Ameriprise 2012 Annual Report Download - page 158

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3
corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB
embedded derivatives in isolation would result in a significantly higher (lower) fair value measurement. Significant increases
(decreases) in surrender rate and nonperformance risk used in the fair value measurement of the GMWB and GMAB
embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement. Utilization of
guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the
contractholder, the distribution system and whether the value of the guaranteed benefit exceeds the contract accumulation
value.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of
its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation
techniques to convert future projected cash flows to a single discounted present value amount. When applying either
approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these
instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market
funds are measured at their net asset value (‘‘NAV’’) and classified as Level 1. The Company’s remaining cash equivalents
are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the
short time between the purchase of the instrument and its expected realization.
Investments (Available-for-Sale Securities and Trading 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 third party pricing services, non-binding broker quotes, or other model-based valuation
techniques. Level 1 securities primarily include U.S. Treasuries. Level 2 securities primarily include corporate bonds,
residential mortgage backed securities, commercial mortgage backed securities, asset backed securities, municipal bonds
and U.S. agency and foreign government securities. The fair value of these Level 2 securities is based on a market
approach with prices obtained from third party pricing services. Observable inputs used to value these securities can
include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3
securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial
mortgage backed securities and asset backed securities. The fair value of corporate bonds, non-agency residential
mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as
Level 3 is typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding
broker quotes are not readily available to the Company.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices
received from third party pricing services are subjected to exception reporting that identifies investments with significant
daily price movements as well as no movements. The Company reviews the exception reporting and resolves the
exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs
subsequent transaction testing. The Company performs annual due diligence of third party pricing services. The Company’s
due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-
class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable
assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception
reporting controls and any resulting price challenges that arise.
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.
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