Ameriprise 2005 Annual Report Download - page 92

90 |Ameriprise Financial, Inc.
Cash Flow Hedges
The Company uses interest rate products, primarily swaps and
swaptions, to manage funding costs related to the Company’s
debt, investment certificate and fixed annuity businesses. The
interest rate swaps are used to hedge the exposure to interest
rates on the forecasted interest payments associated with
debt issuances and on investment certificates which reset at
shorter intervals than the average maturity of the investment
portfolio. Additionally, the Company uses interest rate
swaptions to hedge the risk of increasing interest rates on
forecasted fixed annuity sales.
During 2005, 2004 and 2003, the Company recognized the
following impacts in other comprehensive income (loss)
related to its cash flow hedging activity, net of tax:
2005 2004 2003
(in millions)
Holding gains (losses), net of tax of
$20, $5, and $4, respectively $36 $(10) $(8)
Reclassification for realized (gains)
losses, net of tax of $1, $2, and $2,
respectively (1) 33
Net unrealized derivative gains (losses) $35 $ (7) $(5)
The change in other comprehensive income (loss) related to
discontinued operations was: ($1) million, ($5) million and ($2)
million for the years ended December 31, 2005, 2004 and
2003, respectively, net of tax of $1 million, $3 million and
$1 million, respectively.
At December 31, 2005, the Company expects to reclassify
$8 million of net pretax gains on derivative instruments from
accumulated other comprehensive income (loss) to earnings
during the next twelve months. In the event that cash flow
hedge accounting is no longer applied as the derivative is de-
designated as a hedge by the Company, the hedge is not
considered to be highly effective, or the forecasted transaction
being hedged is no longer likely to occur, the reclassification
from accumulated other comprehensive income (loss) into
earnings may be accelerated and all future market value fluctu-
ations will be reflected in earnings. There were no cash flow
hedges for which hedge accounting was terminated for these
reasons during 2005, 2004 or 2003. No hedge relationships
were discontinued during the years ended December 31, 2005,
2004 and 2003 due to forecasted transactions no longer
expected to occur according to the original hedge strategy.
Currently, the longest period of time over which the Company is
hedging exposure to the variability in future cash flows is
30 years and relates to forecasted debt interest payments. For
the year ended December 31, 2005, there were $2 million in
losses on derivative transactions or portions thereof that were
ineffective as hedges, excluded from the assessment of hedge
effectiveness or reclassified into earnings as a result of the
discontinuance of cash flow hedges. For the years ended
December 31, 2004 and 2003 there were no derivative trans-
actions or portions thereof that were ineffective as hedges.
Hedges of Net Investment in Foreign Operations
The Company designates foreign currency derivatives, primarily
forward agreements, as hedges of net investments in certain
foreign operations. For the year ended December 31, 2005,
the net amount of losses related to the hedges included in for-
eign currency translation adjustments was $46 million, net of
tax. The related amounts due to or from counterparties are
included in other liabilities or other assets.
Derivatives Not Designated as Hedges
The Company has economic hedges that either do not qualify
or are not designated for hedge accounting treatment.
Certain annuity and investment certificate products have
returns tied to the performance of equity markets. As a result
of fluctuations in equity markets, the amount of expenses
incurred by the Company related to equity-indexed annuities
and stock market certificate products will positively or nega-
tively impact earnings. As a means of economically hedging its
obligations under the provisions of these products, the
Company writes and purchases index options and occasionally
enters into futures contracts. Purchased options used in con-
junction with these products are reported in other assets and
written options are included in other liabilities. Additionally, cer-
tain annuity products contain GMWB provisions, which
guarantee the right to make limited partial withdrawals each
contract year regardless of the volatility inherent in the underly-
ing investments. The GMWB provision is considered an
embedded derivative and is valued each period by estimating
the present value of future benefits less applicable fees
charged for the rider using actuarial models, which simulate
various economic scenarios. The Company economically
hedges the exposure related to the GMWB provision using vari-
ous equity futures and structured derivatives. As of
December 31, 2005 and 2004, the fair value of the purchased
derivatives used in conjunction with these products was $207
million and $144 million, respectively. As of December 31,
2005 and 2004, the fair value of the written options was $39
million and $74 million, respectively. Futures contracts are set-
tled daily by exchanging cash with the counterparty and gains
and losses are reported in earnings.
The Company enters into financial futures and equity swaps to
manage its exposure to price risk arising from seed money
investments made in proprietary mutual funds for which the
related gains and losses are recorded currently in earnings.
The futures contracts generally mature within four months and
the related gains and losses are reported currently in earn-
ings. As of December 31, 2005 and 2004, the fair value of the
financial futures and equity swaps was not significant.
The Company uses interest rate caps, swaps and floors to pro-
tect the margin between the interest rates earned on
investments and interest rates credited to holders of certain
investment certificates and fixed annuities. Balances as of
December 31, 2005 and 2004 were not material.