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Allianz Annual Report 2013

Annual Report 2013    Allianz Group138 Held-to-maturity investments Held-to-maturity investments are debt securities with fixed or deter- minable payments and fixed maturities for which the ­Allianz Group has the positive intent and ability to hold to maturity. These securi- ties are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method. Funds held by others under reinsurance contracts assumed Funds held by others under reinsurance contracts assumed relate to cash deposits to which the ­Allianz Group is entitled, but which the ceding insurer retains as collateral for future obligations of the ­Allianz Group. The cash deposits are recorded at face value, less any impairment for balances that are deemed not to be recoverable. Investments in associates and joint ventures Please see the section Principles of Consolidation for details on the accounting for investments in associates and joint ventures. Real estate held for investment Real estate held for investment (i.e. real estate and rights equivalent to real property and buildings, including buildings on leased land) is carried at cost less accumulated depreciation and impairments. Real estate held for investment is depreciated on a straight-line basis over its estimated life, with a maximum of 50 years. At each reporting date or whenever there are any indications that the carrying amount may not be recoverable, real estate is tested for impairment by determin- ing its recoverable amount. Subsequent costs are capitalized if they extend the useful life or increase the value of the asset; otherwise they are expensed as incurred. LOANS AND ADVANCES to banks and customers Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not classified as financial assets held for trading, desig- nated at fair value through income or designated as available for sale. Loans and advances are initially recognized at fair value. Subse- quently, they are recorded at amortized cost using the effective inter- est method. Interest income is accrued on the unpaid principal bal- ance, net of impairments. Using the effective interest method, net deferred fees and premiums or discounts are recorded as an adjust- ment of other interest income yield over the lives of the related loans. FINANCIAL ASSETS FOR UNIT-LINKED CONTRACTS Financial assets for unit-linked contracts are recorded at fair value with changes in fair value recorded in net income together with the offsetting changes in fair value of the corresponding financial liabili- ties for unit-linked contracts. REINSURANCE ASSETS Assets and liabilities related to reinsurance are reported on a gross basis. Reinsurance assets include balances expected to be recovered from reinsurance companies. The amount of reserves ceded to re- insurers is estimated in a manner consistent with the claim liability associated with the reinsured risks. To the extent that the assuming reinsurers are unable to meet their obligations, the respective ceding insurers of the ­Allianz Group remain liable to its policyholders for the portion reinsured. Consequently, allowances are made for receiv- ables on reinsurance contracts which are deemed uncollectible. DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) Costs that vary with and are directly related to the acquisition and renewal of insurance contracts and investment contracts with dis- cretionary participation features are deferred by recognizing a DAC asset. DAC generally consists of commissions, underwriting expenses and policy issuance costs. At inception, DAC is tested to ensure that it is recoverable over the life of the contracts. Subsequently, loss recog- nition tests at the end of each reporting period ensure that only the amount of DAC that is covered by future profits is carried on the con- solidated balance sheet. Please refer to the section reserves for insur- ance and investment contracts, where details on the corresponding liability adequacy test are explained. For short-duration, traditional long-duration, and limited-pay- ment insurance contracts, DAC is amortized in proportion to premi- um revenue recognized. For universal life-type and participating life insurance contracts as well as investment contracts with discretion- ary participation features, DAC is generally amortized over the life of a book of contracts based on estimated gross profits (EGP) or esti- mated gross margins (EGM), respectively. EGP and EGM are based on historical and anticipated experience, which is determined on a best estimate basis and evaluated at the end of each reporting period, with the effect of changes being recognized in the net income in the period revised. Acquisition costs for unit-linked investment contracts without discretionary participation features accounted for under IAS39 at fair value are deferred in accordance with IAS18 if the costs are incremen- tal. For non-unit-linked investment contracts without discretionary participation features accounted for under IAS 39 at amortized cost, acquisition costs that meet the definition of transaction costs under IAS 39 are considered in the aggregate policy reserves. Please refer to note 3, where the processes and controls for ensur- ing an appropriate use of estimates and assumptions are explained. Present value of future profits (PVFP) The value of an insurance business or an insurance portfolio acquired is measured by the PVFP, which is the present value of net cash flows

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