Ameriprise 2007 Annual Report Download - page 85

Ameriprise Financial 2007 Annual Report 83
Most of the variable annuity contracts issued by the Company contain
one or more guaranteed benefits, including GMWB, GMAB, GMDB
and GGU provisions. GMAB and the non-life contingent benefits
associated with GMWB provisions are considered embedded deriva-
tives and are recorded at fair value. The changes in fair values of these
embedded derivatives are reflected in benefits, claims, losses and settle-
ment expenses. The negative fair values for GMWB and GMAB at
December 31, 2006 reflected that under conditions and expectations
at that time, the Company believed the applicable fees charged for the
rider would more than offset the future benefits paid to policyholders
under the rider provisions. The Company does not currently hedge its
risk under the GMDB, GGU and GMIB provisions. The total value
of variable annuity contracts with GMWB riders increased from
$7.2 billion at December 31, 2006 to $13.1 billion at
December 31, 2007. The total value of variable annuity contracts with
GMAB riders increased from $1.4 billion at December 31, 2006 to
$2.3 billion at December 31, 2007. As a means of economically
hedging its obligations under GMWB and GMAB provisions, the
Company purchases equity put and call options, enters into interest
rate swaps and trades equity futures contracts. The changes in the fair
value of these hedge derivatives are included in net investment
income. The notional amounts and fair value assets (liabilities) of
these options, swaps and futures were as follows:
December 31,
2007 2006
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased options
and futures $6,318 $338 $1,410 $171
Interest rate swaps 202 2 359 (1)
Sold equity futures (202) — (111) —
Insurance Liabilities
VUL/UL is the largest group of insurance policies written by the
Company. Purchasers of VUL can select from a variety of investment
options and can elect to allocate a portion to a fixed account. A vast
majority of the premiums received for VUL contracts are held in
separate accounts where the assets are held for the exclusive benefit of
those contractholders. The Company also offers term and whole life
insurance as well as disability products. The Company no longer
offers long term care products but has inforce policies from prior
years. Ameriprise Auto & Home Insurance offers auto and home
coverage directly to customers and through marketing alliances.
Insurance liabilities include accumulation values, unpaid reported
claims, incurred but not reported claims and obligations for antici-
pated future claims.
Threadneedle Investment Liabilities
Threadneedle provides a range of unitized pooled pension funds,
which invest in property, stocks, bonds and cash. These funds are
part of the long term business fund of Threadneedle’s subsidiary,
Threadneedle Pensions Limited. The investments are selected by the
clients and are based on the level of risk they are willing to assume.
All investment performance, net of fees, is passed through to the
investors. The value of the liabilities represents the value of the units
in issue of the pooled pension funds.
13. Variable Annuity Guarantees
The majority of the variable annuity contracts offered by the
Company contain GMDB provisions. The Company also offers
variable annuities with death benefit provisions that gross up the
amount payable by a certain percentage of contract earnings, which
are referred to as GGU benefits. In addition, the Company offers
contracts with GMWB and GMAB provisions. The Company previ-
ously offered contracts containing GMIB provisions. The Company
has established additional liabilities for the variable annuity death
benefits and GMIB provisions and for life contingent benefits associ-
ated with GMWB provisions. GMAB and non-life contingent
benefits associated with GMWB provisions are considered embedded
derivatives and are recorded at fair value.
The variable annuity contracts with GMWB riders typically have
account values that are based on an underlying portfolio of mutual
funds, the values of which fluctuate based on equity market perform-
ance. At issue, the guaranteed amount is equal to the amount
deposited, but the guarantee may be increased annually to the
account value (a “step-up”) in the case of favorable market perform-
ance. The GMWB offered initially guarantees that the client can
withdraw 7% per year until the amount withdrawn is equal to the
guaranteed amount, regardless of the performance of the underlying
funds. In 2006, the Company began offering an enhanced
withdrawal benefit that gives policyholders a choice to withdraw 6%
per year for the life of the policyholder or 7% per year until the
amount withdrawn is equal to the guaranteed amount. In 2007, the
Company added a new GMWB benefit design that is available in a
joint version that promises 6% withdrawals while either contrac-
tholder remains alive. In addition, once withdrawals begin, the
policyholder’s funds are moved to one of the three less aggressive asset
allocation models (of the five that are available prior to withdrawal).
Variable annuity contract owners age 79 or younger at contract issue
can also obtain a principal-back guarantee by purchasing the optional
GMAB rider for an additional charge. The GMAB rider guarantees
that, regardless of market performance, at the end of the 10 year
waiting period, the contract value will be no less than the original
investment or 80% of the highest anniversary value, adjusted for
withdrawals. If the contract value is less than the guarantee at the end
of the 10 year period, a lump sum will be added to the contract value
to make the contract value equal to the guarantee value.