Ameriprise 2014 Annual Report Download - page 69

Management regularly monitors financial market conditions and actual contractholder and policyholder behavior experience
and compares them to its assumptions.
For annuity and universal life (‘‘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 products with associated DSIC, the same policy applies in
calculating the DSIC balance and periodic DSIC amortization.
For traditional life, DI and LTC insurance products, the assumptions made in calculating our DAC balance and DAC
amortization expense are consistent with those used in determining the liabilities. For traditional life and DI insurance
products, the assumptions 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 our Consolidated Statements of Operations. The assumptions for LTC insurance products are management’s
best estimate from previous loss recognition thus no longer provide for adverse deviations in experience.
For annuity, life, DI and LTC insurance products, key assumptions underlying these 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, variable annuity benefit utilization rates and the rates at which contractholders
and 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
our 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 long-term client asset value growth rates are based on assumed gross
annual returns of 9% for equity funds and 6% for fixed income funds. We typically use 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.
A decrease of 100 basis points in various rate assumptions is likely to result in an increase in DAC and DSIC amortization
and an increase in benefits and claims expense from variable annuity guarantees. The following table presents the
estimated impact to current period pretax income:
Estimated Impact to
Pretax Income(1)
(in millions)
Decrease in future near- and long-term fixed income returns by 100 basis points $ (57)
Decrease in future near-term equity fund growth returns by 100 basis points $ (39)
Decrease in future long-term equity fund growth returns by 100 basis points (31)
Decrease in future near- and long-term equity fund growth returns by 100 basis points $ (70)
(1) An increase in the above assumptions by 100 basis points would result in an increase to pretax income for approximately the
same amount.
We monitor other principal DAC and DSIC amortization assumptions, such as persistency, mortality, morbidity, interest
margin, variable annuity benefit utilization and maintenance expense levels each quarter and, when assessed
independently, each could impact our DAC and DSIC balances.
The analysis of DAC and DSIC balances and the corresponding amortization is a dynamic process that considers all
relevant factors and assumptions described previously. Unless management identifies a significant deviation over the
course of the quarterly monitoring, management reviews and updates these DAC and DSIC amortization assumptions
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