Ameriprise 2006 Annual Report Download - page 71

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.
Future Policy Benefits and Claims
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and claims related to fixed annuities and
variable annuity guarantees include liabilities for fixed account
values on fixed and variable deferred annuities, guaranteed
benefits associated with variable annuities, equity indexed
annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable
deferred annuities are equal to accumulation values, which are
the cumulative gross deposits and credited interest less
withdrawals and various 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, which are referred to as gain gross-up
(“GGU”) benefits. In addition, the Company offers contracts
containing guaranteed minimum income benefit (“GMIB”),
guaranteed minimum withdrawal benefit (“GMWB”) and
guaranteed minimum accumulation benefit (“GMAB”)
provisions.
In determining the liabilities for variable annuity death benefits
and GMIB, the Company projects these benefits and contract
assessments using actuarial models to simulate various
equity market scenarios. Significant assumptions made in pro-
jecting future benefits and assessments relate to customer
asset value growth rates, mortality, persistency and invest-
ment margins and are consistent with those used for DAC
asset valuation for the same contracts. As with DAC,
management will review and, where appropriate, adjust its
assumptions each quarter. Unless management identifies a
material deviation over the course of quarterly monitoring,
management will review and update these assumptions
annually in the third quarter of each year.
The variable annuity death benefit liability is determined by
estimating the expected value of death benefits in excess of
the projected contract accumulation value and recognizing the
excess over the estimated meaningful life based on expected
assessments (e.g., mortality and expense fees, contractual
administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting
period from contract issuance, a GMIB guarantees a minimum
lifetime annuity based on a specified rate of contract accumu-
lation value growth and predetermined annuity purchase rates.
The GMIB liability is determined each period by estimating the
expected value of annuitization benefits in excess of the
projected contract accumulation value at the date of
annuitization and recognizing the excess over the estimated
meaningful life based on expected assessments.
GMWB and GMAB provisions are considered embedded
derivatives and are recorded at fair value. The fair value of
these embedded 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.
Liabilities for equity indexed annuities are equal to the
accumulation of host contract values covering guaranteed
benefits and the market value of embedded equity options.
Liabilities for fixed annuities in a benefit or payout status are
based on future estimated payments using established
industry mortality tables and interest rates, ranging from
4.6% to 9.5% at December 31, 2006, depending on year of
issue, with an average rate of approximately 5.9%.
Life, Disability Income and Long Term Care Insurance
Future policy benefits and claims related to life, disability
income and long term care insurance include liabilities for
fixed account values on fixed and variable universal life
policies, liabilities for unpaid amounts on reported claims,
estimates of benefits payable on claims incurred but not yet
reported and estimates of benefits that will become payable
on term life, whole life, disability income and long term care
policies as claims are incurred in the future.
Liabilities for fixed account values on fixed and variable
universal life insurance are equal to accumulation values.
Accumulation values are the cumulative gross deposits and
credited interest less various contractual expense and
mortality charges and less amounts withdrawn by policyholders.
Liabilities for unpaid amounts on reported life insurance
claims are equal to the death benefits payable under the
policies. Liabilities for unpaid amounts on reported disability
income and long term care claims include any periodic or other
benefit amounts due and accrued, along with estimates of the
present value of obligations for continuing benefit payments.
These amounts are calculated based on claim continuance
tables which estimate the likelihood an individual will continue
to be eligible for benefits. Present values are calculated at
interest rates established when claims are incurred.
Anticipated claim continuance rates are based on established
industry tables, adjusted as appropriate for the Company’s
experience. Interest rates used with disability income claims
range from 3.0% to 8.0% at December 31, 2006, with an
average rate of 5.0%. Interest rates used with long term care
claims range from 4.0% to 7.0% at December 31, 2006, with
an average rate of 4.4%.
Liabilities for estimated benefits payable on claims that have
been incurred but not yet reported are based on periodic
analysis of the actual time lag between when a claim occurs
and when it is reported.
Liabilities for estimates of benefits that will become payable on
future claims on term life, whole life, disability income and long
term care policies are based on the net level premium method,
using anticipated premium payments, mortality and morbidity
rates, policy persistency and interest rates earned on assets
69
Ameriprise Financial, Inc. 2006 Annual Report