Ameriprise 2009 Annual Report Download - page 101

annuity contracts written previously in 2009. See Note 20 to our Consolidated Financial Statements for further information on our
derivative instruments.
Interest Rate Risk — Variable Annuity Riders
The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at
fair value separately from the underlying host variable annuity contract. Changes in the fair value of the GMWB and GMAB liabilities are
recorded through earnings with fair value calculated based on projected, discounted cash flows over the life of the contract, including
projected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB and GMAB liabilities. The GMWB
and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives, interest rate swaps and swaptions.
These derivatives are an alternative to the more customized equity puts we previously used. We have entered into interest rate swaps
according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to
increase, we would have to pay more to the swap counterparty, and the fair value of our equity puts would decrease, resulting in a negative
impact to our pretax income.
Fixed Annuities, Fixed Portion of Variable Annuities and Fixed Insurance Products
Interest rate exposures arise primarily with respect to the fixed account portion of annuity and insurance products of RiverSource Life
companies and their investment portfolios. 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 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’ accounts generally reset at shorter intervals than the yield
on the underlying investments. Therefore, in an increasing 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. Of the $30.9 billion in future policy benefits and claims on our Consolidated Balance Sheet at
December 31, 2009, $30.1 billion related to liabilities created by these products. We do not hedge this exposure.
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. Of the $8.6 billion in customer deposits at December 31, 2009, $3.2 billion related
to reserves for our fixed rate certificate products and $2.6 billion related to reserves for 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. At
December 31, 2009, we had $168 million in reserves related to equity indexed annuities. In 2007, we discontinued new sales of equity
indexed annuities.
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 prices. 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.
86 ANNUAL REPORT 2009