Ameriprise 2012 Annual Report Download - page 107

in interest rates as of December 31, 2011. The change in the interest rate exposure was primarily related to fixed
annuities and the fixed portion of variable annuities, which increased approximately $63 million primarily driven by model
updates, namely enhanced reflection of recent mortgage prepayment experience and enhanced asset portfolio turn-over
logic. The underlying interest rate sensitivity of the fixed annuity and fixed portion of variable annuities has not materially
changed due to market conditions. The change in interest rate exposure also increased $42 million, primarily driven by
higher brokerage client cash balances.
Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability
valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder
behavior assumptions loaded to provide risk margins and with discount rates increased to reflect a current market estimate
of our risk of nonperformance specific to these liabilities. For variable annuity riders introduced prior to mid-2009,
management elected to hedge based on best estimate policyholder behavior assumptions. For riders issued since
mid-2009, management has been hedging on a basis that includes risk margins related to policyholder behavior. The
nonperformance spread risk is not hedged.
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, 2012,
the value of our assets under management was $562.4 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, 2012 was $68.1 billion compared to $62.3 billion at
December 31, 2011. These contract values include GMWB and GMAB contracts which were $32.5 billion and $3.8 billion,
respectively, at December 31, 2012, compared to $27.6 billion and $3.5 billion, respectively, at December 31, 2011. At
December 31, 2012, reserves for GMWB and GMAB were $799 million and $103 million, respectively, compared to
$1.4 billion and $237 million, respectively, at December 31, 2011. The decrease in reserves for GMWB and GMAB reflect
the changes in economic factors impacting the mark-to-market value of the guarantees. At December 31, 2012, the
reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $13 million compared to $14 million at
December 31, 2011.
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.
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