Ameriprise 2008 Annual Report Download - page 102

rate environment, 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
had $26.8 billion in reserves in future policy benefits and claims on our Consolidated Balance Sheet at December 31, 2008
to recognize liabilities created by these products. As of December 31, 2008, we did not hedge this exposure. As of
December 31, 2007, we hedged part of this exposure through the use of swaptions. As of December 31, 2007, the
outstanding derivatives were not significant.
Flexible Savings and Other Fixed Rate Savings Products
We have interest rate risk from our flexible savings and other fixed rate savings products. These products are primarily
investment certificates generally ranging in amounts from $1,000 to $1 million with terms ranging from three to 36 months,
as well as other savings products sold through Ameriprise Bank. 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.
At December 31, 2008, we had $3.9 billion in reserves related to our fixed rate certificate products and $1.4 billion in
reserves related to our banking products.
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 $29.3 billion in future policy benefits and claims at December 31, 2008,
$244 million relates to the liabilities created by this product. In 2007, we discontinued new sales of equity indexed annuities.
See Note 20 to our Consolidated Financial Statements for further information on derivative instruments.
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 characteristics of the liability.
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.
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 20 years. For each term the certificate 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
customer deposits on our Consolidated Balance Sheets. Of the $8.2 billion in customer deposits at December 31, 2008,
$914 million pertain to stock market certificates.
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. See
Note 20 to our Consolidated Financial Statements for further information on derivative instruments.
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