Ameriprise 2009 Annual Report Download - page 100

period. See Critical Accounting Policies for additional discussion on our DAC and DSIC accounting policies. We make this same
conservative assumption in estimating the impact from GMDB and GMIB riders.
Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis
and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to
provide risk margins and with discount rates increased to reflect a current market estimate of our risk of nonperformance specific to these
liabilities. Management has elected to hedge based on best estimate policyholder assumptions and explicitly does not hedge
nonperformance spread risk. Net impacts shown in the above table from GMDB and GMIB reflect the fact that these guaranteed benefits
are primarily retained by us and not hedged. In the third quarter of 2009, we entered into a limited number of derivative contracts to
economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.
Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These
include assuming that implied market volatility does not change when equity values fall by 10%, that management does not increase
assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB
liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, we have not tried to
anticipate changes in client preferences for different types of assets or other changes in client behavior, nor have we tried to anticipate
actions management might take to increase revenues or reduce expenses in these scenarios.
The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of
future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a
100 basis point increase in interest rates or a 10% decline in equity prices.
Asset-Based Management and Distribution Fees
We earn asset-based management fees on our owned separate account assets and certain of our managed assets. At December 31, 2009,
the value of these assets was $58.1 billion and $243.2 billion, respectively. We also earn distribution fees on our managed assets. These
sources of revenue are subject to both interest rate and equity price risk since the value of these assets and the fees they earn fluctuate
inversely with interest rates and directly with equity prices. We do not currently hedge the interest rate or equity price risk of this
exposure.
DAC and DSIC Amortization
For annuity and universal life products, DAC and DSIC are amortized on the basis of estimated gross profits. Estimated gross profits are a
proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase
current period estimated gross profits, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat
mitigating the impact of the event on pretax income.
Variable Annuity Riders
The total value of all variable annuity contracts has increased from $43.3 billion at December 31, 2008 to $55.1 billion at December 31,
2009. These contract values include GMWB and GMAB contracts which have increased from $12.7 billion and $2.0 billion, respectively,
at December 31, 2008 to $19.2 billion and $2.9 billion at December 31, 2009, respectively. At December 31, 2009, reserves for GMWB
and GMAB were $204 million and $100 million, respectively, compared to reserves of $1.5 billion and $367 million at December 31,
2008, respectively. The decrease in reserves for GMWB and GMAB reflect the changes in economic factors impacting the mark-to-market
value of the guarantees. At December 31, 2009, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was
$12 million compared to $67 million at December 31, 2008.
Equity Price Risk — Variable Annuity Riders
The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions regardless of the
performance of the investment assets. For this reason, when equity prices decline, the returns from the separate account assets coupled
with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased
with a negative impact to earnings.
The core derivative instruments with which we hedge the equity price risk of our GMWB and GMAB provisions are longer dated put and
call derivatives; these core instruments are supplemented with equity futures and total return swaps. In the third quarter of 2009, we
entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable
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