Ameriprise 2013 Annual Report Download - page 111

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 Insurance and Fixed Portion of Variable Annuities and Variable Insurance Contracts
Our earnings from fixed annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance
contracts are based upon the spread between rates earned on assets held and the rates at which interest is credited to
accounts. We primarily invest in fixed rate securities to fund the rate credited to clients. We guarantee an interest rate to
the holders of these products. Investment assets and client liabilities 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, 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, the current low interest rate
environment is resulting in interest rates below the level of some of our liability guaranteed minimum interest rates
(‘‘GMIRs’’). Hence, a modest rise in interest rates would not necessarily result in changes to all the liability credited rates
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 $29.6 billion in policyholder account balances, future policy benefits and
claims on our Consolidated Balance Sheet at December 31, 2013, $24.5 billion is related to liabilities created by these
products. We do not hedge this exposure.
As a result of the low interest rate environment, our current reinvestment yields are generally lower than the current
portfolio yield. We expect our portfolio income yields to continue to decline in future periods if interest rates remain low.
The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans
that may generate proceeds to reinvest through 2015 due to prepayment, maturity or call activity at the option of the
issuer, excluding securities with a make-whole provision, was $3.8 billion and 4.1%, respectively, as of December 31,
2013. In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low
interest rate environment, totaled $6.1 billion and had a weighted average yield of 3.4% as of December 31, 2013. While
these amounts represent investments that could be subject to reinvestment risk, it is also possible that these investments
will be used to fund liabilities or may not be prepaid and will remain invested at their current yields. In addition to the
interest rate environment, the mix of benefit payments versus product sales as well as the timing and volumes associated
with such mix may impact our investment yield. Furthermore, reinvestment activities and the associated investment yield
may also be impacted by corporate strategies implemented at management discretion. The average yield for investment
purchases during the year ended December 31, 2013 was approximately 3.0%.
The reinvestment of proceeds from maturities, calls and prepayments at rates below the current portfolio yield, which may
be below the level of some liability guaranteed minimum interest rates, will have a negative impact to future operating
results. To mitigate the unfavorable impact that the low interest rate environment has on our spread income, we assess
reinvestment risk in our investment portfolio and monitor this risk in accordance with our asset/liability management
framework. In addition, we may reduce the crediting rates on our fixed products when warranted, subject to guaranteed
minimums. We are in the process of setting lower renewal interest rates for a portion of our fixed annuities that are
currently above the guaranteed minimum, which should help relieve some of the spread compression caused by low rates.
The majority of the interest rate renewals will occur in the first half of 2014.
The following table presents the account values of fixed annuities, fixed insurance, and the fixed portion of variable
annuities and variable insurance contracts by range of guaranteed minimum crediting rates and the range of the difference
between rates credited to contractholders as of December 31, 2013 and the respective guaranteed minimums, as well as
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