Ameriprise 2005 Annual Report Download - page 29

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Ameriprise Financial, Inc. |
also make assumptions to project maintenance expenses
associated with servicing our annuity and insurance busi-
nesses during the DAC amortization period.
The client asset value growth rate is the rate at which contract
values are assumed to appreciate in the future. The rate is net
of asset fees and anticipates a blend of equity and fixed
income investments. Our management reviews and, where
appropriate, adjusts its assumptions with respect to client
asset value growth rates on a quarterly basis. We use a mean
reversion method as a monthly guideline in setting near-term
client asset value growth rates based on a long-term view of
financial market performance as well as actual historical per-
formance. In periods when market performance results in
actual contract value growth at a rate that is different than
that assumed, we will reassess the near-term rate in order to
continue to project our best estimate of long-term growth. The
near-term growth rate is reviewed to ensure consistency with
our management’s assessment of anticipated equity market
performance. Our management is currently assuming a 7%
long-term client asset value growth rate. If we increased or
decreased our assumption related to this growth rate by 100
basis points, the impact on annual DAC amortization expense
would be a decrease or increase of approximately $65 million.
We monitor other principal DAC amortization assumptions, such
as persistency, mortality, morbidity, interest margin and mainte-
nance expense levels, each quarter and, when assessed
independently, each could impact our DAC balances. For exam-
ple, if we increased or decreased our interest margin on our
universal life insurance and on the fixed portion of our variable
universal life insurance products by 10 basis points, the impact
on annual DAC amortization expense would be a decrease or
increase of approximately $5 million. Additionally, if we
extended or reduced the amortization periods by one year for
variable annuities to reflect changes in premium paying persis-
tency and/or surrender assumptions, the impact on annual
DAC amortization expense would be a decrease or increase of
approximately $30 million. The amortization impact of extend-
ing or reducing the amortization period any additional years is
not linear.
The analysis of DAC balances and the corresponding amortiza-
tion is a dynamic process that considers all relevant factors
and assumptions described previously. Unless our manage-
ment identifies a significant deviation over the course of the
quarterly monitoring, our management reviews and updates
these DAC amortization assumptions annually in the third
quarter of each year. An assessment of sensitivity associated
with changes in any single assumption would not necessarily
be an indicator of future results.
For details regarding the balances of and changes in DAC for
the years ended December 31, 2005, 2004 and 2003, see
Note 5 to our consolidated financial statements.
Derivative Financial Instruments and Hedging Activities
The fair values of our derivative financial instruments are
determined using either market quotes or valuation models
that are based upon the net present value of estimated future
cash flows and incorporate current market data inputs. In cer-
tain instances, the fair value includes structuring costs
incurred at the inception of the transaction. The accounting for
the change in the fair value of a derivative financial instrument
depends on its intended use and the resulting hedge designa-
tion, if any. We currently designate derivatives as cash flow
hedges or hedges of net investment in foreign operations or, in
certain circumstances, do not designate derivatives as
accounting hedges.
For derivative financial instruments that qualify as cash flow
hedges, the effective portions of the gain or loss on the deriva-
tive instruments are reported in accumulated other
comprehensive income (loss) and reclassified into earnings
when the hedged item or transaction impacts earnings. Any
ineffective portion of the gain or loss is also reported currently
in earnings as a component of net investment income.
For derivative financial instruments that qualify as net invest-
ment hedges in foreign operations, the effective portions of
the change in fair value of the derivatives are recorded in accu-
mulated other comprehensive income (loss) as part of the
foreign currency translation adjustment. Any ineffective por-
tions of net investment hedges are recognized in net
investment income during the period of change.
For derivative financial instruments that do not qualify for hedge
accounting or are not designated as hedges, changes in fair
value are recognized in current period earnings, generally as a
component of net investment income. These derivatives primarily
provide economic hedges to equity market exposures. Examples
include structured derivatives, options and futures that economi-
cally hedge the equity components of certain annuity and
certificate liabilities, equity swaps and futures that economically
hedge exposure to price risk arising from proprietary mutual fund
seed money investments, and foreign currency forward contracts
to economically hedge foreign currency transaction exposures.
For further details on the types of derivatives we use and how
we account for them, see Note 15 to our consolidated finan-
cial statements.
Income Tax Accounting
Income taxes, as reported in our consolidated financial state-
ments, represent the net amount of income taxes that we
expect to pay to or receive from various taxing jurisdictions in
connection with our operations. We provide for income taxes
based on amounts that we believe we will ultimately owe.
Inherent in the provision for income taxes are estimates and
judgments regarding the tax treatment of certain items and
the realization of certain offsets and credits. In the event that
the ultimate tax treatment of items or the realization of offsets
or credits differs from our estimates, we may be required to