Ameriprise 2009 Annual Report Download - page 116

Direct sales commissions and other costs deferred as DAC are amortized over time. For annuity and universal life (‘‘UL’’) contracts, DAC
are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For
other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-
paying period. For certain mutual fund products, DAC are generally amortized over fixed periods on a straight-line basis adjusted for
redemptions.
For annuity and UL insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC
amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that,
based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of
estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is 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 particular 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, therefore, 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. 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 the Consolidated Statements 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 contractholder and 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 earned and credited interest rates are the primary factors used to
project interest margins, while assumptions about equity and bond 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
insurance businesses during the DAC amortization period.
The client asset value growth rates are the rates at which variable annuity and variable universal life (‘‘VUL’’) insurance contract values
invested in separate accounts are assumed to appreciate in the future. The rates used vary by 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 typically uses a five-year mean reversion process as a guideline in setting near-term equity asset growth rates based on a
long-term view of financial market performance as well as recent actual performance. The suggested near-term growth rate is reviewed to
ensure consistency with management’s assessment of anticipated equity market performance. In 2009, management continued to follow
the mean reversion process, decreasing near-term equity asset growth rates to reflect the positive market. 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 management’s near-term estimate.
The Company monitors other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and
maintenance expense levels each quarter and, when assessed independently, each could impact the Company’s DAC balances.
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 assumptions annually in the third quarter of each year.
Deferred Sales Inducement Costs
DSIC consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values. These benefits
are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature.
The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. DSIC is recorded in other
assets, and amortization of DSIC is recorded in benefits, claims, losses and settlement expenses.
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