Ameriprise 2011 Annual Report Download - page 124

Statements of Operations based on the nature and use of the instrument. Changes in fair value of derivatives used as
economic hedges are presented in the Consolidated Statements of Operations with the corresponding change in the
hedged asset or liability.
For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as changes
in the fair value of the hedged assets, liabilities or firm commitments, are recognized on a net basis in current period
earnings. The carrying value of the hedged item is adjusted for the change in fair value from the designated hedged risk. If
a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying
value of the hedged item are recognized into earnings over the remaining life of the hedged item.
For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative
instruments is reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged
item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated
Statements of Operations with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is
reported in current period earnings as a component of net investment income. If a hedge designation is removed or a
hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is
reclassified to earnings over the period that the hedged item impacts earnings. For hedge relationships that are
discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related
amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.
For derivative instruments that qualify as net investment hedges in foreign operations, the effective portion of the change
in fair value of the derivatives is recorded in accumulated other comprehensive income (loss) as part of the foreign
currency translation adjustment. Any ineffective portion of the net investment hedges in foreign operations is recognized in
net investment income during the period of change.
See Note 14 for information regarding the Company’s fair value measurement of derivative instruments and Note 15 for
the impact of derivatives on the Consolidated Statements of Operations.
The equity component of equity indexed annuity (‘‘EIA’’), indexed universal life (‘‘IUL’’) and stock market certificate
obligations are considered embedded derivatives. Additionally, certain annuities contain guaranteed minimum accumulation
benefit (‘‘GMAB’’) and guaranteed minimum withdrawal benefit (‘‘GMWB’’) provisions. The GMAB and the non-life
contingent benefits associated with GMWB provisions are also considered embedded derivatives. The fair value of
embedded derivatives associated with annuities and IUL is included in future policy benefits and claims, whereas the fair
value of stock market certificate embedded derivatives is included in customer deposits. The changes in the fair value of
the EIA and IUL embedded derivatives are reflected in interest credited to fixed accounts. The changes in the fair value of
the stock market certificate embedded derivatives are included in banking and deposit interest expense. The changes in
the fair value of the GMAB and GMWB embedded derivatives are reflected in benefits, claims, losses and settlement
expenses.
Deferred Acquisition Costs
DAC represent the costs of acquiring new business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of annuity and insurance products and, to a lesser extent, certain
mutual fund products. These costs are deferred to the extent they are recoverable from future profits or premiums. The
DAC associated with insurance or annuity contracts that are significantly modified or internally replaced with another
contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periods
and other valuation assumptions.
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.
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