Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivatives and Hedging Activities

Derivatives and Hedging Activities

12.  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
Derivatives designated	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
as hedging instruments	Location	2011		2010		Location	2011		2010
		(in millions)					(in millions)
Cash flow hedges
Asset-based distribution fees	Other assets	$	—	$	10	Other liabilities	$	—	$	—
Fair value hedges
Fixed rate debt	Other assets	82		61		Other liabilities	—		—
Total qualifying hedges		82		71			—		—
Derivatives not designated as hedging instruments
GMWB and GMAB
Interest rate contracts	Other assets	464		366		Other liabilities	451		379
Equity contracts	Other assets	342		354		Other liabilities	780		665
Credit contracts	Other assets	1		4		Other liabilities	1		1
Foreign currency contracts	Other assets	2		—		Other liabilities	2		—
Embedded derivatives(1)	N/A	—		—		Future policy benefits and claims	316		421
Total GMWB and GMAB		809		724			1,550		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
Stock market certificates	Other assets	71		89		Other liabilities	61		75
Stock market certificates embedded derivatives	N/A	—		—		Customer deposits	10		14
Ameriprise Financial Franchise Advisor Deferred Equity Plan	Other assets	8		8		Other liabilities	—		—
Foreign exchange
Foreign currency	Other assets	1		1		Other liabilities	—		1
Total other		80		100			73		93
Total non-designated hedges		889		824			1,623		1,559
Total derivatives		$	971	$	895		$	1,623	$	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 11 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:

		Amount of Gain (Loss) on
		Derivatives Recognized in Income
		Three Months Ended						Six Months Ended
Derivatives not designated as	Location of Gain (Loss) on	June 30,						June 30,
hedging instruments	Derivatives Recognized in Income	2011			2010			2011			2010
		(in millions)
GMWB and GMAB
Interest rate contracts	Benefits, claims, losses and settlement expenses	$	87		$	185		$	62		$	211
Equity contracts	Benefits, claims, losses and settlement expenses	5			747			(250		)	574
Credit contracts	Benefits, claims, losses and settlement expenses	(5		)	(20		)	(7		)	(30		)
Foreign currency contracts	Benefits, claims, losses and settlement expenses	(4		)	—			(6		)	—
Embedded derivatives(1)	Benefits, claims, losses and settlement expenses	(125		)	(890		)	105			(784		)
Total GMWB and GMAB		(42		)	22			(96		)	(29		)
Other derivatives:
Interest rate
Interest rate lock commitments	Other revenues	—			—			(1		)	—
Equity
GMDB	Benefits, claims, losses and settlement expenses	—			8			—			5
EIA	Interest credited to fixed accounts	(1		)	(1		)	—			—
EIA embedded derivatives	Interest credited to fixed accounts	1			4			1			6
Stock market certificates	Banking and deposit interest expense	—			(5		)	3			(2		)
Stock market certificates embedded derivatives	Banking and deposit interest expense	1			5			(2		)	2
Seed money	Net investment income	—			5			(3		)	3
Ameriprise Financial Franchise Advisor Deferred Equity Plan	Distribution expenses	(2		)	—			—			—
Foreign exchange
Seed money	General and administrative expense	—			(1		)	—			1
Foreign currency	Net investment income	1			—			1			—
Total other		—			15			(1		)	15
Total derivatives		$	(42	)	$	37		$	(97	)	$	(14	)

(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, total return swaps, interest rate swaptions, interest rate swaps, variance swaps and credit default swaps. At June 30, 2011 and December 31, 2010, the gross notional amount of derivative contracts for the Company’s GMWB and GMAB provisions was $67.9 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 June 30, 2011 and December 31, 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)
2011(1)	$	151	$	21
2012	285		40
2013	262		25
2014	236		22
2015	212		21
2016-2026	813		38

(1) 2011 amounts represent the amounts payable and receivable for the period from July 1, 2011 to December 31, 2011.

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.

Equity indexed annuities 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 equity indexed annuities 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 $1.4 billion and $1.5 billion at June 30, 2011 and December 31, 2010, respectively.

The Company enters into forward contracts, futures and total return 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 $152 million and $174 million at June 30, 2011 and December 31, 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 $24 million and $21 million at June 30, 2011 and December 31, 2010, respectively.

In the first quarter of 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 Equity Plan. In the fourth quarter of 2010, the Company extended the contract through 2011. 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, 2011. The gross notional value of this contract was $35 million at both June 30, 2011 and December 31, 2010.

Embedded Derivatives

Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the equity indexed annuity 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 June 2011.  The gain was reclassified due to the forecasted transaction not occurring according to the original hedge strategy. For the three months and six months ended June 30, 2011, amounts recognized in earnings related to cash flow hedges due to ineffectiveness were not material. The estimated net amount of existing pretax losses on June 30, 2011 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 on Derivatives
	Three Months Ended June 30,				Six Months Ended June 30,
Derivatives designated as hedging instruments	2011		2010		2011		2010
	(in millions)
Interest on debt	$	—	$	—	$	—	$	(10	)
Asset-based distribution fees	—		9		1		9
Total	$	—	$	9	$	1	$	(1	)

	Amount of Gain (Loss) Reclassified from Accumulated
	Other Comprehensive Income into Income
Location of Gain (Loss) Reclassified from Accumulated	Three Months Ended June 30,						Six Months Ended June 30,
Other Comprehensive Income into Income	2011			2010			2011			2010
	(in millions)
Other revenues	$	27		$	—		$	27		$	—
Interest and debt expense	1			2			2			4
Distribution fees	4			—			9			—
Net investment income	(2		)	(1		)	(3		)	(3		)
Total	$	30		$	1		$	35		$	1

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:

		Amount of Gain Recognized in Income on Derivatives
Derivatives designated	Location of Gain	Three Months Ended June 30,				Six Months Ended June 30,
as hedging instruments	Recorded into Income	2011		2010		2011		2010
		(in millions)				(in millions)
Fixed rate debt	Interest and debt expense	$	10	$	—	$	20	$	6
Total		$	10	$	—	$	20	$	6

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 June 30, 2011 and December 31, 2010, the Company held $105 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 June 30, 2011 and December 31, 2010, the Company had accepted additional collateral consisting of various securities with a fair value of $3 million and $23 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of June 30, 2011 and December 31, 2010, the Company’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $14 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 June 30, 2011 and December 31, 2010, the aggregate fair value of all derivative instruments in a net liability position containing such credit risk features was $384 million and $412 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of June 30, 2011 and December 31, 2010 was $361 million and $406 million, respectively. If the credit risk features of derivative contracts that were in a net liability position at June 30, 2011 and December 31, 2010 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $23 million and $6 million, respectively.