Ameriprise 2011 Annual Report Download - page 109

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 prices 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 and distribution fees on our assets under management. At December 31, 2011,
the value of our assets under management was $527.6 billion. 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 UL 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 contract value of all variable annuities at December 31, 2011 was $62.3 billion compared to $62.6 billion at
December 31, 2010. These contract values include GMWB and GMAB contracts which were $27.6 billion and $3.5 billion,
respectively, at December 31, 2011, compared to $24.7 billion and $3.5 billion, respectively, at December 31, 2010. At
December 31, 2011, reserves for GMWB and GMAB were $1.4 billion and $237 million, respectively, compared to
$337 million and $104 million, respectively, at December 31, 2010. The increase in reserves for GMWB and GMAB reflect
the changes in economic factors impacting the mark-to-market value of the guarantees and increased volume of business.
At December 31, 2011, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $14 million
compared to $13 million at December 31, 2010.
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. See
Note 15 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. 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
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