Ameriprise 2009 Annual Report Download - page 40

securities and insurance regulators, the SEC, the New York Stock In addition, we use a variety of derivative instruments (including
Exchange, FINRA, The Securities Investor Protection Corporation options, forwards, and interest rate and currency swaps) with a
(‘‘SIPC’’), the OTS, the U.S. Department of Justice and state number of counterparties to hedge business risks. The amount
attorneys general. Financial conditions may prompt, and have and breadth of exposure to derivative counterparties, as well as
prompted, some of these authorities to consider additional the cost of derivative instruments, have increased significantly in
regulatory requirements intended to prevent future crises or connection with our strategies to hedge guaranteed benefit
otherwise assure the stability of institutions under their obligations under our variable annuity products. If our
supervision. These authorities may also seek to exercise their counterparties fail to honor their obligations under the derivative
authority in new or more expansive ways and the U.S. government instruments in a timely manner, our hedges of the related risk will
may create additional regulators or materially change the be ineffective. That failure could have a material adverse effect on
authorities of existing regulators. All of these possibilities, if they our financial condition and results of operations. This risk of
occurred, could impact the way we conduct our business and failure of our hedge transactions may be increased by capital
manage our capital, and may require us to satisfy increased capital market volatility.
requirements, which in turn could materially impact our results of
The determination of the amount of allowances and
operations, financial condition and liquidity.
impairments taken on certain investments is subject to
Defaults in our fixed maturity securities portfolio or management’s evaluation and judgment and could
consumer credit products could adversely affect our materially impact our results of operations or financial
earnings. position.
Issuers of the fixed maturity securities that we own may default on The determination of the amount of allowances and impairments
principal and interest payments. As of December 31, 2009, 5% of vary by investment type and is based upon our periodic evaluation
our invested assets had ratings below investment-grade. and assessment of inherent and known risks associated with the
Moreover, economic downturns and corporate malfeasance can respective asset class. Such evaluations and assessments are
increase the number of companies, including those with revised as conditions change and new information becomes
investment-grade ratings, that default on their debt obligations. available. Management updates its evaluations regularly and
Default-related declines in the value of our fixed maturity reflects changes in allowances and impairments in operations as
securities portfolio or consumer credit products could cause our such evaluations are revised. Historical trends may not be
net earnings to decline and could also cause us to contribute indicative of future impairments or allowances.
capital to some of our regulated subsidiaries, which may require
The assessment of whether impairments have occurred is based
us to obtain funding during periods of unfavorable market
on management’s case-by-case evaluation of the underlying
conditions. Higher delinquency and default rates in our bank’s
reasons for the decline in fair value that considers a wide range of
loan portfolio could require us to contribute capital to Ameriprise
factors about the security issuer, and management uses its best
Bank and may result in additional restrictions from our regulators
judgment in evaluating the cause of the decline in the estimated
that impact the use and access to that capital.
fair value of the security and in assessing the prospects for
recovery. Inherent in management’s evaluation of the security are
If the counterparties to our reinsurance arrangements
assumptions and estimates about the operations of the issuer and
or to the derivative instruments we use to hedge our
its future earnings potential, which assumptions and estimates are
business risks default, we may be exposed to risks we
more difficult to make with certainty under current market
had sought to mitigate, which could adversely affect our
conditions.
financial condition and results of operations.
We use reinsurance to mitigate our risks in various circumstances Our valuation of fixed maturity and equity securities
as described in Item 1 of this Annual Report on Form 10-K — may include methodologies, estimations and
‘‘Business — Our Segments — Protection — Reinsurance.’’ assumptions which are subject to differing
Reinsurance does not relieve us of our direct liability to our interpretations and could result in changes to
policyholders, even when the reinsurer is liable to us. Accordingly, investment valuations that may materially adversely
we bear credit and performance risk with respect to our impact our results of operations or financial condition.
reinsurers. A reinsurer’s insolvency or its inability or
Fixed maturity, equity, trading securities and short-term
unwillingness to make payments under the terms of our
investments, which are reported at fair value on the consolidated
reinsurance agreement could have a material adverse effect on our
balance sheets, represent the majority of our total cash and
financial condition and results of operations. See Notes 2 and 10 to
invested assets. The determination of fair values by management
our Consolidated Financial Statements included in Part II, Item 8
in the absence of quoted market prices is based on: (i) valuation
of this Annual Report on Form 10-K.
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