Ameriprise 2009 Annual Report Download - page 102

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. At
December 31, 2009, we had $878 million in reserves related 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.
Interest Rate Risk — Stock Market Certificates
Stock market certificates have some interest rate risk as changes in interest rates affect the fair value of the payout to be made to the
certificate holder. This risk continues to be fully hedged.
Foreign Currency Risk
We have foreign currency risk through our net investment in foreign subsidiaries and our operations in foreign countries. We are
primarily exposed to changes in British Pounds (‘‘GBP’’) related to our net investment in Threadneedle, which had 427 million GBP
exposure at December 31, 2009. Our primary exposure related to operations in foreign countries is to the GBP and the Indian Rupee. We
monitor the foreign exchange rates that we have exposure to and enter into foreign currency forward contracts to mitigate risk when
economically prudent. At December 31, 2009, the notional value of outstanding contracts and our remaining foreign currency risk related
to operations in foreign countries were not material.
Interest Rate Risk on External Debt
The stated interest rate on the $1.5 billion of our senior unsecured notes is fixed and the stated interest rate on the $322 million of junior
notes is fixed until June 1, 2016. In January 2010, the Company entered into interest rate swap agreements to effectively convert the fixed
interest rate on $1.0 billion of the senior unsecured notes to floating interest rates based on six-month LIBOR. As a result, we are exposed
to interest rate risk on this debt.
We also have floating rate debt of $6 million related to our municipal bond inverse floater certificates and $381 million related to certain
consolidated property funds, a portion of which is hedged using interest rate swaps which effectively convert the floating rates to fixed
rates. The remaining interest rate risk on this debt is not material.
Credit Risk
We are exposed to credit risk within our investment portfolio, including our loan portfolio, and through our derivative and reinsurance
activities. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the
contractual terms of the financial instrument or contract. We consider our total potential credit exposure to each counterparty and its
affiliates to ensure compliance with pre-established credit guidelines at the time we enter into a transaction which would potentially
increase our credit risk. These guidelines and oversight of credit risk are managed through a comprehensive enterprise risk management
program that includes members of senior management.
We manage the risk of credit-related losses in the event of nonperformance by counterparties by applying disciplined fundamental credit
analysis and underwriting standards, prudently limiting exposures to lower-quality, higher-yielding investments, and diversifying
exposures by issuer, industry, region and underlying investment type. We remain exposed to occasional adverse cyclical economic
downturns during which default rates may be significantly higher than the long-term historical average used in pricing.
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