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Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements
Fair value of financial instruments
The ­Allianz Group applies the IAS 39 fair value measurement
rules to determine the fair value of financial instruments.
Active markets – quoted market price The fair values of
financial instruments that are traded in active markets are
based on quoted market prices or dealer price quotations
on the last exchange trading day prior to and at the balance
sheet date. The quoted market price used for a financial asset held by the A
­ llianz Group is the current bid price; the
quoted market price used for financial liabilities is the current ask price.
No active markets – valuation techniques If the market for
a financial instrument is not active, the fair value is determined by using valuation techniques. The valuation techniques used are based on market observable inputs when
available. Such market inputs include references to recently
quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets and quoted prices for similar instruments
from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. Where observable market
prices are not available, fair value is based on appropriate
valuation techniques using non-market observable inputs.
Valuation techniques include net present value techniques,
the discounted cash flow method, comparison to similar
instruments for which observable market prices exist and
other valuation models. In the process, appropriate adjustments are made for credit risks.
No active market – equity instruments Equity securities are
measured at fair value where the ownership interest is less
than 20 % and when the fair value is reliably measurable. If
the fair value cannot be measured reliably, unquoted equity
instruments and derivatives linked to such instruments are
stated at cost until a fair value can be measured reliably.
These financial instruments are subject to the normal impairment procedures.
Amortized cost of financial instruments
The amortized cost of a financial instrument is the amount
at which the financial instrument is measured at initial
recognition minus principal repayments, plus or minus the
cumulative amortization using the effective interest rate
method of any difference between that initial amount and
the maturity amount, and minus any subsequent reduction
for impairment or uncollectability.
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Recognition of a day one profit or loss
If the fair value of a financial instrument differs from its
initial transaction price (i.e. by comparing it to other observable current market transactions or by using a technical valuation model incorporating only observable market
data), it is required that the recognition of a “day one profit
or loss“ is consistent with the subsequent measurement of
the financial instrument with all the other requirements
regarding the calculation of fair value. A profit or loss
should be recognized after initial recognition only to the
extent that it arises from a change in a factor that market
participants would consider in setting a price.
Subsequent measurement of financial instruments
The subsequent measurement of financial instruments
depends on their classification as follows:
Financial assets and liabilities carried at fair value through
income
Financial assets and liabilities carried at fair value through
income include financial assets and liabilities held for
trading and financial assets and liabilities designated at fair
value through income.
Financial assets and liabilities are classified as held for
trading if they have been principally acquired or incurred
for the purpose of generating a profit from short-term
fluctuations in price or for the purpose of selling in the near
future.
Financial assets held for trading consist of debt and equity
securities and derivative financial instruments with
positive fair values that do not meet the criteria for hedge
accounting.
Financial liabilities held for trading primarily consist of
derivative financial instruments with negative fair values
that do not meet the criteria for hedge accounting.
Derivative financial instruments include separated embedded derivatives of hybrid financial instruments.
Financial assets and liabilities carried at fair value through
income are measured at fair value. Changes in fair value are
recognized directly in the consolidated income statement.
The recognized net gains and losses include dividends and
interest of the underlying financial instruments. A financial
instrument may only be designated at inception as held at
fair value through income and cannot be subsequently
changed.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009
Available-for-sale investments
Available-for-sale investments comprise debt and equity
securities that are designated as available-for-sale or are
not classified as held-to-maturity, loans and advances to
banks and customers, or financial assets carried at fair
value through income. Available-for-sale investments are
recorded at fair value. Unrealized gains and losses, which
are the difference between fair value and cost or amortized
cost, are included as a separate component of other comprehensive income, net of deferred taxes and the latent
reserve for premium refunds to the extent that policyholders
will participate in such gains and losses on the basis of
statutory or contractual regulations when they are realized.
When an available-for-sale investment is derecognized or
determined to be impaired, the cumulative gain or loss
previously recorded in shareholders’ equity is transferred
and recognized in the consolidated income statement.
Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary
level.
Available-for-sale equity securities are measured at fair
value where the ownership interest is less than 20 % and
when the fair value is reliably measurable. Available-forsale equity securities include investments in limited partnerships. The ­Allianz Group records its investments in
limited partnerships at cost, where the ownership interest
is less than 20 %, and when the limited partnerships do not
have a quoted market price and fair value cannot be reliably
measured. In general, the A
­ llianz Group accounts for its
investments in limited partnerships with ownership interests of 20 % or greater using the equity method due to the
rebuttable presumption that the limited partner has no
control over the limited partnership.
Held-to-maturity investments
Held-to-maturity investments are debt securities with fixed
or determinable payments and fixed maturities for which
the ­Allianz Group has the positive intent and ability to hold
to maturity. These securities are recorded at amortized cost
using the effective interest method over the life of the security, less any impairment losses. Amortization of premium
or discount is included in interest and similar income.
Loans and advances to banks and customers
Loans and advances to banks and customers are non-derivative financial assets with fixed or determinable payments,
that are not quoted in an active market, are not classified as
available-for-sale investments or held-to-maturity investments, financial assets held for trading, or financial assets
designated at fair value through income. Loans to banks
and customers are initially recorded at fair value plus trans-
action costs, and subsequently recorded at amortized cost
using the effective interest rate method. Interest income is
accrued on the unpaid principal balance, net of charge-offs.
Using the effective interest method, net deferred fees and
premiums or discounts are recorded as an adjustment of
interest income yield over the lives of the related loans.
Loans and advances to banks and customers include reverse repurchase (“reverse repo”) agreements and collateral
paid for securities borrowing transactions. Reverse repo
transactions involve the purchase of securities by the
­Allianz Group from a counterparty, subject to a simultaneous obligation to sell these securities at a certain later
date, at an agreed upon price. If substantially all of the risks
and rewards of the securities remains with the counterparty
over the entire lifetime of the agreement of the transaction,
the securities concerned are not recognized as assets. The
amounts of cash disbursed are recorded under loans and
advances to banks and customers. Interest income on reverse repo agreements is accrued over the duration of the
agreements and is reported in interest and similar income.
Securities borrowing transactions generally require the
­Allianz Group to deposit cash with the security’s lender.
Fees paid are reported as interest expense.
Funds held by others under reinsurance contracts
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 A
­ llianz Group. The cash deposits are
recorded at face value, less any impairments for balances
that are deemed to be not recoverable.
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 liabilities for unit-linked contracts.
Liabilities to banks and customers
Liabilities to banks and customers are subsequently measured at amortized cost. Herein included are repurchase
(“repo”) agreements and securities lending transactions.
Repo transactions involve the sale of securities by the
­Allianz Group to a counterparty, subject to the simultaneous agreement to repurchase these securities at a certain
later date, at an agreed price. If substantially all of the risks
and rewards of the securities remains with the A
­ llianz
Group over the entire lifetime of the transaction, the securities concerned are not derecognized by the A
­ llianz Group.
The proceeds of the sale are reported under liabilities to
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Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements
banks or customers. Interest expense from repo transactions
is accrued over the duration of the agreements and reported
in interest and similar expenses.
In securities lending transactions the A
­ llianz Group generally receives cash collateral which is recorded as liabilities
to banks or customers. Fees received are recognized as
interest income.
Investment contracts with policyholders
Fair value for investment and annuity contracts are determined using the cash surrender values of policyholders’
and contract holders’ accounts.
Financial liabilities for unit-linked contracts
The fair value of financial liabilities for unit-linked contracts
is equal to the fair value of the financial assets for unit-linked
contracts.
Financial liabilities for puttable equity instruments
Financial liabilities for puttable equity instruments include
the minority interests in shareholders’ equity of certain
consolidated investment funds. These minority interests
qualify as a financial liability of the ­Allianz Group, as they
give the holder the right to put the instrument back to the
­Allianz Group for cash or another financial asset (“puttable
instrument”). These liabilities are required to be recorded at
redemption amount with changes recognized in income.
Certified liabilities, participation certificates and subordinated
liabilities
Certified liabilities, participation certificates and subordinated liabilities are subsequently measured at amortized
cost, using the effective interest method to amortize the
premium or discount to the redemption value over the life
of the liability.
Financial guarantee contracts
Financial guarantee contracts issued by the A
­ llianz Group
are those contracts that require a payment to be made to
reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance
with the terms of a debt instrument. Financial guarantee
contracts which are not accounted for as insurance contracts are recognized initially at fair value. Subsequently,
unless the financial guarantee contract was designated at
inception as at fair value through income, the issuer measures it at the higher of the best estimate of the expenditure
required to settle the present obligation and the amount
initially recognized less cumulative amortization when
appropriate.
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Impairment of financial assets
Impairment of held-to-maturity and available-for-sale debt
securities
A held-to-maturity or available-for-sale debt security is
impaired if there is objective evidence that a loss event has
occurred after initial recognition of the security and up to
the relevant date of the A
­ llianz Group’s consolidated balance sheet, and that loss event has negatively impacted the
estimated future cash flows, i.e. all amounts due according
to the contractual terms of the security are not considered
collectible. The evaluation of whether a held-to-maturity or
available-for-sale debt security is impaired requires analysis
of the underlying credit of the relevant issuer and involves
significant management judgment. In particular, current
publicly available information relating to the issuer and the
particular security is considered relating to factors including, but not limited to, evidence of significant financial
difficulty of the issuer and breach of contractual obligations
of the security, such as a default or delinquency on interest
or principal payments. The A
­ llianz Group also considers
other factors which could provide objective evidence of a
loss event, including the probability of bankruptcy and the
lack of an active market due to financial difficulty. The presence of either a decline in fair value below amortized cost or
the downgrade of an issuer’s credit rating does not by itself
represent objective evidence of a loss event, but may represent objective evidence of a loss event when considered
with other available information.
If a held-to-maturity debt security is impaired based on the
­Allianz Group’s impairment review process, the related
impairment loss is measured as the difference between the
security’s carrying amount and the present value of estimated future cash flows, discounted at the security’s original effective interest rate.
If an available-for-sale debt security is impaired based on
the A
­ llianz Group’s impairment review process, the related
impairment loss is measured as the difference between the
security’s acquisition cost (net of any principal repayment
and amortization) and current fair value, less any previously
recognized impairment losses.
In a subsequent period, if the fair value of an available-forsale debt security instrument increases and the increase
can be objectively related to an event occurring after the
recognition of an impairment loss, such as an improvement
in the debtor’s credit rating, the impairment is reversed
through impairments of investments (net).