Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivatives and Hedging Activities

Derivatives and Hedging Activities

15. 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 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:

		Asset					Liability
		December 31,					December 31,
Derivatives designated as hedging instruments	Balance Sheet Location					Balance Sheet Location
		2011		2010			2011		2010
		(in millions)					(in millions)
Cash flow hedges
Asset-based distribution fees	Other assets	$	—	$	10	Other liabilities	$	—	$	—
Interest on debt	Other assets		—		—	Other liabilities		11		—
Fair value hedges
Fixed rate debt	Other assets		157		61	Other liabilities		—		—
Total qualifying hedges			157		71			11		—
Derivatives not designated as hedging instruments
GMWB and GMAB
Interest rate contracts	Other assets		1,801		366	Other liabilities		1,198		379
Equity contracts	Other assets		1,314		354	Other liabilities		1,031		665
Credit contracts	Other assets		1		4	Other liabilities		—		1
Foreign currency contracts	Other assets		7		—	Other liabilities		10		—
Embedded derivatives(1)	N/A		—		—	Future policy benefits and claims		1,585		421
Total GMWB and GMAB			3,123		724			3,824		1,466
Other derivatives:
Interest rate
Interest rate lock commitments	Other assets		—		1	Other liabilities		—		—
Equity
EIA	Other assets		—		1	Other liabilities		—		—
EIA embedded derivatives	N/A		—		—	Future policy benefits and claims		2		3
IUL	Other assets		1		—	Other liabilities		—		—
IUL embedded derivatives	N/A		—		—	Future policy benefits and claims		3		—
Stock market certificates	Other assets		34		89	Other liabilities		29		75
Stock market certificates embedded derivatives	N/A		—		—	Customer deposits		6		14
Ameriprise Financial
Franchise Advisor Deferred
Compensation Plan	Other assets		2		8	Other liabilities		—		—
Seed money	Other assets		—		—	Other liabilities		1		—
Foreign exchange
Foreign currency	Other assets		—		1	Other liabilities		3		1
Commodity
Seed money	Other assets		2		—	Other liabilities		—		—
Total other			39		100			44		93
Total non-designated hedges			3,162		824			3,868		1,559
Total derivatives		$	3,319	$	895		$	3,879	$	1,559

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.

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 for the years ended December 31:

		Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives not designated as hedging instruments	Location of Gain (Loss) on Derivatives Recognized in Income
		2011			2010			2009
		(in millions)
GMWB and GMAB
Interest rate contracts	Benefits, claims, losses and settlement expenses	$	709		$	95		$	(435	)
Equity contracts	Benefits, claims, losses and settlement expenses		326			(370	)		(1,245	)
Credit contracts	Benefits, claims, losses and settlement expenses		(12	)		(44	)		(65	)
Foreign currency contracts	Benefits, claims, losses and settlement expenses		(2	)		—			—
Embedded derivatives(1)	Benefits, claims, losses and settlement expenses		(1,165	)		(121	)		1,533
Total GMWB and GMAB			(144	)		(440	)		(212	)
Other derivatives:
Interest rate
Interest rate lock commitments	Other revenues		(1	)		—			—
Equity
GMDB	Benefits, claims, losses and settlement expenses		—			(4	)		(10	)
EIA	Interest credited to fixed accounts		(1	)		2			4
EIA embedded derivatives	Interest credited to fixed accounts		1			7			7
IUL	Interest credited to fixed accounts		1			—			—
IUL embedded derivatives	Interest credited to fixed accounts		(3	)		—			—
Stock market certificates	Banking and deposit interest expense		1			9			15
Stock market certificates embedded derivatives	Banking and deposit interest expense		—			(10	)		(18	)
Seed money	Net investment income		4			(5	)		(14	)
Ameriprise Financial
Franchise Advisor Deferred
Compensation Plan	Distribution expenses		(4	)		9			—
Foreign exchange
Seed money	General and administrative expense		(1	)		1			—
Foreign currency	Net investment income		(3	)		(1	)		—
Commodity
Seed money	Net investment income		1			—			—
Total other			(5	)		8			(16	)
Total derivatives		$	(149	)	$	(432	)	$	(228	)

(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.

The majority of the Company's annuity contracts contain GMDB provisions, which may result in a death benefit payable that exceeds the contract accumulation value when market values of customers' accounts decline. 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, variance swaps and credit default swaps. At December 31, 2011 and 2010, the gross notional amount of derivative contracts for the Company's GMWB and GMAB provisions was $104.7 billion and $55.5 billion, respectively. The Company had previously entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written in 2009. As of both December 31, 2011 and 2010, the Company did not have any outstanding hedges on its GMDB provisions.

The deferred premium associated with some of the above options is paid or received semi-annually over the life of the option contract. 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)
2012	$	372	$	41
2013		349		26
2014		324		24
2015		296		22
2016		265		15
2017-2026		925		34

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.

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 $1.3 billion and $1.5 billion at December 31, 2011 and 2010, respectively.

The Company enters into forward contracts, futures, total return swaps 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 $123 million and $174 million at December 31, 2011 and 2010, 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 $26 million and $21 million at December 31, 2011 and 2010, respectively.

In 2010, the Company entered into a total return swap to economically hedge its exposure to equity price risk of Ameriprise Financial, Inc. common stock granted as part of its Ameriprise Financial Franchise Advisor Deferred Compensation Plan ("Franchise Advisor Deferral Plan"). In the fourth quarter of 2011, the Company extended the contract through 2012. As part of the contract, the Company expects to cash settle the difference between the value of a fixed number of shares at the contract date (which may be increased from time to time) and the value of those shares over an unwind period ending on December 31, 2012. The gross notional value of this contract was $17 million and $35 million at December 31, 2011 and 2010, 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 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. The Company previously designated and accounted for as cash flow hedges interest rate swaps to hedge certain asset-based distribution fees.

During the second quarter of 2011, the Company reclassified from accumulated other comprehensive income into earnings a $27 million gain on an interest rate hedge put in place in anticipation of issuing debt between December 2010 and September 2011. The gain was reclassified due to the forecasted transaction not occurring according to the original hedge strategy. For the years ended December 31, 2011, 2010 and 2009, amounts recognized in earnings related to cash flow hedges due to ineffectiveness were not material. The estimated net amount of existing pretax losses on December 31, 2011 that the Company expects to reclassify to earnings within the next twelve months is $2 million, which consists of $4 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 for the years ended December 31:

	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
Derivatives designated as hedging instruments	2011			2010		2009
	(in millions)
Interest on debt	$	(11	)	$	16	$	19
Asset-based distribution fees		1			20		—
Total	$	(10	)	$	36	$	19

	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	2011			2010			2009
	(in millions)
Other revenues	$	27		$	—		$	—
Interest and debt expense		4			8			8
Distribution fees		9			11			—
Net investment income		(6	)		(6	)		(6	)
Total	$	34		$	13		$	2

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

	2011			2010			2009
	(in millions)
Net unrealized derivatives gains (losses) at January 1	$	18		$	3		$	(8	)
Holding gains (losses)		(10	)		36			19
Reclassification of realized gains		(34	)		(13	)		(2	)
Income tax benefit (provision)		15			(8	)		(6	)
Net unrealized derivatives gains (losses) at December 31	$	(11	)	$	18		$	3

Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 24 years and relates to forecasted debt interest payments.

Fair Value Hedges

During the first quarter of 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 for the years ended December 31:

		Amount of Gain Recognized in Income on Derivatives
Derivatives designated as hedging instruments	Location of Gain Recorded into Income
		2011		2010
		(in millions)
Fixed rate debt	Interest and debt expense	$	41	$	36

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. As of December 31, 2011 and 2010, the Company held $802 million and $98 million, respectively, in cash and cash equivalents and recorded a corresponding liability in other liabilities for collateral the Company is obligated to return to counterparties. As of December 31, 2011 and 2010, the Company had accepted additional collateral consisting of various securities with a fair value of $186 million and $23 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of December 31, 2011 and 2010, the Company's maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $72 million and $45 million, respectively.

Certain of the Company's derivative instruments 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, 2011 and 2010, the aggregate fair value of all derivative instruments in a net liability position containing such credit risk features was $112 million and $412 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 2011 and 2010 was $103 million and $406 million, respectively. If the credit risk features of derivative contracts that were in a net liability position at December 31, 2011 and 2010 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $9 million and $6 million, respectively.