Ameriprise 2015 Annual Report Download - page 128

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.
Non-Traditional Long-Duration Products
For non-traditional long-duration products (including variable and fixed annuity contracts, universal life (‘‘UL’’) and variable
universal life (‘‘VUL’’) insurance products), DAC are amortized based on projections of estimated gross profits (‘‘EGPs’’)
over amortization periods equal to the approximate life of the business.
EGPs vary based on persistency rates (assumptions at which contractholders and policyholders are expected to surrender,
make withdrawals from and make deposits to their contracts), mortality levels, client asset value growth rates (based on
equity and bond market performance), variable annuity benefit utilization and interest margins (the spread between earned
rates on invested assets and rates credited to contractholder and policyholder accounts). When assumptions are changed,
the percentage of EGPs 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.
The client asset value growth rates are the rates at which variable annuity and 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.
Traditional Long-Duration Products
For traditional long-duration products (including traditional life, disability income (‘‘DI’’) and long term care (‘‘LTC’’)
insurance products), DAC are generally amortized as a percentage of premiums over amortization periods equal to the
premium paying period. The assumptions made in calculating the 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 the Consolidated Statements of Operations.
The assumptions for LTC insurance products include interest rates, premium rate increases, persistency rates and morbidity
rates. These assumptions are management’s best estimate from previous loss recognition and thus no longer provide for
adverse deviations in experience.
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. The Company
evaluates the financial condition of its reinsurers prior to entering into new reinsurance contracts and on a periodic basis
during the contract term.
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, LTC, DI and auto and home, 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
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