Ameriprise 2011 Annual Report Download - page 44

to predict, and it is possible that such changes could have a material effect on our financial condition and results of
operations.
Defaults in our fixed maturity securities portfolio or consumer credit products could adversely affect our
earnings.
Issuers of the fixed maturity securities that we own may default on principal and interest payments. As of December 31,
2011, 5% of our invested assets had ratings below investment-grade. Moreover, economic downturns and corporate
malfeasance can increase the number of companies, including those with investment-grade ratings that default on their
debt obligations. Default-related declines in the value of our fixed maturity securities portfolio or consumer credit products
could cause our net earnings to decline and could also cause us to contribute capital to some of our regulated
subsidiaries, which may require us to obtain funding during periods of unfavorable market conditions. Higher delinquency
and default rates in our bank’s customer loan portfolio could require us to contribute capital to Ameriprise Bank and may
result in additional restrictions from our regulators that impact the use and access to that capital.
If the counterparties to our reinsurance arrangements or to the derivative instruments we use to hedge our
business risks default, we may be exposed to risks we had sought to mitigate, which could adversely affect our
financial condition and results of operations.
We use reinsurance to mitigate our risks in various circumstances as described in Item 1 of this Annual Report on
Form 10-K — ‘‘Business — Our Segments — Protection — Reinsurance.’’ Reinsurance does not relieve us of our direct
liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit and performance risk with
respect to our reinsurers. A reinsurer’s insolvency or its inability or unwillingness to make payments under the terms of our
reinsurance agreement could have a material adverse effect on our financial condition and results of operations. See
Notes 2 and 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
In addition, we use a variety of derivative instruments (including options, forwards, and interest rate and currency swaps)
with a number of counterparties to hedge business risks. The amount and breadth of exposure to derivative counterparties,
as well as the cost of derivative instruments, have increased significantly in connection with our strategies to hedge
guaranteed benefit obligations under our variable annuity products. If our counterparties fail to honor their obligations
under the derivative instruments in a timely manner, our hedges of the related risk will be ineffective. That failure could
have a material adverse effect on our financial condition and results of operations. This risk of failure of our hedge
transactions from counterparty default may be increased by capital market volatility.
The determination of the amount of allowances and impairments taken on certain investments is subject to
management’s evaluation and judgment and could materially impact our results of operations or financial
position.
The determination of the amount of allowances and impairments vary by investment type and is based upon our periodic
evaluation and assessment of inherent and known risks associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information becomes available. Management updates its
evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised.
Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the
underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer, and
management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and
in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential, which assumptions and estimates are more
difficult to make with certainty under current market conditions.
Our valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions
which are subject to differing interpretations and could result in changes to investment valuations that may
materially adversely impact our results of operations or financial condition.
Fixed maturity, equity, trading securities and short-term investments, which are reported at fair value on the consolidated
balance sheets, represent the majority of our total cash and invested assets. The determination of fair values by
management in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities we deem to
be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a
specific point in time, based on available market information and judgments about financial instruments, including
estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty.
Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund
requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of
different methodologies and assumptions may have a material effect on the estimated fair value amounts.
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