Ameriprise 2014 Annual Report Download - page 112

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, 2014,
the value of our assets under management was $658.6 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, 2014 was $77.0 billion. These contract values include
GMWB and GMAB contracts which were $40.5 billion and $4.2 billion, respectively, at December 31, 2014. At
December 31, 2014, reserves for GMWB were liabilities of $693 million and reserves for GMAB were assets of
$41 million. The assets were reflected as contra liabilities in policyholder account balances, futures policy benefits and
claims. The GMWB and GMAB reserves include the fair value of embedded derivatives, which fluctuates based on equity,
interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. At
December 31, 2014, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB was $16 million.
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 options; these core instruments are supplemented with equity futures and total return swaps. See
Note 16 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 options, 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
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