Ameriprise 2015 Annual Report Download - page 162

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
pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior
are reviewed quarterly along with other valuation assumptions.
Customer Deposits
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability
associated with the provisions of its stock market certificates. The inputs to these calculations are primarily market
observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as
Level 2.
Other Liabilities
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 variation margin on futures contracts is also classified
as Level 1. The fair value of derivatives that are traded in less active 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. Other derivative contracts consist of
the Company’s macro hedge program. See Note 16 for further information on the macro hedge program. The Company’s
nonperformance risk associated with uncollateralized derivative liabilities was immaterial at December 31, 2015 and 2014.
See Note 15 and Note 16 for further information on the credit risk of derivative instruments and related collateral.
Securities sold but not yet purchased include highly liquid investments which are short-term in nature. Securities sold but
not yet purchased are measured using 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 and are classified as Level 2.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
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