos. 333-134267 and 811-05618 electronically filed on May 19, 2006. (12)Incorporated by reference from Pre-Effective Amendment No.1 to Registrant's Form N-4 (File Nos. 333-134267 and 811-05618) electronically filed on September 25, 2006. (13)Incorporated by reference from Post-Effective Amendment No. 18 to Registrant's Form N-4 (File Nos. 333-82329 and 811-05618) electronically filed on April 23, 2007. (14)Incorporated by reference from Post-Effective Amendment No. 5 to Registrant's Form N-4 (File Nos. 333-120181 and 811-05618) electronically filed on April 23, 2007. (15)Incorporated by reference from Post-Effective Amendment No. 20 to Registrant's Form N-4 (File Nos. 333-82329 and 811-05618) electronically filed on April 24, 2008. (16)Incorporated by reference from Post-Effective Amendment No. 14 to Registrant's Form N-4 (File Nos. 333-139701 and 811-05618) electronically filed on April 3, 2009. ITEM 25. OFFICERS AND DIRECTORS OF ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA. Unless noted otherwise, all officers and directors have the following principal business address: 5701 Golden Hills Drive Minneapolis, MN 55416-1297
The following are the Officers and Directors of the Company: -------------------------------------------------- ------------------------------------------------------ NAME AND PRINCIPAL BUSINESS ADDRESS POSITIONS AND OFFICES WITH DEPOSITOR -------------------------------------------------- ------------------------------------------------------ Charles M. Kavitsky Director -------------------------------------------------- ------------------------------------------------------ Giulio Terzariol Director, Vice President, Chief Financial Officer and Treasurer -------------------------------------------------- ------------------------------------------------------ Gary C. Bhojwani Director, President and Chief Executive Officer -------------------------------------------------- ------------------------------------------------------ Neil H. McKay Senior Vice President and Chief Actuary -------------------------------------------------- ------------------------------------------------------ Axel Zehren Senior Vice President, Chief Investment Officer -------------------------------------------------- ------------------------------------------------------ Thomas P. Burns Senior Vice President, Chief Distribution Officer -------------------------------------------------- ------------------------------------------------------ Maureen Phillips Senior Vice President, General Counsel and Secretary -------------------------------------------------- ------------------------------------------------------ Stewart Gregg Vice President, Chief Legal Officer of Separate Accounts and Assistant Secretary -------------------------------------------------- ------------------------------------------------------ Stephen Simon Chief Compliance Officer of Separate Accounts -------------------------------------------------- ------------------------------------------------------ Dr. Helmut Perlet Director Allianz AG (Holding) Koniginstr 28 80802 Munchen Germany -------------------------------------------------- ------------------------------------------------------ Jay Ralph Director and Chairman of the Board Allianz SE Koniginstr 28 80802 Munchen Germany -------------------------------------------------- ------------------------------------------------------ Clement Booth Director Koniginstr 28 80802 Munchen Germany -------------------------------------------------- ------------------------------------------------------ Brigitte Bovermann Director Koniginstr 28 80802 Munchen Germany -------------------------------------------------- ------------------------------------------------------ Peter Huehne Director Fireman's Fund Insurance Co. 777 San Marin Drive Novato, CA 94998 -------------------------------------------------- ------------------------------------------------------ Michael E. LaRocco Director Fireman's Fund Insurance Co. 777 San Marin Drive Novato, CA 94998 -------------------------------------------------- ------------------------------------------------------ Jill Paterson Director Fireman's Fund Insurance Co. 777 San Marin Drive Novato, CA 94998 -------------------------------------------------- ------------------------------------------------------
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT The Insurance Company organizational chart is incorporated by reference from Post-Effective Amendment No. 20 to Registrant's Form N-4 (File Nos. 333-82329 and 811-05618) electronically filed on April 24, 2008. ITEM 27. NUMBER OF CONTRACT OWNERS As of March 31, 2009 there were 7,650 Contract Owners of qualified and 5,514 non-qualified contracts. ITEM 28. INDEMNIFICATION The Bylaws of the Insurance Company provide: ARTICLE XI. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES SECTION 1. RIGHT TO INDEMNIFICATION: (a)Subject to the conditions of this Article and any conditions or limitations imposed by applicable law, the Corporation shall indemnify any employee, director or officer of the Corporation (an "Indemnified Person") who was, is, or in the sole opinion of the Corporation, may reasonably become a party to or otherwise involved in any Proceeding by reason of the fact that such Indemnified Person is or was: (i) a director of the Corporation; or (ii) acting in the course and scope of his or her duties as an officer or employee of the Corporation; or (iii) rendering Professional Services at the request of and for the benefit of the Corporation; or (iv) serving at the request of the Corporation as an officer, director, fiduciary or member of another corporation, association, committee, partnership, joint venture, trust, employee benefit plan or other enterprise (an "Outside Organization"). (b)Notwithstanding the foregoing, no officer, director or employee shall be indemnified pursuant to these bylaws under the following circumstances: (i) in connection with a Proceeding initiated by such person, in his or her own personal capacity, unless such initiation was authorized by the Board of Directors; (ii) if a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful; (iii) for acts or omissions involving intentional misconduct or knowing and culpable violation of law; (iv) for acts or omissions that the Indemnified Person believes to be contrary to the best interests of the Corporation or its shareholders or that involve the absence of good faith on the part of the Indemnified Person; (v) for any transaction for which the Indemnified Person derived an improper personal benefit; (vi) for acts or omissions that show a reckless disregard for the Indemnified Person's duty to the Corporation or its shareholders in circumstances in which the Indemnified Person was aware or should have been aware, in the ordinary course of performing the Indemnified Person's duties, of the risk of serious injury to the Corporation or its shareholders; (vii) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the Indemnified Person's duties to the Corporation or its shareholders; (viii) in circumstances where indemnification is prohibited by applicable law; (ix) in the case of service as an officer, director, fiduciary or member of an Outside Organization, where the Indemnified Person was aware or should have been aware that the conduct in question was outside the scope of the assignment as contemplated by the Corporation. SECTION 2. SCOPE OF INDEMNIFICATION: (a)Indemnification provided pursuant to Section 1(a)(iv) shall be secondary and subordinate to indemnification or insurance provided to an Indemnified Person by an Outside Organization or other source, if any. (b)Indemnification shall apply to all reasonable expenses, liability and losses, actually incurred or suffered by an Indemnified Person in connection with a Proceeding, including without limitation, attorneys' fees and any expenses of establishing a right to indemnification or advancement under this article, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and all interest, assessments and other charges paid or payable in connection with or in respect of such expense, liability and loss. (c)Such indemnification shall continue as to any Indemnified Person who has ceased to be an employee, director or officer of the Corporation and shall inure to the benefit of his or her heirs, estate, executors and administrators. SECTION 3. DEFINITIONS: (a)"Corporation" for the purpose of Article XI shall mean Allianz Life Insurance Company of North America and all of its subsidiaries. (b)"Proceeding" shall mean any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative, investigative or otherwise, including actions by or in the right of the Corporation to procure a judgment in its favor. (c)"Professional Services" shall mean services rendered pursuant to (i) a professional actuarial designation, (ii) a license to engage in the practice of law issued by a State Bar Institution or (iii) a Certified Public Accountant designation issued by the American Institute of Certified Public Accountants. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted for directors and officers or controlling persons of the Insurance Company pursuant to the foregoing, or otherwise, the Insurance Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Insurance Company of expenses incurred or paid by a director, officer or controlling person of the Insurance Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 29. PRINCIPAL UNDERWRITERS a. Allianz Life Financial Services, LLC (previously USAllianz Investor Services, LLC) is the principal underwriter for the Contracts. It also is the principal underwriter for: Allianz Life Variable Account A Allianz Life of NY Variable Account C b. The following are the officers (managers) and directors (Board of Governors) of Allianz Life Financial Services, LLC. All officers and directors have the following principal business address: 5701 Golden Hills Drive Minneapolis, MN 55416-1297
Name Positions and Offices with Underwriter ---------------------- ----------------------------------------------------------------------- Robert DeChellis Chief Executive Officer, President and Governor Thomas Burns Governor Angela Forsman Chief Financial Officer and Vice President Catherine Q. Farley Senior Vice President Jeffrey W. Kletti Senior Vice President Michael Brennan Chief Compliance Officer Stewart D. Gregg Vice President and Secretary Carol Dunn Assistant Secretary
c. For the period 1-1-2008 to 12-31-2008: ------------------------------------ --------------------- --------------------- --------------------- --------------------- NAME OF PRINCIPAL UNDERWRITER NET UNDERWRITING COMPENSATION ON BROKERAGE COMPENSATION DISCOUNTS AND COMMISSIONS REDEMPTION COMMISSIONS ------------------------------------ --------------------- --------------------- --------------------- --------------------- ------------------------------------ --------------------- --------------------- --------------------- --------------------- Allianz Life Financial Services, LLC $198,319,091.42 $0 $0 $0 ------------------------------------ --------------------- --------------------- --------------------- ---------------------
The $198,319,091.42 that Allianz Life Financial Services, LLC received from Allianz Life as commissions on the sale of Contracts issued under Allianz Life Variable Account B was subsequently paid entirely to the third party broker/dealers that perform the retail distribution of the Contracts and, therefore, no commission or compensation was retained by Allianz Life Financial Services, LLC. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS 5701 Golden Hills Drive, Minneapolis, Minnesota 55416 and Delaware Valley Financial Services, Allianz Service Center, 300 Berwyn Park, Berwyn, Pennsylvania 19312, maintain physical possession of the accounts, books or documents of the Variable Account required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder. ITEM 31. MANAGEMENT SERVICES Not Applicable ITEM 32. UNDERTAKINGS a. Registrant hereby undertakes to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen (16) months old for so long as payment under the variable annuity contracts may be accepted. b. Registrant hereby undertakes to include either (1) as part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a postcard or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information. c. Registrant hereby undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request. REPRESENTATIONS Allianz Life Insurance Company of North America ("Company") hereby represents that the fees and charges deducted under the Contract, in the aggregate, are reasonable in relation to the services rendered, the expenses to be incurred and the risks assumed by the Company. The Company hereby represents that it is relying upon a No Action Letter issued to the American Council of Life Insurance, dated November 28, 1988 (Commission ref. IP-6-88), and that the following provisions have been complied with: 1. Include appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in each registration statement, including the prospectus, used in connection with the offer of the contract; 2. Include appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in any sales literature used in connection with the offer of the contract; 3. Instruct sales representatives who solicit participants to purchase the contract specifically to bring the redemption restrictions imposed by Section 403(b)(11) to the attention of the potential participants; 4. Obtain from each plan participant who purchases a Section 403(b) annuity contract, prior to or at the time of such purchase, a signed statement acknowledging the participant's understanding of (1) the restrictions on redemption imposed by Section 403(b)(11), and (2) other investment alternatives available under the employer's Section 403(b) arrangement to which the participant may elect to transfer his contract value. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, as amended, Allianz Life Insurance Company of North America on behalf of the Registrant certifies that it meets the requirements of the Securities Act Rule 485(b) for effectiveness of this Registration Statement and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized in the City of Minneapolis and State of Minnesota, on this 16th day of April, 2009. ALLIANZ LIFE VARIABLE ACCOUNT B (Registrant) By: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA (Depositor) By: /S/ STEWART D. GREGG -------------------------------- Stewart D. Gregg Senior Securities Counsel ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA (Depositor) By: GARY C. BHOJWANI* ------------------------------ Gary C. Bhojwani President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on this 16th day of April, 2009. Signature and Title Gary C. Bhojwani* Director, President and Chief Executive Officer Gary C. Bhojwani Giulio Terzariol* Director, Vice President, Giulio Terzariol Chief Financial Officer and Treasurer Peter Huehne* Director Peter Huehne Charles Kavitsky* Director Charles Kavitsky Michael LaRocco* Director Michael LaRocco Jill Paterson* Director Jill Paterson *By Power of Attorney filed as Exhibit 13 to this Registration Statement By: /S/ STEWART D. GREGG -------------------- Stewart D. Gregg Senior Securities Counsel EXHIBITS TO POST-EFFECTIVE AMENDMENT NO. 8 FORM N-4 (FILE NOS. 333-120181 AND 811-05618) ALLIANZ LIFE VARIABLE ACCOUNT B ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA INDEX TO EXHIBITS EX-99.B Opinion and Consent of Counsel EX-99.B10 Consent of Independent Registered Public Accounting Firm