Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivatives and Hedging Activities

Derivatives and Hedging Activities

11.  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.

Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheet is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. The following table presents the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral:

	March 31, 2012						December 31, 2011
	Net Derivative			Net Derivative			Net Derivative			Net Derivative
	Assets			Liabilities			Assets			Liabilities
	(in millions)
Fair value of OTC derivatives after application of master netting agreements	$	389		$	515		$	1,025		$	142
Cash collateral on OTC derivatives	(260		)	(31		)	(767		)	(34		)
Fair value of OTC derivatives after application of master netting agreements and cash collateral	129			484			258			108
Securities collateral on OTC derivatives	(106		)	(455		)	(186		)	(95		)
Fair value of OTC derivatives after application of master netting agreements and cash and securities collateral	23			29			72			13
Fair value of exchange-traded derivatives	139			—			155			—
Total fair value of derivatives after application of master netting agreements and cash and securities collateral	$	162		$	29		$	227		$	13

In April 2012, the Financial Stability Oversight Council (“FSOC”) approved the final rule and interpretive guidance that provides the framework it will follow to determine if a nonbank financial company is a Systemically Important Financial Institution (“SIFI”). The framework includes a three stage process to help narrow down the pool of nonbank financial companies for review and possible designation. Stage 1 criteria include having at least $50 billion in assets and meeting one of five additional quantitative measures. One of the five thresholds is $3.5 billion of derivative liabilities after considering the effects of master netting arrangements and cash collateral held with the same counterparty. The following table presents the Company’s derivative liabilities as defined by the rule:

	March 31, 2012		December 31, 2011
	(in millions)
Fair value of OTC derivative liabilities after application of master netting agreements and cash collateral	$	484	$	108
Fair value of embedded derivative liabilities	861		1,596
Fair value of CIE derivative liabilities	19		20
Fair value of derivative liabilities after application of master netting agreements and cash collateral	$	1,364	$	1,724

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 as	Balance Sheet	March 31,		December 31,		Balance Sheet	March 31,		December 31,
hedging instruments	Location	2012		2011		Location	2012		2011
		(in millions)					(in millions)
Cash flow hedges
Interest on debt	Other assets	$	—	$	—	Other liabilities	$	—	$	11
Fair value hedges
Fixed rate debt	Other assets	148		157		Other liabilities	—		—
Total qualifying hedges		148		157			—		11
Derivatives not designated as
hedging instruments
GMWB and GMAB
Interest rate contracts	Other assets	1,452		1,801		Other liabilities	1,097		1,198
Equity contracts	Other assets	1,094		1,314		Other liabilities	1,601		1,031
Credit contracts	Other assets	—		1		Other liabilities	1		—
Foreign currency contracts	Other assets	6		7		Other liabilities	4		10
Embedded derivatives (1)	N/A	—		—		Future policy benefits and claims	840		1,585
Total GMWB and GMAB		2,552		3,123			3,543		3,824
Other derivatives:
Equity
EIA embedded derivatives	N/A	—		—		Future policy benefits and claims	2		2
IUL	Other assets	2		1		Other liabilities	1		—
IUL embedded derivatives	N/A	—		—		Future policy benefits and claims	9		3
Stock market certificates	Other assets	72		34		Other liabilities	63		29
Stock market certificates embedded derivatives	N/A	—		—		Customer deposits	10		6
Ameriprise Financial Franchise Advisor Deferred Compensation Plan	Other assets	4		2		Other liabilities	—		—
Seed money	Other assets	—		—		Other liabilities	—		1
Foreign exchange
Foreign currency	Other assets	1		—		Other liabilities	2		3
Commodity
Seed money	Other assets	1		2		Other liabilities	—		—
Total other		80		39			87		44
Total non-designated hedges		2,632		3,162			3,630		3,868
Total derivatives		$	2,780	$	3,319		$	3,630	$	3,879

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 10 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 three months ended March 31:

		Amount of Gain (Loss) on
Derivatives not designated as	Location of Gain (Loss) on	Derivatives Recognized in Income
hedging instruments	Derivatives Recognized in Income	2012			2011
		(in millions)
GMWB and GMAB
Interest rate contracts	Benefits, claims, losses and settlement expenses	$	(225	)	$	(25	)
Equity contracts	Benefits, claims, losses and settlement expenses	(695		)	(255		)
Credit contracts	Benefits, claims, losses and settlement expenses	(3		)	(2		)
Foreign currency contracts	Benefits, claims, losses and settlement expenses	4			(2		)
Embedded derivatives(1)	Benefits, claims, losses and settlement expenses	745			230
Total GMWB and GMAB		(174		)	(54		)
Other derivatives:
Interest rate
Interest rate lock commitments	Other revenues	—			(1		)
Equity
EIA	Interest credited to fixed accounts	1			1
Stock market certificates	Banking and deposit interest expense	5			3
Stock market certificates embedded derivatives	Banking and deposit interest expense	4			(3		)
Seed money	Net investment income	(5		)	(3		)
Ameriprise Financial Franchise Advisor Deferred Compensation Plan	Distribution expenses	3			2
Foreign exchange
Foreign currency	Net investment income	1			—
Total other		9			(1		)
Total derivatives		$	(165	)	$	(55	)

(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, variance swaps and credit default swaps. At March 31, 2012 and December 31, 2011, the gross notional amount of derivative contracts for the Company’s GMWB and GMAB provisions was $117.6 billion and $104.7 billion, respectively.

The deferred premium associated with certain 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(1)	$	295	$	32
2013	357		26
2014	332		24
2015	304		22
2016	273		15
2017-2026	972		35

(1) 2012 amounts represent the amounts payable and receivable for the period from April 1, 2012 to December 31, 2012.

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 at both March 31, 2012 and December 31, 2011.

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 $117 million and $123 million at March 31, 2012 and December 31, 2011, 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 at both March 31, 2012 and December 31, 2011.

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 $20 million and $17 million at March 31, 2012 and December 31, 2011, 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 first quarter of 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. No other hedge relationships were discontinued during the three months ended March 31, 2011 due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the three months ended March 31, 2012 and 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 March 31, 2012 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 three months ended March 31:

	Amount of Gain Recognized in Other
	Comprehensive Income on Derivatives
Derivatives designated as hedging instruments	2012			2011
	(in millions)
Interest on debt	$	14		$	—
Asset-based distribution fees	—			1
Total	$	14		$	1
	Amount of Gain (Loss) Reclassified from Accumulated
Location of Gain (Loss) Reclassified from Accumulated	Other Comprehensive Income into Income
Other Comprehensive Income into Income	2012			2011
	(in millions)
Other revenues	$	3		$	—
Interest and debt expense	1			1
Distribution fees	—			5
Net investment income	(2		)	(1		)
Total	$	2		$	5

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 three months ended March 31:

		Amount of Gain Recognized in Income on Derivatives
Derivatives designated as hedging instruments	Location of Gain Recorded into Income	2012		2011
		(in millions)
Fixed rate debt	Interest and debt expense	$	9	$	10

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 March 31, 2012 and December 31, 2011, the Company held $272 million and $802 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 March 31, 2012 and December 31, 2011, the Company had accepted additional collateral consisting of various securities with a fair value of $121 million and $186 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011, the Company’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $23 million and $72 million, respectively.

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 March 31, 2012 and December 31, 2011, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $300 million and $112 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of March 31, 2012 and December 31, 2011 was $272 million and $103 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position at March 31, 2012 and December 31, 2011 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 $28 million and $9 million, respectively.