Ameriprise 2012 Annual Report Download - page 108

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
investments. Therefore, generally speaking in an increasing interest rate environment, higher interest rates may be
reflected in crediting rates to clients sooner than in rates earned on invested assets, which could result in a reduced
spread between the two rates, reduced earned income and a negative impact on pretax income. However, today’s
historically low interest rate environment is resulting in interest rates below the level of some liability guaranteed minimum
interest rates (‘‘GMIRs’’). Given that, a modest rise in interest rates would not necessarily result in any change to the
liability credits while projected asset purchases would capture the full increase in interest rates. This dynamic would result
in widening spreads under a modestly rising rate scenario given the current relationship between the current level of
interest rates and the underlying GMIRs on the business. Of the $31.2 billion in future policy benefits and claims on our
Consolidated Balance Sheet at December 31, 2012, $29.7 billion is related to liabilities created by these products. We do
not hedge this exposure.
Equity Indexed Annuities
Our equity indexed annuity product is a single premium annuity issued with an initial term of seven years. The annuity
guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation
value upon renewal plus a return that is linked to the performance of the S&P 500 Index. The equity-linked return is based
on a participation rate initially set at between 50% and 90% of the S&P 500 Index, which is guaranteed for the initial
seven-year term when the contract is held to full term. At December 31, 2012, we had $33 million in reserves related to
equity indexed annuities. We discontinued new sales of equity indexed annuities in 2007.
Equity Price Risk — Equity Indexed Annuities
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices.
To hedge this exposure, we purchase futures, calls and puts which generate returns to replicate what we must credit to
client accounts. In conjunction with purchasing puts we also write puts. Pairing purchased puts with written puts allows us
to better match the characteristics of the liability.
Interest Rate Risk — Equity Indexed Annuities
Most of the proceeds received from equity indexed annuities are invested in fixed income securities with the return on
those investments intended to fund the 3% guarantee. We earn income from the difference between the return earned on
invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount
credited is affected by changes in interest rates. This risk is not currently hedged and was immaterial at December 31,
2012.
Brokerage Client Cash Balances
We pay interest on certain brokerage client cash balances and have the ability to reset these rates from time to time
based on prevailing economic and business conditions. We earn revenue to fund the interest paid from interest-earning
assets or fees from off-balance sheet deposits at FDIC insured institutions, which are indexed to short-term interest rates.
In general, the change in interest paid lags the change in revenues earned.
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