Ameriprise 2006 Annual Report Download - page 28

We monitor other principal DAC amortization assumptions,
such as persistency, mortality, morbidity, interest margin and
maintenance expense levels each quarter and, when assessed
independently, each could impact our DAC balances. For
example, 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 the DAC balance would be an increase or
decrease 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
persistency and/or surrender assumptions, the impact on the
DAC balance would be an increase or decrease of
approximately $32 million. The amortization impact of
extending or reducing the amortization period any additional
years is not linear.
The analysis of DAC balances and the corresponding
amortization is a dynamic process that considers all relevant
factors and assumptions described previously. Unless our
management 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.
In periods prior to 2007, our policy has been to treat certain
internal replacement transactions as continuations and to
continue amortization of DAC associated with the existing
contract against revenues from the new contract. We will
account for many of these transactions differently as a result of
adopting American Institute of Certified Public Accountants
(“AICPA”) Statement of Position (“SOP”) 05-1, “Accounting by
Insurance Enterprises for Deferred Acquisition Costs in
Connection With Modifications or Exchanges of Insurance
Contracts” (“SOP 05-1”), effective January 1, 2007. See Note
3 to our Consolidated Financial Statements for additional
information about the effect of our adoption of SOP 05-1.
For additional information about our accounting policies for
amortization and capitalization of DAC, see Note 2 and Note 3
to our Consolidated Financial Statements. For details regarding
the balances of and changes in DAC for the years ended
December 31, 2006, 2005 and 2004, see Note 10 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
certain 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
designation, 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
derivative 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
investment hedges in foreign operations, the effective portions
of the change in fair value of the derivatives are recorded in
accumulated other comprehensive income (loss) as part of the
foreign currency translation adjustment. Any ineffective portions
of net investment hedges in foreign operations 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 economically 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 21 to our Consolidated
Financial Statements.
Income Tax Accounting
Income taxes, as reported in our Consolidated Financial
Statements, 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
significantly change the provision for income taxes recorded in
our Consolidated Financial Statements.
In connection with the provision for income taxes, our
Consolidated Financial Statements reflect certain amounts
related to deferred tax assets and liabilities, which result from
temporary differences between the assets and liabilities
measured for financial statement purposes versus the assets
and liabilities measured for tax return purposes. Among our
deferred tax assets is a significant deferred tax asset relating
to capital losses realized for tax return purposes and capital
losses that have been recognized for financial statement
26 Ameriprise Financial, Inc. 2006 Annual Report