Ameriprise 2006 Annual Report Download - page 50

Actual results could differ materially from those illustrated
above as they are based on a number of estimates and
assumptions. These include assuming the composition of
invested assets and liabilities does not change in the
12 month period following the market shock and assuming
the increase in interest rates produces a parallel shift in the
yield curve. The selection of a 100 basis point interest rate
increase and a 10% equity market decline should not be
construed as a prediction of future market events.
Interest rate, equity price, and foreign currency risks are the
market risks to which we have material exposure. To evaluate
interest rate and equity price risk we perform sensitivity testing
which measures the impact on pretax income from the sources
listed below for a 12 month period following a hypothetical
100 basis point increase in interest rates and a hypothetical
10% decline in equity markets.
At December 31, 2006, aggregating our exposure from all
sources of interest rate risk net of financial derivatives hedging
that exposure detailed below, we estimate a negative impact of
$34 million on pretax income for the 12 month period if,
hypothetically, interest rates had increased by 100 basis points
and remain at that level for 12 months. This compares with an
estimate of $43 million made at December 31, 2005 for
12 months following a hypothetical 100 basis point increase in
interest rates at December 31, 2005.
Net Risk Exposure to
Pretax Income
Sources of Market Risk Interest Rate Equity Price
(in millions)
Asset-based management and 12b-1 fees $ (12) $ (105)
Variable annuities and variable universal life (“VUL”) products 12 (38)
Fixed annuities, fixed portion of variable annuities, fixed portion of
VUL and fixed insurance products (22) —
Flexible savings and other fixed rate certificates (4) —
Deferred acquisition costs (“DAC”) (8) 16
Total $ (34) $ (127)
Asset-Based Management and 12b-1 Fees
We earn asset-based management fees on our owned separate
account assets and managed assets. At December 31, 2006,
the value of these assets was $53.8 billion and $299.8 billion,
respectively. We also earn distribution fees on our managed
assets. These sources of revenue are subject to both interest
rate and equity price risk since the value of these assets and
the fees they earn fluctuate inversely with interest rates and
directly with equity prices. We do not hedge the interest rate
risk of this exposure. We hedge a portion of the equity price
risk of the exposure with purchased equity index puts which
had the following notional amounts and fair value assets:
At December 31, 2006, aggregating our exposure from all
sources of equity price risk net of financial derivatives hedging
that exposure detailed below, we estimate a negative impact
of $127 million on pretax income for the 12 month period if,
hypothetically, equity markets had declined by 10% and remain
at that level for 12 months. This compares with an estimate of
$84 million made at December 31, 2005 for 12 months following
a hypothetical 10% drop in equity markets at December 31, 2005.
The numbers below show our estimate of the pretax impact of
these hypothetical market moves, net of hedging, as of
December 31, 2006. Following the table is a discussion by
source of risk and the portfolio management techniques and
derivative financial instruments we use to mitigate these risks.
Quantitative and Qualitative Disclosures About Market Risks
48 Ameriprise Financial, Inc. 2006 Annual Report
December 31,
2006 2005
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased puts $ 721 $ 16 $ 490 $ 8