UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

For the Transition Period from                      to                      

Commission File No. 1-32525

AMERIPRISE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code

(612) 671-3131

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx    Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x        Accelerated Filer o        Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso    Nox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at July 27, 2007
Common Stock (par value $.01 per share)		235,284,642 shares

 

AMERIPRISE FINANCIAL, INC.

FORM 10-Q

INDEX

Part I.	Financial Information:
	Item 1.	Financial Statements
		Consolidated Statements of Income – Three months and six months ended June 30, 2007 and 2006	3
		Consolidated Balance Sheets – June 30, 2007 and December 31, 2006	4
		Consolidated Statements of Cash Flows – Six months ended June 30, 2007 and 2006	5
		Consolidated Statements of Shareholders’ Equity – Six months ended June 30, 2007 and 2006	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4.	Controls and Procedures	39
PART II.	Other Information:
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 4.	Submission of Matters to a Vote of Security Holders	41
	Item 6.	Exhibits	41
	Signatures		42
	Exhibit Index		E-1

 

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share amounts)

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Revenues
Management, financial advice and service fees		$	863		$	721		$	1,654		$	1,431
Distribution fees		415			325			759			626
Net investment income		485			522			1,003			1,096
Premiums		243			229			479			449
Other revenues		176			256			350			400
Total revenues		2,182			2,053			4,245			4,002
Expenses
Compensation and benefits		905			766			1,747			1,505
Interest credited to account values		303			307			590			631
Benefits, claims, losses and settlement expenses		230			225			449			452
Amortization of deferred acquisition costs		125			153			259			281
Interest and debt expense		32			28			64			51
Separation costs		63			84			148			151
Other expenses		279			304			527			554
Total expenses		1,937			1,867			3,784			3,625
Income before income tax provision		245			186			461			377
Income tax provision		49			45			100			91
Net income		$	196		$	141		$	361		$	286
Earnings per Common Share:
Basic		$	0.83		$	0.57		$	1.51		$	1.15
Diluted		0.81			0.57			1.49			1.14
Weighted average common shares outstanding:
Basic		237.4			246.3			239.0			249.3
Diluted		241.0			248.0			242.6			250.8
Cash dividends declared per common share		$	0.15		$	0.11		$	0.30		$	0.22

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

		June 30, 2007			December 31, 2006
		(unaudited)
Assets
Cash and cash equivalents		$	3,303		$	2,717
Investments		31,704			35,553
Separate account assets		60,470			53,848
Receivables		3,207			2,960
Deferred acquisition costs		4,462			4,499
Restricted and segregated cash		1,277			1,236
Other assets		3,709			3,359
Total assets		$	108,132		$	104,172
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits and claims		$	28,318		$	30,033
Separate account liabilities		60,470			53,848
Customer deposits		6,055			6,707
Debt		2,197			2,225
Accounts payable and accrued expenses		1,850			1,788
Other liabilities		1,642			1,646
Total liabilities		100,532			96,247
Shareholders’ Equity:
Common shares ($.01 par value; shares authorized,1,250,000,000; shares issued, 255,563,468 and 252,909,389, respectively)		3			3
Additional paid-in capital		4,533			4,353
Retained earnings		4,428			4,268
Treasury shares, at cost (20,270,752 and 11,517,958 shares, respectively)		(1,009		)	(490		)
Accumulated other comprehensive loss, net of tax:
Net unrealized securities losses		(333		)	(187		)
Net unrealized derivatives losses		(4		)	(1		)
Foreign currency translation adjustment		(15		)	(18		)
Defined benefit plans		(3		)	(3		)
Total accumulated other comprehensive loss		(355		)	(209		)
Total shareholders’ equity		7,600			7,925
Total liabilities and shareholders’ equity		$	108,132		$	104,172

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

		Six Months Ended June 30,
		2007			2006
Cash Flows from Operating Activities
Net income		$	361		$	286
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Capitalization of deferred acquisition and sales inducement costs		(465		)	(428		)
Amortization of deferred acquisition and sales inducement costs		289			304
Depreciation and amortization		85			97
Deferred income taxes		(19		)	(36		)
Share-based compensation		75			56
Net realized investment gains		(13		)	(10		)
Other-than-temporary impairments and provision for loan losses		2			1
Premium and discount amortization on Available-for-Sale and other securities		58			63
Changes in operating assets and liabilities:
Segregated cash		3			154
Trading securities and equity method investments in hedge funds, net		(72		)	27
Future policy benefits and claims, net		(122		)	35
Receivables		(237		)	(268		)
Accounts payable and accrued expenses		57			414
Other, net		(14		)	(159		)
Net cash (used in) provided by operating activities		(12		)	536
Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales		2,659			1,185
Maturities, sinking fund payments and calls		1,446			1,696
Purchases		(636		)	(1,770		)
Open securities transactions payable and receivable, net		(30		)	35
Proceeds from sales and maturities of commercial mortgage loans on real estate		284			241
Funding of commercial mortgage loans on real estate		(192		)	(183		)
Proceeds from sales of other investments		92			71
Purchase of other investments		(45		)	(101		)
Purchase of land, buildings, equipment and software		(155		)	(68		)
Proceeds from sale of land, buildings, equipment and other		8			66
Change in restricted cash		(50		)	1
Other, net		(11		)	(3		)
Net cash provided by investing activities		3,370			1,170

 

See Notes to Consolidated Financial Statements.

5

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(in millions)

		Six Months Ended June 30,
		2007			2006
Cash Flows from Financing Activities
Investment certificates and banking time deposits:
Proceeds from additions		466			849
Interest credited to account values		106			97
Maturities, withdrawals and cash surrenders		(1,130		)	(1,731		)
Change in other customer deposits		(94		)	(152		)
Policyholder and contractholder account values:
Consideration received		491			652
Interest credited to account values		484			534
Surrenders and other benefits		(2,526		)	(2,398		)
Proceeds from issuance of debt, net of issuance costs		—			516
Principal repayments of debt		(28		)	(83		)
Dividends paid to shareholders		(63		)	(55		)
Repurchase of common shares		(519		)	(332		)
Exercise of stock options		27			10
Excess tax benefits from share-based compensation		22			16
Policy loans:
Repayments		56			48
Issuances		(74		)	(63		)
Other, net		2			—
Net cash used in financing activities		(2,780		)	(2,092		)
Effect of exchange rate changes on cash		8			13
Net increase (decrease) in cash and cash equivalents		586			(373		)
Cash and cash equivalents at beginning of period		2,717			2,474
Cash and cash equivalents at end of period		$	3,303		$	2,101
Supplemental Disclosures:
Interest paid		$	67		$	52
Income taxes paid		$	76		$	137

 

See Notes to Consolidated Financial Statements.

6

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(in millions, except share amounts)

		Number of Outstanding Shares		Common Shares			Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Loss			Total
Balances at December 31, 2005		249,875,554		$	2		$	4,091		$	3,745		$	—		$	(151	)	$	7,687
Other comprehensive loss:
Net income		—		—			—			286			—			—			286
Change in net unrealized securities losses		—		—			—			—			—			(518		)	(518		)
Foreign currency translation adjustment		—		—			—			—			—			3			3
Total other comprehensive loss		—		—			—			—			—			—			(229		)
Dividends paid to shareholders		—		—			—			(55		)	—			—			(55		)
Treasury shares		(7,904,299	)	—			—			—			(332		)	—			(332		)
Share-based compensation plans		2,104,267		1			163			—			—			—			164
Balances at June 30, 2006		244,075,522		$	3		$	4,254		$	3,976		$	(332	)	$	(666	)	$	7,235
Balances at December 31, 2006		241,391,431		$	3		$	4,353		$	4,268		$	(490	)	$	(209	)	$	7,925
Change in accounting principles		—		—			—			(138		)	—			—			(138		)
Other comprehensive income:
Net income		—		—			—			361			—			—			361
Change in net unrealized securities losses		—		—			—			—			—			(146		)	(146		)
Change in net unrealized derivatives losses		—		—			—			—			—			(3		)	(3		)
Foreign currency translation adjustment		—		—			—			—			—			3			3
Total other comprehensive income		—		—			—			—			—			—			215
Dividends paid to shareholders		—		—			—			(63		)	—			—			(63		)
Treasury shares		(8,752,794	)	—			—			—			(519		)	—			(519		)
Share-based compensation plans		2,654,079		—			129			—			—			—			129
Other, net		—		—			51			—			—			—			51
Balances at June 30, 2007		235,292,716		$	3		$	4,533		$	4,428		$	(1,009	)	$	(355	)	$	7,600

 

See Notes to Consolidated Financial Statements.

7

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of Ameriprise Financial, Inc. (“Ameriprise Financial”), companies in which it directly or indirectly has a controlling financial interest, variable interest entities in which it is the primary beneficiary and certain limited partnerships for which it is the general partner (collectively, the “Company”). All material intercompany transactions and balances between or among Ameriprise Financial and its subsidiaries and affiliates have been eliminated in consolidation. Ameriprise Financial is a holding company, which primarily conducts business through its subsidiaries to provide financial planning, products and services that are designed to offer solutions for clients’ asset accumulation, income management and insurance protection needs. The Company’s foreign operations in the United Kingdom are conducted through its subsidiary, Threadneedle Asset Management Holdings Limited (“Threadneedle”).

The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain reclassifications of prior period amounts have been made to conform to the current presentation. The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes which are incorporated by reference in the Annual Report on Form 10-K of Ameriprise Financial, Inc. for the year ended December 31, 2006, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2007.

2.   Recent Accounting Pronouncements

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide ‘Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance to determine when an entity may apply the provisions of the Audit and Accounting Guide “Investment Companies” (the “Guide”), which requires investment companies to report investments at fair value. SOP 07-1 also addresses whether specialized industry accounting principles should be retained by a parent company in consolidation or by an equity method investor. SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007 with early adoption encouraged. In May 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FASB Interpretation No. (“FIN”) 46(R)-7, “Application of FIN 46(R) to Investment Companies” (“FSP 46(R)-7”). FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities,” allowed for an indefinite deferral of the application of its provisions to unregistered investment companies that account for their investments in accordance with the Guide. FSP 46(R)-7 makes permanent this provision for entities that meet the definition of an investment company under SOP 07-1. FSP 46(R)-7 is effective upon adoption of SOP 07-1. The Company is currently evaluating the impact of adopting SOP 07-1 and FSP 46(R)-7 on its consolidated results of operations and financial condition.

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 requires entities to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating whether or not it will elect to adopt SFAS 159 for certain assets and liabilities.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). As of December 31, 2006, the Company adopted the recognition provisions of SFAS 158, which require an entity to recognize the overfunded or underfunded status of an employer’s defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The Company’s adoption of this provision did not have a material effect on the consolidated results of operations and financial condition. Effective for fiscal years ending after December 15, 2008, SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position. As of December 31, 2008, the Company will adopt the measurement provisions of SFAS 158, which the Company does not believe will have a material effect on its consolidated results of operations and financial condition.

8

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

2.   Recent Accounting Pronouncements (continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS 157 are required to be applied prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except for certain financial instruments as defined in SFAS 157 which will require retrospective application of SFAS 157. The transition adjustment, if any, will be recognized as a cumulative-effect adjustment to the opening balance of retained earnings for the fiscal year of adoption. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated results of operations and financial condition.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of January 1, 2007 and recorded as a cumulative change in accounting principle an increase in the liability for unrecognized tax benefits and a decrease in beginning retained earnings of $4 million.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155: (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (ii) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133; (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company adopted SFAS 155 as of January 1, 2007. The effect of adopting SFAS 155 was not material.

In September 2005, the AICPA issued SOP 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides clarifying guidance on accounting for deferred acquisition costs (“DAC”) associated with an insurance or annuity contract that is significantly modified or internally replaced with another contract. Prior to adoption, the Company accounted for many of these transactions as contract continuations and continued amortizing existing DAC against revenue from the new or modified contract. Effective on January 1, 2007, the Company adopted SOP 05-1 resulting in these transactions being prospectively accounted for as contract terminations. Consistent with this, the Company now anticipates these transactions in establishing amortization periods and other valuation assumptions. As a result of adopting SOP 05-1, the Company recorded as a cumulative change in accounting principle a pretax charge of $206 million, reducing DAC by $204 million, deferred sales inducement costs (“DSIC”) by $11 million and liabilities for future policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134 million. The adoption of SOP 05-1 is also expected to result in an increase to DAC and DSIC amortization in 2007.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

3.   Separation and Distribution from American Express

Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the separation of Ameriprise Financial and the distribution of the Ameriprise Financial common shares to American Express shareholders (the “Distribution”).

American Express has historically provided a variety of corporate and other support services for the Company, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. Following the Distribution, American Express has continued to provide the Company with many of these services pursuant to transition services agreements for transition periods of up to two years or more, if extended by mutual agreement of the Company and American Express. By the date of this report, the Company has terminated the majority of these service agreements and has completed the vast majority of separation of its information technology infrastructure from American Express. The remaining linkages are expected to be separated by early September, 2007.

The Company has incurred significant non-recurring separation costs as a result of the Separation. These costs have primarily been associated with establishing the Ameriprise Financial brand, separating and reestablishing the Company’s technology platforms and advisor and employee retention programs.

4.   Investments

The following is a summary of investments:

		June 30, 2007			December 31, 2006
		(in millions)
Available-for-Sale securities, at fair value		$	27,093		$	30,880
Commercial mortgage loans on real estate, net		2,964			3,056
Trading securities, at fair value, and equity method investments in hedge funds		655			579
Policy loans		669			652
Other investments		323			386
Total		$	31,704		$	35,553

 

Realized gains and losses on Available-for-Sale securities, determined using the specific identification method, were as follows:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in millions)
Gross realized gains from sales		$	18		$	11		$	34		$	23
Gross realized losses from sales		(14		)	(5		)	(21		)	(13		)
Other-than-temporary impairments		(2		)	—			(2		)	(1		)

 

5.   Deferred Acquisition Costs and Deferred Sales Inducement Costs

Effective January 1, 2007, the Company adopted SOP 05-1. SOP 05-1 provides clarifying guidance on accounting for DAC associated with an insurance or annuity contract that is significantly modified or internally replaced with another contract. Prior to adoption, the Company accounted for many of these transactions as contract continuations and continued amortization of existing DAC against revenue from the new or modified contract. The Company’s adoption of SOP 05-1 resulted in these transactions being prospectively accounted for as contract terminations. As a result of adopting SOP 05-1, the Company recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to DAC and DSIC, respectively.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

5.   Deferred Acquisition Costs and Deferred Sales Inducement Costs (continued)

The balances of and changes in DAC were as follows:

		2007			2006
		(in millions)
Balance at January 1		$	4,499		$	4,182
Cumulative effect of SOP 05-1 adoption		(204		)	—
Capitalization of acquisition costs		399			367
Amortization, excluding impact of changes in assumptions		(272		)	(257		)
Amortization, impact of other quarter changes in DAC-related assumptions		13			(24		)
Impact of change in net unrealized securities losses		27			74
Balance at June 30		$	4,462		$	4,342

 

The balances of and changes in DSIC were as follows:

		2007			2006
		(in millions)
Balance at January 1		$	452		$	370
Cumulative effect of SOP 05-1 adoption		(11		)	—
Capitalization of sales inducements		66			61
Amortization		(30		)	(23		)
Impact of change in net unrealized securities losses		4			12
Balance at June 30		$	481		$	420

 

6.   Future Policy Benefits and Claims and Separate Account Liabilities

Future policy benefits and claims consisted of the following:

		June 30, 2007			December 31, 2006
		(in millions)
Fixed annuities		$	15,583		$	16,841
Equity indexed annuities accumulated host values		259			267
Equity indexed annuities embedded derivatives		58			50
Variable annuities fixed sub-accounts		5,416			5,975
Guaranteed minimum withdrawal benefits variable annuity guarantees		(40		)	(12		)
Other variable annuity guarantees		14			26
Total annuities		21,290			23,147
Variable universal life (“VUL”)/universal life insurance		2,554			2,562
Other life, disability income and long term care insurance		3,977			3,852
Auto and home insurance		393			381
Policy claims and other policyholders’ funds		104			91
Total		$	28,318		$	30,033

 

Separate account liabilities consisted of the following:

		June 30, 2007			December 31, 2006
		(in millions)
Variable annuity variable sub-accounts		$	49,677		$	43,515
VUL insurance variable sub-accounts		6,324			5,772
Threadneedle investment liabilities		4,469			4,561
Total		$	60,470		$	53,848

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

7.   Customer Deposits

Customer deposits consisted of the following:

		June 30, 2007			December 31, 2006
		(in millions)
Fixed rate certificates		$	3,005		$	3,540
Stock market based certificates		1,032			1,041
Stock market embedded derivative reserves		48			48
Other		82			91
Less: accrued interest classified in other liabilities		(40		)	(42		)
Total investment certificate reserves		4,127			4,678
Brokerage deposits		1,213			1,176
Banking deposits		715			853
Total		$	6,055		$	6,707

 

8.   Debt

Debt and the stated interest rates were as follows:

		June 30, 2007					December 31, 2006
		Outstanding Balance			Stated Interest Rate		Outstanding Balance			Stated Interest Rate
		(in millions)					(in millions)
Senior notes due 2010		$	800		5.4	%	$	800		5.4	%
Senior notes due 2015		700			5.7		700			5.7
Junior subordinated notes due 2066		500			7.5		500			7.5
Fixed and floating rate notes due 2011:
Floating rate senior notes		56			5.9		84			5.9
Fixed rate notes		86			8.6		86			8.6
Fixed rate senior notes		46			7.2		46			7.2
Fixed rate notes		9			13.3		9			13.3
Total		$	2,197				$	2,225

 

On November 23, 2005, the Company issued $1.5 billion of unsecured senior notes (“senior notes”) including $800 million of five-year senior notes, which mature November 15, 2010, and $700 million of 10-year senior notes, which mature November 15, 2015, and incurred debt issuance costs of $7 million. Interest payments are due semi-annually on May 15 and November 15.

In June 2005, the Company entered into interest rate swap agreements totaling $1.5 billion, which qualified as cash flow hedges related to planned debt offerings. The Company terminated the swap agreements in November 2005 when the senior notes were issued. The related gain on the swap agreements of $71 million was recorded to accumulated other comprehensive income and is being amortized as a reduction to interest expense over the period in which the hedged cash flows are expected to occur. Considering the impact of the hedge credits, the effective interest rates on the senior notes due 2010 and 2015 are 4.8% and 5.2%, respectively.

On May 26, 2006, the Company issued $500 million of unsecured junior subordinated notes (“junior notes”), which mature June 1, 2066, and incurred debt issuance costs of $6 million. For the initial 10-year period, the junior notes carry a fixed interest rate of 7.5% payable semi-annually in arrears on June 1 and December 1. From June 1, 2016 until the maturity date, interest on the junior notes will accrue at an annual rate equal to the three-month LIBOR plus a margin equal to 290.5 basis points, payable quarterly in arrears.

The fixed and floating rate notes due 2011 are non-recourse debt of a collateralized debt obligation (“CDO”). The debt will be extinguished from the cash flows of the investments held within the portfolio of the CDO, which assets are held for the benefit of the CDO debt holders. The related interest expense on these notes is reflected in net investment income.

On September 30, 2005, the Company obtained an unsecured revolving credit facility for $750 million expiring in September 2010 from various third party financial institutions. Under the terms of the credit agreement, the Company may increase the amount of this facility to $1.0 billion. As of June 30, 2007 and December 31, 2006, no borrowings were outstanding under this facility. Outstanding letters of credit issued against this facility were $6 million and $5 million as of June 30, 2007 and December 31, 2006, respectively. The Company has agreed under this credit agreement not to pledge the shares of its principal subsidiaries and was in compliance with this covenant as of June 30, 2007 and December 31, 2006.

12

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

9.   Share-Based Compensation

The Company’s share-based compensation plans consist of the Ameriprise Financial 2005 Incentive Compensation Plan and the Deferred Equity Program for Independent Financial Advisors.

The Ameriprise Financial 2005 Incentive Compensation Plan (“2005 ICP”) as amended and restated effective as of April 25, 2007, allows for the grant of stock and cash incentive awards to employees, directors and independent contractors, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction.

The Deferred Equity Program for Independent Financial Advisors (“P2 Deferral Plan”) adopted as of September 30, 2005, gives certain advisors the option to defer a portion of their commissions in the form of share-based awards, which are subject to forfeiture based on future service requirements. The Company provides a match of the share-based awards.

For the three months and six months ended June 30, 2007, the Company recognized expense of $40 million and $75 million, respectively, related to awards under these share-based compensation plans. For the three months and six months ended June 30, 2006, the Company recognized expense of $32 million and $56 million, respectively, related to awards under these share-based compensation plans.

As of June 30, 2007, there was $220 million of total unrecognized compensation cost related to non-vested awards under the Company’s share-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.7 years.

10.   Other Expenses

Other expenses consisted of the following:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in millions)
Professional and consultant fees		$	114		$	91		$	205		$	176
Information technology and communications		39			54			64			101
Facilities and equipment		48			44			90			94
Advertising and promotion		25			34			52			62
Legal and regulatory		18			46			48			71
Travel and meetings		29			21			51			39
Printing and distribution		26			26			55			51
Minority interest		16			25			27			28
Other		52			38			108			85
Other expenses capitalized as DAC		(88		)	(75		)	(173		)	(153		)
Total		$	279		$	304		$	527		$	554

 

11.   Income Taxes

The Company’s effective tax rates were 20.0% and 21.7% for the three months and six months ended June 30, 2007, respectively. The Company’s effective tax rates for the three months and six months ended June 30, 2006 were 24.3% and 24.2%, respectively. The effective tax rate for the three months ended June 30, 2007 was impacted by a $16 million tax benefit related to the finalization of certain income tax audits. The effective tax rate for the three months ended June 30, 2006 was impacted by $5 million of non-tax deductible charges.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses realized for tax return purposes and capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. The Company has $140 million in capital loss carryforwards that expire December 31, 2009 for which the benefit is reflected in deferred tax assets. Additionally, the Company has $45 million in capital loss carryforwards that expire December 31, 2009 as a result of the 2005 first short period tax return filed with American Express. Based on analysis of the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable the Company to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets was established as of June 30, 2007 and December 31, 2006.

13

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11.   Income Taxes (continued)

Effective January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation of FIN 48 the Company recognized a $4 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of the date of adoption the Company had $113 million of gross unrecognized tax benefits. If recognized, approximately $57 million, net of federal tax benefits, would affect the effective tax rate. As of June 30, 2007, the Company had $81 million of gross unrecognized tax benefits. If recognized, approximately $42 million, net of federal tax benefits, would affect the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net reduction of interest and penalties of $10 million and $7 million for the three months and six months ended June 30, 2007, respectively. The Company had $16 million and $9 million for the payment of interest and penalties accrued at January 1, 2007 and June 30, 2007, respectively.

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. However, there are a number of open audits and quantification of a range cannot be made at this time.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1997. The Internal Revenue Service (“IRS”), as part of the overall examination of the American Express Company consolidated return, commenced an examination of the Company’s U.S. income tax returns for 1997 through 2002 in the third quarter of 2005. In the first quarter of 2007, the IRS expanded the period of the exam to include 2003 through 2004. The Company or certain of its subsidiaries state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2005.

The Company’s Tax Allocation Agreement with American Express, dated as of September 30, 2005, governs the allocation of consolidated U.S. federal and applicable combined or unitary state and local income tax liabilities between American Express and the Company for tax periods prior to September 30, 2005. In addition, this Tax Allocation Agreement provides for certain restrictions and indemnities in connection with the tax treatment of the Distribution and addresses other tax-related matters.

12.   Earnings per Common Share

The computations of basic and diluted earnings per common share are as follows:

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
		(in millions, except per share amounts)
Numerator:
Net income		$	196		$	141		$	361		$	286
Denominator:
Basic: Weighted-average common shares outstanding		237.4			246.3			239.0			249.3
Effect of potentially dilutive nonqualified stock options and other share-based awards		3.6			1.7			3.6			1.5
Diluted: Weighted-average common shares outstanding		241.0			248.0			242.6			250.8
Earnings per Common Share:
Basic		$	0.83		$	0.57		$	1.51		$	1.15
Diluted		0.81			0.57			1.49			1.14

 

Basic weighted average common shares for the three months and six months ended June 30, 2007 included 1.9 million and 1.8 million, respectively, of vested, nonforfeitable restricted stock units and 3.6 million and 3.6 million, respectively, of non-vested restricted stock awards and restricted stock units that are forfeitable but receive nonforfeitable dividends. Basic weighted average common shares for the three months and six months ended June 30, 2006 included 1.9 million and 2.0 million, respectively, of vested, nonforfeitable restricted stock units and 3.7 million and 3.7 million, respectively, of non-vested restricted stock awards and restricted stock units that are forfeitable but receive nonforfeitable dividends. Potentially dilutive securities include nonqualified stock options and other share-based awards.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13.   Segment Information

The Company’s two main operating segments, Asset Accumulation and Income (“AA&I”) and Protection, are aligned with the financial solutions the Company offers to address clients’ needs.

The AA&I segment offers products and services, both the Company’s and other companies’, to help retail clients address identified financial objectives related to asset accumulation and income management. Products and services in this segment are related to asset management, brokerage and banking, and include mutual funds, wrap accounts, variable and fixed annuities, brokerage accounts and investment certificates. This operating segment also serves institutional clients by providing investment management services in separately managed accounts, sub-advisory and alternative investments. The Company earns revenues in this segment primarily through fees it receives based on managed assets and annuity separate account assets. These fees are impacted by both market movements and net asset flows. The Company also earns net investment income on owned assets, principally supporting the fixed annuity and certificate businesses and capital supporting the business, and distribution fees on sales of mutual funds and other products. This segment includes the results of Securities America Financial Corporation, which through its operating subsidiary, Securities America, Inc. (“SAI”), operates its own separately branded distribution network.

The Protection segment offers a variety of protection products, both the Company’s and other companies’, including life, disability income, long term care and auto and home insurance to address the identified protection and risk management needs of retail clients. The Company earns revenues in this operating segment primarily through premiums, fees and charges that the Company receives to assume insurance-related risk, fees the Company receives on assets supporting variable universal life separate account balances and net investment income on owned assets supporting insurance reserves and capital supporting the business.

The Corporate and Other (“Corporate”) segment consists of income derived from financial planning fees, investment income on corporate level assets including unallocated equity and unallocated corporate expenses. This segment also includes non-recurring separation costs.

The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains (losses) from intercompany revenues and expenses, which are eliminated in consolidation. The Company allocates capital to each segment based upon an internal capital allocation method that allows the Company to more efficiently manage its capital. The Company evaluates the performance of each segment based on income before income tax provision. The Company allocates certain non-recurring items, such as separation costs, to the Corporate segment.

The following is a summary of assets by segment:

		June 30, 2007			December 31, 2006
		(in millions)
Asset Accumulation and Income		$	86,798		$	83,308
Protection		17,993			17,360
Corporate and Other		3,341			3,504
Total assets		$	108,132		$	104,172

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

13. Segment Information (continued)

The following is a summary of segment operating results:

Three Months Ended June 30,		Asset Accumulation and Income			Protection			Corporate and Other			Eliminations			Consolidated
		(in millions)
2007
Revenue from external customers		$	1,612		$	499		$	71		$	—		$	2,182
Intersegment revenue		4			9			—			(13		)	—
Total revenues		$	1,616		$	508		$	71		$	(13	)	$	2,182
Income (loss) before income tax provision		$	278		$	102		$	(135	)	$	—		245
Income tax provision														49
Net income														$	196
2006
Revenue from external customers		$	1,488		$	491		$	74		$	—		$	2,053
Intersegment revenue		5			5			—			(10		)	—
Total revenues		$	1,493		$	496		$	74		$	(10	)	$	2,053
Income (loss) before income tax provision		$	222		$	92		$	(128	)	$	—		186
Income tax provision														45
Net income														$	141

 

Six Months Ended June 30,		Asset Accumulation and Income			Protection			Corporate  and Other			Eliminations			Consolidated
		(in millions)
2007
Revenue from external customers		$	3,104		$	991		$	150		$	—		$	4,245
Intersegment revenue		9			17			—			(26		)	—
Total revenues		$	3,113		$	1,008		$	150		$	(26	)	$	4,245
Income (loss) before income tax provision		$	510		$	203		$	(252	)	$	—		461
Income tax provision														100
Net income														$	361
2006
Revenue from external customers		$	2,906		$	958		$	138		$	—		$	4,002
Intersegment revenue		9			11			—			(20		)	—
Total revenues		$	2,915		$	969		$	138		$	(20	)	$	4,002
Income (loss) before income tax provision		$	450		$	166		$	(239	)	$	—		377
Income tax provision														91
Net income														$	286

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

14.   Related Party Transactions

The Company may engage in transactions in the ordinary course of business with significant shareholders or their subsidiaries, between the Company and its directors and officers or with other companies whose directors or officers may also serve as directors or officers for the Company or its subsidiaries. The Company carries out these transactions on customary terms. Other than for the share repurchase from Berkshire Hathaway Inc. and subsidiaries (“Berkshire”) described below, the transactions have not had a material impact on the Company’s consolidated results of operations or financial condition.

Davis Selected Advisors, L.P. or its affiliates (“Davis”) owned approximately 9% of the Company’s common stock at December 31, 2006. In the ordinary course of business, the Company obtains investment advisory or sub-advisory services from Davis. The Company, or the mutual funds or other clients to which the Company provides advisory services, pay fees to Davis for its services. In the ordinary course of business, Davis pays fees to the Company for distribution services of Davis’ products to the Company’s clients.

FMR Corp. or its affiliates (“FMR”) owned approximately 7% of the Company’s common stock at December 31, 2006. In the ordinary course of business, the Company pays fees to FMR for distribution services of RiverSource Funds to FMR’s clients and FMR pays fees to the Company for distribution services of FMR’s investment products to the Company’s clients.

On March 29, 2006, the Company entered into a Stock Purchase and Sale Agreement with Warren E. Buffet and Berkshire to repurchase 6.4 million shares of the Company’s common stock. The repurchase was completed on March 29, 2006 at a price per share equal to the March 29, 2006 closing price of $42.91 and reduced Berkshire’s ownership of the Company’s common stock to approximately 9.8% of common shares then outstanding. Berkshire’s ownership of the Company’s common stock was further reduced to 3% at December 31, 2006.

The Company’s executive officers and directors may have transactions with the Company or its subsidiaries involving financial products and insurance services. All obligations arising from these transactions are in the ordinary course of the Company’s business and are on the same terms in effect for comparable transactions with the general public. Such obligations involve normal risks of collection and do not have features or terms that are unfavorable to the Company’s subsidiaries.

15.   Common Share Repurchases

In January 2006, the Company’s Board of Directors authorized the repurchase of up to 2 million shares of the Company’s common stock. In March 2006, the Company’s Board of Directors authorized the expenditure of up to $750 million for the repurchase of additional shares through March 31, 2008. In March 2007, the Company’s Board of Directors authorized the expenditure of up to an additional $1.0 billion for the repurchase of shares through March 15, 2009. During the six months ended June 30, 2007 and 2006, the Company repurchased a total of 8.2 million shares and 7.4 million shares, respectively, of its common stock for an aggregate cost of $494 million and $316 million, respectively. As of June 30, 2007, the Company had purchased all shares under the January 2006 and March 2007 authorizations and had $871 million remaining under the March 2007 authorization.

The Company may also reacquire shares of its common stock under its 2005 ICP related to restricted stock awards. Restricted shares that are forfeited before the vesting period has lapsed are recorded as treasury shares. In addition, the holders of restricted shares may elect to surrender a portion of their shares on the vesting date to cover their income tax obligations. These vested restricted shares reacquired by the Company and the Company’s payment of the holders’ income tax obligations are recorded as a treasury share purchase. The restricted shares forfeited under the 2005 ICP and recorded as treasury were 0.1 million during both the six months ended June 30, 2007 and 2006. For the six months ended June 30, 2007 and 2006, the Company reacquired 0.5 million shares and 0.4 million shares, respectively, of its common stock through the surrender of restricted shares upon vesting and paid in the aggregate $25 million and $16 million, respectively, related to the holders’ income tax obligations on the vesting date.

16.   Contingencies

The Company and its subsidiaries are involved in the normal course of business in legal, regulatory and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of its activities as a diversified financial services firm. These include proceedings specific to the Company as well as proceedings generally applicable to business practices in the industries in which it operates. The Company can also be subject to litigation arising out of its general business activities, such as its investments, contracts, leases and employment relationships.

17

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

16.   Contingencies (continued)

As with other financial services firms, the level of regulatory activity and inquiry concerning the Company’s businesses remains elevated. From time to time, the Company receives requests for information from, and has been subject to examination by the SEC, National Association of Securities Dealers (“NASD”), Office of Thrift Supervision, state insurance regulators and various other regulatory authorities concerning its business activities and practices, including: sales and product or service features of, or disclosures pertaining to, financial plans, its mutual funds, annuities, insurance products and brokerage services; non-cash compensation paid to its field leaders and financial advisors; supervision of its financial advisors; and sales of, or brokerage or revenue sharing practices relating to, other companies’ real estate investment trust (“REIT”) shares, mutual fund shares or other investment products. Other open matters relate, among other things, to the administration of death claims to multiple beneficiaries under the Company’s variable annuities, the portability (or network transferability) of the Company’s RiverSource mutual funds, supervisory practices in connection with financial advisors’ outside business activities, the suitability of product recommendations made to retail financial planning clients and the delivery of financial plans, and the suitability of particular trading strategies. The number of reviews and investigations has increased in recent years with regard to many firms in the financial services industry, including the Company. The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.

These legal and regulatory proceedings are subject to uncertainties and, as such, the Company is unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Certain legal and regulatory proceedings involving the Company are described below.

In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona, and was later transferred to the United States District Court for the District of Minnesota. The plaintiffs alleged that they are investors in several of the Company’s mutual funds and they purported to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs alleged that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. On July 6, 2007, the Court granted Ameriprise’s motion for summary judgment, dismissing all claims with prejudice.

In October 2005, the Company reached a comprehensive settlement regarding the consolidated securities class action lawsuit filed against the Company, its former parent and affiliates in October 2004 called “In re American Express Financial Advisors Securities Litigation.” The settlement, under which the Company denies any liability, includes a one-time payment of $100 million to the class members. On July 18, 2007, the Court entered an Order and Final Judgment, which approved the parties’ settlement as fair, reasonable and adequate. The Order and Final Judgment dismisses the Class Action Complaint with prejudice, releases the defendants from all liability for the claims asserted and any other claims based upon the same core allegations, and enjoins class members from asserting such claims in the future. The parties will now move to dismiss the previously disclosed related class action captioned Haritos et al. v. American Express Financial Advisors Inc. pending in the United States District Court for the District of Arizona, based on the fact that the claims in the Haritos action are covered by the In re AEFA settlement.

In March 2006, a lawsuit captioned Good, et al. v. Ameriprise Financial, Inc. et al. (Case No. 00-cv-01027) was filed in the United States District Court for the District of Minnesota. The lawsuit has been brought as a putative class action and plaintiffs purport to represent all of the Company’s advisors who sold shares of REITs and tax credit limited partnerships between March 2000 and March 2006. Plaintiffs seek unspecified compensatory and restitutionary damages as well as injunctive relief, alleging that the Company incorrectly calculated commissions owed advisors for the sale of these products. The matter is in the discovery stage.

The Company previously reported two adverse arbitration awards issued in 2006 by NASD panels against Securities America, Inc. and former registered representatives of SAI. Those arbitrations involved customer claims relating to suitability, disclosures, supervision and certain other sales practices. Other clients of those former registered representative have presented claims.

18