Ameriprise 2005 Annual Report Download - page 69

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Ameriprise Financial, Inc. |
or liabilities. The fair value of the Company’s derivative finan-
cial instruments is 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 certain instances, the fair value includes struc-
turing costs incurred at the inception of the transaction. The
accounting for the change in the fair value of a derivative finan-
cial instrument depends on its intended use and the resulting
hedge designation, if any. The Company currently designates
derivatives as fair value hedges, cash flow hedges or hedges
of net investment in foreign operations or, in certain circum-
stances, does not designate derivatives as accounting
hedges.
For derivative financial instruments that qualify as fair value
hedges, changes in the fair value of the derivatives as well as
of the corresponding hedged assets, liabilities or firm commit-
ments are recognized in current earnings as a component of
net investment income. If a fair value hedge is designated or
terminated prior to maturity, previous adjustments to the carry-
ing value of the hedged item are recognized into earnings to
match the earnings pattern of the hedged item.
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. The
amount that is reclassified into earnings is presented in the
Consolidated Statements of Income with the hedged instru-
ment or transaction impact. Any ineffective portion of the gain
or loss is reported currently in earnings as a component of net
investment income. If a hedge is de-designated or terminated
prior to maturity, the amount previously recorded in accumu-
lated other comprehensive income (loss) is recognized into
earnings over the period that the hedged item impacts earn-
ings. For any hedge relationships that are discontinued
because the forecasted transaction is not expected to occur
according to the original strategy, any related amounts previ-
ously recorded in accumulated other comprehensive income
(loss) are recognized in earnings immediately.
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.
Derivative financial instruments that are entered into for hedg-
ing purposes are designated as such at the time that the
Company enters into the contract. For all derivative financial
instruments that are designated for hedging activities, the
Company formally documents all of the hedging relationships
between the hedge instruments and the hedged items at the
inception of the relationships. Management also formally docu-
ments its risk management objectives and strategies for
entering into the hedge transactions. The Company formally
assesses, at inception and on a quarterly basis, whether deriv-
atives designated as hedges are highly effective in offsetting
the fair value or cash flows of hedged items. If it is determined
that a derivative is not highly effective as a hedge, the
Company will discontinue the application of hedge accounting.
See Note 15 for more information about derivatives and hedg-
ing activities of the Company.
Future Policy Benefits and Claims
Fixed Annuities and Variable Annuity Guarantees
Liabilities for fixed and variable deferred annuities are equal to
accumulation values, which are the cumulative gross deposits,
credited interest and fund performance less withdrawals and
mortality and expense risk charges.
The majority of the variable annuity contracts offered by the
Company contain guaranteed minimum death benefit (GMDB)
provisions. When market values of the customer’s accounts
decline, the death benefit payable on a contract with a GMDB
may exceed the contract accumulation value. The Company
also offers variable annuities with death benefit provisions
that gross up the amount payable by a certain percentage of
contract earnings; these are referred to as gain gross-up
(GGU) benefits. In addition, the Company offers contracts con-
taining guaranteed minimum income benefit (GMIB),
guaranteed minimum withdrawal benefit (GMWB) and guaran-
teed minimum accumulation benefit (GMAB) provisions.
Effective January 1, 2004, liabilities for GMDB, GGU and GMIB
benefits have been established under SOP 03-1. Actuarial mod-
els to simulate various equity market scenarios are used to
project these benefits and contract assessments and include
making significant assumptions related to customer asset value
growth rates, mortality, persistency and investment margins.
These assumptions, as well as their periodic review by manage-
ment, are consistent with those used for DAC purposes. Prior to
the adoption of SOP 03-1, amounts paid in excess of contract
value were expensed when payable. See Recently Issued
Accounting Standards section below and Note 12 for more
information about these guaranteed benefits.
GMWB and GMAB provisions are considered embedded deriva-
tives under SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities,” (SFAS 133) and, accordingly, are car-
ried at fair value within future policy benefits and claims on the
Consolidated Balance Sheets. The fair value of these embed-
ded derivatives is based on the present value of future
benefits less applicable fees charged for the provision.
Changes in fair value are reflected in benefits, claims, losses
and settlement expenses within the Consolidated Statements
of Income.