Ameriprise 2007 Annual Report Download - page 69

applied retrospectively; an increase in amortization percentage will
result in a decrease in the DAC balance and an increase in DAC
amortization expense, while a decrease in amortization percentage
will result in an increase in the DAC balance and a decrease in DAC
amortization expense. The impact on results of operations of
changing assumptions can be either positive or negative in any partic-
ular period and is reflected in the period in which such changes are
made.
For other life and health insurance products, the assumptions made
in calculating the DAC balance and DAC amortization expense are
consistent with those used in determining the liabilities and, there-
fore, are intended to provide for adverse deviations in experience and
are revised only if management concludes experience will be so
adverse that DAC is not recoverable or if premium rates charged for
the contract are changed. If management concludes that DAC is not
recoverable, DAC is reduced to the amount that is recoverable based
on best estimate assumptions and there is a corresponding expense
recorded in consolidated results of operations.
For annuity, life and health insurance products, key assumptions
underlying those long term projections include interest rates (both
earning rates on invested assets and rates credited to policyholder
accounts), equity market performance, mortality and morbidity rates
and the rates at which policyholders are expected to surrender their
contracts, make withdrawals from their contracts and make
additional deposits to their contracts. Assumptions about interest
rates are the primary factor used to project interest margins, while
assumptions about rates credited to policyholder accounts and equity
market performance are the primary factors used to project client
asset value growth rates, and assumptions about surrenders,
withdrawals and deposits comprise projected persistency rates.
Management must also make assumptions to project maintenance
expenses associated with servicing the Company’s annuity and insur-
ance businesses during the DAC amortization period.
The client asset value growth rate is the rate at which variable annuity
and variable universal life insurance 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. Management reviews
and, where appropriate, adjusts its assumptions with respect to client
asset value growth rates on a regular basis. The Company uses a mean
reversion method as a 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 performance. In periods when market
performance results in actual contract value growth at a rate that is
different than that assumed, management reassesses the near-term rate
in order to continue to project management’s best estimate of long term
growth. The near-term growth rate is reviewed to ensure consistency
with management’s assessment of anticipated equity market perform-
ance. DAC amortization expense recorded in a period when client asset
value growth rates exceed management’s near-term estimate will
typically be less than in a period when growth rates fall short of manage-
ment’s near-term estimate.
The analysis of DAC balances and the corresponding amortization is
a dynamic process that considers all relevant factors and assumptions
described previously. Unless the Company’s management identifies a
significant deviation over the course of the quarterly monitoring,
management reviews and updates these DAC amortization assump-
tions annually in the third quarter of each year.
Interest and Debt Expense
Interest and debt expense primarily includes interest on corporate
debt, the impact of interest rate hedging activities and amortization
of debt issuance costs.
Separation Costs
Separation costs include expenses related to the Company’s separa-
tion from American Express. These costs were primarily associated
with establishing the Ameriprise Financial brand, separating and
reestablishing the Company’s technology platforms and advisor and
employee retention programs. The Company’s separation from
American Express is complete.
General and Administrative Expense
General and administrative expense includes compensation, share-
based awards and other benefits for employees (other than employees
directly related to distribution, including financial advisors), profes-
sional and consultant fees, information technology, facilities and
equipment, advertising and promotion, legal and regulatory, minority
interest and corporate related expenses. Minority interest is related to
certain limited partnerships that were consolidated beginning in
2006, which primarily consist of the portion of net income (loss) of
these partnerships not owned by the Company.
Advertising costs are charged to expense in the year in which the
advertisement first takes place, except for certain direct-response
advertising costs primarily associated with the solicitation of auto and
home insurance products. Direct-response advertising expenses
directly attributable to the sale of auto and home insurance products
are capitalized and generally amortized over the life of the policy.
The Company measures and recognizes the cost of share-based
awards granted to employees and directors based on the grant-date
fair value of the award. The fair value of each option is estimated on
the grant date using a Black-Scholes option-pricing model and is
charged to expense on a straight-line basis over the vesting period.
The Company recognizes the cost of share-based awards granted to
independent contractors on a fair value basis until the award is fully
vested.
Income Taxes
The Company’s provision for income taxes represents the net amount
of income taxes that the Company expects to pay or to receive from
various taxing jurisdictions in connection with its operations. The
Company provides for income taxes based on amounts that the
Company believes it will ultimately owe taking into account the
recognition and measurement for uncertain tax positions. Inherent in
the provision for income taxes are estimates and judgments regarding
the tax treatment of certain items.
Balance Sheet
Cash and Cash Equivalents
Cash equivalents include time deposits and other highly liquid
investments with original maturities of 90 days or less.
Investments
Investments consist of the following:
Ameriprise Financial 2007 Annual Report 67