Ameriprise 2010 Annual Report Download - page 146

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. Level 1 securities include U.S. Treasuries and seed money in funds traded in active markets. Level 2 securities
primarily 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. The fair value of these Level 2 securities is based on a market approach with prices
obtained from nationally-recognized pricing services. Observable inputs used to value these securities can include: reported
trades, benchmark yields, issuer spreads and broker/dealer quotes. Level 3 securities primarily include non-agency
residential mortgage backed securities, asset backed securities and corporate bonds. The fair value of these Level 3
securities is typically based on a single broker quote, except for the valuation of non-agency residential mortgage backed
securities. Effective March 31, 2010, the Company returned to using prices from nationally-recognized pricing services to
determine the fair value of non-agency residential mortgage backed securities because the difference between these prices
and the results of the Company’s discounted cash flows was not significant. The Company continues to classify its
non-agency residential mortgage backed securities as Level 3 because it believes the market for these securities is still
inactive and their valuation includes significant unobservable inputs.
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.
Other Assets
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 swaps
and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as
Level 3 measurements. The Company settled these Level 3 derivatives in the second quarter of 2009 and has not entered
into any additional derivative instruments that have significant unobservable inputs since then.
Liabilities
Future Policy Benefits and Claims
The Company values the embedded derivative liability attributable to the provisions of certain variable annuity riders using
internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins
for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include
observable capital market assumptions (such as, market implied equity volatility and the LIBOR swap curve) and
incorporate significant unobservable inputs related to contractholder behavior assumptions (such as withdrawals and lapse
rates) and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The
fair value of these embedded derivatives also reflects a current estimate of the Company’s nonperformance risk specific to
these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3.
The embedded derivative liability attributable to these provisions is recorded in future policy benefits and claims. The
Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability
associated with the provisions of its equity indexed annuities. The inputs to these calculations are primarily market
observable and include interest rates, volatilities, and equity index levels. As a result, these measurements are classified as
Level 2.
Customer Deposits
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability
associated with the provisions of its stock market certificates. The inputs to these calculations are primarily market
observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as
Level 2.
Other Liabilities
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 swaps
and options.
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