Ameriprise 2007 Annual Report Download - page 53

Ameriprise Financial 2007 Annual Report 51
negative impact related to DAC amortization. The positive impact of
our hedging strategy offsets the negative impact attributable to
GMAB for an immaterial net exposure.
Fixed Annuities, Fixed Portion of Variable
Annuities and Fixed Insurance Products
Interest rate exposures arise primarily with respect to the fixed
account portion of RiverSource Life’s annuity and insurance products
and its investment portfolio. We guarantee an interest rate to the
holders of these products. Premiums and deposits collected from
clients are primarily invested in fixed rate securities to fund the client
credited rate with the spread between the rate earned from invest-
ments 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’
accounts generally reset at shorter intervals than the yield on the
underlying investments. Therefore, in an increasing rate environ-
ment, higher interest rates are reflected in crediting rates to clients
sooner than in rates earned on invested assets resulting in a reduced
spread between the two rates, reduced earned income and a negative
impact on pretax income. We have $26.8 billion in reserves in future
policy benefits and claims on our Consolidated Balance Sheet at
December 31, 2007 to recognize liabilities created by these products.
To hedge against the risk of higher interest rates, we have purchased
swaption contracts which had the following notional amounts and
fair value assets:
December 31,
2007 2006
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased swaptions $800 $1 $1,200 $2
If interest rates had increased by, hypothetically, 100 basis points at
December 31, 2007 and remain at that level for 12 months we
estimate the impact on pretax income for the 12 month period to be
a negative $6 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 generally 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. We have $2.6 billion in reserves included
in customer deposits at December 31, 2007 to cover the liabilities
associated with these fixed rate certificate products. At
December 31, 2007, 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
$1 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 $27.4 billion in future policy benefits and claims at
December 31, 2007, $306 million relates to the liabilities created by
this product. In 2007, we discontinued new sales of equity indexed
annuities. The notional amounts and fair value assets (liabilities) of
derivatives hedging this product were as follows:
December 31,
2007 2006
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased options and
futures $164 $39 $185 $37
Purchased Knock-in-Puts 73 4 86 3
Written Knock-in-Puts (57) (1) (67) (1)
Written S&P 500
futures(1) (1) — — —
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.
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 invest-
ments 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, 2007 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 $1 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 is used to purchase futures, calls and puts which generate
returns to replicate what we must credit to client accounts. In
conjunction with purchasing puts we also write puts. Pairing
purchased puts with written puts allows us to better match the charac-
teristics of the liability. For this product we estimate that if,
hypothetically, the equity markets had declined by 10% at