Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
For the years ended 31 December, the DAC were as follows:
| Download |
|
2011 |
Property & Casualty Reinsurance |
Life & Health Reinsurance |
Corporate Solutions |
Admin Re® |
Group items |
Total |
|
Opening balance as |
819 |
2 743 |
–40 |
34 |
15 |
3 571 |
|
Deferred |
2 233 |
254 |
202 |
|
–3 |
2 686 |
|
Effect of acquisitions/disposals and retrocessions |
–1 |
|
–9 |
|
|
–10 |
|
Amortisation |
–1 798 |
–313 |
–180 |
|
–8 |
–2 299 |
|
Effect of foreign currency translation |
–6 |
–21 |
2 |
|
|
–25 |
|
Closing balance |
1 247 |
2 663 |
–25 |
34 |
4 |
3 923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
Property & Casualty Reinsurance |
Life & Health Reinsurance |
Corporate Solutions |
Admin Re® |
Group items |
Total |
|
Opening balance |
1 247 |
2 663 |
–25 |
34 |
4 |
3 923 |
|
Cumulative effect of adoption of ASU No. 2010-26 |
|
–35 |
|
|
|
–35 |
|
Deferred |
2 119 |
399 |
542 |
|
|
3 060 |
|
Effect of acquisitions/disposals and retrocessions |
|
|
|
|
|
0 |
|
Amortisation |
–2 266 |
–367 |
–300 |
–1 |
–3 |
–2 937 |
|
Effect of foreign currency translation |
3 |
53 |
2 |
|
1 |
59 |
|
Write-off of DAC |
|
|
|
–31 |
|
–31 |
|
Closing balance |
1 103 |
2 713 |
219 |
2 |
2 |
4 039 |
Retroceded DAC may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation.
As of 1 January 2012, the Group adopted ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (ASU 2010-26). This new guidance limits the definition of deferrable acquisition costs to costs directly related to the successful acquisition or renewal of insurance contracts. The Group chose to adopt the standard retroactively. Due to immateriality, the release of USD 35 million of DAC not qualifying for deferral under the update was recognised against retained earnings as of 1 January 2012. Consequently, prior-period information has not been retrospectively adjusted. The impact of the guidance on the Group is immaterial.
For the years ended 31 December, the PVFP was as follows:
| Download |
|
|
|
|
2011 |
|
|
2012 |
|
USD millions |
Life & Health Reinsurance |
Admin Re® |
Total |
Life & Health Reinsurance |
Admin Re® |
Total |
|
Opening balance |
1 736 |
2 829 |
4 565 |
1 674 |
2 552 |
4 226 |
|
Effect of acquisitions/disposals and retrocessions |
112 |
135 |
247 |
–206 |
126 |
–80 |
|
Amortisation |
–218 |
–413 |
–631 |
–201 |
–244 |
–445 |
|
Interest accrued on unamortised PVFP |
54 |
177 |
231 |
51 |
140 |
191 |
|
Effect of foreign currency translation |
–10 |
–10 |
–20 |
40 |
56 |
96 |
|
Effect of change in unrealised gains/losses |
|
–166 |
–166 |
|
–316 |
–316 |
|
Write-off of PVFP |
|
|
|
|
–649 |
–649 |
|
Closing balance |
1 674 |
2 552 |
4 226 |
1 358 |
1 665 |
3 023 |
Retroceded PVFP may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation.
On 4 September 2012, the Group completed the sale of Admin Re® US to Jackson National. Subsequently, the subject business was deconsolidated as of that date. In the second quarter of 2012, upon classification of Admin Re® US as assets held for sale, PVFP and DAC of USD 649 million and USD 31 million, respectively, were reassessed as impaired and written off. Please refer to Note 6 “Acquisitions and disposals” for further information.
In the fourth quarter, based on the results of shadow loss recognition testing a shadow loss reserve of USD 307m, net of tax, was recognised impacting PVFP and other comprehensive income. The adjustment relates to Admin Re business and it is reflected in the effect of change in unrealised gains/losses in the table above. Shadow loss recognition testing considers the adequacy of contractual liabilities, net of DAC and PVFP, using current best estimates of all future cash flows discounted at current market yields.
The percentage of PVFP which is expected to be amortised in each of the next five years is 9%, 8%, 8%, 7% and 7%.