Ameriprise 2006 Annual Report Download - page 54

Interest Rate Risk—Stock Market Certificates
Stock market certificates have some interest rate risk as
changes in interest rates affect the fair value of the payout to
be made to the certificate holder. This exposure to interest
rate changes is hedged by the derivatives listed above. 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 $1 million on pretax income for the 12 month period
offset by a positive impact of the same amount from our
hedging strategy for an immaterial net exposure.
Equity Price Risk—Stock Market Certificates
As with the equity indexed annuities, the equity-linked return to
investors creates equity price risk exposure. We seek to
minimize this exposure with purchased futures and call spreads
that replicate what we must credit to client accounts. We estimate
that if, hypothetically, 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 $27 million. The impact of our hedging
strategy offsets that gain for an immaterial net exposure.
DAC
For annuity and universal life products, DAC are amortized on
the basis of estimated gross profits. Estimated gross profits
are a proxy for pretax income prior to the recognition of DAC
amortization expense. When events occur that reduce or
increase current period estimated gross profits, DAC
amortization expense is typically reduced or increased as well,
somewhat mitigating the impact of the event on pretax income.
Interest Rate Risk—DAC
An increase in interest rates would result in a significant
decrease in guaranteed living benefit reserves associated with
our variable annuity products, with the decrease partially offset
by changes in hedge asset values. This would result in increased
estimated gross profits and increased DAC amortization. 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, the negative impact to pretax income from
increased DAC amortization would be $8 million.
Equity Price Risk—DAC
A decline in equity markets would result in reduced fee revenue
and an increase in guaranteed death and living benefit
reserves associated with our variable annuity products, with
the increase partly offset by changes in hedge asset values.
This would result in decreased estimated gross profits and
decreased DAC amortization. We estimate that if, hypothetically,
equity markets had declined by 10% at December 31, 2006, the
positive impact to pretax income from decreased DAC
amortization would be $16 million over a 12 month period.
Foreign Currency Risk
We have foreign currency risk because of our net investment in
Threadneedle Asset Management Holdings Limited. We hedge
this risk by entering into foreign currency forward contracts
which are adjusted monthly. At December 31, 2006, we had
forward currency contracts with a notional value of 425 million
British pounds (“GBP”) hedging 433 million GBP of exposure.
Our foreign currency risk is immaterial after hedging.
Interest Rate Risk on External Debt
Interest rate risk on our external debt is not material. The
interest rate on the $1.5 billion of senior unsecured notes is
fixed and the interest rate on the $500 million of junior
subordinated notes is fixed until June 1, 2016. We have
floating rate debt of $85 million related to our consolidated
collateralized debt obligation securitization trust which is not
hedged but on which the interest rate risk to pretax income is
not material.
Credit Risk
Our potential derivative credit exposure to each counterparty is
aggregated with all of our other exposures to the counterparty
to determine compliance with established credit and market
risk limits at the time we enter into a derivative transaction.
Credit exposures may take into account enforceable netting
arrangements. Before executing a new type or structure of
derivative contract, we determine the variability of the contract’s
potential market and credit exposures and whether such
variability might reasonably be expected to create exposure to
a counterparty in excess of established limits.
customer deposits on our Consolidated Balance Sheets. Of the $6.5 billion in customer deposits at December 31, 2006, $1.1 billion pertain
to stock market certificates. The notional amounts and fair value assets (liabilities) of derivatives hedging this product were as follows:
December 31,
2006 2005
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased calls $ 900 $ 104 $ 1,039 $ 74
Written calls (962) (56) (1,094) (38)
Purchased S&P 500 futures(1) 1— 1—
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.
52 Ameriprise Financial, Inc. 2006 Annual Report