Ameriprise 2012 Annual Report Download - page 127

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 are not
recoverable. If management concludes that DAC are not recoverable, DAC are 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 fund growth rates based on a long-term view of financial market performance as well as recent
actual performance. The suggested near-term equity fund growth rate is reviewed quarterly to ensure consistency with
management’s assessment of anticipated equity market performance. 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
Sales inducement costs 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.
Reinsurance
The Company cedes significant amounts of insurance risk to other insurers under reinsurance agreements. Reinsurance
premiums paid and benefits received are accounted for consistently with the basis used in accounting for the policies from
which risk is reinsured and consistently with the terms of the reinsurance contracts. Reinsurance premiums for traditional
life, long term care (‘‘LTC’’), disability income (‘‘DI’’) and auto and home ceded on a coinsurance basis, net of the change
in any prepaid reinsurance asset, are reported as a reduction of premiums. Fixed and variable universal life reinsurance
premiums are reported as a reduction of other revenues. In addition, for fixed and variable universal life insurance policies,
the net cost of reinsurance ceded, which represents the discounted amount of the expected cash flows between the
reinsurer and the Company, is recognized as an asset and amortized over the term of the reinsurance contract, in
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