Ameriprise 2013 Annual Report Download - page 162

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. The Company’s privately placed corporate bonds are typically
based on a single non-binding broker quote. In addition to the general pricing controls, the Company reviews the broker
prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities
to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed
investment is reasonable considering investment characteristics, maturity, and average life of the investment.
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.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as foreign currency forwards, or derivatives that
are exchange-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active
over-the-counter (‘‘OTC’’) 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 the majority of options. The counterparties’ nonperformance risk associated with uncollateralized
derivative assets was immaterial at December 31, 2013 and 2012. See Note 15 and Note 16 for further information on
the credit risk of derivative instruments and related collateral.
Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
The Company values the embedded derivatives 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 and incorporate significant unobservable inputs related to contractholder behavior assumptions,
implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would
expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded
derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The
embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits
and claims.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivatives associated
with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates,
volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives
includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate
of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the
IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded
in policyholder account balances, future policy benefits and claims.
The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis.
During this process, control checks are performed to validate the completeness of the data. Actuarial management
approves various components of the valuation along with the final results. The change in the fair value of the embedded
derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the
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