Ameriprise 2006 Annual Report Download - page 53

If interest rates had increased by, hypothetically, 100 basis
points at December 31, 2006 and remain at that level for
12 months we estimate the impact on pretax income for
the 12 month period to be a negative $22 million.
Flexible Savings and Other Fixed Rate
Certificates
We have interest rate risk from our flexible savings and other
fixed rate certificates. These are investment certificates ranging
in amounts from $1,000 to $1 million with terms ranging from
three to 36 months. We guarantee an interest rate to the
holders of these products. Payments collected from clients
are primarily invested in fixed rate securities to fund the
client credited rate with the spread between the rate earned
from investments and the rate credited to clients recorded as
earned income. Client liabilities and investment assets
generally differ as it relates to basis, repricing or maturity
characteristics. Rates credited to clients generally reset at
shorter intervals than the yield on underlying investments.
This exposure is not currently hedged although we monitor
our investment strategy and make modifications based on our
changing liabilities and the expected rate environment.
Interest Rate Risk—Equity Indexed Annuities
Most of the proceeds from the sale of equity indexed annuities
are invested in fixed income securities with the return on
those investments intended to fund the 3% guarantee. We
earn income from the difference between the return earned on
invested assets and the 3% guarantee rate credited to
customer accounts. The spread between return earned and
amount credited is affected by changes in interest rates. We
estimate that if, hypothetically, interest rates had increased by
100 basis points at December 31, 2006 and remain at that
level for 12 months our unhedged exposure would be a negative
impact of $2 million on pretax income for the 12 month period
offset by a positive impact of nearly $2 million from our hedging
strategy for an immaterial net exposure.
Equity Price Risk—Equity Indexed Annuities
The equity-linked return to investors creates equity price risk
as the amount credited depends on changes in equity
markets. To hedge this exposure, a portion of the proceeds
from the sale of equity indexed annuities are used to purchase
futures, calls and puts which generate returns to replicate
what we must credit to client accounts. In conjunction with
We have $3.5 billion in reserves included in customer deposits
at December 31, 2006 to cover the liabilities associated with
these products. At December 31, 2006, we estimate the
interest rate risk from this exposure on pretax income for the
12 month period following a hypothetical increase of
100 basis points in interest rates to be a negative $4 million.
Equity Indexed Annuities
Our equity indexed annuity product is a single premium annuity
issued with an initial term of seven years. The annuity
guarantees the contractholder a minimum return of 3% on 90%
of the initial premium or end of prior term accumulation value
upon renewal plus a return that is linked to the performance of
the S&P 500 Index. The equity-linked return is based on a
participation rate initially set at between 50% and 90% of the
S&P 500 Index which is guaranteed for the initial
seven-year term when the contract is held to full term.
Of the $30.0 billion in future policy benefits and claims at
December 31, 2006, $317 million relates to the liabilities
created by this product. The notional amounts and fair value
assets (liabilities) of derivatives hedging this product were as
follows:
purchasing puts we also write puts. Pairing purchased puts
with written puts allows us to better match the characteristics
of the liability. For this product we estimate that if,
hypothetically, the equity markets had declined by 10% at
December 31, 2006 and remain at that level for 12 months,
the impact to pretax income for the 12 month period without
hedging would be a positive $15 million. The impact of our
hedging strategy offsets that gain for an immaterial net exposure.
Stock Market Certificates
Stock market certificates are purchased for amounts generally
from $1,000 to $1 million for terms of 52 weeks which can be
extended to a maximum of 14 terms. For each term the certifi-
cate holder can choose to participate 100% in any percentage
increase in the S&P 500 Index up to a maximum return or choose
partial participation in any increase in the S&P 500 Index plus
a fixed rate of interest guaranteed in advance. If partial
participation is selected, the total of equity-linked return and
guaranteed rate of interest cannot exceed the maximum return.
Reserves for our stock market certificates are included in
51
Ameriprise Financial, Inc. 2006 Annual Report
December 31,
2006 2005
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased calls $ 151 $ 37 $ 197 $ 27
Purchased Knock-in-Puts 86 3 129 3
Written Knock-in-Puts (67) (1) (101) (1)
Purchased S&P 500 futures(1) 34 — 32 —
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.