Ameriprise 2009 Annual Report Download - page 98

• general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers
generally to invest as well as their ability and inclination to invest in financial instruments and products other than cash and cash
equivalents, the costs of products and services the Company consumes in the conduct of its business, and applicable legislation and
regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding
the financial services industry and publicly-held firms, and regulatory rulings and pronouncements.
Management cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that management is
unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.
Management undertakes no obligation to update publicly or revise any forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate, equity price, foreign currency and credit risk are the market risks to which we have material exposure. Equity price and
interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset
management and other asset-based fees we earn, the spread income generated on our annuities, banking, and face amount certificate
products and UL insurance products, the value of DAC and DSIC assets associated with variable annuity and variable UL products, the
values of liabilities for guaranteed benefits associated with our variable annuities and the values of derivatives held to hedge these
benefits.
The guaranteed benefits associated with our variable annuities are guaranteed minimum withdrawal benefits (‘‘GMWB’’), guaranteed
minimum accumulation benefits (‘‘GMAB’’), guaranteed minimum death benefits (‘‘GMDB’’) and guaranteed minimum income benefits
(‘‘GMIB’’) options. Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions
regardless of the performance of the underlying investment assets.
We continue to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This
approach works with the premise that matched sensitivities will produce a highly effective hedging result. This program can generally be
described as a ‘‘Static 3-Greek’’ hedging program. This style of hedging focuses mainly on first order sensitivities of the assets and
liabilities; Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities
are managed. We use various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to
manage the risk exposures. The exposures are measured and monitored daily, and adjustments to the hedge portfolio are made as
necessary.
To evaluate interest rate and equity price risk we perform sensitivity testing which measures the impact on pretax income from the
sources listed below for a 12 month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline
in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at
those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying
at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities, stock market
certificates and the associated hedge assets, we assumed no change in implied market volatility despite the 10% drop in equity prices.
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