Ameriprise 2008 Annual Report Download - page 142

Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market
funds are measured at their net asset value (‘‘NAV’’) and classified as Level 1. The Company’s remaining cash equivalents are
classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time
between the purchase of the instrument and its expected realization.
Investments (Trading Securities and Available-for-Sale Securities)
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair
values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques
such as the present value of cash flows. Level 1 securities include U.S. Treasuries and seed money in funds traded in active
markets. Level 2 securities include agency mortgage backed securities, commercial mortgage backed securities, asset
backed securities, municipal and corporate bonds, U.S. and foreign government and agency securities, and seed money and
other investments in certain hedge funds. Level 3 securities include non-agency residential mortgage backed securities, asset
backed securities, and corporate bonds.
Through the Company’s own experience transacting in the marketplace and through discussions with its pricing vendors, the
Company believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive
markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the
disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and
a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in
the Company applying valuation techniques that rely more on an income approach (discounted cash flows using market rates)
than on a market approach (prices from pricing services). The Company considers market observable yields for other asset
classes it considers to be of similar risk which includes nonperformance and liquidity for individual securities to set the
discount rate for applying the income approach to certain non-agency residential mortgage backed securities.
At the beginning of the fourth quarter of 2008, $539 million of prime non-agency residential mortgage backed securities were
transferred from Level 2 to Level 3 of the fair value hierarchy because management believes the market for these prime quality
assets is now inactive. The loss recognized on these assets during the fourth quarter of 2008 was $72 million, of which
$16 million was included in net investment income and $56 million was included in other comprehensive loss.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are
invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they
are traded in principal-to-principal markets with little publicly released pricing information.
Derivatives
Derivatives that are measured using quoted prices in active markets, such as foreign exchange forwards, or derivatives that
are exchanged-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active
over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates
and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include interest rate
swaps and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as
Level 3 measurements. Structured derivatives that are used by the Company to hedge its exposure to market risk related to
certain variable annuity riders are classified as Level 3.
Consolidated Property Funds
The Company records the fair value of the properties held by its consolidated property funds within other assets. The fair value
of these assets is determined using discounted cash flows and market comparables. Given the significance of the
unobservable inputs to these measurements, the assets are classified as Level 3.
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