Derivatives and Hedging Activities

Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity, foreign exchange and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.

The Company’s freestanding derivatives are recorded at fair value and are reflected in other assets or other liabilities. The Company’s freestanding derivative instruments are all subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 15 for additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.

The Company uses derivatives as economic hedges and accounting hedges. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives:



		Assets					Liabilities
	Balance Sheet Location	December 31,				Balance Sheet Location	December 31,
	Balance Sheet Location	2013		2012		Balance Sheet Location	2013				2012
		(in millions)					(in millions)
Derivatives designated as hedging instruments
Fair value hedges
Fixed rate debt	Other assets	$	82	$	167	Other liabilities	$	—			$	—
Total qualifying hedges		82		167			—				—

Derivatives not designated as hedging instruments
GMWB and GMAB
Interest rate contracts	Other assets	1,484		2,191		Other liabilities	1,672				1,486
Equity contracts	Other assets	1,741		1,215		Other liabilities	3,028				1,792
Credit contracts	Other assets	3		—		Other liabilities	—				—
Foreign currency contracts	Other assets	2		6		Other liabilities	—				—
Embedded derivatives ⁽¹⁾	N/A	—		—		Policyholder account balances, future policy benefits and claims	(575		)	⁽²⁾	833
Total GMWB and GMAB		3,230		3,412			4,125				4,111
Other derivatives:
Interest rate
Macro hedge program	Other assets	4		—		Other liabilities	21				—
Equity
Macro hedge program	Other assets	—		—		Other liabilities	8				—
EIA embedded derivatives	N/A	—		—		Policyholder account balances, future policy benefits and claims	5				2
IUL	Other assets	27		6		Other liabilities	13				1
IUL embedded derivatives	N/A	—		—		Policyholder account balances, future policy benefits and claims	125				45
Stock market certificates	Other assets	73		37		Other liabilities	66				30
Stock market certificates embedded derivatives	N/A	—		—		Customer deposits	7				8
Foreign exchange
Foreign currency	Other assets	2		—		Other liabilities	—				1
Commodity
Seed money	Other assets	—		1		Other liabilities	—				—
Total other		106		44			245				87
Total non-designated hedges		3,336		3,456			4,370				4,198
Total derivatives		$	3,418	$	3,623		$	4,370			$	4,198

N/A Not applicable.


⁽¹⁾	The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.


⁽²⁾	The fair value of the GMWB and GMAB embedded derivatives was a net asset at December 31, 2013 and the amount is reported as a contra liability.

See Note 14 for additional information regarding the Company’s fair value measurement of derivative instruments.

Derivatives Not Designated as Hedges

The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:



Derivatives not designated as hedging instruments	Location of Gain (Loss) on Derivatives Recognized in Income	Amount of Gain (Loss) on Derivatives Recognized in Income
		Years Ended December 31,
		2013			2012			2011
		(in millions)
GMWB and GMAB
Interest rate contracts	Benefits, claims, losses and settlement expenses	$	(742	)	$	17		$	709
Equity contracts	Benefits, claims, losses and settlement expenses	(1,103		)	(1,218		)	326
Credit contracts	Benefits, claims, losses and settlement expenses	6			(2		)	(12		)
Foreign currency contracts	Benefits, claims, losses and settlement expenses	26			(1		)	(2		)
Embedded derivatives ⁽¹⁾	Benefits, claims, losses and settlement expenses	1,408			752			(1,165		)
Total GMWB and GMAB		(405		)	(452		)	(144		)

Other derivatives:
Interest rate
Macro hedge program	Benefits, claims, losses and settlement expenses	(15		)	—			—
Bank assets	Net investment income	—			(7		)	—
Tax hedge	Net investment income	—			1			—
Interest rate lock commitments	Other revenues	—			—			(1		)
Seed money	Net investment income	2			—			—
Equity
Macro hedge program	Benefits, claims, losses and settlement expenses	(8		)	—			—
IUL	Interest credited to fixed accounts	11			1			1
IUL embedded derivatives	Interest credited to fixed accounts	16			(4		)	(3		)
EIA	Interest credited to fixed accounts	3			1			(1		)
EIA embedded derivatives	Interest credited to fixed accounts	(3		)	1			1
Stock market certificates	Banking and deposit interest expense	7			6			1
Stock market certificates embedded derivatives	Banking and deposit interest expense	(6		)	(5		)	—
Seed money	Net investment income	(17		)	(6		)	4
Ameriprise Financial Franchise Advisor Deferred Compensation Plan	Distribution expenses	—			5			(4		)
Deferred compensation	Distribution expenses	9			—			—
Deferred compensation	General and administrative expense	5			—			—
Foreign exchange
Seed money	General and administrative expense	—			—			(1		)
Foreign currency	Net investment income	(2		)	—			(3		)
Commodity
Seed money	Net investment income	1			—			1
Total other		3			(7		)	(5		)
Total derivatives		$	(402	)	$	(459	)	$	(149	)


⁽¹⁾	The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.

The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These

derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to

various products and transactions of the Company.

Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The Company economically hedges the exposure related to non-life contingent GMWB and GMAB provisions primarily using various futures, options, interest rate swaptions, interest rate swaps, total return swaps, variance swaps and credit default swaps. At December 31, 2013 and 2012, the gross notional amount of derivative contracts for the Company’s GMWB and GMAB provisions was $144.5 billion and $142.1 billion, respectively.

The deferred premium associated with certain of the above options is paid or received semi-annually over the life of the option contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options:



	Premiums Payable		Premiums Receivable
	(in millions)
2014	$	378	$	86
2015	349		67
2016	305		51
2017	240		45
2018	196		56
2019-2027	601		79
Total	$	2,069	$	384

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.

Beginning in the fourth quarter of 2013, the Company established a macro hedge program which uses a combination of options and/or swaps to provide protection against the statutory tail scenario risk arising from variable annuity reserves on our statutory surplus. The program also covers some of the residual risks not covered by other hedging activities. The gross notional amount of these derivative contracts was $710 million at December 31, 2013.

EIA, IUL and stock market certificate products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to EIA, IUL and stock market certificate products will positively or negatively impact earnings over the life of these products. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and futures contracts. The gross notional amount of these derivative contracts was $1.5 billion and $1.3 billion at December 31, 2013 and 2012, respectively.

The Company enters into futures and commodity swaps to manage its exposure to price risk arising from seed money investments in proprietary investment products. The gross notional amount of these contracts was $111 million and $146 million at December 31, 2013 and 2012, respectively.

The Company enters into foreign currency forward contracts to economically hedge its exposure to certain receivables and obligations denominated in non-functional currencies. The gross notional amount of these contracts was $30 million and $14 million at December 31, 2013 and 2012, respectively.

The Company enters into futures contracts to economically hedge its exposure related to compensation plans. The gross notional amount of these contracts was $224 million and $5 million at December 31, 2013 and 2012, respectively.

Embedded Derivatives

Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the EIA, IUL and stock market certificate product obligations are also considered embedded derivatives. These embedded derivatives are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As discussed above, the Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.

Cash Flow Hedges

The Company has designated and accounts for the following as cash flow hedges: (i) interest rate swaps to hedge interest rate exposure on debt, (ii) interest rate lock agreements to hedge interest rate exposure on debt issuances and (iii) swaptions used to hedge the risk of increasing interest rates on forecasted fixed premium product sales.

During the year ended December 31, 2012, the Company reclassified from accumulated other comprehensive income into earnings a $3 million gain on an interest rate hedge put in place in anticipation of issuing debt. The gain was reclassified due to the forecasted transaction not occurring according to the original hedge strategy. For the years ended December 31, 2013, 2012 and 2011, amounts recognized in earnings related to cash flow hedges due to ineffectiveness were $1 million, $1 million, and nil, respectively. The estimated net amount of existing pretax losses as of December 31, 2013 that the Company expects to reclassify to earnings within the next twelve months is $1 million, which consists of $5 million of pretax gains to be recorded as a reduction to interest and debt expense and $6 million of pretax losses to be recorded in net investment income. The following tables present the impact of the effective portion of the Company’s cash flow hedges on the Consolidated Statements of Operations and the Consolidated Statements of Equity:



	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives
	December 31,
Derivatives designated as hedging instruments	2013		2012		2011
	(in millions)
Interest on debt	$	—	$	14	$	(11	)
Asset-based distribution fees	—		—		1
Total	$	—	$	14	$	(10	)



	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	December 31,
	2013			2012			2011
	(in millions)
Other revenues	$	—		$	3		$	27
Interest and debt expense	4			4			4
Distribution fees	—			—			9
Net investment income	(5		)	(6		)	(6		)
Total	$	(1	)	$	1		$	34

The following is a summary of unrealized derivatives gains (losses) included in accumulated other comprehensive income related to cash flow hedges:



	2013			2012			2011
	(in millions)
Net unrealized derivatives gains (losses) at January 1	$	(2	)	$	(11	)	$	18
Holding gains (losses)	—			14			(10		)
Reclassification of realized (gains) losses	1			(1		)	(34		)
Income tax benefit (provision)	—			(4		)	15
Net unrealized derivatives losses at December 31	$	(1	)	$	(2	)	$	(11	)

Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 22 years and relates to forecasted debt interest payments.

Fair Value Hedges

In 2010, the Company entered into and designated as fair value hedges three interest rate swaps to convert senior notes due 2015, 2019 and 2020 from fixed rate debt to floating rate debt. The swaps have identical terms as the underlying debt being hedged so no ineffectiveness is expected to be realized. The Company recognizes gains and losses on the derivatives and the related hedged items within interest and debt expense. The following table presents the amounts recognized in income related to fair value hedges:



Derivatives designated as hedging instruments	Location of Gain Recorded into Income	Amount of Gain Recognized in Income on Derivatives
		December 31,
		2013		2012		2011
		(in millions)
Fixed rate debt	Interest and debt expense	$	57	$	37	$	41

Included in the table above is an $18 million gain from the partial settlement of the fair value hedge on the Company’s senior notes due November 2015, as a result of redeeming $350 million of the notes in the fourth quarter of 2013.

Credit Risk

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. See Note 15 for additional information on the Company’s credit exposure related to derivative assets.

Certain of the Company’s derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s debt rating (or based on the financial strength of the Company’s life insurance subsidiaries for contracts in which those subsidiaries are the counterparty). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company’s debt does not maintain a specific credit rating (generally an investment grade rating) or the Company’s life insurance subsidiary does not maintain a specific financial strength rating. If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. At December 31, 2013 and 2012, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $1.0 billion and $364 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 2013 and 2012 was $959 million and $360 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position at December 31, 2013 and 2012 were triggered, the aggregate fair value of additional assets that would be required to be posted as collateral or needed to settle the instruments immediately would have been $56 million and $4 million, respectively.