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Fair Values of Assets and Liabilities
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
Fair values of assets and liabilities [Text Block]
Fair Values of Assets and Liabilities
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1    Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2
Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The following tables present the balances of assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis: 
 
September 30, 2014
  
 
Level 1
 
Level 2
 
Level 3
 
Total
  
 
(in millions)
  
Assets
 

 
 

 
 

 
 

  
Cash equivalents
$
29

 
$
2,404

 
$

 
$
2,433

  
Available-for-Sale securities:
 

 
 

 
 

 
 

  
Corporate debt securities

 
15,756

 
1,566

 
17,322

  
Residential mortgage backed securities

 
5,959

 
273

 
6,232

  
Commercial mortgage backed securities

 
2,544

 
93

 
2,637

  
Asset backed securities

 
1,295

 
193

 
1,488

  
State and municipal obligations

 
2,257

 

 
2,257

  
U.S. government and agencies obligations
12

 
35

 

 
47

  
Foreign government bonds and obligations

 
253

 

 
253

  
Common stocks
6

 
9

 
5

 
20

  
Total Available-for-Sale securities
18

 
28,108

 
2,130

 
30,256

  
Trading securities
114

 
81

 
1

 
196

  
Separate account assets

 
82,420

 

 
82,420

  
Other assets:
 
 
 
 
 
 
 
 
Interest rate derivative contracts

 
1,587

 

 
1,587

  
Equity derivative contracts
314

 
1,552

 

 
1,866

  
Credit derivative contracts

 
4

 

 
4

  
Foreign exchange derivative contracts
2

 
4

 

 
6

  
Other derivative contracts

 

 
1

 
1

  
Other
1

 

 

 
1

 
Total other assets
317

 
3,147

 
1

 
3,465

  
Total assets at fair value
$
478

 
$
116,160

 
$
2,132

 
$
118,770

  
Liabilities
 
 
 
 
 
 
 
 
Policyholder account balances, future policy benefits and claims:
 

 
 

 
 

 
 

  
EIA embedded derivatives
$

 
$
6

 
$

 
$
6

  
IUL embedded derivatives

 

 
202

 
202

  
GMWB and GMAB embedded derivatives

 

 
(77
)
 
(77
)
(2) 
Total policyholder account balances, future policy benefits and claims

 
6

 
125

 
131

(1) 
Customer deposits

 
6

 

 
6

  
Other liabilities:
 

 
 

 
 

 
 

  
Interest rate derivative contracts

 
1,208

 

 
1,208

  
Equity derivative contracts
472

 
2,205

 

 
2,677

  
Other derivative contracts

 
117

 

 
117

 
Other

 
17

 

 
17

  
Total other liabilities
472

 
3,547

 

 
4,019

  
Total liabilities at fair value
$
472

 
$
3,559

 
$
125

 
$
4,156

  
(1) The Company’s adjustment for nonperformance risk resulted in a $238 million cumulative decrease to the embedded derivatives.
(2) The fair value of the GMWB and GMAB embedded derivatives was a net asset at September 30, 2014 and the amount is reported as a contra liability.
 
December 31, 2013
  
 
Level 1
 
Level 2
 
Level 3
 
Total
  
 
(in millions)
  
Assets
 

 
 

 
 

 
 

  
Cash equivalents
$
12

 
$
1,841

 
$

 
$
1,853

  
Available-for-Sale securities:
 

 
 

 
 

 
 

  
Corporate debt securities

 
15,826

 
1,640

 
17,466

  
Residential mortgage backed securities

 
5,937

 
187

 
6,124

  
Commercial mortgage backed securities

 
2,711

 
30

 
2,741

  
Asset backed securities

 
1,244

 
260

 
1,504

  
State and municipal obligations

 
2,160

 

 
2,160

  
U.S. government and agencies obligations
17

 
35

 

 
52

  
Foreign government bonds and obligations

 
245

 

 
245

  
Common stocks
5

 
7

 
6

 
18

  
Total Available-for-Sale securities
22

 
28,165

 
2,123

 
30,310

  
Trading securities
3

 
32

 
2

 
37

  
Separate account assets

 
81,223

 

 
81,223

  
Other assets:
 

 
 

 
 

 
 

  
Interest rate derivative contracts

 
1,566

 

 
1,566

  
Equity derivative contracts
265

 
1,576

 

 
1,841

  
Credit derivative contracts

 
3

 

 
3

 
Foreign exchange derivative contracts
2

 
2

 

 
4

  
Other derivative contracts

 
4

 

 
4

  
Total other assets
267

 
3,151

 

 
3,418

  
Total assets at fair value
$
304

 
$
114,412

 
$
2,125

 
$
116,841

  
Liabilities
 

 
 

 
 

 
 

  
Policyholder account balances, future policy benefits and claims:
 

 
 

 
 

 
 

  
EIA embedded derivatives
$

 
$
5

 
$

 
$
5

  
IUL embedded derivatives

 

 
125

 
125

  
GMWB and GMAB embedded derivatives

 

 
(575
)
 
(575
)
(2) 
Total policyholder account balances, future policy benefits and claims

 
5

 
(450
)
 
(445
)
(1) 
Customer deposits

 
7

 

 
7

  
Other liabilities:
 

 
 

 
 

 
 

  
Interest rate derivative contracts

 
1,672

 

 
1,672

  
Equity derivative contracts
550

 
2,447

 

 
2,997

  
Other derivative contracts

 
139

 

 
139

 
Other

 
12

 

 
12

  
Total other liabilities
550

 
4,270

 

 
4,820

  
Total liabilities at fair value
$
550

 
$
4,282

 
$
(450
)
 
$
4,382

  
 
(1) 
The Company’s adjustment for nonperformance risk resulted in a $150 million cumulative increase to the embedded derivatives.
(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.
The following tables provide a summary of changes in Level 3 assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:
 
Available-for-Sale Securities
 
 
 
 
 
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
Trading Securities
 
Other Derivative Contracts
 
 
(in millions)
 
Balance, July 1, 2014
$
1,565

 
$
214

 
$
15

 
$
185

 
$
6

 
$
1,985

 
$
1

 
$
1

 
Total losses included in:
 
    Net income

 

 

 

 

 

 

 
(1
)
(1) 
    Other comprehensive loss
(12
)
 

 

 
(1
)
 

 
(13
)
 

 

 
Purchases
37

 
170

 

 
11

 

 
218

 

 
1

 
Settlements
(24
)
 
(6
)
 

 
(2
)
 

 
(32
)
 

 

 
Transfers into Level 3

 

 
78

 

 

 
78

 

 

 
Transfers out of Level 3

 
(105
)
 

 

 
(1
)
 
(106
)
 

 

 
Balance, September 30, 2014
$
1,566

 
$
273

 
$
93

 
$
193

 
$
5

 
$
2,130

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized losses relating to assets held at September 30, 2014 included in:
 
Net investment income
$
(1
)
 
$

 
$

 
$

 
$

 
$
(1
)
 
$

 
$

 
Benefits, claims, losses and settlement expenses

 

 

 

 

 

 

 
(1
)
 

(1) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.
 
Policyholder Account Balances,
Future Policy Benefits and Claims
 
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
 
(in millions)
Balance, July 1, 2014
$
184

 
$
(347
)
 
$
(163
)
Total losses included in:
    Net income


207

(1) 
207

Issues
21

 
65

 
86

Settlements
(3
)
 
(2
)
 
(5
)
Balance, September 30, 2014
$
202

 
$
(77
)
 
$
125

 
 
 
 
 
 
Changes in unrealized losses relating to liabilities held at September 30, 2014 included in:
Benefits, claims, losses and settlement expenses
$

 
$
208

 
$
208


(1) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

 
Available-for-Sale Securities
 
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
 
(in millions)
Balance, July 1, 2013
$
1,667

 
$
69

 
$
210

 
$
214

 
$
5

 
$
2,165

 
Total gains (losses) included in:
Net income
(1
)
 

 

 

 

 
(1
)
(1) 
Other comprehensive income
3

 
(1
)
 

 
(2
)
 

 

 
Purchases

 
245

 

 
29

 

 
274

 
Settlements
(37
)
 
(6
)
 
(36
)
 
(1
)
 

 
(80
)
 
Transfers out of Level 3

 
(19
)
 
(159
)
 
(37
)
 

 
(215
)
 
Balance, September 30, 2013
$
1,632

 
$
288

 
$
15

 
$
203

 
$
5

 
$
2,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2013 included in:
Net investment income
$
(1
)
 
$

 
$

 
$
1

 
$

 
$

 
(1) Included in net investment income in the Consolidated Statements of Operations.
 
Policyholder Account Balances,
Future Policy Benefits and Claims
 
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
 
(in millions)
Balance, July 1, 2013
$
76

 
$
11

 
$
87

Total (gains) losses included in:
Net income
2

(1) 
(322
)
(2) 
(320
)
Issues
17

 
60

 
77

Settlements
1

 
(5
)
 
(4
)
Balance, September 30, 2013
$
96

 
$
(256
)
 
$
(160
)
 
 
 
 
 
 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2013 included in:
Interest credited to fixed accounts
$
2

 
$

 
$
2

Benefits, claims, losses and settlement expenses

 
(321
)
 
(321
)
(1) Included in interest credited to fixed accounts in the Consolidated Statements of Operations.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

 
Available-for-Sale Securities
 
 
 
 
 
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
Trading Securities
 
Other Derivative Contracts
 
 
(in millions)
 
Balance, January 1, 2014
$
1,640

 
$
187

 
$
30

 
$
260

 
$
6

 
$
2,123

 
$
2

 
$

 
Total gains (losses) included in:
 
    Net income
(1
)
 

 

 
1

 

 

(1) 

 
(1
)
(2) 
    Other comprehensive income
4

 

 

 
(1
)
 

 
3

 

 

 
Purchases
159

 
388

 
60

 
32

 

 
639

 
1

 
2

 
Sales
(11
)
 

 

 

 

 
(11
)
 
(2
)
 

 
Settlements
(225
)
 
(18
)
 

 
(10
)
 

 
(253
)
 

 

 
Transfers into Level 3

 

 
78

 

 

 
78

 

 

 
Transfers out of Level 3

 
(284
)
 
(75
)
 
(89
)
 
(1
)
 
(449
)
 

 

 
Balance, September 30, 2014
$
1,566

 
$
273

 
$
93

 
$
193

 
$
5

 
$
2,130

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2014 included in:
 
Net investment income
$
(2
)
 
$

 
$

 
$
1

 
$

 
$
(1
)
 
$

 
$

 
Benefits, claims, losses and settlement expenses

 

 

 

 

 

 

 
(1
)
 

(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.
 
Policyholder Account Balances,
Future Policy Benefits and Claims
 
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
 
(in millions)
Balance, January 1, 2014
$
125

 
$
(575
)
 
$
(450
)
Total losses included in:
    Net income
14

(1) 
327

(2) 
341

Issues
69

 
184

 
253

Settlements
(6
)
 
(13
)
 
(19
)
Balance, September 30, 2014
$
202

 
$
(77
)
 
$
125

 
 
 
 
 
 
Changes in unrealized losses relating to liabilities held at September 30, 2014 included in:
Interest credited to fixed accounts
$
14

 
$

 
$
14

Benefits, claims, losses and settlement expenses

 
327

 
327

(1) Included in interest credited to fixed accounts in the Consolidated Statements of Operations.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.
 
Available-for-Sale Securities
 
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
 
(in millions)
Balance, January 1, 2013
$
1,764

 
$
284

 
$
206

 
$
178

 
$
6

 
$
2,438

  
Total gains (losses) included in:
Net income
(2
)
 

 

 
1

 

 
(1
)
(1) 
Other comprehensive loss
(34
)
 
(1
)
 
(6
)
 
5

 

 
(36
)
 
Purchases
74

 
307

 
10

 
200

 

 
591

 
Settlements
(170
)
 
(7
)
 
(36
)
 
(4
)
 

 
(217
)
 
Transfers into Level 3

 

 

 
8

 

 
8

 
Transfers out of Level 3

 
(295
)
 
(159
)
 
(185
)
 
(1
)
 
(640
)
 
Balance, September 30, 2013
$
1,632

 
$
288

 
$
15

 
$
203

 
$
5

 
$
2,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2013 included in:
Net investment income
$
(2
)
 
$

 
$

 
$
1

 
$

 
$
(1
)
  
(1) Included in net investment income in the Consolidated Statements of Operations.
 
Policyholder Account Balances,
Future Policy Benefits and Claims
 
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
 
(in millions)
Balance, January 1, 2013
$
45

 
$
833

 
$
878

Total (gains) losses included in:
Net income
8

(1) 
(1,246
)
(2) 
(1,238
)
Issues
42

 
163

 
205

Settlements
1

 
(6
)
 
(5
)
Balance, September 30, 2013
$
96

 
$
(256
)
 
$
(160
)
 
 
 
 
 
 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2013 included in:
Interest credited to fixed accounts
$
8

 
$

 
$
8

Benefits, claims, losses and settlement expenses

 
(1,229
)
 
(1,229
)
(1) Included in interest credited to fixed accounts in the Consolidated Statements of Operations.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.
The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $59 million and $(14) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the three months ended September 30, 2014 and 2013, respectively. The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $68 million and $(104) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the nine months ended September 30, 2014 and 2013, respectively.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
 
September 30, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range 
 
Weighted Average
 
(in millions)
 
 
 
 
 
 
 
 
 
Corporate debt securities (private placements)
$
1,509

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9
 %
3.5%
 
1.2%
Other derivative contracts
$
1

 
Option pricing model
 
Correlation (1)
 
(3.0
)%
(84.0)%
 
(60.0)%
IUL embedded derivatives
$
202

 
Discounted cash flow
 
Nonperformance risk (2)
 
69

 
bps
 
 
GMWB and GMAB embedded derivatives
$
(77
)
 
Discounted cash flow
 
Utilization of guaranteed withdrawals (3)
 
0.0
 %
51.1%
 
 
 
 
 
 
 
Surrender rate
 
0.0
 %
59.1%
 
 
 
 

 
 
 
Market volatility (4)
 
4.9
 %
19.4%
 
 
 
 
 
 
 
Nonperformance risk (2)
 
69

 
bps
 
 
 
 
 
 
 
Elective contractholder strategy allocations (5)
 
0.0
 %
31.0%
 
 
 
December 31, 2013
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range 
 
Weighted Average
 
(in millions)
 
 
 
 
 
 
 
 
 
Corporate debt securities (private placements)
$
1,589

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9
%
5.3%
 
1.5%
IUL embedded derivatives
$
125

 
Discounted cash flow
 
Nonperformance risk (2)
 
74

 
bps
 
 
GMWB and GMAB embedded derivatives
$
(575
)
 
Discounted cash flow
 
Utilization of guaranteed withdrawals (3)
 
0.0
%
51.1%
 
 
 
 

 
 
 
Surrender rate
 
0.1
%
57.9%
 
 
 
 

 
 
 
Market volatility (4)
 
4.9
%
18.8%
 
 
 
 

 
 
 
Nonperformance risk (2)
 
74

 
bps
 
 
 
 
 
 
 
Elective contractholder strategy allocations (5)
 
0.0
%
50.0%
 
 
(1) 
Represents the correlation between equity returns and interest rates used in the valuation of the derivative contract.
(2) 
The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.
(3) 
The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year.
(4) 
Market volatility is implied volatility of fund of funds and managed volatility funds.
(5) 
The elective allocation represents the percentage of contractholders that are assumed to electively switch their investment allocation to a different allocation model.
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to the Company.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.
Significant (decreases) increases in the correlation used in the fair value measurement of Level 3 derivatives in isolation would result in a significantly higher (lower) fair value measurement.
Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in utilization, surrender rate and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) asset value, possibly creating a liability. Significant increases (decreases) in nonperformance risk and elective investment allocation model used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) asset value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution system and whether the value of the guaranteed benefit exceeds the contract accumulation value.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. The Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Investments (Available-for-Sale Securities and Trading Securities)
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third party pricing services, non-binding broker quotes, or other model-based valuation techniques. Level 1 securities primarily include U.S. Treasuries. Level 2 securities primarily include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, asset backed securities, municipal bonds and U.S. agency and foreign government securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from third party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities. The fair value of corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as Level 3 is typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, the Company reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third party pricing services. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as foreign currency forwards, or derivatives that are exchange-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of the Company’s options. The fair value of certain derivatives measured using pricing models which include significant unobservable inputs are classified as Level 3 within the fair value hierarchy. Other derivative contracts consist of the Company’s macro hedge program. See Note 12 for further information on the macro hedge program. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at September 30, 2014 and December 31, 2013. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to contractholder behavior assumptions, implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivatives associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior are reviewed quarterly along with other valuation assumptions.
Customer Deposits
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its stock market certificates. The inputs to these calculations are primarily market observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as Level 2.
Other Liabilities
Derivatives that are measured using quoted prices in active markets, such as foreign currency forwards, or derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active OTC markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. Other derivative contracts consist of the Company’s macro hedge program. See Note 12 for further information on the macro hedge program. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at September 30, 2014 and December 31, 2013. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
Securities sold but not yet purchased include highly liquid investments which are short-term in nature. Securities sold but not yet purchased are measured using amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization and are classified as Level 2.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities Ameriprise Financial measured at fair value on a recurring basis.
 
September 30, 2014
 
Carrying Value
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Financial Assets
Mortgage loans, net
$
3,457

 
$

 
$

 
$
3,495

 
$
3,495

Policy and certificate loans
805

 

 
1

 
788

 
789

Receivables
1,357

 
174

 
1,176

 
6

 
1,356

Restricted and segregated cash
2,382

 
2,382

 

 

 
2,382

Other investments and assets
537

 

 
460

 
74

 
534

Financial Liabilities
Policyholder account balances, future policy benefits and claims
$
13,203

 
$

 
$

 
$
13,819

 
$
13,819

Investment certificate reserves
4,225

 

 

 
4,218

 
4,218

Brokerage customer deposits
3,290

 
3,290

 

 

 
3,290

Separate account liabilities
4,500

 

 
4,500

 

 
4,500

Debt and other liabilities
3,536

 
249

 
3,440

 
94

 
3,783

 
December 31, 2013
 
Carrying Value
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Financial Assets
Mortgage loans, net
$
3,510

 
$

 
$

 
$
3,490

 
$
3,490

Policy and certificate loans
774

 

 
1

 
765

 
766

Receivables
1,141

 
107

 
1,026

 
8

 
1,141

Restricted and segregated cash
2,360

 
2,360

 

 

 
2,360

Other investments and assets
440

 

 
368

 
73

 
441

Financial Liabilities
Policyholder account balances, future policy benefits and claims
$
14,106

 
$

 
$

 
$
14,724

 
$
14,724

Investment certificate reserves
3,977

 

 

 
3,982

 
3,982

Brokerage customer deposits
3,088

 
3,088

 

 

 
3,088

Separate account liabilities
4,007

 

 
4,007

 

 
4,007

Debt and other liabilities
3,416

 
137

 
3,372

 
134

 
3,643


Mortgage Loans, Net
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities, liquidity and characteristics including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for the Company’s estimate of the amount recoverable on the loan. Given the significant unobservable inputs to the valuation of commercial mortgage loans, these measurements are classified as Level 3.
The fair value of consumer loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity, liquidity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions. The fair value of consumer loans is classified as Level 3 as the valuation includes significant unobservable inputs.
Policy and Certificate Loans
Policy loans represent loans made against the cash surrender value of the underlying life insurance or annuity product. These loans and the related interest are usually realized at death of the policyholder or contractholder or at surrender of the contract and are not transferable without the underlying insurance or annuity contract. The fair value of policy loans is determined by estimating expected cash flows discounted at rates based on the U.S. Treasury curve. Policy loans are classified as Level 3 as the discount rate used may be adjusted for the underlying performance of individual policies.
Certificate loans represent loans made against and collateralized by the underlying certificate balance. These loans do not transfer to third parties separate from the underlying certificate. The outstanding balance of these loans is considered a reasonable estimate of fair value and is classified as Level 2.
Receivables
Brokerage margin loans are measured at outstanding balances, which are a reasonable estimate of fair value because of the sufficiency of the collateral and short term nature of these loans. Margin loans that are sufficiently collateralized are classified as Level 2. Margin loans that are not sufficiently collateralized are classified as Level 3.
Securities borrowed require the Company to deposit cash or collateral with the lender. As the market value of the securities borrowed is monitored daily, the carrying value is a reasonable estimate of fair value. The fair value of securities borrowed is classified as Level 1 as the value of the underlying securities is based on unadjusted prices for identical assets.
Restricted and Segregated Cash
Restricted and segregated cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value.
Amounts segregated under federal and other regulations may also reflect resale agreements and are measured at the price at which the securities will be sold. This measurement is a reasonable estimate of fair value because of the short time between entering into the transaction and its expected realization and the reduced risk of credit loss due to pledging U.S. government-backed securities as collateral.
The fair value of restricted and segregated cash is classified as Level 1.
Other Investments and Assets
Other investments and assets primarily consist of syndicated loans. The fair value of syndicated loans is obtained from a third party pricing service or non-binding broker quotes. Syndicated loans that are priced using a market approach with observable inputs are classified as Level 2 and syndicated loans priced using a single non-binding broker quote are classified as Level 3.
Other investments and assets also include the Company’s membership in the Federal Home Loan Bank of Des Moines and investments related to the Community Reinvestment Act. The fair value of these assets is approximated by the carrying value and classified as Level 3 due to restrictions on transfer and lack of liquidity in the primary market for these assets.
Policyholder Account Balances, Future Policy Benefits and Claims
The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a margin for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of non-life contingent fixed annuities in payout status, equity indexed annuity host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner. Given the use of significant unobservable inputs to these valuations, the measurements are classified as Level 3.
Investment Certificate Reserves
The fair value of investment certificate reserves is determined by discounting cash flows using discount rates that reflect current pricing for assets with similar terms and characteristics, with adjustments for early withdrawal behavior, penalty fees, expense margin and the Company’s nonperformance risk specific to these liabilities. Given the use of significant unobservable inputs to this valuation, the measurement is classified as Level 3.
Brokerage Customer Deposits
Brokerage customer deposits are liabilities with no defined maturities and fair value is the amount payable on demand at the reporting date. The fair value of these deposits is classified as Level 1.
Separate Account Liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. The NAV of the related separate account assets represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.
Debt and Other Liabilities
The fair value of long-term debt is based on quoted prices in active markets, when available. If quoted prices are not available, fair values are obtained from third party pricing services, broker quotes, or other model-based valuation techniques such as present value of cash flows. The fair value of long-term debt is classified as Level 2.
The fair value of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.
The fair value of future funding commitments to affordable housing partnerships is determined by discounting cash flows. The fair value of these commitments includes an adjustment for the Company’s nonperformance risk and is classified as Level 3 due to the use of the significant unobservable input.
Securities loaned require the borrower to deposit cash or collateral with the Company. As the market value of the securities loaned is monitored daily, the carrying value is a reasonable estimate of fair value. Securities loaned are classified as Level 1 as the fair value of the underlying securities is based on unadjusted prices for identical assets.