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:

2011 USD millions	Property & Casualty Reinsurance	Life & Health Reinsurance	Corporate Solutions	Admin Re^®	Group items	Total
Opening balance as of 1 January 2011	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 as of 31 December 2011	1 247	2 663	–25	34	4	3 923


2012 USD millions	Property & Casualty Reinsurance	Life & Health Reinsurance	Corporate Solutions	Admin Re^®	Group items	Total
Opening balance as of 1 January 2012	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 as of 31 December 2012	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:

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			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%.