Ameriprise 2012 Annual Report Download - page 66

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charges and less amounts withdrawn by policyholders.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 indexed accounts of IUL products are equal to the accumulation of host contract values covering guaranteed
benefits and the fair value of embedded equity options.
A portion of our fixed and variable universal life policies have product features that result in profits followed by losses from
the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the
product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions,
the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover
the monthly deductions and charges.
In determining the liability for contracts with profits followed by losses, we project benefits and contract assessments using
actuarial models. Significant assumptions made in projecting future benefits and assessments relate to customer asset
value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset
valuation for the same contracts. As with DAC, management reviews, and where appropriate, adjusts its assumptions each
quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management reviews
and updates these assumptions annually in the third quarter of each year.
The liability for these future losses is determined by estimating the death benefits in excess of account value and
recognizing the excess over the estimated meaningful life based on expected assessments (e.g. cost of insurance charges,
contractual administrative charges, similar fees and investment margin). See Note 10 to our Consolidated Financial
Statements for information regarding the liability for contracts with secondary guarantees.
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% to 8% at December 31, 2012, with an average rate of 4.5%. Interest rates
used with long term care claims ranged from 4% to 6% at December 31, 2012, with an average rate of 4.0%.
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 3.25% to 10.0% at December 31,
2012, depending on policy form, issue year and policy duration. Anticipated interest rates for disability income policies
ranged from 3.25% to 7.5% at December 31, 2012, depending on policy form, issue year and policy duration. 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, 2012.
Changes in future policy benefits and claims are reflected in earnings in the period adjustments are made.
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. Examples include index options, interest
rate swaps and swaptions, total return swaps, and futures that economically hedge the equity and interest rate exposure of
derivatives embedded in certain annuity, life and certificate liabilities, as well as exposure to price risk arising from affiliated
mutual fund seed money investments. 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
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