Ameriprise 2007 Annual Report Download - page 72

The amounts capitalized are amortized using the same methodology
and assumptions used to amortize DAC.
Derivative Financial Instruments and Hedging Activities
Derivative financial instruments are recorded at fair value. The fair
value of the Company’s derivative financial 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 observable inputs to the extent available. In certain
instances, the fair value includes structuring costs incurred at the
inception of the transaction. The accounting for changes in the fair
value of a derivative financial instrument depends on its intended use
and the resulting hedge designation, if any. The Company primarily
uses derivatives as economic hedges that are not designated as
accounting hedges or do not qualify for hedge accounting treatment.
The Company occasionally designates derivatives as (1) hedges of
changes in the fair value of assets, liabilities, or firm commitments
(“fair value hedges”), (2) hedges of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability (“cash flow hedges”), or (3) hedges of foreign
currency exposures of net investments in foreign operations (“net
investment hedges in foreign operations”).
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.
For derivative financial instruments that qualify as fair value hedges,
changes in the fair value of the derivatives, as well as of the correspon-
ding hedged assets, liabilities or firm commitments, are recognized in
current earnings. If a fair value hedge designation is removed or the
hedge is terminated prior to maturity, previous adjustments to the
carrying value of the hedged item are recognized into earnings over
the remaining life of the hedged item.
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. The amount that is reclassified into earnings is
presented in the Consolidated Statements of Income with the hedged
instrument or transaction impact. Any ineffective portion of the gain
or loss is reported currently in earnings as a component of net invest-
ment income. If a hedge designation is removed or a hedge is
terminated prior to maturity, the amount previously recorded in
accumulated other comprehensive income (loss) may be recognized
into earnings over the period that the hedged item impacts earnings.
For any hedge relationships that are discontinued because the
forecasted transaction is not expected to occur according to the original
strategy, any related amounts previously recorded in accumulated other
comprehensive income (loss) are recognized in earnings immediately.
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 transla-
tion adjustment. Any ineffective portions of net investment hedges
are recognized in net investment income during the period of change.
Derivative financial instruments that are entered into for hedging
purposes are designated as such at the time the Company enters into
the contract. For all derivative financial instruments that are desig-
nated 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 documents its risk management objectives and strategies for
entering into the hedge transactions. The Company formally assesses,
at inception and on a quarterly basis, whether derivatives 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 no longer
highly effective as a hedge, the Company will discontinue the appli-
cation of hedge accounting.
The equity component of equity indexed annuity and stock market
investment certificate obligations are considered embedded deriva-
tives. Additionally, certain annuities contain guaranteed minimum
accumulation benefit (“GMAB”) and guaranteed minimum
withdrawal benefit (“GMWB”) provisions. The GMAB and the non-
life contingent benefits associated with GMWB provisions are also
considered embedded derivatives. The fair value of embedded deriva-
tives associated with annuities is included in future policy benefits
and claims, whereas the fair value of stock market investment certifi-
cate embedded derivatives is included in customer deposits. The
changes in fair value of the equity indexed annuity and investment
certificate embedded derivatives are reflected in interest credited to
fixed accounts and in banking and deposit interest expense, respec-
tively. The changes in the fair value of the GMWB and GMAB
embedded derivatives are reflected in benefits, claims, losses and
settlement expenses.
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 associ-
ated 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 GMWB and GMAB provisions
and, until May 2007, the Company offered contracts containing
guaranteed minimum income benefit (“GMIB”) provisions.
In determining the liabilities for variable annuity death benefits,
GMIB and the life contingent benefits associated with GMWB, the
Company projects these benefits and contract assessments using
actuarial models to simulate various equity market scenarios.
70 Ameriprise Financial 2007 Annual Report