Ameriprise 2009 Annual Report Download - page 157

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 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 considerations 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 using various equity futures, equity options, total return swaps, interest rate swaptions and interest rate swaps. In the
third quarter of 2009, the Company entered into a limited number of derivative contracts to economically hedge equity exposure related
to GMDB provisions on variable annuity contracts written previously in 2009. At December 31, 2009, the gross notional amount of these
contracts was $38.7 billion and $77 million for the Company’s GMWB and GMAB provisions and GMDB provisions, respectively. The
premium associated with certain 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)
2010 $ 189 $ 5
2011 181 4
2012 160 3
2013 143 2
2014 118 1
2015-2024 410 4
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 occasionally enters into futures contracts. The gross
notional amount of these derivative contracts was $1.6 billion at December 31, 2009.
The Company enters into forward contracts, futures and total return swaps to manage its exposure to price risk arising from seed money
investments made in proprietary mutual funds. The gross notional amount of these contracts was $191 million at December 31, 2009.
The Company enters into foreign currency forward contracts to hedge its exposure to certain receivables and obligations denominated in
non-functional currencies. The gross notional amount of these contracts was $7 million at December 31, 2009.
Embedded Derivatives
Certain annuities contain non-life contingent GMWB and GMAB provisions, which are considered embedded derivatives. In addition, the
equity component of the equity indexed annuity and stock market investment certificate product obligations are also considered
embedded derivatives. As captured in the tables above, 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 noted 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 future debt issuances and (iii) swaptions used to hedge the risk
of increasing interest rates on forecasted fixed premium product sales. The Company records amounts in accumulated other
comprehensive income (loss) related to gains and losses associated with the effective portion of designated cash flow hedges. The
Company reclassifies these amounts into income as the forecasted transactions impact earnings.
142 ANNUAL REPORT 2009