Ameriprise 2009 Annual Report Download - page 58

Life, Disability Income and Long Term Care Insurance
Future policy benefits and policy claims and other policyholders’ funds related to life, disability income and long term care insurance
include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims,
estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life,
whole life, disability income and long term care policies as claims are incurred in the future.
Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values. Accumulation values
are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts
withdrawn by policyholders.
Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for
unpaid amounts on reported disability income and long term care claims include any periodic or other benefit amounts due and accrued,
along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim
continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at
interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables,
adjusted as appropriate for our experience. Interest rates used with disability income claims ranged from 3.0% to 8.0% at December 31,
2009, with an average rate of 4.7%. Interest rates used with long term care claims ranged from 4.0% to 7.0% at December 31, 2009, with
an average rate of 4.1%.
Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the
actual time lag between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, disability income and long term care
policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy
persistency and interest rates earned on assets supporting the liability. Anticipated mortality and morbidity rates are based on established
industry mortality and morbidity tables, with modifications based on our experience. Anticipated premium payments and persistency
rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life
ranged from 4.0% to 10.0% at December 31, 2009, depending on policy form, issue year and policy duration. Anticipated interest rates for
disability income vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively.
Anticipated interest rates for long term care policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31,
2009.
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded
as reinsurance recoverable within receivables.
Derivative Instruments and Hedging Activities
We use derivative instruments to manage our exposure to various market risks. All derivatives are recorded at fair value. The fair value of
our derivative 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.
The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if
any. We primarily use derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting
treatment. We occasionally designate derivatives as i) hedges of changes in the fair value of assets, liabilities or firm commitments (‘‘fair
value hedges’’), ii) 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 iii) hedges of foreign currency exposures of net investments in foreign operations (‘‘net investment
hedges in foreign operations’’).
Our policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty
under the same master netting arrangement. For derivative instruments that do not qualify for hedge accounting or are not designated as
hedges, changes in fair value are recognized in current period earnings. The changes in fair value of derivatives hedging variable annuity
living benefits and certain variable annuity death benefits are included within benefits, claims, losses and settlement expenses. The
changes in fair value of derivatives hedging equity indexed annuities and stock market certificates are included within interest credited to
fixed accounts and banking and deposit interest expense, respectively. The changes in fair value of all other derivatives are a component of
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