Ameriprise 2008 Annual Report Download - page 92

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.
Residential Mortgage Backed Securities Backed by Sub-prime, Alt-A or Prime Collateral
Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. Alt-A
mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime but
may not conform to government-sponsored standards. Prime mortgage lending is the origination of residential mortgage
loans to customers with good credit profiles. We have exposure to these types of loans predominantly through mortgage
backed and asset backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting
standards by some originators, has recently led to higher delinquency and loss rates for some of these investments. Recent
market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential
mortgage backed securities. As a part of our risk management process, an internal rating system is used in conjunction with
market data as the basis of analysis to assess the likelihood that we will not receive all contractual principal and interest
payments for these investments. For the investments that are more at risk for impairment, we perform our own assessment of
projected cash flows incorporating assumptions about default rates, prepayment speeds, loss severity, and geographic
concentrations to determine if an other-than-temporary impairment should be recognized. Based on this analysis, other than
non-agency mortgage backed securities that had credit-related impairments recorded in 2008, all contractual payments are
expected to be received.
The following table presents, as of December 31, 2008, our residential mortgage backed and asset backed securities backed
by sub-prime, Alt-A or prime mortgage loans by credit rating and vintage year (in millions):
AAA AA A BBB BB & Below Total
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
Sub-prime
2003 & prior $ 2 $ 1 $ — $ — $ — $ — $ — $ — $ — $ — $ 2 $ 1
2004 17 14 7 3 — — 11 6 — — 35 23
2005 86 74 13 8 — — 7 3 — — 106 85
2006 78 69 28 18 — — — — 14 14 120 101
2007 — — — — — — — — 2 2 2 2
2008 10 8 — — — — — — — — 10 8
Total Sub-prime $ 193 $ 166 $ 48 $ 29 $ — $ — $ 18 $ 9 $ 16 $ 16 $ 275 $ 220
Alt-A
2003 & prior $ 8 $ 7 $ — $ — $ — $ — $ — $ — $ — $ — $ 8 $ 7
2004 96 74 15 11 — — — — — — 111 85
2005 338 217 24 20 15 12 13 13 2 2 392 264
2006 111 104 29 29 26 26 35 34 8 8 209 201
2007 158 84 4 4 5 5 41 34 10 10 218 137
2008 — — — — — — — — — — — —
Total Alt-A $ 711 $ 486 $ 72 $ 64 $ 46 $ 43 $ 89 $ 81 $ 20 $ 20 $ 938 $ 694
Prime
2003 & prior $ 123 $ 101 $ — $ — $ — $ — $ — $ — $ — $ — $ 123 $ 101
2004 160 131 37 21 — — 2 2 — — 199 154
2005 262 178 52 28 14 6 — — — — 328 212
2006 5 4 6 2 — — — — — — 11 6
2007 — — — — 17 11 — — — — 17 11
2008 19 31 — — — — — — — — 19 31
Total Prime $ 569 $ 445 $ 95 $ 51 $ 31 $ 17 $ 2 $ 2 $ — $ — $ 697 $ 515
Grand Total $ 1,473 $ 1,097 $ 215 $ 144 $ 77 $ 60 $ 109 $ 92 $ 36 $ 36 $ 1,910 $ 1,429
Fair Value of Liabilities and Nonperformance Risk
SFAS 157 also requires companies to measure the fair value of liabilities at the price that would be received to transfer the
liability to a market participant (an exit price). Since there is not a market for our obligations of our variable annuity riders, we
consider the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, we adjust the
valuation of variable annuity riders by updating certain contractholder assumptions, adding explicit margins to provide for
profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of
our nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are
adjusted to estimate the risk of our life insurance company subsidiaries not fulfilling these liabilities. Consistent with general
market conditions, this estimate resulted in a spread over the LIBOR swap curve as of December 31, 2008. As our estimate of
this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero
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