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Allianz Annual Report 2012

risks. Revenues and expenses related to reinsurance agree- ments are recognized in a manner consistent with the un- derlying risk of the business reinsured. To the extent that the assuming reinsurers are unable to meettheirobligations,therespectivecedinginsurersofthe ­Allianz Group remain liable to its policyholders for the por- tion reinsured. Consequently, allowances are made for re- ceivables on reinsurance contracts which are deemed un- collectible. Deferred acquisition costs Deferred acquisition costs (DAC), present value of future profits (PVFP) and deferred sales inducements comprise the deferred acquisition costs in the consolidated balance sheets. Costs that vary with and are directly related to the acquisi- tion and renewal of insurance contracts are deferred by recognizing a DAC asset. DAC generally consists of commis- sions, 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 recognition tests at the end of each reporting period ensure that only the amount of DAC that is covered by future profits is car- ried on the consolidated balance sheet. For short-duration contracts, traditional long-duration contracts, and limited- payment contracts, DAC is amortized in proportion to pre- mium revenue recognized. For universal life-type contracts, participating life insur- ance contracts and investment contracts with discretion- ary participation features, DAC is amortized over the con- tract life of a book of contracts based on estimated gross profits (EGP) or estimated gross margins (EGM), as appro- priate, based on historical and anticipated future experi- ence, which is evaluated at the end of each reporting period. For unit-linked investment contracts without discretionary participation features (DPF) accounted for under IAS 39 at fair value, acquisition costs are deferred in accordance with IAS 18, Revenue, if the costs are incremental. Acquisi- tion costs are incremental, so long as no costs are incurred from non-issuance of the related contracts. For non-unit- linked investment contracts without discretionary partici- pation features accounted for under IAS 39 at amortized cost, acquisition costs that meet the definition of transac- tion costs under IAS 39, are considered in the aggregate policy reserves. INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance and investment contracts Contracts issued by insurance subsidiaries of the ­Allianz Group are classified according to IFRS 4 as insurance or in- vestment contracts. Contracts under which the ­Allianz Group accepts significant insurance risk from a policyhold- er are classified as insurance contracts. Contracts under which the ­Allianz Group does not accept significant insur- ance risk are classified as investment contracts. Certain investment contracts include discretionary participation features. All insurance contracts and investment contracts with discretionary participating features are accounted for under the related insurance accounting provisions of US GAAP as at first-time adoption of IFRS 4 on 1 January 2005 when IFRS 4 does not provide specific guidance. Investment contracts without discretionary participation features are accounted for as financial instruments in accordance with IAS 39. Reinsurance contracts The ­Allianz Group’s consolidated financial statements re- flect the effects of ceded and assumed reinsurance con- tracts. Assumed reinsurance refers to the acceptance of certain insurance risks by the ­Allianz Group that other companies have underwritten. Ceded reinsurance refers to the transfer of insurance risk, along with the respective pre- miums, to one or more reinsurers who will share in the risks. When the reinsurance contracts do not transfer sig- nificant insurance risk, deposit accounting is applied as required under the related reinsurance accounting provi- sions of US GAAP or under IAS 39. Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of techni- cal provisions are accounted for in accordance with the conditions of the reinsurance contracts and with consider- ation of the original contracts for which the reinsurance was concluded. Premiums ceded for reinsurance and reinsurance recover- ies on benefits and claims incurred are deducted from pre- miums earned and insurance and investment contract benefits, respectively. Assets and liabilities related to rein- surance are reported on a gross basis. The amount of re- serves ceded to reinsurers are estimated in a manner con- sistentwiththeclaimliabilityassociatedwiththereinsured Annual Report 2012    Allianz Group236