Ameriprise 2006 Annual Report Download - page 97

be preapproved. Additionally, the Company may, from time to time,
enter into master netting agreements wherever practical. As of
December 31, 2006 and 2005, the total net fair values, excluding
accruals, of derivative assets were $331 million and $215 million,
respectively, and derivative liabilities were $89 million and
$38 million, respectively. The net notional amount of derivatives
as of December 31, 2006 was $4.7 billion, consisting of
$5.9 billion purchased and $1.2 billion written.
Cash Flow Hedges
The Company uses interest rate derivative 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 inter-
est rate swaptions to hedge the risk of increasing interest
rates on forecasted fixed premium product sales.
The following is a summary of net unrealized derivatives gains
(losses) related to cash flow hedging activity, net of tax:
Years Ended December 31,
2006 2005 2004
(in millions)
Net unrealized derivatives gains (losses)
at January 1 $6 $ (28) $ (16)
Holding gains (losses), net of tax of
$2, $20 and $5, respectively (4) 36 (10)
Reclassification of realized (gains)
losses, net of tax of $2, $1 and $2,
respectively (3) (1) 3
Net realized derivatives losses related
to discontinued operations, net of tax
of nil, $1 and $3, respectively —(1) (5)
Net unrealized derivatives gains (losses)
at December 31 $ (1) $ 6 $ (28)
At December 31, 2006, the Company expects to reclassify
$7 million of net pretax gains on derivative instruments from
accumulated other comprehensive income (loss) to earnings
during the next 12 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
fluctuations will be reflected in earnings. There were no cash
flow hedges for which hedge accounting was terminated for
these reasons during 2006, 2005 or 2004. No hedge
relationships were discontinued during the years ended
December 31, 2006, 2005 and 2004 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
29 years and relates to forecasted debt interest payments. For
the years ended December 31, 2006 and 2005, there were
$4 million and $2 million, respectively, 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 year ended December 31, 2004,
there were no derivative transactions 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, 2006,
the net amount of losses related to the hedges included in
foreign currency translation adjustments was $64 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. The fair value
assets (liabilities) of these purchased and written derivatives was
as follows:
December 31,
2006 2005
Purchased Written Purchased Written
(in millions)
Equity indexed annuities $ 40 $ (1) $ 30 $ (1)
Stock market certificates 104 (56) 74 (38)
GMWB 170 — 95 —
Management fees 15 — 8—
Total(1) $ 329 $ (57) $ 207 $ (39)
(1) Exchange traded equity swaps and futures contracts are settled daily
by exchanging cash with the counterparty and gains and losses are
reported in earnings. Accordingly, there are no amounts on the
Consolidated Balance Sheets related to these contracts.
Certain annuity and investment certificate products have returns
tied to the performance of equity markets. As a result of fluctua-
tions in equity markets, the amount of expenses incurred by the
Company related to equity indexed annuities and stock market
certificate products will positively or negatively 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 conjunction with these products are
reported in other assets and written options are included in other
liabilities. Additionally, certain annuity products contain GMWB
provisions, which guarantee the right to make limited partial with-
drawals each contract year regardless of the volatility inherent in
the underlying 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
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Ameriprise Financial, Inc. 2006 Annual Report