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2006_10K

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  • 1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2006 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission file number 1-32525 AMERIPRISE FINANCIAL, INC. (Exact name of registrant as specified in its charter) Delaware 13-3180631 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 55 Ameriprise Financial Center Minneapolis, Minnesota 55474 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code (612) 671-3131 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 per share The New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No 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. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Accelerated filer Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value, as of June 30, 2006, of voting shares held by non-affiliates of the registrant was approximately $10.9 billion. 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 February 15, 2007 Common Stock, par value $.01 per share 239,206,084 shares
  • 2. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV: Portions of the registrant’s 2006 Annual Report to Shareholders (“2006 Annual Report to Shareholders”) Part III: Portions of the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held on April 25, 2007 (“Proxy Statement”).
  • 3. AMERIPRISE FINANCIAL, INC. FORM 10-K INDEX Page No. Part I. Item 1. Business 1 Item 1A. Risk Factors 32 Item 1B. Unresolved Staff Comments 42 Item 2. Properties 42 Item 3. Legal Proceedings 43 Item 4. Submission of Matters to a Vote of Security Holders 44 Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 44 Item 6. Selected Financial Data 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45 Item 8. Financial Statements and Supplementary Data 45 Consolidated Statements of Income – Years ended December 31, 2006, 2005 and 2004 Consolidated Balance Sheets – December 31, 2006 and 2005 Consolidated Statements of Cash Flows – Years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Shareholders’ Equity – Years ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 45 Item 9A. Controls and Procedures 46 Item 9B. Other Information 46 Part III. Item 10. Directors and Executive Officers of the Registrant 46 Item 11. Executive Compensation 47 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47 Item 13. Certain Relationships and Related Transactions, and Director Independence 47 Item 14. Principal Accountant Fees and Services 47 Part IV. Item 15. Exhibits and Financial Statement Schedules 47 Signatures 49 Exhibit Index E-1
  • 4. PART I. Item 1. Business. Overview We are engaged in providing financial planning, products and services that are designed to offer solutions for our clients’ asset accumulation, income and protection needs. As of December 31, 2006, we had approximately 2.8 million individual, business and institutional clients and a network of more than 12,000 financial advisors and registered representatives (“affiliated financial advisors”). As a holding company, we primarily engage in business through our subsidiaries. Accordingly, references below to “we,” “us” and “our” may refer to Ameriprise Financial, Inc. exclusively, to our entire family of companies or to one or more of our subsidiaries. We strive to deliver solutions to our clients through an approach focused on building a long-term personal relationship through financial planning and advice that is responsive to our clients’ evolving needs and by helping clients achieve their identified financial goals by providing investment, insurance and other financial products that position them to realize a positive return or form of protection while they are accepting an appropriate range and level of risks. The financial solutions we offer include both our own products and services and products of other companies. Our financial planning and advisory process is designed to provide comprehensive advice, when appropriate, to address our clients’ asset accumulation, income and protection needs. We believe that our focus on personal relationships, together with our strengths in financial planning and product development, allows us to better address our clients’ financial needs, including the financial needs of our primary target market segment, the mass affluent and affluent, which we define as households with investable assets of at least $100,000. This focus also puts us in a strong position to capitalize on significant demographic and market trends, which we believe will continue to drive increased demand for financial planning and the other financial services we provide. Our multi-platform network of affiliated financial advisors is the means by which we develop personal relationships with our clients. We refer to the affiliated financial advisors who use our brand name (who numbered more than 10,000 at December 31, 2006) as our branded advisors, and those that do not use our brand name but who affiliate as registered representatives of ours as our unbranded advisors (who numbered over 1,700 at December 31, 2006). Our branded advisor network is also the primary distribution channel through which we offer our asset accumulation and income products and services, as well as a range of banking and protection products. We offer our branded advisors training, tools, leadership, marketing programs and other centralized support to assist them in delivering solutions to our clients. We believe our approach not only improves the products and services we provide to our clients, but also allows us to reinvest in enhanced services for our clients and support available to our affiliated financial advisors. This integrated model also affords us a better understanding of our client base, which allows us to better manage the risk profile of our businesses. We believe our focus on meeting our clients’ needs through financial planning results in more satisfied clients with deeper, longer lasting relationships with our company and higher retention of experienced financial advisors. We have two main operating segments aligned with the financial solutions we offer to address our clients’ needs: • Asset Accumulation and Income and • Protection. Our Asset Accumulation and Income segment offers our own and other companies’ mutual funds, as well as our own annuities and other asset accumulation and income products and services to retail clients through our multi-platform financial advisor network. Accordingly, this segment includes the results of our Ameriprise- and RiverSource-branded broker-dealer subsidiaries (other than financial planning fees). In addition this segment also includes the results of our separate “Securities America” unbranded advisor network, which offers our own and other companies’ mutual funds and variable annuities as well as other asset accumulation and income products and protection products of other companies. We also offer our annuity products and, to a more limited extent, our investment management products, through outside distribution channels. This operating segment also serves institutional clients in the separately managed account, sub-advisory, alternative investments and 401(k) markets, among others. We earn revenues in our Asset Accumulation and Income segment primarily through the fees we receive based on managed and administered assets and on separate accounts, the net investment income we earn on assets on our balance sheet related to this segment, and the distribution fees we earn on sales of mutual funds and other products. 1
  • 5. Our Protection segment offers various life insurance, disability income and brokered insurance products through our branded advisor network. We also offer personal auto and home insurance products on a direct basis to retail clients principally through our strategic marketing alliances. We earn revenues in this operating segment primarily through the premiums, fees and charges that we receive to assume insurance-related risk, the fees we receive on the funds underlying our variable products, and the net investment income we earn on assets on our balance sheet related to this segment. We also have a “Corporate and Other” segment, which 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 costs associated with the separation of our company from American Express Company (“American Express”). In 2006, we generated $8.1 billion in total revenues, $797 million in income before income tax provision and $631 million in net income. As of December 31, 2006, we had $466.1 billion in assets owned, managed and administered worldwide. We were formerly a wholly owned subsidiary of American Express. Effective as of the close of business on September 30, 2005, American Express completed the disposition of 100% of its share holdings in us through a tax-free distribution of our common shares to its shareholders (the “Distribution”). The Distribution was effectuated through a pro-rata dividend consisting of one share of our common stock for every five shares of American Express common stock owned by American Express’s shareholders on September 19, 2005, the record date for the Distribution. Prior to August 1, 2005, we were referred to as American Express Financial Corporation (“AEFC”). We are incorporated in Delaware and our headquarters are located at 55 Ameriprise Financial Center, Minneapolis, Minnesota 55474. We also maintain executive offices in New York City. Our Organization Following is a simplified organization structure for our company. Names reflect current legal entity names of subsidiaries. Following is a brief description of the business conducted by each subsidiary noted above, as well as the segment or segments in which it operates. • Ameriprise Financial Services, Inc. (“AMPF”) is our primary financial planning and retail distribution subsidiary which operates under our Ameriprise Financial brand name. Its results of operations are included in our Asset Accumulation and Income segment, except for income derived from financial planning fees (which are reflected in our “Corporate and Other” segment). 2
  • 6. • American Enterprise Investment Services Inc. (“AEIS”) is our registered clearing broker-dealer subsidiary. Brokerage transactions for accounts introduced by AMPF are executed and cleared through AEIS. Its results of operations are included in our Asset Accumulation and Income segment. • RiverSource Investments, LLC serves as investment advisor to our RiverSourceSM family of mutual funds and to our domestic institutional accounts. Its results of operations are included in our Asset Accumulation and Income segment. • RiverSource Life Insurance Company conducts its life insurance and annuity business in states other than New York. Its results of operations for our annuities business are included in the Asset Accumulation and Income segment, and its results of operations with respect to other products it manufactures are reflected in the Protection segment. • RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”) conducts its life insurance and annuity business in the State of New York. Its results of operations for our annuities business are included in the Asset Accumulation and Income segment, and its results of operations with respect to other products it manufactures are reflected in the Protection segment. RiverSource Life of NY is a wholly-owned subsidiary of RiverSource Life Insurance Company. We refer to RiverSource Life Insurance Company and RiverSource Life of NY as the “RiverSource Life companies.” • Ameriprise Certificate Company issues a variety of face-amount certificates, which are a type of investment product. Its results of operations are included in the Asset Accumulation and Income segment. • Ameriprise Bank, FSB (“Ameriprise Bank”) commenced operations in the third quarter of 2006 and offers a variety of consumer banking and lending products and personal trust and related services. Its results of operations are included in the Asset Accumulation and Income segment. • Ameriprise Trust Company provides trust services to individuals and businesses. It also acts as custodian for the majority of the RiverSource mutual funds. Its results of operations are included in the Asset Accumulation and Income segment. • RiverSource Distributors, Inc. (“RiverSource Distributors”) is a broker-dealer subsidiary organized in 2006 to serve as the principal underwriter and distributor for our RiverSource mutual funds, annuities and insurance products through AMPF, SAI and third-party channels such as banks and broker-dealer networks. Its results of operations are included in our Asset Accumulation and Income segment. • RiverSource Service Corporation is a transfer agent that processes client transactions for our RiverSource mutual funds and Ameriprise face-amount certificates. Its results of operations are included in our Asset Accumulation and Income segment. • IDS Property Casualty Insurance Company (“IDS Property Casualty” or “Ameriprise Auto & Home”) provides personal auto, home and excess liability insurance products. Ameriprise Insurance Company is also licensed to provide these products. The results of operations of these companies are included in the Protection segment. • AMEX Assurance Company provides American Express card-related insurance products. AMEX Assurance Company ceded its travel insurance and card-related business to American Express effective July 1, 2005, and was deconsolidated on a U.S. GAAP basis effective September 30, 2005. As of September 30, 2005, we entered into an agreement to sell the AMEX Assurance legal entity to American Express on or before September 30, 2007. • Threadneedle Asset Management Holdings Limited is a holding company for the London-based Threadneedle group of companies (“Threadneedle” or “Threadneedle Investments”), which provide investment management products and services on a basis primarily independent from our other affiliates. Their results of operations are included in our Asset Accumulation and Income segment. • Securities America Financial Corporation is a holding company for Securities America, Inc. (“SAI”), our retail distribution subsidiary which provides a platform for our unbranded advisors. Its results of operations are included in our Asset Accumulation and Income segment. 3
  • 7. Our Strengths We believe we are positioned to be the provider of choice to a growing base of mass affluent and affluent consumers, particularly as many of them reach their retirement phase of life. These strengths include our: • Strong heritage with established position in the financial services industry. Over our more than 110-year history, we have established ourselves as a leading provider of solutions designed to help clients plan for and achieve their financial objectives, built on a foundation of personal relationships. We are investing in and building on our heritage as we have re-established ourselves as an independent company with a new brand identity following the Distribution from American Express. As of December 31, 2006, we had $466.1 billion in owned, managed and administered assets and a sales force of more than 12,000 affiliated financial advisors. For the year ended December 31, 2006, our variable annuity products ranked eighth in new sales of variable annuities (according to VARDS®). For the nine months ended September 30, 2006, our variable universal life insurance ranked first in sales based on total premiums (according to Tillinghast-Towers Perrin’s Value™ survey) and our individual disability income insurance (non-cancellable) ranked seventh in sales based on total premiums (according to LIMRA International®). • Longstanding and deep client relationships. We believe that our branded advisor financial planning approach helps to meet our clients’ financial needs and fosters deep and long-term client relationships. We estimate that, of our branded advisor clients who have received a financial plan or who have entered into an agreement to receive and have paid for a financial plan, over 75% have been with us for three or more years, with an attrition rate of less than 2% per year. Our branded advisor clients with more than $100,000 in assets with us have been with us, on average, more than 12 years. More than 60% of these longstanding clients have a financial plan and these clients hold an average of at least four products. We believe the depth of our branded advisor client relationships and portion of a client’s liquid or investable assets (excluding 401(k) assets, employee stock plans and real estate) is leading in the industry. • Personal financial planning and investment advisory approach targeted to the fast-growing mass affluent and affluent market segment. Our branded advisors offer our clients financial planning and other advisory services as well as banking and brokerage services. Our branded advisor network included the largest number of CERTIFIED FINANCIAL PLANNER™ professionals of any retail advisory force as of December 2006 (according to the Certified Financial Planner Board of Standards, Inc.). We believe our focus on financial planning positions us well to capitalize on the demographic trends in our target segment, particularly as they prepare for retirement. The mass affluent and affluent market segment accounts for about 90% of the $21 trillion of U.S. investable assets (according to the MacroMonitor 2006-2007 consumer survey prepared by SRI Consulting Business Intelligence). We have found that more than 58% of consumers in our target segment are willing to pay a knowledgeable advisor for financial advice to address their immediate and long-term needs in the context of their entire financial situation (MacroMonitor 2006-2007 survey prepared by SRI Consulting Business Intelligence). We believe the planning process not only helps us to develop more tailored solutions designed to address our clients’ financial needs but also helps us develop a better understanding of the demographics and trends among our clients. We believe our approach results in increased client satisfaction, longer-term relationships with our clients and better risk profiles in our Protection segment. Our experience has shown that by helping our clients meet their needs through our financial planning approach, clients with an implemented financial planning relationship hold approximately three times more invested assets with our company than clients without a financial plan. • Large, well-trained sales force with a nationwide presence. At December 31, 2006, we had a nationwide network that included more than 10,000 branded advisors and more than 1,700 unbranded advisors. According to the 2006-2007 Securities Industry Association Yearbook, we had the third largest sales force in 2006 among Securities Industry Association members (based on the number of our registered representatives). Most of our branded advisors started their careers in financial planning with our company. We offer training designed to instill the financial knowledge of our varied product and service offerings, personalized client focus and tools necessary to help deliver a consistent, disciplined financial planning experience to clients. We believe that the grounding of our branded advisors in our financial planning model, as well as the resources that our integrated business model offers them, enhances our ability to hire, offer franchises to, and retain financial advisors. As of December 31, 2006, over 60% of our branded advisors had been with our company for more than four years and within that group, they have an average tenure of nearly 13 years. 4
  • 8. • Broad product development capability and diversified range of products and services. We develop and manage a broad range of asset accumulation, income and insurance products under the RiverSource and Threadneedle brands. In addition to our RiverSource and ThreadneedleSM families of mutual funds, we are a leading producer of variable annuity and variable life insurance products and fixed annuities, and we also develop disability income and personal auto and home insurance. Complementing our product offerings, we also provide access to a wide range of other companies’ products and securities and offer a number of financial planning, banking and related services to help our clients achieve their financial goals. The diversity among our product and service offerings not only assists our affiliated financial advisor network in addressing the varied needs of our clients, but also provides our company with diversification among its sources of revenues and earnings. • Strong balance sheet and ratings and comprehensive risk management process. We believe our size, ratings and capital strength provide us with a sound basis for competing in the marketplace. Our strong balance sheet, sound risk management and financial discipline have helped us maintain strong ratings, as well as client and financial advisor confidence in our business. We have a high quality investment portfolio, with only 7% of our available-for-sale fixed income securities rated below investment grade as of December 31, 2006. In addition, we apply risk management tools to prudently manage the risk profile of our company. • Experienced management team with sound business and decision-making capabilities. Our senior management team has an average of over 22 years of experience in the financial services industry. We are fostering a performance- and execution-oriented corporate culture. We utilize a consistent decision-making framework to evaluate our existing products and businesses, as well as to prioritize growth opportunities and the associated trade-offs for our company. This framework takes into account four key elements: client needs and behavior, competitor positioning and strategies, our capabilities and risk-return financial metrics. Our Strategy As a financial planning and financial services company with a nationwide presence, a diverse set of asset accumulation, income and insurance products and services and an industry leading reputation for financial planning, we believe we are well positioned to further strengthen our offerings to existing and new clients and deliver profitable growth to our shareholders. Our five strategic objectives include: • Growing our mass affluent and affluent client base. We intend to grow our mass affluent and affluent client base by building our brand awareness, deepening existing client relationships and developing new client relationships. • Building brand awareness. We are investing substantial resources through national advertisers and locally based marketing programs to develop and build awareness of our Ameriprise and RiverSource brands. As of December 31, 2006, we had total brand awareness of 50%, which is above what we expected it would be at this point following the Distribution. We utilize alliance arrangements to expand awareness of our brands, to support financial advisor recruitment and client acquisition efforts, and to define our advantages for prospective new clients and distribution partners. For more information on our alliances, see “Our Relationship with American Express,” “Our Solutions—Asset Accumulation and Income Segment—Brokerage and Investment Advisory Services—Strategic Alliances and Other Marketing Channels—Strategic Alliances and Other Marketing Arrangements” and “Our Solutions— Protection Segment—Distribution and Marketing Channels.” We believe having strong Ameriprise brand recognition, built on a consistent message of shaping financial solutions for a lifetime through tailored financial advice, will help us continue to grow. In addition, a strong RiverSource brand will serve to support our product sales efforts through affiliated and unaffiliated channels. • Deepening existing client relationships. Our affiliated financial advisors strive to take a client-centric approach. To help our branded advisors address the changing needs of our clients, we continue to develop methods for advisors to introduce, when appropriate, non-financial plan clients to the financial planning process and to assist financial planning clients to more fully implement plans they have in place. In 2006, we introduced our Dream Book™ guide and our approach to financial planning that we call Dream>Plan>Track>SM. It starts with each client’s dreams and leads to a financial plan that we help the client track over time. We have also 5
  • 9. created segmented service offerings, such as Ameriprise Gold Financial ServicesSM and Ameriprise Platinum Financial ServicesSM, to provide recognition, special benefits and higher levels of service to our highest value clients. In addition, through centralized support we provide our branded advisor network, such as market research about our existing client base, we identify opportunities to build deeper relationships with clients by addressing potentially underserved needs. We believe that deeper, longer-term relationships with our clients foster, among other things, increased satisfaction among our clients and affiliated financial advisors and greater owned, managed and administered assets. • Developing new client relationships. We intend to continue to grow our client base, with particular focus on the large and growing mass affluent and affluent market segments. With our tailored approach and diverse range of financial solutions, we believe we are well positioned to address their needs— particularly as they approach retirement, typically a time with heightened needs for a comprehensive financial planning approach. According to the U.S. census bureau, between 2000 and 2020, the 45-64 age group—typically the prime financial and asset accumulation years for retirement—is projected to grow by 34%, with most of that growth occurring by 2010. In addition, we provide support to our branded advisors with a wide range of corporate and locally defined client acquisition programs. • Strengthening our lead in financial planning and advice. We have a range of strategies to grow our lead, leveraging our Dream>Plan>Track>SM approach to financial planning and advice. Our approach begins by asking clients to define their dreams and aspirations, then we support them to develop their plan to help them achieve those goals, and we work with them over time to execute against that plan and track their progress in achieving their goals. • Delivering profitable growth and improved productivity in our financial advisor network. We intend to continue to enhance the productivity and growth of our affiliated financial advisor network, including our branded and unbranded platforms. With regard to our branded advisors, we offer strong centralized support to help them build their practices and we seek to offer franchises to quality individuals, offering a choice of affiliation (employee or franchisee). Our intention is to continue to enhance the centralized support available to our branded advisors in areas such as leadership, technology, training, marketing support, financial planning support and products/services. We do charge a fee to our franchisee branded advisors for some of these services. We believe this centralized support helps our branded advisors acquire more of our target clients, deliver a more consistent experience and serve clients with a wider range of products and services. We are continuing our focused recruitment efforts through our traditional channel of recruiting individuals who are new to the industry, as well as targeting the addition of experienced financial advisors through both individual recruitment and practice acquisitions. Our branded advisor network model provides flexibility to our branded advisors in building and managing their individual practices, which we believe leads to better retention. We continuously evaluate ways in which to improve our branded advisor network model and believe a larger branded advisor force will assist in growing our client base. We design our compensation plans, including our equity compensation plans for employee and franchisee branded advisors, to foster, among other things, greater levels of financial advisor productivity and retention. With regard to our unbranded advisors, who are offered a lower level of firm-provided support in exchange for higher levels of compensation, our strategy is to continue to profitably grow this platform. • Growing assets by continuing to enhance our mix of products and solutions, and by extending our distribution reach with alternative channels. We have a range of strategies to achieve this objective, including: • Expanding our product and service solutions. We plan to continue developing and deploying new products and services designed to address the financial and retirement needs of mass affluent and affluent clients while delivering growth and margin improvement for our company. Recent RiverSource product initiatives include mutual funds, variable annuity offerings with living benefits, and new “goal-based” solutions that embed sound investment principles such as asset allocation and risk management within the product. Our branded service solutions expanded in 2006 with the launch of a full range of banking solutions through Ameriprise Bank. Through Threadneedle, we have strengthened our international investment product and service offerings and will continue to expand our international offerings. 6
  • 10. • Maintaining consistent investment performance. Over the past several years, we have significantly improved our investment performance as demonstrated by the number of mutual funds above Lipper performance medians and as recognized in the recently published 2006 Barron’s Mutual Fund Family Ratings. Our strategy for maintaining consistent investment performance includes continuing to leverage our top talent and selectively growing our investment management talent pool. We intend to grow our talent pool by organic means (through strengthening of our investment management teams), by external means (through continuing to recruit individuals and teams of investment professionals with strong track records and potentially making opportunistic acquisitions of well-performing boutique investment management firms) and through the utilization of sub-advisors as appropriate. We intend to continue investing in tools and resources to assist both our fixed income and equity investment management teams to improve performance while managing risk effectively through the consistent application of risk management processes. We utilize BlackRock Solutions®, a leading portfolio management, trading and risk management tool, to assist our fixed-income investment management teams in better analyzing and isolating the effects of specific factors affecting performance of fixed income portfolios. In equities, we employ a boutique approach using small, highly accountable investment management teams with dedicated analytical and equity trading resources. Each team focuses on particular investment strategies that are accessible through multiple distribution channels. We also implemented the Charles River equity trading and compliance system in 2006, a leading tool that will enable us to further enhance our equity trading and compliance monitoring capabilities. We believe that maintaining consistent investment performance will positively impact growth in our managed assets. • Extending our distribution reach. Our distribution reach spans retail advisors, institutional, direct and worksite channels. • With regard to retail advisors, our efforts focus on enhancing our existing wholesaling, sales and marketing capabilities to our affiliated as well as unaffiliated advisors. Ameriprise branded advisors are our primary channel for our asset accumulation, income, and protection solutions, and our mutual fund products compete to earn and gain sales with these advisors. An important part of our growth strategy includes unaffiliated advisors. We are already an established player with sales of RiverSource variable annuities to unaffiliated advisors, and we have begun distribution of RiverSource investment management solutions through this channel. In addition, we are continuing to expand distribution of Threadneedle products and services through both our own channels in the United States and third-party retail and institutional channels elsewhere. • We also compete in institutional channels with products and solutions offered by RiverSource Investments, as well as Threadneedle. These offerings include separately managed accounts, hedge funds and sub-advised accounts. • Principally with regard to our property and casualty business, we compete in the direct channel as well as by forging new alliances. We have successfully formed marketing alliances with major companies, such as Costco Wholesale Corporation (“Costco”), Delta Loyalty Management Services, Inc. (“Delta”) and Ford Motor Credit Company to create programs to acquire and serve new clients and distribute our own products. • Through our work-site program, Workplace Financial Planning, our Business Alliances group provides corporate clients with personal financial planning services for their employees. For more information about these alliances, see “Our Solutions—Asset Accumulation and Income Segment—Brokerage and Investment Advisory Services—Strategic Alliances and Other Marketing Channels—Financial Planning and Planning Services”. In addition, we have begun distributing RiverSource mutual funds through third-party channels, building on our success in distributing RiverSource annuities. Through these efforts, we believe we can grow our client base and increase the volume of products and services that we provide. 7
  • 11. • Ensuring an increasingly strong and efficient operating platform. This includes enhancing the requisite technology infrastructure, seeking to ensure compliant business practices, ensuring organizational effectiveness and employee satisfaction, focusing our use of capital and expanding operating margins. Our strategies include: • Enhancing the requisite technology infrastructure. Operational excellence in technology and service delivery are key enablers in our growth strategy. We target our technology investments to modern, scaleable solutions that serve the needs of clients, advisors and employees with efficiency and dependability. Our primary sites for technology and service delivery are in Minneapolis, Minnesota, but much of this work is accomplished through vendor partnerships in the United States, India, the Philippines and Canada. While we seek to structure our technology and service delivery operations in a cost-effective manner, we maintain in-house staffing of service delivery personnel who are touchpoints for our advisors and clients, and emphasize internal ownership and staffing of the functions accountable for information technology strategy, architecture and security as well as planning of data and telecommunications equipment and software comprising our entire computing and network infrastructure. • Ensuring compliant business practices. Our corporate values emphasize the need for our employees and financial advisors to act with integrity, in compliance with laws and company policy, and in the best interests of our clients. Propelled by these values, we have designed and implemented a combination of dedicated resources, technology, policies, processes and tools to instill and operate in a strong culture of compliance. Our compliance departments are organized along the lines of our business units and possess functional groups assigned to policy-making and interpretation, transactional and operations compliance, supervisory oversight, training input, communications, surveillance and investigations. • Ensuring organizational effectiveness. Our Human Resources function partners with our various lines of business to attain a world-class organization that is aligned with our goals, objectives and employee needs. We strive to attract, motivate, develop, reward and retain a diverse workforce and emphasize a culture of collaboration and peak performance. Our commercial mindset and passion for delivering effective, value-added programs and initiatives to our employees and affiliated financial advisors enhances our unique business model. • Focusing use of capital. We continually seek opportunities to deploy capital more efficiently to support our business, while maintaining our ratings and capital position. Using our risk management decision- making framework, we regularly review our product pricing and overall risk positioning to properly account for capital requirements and make strategic adjustments to our product mix, pricing and features. All decisions about capital allocation and new product development include an evaluation of efficiency, growth prospects and margin improvement. • Expanding operating margins through reengineering. During the period when we were part of American Express, we had a history of producing cost savings in our businesses through a three-pronged reengineering process focused on process improvements, identifying untapped operating synergies and continually reviewing third-party costs, including consolidating or outsourcing some operations. We have continued this as an independent company to help manage the increased operating costs incurred as a result of our separation from American Express. We continue to seek opportunities to reengineer our processes and strive to improve distribution effectiveness and operating efficiency. We believe that improved efficiencies resulting from cost savings will enable us to expand operating margins and free up capital to invest in new growth opportunities. As we pursue these strategic objectives we expect increasing return on capital to come from a shift in revenues from our fixed-spread businesses, such as fixed annuities and investment certificates, to fee-based revenues from our RiverSource variable annuity products and financial planning, brokerage, asset management and banking services. This shift, we believe, reflects current consumer demand in the marketplace given the prevailing interest rate environment and is expected to be significantly less capital- intensive than our historical fixed-spread business. 8
  • 12. History and Development Our company has more than 110 years of history of providing financial solutions designed to help our clients achieve their financial objectives. Our earliest predecessor company, Investors Syndicate, was founded in 1894 to provide face-amount certificates to consumers with a need for conservative investments. By 1937, Investors Syndicate had expanded its product offerings through Federal Housing Authority mortgages, and later, mutual funds, by establishing Investors Mutual, one of the pioneers in the mutual fund industry. In 1949, Investors Syndicate was renamed Investors Diversified Services, Inc., or IDS. In 1957, IDS added life insurance products, and later, annuity products, through IDS Life Insurance Company (now known as “RiverSource Life Insurance Company”). In 1972, IDS began to expand its distribution network by delivering investment products directly to clients of unaffiliated financial institutions. IDS also introduced its comprehensive financial planning process to clients, integrating the identification of client needs with the products and services to address those needs in the 1970s, and it introduced its fee-based planning service in the 1980s. In 1979, IDS became a wholly owned subsidiary of Alleghany Corporation pursuant to a merger. In 1983, our company was formed as a Delaware corporation in connection with American Express’s 1984 acquisition of IDS Financial Services from Alleghany Corporation. We changed our name to “American Express Financial Corporation” and began selling our products and services under the American Express brand in 1994. To provide retail clients with a more comprehensive set of solutions, in the late 1990s we began significantly expanding our offering of mutual funds of other companies. We continued to expand our investment product offerings in 2002 with the acquisition of our Cambridge, Massachusetts-based quantitative investment management office and the establishment of our Boston equity investment management office. In 2003, we acquired Threadneedle Investments. On September 30, 2005, the Distribution was consummated, and we became an independent publicly traded company. Our Relationship with American Express In connection with the separation from American Express, we entered into certain agreements with American Express. The key terms of the principal agreements that continue to be operative are summarized below. Separation and Distribution Agreement. We entered into a separation and distribution agreement that generally requires us and American Express to indemnify each other and each other’s representatives and affiliates against certain liabilities. The separation and distribution agreement also contains certain covenants regarding cooperation to effect the transactions contemplated by the Distribution, including separation activities that have been concluded following the Distribution. The agreement also governs rights both American Express and we have to access certain of each other’s information following the Distribution. We also entered into an employee benefits agreement relating to certain compensation and employee benefit obligations with respect to our current and former employees. Tax Allocation Agreement. In connection with the Distribution, we entered into a tax allocation agreement with American Express. This agreement governs the allocation of consolidated U.S. federal and applicable combined or unitary state and local income tax liability as between American Express and us, and provides for certain restrictions and indemnities in connection with the tax treatment of the Distribution and addresses other tax-related matters. To avoid the Distribution being taxable to American Express and its shareholders, we are prohibited, except under certain circumstances, for a period of two years following the Distribution, from (i) consenting to certain acquisitions of significant amounts of our stock; (ii) transferring significant amounts of our assets; (iii) merging or consolidating with any other person; (iv) liquidating or partially liquidating; (v) reacquiring our stock; (vi) taking any action affecting the relative voting rights of any separate classes of our stock; or (vii) taking any other action that would be reasonably likely to jeopardize the tax free status of the Distribution. We do not believe these prohibitions impose a significant constraint on our ability to continue executing against share repurchase authorizations that we announced in 2006. In addition, we have undertaken to maintain our fund management business as an active business for a period of two years following the Distribution. We have an obligation to indemnify American Express for corporate level taxes and related losses suffered by both American Express and its shareholders if, due to any of our representations or undertakings being incorrect or violated, the Distribution is determined to be taxable for other reasons. We currently estimate that the indemnification obligation to American Express for taxes due in the event of a 50% or greater change in our stock ownership could exceed $1.5 billion. This estimate, which does not take into account related losses such as interest, penalties and other additions to tax, depends upon several factors that are beyond our control. As a consequence, the indemnity to American Express could vary substantially from the estimate. Furthermore, the estimate does not address the potential indemnification obligation to both American Express and its shareholders in the event that, due to our representations or undertakings being incorrect or violated, the Distribution is determined to be taxable for other reasons. In that event, the total indemnification obligation would likely be much greater. 9
  • 13. Marketing and Branding Agreement. We have entered into a marketing and branding agreement with American Express under which we have the right to use the “American Express” brand name and logo in a limited capacity for up to two years from the Distribution date in conjunction with our brand name and logo and, for a transitional period, in the names of certain of our products, services and subsidiaries. We have access to American Express partners, cardmembers and users of the americanexpress.com website for the purpose of marketing our products and services that is similar to the access that we had prior to the Distribution. In addition, the American Express Card is the exclusive charge card that we offer to clients of our Ameriprise Gold Financial Services, Ameriprise Platinum Financial Services and Ameriprise ONESM Financial Account during the term of the agreement. We have also entered into an intellectual property license and transfer agreement with American Express and certain of its subsidiaries. Reinsurance and Purchase Agreements. In connection with the separation from American Express, our subsidiary AMEX Assurance relinquished all risks and rewards of the travel and other card insurance business of American Express Travel Related Services Company through a quota share reinsurance agreement with Amexco Insurance Company (“Amexco”), a captive insurance company subsidiary of American Express. Under the agreement, AMEX Assurance ceded 100% of the travel insurance and card related business to Amexco in return for an arm’s length ceding commission and Amexco acquired the deferred acquisition costs related to the ceded business for cash. As of September 30, 2005, we entered into an agreement to sell the AMEX Assurance legal entity to a subsidiary of American Express within two years after the Distribution for a fixed price equal to the net book value of AMEX Assurance as of the Distribution date, which approximated $115 million. The closing of the sale of AMEX Assurance was deferred primarily in order for us to secure regulatory filings and other approvals in the interim. These transactions created a variable interest entity, for the purposes of U.S. generally accepted accounting principles (“GAAP”), for which we are not the primary beneficiary. Accordingly, we deconsolidated AMEX Assurance as of September 30, 2005 for purposes of GAAP, although it continues to appear in our statutory reporting and will do so until the closing of the sale. Our Brands In 2005, in connection with the separation from American Express, we launched two new brand names for our businesses. We are using Ameriprise Financial as our holding company brand, as well as the name of our branded distribution network and certain of our retail products and services. The retail products and services that utilize the Ameriprise brand include some that we provide through our branded advisors (e.g., wrap accounts, retail brokerage services and banking solutions) and some that we market directly to consumers (e.g., personal auto and home insurance). We completed the transition of our banking products and services to the Ameriprise brand in the third quarter of 2006, when our new banking subsidiary received all necessary regulatory approvals. See “Our Solutions—Asset Accumulation and Income Segment—Brokerage and Investment Advisory Services—Banking Products” below for additional information about Ameriprise Bank. Our second brand name, RiverSource, is used for our asset management, annuity, and most of our insurance solutions. Products that utilize the RiverSource name include institutional asset management products, annuities and life and disability insurance products. We believe that using a separate brand for these products, including our retail mutual funds, permits differentiation from our branded advisor network. As part of our re-branding to RiverSource, effective as of December 31, 2006, we streamlined the organizational structure of our life insurance and annuities manufacturing operations by consolidating our five life insurance subsidiaries into two entities. This reorganization incorporated the RiverSource brand into the names of our life insurance subsidiaries that issue our annuity and life and disability insurance products. Our Financial Advisor Platform We provide our clients financial planning and brokerage services through our nationwide network of over 12,000 affiliated financial advisors. Our network currently includes more than 10,000 branded advisors, of which more than 3,000 are employees of our company and approximately 7,000 are independent franchisees. Our network also includes approximately 1,700 non-employee SAI unbranded advisors. According to the 2006-2007 Securities Industry Association Yearbook, we had the third largest sales force in 2006 among Securities Industry Association members (based on the number of our registered representatives). Advisors who use our brand name can affiliate with our company in two different ways. Each affiliation offers different levels of support and compensation from our company, with the rate of commission we pay to each branded advisor determined by a schedule that takes into account the type of service or product provided, the type of branded advisor affiliation and other criteria. The affiliation options are: • Employee Advisors. Under this affiliation, a financial advisor is an employee of our company, and we pay compensation competitive with other employee models, based principally on commissions and other fees. We 10
  • 14. provide our employee advisors a high level of support, including providing them local office space, in exchange for a lower commission payout rate than our branded franchisee advisors. • Branded Franchisee Advisors. Under this affiliation, a financial advisor is an independent contractor franchisee who affiliates with our company and has the right to use our brand name. We pay our branded franchisee advisors a higher payout rate than employee advisors, but they are responsible for paying their own business expenses, such as overhead and any compensation of staff they may employ. In addition, our branded franchisee advisors pay us a franchise association fee and other fees in exchange for support we offer and the right to associate with our brand name. The support that we offer to our branded franchisee advisors includes general leadership support, technology platforms and tools, training, and marketing programs. We believe our strong financial advisor retention speaks to the value proposition we offer advisors. As of December 31, 2006, over 60% of our total branded advisors had been with us for more than four years, with an average tenure among these branded advisors of nearly 13 years. Among branded advisors who have been with us for more than four years, we have an over 94% retention rate. We believe this success is driven by the choice we offer branded advisors about how to affiliate with our company, together with our competitive payout schemes and centralized support that helps them build their practices. Our branded advisor platforms strive to deliver financial solutions to our clients through an approach focused on building long-term personal relationships through financial planning that is responsive to our clients’ evolving needs. In our branded advisor client relationships involving financial plans, we utilize the Certified Financial Planner Board of Standards, Inc.’s defined financial planning process. This process involves gathering relevant financial information, setting life goals, examining our clients’ current financial status and determining a strategy or plan for helping our clients meet their goals given their current situation and future plans. Once we have identified a financial planning client’s objectives in asset accumulation, income and protection, we then recommend a comprehensive solution set, including products intended to address those needs while clients are accepting an appropriate range and level of risks. Our experience has shown that financial planning relationships with our clients are characterized by an ability to better understand clients’ specific needs, leading to being able to better help our clients meet those needs, higher overall client satisfaction, more products held and higher assets under management. Our financial planning clients pay a fixed fee, an hourly rate or a combination of the two for the receipt of financial planning services. This fee is not based on, or related to, actual investment performance. If clients elect to implement their financial plan with our company, we and our affiliated financial advisors generally receive a sales commission and/or sales load and other revenues for the products that we sell to them. These commissions, sales loads and other revenues are separate from and in addition to financial planning fees we and our affiliated financial advisors may receive. We achieved financial planning fee revenue in 2006 of $176 million, a 3% increase over 2005. In addition, sales of financial plans increased in 2006, and now approximately 45% of our retail clients have received a financial plan or have entered into an agreement to receive and have paid for a financial plan, up from approximately 44% in 2005. Each of our three platforms of affiliated financial advisors provides our clients access to our diversified set of asset accumulation, income and insurance products and services, as well as a selection of products of other companies. The asset accumulation and income products we offer are described in more detail under “Our Solutions—Asset Accumulation and Income Segment” below, and the insurance products we offer are described in more detail under “Our Solutions—Protection Segment” below. Compensation we pay our affiliated financial advisors consists of, among others, a significant portion of the revenues received in the form of financial planning fees, wrap account fees, commissions, sales charges and Rule 12b-1 distribution and servicing- related fees. Our Solutions – Asset Accumulation and Income Segment We offer an array of asset accumulation and income products and services to help retail and institutional clients address their identified financial objectives. We also offer a wide range of investment management products and services to retail and institutional clients outside the United States through Threadneedle Investments, as well as a variety of services to 401(k) and other qualified and non-qualified employee retirement plans, individuals and small- and mid-sized businesses. In 2006, 73% of our revenues were attributable to our Asset Accumulation and Income business. Our Asset Accumulation and Income segment primarily derives revenues from the fees we receive from asset management and product distribution, as well as mortality and expense risk fees and other fees generally paid for supplemental benefits to our RiverSource variable annuities (including optional living and death benefits, such as guaranteed minimum income benefit and guaranteed minimum death benefit provisions) and marketing support payments received from external mutual funds and other firms. We also derive revenues from the net investment and interest income earned on assets supporting our 11
  • 15. RiverSource fixed annuities (and the fixed accounts within RiverSource variable annuities) and certificates. Because most fees that we receive for asset management and related services are based on managed assets, market appreciation will generally result in increased revenues, and inversely, market depreciation will generally reduce revenues. Revenues will also fluctuate due to net inflows or outflows of assets. At December 31, 2006, we had $466.1 billion in owned, managed and administered assets worldwide compared to $428.2 billion as of December 31, 2005, as follows: As of December 31, Asset Category 2006 2005 (in billions) Owned $ 97.2 $ 86.9 Managed 299.8 264.0 Administered 69.1 77.3 Total $ 466.1 $ 428.2 Owned assets include certain assets on our balance sheet, such as investments in the general accounts and the separate accounts of the RiverSource Life companies, as well as cash and cash equivalents, restricted and segregated cash and receivables. Managed assets include client assets for which we provide investment management and other services, such as the assets of the RiverSource family of mutual funds, assets of institutional clients and assets held in our wrap accounts (retail accounts for which we receive a fee based on assets held in the account). Managed assets also include assets managed by sub-advisors selected by us. Administered assets include assets for which we provide administrative services, such as assets of our clients invested in other companies’ products that we offer outside of our wrap accounts. The decline in administered assets shown in the table above is due principally to the 2006 sale of our defined contribution plan recordkeeping business. Our in-house investment management teams manage approximately 61% of our owned, managed and administered assets. For additional details regarding our owned, managed and administered assets, see “Management’s Discussion and Analysis” contained in our 2006 Annual Report to Shareholders. Investment Management Capabilities and Development Our investment management teams manage the majority of assets in our RiverSource and Threadneedle families of mutual funds, as well as the assets we manage for institutional clients in separately managed accounts, the general and separate accounts of the RiverSource Life companies and the assets of our face-amount certificate company. These investment management teams also manage assets under sub-advisory arrangements. We believe that delivering consistent and strong investment performance will positively impact our assets under management by increasing the competitiveness and attractiveness of many of our asset accumulation and income products. We strive to deliver strong investment performance by supporting our fixed income and equity management teams and investing in the tools and resources to assist them in their investment management activities. We have implemented different approaches to investment management depending on whether the investments in our portfolio are fixed income or equity. • Fixed Income. In the United States, our fixed-income investment management teams are centralized in Minneapolis, Minnesota, with our leveraged loan team located in Los Angeles, California. Our fixed income teams are organized by sector. They utilize valuation models with both quantitative and qualitative inputs to drive duration, yield curve and credit decisioning. This sector-based approach creates focused teams organized by expertise and accountable for performance. Portfolio performance is measured in such a way that client interests are optimized and asset managers are incentivized to collaborate, employ best practices and execute in rapid response to changing market and investment conditions consistent with established portfolio management principles. • Equity. We have implemented a multi-boutique approach to equity asset management using individual, highly accountable investment management teams with dedicated analytical and equity trading resources. Each team focuses on particular investment strategies and product sets. We have investment management teams located in Boston, Cambridge (Massachusetts) and Minneapolis as well as at our affiliates Kenwood Capital Management LLC (“Kenwood”) and Threadneedle Investments. Kenwood is an investment management joint venture we established in 1998. We own 47.7% of Kenwood and Kenwood’s investment management principals own 47.5% of the firm, with the remainder held by associate portfolio managers employed by Kenwood. Kenwood investment management services are focused on the small- and mid-cap segments of the U.S. equity market. 12
  • 16. Beginning in 2001, we have taken major steps to improve investment performance by enhancing investment management leadership, talent and infrastructure. • In September 2001, we hired our current Chief Investment Officer, who has 23 years of experience in the financial services industry. • In the first quarter of 2002, we formed our Boston investment management team through the strategic hiring of analysts and portfolio managers with substantial experience in the financial services and asset management industries. This investment team is focused on management of ten of our own large-cap and sector mutual funds using fundamental research as a money management technique and assumed management of eight of these funds in 2002. • In the third quarter of 2002, we hired a new head of our fixed income investment management, who has 21 years of experience in the asset management industry. • In August 2002, we formed our Cambridge investment team following the acquisition of the assets of Dynamic Ideas LLC. Our Cambridge team uses proprietary investment management and asset allocation models to manage money and proprietary optimization techniques to control risk, lower turnover and control costs. Our Cambridge team also developed our proprietary financial planning tool Lifetime Optimizer with our financial advice services personnel, which is included in the customized Morningstar® workstations used by our branded advisors. Our Cambridge team manages two retail mutual funds, portions of three other equity funds and co-manages three funds-of-funds. • In the first quarter of 2003, we reorganized our fixed income investment management team around the sector-based approach described above. • In September 2003, we acquired Threadneedle Investments, one of the U.K.’s leading investment managers. Threadneedle Investments currently has over 100 investment professionals based in London. We restructured our international investment management teams located in London, Singapore and Tokyo and transferred management of our RiverSource global and international equity portfolios to Threadneedle. Threadneedle Investments has performed strongly since our September 2003 acquisition and has increased its managed assets over the period from $81.1 billion at September 30, 2003 to $136.3 billion at December 31, 2006. • In 2003, we reorganized our Minneapolis-based resources to provide better support to our deep value equity investment team. • In 2004, we implemented BlackRock Solutions, a leading fixed income portfolio management platform. The platform provides assistance in both pre-and post-trade compliance, as well as scenario analytics, and allows our U.S.-based fixed income management teams to better analyze the effects of specific factors affecting performance. The platform also helps our fixed income portfolio managers identify and manage risk according to a multitude of factors on a real-time basis. • In 2005, we expanded the role of our head of fixed income to include a broad set of our Minneapolis investment teams, including both equity and fixed income. We also closed our San Diego office, allowing us to leverage resources and talent more effectively by focusing our U.S. equity portfolio management and research efforts on our three other U.S. equity platforms. • In 2006, we implemented the Charles River equity trading and compliance system, a leading tool that significantly enhances our infrastructure and capabilities. Taken together, these actions have led us to deliver strong investment performance. As of December 31, 2006, 77% of RiverSource equity mutual funds and 72% of RiverSource fixed income mutual funds were above the median of their respective Lipper peer groups for one-year performance. In addition to our existing products, we are seeking to take advantage of the improvements in our investment performance by creating new retail and institutional investment products, including 18 new RiverSource mutual funds, 18 RiverSource-manufactured annuity products, 2 Threadneedle hedge funds, and 4 Threadneedle Open Ended Investment Companies (“OEICs”) that were launched in 2006. We provide seed money to certain of our investment management teams to develop new products for our institutional clients. In addition, Threadneedle Investments is leading our efforts to develop investment strategies in emerging markets with a China Equity mutual fund being launched in 2007. 13
  • 17. Threadneedle Investments We also offer investment management products and services through Threadneedle Investments. Threadneedle Investments is headquartered in London, England, and had approximately 700 employees as of December 31, 2006. The Threadneedle group of companies provides investment management products and services independently from our other affiliates. Threadneedle Investments offers a wide range of asset management products and services, including segregated asset management, mutual funds and hedge funds, to institutional clients as well as to retail clients through intermediaries, banks and fund platforms in Europe. These services comprise most asset classes, including equities, fixed income, cash and real estate. Threadneedle Investments also offers investment management products and services to U.S. investment companies, other U.S. institutional clients, including certain RiverSource investment funds, as well as non-U.S. institutional clients. In addition, Threadneedle Investments provides sub-advisory services to the Luxembourg-based fund family of American Express Bank Ltd., a subsidiary of American Express. Threadneedle Investments sold its controlling interest in an institutional multi-manager business, MM Asset Management Ltd., to Investment Manager Selection (Holdings) Limited (“IMSHL”) in exchange for shares in IMSHL on October 31, 2005. Threadneedle Investments expects to develop additional hedge funds and other products for both the retail and institutional markets as well as to continue its efforts to attract new retail and institutional clients. Our September 2003 acquisition of Threadneedle Investments helped facilitate consolidation of our international asset management activities in the United Kingdom. Threadneedle has benefited from growth in assets under management both through new client business and organic market growth of existing funds. At December 31, 2006, the Threadneedle group of companies managed $136.3 billion, or 29%, of our total owned, managed and administered assets for both retail and institutional clients compared to $117.2 billion at December 31, 2005. Mutual Fund Families – RiverSource and Threadneedle Our RiverSource family of mutual funds consists of two groups of funds: (1) the RiverSource Funds, a group of retail mutual funds, and (2) the RiverSource Variable Portfolio Funds (“VP Funds”), a group of variable product funds available as investment options in variable insurance and annuity products. We offer the RiverSource Funds to investors primarily through our financial advisor network and to participants in retirement plans through various third-party administrative platforms. In 2006, we began increasing our efforts to distribute RiverSource funds through third-party broker-dealer firms, third-party administrative platforms, and banks. The VP Funds are generally available only as underlying investment options in our own RiverSource variable annuity and variable life products. Both the RiverSource Funds and the VP Funds include domestic and international equity, fixed income, cash management and balanced funds with a variety of investment objectives. We refer to the RiverSource Funds and the VP Funds, together, as the RiverSource family of mutual funds. At December 31, 2006, the RiverSource family of mutual funds consisted of 99 funds with $81.7 billion in managed assets compared to 90 funds with $76.6 billion at December 31, 2005. The RiverSource Funds had total managed assets at December 31, 2006 of $59.5 billion in 76 funds compared to $58.1 billion at December 31, 2005 in 66 funds. The VP Funds had total managed assets at December 31, 2006 of $22.2 billion in 23 funds compared to $18.6 billion at December 31, 2005 in 24 funds. AMPF, our primary retail brokerage subsidiary, acts as the principal underwriter (distributor of shares) for the RiverSource family of mutual funds. In addition, RiverSource Investments, LLC acts as investment manager, and several of our subsidiaries perform various services for the funds, including accounting, administrative, transfer agency and custodial services. RiverSource Investments, LLC performs investment management services pursuant to contracts with the mutual funds that are subject to renewal by the mutual fund boards within two years after initial implementation, and thereafter, on an annual basis. RiverSource Investments, LLC earns management fees for managing the assets of the RiverSource family of mutual funds based on the underlying asset values. We also earn fees by providing other services to the RiverSource family of mutual funds. RiverSource Funds that are equity or balanced funds have a performance incentive adjustment that adjusts the level of management fees received, upward or downward, based on the fund’s performance as measured against a designated external index of peers. This has a corresponding impact on management fee revenue. In 2006, revenues were adjusted 14
  • 18. upward by $6 million due to performance incentive adjustments. We earn commissions for distributing the RiverSource Funds through sales charges (front-end or back-end loads) on certain classes of shares and distribution and servicing-related (12b-1) fees based on a percentage of fund assets, and receive intercompany allocation payments. This revenue is impacted by our overall asset levels, and overall the RiverSource Funds have experienced significant net asset outflows since 2000, although we believe this trend has slowed in recent quarters taken as a whole due to strong sales growth resulting from improved investment performance and new product introductions. The RiverSource family of funds also uses sub-advisors to diversify and enhance investment management expertise. Since the end of 2003, Threadneedle personnel have provided investment management services to the global and international equity funds. Kenwood, another of our affiliates, also provides sub-advisory services to one small-cap RiverSource Fund and one small-cap VP Fund. In addition to Threadneedle Investments and Kenwood, 23 unaffiliated sub-advisors provide investment management services to certain RiverSource funds. Threadneedle manages two UK-domiciled OEICs each of which qualifies as a public limited company that coordinates the distribution and management of unit trusts among countries in the European Union (“UCITS”): Threadneedle Investment Funds ICVC (“TIF”) and Threadneedle Specialist Investment Funds ICVC (“TSIF”). TIF is registered for public offer in the UK, Austria, Belgium, France, Germany, Hong Kong, Luxembourg, Spain, Switzerland (15 sub-funds only) and The Netherlands. TSIF is registered for public offer in the UK, Austria, France, Germany, Luxembourg, Spain and The Netherlands. TIF and TSIF are structured as umbrella companies with a total of 42 (34 and 8, respectively) sub-funds covering the world’s bond and equity markets as well as money market funds, and all funds are compliant with EU Directives for the cross-border marketing of UCITS. Institutional Separately Managed Accounts We provide investment management services to pension, profit-sharing, employee savings and endowment funds, accounts of large- and medium-sized businesses and governmental clients, as well as the accounts of high-net-worth individuals and smaller institutional clients, including tax-exempt and not-for-profit organizations. The management services we offer include investment of funds on a discretionary or non-discretionary basis and related services including trading, cash management and reporting. We offer various fixed income and equity investment strategies for our institutional separately managed accounts clients. Through an arrangement with Threadneedle Investments and our affiliate Kenwood, we also offer certain international and U.S. equity strategies to U.S. clients. For our investment management services, we generally receive fees based on the market value of managed assets pursuant to contracts that can typically be terminated by the client on short notice. Clients may also pay fees to us based on the performance of their portfolio. At December 31, 2006, we managed a total of $18.8 billion in assets under this range of services. Insurance Company General and Separate Accounts We provide investment management services for assets held in the general and separate accounts of our RiverSource Life companies. Our fixed-income team manages the general account assets according to a strategy designed to provide for a consolidated and targeted rate of return on investments while controlling risk. Separate account assets are managed by both our fixed-income and equity teams. At December 31, 2006, on behalf of the RiverSource Life companies, we managed general account assets of $27.9 billion and separate account assets of $22.3 billion, compared to $31.0 billion and $18.6 billion, respectively, at December 31, 2005. In accordance with regulatory investment guidelines, the RiverSource Life companies, through their respective boards of directors, boards of directors’ investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures and their effect on profitability in order to guide us in our management of the general account assets. They also review the distribution of assets in the portfolio by type and credit risk sector. The objective is to structure the investment securities portfolio in the general accounts to meet contractual obligations under the insurance and annuity products we have manufactured and achieve targeted levels of profitability within defined risk parameters. Threadneedle Investments provides investment management services for accounts of The Zurich Group totaling $96.5 billion in separately managed assets as of December 31, 2006, compared to $84.1 billion as of December 31, 2005. See “—International Distribution—The Zurich Group” below. 15
  • 19. Management of Collateralized Debt Obligations (“CDOs”) We provide collateral management services to special purpose vehicles that issue CDOs through a dedicated team of investment professionals located in Los Angeles and Minneapolis. CDOs are securities collateralized by a pool of assets, usually primarily syndicated bank loans and, to a lesser extent, high yield bonds. Multiple tranches of securities are issued by a CDO, offering investors various maturity and credit risk characteristics. Scheduled payments to investors are based on the performance of the CDO’s collateral pool. For collateral management of CDOs, we earn fees based on managed assets and, in certain instances, may also receive performance-based fees. At December 31, 2006, we managed $7.6 billion of assets related to CDOs. Sub-Advisory Services We serve as sub-advisors to certain offshore mutual funds sponsored by American Express Bank Ltd., a subsidiary of American Express. These funds are organized under the laws of Luxembourg and are advised by American Express Asset Management Company (Luxembourg) Ltd., a subsidiary of American Express. We act as sub-advisor for other domestic and international funds, and are pursuing opportunities to sub-advise additional investment company assets in the U.S. and overseas. As of December 31, 2006, we had over $1.2 billion in sub-advised assets. Our affiliates, Kenwood and Threadneedle Investments, also serve as sub-advisors to investment companies and other assets. Hedge Funds We provide investment advice and related services to private, pooled investment vehicles organized as limited partnerships, limited liability corporations or foreign (non-U.S.) entities. These funds are currently exempt from registration under the Investment Company Act of 1940 and are organized as domestic and foreign funds. For investment management services, we generally receive fees based on the market value of assets under management, as well as performance-based fees. Brokerage and Investment Advisory Services Non-Proprietary Mutual Funds We offer more than 2,000 mutual funds from more than 200 other mutual fund families on a stand-alone basis and as part of our wrap accounts and 401(k) plans to provide our clients a broad choice of investment products. In 2006, our retail sales of other companies’ mutual funds accounted for a substantial portion of our total retail mutual fund sales. Client assets held in mutual funds of other companies on a stand-alone basis generally produce lower revenues than client assets held in our own mutual funds. Mutual fund families of other companies generally pay us by sharing a portion of the revenue generated from the sales of those funds and from the ongoing management of fund assets attributable to our clients’ ownership of shares of those funds. In exchange for these payments, the mutual fund families of other companies are generally made available through our financial advisors and through our online brokerage platform. We also receive administrative services fees from most mutual funds sold through our distribution network. Fee-based Investment Advisory Accounts In addition to purchases of proprietary and non-proprietary mutual funds and other securities on a stand-alone basis, clients may purchase mutual funds, among other securities, in connection with investment advisory fee-based “wrap account” programs or services, and pay fees based on a percentage of their assets. We currently offer both discretionary and non-discretionary investment advisory wrap accounts. In a discretionary wrap account, we or an unaffiliated investment advisor chooses the underlying investments in the portfolio on behalf of the client, whereas in a non-discretionary wrap account, clients choose the underlying investments in the portfolio based, to the extent the client elects, on the recommendations of their financial advisor. Investors in discretionary and non- discretionary wrap accounts generally pay an asset-based fee that is based on the assets held in their wrap accounts as well as any related fees or costs included in the underlying securities held in that account (e.g., underlying mutual fund operating expenses, Rule 12b-1 fees, etc.). A portion of our proprietary mutual fund sales are made through wrap accounts. Client assets held in proprietary mutual funds in a wrap account generally produce higher revenues than client assets held in proprietary mutual funds on a stand-alone basis because, as noted above, we receive a fee based on the asset values of the assets held in a wrap account in addition to revenues we normally receive for investment management of the funds included in the account. We offer four major types of investment advisory accounts under our Ameriprise Premier Portfolio Services (“Premier”) program. The largest wrap service we sponsor within Premier is AmeripriseSM Strategic Portfolio Service 16
  • 20. Advantage, a non-discretionary wrap account service. The Strategic Portfolio Service Advantage wrap program had total client assets under management of $59.4 billion as of December 31, 2006, compared to $44.6 billion as of December 31, 2005. We also sponsor separately managed accounts (“SMAs”), a discretionary wrap account service through which clients invest in strategies offered by us and affiliated and non-affiliated investment managers. SMAs had total client assets under management of $2.4 billion as of December 31, 2006, compared to $2.1 billion as of December 31, 2005. We also offer a discretionary fund of hedge funds investment advisory account through Premier and in the first quarter of 2007, we launched Active Portfolios, a discretionary mutual fund wrap account service of which we are the sponsor. Active Portfolios clients are able to invest in portfolios managed by RiverSource Investments. Brokerage and Other Products and Services We offer our retail and institutional clients a variety of brokerage and other products and services. Our Ameriprise ONE Financial Account is a single integrated financial management account for our retail clients that combines a client’s investment, banking and lending relationships. The Ameriprise ONE Financial Account enables clients to access a single cash account to fund a variety of financial transactions, including investments in mutual funds, individual securities, cash products and margin lending. Additional features of the Ameriprise ONE Financial Account include unlimited check writing with overdraft protection, an American Express® Gold or Platinum Card (subject to certain eligibility requirements), online bill payments, ATM access and a savings account. We provide securities execution and clearing services for our retail and institutional clients through our registered broker- dealer subsidiaries. As of December 31, 2006, we administered $69.1 billion in assets for clients, a decrease of $8.2 billion from December 31, 2005. Our online brokerage service allows clients to purchase and sell securities online, obtain independent research and information about a wide variety of securities, use self-directed asset allocation and other financial planning tools, contact a financial advisor, as well as have access to mutual funds, among other services. We also offer shares in public, non-exchange traded Real Estate Investment Trusts (“REITs”) issued by other companies. We believe that we are one of the largest distributors of public non-exchange traded REITs in the United States. In addition, we service, but do not sell, managed futures limited partnerships engaged in the trading of commodity interests, including futures contracts, in which one of our subsidiaries is the general partner. These products subject us to regulation by the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association. We also offer a My Financial Accounts data aggregation service, which is an online capability that enables clients to view and manage their entire Ameriprise Financial relationship (i.e., brokerage, 401(k), banking and credit cards) in one secure place via the Internet. Our My Financial Accounts data aggregation service also allows clients to add third-party account information, providing a consolidated view of their financial services account relationships. In May 2004, we began the nationwide rollout of Ameriprise Gold Financial Services to offer special benefits to recognize and reward our clients with more than $100,000 invested with our company or, starting in 2005, with at least a $1 million face-amount estate series life insurance policy. Clients with over $500,000 invested with our company or a $5 million face-amount estate series life insurance policy may qualify for Ameriprise Platinum Financial Services. Clients must meet detailed eligibility and maintenance rules to qualify for and retain Gold or Platinum status. Special benefits may include items such as annual fee waivers on IRA rollovers, quarterly fee waivers on the Ameriprise ONE Financial Account or a fee-waived American Express® Preferred Rewards Gold or Platinum Card, as applicable. Financial planning services are available for a separate fee as described above under “Our Financial Advisor Platform.” Face-Amount Certificates We issue five different types of face-amount certificates, a type of investment product, through Ameriprise Certificate Company, a wholly owned subsidiary that is registered as an investment company under the Investment Company Act of 1940. Owners of our certificates invest funds and are entitled to receive, at maturity or at the end of a stated term, a determinable amount of money equal to their aggregate investments in the certificate plus interest at rates we declare from time to time, less any withdrawals and early withdrawal penalties. For two types of certificate products, the rate of interest is calculated in whole or in part based on any upward movement in a broad-based stock market index up to a maximum return, where the maximum is a fixed rate for a given term, but can be changed at our discretion for prospective terms. At December 31, 2006, we had $4.7 billion in total certificate reserves underlying our certificate products. Our earnings are based upon the spread between the interest rates credited to certificate holders and the interest earned on the certificate assets invested. A portion of these earnings is used to compensate the various affiliated and unaffiliated entities that provide management, administrative and other services to our company for these products. The certificates compete with many other investments offered by banks (including Ameriprise Bank), savings and loan associations, credit unions, mutual funds, insurance companies and similar financial institutions, which may be viewed by potential customers as offering a 17
  • 21. comparable or superior combination of safety and return on investment. In times of weak performance in the equity markets, certificate sales are generally stronger. Annuities We offer annuity products issued almost exclusively through the RiverSource Life companies. Our products include deferred variable and fixed annuities, in which assets accumulate until the contract is surrendered, the contractholder (or in some contracts, annuitant) dies or the contractholder or annuitant begins receiving benefits under an annuity payout option. We also offer immediate annuities, in which payments begin within one year of issue and continue for life or for a fixed period of time. In addition to the revenues we generate on these products, which are described below, we also receive fees charged on assets allocated to our separate accounts to cover administrative costs, and a portion of the management fees from the underlying investment accounts in which assets are invested, as discussed below under “ —Variable Annuities.” Investment management performance is critical to the profitability of our RiverSource annuity business. Our branded advisors generally do not offer annuity products of our competitors, except for annuities specifically designed for use in the small employer 401(k) market that are issued by two unaffiliated insurance companies, and except for a limited number of selected newly recruited advisors who can continue to service and receive commissions on previously placed business with certain approved unaffiliated insurance companies. Our unbranded advisors do offer annuities from a broader array of insurance companies. Our RiverSource Distributors subsidiary serves as the principal underwriter and distributor of RiverSource Annuities through AMPF, SAI, and third-party channels such as banks and broker-dealer networks. RiverSource Life is one of the largest issuers of annuities in the United States. For the year ended December 31, 2006, on a consolidated basis, our variable annuity products ranked eighth in new sales of variable annuities according to VARDS. We continue to expand distribution by delivering annuity products issued by the RiverSource Life companies through non-affiliated representatives and agents of third-party distributors. RiverSource Life had fixed and variable annuity cash sales in 2006 of $12.9 billion, up from 2005 as a result of a 46% increase in variable annuity sales, partially offset by a decrease in fixed annuity sales. The relative proportion between fixed and variable annuity sales is generally driven by the relative performance of the equity and fixed income markets. In times of lackluster performance in equity markets, fixed sales are generally stronger. In times of superior performance in equity markets, variable sales are generally stronger. The relative proportion between fixed and variable annuity sales is also influenced by product design and other factors. Our recent sales of fixed annuity products have been substantially limited in response to consumer demand and market conditions. Variable Annuities A variable annuity provides a contractholder with investment returns linked to underlying investment accounts of the contractholder’s choice. These underlying investment options may include the RiverSource VP Funds discussed above as well as mutual funds of other companies. RiverSource variable annuity products in force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging up to 4% at December 31, 2006. Our Portfolio Navigator asset allocation program is available under our variable annuities. The Portfolio Navigator program is designed to help a contract purchaser select an asset allocation model portfolio from the choices available under the program, based on the purchaser’s stated investment time horizon, risk tolerance and investment goals. We believe the benefits of the Portfolio Navigator asset allocation program include a well-diversified annuity portfolio, disciplined, professionally created asset allocation models, simplicity and ease of use, access to multiple well-known money managers within each model portfolio and automatic rebalancing of the client’s contract value on a quarterly basis. The model portfolios under the Portfolio Navigator asset allocation program are designed and periodically updated by our investment management subsidiary RiverSource Investments, LLC, based on recommendations from Morningstar Associates. Contract purchasers can choose to add various optional benefit provisions to their contracts to meet their needs. These include enhanced guaranteed minimum death benefit provisions, guaranteed minimum withdrawal benefit provisions, guaranteed minimum accumulation benefit provisions and guaranteed minimum income benefit provisions. In general, these features can help protect contractholders and beneficiaries from a shortfall in death or living benefits due to a decline in the value of their underlying investment accounts. The general account assets of each of our life insurance subsidiaries support the contractual obligations under the guaranteed benefit provisions the company issues (see “—Investment Management Capabilities and Development—Insurance Company General and Separate Accounts” above). As a result, they bear the risk that protracted under- 18
  • 22. performance of the financial markets could result in guaranteed benefit payments being higher than what current account values would support. Their exposure to risk from guaranteed benefits generally will increase when equity markets decline. RiverSource variable annuities provide us with fee-based revenue in the form of mortality and expense risk charges and fees charged for optional features elected by the contractholder and other contract charges. We and our affiliates receive asset management fees for managing the VP Funds underlying our variable annuity products as well as Rule 12b-1 distribution and servicing-related fees from the VP Funds and the underlying funds of other companies. In addition, we receive marketing support payments from the affiliates of other companies’ funds included as investment options in our RiverSource variable annuity products. Fixed Annuities RiverSource fixed annuity products provide a contractholder with cash value that increases by a fixed or indexed interest rate. Fixed rates are periodically reset at our discretion subject to certain policy terms establishing minimum guaranteed interest crediting rates. Our earnings from fixed annuities are based upon the spread between rates earned on assets purchased with fixed annuity deposits and the rates at which interest is credited to our RiverSource fixed annuity contracts. RiverSource fixed annuity contracts in force provide guaranteed minimum interest crediting rates ranging from 1.5% to 5% at December 31, 2006. In 2003, and in response to a declining interest rate environment, several states adopted an interim regulation allowing for a guaranteed minimum interest-crediting rate of 1.5% and/or a model regulation providing for a guaranteed indexed rate and have now adopted regulations that mirror the National Association of Insurance Commissioners (“NAIC”) model regulation for a guaranteed indexed rate. In response, we filed a number of contract changes in recent years to implement lower minimum guarantees. We will continue to implement contract changes as states adopt the new model regulation or as the interim regulation expires according to its terms. As noted above, given prevailing consumer demand and market conditions, our recent sales of fixed annuity products have been substantially limited. Liabilities and Reserves for Annuities We must maintain adequate financial reserves to cover the risks associated with guaranteed benefit provisions added to variable annuity contracts in addition to liabilities arising from fixed and variable annuity base contracts. You can find a discussion of liabilities and reserves related to our annuity products in Note 2 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders. Banking Products We provide consumer lending and Federal Deposit Insurance Corporation (“FDIC”) insured deposit products to our retail clients through our new banking subsidiary, Ameriprise Bank, which commenced operations in the third quarter of 2006. Our consumer lending products include first mortgages, home equity loans, home equity lines of credit, investment secured loans and lines of credit and unsecured loans and lines of credit. The majority of bank deposits are in the Ameriprise Personal Savings Account, which is offered in connection with the Ameriprise ONE Financial Account described above in “Our Solutions—Asset Accumulation and Income Segment—Brokerage and Investment Advisory Services—Brokerage and Other Products and Services.” This product held $636 million in total deposits as of December 31, 2006. We also offer stand-alone checking, savings and money market accounts and certificates of deposit. We believe these products play a key role in our Asset Accumulation and Income business by offering our clients an FDIC-insured alternative to other cash products. They also provide pricing flexibility generally not available through money market funds. Our originated mortgage and home equity installment loan products are sold to third parties shortly after origination. All other lending products are originated and held on the balance sheet of Ameriprise Bank. As of December 31, 2006, there were $410 million in home equity line of credit balances, $31 million in investment-secured loan and line of credit balances and $58 million in unsecured balances, net of premiums and discounts. We distribute our banking products through branded advisor referrals and through our website. We believe that the availability of these products is a competitive advantage and supports our financial advisors in their ability to meet the financial needs of our clients. We also provide distribution services for the Personal Trust Services division of Ameriprise Bank. Personal Trust Services provides personal trust, custodial, agency and investment management services to individual and corporate clients of our branded advisors. Personal Trust Services also uses some of our investment products in connection with its services. 19
  • 23. Strategic Alliances and Other Marketing Channels We use strategic marketing alliances, local marketing programs for our branded advisors and on-site workshops through our Business Alliances group in order to generate new clients for our financial planning and other financial services. In addition, we use third-party distribution channels to sell our RiverSource annuity products and our RiverSource Funds. Strategic Alliances and Other Marketing Arrangements An important aspect of our strategy is to leverage the client relationships of our other businesses by working with major companies to create alliances that help generate new financial services clients for us. We currently have relationships with Delta, American Century Services Corporation (“American Century”), eWomenNetwork, Inc. and Life Time Fitness. In addition to these relationships, we also continue to market products and services directly to consumers holding an American Express Card under our arrangement with American Express. • Delta. Our marketing alliance with Delta, which began in 2003, provides us with the opportunity to market financial planning and advice services to consumers who have a relationship with Delta Air Lines through its Delta SkyMiles program. • American Century. In April 2004, we began a cooperative marketing alliance with American Century. This alliance provides us with the opportunity to market our financial planning and advice services to direct shareholders of American Century’s own mutual fund family. • eWomenNetwork, Inc. In September 2005, we entered into a marketing agreement with eWomenNetwork, Inc., to offer financial planning and advice services to their membership base. The agreement allows us to use multi-channel touch points, from online to seminars and events, to reach members for financial advisor client acquisition opportunities. • Life Time Fitness. In February 2006, we engaged in a marketing agreement with Life Time Fitness. Through in-club promotions, fine dining events and direct response offers made through Life Time Fitness’s Experience Life magazine, we offer financial planning services to a demographically desirable membership base approaching one million members. Ameriprise will also be a sponsor for the Life Time Fitness triathlon series in five cities in both 2007 and 2008. Our alliance arrangements are generally for a limited duration of one to five years with an option to renew. Additionally, these types of marketing arrangements typically provide that either party may terminate the agreements on short notice, typically within 60 days. We compensate our alliance partners for providing opportunities to market to their clients. In addition to our alliance arrangements, we have developed a number of local marketing programs for our branded advisors to use in building a client base in their local communities. These include pre-approved seminars, seminar- and event-training and referral tools and training, which are designed to encourage both prospective and existing clients to refer or bring their friends to an event. Third-Party Distribution Channels We also offer our RiverSource annuity products to retail clients through third-party banks and broker-dealers, such as Wachovia Securities, Inc., SunTrust Securities, Inc., Wells Fargo Securities, Inc. and Dreyfus Service Corporation. As of December 31, 2006, we had distribution agreements for RiverSource annuity products in place with approximately 14 banks and over 70 broker-dealers, with annual sales of $1.6 billion in 2006. In 2006 we began signing agreements to offer RiverSource Funds through third-party bank and broker-dealer channels. Our intention is to grow this demand of distribution, and we have begun a staffing initiative in order to do so. Financial Education and Planning Services We provide workplace financial education and advisory services programs to major corporations and small businesses through our Business Alliances group. Our Business Alliances group focuses on helping the individual employees of client companies plan for and achieve their long-term financial objectives. It makes available educational materials, tools and programs as well as training and supporting financial advisors working on-site at company locations to present educational seminars, conducting one-on- one meetings and participating in client educational events. In 2006, we maintained and continued to seek financial education relationships with companies and small businesses, and focused on retaining 20
  • 24. broader financial planning and educational programs with our clients transitioning away from the defined contribution plan recordkeeping business which we sold in 2006. We also provide financial advice service offerings, such as Financial Planning and Executive Financial Services, tailored to discrete employee segments. We believe that demand for employee financial education will remain high, particularly given the continuing trend toward increased employee responsibility for selecting retirement investments, selecting benefit options, and for their overall personal retirement readiness. Financial Services Center In 2004, we established the Financial Services Center, a special call center for remote-based sales and service. The Financial Services Center provides support for those retail customers who do not have access to or do not desire a face-to-face relationship with a financial advisor. Financial consultants in the Financial Services Center provide personal service and guidance through phone-based interactions and may provide product choices in the context of the client’s needs and objectives. Institutional Distribution We offer separately managed account services to a variety of institutional clients, including pension plans, employee savings plans, foundations, endowments, corporations, banks, trusts, governmental entities, high-net-worth individuals and not-for-profit organizations. We also provide investment management services for the general and separate accounts of insurance companies, including for our insurance subsidiaries, as well as hedge fund management and other alternative investment products. These alternative investment products include CDOs available through our syndicated loan management group to our institutional clients. We also offer a variety of retirement plan services to institutional clients. We are working to further develop our institutional capabilities, including funding institutional product development by our investment management teams and through the recent expansion of our institutional and sub-advisory sales teams. At December 31, 2006, $153.1 billion, or 33%, of our total owned, managed and administered assets (other than assets held in the general and separate accounts of our RiverSource Life companies described below) were managed for institutional clients, including assets managed by Threadneedle Investments. Retirement Plan Services We provide a variety of services for our institutional clients who sponsor retirement plans. These services are provided primarily through our trust company subsidiary and one of our broker-dealer subsidiaries. As of December 31, 2006, $10.1 billion of RiverSource Trust Collective Funds and separate accounts, or 2%, of our total owned, managed and administered assets as of such date, were managed for retirement services clients, compared to $11.2 billion at December 31, 2005. This amount does not include the RiverSource family of mutual funds held in other retirement plans, because these assets are included under assets managed for institutional and retail clients and within the “Investment Management Capabilities and Development—Mutual Fund Families—RiverSource and Threadneedle” section above. On June 1, 2006, our trust company subsidiary completed the sale of its defined contribution recordkeeping business for $66 million. We incurred $30 million of expenses related to the sale and realized a pretax gain of $36 million. The expenses included a write-down of capitalized software development costs of $17 million and severance costs of $11 million. Our trust company subsidiary continues to provide recordkeeping services to these plans through a transition period that will end in 2007. We continue to manage $11.8 billion of defined contribution assets. We continue to provide investment management services through collective investment funds provided by our trust company subsidiary. Collective funds are investment funds that are exempt from registration with the Securities and Exchange Commission (“SEC”) and offered primarily through banks and other financial institutions to institutional clients such as retirement, pension and profit-sharing plans. We currently serve as investment manager to 42 collective funds covering a broad spectrum of investment strategies. We receive fees for investment management services that are generally based upon a percentage of assets under management rather than performance-based fees. We continue to provide our collective funds to retirement plans that were involved in the sale of our defined contribution recordkeeping business. In addition to RiverSource Funds and RiverSource Trust Collective Funds, we offer separately managed accounts to our retirement plan clients. In addition to the investment management services described above, our trust company also acts as custodian, and one of our brokerage subsidiaries acts as broker, for individual retirement accounts, tax-sheltered custodial accounts and 21
  • 25. other retirement plans for individuals and small- and mid-sized businesses. At December 31, 2006, these tax-qualified assets totaled $89.3 billion, 19% of our total assets owned, managed and administered. Our trust company subsidiary also provides institutional asset custodial services primarily to our affiliates providing mutual funds, face-amount certificates, asset management and life insurance. At December 31, 2006, our institutional assets under custody were $110.9 billion. We receive fees for our custody services that are generally based upon assets under custody as well as transaction-related fees for our institutional custody services. International Distribution Outside the United States, distribution is led by Threadneedle and is organized along three lines: retail, institutional and The Zurich Group. Retail. The retail business line includes Threadneedle’s U.K. mutual fund family, which ranked as the fourth largest retail fund business in the United Kingdom in terms of assets under management at December 31, 2006, according to the Investment Management Association, a trade association for the U.K. investment management industry. Threadneedle sells mutual funds mostly in Europe (primarily the U.K. and Germany) through financial intermediaries and institutions. The retail business unit also includes Threadneedle’s hedge funds comprising five long/short equity funds, a fund-of-funds and one fixed income fund. The hedge funds are sold primarily to banks and other managers of funds of hedge funds. Institutional. Threadneedle’s institutional business offers separately managed accounts to U.K. and international pension funds and other institutions as well as offering insurance funds. Threadneedle Investments is expanding distribution of its institutional products in Scandinavia, Switzerland, Spain, the Middle East and Asia. At December 31, 2006, Threadneedle Investments had $119.6 billion in owned assets and managed assets in separately managed accounts (including “—The Zurich Group” assets, as described below) compared to $103.2 billion at December 31, 2005. The Zurich Group. Threadneedle’s Zurich business comprises the asset management activities undertaken by Threadneedle Investments for The Zurich Group. The Zurich Group is Threadneedle’s single largest client and represented 73% of Threadneedle’s assets under management as of December 31, 2006. However, the annual fees associated with these assets comprise a substantially lower portion of Threadneedle’s revenue. Threadneedle provides investment management products and services to The Zurich Group for assets generated by The Zurich Group through the sale of its life insurance products, variable annuity, pension and general insurance products, as well as other assets on the balance sheet of The Zurich Group. Threadneedle entered into an agreement with The Zurich Group when we acquired Threadneedle Investments in 2003 for Threadneedle to continue to manage certain assets of Zurich Financial Services, a subsidiary of The Zurich Group. For investment management of the assets underlying The Zurich Group’s life insurance products (which represent 90% of the assets managed for The Zurich Group as of December 31, 2006), the initial term of the agreement is through October 2011. For investment management of The Zurich Group’s other assets, the initial term ended in October 2006 and has been extended in connection with a restructuring of the portfolio and a move to more market- aligned rates and terms. The agreement also provides for a fee review in March 2007 for management of non-property policyholder assets on the balance sheet of The Zurich Group and the potential for a property fee review in 2008. Threadneedle Investments also offers its funds directly or within a multi-manager wrap through an independent UK distribution platform operated by Openwork Limited. Threadneedle Investments provides sales and marketing support for these distribution channels. Our Solutions – Protection Segment We offer a variety of protection products, including life, disability income, brokered life and health insurance products and personal auto and home insurance, to address the identified protection and risk management needs of our retail clients. We offer these insurance products primarily to our clients with financial plans and, other than personal auto and home insurance, we offer these products exclusively through our branded advisors. We offer our personal auto and home insurance products primarily on a direct basis through co-marketing alliances. We issue insurance policies through our life insurance subsidiaries and the Property Casualty companies (as defined below under “—Ameriprise Auto & Home”). The RiverSource Life companies are also the issuers of the annuity products described above under “Our Solutions—Asset Accumulation and Income Segment—Brokerage and Investment Advisory Services—Annuities.” In 2006, 24% of our revenues were attributable to our Protection business. Our Protection business generates income from premiums and cost of insurance charges, the spread between our earnings on the investment of general account assets of our RiverSource Life companies and the interest credited to contractholders’ fixed accounts, and mortality and expense risk fees, as well as marketing, administrative, servicing and distribution support fees related to the funds underlying our variable life products. 22
  • 26. RiverSource Life Through the RiverSource Life companies, we are the issuers of both variable and fixed universal life insurance, traditional life insurance including whole life and term life, and disability income insurance (we discontinued underwriting new long term care policies as of December 31, 2002). Universal life insurance is a form of permanent life insurance characterized by its flexible premiums, its flexible death benefit amounts and its unbundling of the pricing factors (i.e., mortality, interest and expenses). Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium. Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith. RiverSource Life’s sales of individual life insurance in 2006, as measured by scheduled annual premiums, excluding lump sum and excess premiums, consisted of 82% variable universal life, 9% fixed universal life and 9% traditional life. Our RiverSource Life companies issue only non-participating policies, which do not pay dividends to policyholders from the insurer’s earnings. Assets supporting policy values associated with fixed account life insurance and annuity products, as well as those assets associated with fixed account investment options under variable insurance and annuity products (collectively referred to as the “fixed accounts”), are part of the RiverSource Life companies’ general accounts. Under fixed accounts, the RiverSource Life companies bear the investment risk. More information on the RiverSource Life companies general accounts is found under “Our Solutions— Asset Accumulation and Income Segment—Investment Management Capabilities and Development—Insurance Company General and Separate Accounts” above. Variable Universal Life Insurance RiverSource’s best-selling life insurance products are variable universal life insurance policies. Variable universal life provides life insurance coverage along with investment returns linked to underlying investment accounts of the policyholder’s choice, options that may include RiverSource VP Funds discussed above as well as funds of other companies. RiverSource variable universal life insurance products in force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging from 3.0% to 4.5% at December 31, 2006. For the nine months ended September 30, 2006, RiverSource Life ranked first in sales of variable universal life based on total premiums (according to the Tillinghast-Towers Perrin’s Value survey). Fixed Universal Life Insurance and Traditional Whole Life Insurance Fixed universal life and traditional whole life insurance policies do not subject the policyholder to the investment risks associated with variable universal life insurance. RiverSource fixed universal life insurance products provide life insurance coverage and cash value that increases by a fixed interest rate. The rate is periodically reset at the discretion of the issuing company subject to certain policy terms relative to minimum interest crediting rates. RiverSource fixed universal life insurance policies in force provided guaranteed minimum interest crediting rates ranging from 3.0% to 5.0% at December 31, 2006. The RiverSource Life companies also offer traditional whole life insurance, which combines a death benefit with a cash value that generally increases gradually in amount over a period of years and does not pay a dividend (non-participating). The RiverSource Life companies have sold very little traditional whole life insurance in recent years. Term Life Insurance The RiverSource Life companies also offer term life insurance. Term life insurance only provides a death benefit, does not build up cash value and does not pay a dividend. The policyholder chooses the term of coverage with guaranteed premiums at the time of issue. During the chosen term, we can not raise premium rates even if claims experience deteriorates. At the end of the chosen term, coverage may continue with higher premiums until the maximum age is attained, at which point the policy expires with no value. Disability Income Insurance The RiverSource Life companies also issue disability income insurance. For the nine months ended September 30, 2006, we were ranked as the seventh largest provider of individual (non-cancellable) disability income insurance based on premiums (according to LIMRA International). Disability income insurance provides monthly benefits to individuals who are unable to earn income at either their occupation at time of disability (“own occupation”) or at any suitable occupation (“any occupation”) for premium payments that are guaranteed not to change. Depending upon occupational and medical underwriting criteria, applicants for disability income insurance can choose “own occupation” and “any occupation” coverage 23
  • 27. for varying benefit periods up to age 65. In some states, applicants may also choose various benefit provisions to help them integrate individual disability income insurance benefits with social security or similar benefit plans and to help them protect their disability income insurance benefits from the risk of inflation. Long Term Care Insurance As of December 31, 2002, RiverSource Life discontinued underwriting long term care insurance. Our financial advisors now sell only long term care insurance of other companies, primarily products offered by one of the Genworth Financial insurance companies. In addition, in May 2003, we began outsourcing claims administration on our existing block of long term care policies to the Genworth Financial insurer. Beginning in 2004, RiverSource Life filed for approval to implement rate increases on its existing block of nursing home- only indemnity long term care insurance policies. Implementation of these rate increases began in early 2005 and we have so far received approval in 47 states, covering over 86% of the eligible premiums, with an average approved rate increase of 33.2%. Implementation of rate increases is expected to continue in 2007 and may be sought with respect to other existing blocks of long term care insurance policies, in each case subject to regulatory approval. Ameriprise Auto & Home We offer personal auto, home, excess personal liability and American Express Card-related insurance products through IDS Property Casualty and its subsidiaries (the “Property Casualty companies”). Our Property Casualty companies provide personal auto, home and liability coverage to clients in 41 states and the District of Columbia. AMEX Assurance also provides certain American Express Card-related insurance products such as travel accident insurance. AMEX Assurance cedes 100% of its personal auto, home and liability coverage risks to IDS Property Casualty pursuant to a reinsurance agreement. Effective July 1, 2005, AMEX Assurance ceded 100% of the travel insurance and card related business of American Express Travel Related Services Company, Inc., a subsidiary of American Express pursuant to a reinsurance agreement with Amexco Insurance Company. In connection with the separation from American Express, we entered into an agreement to sell AMEX Assurance to American Express Travel Related Services Company, Inc. within two years after the Distribution. For additional information relating to this agreement and future sale, see “Our Relationship with American Express.” Distribution and Marketing Channels We offer the insurance products of our RiverSource Life companies almost exclusively through our branded financial advisors. Our branded advisors offer insurance products issued almost exclusively by the RiverSource Life companies. In limited circumstances in which we do not offer comparable products or based on risk rating or policy size, our branded advisors may offer insurance products of unaffiliated carriers. We also sell RiverSource Life insurance products through our Financial Services Center. Our Property Casualty companies do not have field agents; rather, we use co-branded direct marketing to sell our personal auto and home insurance products through alliances with commercial institutions, through affinity groups, and directly to our clients, American Express Cardmembers and the general public. We also receive referrals through our financial advisor network. Our Property Casualty companies have a multi-year distribution agreement with Costco Insurance Agency, Inc., Costco’s affiliated insurance agency. Costco members represented 71% of all new policy sales of our Property Casualty companies in 2006. Through other alliances, we market our property casualty products to certain consumers who have a relationship with Delta Air Lines and offer personal auto, home and liability insurance products to customers of Ford Motor Credit Company. Liabilities and Reserves We must maintain adequate financial reserves to cover the insurance risks associated with the insurance products we issue. Generally, reserves represent estimates of the invested assets that our insurance companies need to hold now to provide adequately for future benefits and expenses. For a discussion of liabilities and reserves related to our insurance products, see Note 2 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders. Reinsurance We reinsure a portion of the insurance risks associated with our life and long term care insurance products through reinsurance agreements with unaffiliated reinsurance companies. We use reinsurance in order to limit losses, reduce exposure to large risks and provide additional capacity for future growth. To manage exposure to losses from reinsurer 24
  • 28. insolvencies, we evaluate the financial condition of reinsurers prior to entering into new reinsurance treaties and on a periodic basis during the terms of the treaties. Our insurance companies remain primarily liable as the direct insurers on all risks reinsured. They also retain all risk for claims on disability income contracts. We currently manage risk by limiting the amount of disability income insurance written on any one individual. Our insurance companies also retain all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions. Generally, we reinsure 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products. As a result, the RiverSource Life companies typically retain and are at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurer actually paying. RiverSource Life Insurance Company began reinsuring risks at this level during 2001 and 2002 for term life insurance and 2002 and 2003 for variable and universal life insurance. Policies issued prior to these dates are not subject to these reinsurance levels. Generally, the maximum amount of life insurance risk retained by the RiverSource Life companies is $750,000 on any policy insuring a single life and $1.5 million on any flexible premium survivorship variable life policy. For existing long term care policies, RiverSource Life Insurance Company (and RiverSource Life of NY for 1996 and later issues) retained 50% of the risk and ceded on a coinsurance basis the remaining 50% of the risk to a subsidiary of Genworth Financial. Risk on variable life and universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionately in all material risks and premiums associated with a policy. See Note 2 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders. We also reinsure a portion of the risks associated with our personal auto and home insurance products through two types of reinsurance agreements with unaffiliated reinsurance companies. We purchase reinsurance with a limit of $4.65 million per loss and we retain $350,000 per loss. We purchase catastrophe reinsurance and retain $6 million of loss per event with loss recovery up to $74 million per event. Financial Strength Ratings Our insurance subsidiaries receive ratings from independent rating agencies. Ratings are important to maintaining public confidence in our insurance subsidiaries and our protection and annuity products. Lowering of our insurance subsidiaries’ ratings could have a material adverse effect on our ability to market our protection and annuity products and could lead to increased surrenders of these products. Rating agencies continually evaluate the financial soundness and claims-paying ability of insurance companies based on a number of different factors. More specifically, the ratings assigned are developed from an evaluation of a company’s balance sheet strength, operating performance and business profile. Balance sheet strength reflects a company’s ability to meet its current and ongoing obligations to its policyholders and includes analysis of a company’s capital adequacy. The evaluation of operating performance centers on the stability and sustainability of a company’s sources of earnings. The analysis of business profile reviews a company’s mix of business, market position and depth and experience of management. RiverSource Life Insurance Company is currently rated as “A+” (Superior) by A.M. Best Company, Inc. and its claims- paying ability/financial strength is rated “Aa3” (Excellent) by Moody’s Investors Service, Inc., “AA-” (Very Strong) by Fitch and “AA-” (Very Strong) by Standard & Poor’s. Generally, RiverSource Life of NY does not receive an individual rating, but receives the same rating as RiverSource Life. Our Property Casualty companies receive two ratings from A.M. Best, one related to AMEX Assurance as a separate company and one for the combined Property Casualty companies. Both AMEX Assurance and the combined Property Casualty companies received “A” ratings (Excellent) by A.M. Best with a negative outlook. Risk-Based Capital The NAIC defines risk-based capital (“RBC”) requirements for insurance companies. The RBC requirements are used by the NAIC and state insurance regulators to identify companies that merit regulatory actions designed to protect policyholders. The NAIC RBC report is completed as of December 31 and filed annually, along with the statutory financial statements. Our RiverSource Life companies and Property Casualty companies would be subject to various levels of regulatory intervention should their total adjusted statutory capital fall below the RBC requirement. At the “company action level,” defined as total adjusted capital level between 100% and 75% of the RBC requirement, an insurer must submit a plan for corrective action with its primary state regulator. The “regulatory action level,” which is between 75% and 50% of the RBC requirement, subjects an insurer to examination, analysis and specific corrective action prescribed by the primary state 25
  • 29. regulator. If a company’s total adjusted capital falls between 50% and 35% of its RBC requirement, referred to as “authorized control level,” the insurer’s primary state regulator may place the insurer under regulatory control. Insurers with total adjusted capital below 35% of the requirement will be placed under regulatory control. For RiverSource Life Insurance Company, the company action level RBC was $590.5 million as of December 31, 2006, and the corresponding total adjusted capital was $3.5 billion, which represents 595% of company action level RBC. As of December 31, 2006, the company action level RBC was $115 million for IDS Property Casualty, $5.9 million for AMEX Assurance and $2 million for Ameriprise Insurance Company. As of December 31, 2006, IDS Property Casualty had $523 million of total adjusted capital, or 455% of the company action level RBC, AMEX Assurance had $118 million of total adjusted capital, or 1,967% of the company action level RBC, and Ameriprise Insurance Company had $47 million of total adjusted capital, or 2,350% of the company action level RBC. As described above, RiverSource Life Insurance Company, IDS Property Casualty, AMEX Assurance and Ameriprise Insurance Company maintain capital well in excess of the company action level required by their state insurance regulators. Competition We operate in a highly competitive industry. Because of our business model as a diversified financial services firm, we compete directly with a variety of financial institutions such as banks, securities brokers, asset managers and insurance companies depending on the type of product and service we are offering. We compete directly with these entities for the provision of products and services to clients, as well as for our financial advisors and investment management personnel. Our products and services also compete indirectly in the marketplace with the products and services of our competitors. Our financial advisor force competes for clients with a range of other advisors, broker-dealers and direct channels, including wirehouses, regional broker-dealers, independent broker-dealers, insurers, banks, asset managers, registered investment advisers and direct distributors. To acquire and maintain owned, managed and administered assets, we compete against a substantial number of firms, including those of the categories listed above. Our mutual funds, like other mutual funds, face competition from other mutual fund families and alternative investment products, such as exchange traded funds. Additionally, for mutual funds, high ratings from rating services, such as Morningstar or Lipper, as well as favorable mention in financial publications, may influence sales and lead to increases in managed assets. As a mutual fund’s assets increase, management fee revenue increases and the fund may achieve economies of scale that make it more attractive to investors because of potential resulting reductions in the fund’s expense ratio. Conversely, low ratings and negative mention in financial publications can lead to outflows, which reduce management fee revenues and can impede achieving the benefits of economies of scale. Additionally, reputation and brand integrity are becoming increasingly more important as the mutual fund industry generally and certain firms in particular have come under regulatory and media scrutiny. Our mutual fund products compete against products of firms like Fidelity, American Funds and Oppenheimer. Competitive factors affecting the sale of mutual funds include investment performance in terms of attaining the stated objectives of the particular products and in terms of fund yields and total returns, advertising and sales promotional efforts, brand recognition, investor confidence, type and quality of services, fee structures, distribution, and type and quality of service. Our RiverSource annuity products compete with products from numerous other companies, such as Hartford, MetLife, Lincoln National and Nationwide. Competitive factors affecting the sale of annuity products include price, product features, investment performance, commission structure, perceived financial strength, claims-paying ratings, service, brand recognition and distribution capabilities. Our brokerage subsidiaries compete with securities broker-dealers, independent broker-dealers, financial planning firms, insurance companies and other financial institutions in attracting and retaining members of the field force. Competitive factors in the brokerage services business include price, service and execution. Competitors of our RiverSource Life companies and Property Casualty companies consist of both stock and mutual insurance companies, as well as other financial intermediaries marketing insurance products such as Prudential, Principal Financial, Nationwide, Allstate and State Farm. Competitive factors affecting the sale of life and disability income insurance products include the cost of insurance and other contract charges, the level of premium rates and financial strength ratings from rating agencies such as A.M. Best. Competitive factors affecting the sale of property casualty insurance products include brand recognition, distribution capabilities and product pricing. Technology We have an integrated customer management system, built in the early 1980s, which serves as the hub of our technology platform. In addition, we have specialized recordkeeping engines that manage individual brokerage, mutual 26
  • 30. fund, insurance and banking client accounts. Over the years we have updated our platform to include new product lines such as brokerage, deposit, credit and products of other companies, wrap accounts and e-commerce capabilities for our financial advisors and clients. We also use a proprietary suite of processes, methods, and tools for our financial planning services. Most of our applications run on a technology infrastructure that we outsourced to IBM in 2002. Under this arrangement, IBM is responsible for all mainframe, midrange and end-user computing operations and a substantial portion of our web hosting and help desk operations. Also, we outsource our voice network operations to AT&T. In addition to these two arrangements, we have outsourced our production support and a portion of our development and maintenance of our computer applications to offshore firms. We are updating our technological capabilities to create a more adaptive platform design that will allow a faster, lower-cost response to emerging business opportunities, compliance requirements and marketplace trends. Since 2002, we have upgraded our investment accounting platform for our owned assets, transitioned our wrap account system and transitioned our investment trading platforms to BlackRock Solutions, a leading industry platform, to support our fixed income teams and Charles River to support our equity teams. We also completed a customer analytics and business intelligence capability to enable targeted marketing and identify product sales opportunities. In addition, we completed the upgrade of our mutual fund transfer agent platform in order to help improve compliance, enhance functionality and enable third-party distribution of our own mutual funds. Our 2006 initiatives included investing in our technology manufacturing processes with an objective of increasing our Capability Maturity Model for Integration. The primary purposes of this investment have been to improve the quality of the systems we deliver, improve efficiency of our employee and outsource workforce and enhance our ability to meet business service levels. In the current phase of our technology upgrade, we have begun to update our account opening, order management and servicing platforms for individual and corporate clients. In addition to general updating of our technological capabilities as part of the separation from American Express, we are installing and implementing an information technology infrastructure to support our enterprise business functions, including customer service and distribution. This separation from American Express’s technology infrastructure includes initiatives to separate hardware, applications, network, telecommunications, databases and backup and recovery solutions. We have developed a comprehensive business continuity plan that covers business disruptions of varying severity and scope and addresses the loss of a geographic area, building, staff, data, systems and/or telecommunications capabilities. We subject our business continuity plan to review and testing on an ongoing basis and update it as necessary. We require our key technology vendors and service providers to do the same. Under our business continuity plan, we expect to continue to be able to do business and resume operations with minimal service impacts. However, under certain scenarios, the time that it would take for us to recover and to resume operations may significantly increase depending on the extent of the disruption and the number of personnel affected. Geographic Presence For years ended December 31, 2006, 2005 and 2004, over 90% of our long-lived assets were located in the United States and over 90% of our revenues were generated in the United States. Employees At December 31, 2006, we had 11,858 employees, including 3,178 employee branded advisors (which does not include our branded franchisee advisors or the unbranded advisors of SAI, none of whom are employees of our company). None of our employees are subject to collective bargaining agreements governing their employment with us. We believe that our employee relations are good. Regulation Most aspects of our business are subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges and by non-U.S. government agencies or regulatory bodies and securities exchanges. Our public disclosure, internal control environment and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002, related regulations and rules of the SEC and the listed company requirements of The New York Stock Exchange, Inc. We have implemented franchise and compliance standards and strive for a consistently high level of client service. For several years, we have used standards developed by the Certified Financial Planner Board of Standards, Inc., in our financial planning process. We also participated in developing the International Organization for Standardization (“ISO”) 22222 Personal Financial Planning Standard published in December 2005 by the ISO. We put in place franchise standards 27
  • 31. and requirements regardless of location. We have made significant investments in our compliance processes, enhancing policies and procedures to monitor our compliance with the numerous and varied legal and regulatory requirements applicable to our business. These requirements are discussed below. We expect to continue to make significant investments in our compliance efforts. Our life and annuity insurance businesses operate in both the Asset Accumulation and Income segment and the Protection segment, and consequently are subject to regulation summarized below. Asset Accumulation and Income Our Asset Accumulation and Income business is regulated by the SEC, the National Association of Securities Dealers, commonly referred to as the NASD, the Commodity Futures Trading Commission, the National Futures Association, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision (“OTS”), state securities regulators and state insurance regulators and the U.K. Financial Services Authority (“FSA”). Our European fund distribution activities are also subject to local country regulations. Additionally, the U.S. Departments of Labor and Treasury regulate certain aspects of our retirement services business. As has the rest of the financial services industry, we have experienced, and believe we will continue to be subject to, increased regulatory oversight of the securities, insurance and commodities industries at all levels. As an example, under the European Union (“EU”) directive on the supplementary supervision of financial conglomerates (“EU Financial Conglomerates Directive”), we are required to have a “coordinating” or “consolidating” regulator to monitor the organization as a whole and coordinate information with other regulators (primarily the FSA, the supervisor of Threadneedle Investments) that have jurisdiction over discrete aspects of our operations. For more information on these requirements, see “—General” below. Since October 2004, investment companies and investment advisers have been required by the SEC to adopt and implement written policies and procedures designed to prevent violation of the federal securities laws and to designate a chief compliance officer responsible for administering these policies and procedures. The SEC and NASD have also heightened requirements for, and continued scrutiny of, the effectiveness of supervisory procedures and compliance programs of broker-dealers, including certification by senior officers regarding the effectiveness of these procedures and programs. AMPF is registered as a broker-dealer and investment adviser with the SEC, is a member of the NASD and does business as a broker-dealer and investment adviser in all 50 states and the District of Columbia. Our limited purpose broker-dealer, RiverSource Distributors, is registered as a broker-dealer with the SEC, each of the fifty states and the District of Columbia, and is a member of the NASD. AMPF and RiverSource Distributors are also licensed as insurance agencies under state law. The SEC and the NASD have stringent rules with respect to the net capital requirements and activities of broker-dealers. Our financial advisors and other personnel must obtain all required state and NASD licenses and registrations. SEC regulations also impose notice and capital limitations on the payment of dividends by a broker-dealer to a parent. Our subsidiary, American Enterprise Investment Services, Inc., is also registered as a broker-dealer with the SEC and appropriate states and is a member of the NASD and the Boston Stock Exchange and a stockholder in the Chicago Stock Exchange. A subsidiary of our independent financial advisor platform, SAI, is also registered as a broker-dealer and is a member of the NASD. Certain of our subsidiaries also do business as registered investment advisers and are regulated by the SEC and state securities regulators where required. The RiverSource Life companies are subject to regulation by state insurance regulators as described under “—Protection” below. Our trust company is primarily regulated by the Minnesota Department of Commerce (Banking Division) and is subject to capital adequacy requirements under Minnesota law. It may not accept deposits or make personal or commercial loans. As a provider of products and services to tax-qualified retirement plans and IRAs, certain aspects of our business, including the activities of our trust company, fall within the compliance oversight of the U.S. Departments of Labor and Treasury, particularly the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA, and the tax reporting requirements applicable to such accounts. Ameriprise Certificate Company, our face-amount certificate company, is regulated as an investment company under the Investment Company Act of 1940, as amended. The payment of dividends to our company by Ameriprise Certificate Company is subject to capital requirements under applicable law and understandings with the SEC and the Minnesota Department of Commerce. Our banking subsidiary, Ameriprise Bank, is subject to regulation by the OTS, which is the primary regulator of federal savings banks, and by the FDIC in its role as insurer of Ameriprise Bank’s deposits. As its controlling company, we are a savings and loan holding company, and we are subject to regulation by the OTS. Furthermore, our ownership of Threadneedle Investments subjects us to the EU Financial Conglomerates Directive to designate a global consolidated supervisory regulator, and we have designated the OTS for this purpose. Because of our status as a savings and loan holding 28
  • 32. company, our activities are limited to those that are financial in nature, and the OTS has authority to regulate our capital and debt, although there are not specific holding company capital requirements. Ameriprise Bank is subject to specific capital rules and if its capital falls below certain levels, the OTS is required to take certain remedial actions and may take other actions, including the imposition of limits on dividends or activities, and the OTS could direct us to divest the subsidiary. Ameriprise Bank is also subject to limits on capital distributions, including payment of dividends to us and on transactions with affiliates. In addition, an array of community reinvestment, fair lending, and other consumer protection laws and regulations apply to Ameriprise Bank. Either of the OTS or the FDIC may bring administrative enforcement actions against Ameriprise Bank or its officers, directors or employees if any of them violate a law or engage in an unsafe or unsound practice. Compliance with these and other regulatory requirements adds to the cost and complexity of operating our business. In addition, the SEC, OTS, U.S. Departments of Labor and Treasury, NASD, other self-regulatory organizations and state securities, banking and insurance regulators may conduct periodic examinations. We may or may not receive advance notice of periodic examinations, and these examinations may result in administrative proceedings, which could lead to, among other things, censure, fine, the issuance of cease-and-desist orders or suspension or expulsion of a broker-dealer or an investment adviser and its officers or employees. Individual investors also can bring complaints against our company and can file those complaints with regulators. Because our independent contractor branded advisor platform is structured as a franchise system, we are also subject to Federal Trade Commission and state franchise requirements. Protection The Minnesota Department of Commerce (Insurance Division), the Wisconsin Office of the Commissioner of Insurance, the Illinois Insurance Department and the New York State Insurance Department (the “Domiciliary Regulators”) regulate certain of the RiverSource Life companies, IDS Property Casualty, AMEX Assurance and Ameriprise Insurance Company depending on each company’s state of domicile. The New York State Insurance Department regulates RiverSource Life of NY. In addition to being regulated by their Domiciliary Regulators, our RiverSource Life companies and Property Casualty companies are regulated by each of the insurance regulators in the states where each is authorized to transact the business of insurance. Other states also regulate such matters as the licensing of sales personnel and, in some cases, the marketing and contents of insurance policies and annuity contracts. The primary purpose of such regulation and supervision is to protect the interests of contractholders and policyholders. Financial regulation of our RiverSource Life companies and Property Casualty companies is extensive, and their financial and intercompany transactions (such as intercompany dividends, capital contributions and investment activity) are often subject to pre-notification and continuing evaluation by the Domiciliary Regulators. Virtually all states require participation in insurance guaranty associations which assess fees to insurance companies in order to fund claims of policyholders and contractholders of insolvent insurance companies. At the federal level, there is periodic interest in enacting new regulations relating to various aspects of the insurance industry, including taxation of annuities and life insurance policies, accounting procedures, and the treatment of persons differently because of gender with respect to terms, conditions, rates or benefits of an insurance policy. Adoption of any new federal regulation in any of these or other areas could potentially have an adverse effect upon our RiverSource Life companies. Client Information Many aspects of our business are subject to increasingly comprehensive legal requirements by a multitude of different functional regulators concerning the use and protection of personal information, particularly that of clients, including those adopted pursuant to the Gramm-Leach-Bliley Act, the Fair and Accurate Credit Transactions Act and an ever increasing number of state laws. We have implemented policies and procedures in response to such requirements. We continue our efforts to safeguard the data entrusted to us in accordance with applicable law and our internal data protection policies, including taking steps to reduce the potential for identity theft or other improper use or disclosure of personal information, while seeking to collect and use data to properly achieve our business objectives and to best serve our clients. General The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the USA Patriot Act, was enacted in October 2001 in the wake of the September 11th terrorist attacks. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States. In response, we have enhanced our existing anti-money laundering programs and developed new procedures and programs. For example, we have implemented a customer identification program applicable to many of our businesses, and have enhanced our “know your customer” and “enhanced due diligence” programs in others. We intend to take steps to comply with any additional regulations that are adopted. In addition, we have 29
  • 33. taken and will take steps to comply with anti-money laundering in the U.K. derived from the EU Directives and take account of international initiatives adopted in other jurisdictions in which we conduct business. We have operations in the EU through Threadneedle Investments and certain of our other subsidiaries. We monitor developments in EU legislation, as well as in the other markets in which we operate, to ensure that we comply with all applicable legal requirements, including EU directives applicable to financial institutions. Because of the mix of Asset Accumulation and Income and Protection activities we conduct, we will be addressing the EU Financial Conglomerates Directive, which contemplates that certain financial conglomerates involved in banking, insurance and investment activities will be subject to a system of supplementary supervision at the level of the holding company constituting the financial conglomerate. The directive requires financial conglomerates to, among other things, implement measures to prevent excessive leverage and multiple leveraging of capital and to maintain internal control processes to address risk concentrations as well as risks arising from significant intragroup transactions. We have designated the OTS as our global consolidated supervisory regulator under the EU Financial Conglomerates Directive. SECURITIES EXCHANGE ACT REPORTS AND ADDITIONAL INFORMATION We maintain an Investor Relations website on the Internet at http://ir.ameriprise.com. We make available free of charge, on or through this website, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC. To access these, just click on the “SEC Filings” link found on our Investor Relations homepage. You can also access our Investor Relations website through our main website at www.ameriprise.com by clicking on the “Investor Relations” link, which is located at the bottom of our homepage. Information contained on our website is not incorporated by reference into this report or any other report filed with the SEC. SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES You can find information regarding our operating segments and classes of similar services in Note 27 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders and incorporated herein by reference. EXECUTIVE OFFICERS OF OUR COMPANY Set forth below is a list of all our executive officers and our principal accounting officer as of February 27, 2007. None of such officers has any family relationship with any other executive officer or our principal accounting officer, and none of such officers became an officer pursuant to any arrangement or understanding with any other person. Each such officer has been elected to serve until the next annual election of officers or until his or her successor is elected and qualified. Each officer’s age is indicated by the number in parentheses next to his or her name. James M. Cracchiolo – Chairman and Chief Executive Officer Mr. Cracchiolo (48) has been our Chairman and Chief Executive Officer since the Distribution in September 2005. Prior to the Distribution, Mr. Cracchiolo was Chairman and Chief Executive Officer of AEFC since March 2001; President and Chief Executive Officer of AEFC since November 2000; and Group President, Global Financial Services of American Express since June 2000. He served as Chairman of American Express Bank Ltd. from September 2000 until April 2005 and served as President and Chief Executive Officer of Travel Related Services International from May 1998 through July 2003. He is also currently on the board of advisors of the March of Dimes. Brian M. Heath – President—U.S. Advisor Group Mr. Heath (46) has been our President—U.S. Advisor Group since September 2005. Prior to the Distribution, Mr. Heath served as Senior Vice President and General Sales Manager, U.S. Advisor Group of AEFC since June 1999. Mark Schwarzmann - President—Insurance, Annuities and Product Distribution Mr. Schwarzmann (45) has been our President—Insurance, Annuities and Product Distribution since September 2005. Prior to the Distribution, Mr. Schwarzmann served as Senior Vice President, Insurance, Annuities and Product Distribution of AEFC since February 2005, and Chairman and Chief Executive Officer, RiverSource Life Insurance Company, and Chairman and Chief Executive Officer, American Enterprise Life Insurance Company from December 2003 until it was merged out of existence in December 2006. Prior thereto, he served as Senior Vice President of Insurance and Annuities of AEFC from December 2003, when he joined American Express. Mr. Schwarzmann also currently serves on the American Council of Life Insurers’ Board of Directors, a position he has held since June 2004. Prior to joining American 30
  • 34. Express, he was Chief Executive Officer, Allfinanz, Inc., and had previously held a variety of senior leadership positions at GE, GE Capital, and GE Financial Assurance. Joseph E. Sweeney - President—Financial Planning, Products and Services Mr. Sweeney (45) has been our President—Financial Planning, Products and Services since September 2005. Prior to the Distribution, Mr. Sweeney served as Senior Vice President and General Manager of Banking, Brokerage and Managed Products of AEFC since April 2002. Prior thereto, he served as Senior Vice President and Head, Business Transformation, Global Financial Services of American Express from March 2001 until April 2002. William F. Truscott - President—U.S. Asset Management and Chief Investment Officer Mr. Truscott (46) has been our President—U.S. Asset Management and Chief Investment Officer since September 2005. Prior to the Distribution, Mr. Truscott served as Senior Vice President and Chief Investment Officer of AEFC, a position he held since he joined the company in September 2001. Walter S. Berman - Executive Vice President and Chief Financial Officer Mr. Berman (64) has been our Executive Vice President and Chief Financial Officer since September 2005. Prior to the Distribution, Mr. Berman served as Executive Vice President and Chief Financial Officer of AEFC, a position he held since January 2003. From April 2001 to January 2004, Mr. Berman served as Corporate Treasurer of American Express. Kelli A. Hunter - Executive Vice President of Human Resources Ms. Hunter (45) has been our Executive Vice President of Human Resources since September 2005. Prior to the Distribution, Ms. Hunter served as Executive Vice President of Human Resources of AEFC since joining our company in June 2005. Prior to joining AEFC, Ms. Hunter was Senior Vice President—Global Human Capital for Crown Castle International Corporation in Houston, Texas. Prior to that, she held a variety of senior level positions in human resources for Software Spectrum, Inc., Mary Kay, Inc., as well as Morgan Stanley Inc. and Bankers Trust New York Corporation. John C. Junek - Executive Vice President and General Counsel Mr. Junek (57) has been our Executive Vice President and General Counsel since September 2005. Prior to the Distribution, Mr. Junek served as Senior Vice President and General Counsel of AEFC since June 2000. Glen Salow - Executive Vice President—Technology and Operations Mr. Salow (50) has been our Executive Vice President—Technology and Operations since September 2005. Prior to the Distribution, Mr. Salow was Executive Vice President of Technologies and Operations of AEFC since May 2005 and was Executive Vice President and Chief Information Officer of American Express from March 2000 to May 2005. Kim M. Sharan - Executive Vice President and Chief Marketing Officer Ms. Sharan (49) has been our Executive Vice President and Chief Marketing Officer since September 2005. Prior to the Distribution, Ms. Sharan served as Senior Vice President and Chief Marketing Officer of AEFC since July 2004. Prior thereto, she served as Senior Vice President and Head of Strategic Planning of the Global Financial Services Division of American Express from October 2002 until July 2004. Prior to joining American Express, Ms. Sharan was Managing Director at Merrill Lynch in Tokyo, Japan, from February 2000 until September 2002. Deirdre N. Davey — Senior Vice President — Corporate Communications and Community Relations Ms. Davey (36) has been our Senior Vice President—Corporate Communications and Community Relations since February 2007. Previously, Ms. Davey served as Vice President—Corporate Communications since May 2006. Prior thereto, Ms. Davey served as Vice President—Business Planning and Communications for our Chairman’s Office, and prior to the Distribution, she served as Vice President—Business Planning and Communications for the Group President, Global Financial Services at American Express. Ms. Davey has more than 15 years of experience in marketing, business planning and corporate communications. John R. Woerner - Senior Vice President—Strategic Planning and Business Development Mr. Woerner (38) has been our Senior Vice President—Strategic Planning and Business Development since September 2005. Prior to the Distribution, Mr. Woerner served as Senior Vice President—Strategic Planning and Business Development of AEFC since March 2005. Prior to joining us, Mr. Woerner was a Principal at McKinsey & Co., where he 31
  • 35. spent approximately ten years serving leading U.S. and European financial services firms, and co-led McKinsey’s U.S. Asset Management Practice. David K. Stewart - Senior Vice President and Controller (Principal Accounting Officer) Mr. Stewart (53) has been our Senior Vice President and Controller since September 2005. Prior to the Distribution, Mr. Stewart served as Vice President and Controller of AEFC and its subsidiaries since June 2002, when he joined American Express. Prior thereto, Mr. Stewart held various management and officer positions in accounting, financial reporting and treasury operations at Lutheran Brotherhood, now part of Thrivent Financial for Lutherans, where he was Vice President—Treasurer from 1997 until 2001. Item 1A. Risk Factors. If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company in each of these categories of risk. However, the risks and uncertainties our company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Risks Relating to Our Business Our financial condition and results of operations may be adversely affected by market fluctuations and by economic and other factors. Our financial condition and results of operations may be materially affected by market fluctuations and by economic and other factors. Many such factors of a global or localized nature include: political, economic and market conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates; currency values and other market indices; technological changes and events; the availability and cost of credit; inflation; investor sentiment and confidence in the financial markets; terrorism events and armed conflicts; and natural disasters such as weather catastrophes and widespread health emergencies. Furthermore, changes in consumer economic variables, such as the number and size of personal bankruptcy filings, the rate of unemployment, decreases in property values, and the level of consumer confidence and consumer debt, may substantially affect consumer loan levels and credit quality, which, in turn, could impact the results of our banking business. These factors also may have an impact on our ability to achieve our strategic objectives. Certain of our insurance and annuity products and certain of our investment and banking products are sensitive to interest rate fluctuations, and our future costs associated with such variations may differ from our historical costs. In addition, interest rate fluctuations could result in fluctuations in the valuation of certain minimum guaranteed benefits contained in some of our variable annuity products. During periods of increasing market interest rates, we must offer higher crediting rates on interest-sensitive products, such as fixed universal life insurance, fixed annuities, face-amount certificates and certificates of deposit, and we must increase crediting rates on in-force products to keep these products competitive. Because returns on invested assets may not increase as quickly as current interest rates, we may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets. In addition, increases in market interest rates may cause increased policy surrenders, withdrawals from life insurance policies, annuity contracts and certificates of deposit and requests for policy loans, as policyholders, contractholders and depositors seek to shift assets to products with perceived higher returns. This process may lead to an earlier than expected flow of cash out of our business. Also, increases in market interest rates may result in extension of certain cash flows from structured mortgage assets. These withdrawals and surrenders may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on our financial condition and results of operations. An increase in surrenders and withdrawals also may require us to accelerate amortization of deferred acquisition costs or other intangibles or cause an impairment of goodwill, which would increase our expenses and reduce our net earnings. During periods of falling interest rates, our “spread,” or the difference between the returns we earn on the investments that support our obligations under these products and the amounts that we must pay policyholders, contractholders and depositors, may be reduced or could become negative, primarily because some of these products have guaranteed minimum crediting rates. 32
  • 36. Interest rate fluctuations also could have an adverse effect on the results of our investment portfolio. During periods of declining market interest rates, the interest we receive on variable interest rate investments decreases. In addition, during those periods, we are forced to reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of certain callable fixed income securities also may decide to prepay their obligations in order to borrow at lower market rates, which exacerbates the risk that we may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments. Significant downturns and volatility in equity markets could have an adverse effect on our financial condition and results of operations. Market downturns and volatility may cause potential new purchasers of our products to refrain from purchasing products, such as mutual funds, variable annuities and variable universal life insurance, that have returns linked to the performance of the equity markets. Downturns may also cause current shareholders in our mutual funds and contractholders in our annuity and protection products to withdraw cash values from those products. Additionally, downturns and volatility in equity markets can have an adverse effect on the revenues and returns from our asset management services, wrap accounts, and variable annuity contracts. Because the profitability of these products and services depends on fees related primarily to the value of assets under management, declines in the equity markets will reduce our revenues because the value of the investment assets we manage will be reduced. In addition, some of our variable annuity products contain guaranteed minimum death benefits and guaranteed minimum income, withdrawal and accumulation benefits. A significant equity market decline could result in guaranteed minimum benefits being higher than what current account values would support, thus producing a loss as we pay the benefits, having an adverse effect on our financial condition and results of operations. Although we have hedged a portion of the guarantees for the variable annuity contracts in order to mitigate the financial loss of an equity markets decline, there can be no assurance that such a decline would not materially impact the profitability of certain products or product lines. We believe that investment performance is an important factor in the growth of our Asset Accumulation and Income business. Poor investment performance could impair our revenues and earnings, as well as our prospects for growth. A significant portion of our revenue is derived from investment management agreements with the RiverSource family of mutual funds that are terminable on 60 days’ notice. In addition, although some contracts governing investment management services are subject to termination for failure to meet performance benchmarks, institutional and individual clients can generally terminate their relationships with us or our financial advisors at will or on relatively short notice. Our clients can also reduce the aggregate amount of managed assets or shift their funds to other types of accounts with different rate structures, for any number of reasons, including investment performance, changes in prevailing interest rates, changes in investment preferences, changes in our (or our financial advisors’) reputation in the marketplace, changes in client management or ownership, loss of key investment management personnel and financial market performance. A reduction in managed assets, and the associated decrease in revenues and earnings, could have a material adverse effect on our business. In addition, during periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets may also decrease, which would negatively impact the results of our retail businesses. Fluctuations in global market activity could impact the flow of investment capital into or from assets under management and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which could negatively impact our Asset Accumulation and Income business. Also, during periods of unfavorable economic conditions, unemployment rates often increase, which can result in higher loan delinquency and default rates, and this can have a negative impact on our banking business. Defaults in our fixed income securities portfolio or consumer credit products would adversely affect our earnings. Issuers of the fixed income securities that we own may default on principal and interest payments. As of December 31, 2006, 7% of our available-for-sale fixed income investment portfolio had ratings below investment-grade. Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those with investment-grade ratings, that default on their debt obligations. As of December 31, 2006, we had fixed income securities in or near default (where the issuer had missed payment of principal or interest or entered bankruptcy) with a fair value of $37 million. Default-related declines in the value of our fixed income securities portfolio or consumer credit products could cause our net earnings to decline and could also cause us to contribute capital to some of our regulated subsidiaries, which may require us to obtain funding during periods of unfavorable market conditions. Higher delinquency and default rates in our bank’s loan portfolio could require us to contribute capital to Ameriprise Bank and may result in additional restrictions from our regulators that impact the use and access to that capital. 33
  • 37. If the counterparties to our reinsurance arrangements or to the derivative instruments we use to hedge our business risks default, we may be exposed to risks we had sought to mitigate, which could adversely affect our financial condition and results of operations. We use reinsurance to mitigate our risks in various circumstances as described in Item 1 of this Annual Report on Form 10- K— “Our Solutions—Protection Segment—Reinsurance.” Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit and performance risk with respect to our reinsurers. A reinsurer’s insolvency or its inability or unwillingness to make payments under the terms of our reinsurance agreement could have an adverse effect on our financial condition and results of operations that could be material. See Note 2 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders. In addition, we use a variety of derivative instruments to hedge several business risks. If our counterparties fail to honor their obligations under the derivative instruments, our hedges of the related risk will be ineffective. That failure could have an adverse effect on our financial condition and results of operations that could be material. Some of our investments are relatively illiquid. We invest a portion of our owned assets in certain privately placed fixed income securities, mortgage loans, policy loans, limited partnership interests, collateralized debt obligations and restricted investments held by securitization trusts, among others, all of which are relatively illiquid. These asset classes represented 14% of the carrying value of our investment portfolio as of December 31, 2006. If we require significant amounts of cash on short notice in excess of our normal cash requirements, we may have difficulty selling these investments in a timely manner, or be forced to sell them for an amount less than we would otherwise have been able to realize, or both, which could have an adverse effect on our financial condition and results of operations. Intense competition and the economics of changes in our product revenue mix and distribution channels could negatively affect our ability to maintain or increase our market share and profitability. Our businesses operate in intensely competitive industry segments. We compete based on a number of factors including name recognition, service, the quality of investment advice, investment performance, product features, price, perceived financial strength, and claims-paying and credit ratings. Our competitors include broker-dealers, banks, asset managers, insurers and other financial institutions. Many of our businesses face competitors that have greater market share, offer a broader range of products, have greater financial resources, or have higher claims-paying or credit ratings than we do. In addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This convergence could result in our competitors gaining greater resources and we may experience pressures on our pricing and market share as a result of these factors and as some of our competitors seek to increase market share by reducing prices. Currently, our branded advisor network distributes annuity and protection products issued almost exclusively by our RiverSource Life companies. If our branded advisor network further opened or expanded its distribution of annuity and protection products of other companies, we could experience lower sales of our companies’ products or other developments which could have a material adverse effect on our financial condition and results of operations. A drop in investment performance as compared to our competitors could negatively impact our ability to increase profitability. Sales of our own mutual funds by our affiliated financial advisor network have recently improved as a percentage of our total mutual fund sales. We attribute this success to improved investment performance and marketing efforts. A decline in the level of investment performance as compared to our competitors could cause a decline in market share and a commensurate drop in profits as sales of other companies’ mutual funds are less profitable than those from our own mutual funds. A decline in investment performance could also adversely affect the realization of benefits from investments in our strategy to expand alternative distribution channels for our own products, including third-party distribution of our mutual funds. We face intense competition in attracting and retaining key talent. We are dependent on our network of branded advisors for a significant portion of the sales of our mutual funds, annuities, face-amount certificates, banking and insurance products. In addition, our continued success depends to a substantial degree on our ability to attract and retain qualified personnel to conduct our fund management and investment advisory businesses, as well as senior management. The market for financial advisors, registered representatives, management talent, qualified legal and compliance professionals, fund managers, and investment analysts is extremely 34
  • 38. competitive and has grown more so in recent periods due to industry growth. If we are unable to attract and retain qualified individuals or our recruiting and retention costs increase significantly, our financial condition and results of operations could be materially adversely affected. Our businesses are heavily regulated, and changes in regulation may reduce our profitability, limit our growth, or impact our ability to pay dividends or achieve targeted return-on-equity levels. We operate in highly regulated industries, and are required to obtain and maintain licenses for many of the businesses we operate in addition to being subject to regulatory oversight. Securities regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation. Significant discussion and activity by regulators concerns the sale of financial products and services to persons planning for retirement, as well as to older investors. In addition, we are subject to heightened regulatory requirements relating to privacy and the protection of customer data. These regulations, as well as possible legislative or regulatory changes, may constrain our ability to market our products and services to our target demographic and potential customers, and could negatively affect our profitability and make it more difficult for us to pursue our growth strategy. Our insurance companies are subject to state regulation, so must comply with statutory reserve and capital requirements. State regulators are continually reviewing and updating these requirements. Moreover, our life insurance companies are subject to capital requirements for variable annuity contracts with guaranteed death or living benefits. These requirements may have an impact on future statutory reserves and regulatory capital in the event equity market values fall in the future. Moreover, there is active discussion at the NAIC of moving to a principles-based reserving system. This could change statutory reserve requirements significantly, and it is not possible to estimate the impact at this time. Further, we cannot predict the effect that proposed federal legislation, such as the option of federally chartered insurers, may have on our insurance businesses or their competitors. Compliance with applicable laws and regulations is time consuming and personnel-intensive. Changes in these laws and regulations may increase materially our direct and indirect compliance and other expenses of doing business. Our financial advisors may decide that the direct cost of compliance and the indirect cost of time spent on compliance matters outweigh the benefits of a career as a financial advisor, which could lead to financial advisor attrition. The costs of the compliance requirements we face, and the constraints they impose on our operations, could have a material adverse effect on our financial condition and results of operations. In addition, we may be required to reduce our fee levels, or restructure the fees we charge, as a result of regulatory initiatives or proceedings that are either industry-wide or specifically targeted at our company. Reductions or other changes in the fees that we charge for our products and services could reduce our revenues and earnings. Moreover, in the years ended December 31, 2006, 2005 and 2004, we received $1.3 billion, $1.2 billion and $1.1 billion, respectively, in distribution fees. A significant portion of these revenues was paid to us by our own RiverSource family of mutual funds in accordance with plans and agreements of distribution adopted under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, or Rule 12b-1. We believe that these fees are a critical element in the distribution of our own mutual funds. However, an industry-wide reduction or restructuring of Rule 12b-1 fees could have a material adverse effect on our ability to distribute our own mutual funds and the fees we receive for distributing other companies’ mutual funds, which could, in turn, have an adverse effect on our revenues and earnings. Consumer lending activities at our bank are subject to applicable laws as well as regulation by various regulatory bodies. Changes in laws or regulation could affect our bank’s ability to conduct business. These changes could include but are not limited to our bank’s ability to market and sell products, fee pricing or interest rates that can be charged on loans outstanding, changes in communicating with customers that affect payments, statements and collections of loans, and changes in accounting for the consumer lending business. For a further discussion of the regulatory framework in which we operate, see Item 1 of this Annual Report on Form 10-K— “Regulation.” A failure to appropriately deal with conflicts of interest could adversely affect our businesses. Our reputation is one of our most important assets. As we have expanded the scope of our businesses and our client base, we increasingly have to address potential conflicts of interest, including those relating to our proprietary activities and those relating to our sales of non-proprietary products from manufacturers that have agreed to provide us marketing, sales, and account maintenance support. For example, conflicts may arise between our position as a provider of financial planning products and a manufacturer and/or distributor or broker of asset accumulation, income or insurance products that one of our affiliated financial advisors may recommend to a financial planning client. We have procedures and controls that are designed to address conflicts of interest. However, appropriately dealing with conflicts of interest is complex and our 35
  • 39. reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. It is possible that potential or perceived conflicts could give rise to litigation or enforcement actions. It is possible also that the regulatory scrutiny of, and litigation in connection with, conflicts of interest will make our clients less willing to enter into transactions in which such a conflict may occur, and will adversely affect our businesses. Misconduct by our employees and affiliated financial advisors is difficult to detect and deter and could harm our business, results of operations or financial condition. Misconduct by our employees and affiliated financial advisors could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm. Misconduct can occur in each of our businesses and could include: • binding us to transactions that exceed authorized limits; • hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses; • improperly using or disclosing confidential information; • recommending transactions that are not suitable; • engaging in fraudulent or otherwise improper activity; • engaging in unauthorized or excessive trading to the detriment of customers; or • otherwise not complying with laws or our control procedures. We cannot always deter misconduct by our employees and affiliated financial advisors, and the precautions we take to prevent and detect this activity may not be effective in all cases. Prevention and detection among our branded franchisee advisors and our unbranded affiliated financial advisors, who are not employees of our company and tend to be located in small, decentralized offices, present additional challenges. We also cannot assure that misconduct by our employees and affiliated financial advisors will not lead to a material adverse effect on our business, results of operations or financial condition. Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses. We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our operations, both domestically and internationally. Various regulatory and governmental bodies have the authority to review our products and business practices and those of our employees and independent financial advisors and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our employees or affiliated financial advisors, are improper. Pending legal and regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are typical of the industries and businesses in which we operate. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. See Item 3 of this Annual Report on Form 10-K— “Legal Proceedings.” Substantial legal liability in these or future legal or regulatory actions could have a material adverse financial effect or cause significant reputational harm, which in turn could seriously harm our business prospects. A downgrade or a potential downgrade in our financial strength or credit ratings could adversely affect our financial condition and results of operations. Financial strength ratings, which various ratings organizations publish as a measure of an insurance company’s ability to meet contractholder and policyholder obligations, are important to maintaining public confidence in our products, the ability to market our products and our competitive position. Any downgrade in our financial strength ratings, or the announced potential for a downgrade, could have a significant adverse effect on our financial condition and results of operations in many ways, including: • reducing new sales of insurance products, annuities and investment products; • adversely affecting our relationships with our affiliated financial advisors and third-party distributors of our products; 36
  • 40. • materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders; • requiring us to reduce prices for many of our products and services to remain competitive; and • adversely affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. A downgrade in our credit ratings could also adversely impact our future cost and speed of borrowing and have an adverse effect on our financial condition, results of operations and liquidity. If our reserves for future policy benefits and claims, or for our bank lending portfolio, are inadequate, we may be required to increase our reserve liabilities, which could adversely affect our results of operations and financial condition. We establish reserves as estimates of our liabilities to provide for future obligations under our insurance policies, annuities and investment certificate contracts. We also establish reserves as estimates of the potential for loan losses in our consumer lending portfolios. Reserves do not represent an exact calculation, but rather are estimates of contract benefits or loan losses and related expenses we expect to incur over time. The assumptions and estimates we make in establishing reserves require certain judgments about future experience and, therefore, are inherently uncertain. We monitor our reserve levels continually. If we were to conclude that our reserves are insufficient to cover actual or expected contract benefits or loan collections, we would be required to increase our reserves and potentially incur income statement charges for the period in which we make the determination, which could adversely affect our results of operations and financial condition. For more information on how we set our reserves, see Note 2 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders. Morbidity rates or mortality rates that differ significantly from our pricing expectations could negatively affect profitability. We set prices for RiverSource life insurance, disability income insurance and some annuity products based upon expected claim payment patterns, derived from assumptions we make about the morbidity rates, or likelihood of sickness, and mortality rates, or likelihood of death, of our policyholders and contractholders. The long-term profitability of these products depends upon how our actual experience compares with our pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than our pricing assumptions, we could be required to make greater payments under disability income insurance policies and immediate annuity contracts than we had projected. The same holds true for long term care policies we previously underwrote to the extent of the risks that we have retained. If mortality rates are higher than our pricing assumptions, we could be required to make greater payments under our life insurance policies and annuity contracts with guaranteed minimum death benefits than we had projected. The risk that our claims experience may differ significantly from our pricing assumptions is particularly significant for our long term care insurance products notwithstanding our ability to implement future price increases. As with life insurance, long term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years. However, as a relatively new product in the market, long term care insurance does not have the extensive claims experience history of life insurance, and, as a result, our ability to forecast future claim rates for long term care insurance is more limited than for life insurance. We have sought to moderate these uncertainties to some extent by partially reinsuring long-term care policies we previously underwrote and by limiting our present long term care insurance offerings to policies underwritten fully by an unaffiliated third party, and we have also implemented rate increases on certain in-force policies as described in Item 1 of this Annual Report on Form 10-K— “Our Solutions—Protection Segment—RiverSource Life—Long Term Care Insurance”. There can be no assurance that we will not be required to implement additional rate increases in the future or that we will receive regulatory approval to the full extent and timing of any rate increases that we may seek. We may face losses if there are significant deviations from our assumptions regarding the future persistency of our insurance policies and annuity contracts. The prices and expected future profitability of our life insurance and deferred annuity products are based in part upon assumptions related to persistency, which is the probability that a policy or contract will remain in force from one period to the next. The effect of persistency on profitability varies for different products. For most of our life insurance and deferred annuity products, actual persistency that is lower than our persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy or contract. 37
  • 41. For our long term care insurance, actual persistency that is higher than our persistency assumptions could have a negative impact on profitability. If these policies remain in force longer than we assumed, then we could be required to make greater benefit payments than we had anticipated when we priced or partially reinsured these products. Some of our long term care insurance policies have experienced higher persistency and poorer loss experience than we had assumed, which led us to increase premium rates on certain of these policies. Because our assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and claims may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of our products permit us to increase premiums during the life of the policy or contract, we cannot guarantee that these increases would be sufficient to maintain profitability. Additionally, some of these pricing changes require regulatory approval, which may not be forthcoming. Moreover, many of our products do not permit us to increase premiums or limit those increases during the life of the policy or contract, while premiums on certain other products (primarily long term care insurance) may not be increased without prior regulatory approval. Significant deviations in experience from pricing expectations regarding persistency could have an adverse effect on the profitability of our products. We may be required to accelerate the amortization of deferred acquisition costs, which would increase our expenses and reduce profitability. Deferred acquisition costs (“DAC”) represent the costs of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life and disability income insurance and, to a lesser extent, marketing and promotional expenses for personal auto and home insurance, and distribution expense for certain mutual fund products. For annuity and universal life products, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period. For certain mutual fund products, we generally amortize DAC over fixed periods on a straight-line basis. Our projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. We periodically review and, where appropriate, adjust our assumptions. When we change our assumptions, we may be required to accelerate the amortization of DAC or to record a charge to increase benefit reserves. As of December 31, 2006 and 2005, we had $4.5 billion and $4.2 billion, respectively, of DAC and we amortized $472 million and $431 million, respectively, of DAC as a current-period expense for the years ended December 31, 2006 and 2005, respectively. For more information regarding DAC, see the information contained in our 2006 Annual Report to Shareholders under the captions “Management’s Discussion and Analysis—Critical Accounting Policies—Deferred Acquisition Costs” and “—Recent Accounting Pronouncements.” Risk management policies and procedures may not be fully effective in mitigating risk exposure in all market environments or against all types of risk, including employee and financial advisor misconduct. We have devoted significant resources toward developing our risk management policies and procedures and will continue to do so in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what our models indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Moreover, we are subject to the risks of misconduct by our employees and financial advisors — such as fraud, non-compliance with policies, recommending transactions that are not suitable, and improperly using or disclosing confidential information — which is difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Insurance and other traditional risk-shifting tools may be held by or available to us in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency. 38
  • 42. As a holding company, we depend on the ability of our subsidiaries to transfer funds to us to pay dividends and to meet our obligations. We act as a holding company for our insurance and other subsidiaries. Dividends from our subsidiaries and permitted payments to us under our intercompany arrangements with our subsidiaries are our principal sources of cash to pay shareholder dividends and to meet our other financial obligations. These obligations include our operating expenses and interest and principal on our borrowings and also include amounts we must pay under the tax allocation agreement and transition services agreement we entered into with American Express. If the cash we receive from our subsidiaries pursuant to dividend payment and intercompany arrangements is insufficient for us to fund any of these obligations, we may be required to raise cash through the incurrence of additional debt, the issuance of additional equity or the sale of assets. If any of this happens, it could adversely affect our financial condition and results of operations. Insurance, banking and securities laws and regulations regulate the ability of many of our subsidiaries (such as our insurance, banking and brokerage subsidiaries and our face-amount certificate company) to pay dividends or make other distributions. See Item 1 of this Annual Report on Form 10-K— “Our Solutions—Protection Segment—Risk-Based Capital” and “Regulation” as well as the information contained in our 2006 Annual Report to Shareholders under the heading “Management’s Discussion and Analysis — Liquidity and Capital Resources.” In addition to the various regulatory restrictions that constrain our subsidiaries’ ability to pay dividends to our company, the rating agencies impose various capital requirements on our company and our insurance company subsidiaries in order for us to maintain our ratings and the ratings of our insurance subsidiaries, which also constrains our and their ability to pay dividends. Changes in U.S. federal income or estate tax law could make some of our products less attractive to clients. Many of the products we issue or on which our businesses are based (including both insurance products and non-insurance products) enjoy favorable treatment under current U.S. federal income or estate tax law. Changes in U.S. federal income or estate tax law could thus make some of our products less attractive to clients. We are subject to tax contingencies that could adversely affect our provision for income taxes. We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we have significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. Risks Relating to Our Common Stock The market price of our shares may fluctuate. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including: • changes in expectations concerning our future financial performance and the future performance of the financial services industry in general, including financial estimates and recommendations by securities analysts; • differences between our actual financial and operating results and those expected by investors and analysts; • strategic moves by us or our competitors, such as acquisitions or restructurings; • changes in the regulatory framework of the financial services industry and regulatory action; and • changes in general economic or market conditions. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock. Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market value of our common stock. Our certificate of incorporation and bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making them unacceptably expensive to the raider and to encourage 39
  • 43. prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others: • a board of directors that is divided into three classes with staggered terms; • elimination of the right of our shareholders to act by written consent; • rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings; • the right of our board of directors to issue preferred stock without shareholder approval; and • limitations on the right of shareholders to remove directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our shareholders. Risks Relating to Our Separation from American Express We will only have the right to use the “American Express” brand name and logo in a limited capacity. In connection with the separation from American Express, we changed our corporate name to “Ameriprise Financial, Inc.” and are operating under two new brand names. We and our subsidiaries may use the “American Express” brand name and logo in a limited capacity in conjunction with our brand names and logos until September 30, 2007 pursuant to our marketing and branding agreement with American Express. For more information regarding these arrangements, see Item 1 of this Annual Report on Form 10-K— “Our Relationship with American Express.” When our right to use the “American Express” brand name and logo expires, we will not be able to maintain or enjoy the name recognition associated with that brand. We have experienced increased costs in connection with the separation from American Express and as an independent company. We are in the process of developing certain independent facilities, systems, infrastructure and personnel to replace services previously provided by American Express. We have also made significant investments to develop our new brand and establish our ability to operate without access to American Express’s operational and administrative infrastructure. These initiatives have been costly to implement. We have incurred $654 million in total pretax non-recurring separation costs through December 31, 2006 and we expect to incur an additional $221 million in separation costs. Due to the scope and complexity of the underlying projects, the amount of total costs could be materially higher and the timing of incurrence of these costs is subject to change. Although we have established many of our own independent systems and operations, we continue to pay American Express to perform certain important corporate functions for our operations, including information technology support, procurement and other services. The amounts we pay for this transitional support are arm’s length rates generally based on American Express’s direct and indirect costs. For more information regarding the transition arrangements, see Item 1 of this Annual Report on Form 10-K — “Our Relationship with American Express.” Although we implemented many independent functions, if we are not able to complete the establishment of these functions, or obtain them from third parties, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. As a stand-alone company, we do not have the same purchasing power we had through American Express and, in some cases, we may not have as favorable terms or prices as those obtained prior to the separation from American Express, which could decrease our overall profitability. 40
  • 44. As we build our information technology infrastructure and transition our data to our own systems, we could experience temporary business interruptions and incur substantial additional costs. We are in the process of installing and implementing the information technology infrastructure to support our business functions, including customer service and distribution. We may incur temporary interruptions in business operations if we cannot transition effectively from American Express’s existing technology infrastructure (which covers hardware, applications, network, telephony, databases, backup and recovery solutions), as well as the people and processes that support them. We may not be successful in implementing our new technology infrastructure and transitioning our data, and we may incur higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement the new infrastructure and transition our data, or our failure to implement the new infrastructure and transition our data successfully, could disrupt our business and have a material adverse effect on our profitability. In addition, technology service failures could have adverse regulatory consequences for our business and make us vulnerable to our competitors. We continue to rely on American Express’s disaster recovery capabilities as part of our business continuity processes. We will only have the right to use American Express’s disaster recovery resources until September 30, 2007. We are developing and implementing our own disaster recovery infrastructure and developing business continuity for our operations, which we anticipate will involve significant costs. We may not be successful in developing stand-alone disaster recovery capabilities and business continuity processes, and may incur higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement new business continuity processes, or our failure to implement the new processes successfully, could disrupt our business and have a material adverse effect on our profitability in the event of a significant business disruption. We agreed to certain restrictions to preserve the treatment of the Distribution as tax free to American Express and its shareholders, which reduces our strategic and operating flexibility. In connection with the Internal Revenue Service ruling and opinion confirming the tax free status of the Distribution, we made certain representations and undertakings. In addition, current tax law generally creates a presumption that the Distribution would be taxable to American Express, but not to its shareholders, if we or our shareholders were to engage in a transaction that would result in a 50% or greater change by vote or by value in our stock ownership during the four-year period beginning on the date that begins two years before the Distribution date, unless it is established that the Distribution and the transaction are not part of a plan or series of related transactions to effect such a change in ownership. In the case of such a 50% or greater change in our stock ownership, tax imposed on American Express in respect of the Distribution would be based on the fair market value of our stock on the Distribution date over American Express’s tax basis in our stock. Under our tax allocation agreement with American Express, we are generally prohibited, before October 1, 2007, except in certain circumstances, from (i) consenting to certain acquisitions of significant amounts of our stock; (ii) transferring significant amounts of our assets; (iii) failing to maintain certain components of our business as an active business; or (iv) engaging in certain other actions or transactions that could jeopardize the tax free status of the Distribution. In addition, we are generally prohibited from consenting to certain acquisitions of significant amounts of our stock or assets, or from participating in certain other corporate transactions, unless the other parties to the transaction agree to be jointly and severally liable with us in respect of our indemnification obligation to American Express under the tax allocation agreement (described below in the succeeding risk factor). We agreed to indemnify American Express and its shareholders for taxes and related losses resulting from certain actions that cause the Distribution to fail to qualify as a tax free transaction. Under the tax allocation agreement, we agreed to indemnify American Express and its shareholders for taxes and related losses they suffer as a result of the Distribution failing to qualify as a tax free transaction, if the taxes and related losses are attributable to (i) direct or indirect acquisitions of our stock or assets (regardless of whether we consent to such acquisitions); (ii) negotiations, understandings, agreements, or arrangements in respect of such acquisitions; or (iii) our failure to comply with certain representations and undertakings from us, including the restrictions described in the preceding risk factor. See Item 1 of this Annual Report on Form 10-K— “Our Relationship with American Express.” Our indemnity will cover both corporate level taxes and related losses imposed on American Express in the event of a 50% or greater change in our stock ownership described in the preceding risk factor, as well as taxes and related losses imposed on both American Express and its shareholders if, due to our representations or undertakings being incorrect or violated, the Distribution is determined to be taxable for other reasons. We currently estimate that the indemnification obligation to American Express for taxes due in the event of a 50% or greater change in our stock ownership could exceed $1.5 billion. This estimate, which does not take into account related 41
  • 45. losses such as interest, penalties, and other additions to tax, depends upon several factors that are beyond our control. As a consequence, the indemnity to American Express could vary substantially from the estimate. Furthermore, the estimate does not address the potential indemnification obligation to both American Express and its shareholders in the event that, due to our representations or undertakings being incorrect or violated, the Distribution is determined to be taxable for other reasons. In that event, the total indemnification obligation would likely be much greater. Our separation from American Express could increase our U.S. federal income tax costs. Due to the separation from American Express, our life insurance subsidiaries will not be able to file a consolidated U.S. federal income tax return with the other members of our affiliated group for five tax years following the Distribution. As a consequence, during this period, net operating and capital losses, credits, and other tax attributes generated by one group will not be available to offset income earned or taxes owed by the other group for U.S. federal income tax purposes. As a result of these and other inefficiencies, the aggregate amount of U.S. federal income tax that we pay may increase and we may in addition not be able to fully realize certain of our deferred tax assets. The continued ownership of American Express common stock and options by our executive officers may create, or may create the appearance of, conflicts of interest. Because of their former positions with American Express, substantially all of our executive officers, including our Chairman and Chief Executive Officer and our Chief Financial Officer, own American Express common stock and options to purchase American Express common stock. Although these holdings in the aggregate are insubstantial in relation to American Express, the individual holdings of American Express stock and options to purchase that stock that remain after the Distribution may be significant for some of these persons compared to that person’s total assets. Even though our board of directors consists of a majority of directors who are independent from both American Express and our company and our executive officers who were formally employees of American Express have ceased to be employees of American Express following the Distribution, ownership of American Express common stock and options to purchase American Express stock by our officers after the Distribution may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for American Express than they do for us. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. We operate our business from two principal locations, both of which are located in Minneapolis, Minnesota: the Ameriprise Financial Center, a 897,280 square foot building that we lease, and our 903,722 square foot Client Service Center, which we own. Our lease term for the Ameriprise Financial Center began in November 2000 and is for 20 years, with several options to extend the term. Our aggregate annual rent for the Ameriprise Financial Center is $15 million. We also own the 170,815 square foot Oak Ridge Conference Center, a training facility and conference center in Chaska, Minnesota, which can also serve as a disaster recovery site if necessary. We also lease space in an operations center located in Minneapolis. American Express Travel Related Services Company, an American Express subsidiary, also leases space in the center from the same landlord and we share common space in the building with them. Additionally, we occupy space in a second operations center located in Phoenix, Arizona. Our property and casualty subsidiary, IDS Property Casualty, leases its corporate headquarters in DePere, Wisconsin, a suburb of Green Bay. In December 2004, it entered into a sale-and-leaseback agreement with Inland Real Estate Acquisitions, Inc., and sold that property for $18 million. Under the terms of the agreement, Inland leased the property back to IDS Property Casualty for a ten-year term with an option to renew the lease for up to six renewal terms of five years each. The lease is a net lease, which means our subsidiary is responsible for all costs and expenses relating to the property in addition to annual rent. Threadneedle leases three office facilities in London, England. It is the sole tenant of its principal headquarters office, a 60,410 square foot building, under a lease expiring in June 2018. Threadneedle also leases part of a building in Frankfurt, Germany and rents offices in a number of other European countries to support its non-U.K. operations. Generally, we lease the premises we occupy in other locations, including the executive offices that we maintain in New York, New York. We believe that the facilities owned or occupied by our company suit our needs and are well maintained. 42
  • 46. Item 3. Legal Proceedings. We and our 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 our activities as a diversified financial services firm. These include proceedings specific to us as well as proceedings generally applicable to business practices in the industries in which we operate. We can also be subject to litigation arising out of our general business activities, such as our investments, contracts, leases and employment relationships. As with other financial services firms, the level of regulatory activity and inquiry concerning our businesses remains elevated. From time to time, we receive requests for information from, and have been subject to examination by, the SEC, NASD, OTS and various other regulatory authorities concerning our business activities and practices, including: sales and product or service features of, or disclosures pertaining to, financial plans, our mutual funds, annuities, insurance products and brokerage services; non— cash compensation paid to our financial advisors; supervision of our financial advisors; operational and data privacy issues relating to the theft of a laptop computer containing certain client information; compliance with postal regulations; and sales of, or brokerage or revenue sharing practices relating to, other companies’ REIT shares, mutual fund shares or other investment products. Other open matters relate, among other things, to the portability (or network transferability) of our RiverSource mutual funds, the suitability of product recommendations made to retail financial planning clients, licensing matters related to sales by our financial advisors to out- of-state clients and net capital and reserve calculations. The number of reviews and investigations has increased in recent years with regard to many firms in the financial services industry, including our company. We have 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, we are 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 our consolidated financial condition or results of operations. Certain legal and regulatory proceedings involving our company are described below. In November 2002, a suit, now captioned Haritos et al. v. American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The suit was filed by plaintiffs who purport to represent a class of all persons that have purchased financial plans from our financial advisors from November 1997 through July 2004. Plaintiffs allege that the sale of the plans violates the Investment Advisers Act of 1940. The suit seeks an unspecified amount of damages, rescission of the investment advisor plans and restitution of monies paid for such plans. On January 3, 2006, the Court granted the parties joint stipulation to stay the action pending the approval of the proposed settlement in the putative class action, “In re American Express Financial Advisors Securities Litigation,” which is 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. The plaintiffs allege that they are investors in several of our mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to our motion to dismiss the complaint, the Court dismissed one of plaintiffs’ four claims and granted plaintiffs limited discovery. Discovery is currently set to end in March 2007. In October 2005, we reached a comprehensive settlement regarding the consolidated securities class action lawsuit filed against us, our former parent and affiliates in October 2004 called “In re American Express Financial Advisors Securities Litigation.” The settlement, under which we deny any liability, includes a one-time payment of $100 million to the class members. The class members include individuals who purchased mutual funds in our Preferred Provider Program, Select Group Program, or any similar revenue sharing program, purchased mutual funds sold under the American Express® or AXP® brand; or purchased for a fee financial plans or advice from our company between March 10, 1999 and through April 1, 2006. On February 14, 2007, the court preliminarily approved the settlement and set a Final Fairness Hearing for June 4, 2007. Two lawsuits making similar allegations (based solely on state causes of actions) are pending in the United States District Court for the Southern District of New York: Beer v. American Express and American Express Financial Advisors and You v. American Express and American Express Financial Advisors. Plaintiffs have moved to remand the cases to state court. The Court’s decision on the remand motion is pending. 43
  • 47. 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 our 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 we incorrectly calculated commissions owed advisors for the sale of these products. The Court denied our motion to dismiss, and the matter now proceeds to discovery. On May 15, 2006, an NASD panel issued a decision regarding customer claims relating to suitability, disclosures, supervision and certain other sales practices in an arbitration proceeding captioned Wayland Adams et al. vs. David McFadden and Securities America, Inc. (brought by a group of 44 claimants). The arbitrators ruled against SAI and its former registered representative and awarded the plaintiffs $22 million and, in connection with this matter, SAI agreed with the NASD to have an independent consultant review its retirement planning and variable annuity exchange practices. Other clients of this former registered representative have presented claims which are pending. On December 22, 2006, an NASD panel issued a decision regarding customer claims relating to suitability, disclosures, supervision and certain other sales practices in an arbitration proceeding captioned Thomas and Patricia Cain et al. vs. Securities America, Inc., Robert P. Gormly et al. (brought by three claimant groups). The arbitrators ruled against SAI and its former registered representative and awarded the plaintiffs $9 million. Other clients of this former registered representative have presented claims which are pending. Item 4. Submissions of Matters to a Vote of Security Holders. None. PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock trades principally on The New York Stock Exchange under the trading symbol AMP. As of February 15, 2007, we had approximately 31,950 common shareholders of record. Price and dividend information concerning our common shares may be found in Note 28 to our Consolidated Financial Statements included in our 2006 Annual Report to Shareholders and incorporated herein by reference. The information set forth under the heading “Performance Graph” contained in our 2006 Annual Report to Shareholders and the table set forth under “Items to Be Voted on by Shareholders—Item 2—Proposal to Approve the Ameriprise Financial 2005 Incentive Compensation Plan—Equity Compensation Plan Information” contained in the Proxy Statement are incorporated herein by reference. We are primarily a holding company and as a result, our ability to pay dividends in the future will depend on receiving dividends from our subsidiaries. For information regarding our ability to pay dividends, see the information set forth under the heading “Management’s Discussion and Analysis—Liquidity and Capital Resources” contained in our 2006 Annual Report to Shareholders and incorporated herein by reference. 44
  • 48. Share Repurchases The following table presents the information with respect to purchases made by or on behalf of Ameriprise Financial, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the fourth quarter of 2006. (a) (b) (c) (d) Total Number of Shares Total Number Purchased as Part of Approximate Dollar Value of of Average Price Publicly Announced Shares that May Yet Be Shares Paid Plans or Purchased Under the Plans or Period Purchased per Share Programs (1) Programs (1) October 1 to October 31, 2006 Share repurchase program (1) 277,500 $ 48.34 (2) 277,500 $ 400,827,975 Employee transactions (3) 64,258 $ 47.53 N/A N/A November 1 to November 30, 2006 Share repurchase program (1) — — — — Employee transactions (3) 886 $ 52.22 N/A N/A December 1 to December 31, 2006 Share repurchase program (1) 643,400 $ 54.87 (2) 643,400 $ 365,527,021 Employee transactions (3) 1,536 $ 53.72 N/A N/A (1) On March 29, 2006, we announced that our Board of Directors authorized us to repurchase up to $750 million worth of our common stock through March 31, 2008. This share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and factors, these purchases may be commenced or suspended at any time without prior notice. Acquisitions under this share repurchase program may be made in the open market, through block trades or other means. (2) Includes commissions and other transaction costs of approximately $0.02 per share. (3) Restricted shares withheld pursuant to the terms of awards under the Ameriprise Financial 2005 Incentive Compensation Plan (“2005 ICP”) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The 2005 ICP provides that the value of the shares withheld shall be the average of the high and low prices of common stock of Ameriprise Financial, Inc. on the date the relevant transaction occurs. Item 6. Selected Financial Data. The “Consolidated Five-Year Summary of Selected Financial Data” appearing on page 104 of our 2006 Annual Report to Shareholders is incorporated herein by reference. The “Schedule I—Condensed Financial Information of Registrant (Parent Company Only)” appearing on pages F-1 through F-5 of this report is incorporated herein by reference. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The information set forth under the heading “Management’s Discussion and Analysis” appearing on pages 22 through 47 of our 2006 Annual Report to Shareholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information set forth under the heading “Quantitative and Qualitative Disclosures About Market Risk” appearing on pages 48 through 52 of our 2006 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The “Report of Independent Registered Public Accounting Firm,” the “Consolidated Financial Statements” and the “Notes to Consolidated Financial Statements” appearing on pages 57 through 103 of our 2006 Annual Report to Shareholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. The information set forth under the heading “Changes in and Disagreements With Accountants on Accounting and Financial Disclosure” appearing on page 54 of our 2006 Annual Report to Shareholders is incorporated herein by reference. 45
  • 49. Item 9A. Controls and Procedures. Disclosure Controls and Procedures. Our company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to SEC regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, our company’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2006. The information set forth under the heading “Management’s Report on Internal Control Over Financial Reporting,” which sets forth management’s evaluation of internal control over financial reporting, and appears on page 55 of our 2006 Annual Report to Shareholders, and under the headings, the “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting,” and the “Report of Independent Registered Public Accounting Firm,” appearing on pages 56 and 57 of our 2006 Annual Report to Shareholders, are incorporated herein by reference. Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting. Item 9B. Other Information. None. PART III. Item 10. Directors and Executive Officers of the Registrant. The following portions of the Proxy Statement are incorporated herein by reference: • information included under the caption “Items to be Voted on by Shareholders—Item 1—Election of Directors”; • information included under the caption “Requirements, Including Deadlines, for Submission of Proxy Proposals, Nomination of Directors and Other Business of Shareholders”; • information under the caption “Corporate Governance—Codes of Conduct”; • information included under the caption “Corporate Governance—Membership on Board Committees”; • information under the caption “Corporate Governance—Nominating and Governance Committee—Director Nomination Process”; • information included under the caption “Corporate Governance—Audit Committee”; • information included under the caption “Corporate Governance—Audit Committee Financial Expert”; and • information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” In addition, the information regarding executive officers called for by Items 401(b), (e) and (f) of Regulation S-K may be found under the caption “Executive Officers of the Company” in this Annual Report on Form 10-K. We have adopted a set of Corporate Governance Principles and Categorical Standards of Director Independence, which together with the charters of the three standing committees of the Board of Directors (Audit; Compensation and Benefits; and Nominating and Governance) and our Code of Conduct (which constitutes the Company’s code of ethics), provide the framework for the governance of our company. A complete copy of our Corporate Governance Principles and Categorical Standards of Director Independence, the charters of each of the Board committees, the Code of Conduct (which applies not only to our Chief Executive Officer, Chief Financial Officer and Controller, but also to all other employees of our company) and the Code of Business Conduct for the Members of the Board of Directors may be found by clicking on the 46
  • 50. “Corporate Governance” link found on our Investor Relations website at http://ir.ameriprise.com. You may also access our Investor Relations website through our main website at www.ameriprise.com by clicking on the “Investor Relations” link, which is located at the bottom of our homepage. (Information from such sites is not incorporated by reference into this report.) You may obtain free copies of these materials by also writing to our Corporate Secretary at our principal executive offices. Item 11. Executive Compensation. The following portions of the Proxy Statement are incorporated herein by reference: • information under the caption “Corporate Governance—Compensation and Benefits Committee—Compensation Committee Interlocks and Insider Participation”; • information included under the caption “Compensation of Executive Officers—Compensation of Executive Officers”; and • information included under the caption “Compensation of Directors.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information included under the captions “Ownership of Our Common Shares” and “Items to Be Voted on by Shareholders—Item 2—Proposal to Approve the Ameriprise Financial 2005 Incentive Compensation Plan—Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information under the captions “Corporate Governance—Director Independence,” “Corporate Governance—Categorical Standards for Director Independence,” “Corporate Governance—Independence of Committee Members” and “Certain Transactions” in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information set forth under the heading “Items to be Voted on by Shareholders—Item 3—Ratification of Audit Committee’s Selection of Independent Registered Public Accountants—Independent Registered Public Accountant Fees”; “— Services to Associated Organizations”; and “—Policy on Pre-Approval of Services Provided by Independent Registered Public Accountants,” in the Proxy Statement is incorporated herein by reference. PART IV. Item 15. Exhibits and Financial Statement Schedules. (a) The following documents are filed as part of this report: 1. Financial statements from the Ameriprise Financial, Inc. 2006 Annual Report to Shareholders which are incorporated herein by reference: Consolidated balance sheets – December 31, 2006 and 2005 Consolidated statements of income – Years ended December 31, 2006, 2005 and 2004 Consolidated statements of cash flows – Years ended December 31, 2006, 2005, and 2004 Consolidated statements of shareholders’ equity – Years ended December 31, 2006, 2005, and 2004 Notes to consolidated financial statements – December 31, 2006 2. Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below: Schedule I Condensed Financial Information of Registrant (Parent Company Only) All other financial schedules are not required under the related instructions, or are inapplicable and therefore have been omitted. 47
  • 51. 3. Exhibits: The list of exhibits required to be filed as exhibits to this report are listed on pages E-1 through E-4 hereof under “Exhibit Index,” which is incorporated herein by reference. 48
  • 52. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERIPRISE FINANCIAL, INC. (Registrant) Date: February 27, 2007 By /s/ Walter S. Berman Walter S. Berman Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned directors and officers of Ameriprise Financial, Inc., a Delaware corporation, does hereby make, constitute and appoint James M. Cracchiolo, Walter S. Berman and John C. Junek, and each of them, the undersigned’s true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned’s name, place and stead, to sign and affix the undersigned’s name as such director and/or officer of said corporation to an Annual Report on Form 10-K or other applicable form, and all amendments thereto, to be filed by such corporation with the Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of 1934, as amended, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and any of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated. Date: February 27, 2007 /s/ James M. Cracchiolo James M. Cracchiolo Chairman and Chief Executive Officer (Principal Executive Officer and Director) Date: February 27, 2007 /s/ Walter S. Berman Walter S. Berman Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: February 27, 2007 /s/ David K. Stewart David K. Stewart Senior Vice President and Controller (Principal Accounting Officer) Date: February 27, 2007 /s/ Ira D. Hall Ira D. Hall Director Date: February 27, 2007 /s/ Warren D. Knowlton Warren D. Knowlton Director Date: February 27, 2007 /s/ W. Walker Lewis W. Walker Lewis Director Date: February 27, 2007 /s/ Siri S. Marshall Siri S. Marshall Director 49
  • 53. Date: February 27, 2007 /s/ Jeffrey Noddle Jeffrey Noddle Director Date: February 27, 2007 /s/ Richard F. Powers III Richard F. Powers III Director Date: February 27, 2007 /s/ H. Jay Sarles H. Jay Sarles Director Date: February 27, 2007 /s/ Robert F. Sharpe, Jr. Robert F. Sharpe, Jr. Director Date: February 27, 2007 /s/ William H. Turner William H. Turner Director 50
  • 54. Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Ameriprise Financial, Inc. We have audited the consolidated financial statements of Ameriprise Financial, Inc. as of December 31, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, and have issued our report thereon dated February 26, 2007 (incorporated by reference in this Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) of Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Minneapolis, Minnesota February 26, 2007 F-1
  • 55. AMERIPRISE FINANCIAL, INC. SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (Parent Company Only) Years Ended December 31, 2006 2005 2004 (in millions) Revenues Management, financial advice and service fees $ 60 $ 339 $ 413 Distribution fees 73 54 19 Net investment income 59 20 19 Other revenues 6 6 10 Total revenues 198 419 461 Expenses Compensation and benefits 467 418 356 Interest and debt expense 108 70 51 Separation costs 137 76 — Other expenses (53) 30 182 Total expenses 659 594 589 Loss before income tax benefit and equity in earnings of subsidiaries (461) (175) (128) Income tax benefit (179) (27) (15) Loss before equity in earnings of subsidiaries (282) (148) (113) Equity in earnings of subsidiaries: Equity in earnings of subsidiaries 913 706 938 Equity in income from discontinued operations of subsidiary, net of tax — 16 40 Equity in cumulative effect of accounting change in subsidiaries, net of tax — — (71) Total equity in earnings of subsidiaries 913 722 907 Net income $ 631 $ 574 $ 794 See Notes to Condensed Financial Information of Registrant. F-2
  • 56. AMERIPRISE FINANCIAL, INC. SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (Parent Company Only) December 31, 2006 2005 (in millions, except share data) Assets Cash and cash equivalents $ 1,346 $ 1,192 Investments 320 303 Receivables 62 29 Due from subsidiaries 128 148 Land, buildings, equipment, and software, net of accumulated depreciation of $409 and $336, respectively 611 566 Investment in subsidiaries 8,265 7,777 Other assets 229 214 Total assets $ 10,961 $ 10,229 Liabilities and Shareholders’ Equity Liabilities: Accounts payable and accrued expenses $ 641 $ 599 Due to subsidiaries 335 245 Payable to American Express 52 16 Debt 2,000 1,550 Other liabilities 8 132 Total liabilities 3,036 2,542 Shareholders’ Equity: Common shares ($.01 par value; shares authorized, 1,250,000,000; shares issued, 252,909,389 and 249,998,206, respectively) 3 2 Additional paid-in capital 4,353 4,091 Retained earnings 4,268 3,745 Treasury shares, at cost (11,517,958 and 122,652 shares, respectively) (490) — Accumulated other comprehensive loss, net of tax, including amounts applicable to equity investments in subsidiaries: Net unrealized securities losses (187) (129) Net unrealized derivative gains (losses) (1) 6 Foreign currency translation adjustment (18) (25) Defined benefit plans (3) (3) Total accumulated other comprehensive loss (209) (151) Total shareholders’ equity 7,925 7,687 Total liabilities and shareholders’ equity $ 10,961 $ 10,229 See Notes to Condensed Financial Information of Registrant. F-3
  • 57. AMERIPRISE FINANCIAL, INC. SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only) Years Ended December 31, 2006 2005 2004 (in millions) Cash Flows from Operating Activities Net income $ 631 $ 574 $ 794 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries (913) (706) (938) Equity in income from discontinued operations of subsidiary, net of tax — (16) (40) Equity in cumulative effect of accounting change in subsidiaries, net of tax — — 71 Dividends received from subsidiaries and affiliates 670 486 1,147 Other operating activities, primarily with subsidiaries 139 615 124 Net cash provided by operating activities 527 953 1,158 Cash Flows from Investing Activities Available-for-Sale securities: Proceeds from sales 23 243 156 Maturities, sinking fund payments and calls 401 179 21 Purchases (347) (278) (162) Purchase of land, buildings, equipment and software (153) (113) (100) Investment in subsidiaries (220) (924) (29) Acquisition of loans (33) — — Change in loans 2 — — Net cash used in investing activities (327) (893) (114) Cash Flows from Financing Activities Proceeds from issuances of debt, net of issuance costs 494 2,843 — Principal repayments of debt (50) (1,350) (78) Payable to American Express, net 36 (1,578) 263 Capital transactions with American Express, net — 1,256 40 Dividends paid to American Express — (53) (1,325) Dividends paid to shareholders (108) (27) — Repurchase of common shares (490) — — Exercise of stock options 20 — — Excess tax benefits from share-based compensation 52 — — Net cash provided by (used in) financing activities (46) 1,091 (1,100) Parent Company Operations Applicable to Discontinued Operations of Subsidiary Net cash provided by operating activities — 48 95 Net cash used in financing activities — (24) (40) Net cash provided by Parent Company operations applicable to discontinued operations of subsidiary — 24 55 Net increase (decrease) in cash and cash equivalents 154 1,175 (1) Cash and cash equivalents at beginning of year 1,192 17 18 Cash and cash equivalents at end of year $1,346 $1,192 $ 17 Supplemental Disclosures: Interest paid $ 104 $ 80 $ 52 Income taxes received, net 124 169 21 Non-cash dividend of AEIDC to American Express — 164 — See Notes to Condensed Financial Information of Registrant. F-4
  • 58. AMERIPRISE FINANCIAL, INC. SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company Only) 1. Basis of Presentation The accompanying Condensed Financial Statements include the accounts of Ameriprise Financial, Inc. (the “Registrant,” “Ameriprise Financial” or “Parent Company”) and, on an equity basis, its subsidiaries and affiliates. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and all adjustments made were of a normal, recurring nature. The financial information of the Parent Company should be read in conjunction with the Consolidated Financial Statements and Notes of Ameriprise Financial. Parent Company revenues and expenses, other than compensation and benefits and debt and interest expense, are primarily related to intercompany transactions with subsidiaries and affiliates. Until the fourth quarter of 2005, the Parent Company was a Registered Investment Advisor. During the fourth quarter of 2005, the Parent Company ceased being a Registered Investment Advisor and, in turn, an Ameriprise Financial subsidiary became a Registered Investment Advisor. 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. In preparation for the disposition, Ameriprise Financial approved a stock split of its 100 common shares entirely held by American Express into 246 million common shares. 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”). The Distribution was effectuated through a pro-rata dividend to American Express shareholders consisting of one share of Ameriprise Financial common stock for every 5 shares of American Express common stock owned by its shareholders on September 19, 2005, the record date. Prior to August 1, 2005, Ameriprise Financial was named American Express Financial Corporation. 2. Debt All of the consolidated debt of Ameriprise Financial are borrowings of the Parent Company, except as indicated below. • At December 31, 2006 and 2005, the consolidated debt of Ameriprise Financial included $225 million and $283 million, respectively, of non-recourse debt of a consolidated variable interest entity, or 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. • Ameriprise Financial began consolidating certain limited partnerships, including certain property fund limited partnerships, as a result of its adoption of Emerging Issues Task Force (“EITF” Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”) as of January 1, 2006. The effect of this consolidation as of January 1, 2006 included an increase of $136 million in non-recourse debt related to the property funds. In September 2006, the partnerships repaid the outstanding non-recourse debt following a restructuring of the partnership capital. 3. Commitments and Contingencies The Parent Company is the guarantor for an operating lease of IDS Property Casualty Insurance Company. All consolidated legal, regulatory and arbitration proceedings, including class actions of Ameriprise Financial, Inc. and its consolidated subsidiaries are potential or current obligations of the Parent Company. F-5
  • 59. EXHIBIT INDEX Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed certain agreements as exhibits to this Annual Report on Form 10-K. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon. The following exhibits are filed as part of this Annual Report on Form 10-K. The exhibit numbers followed by an asterisk (*) indicate exhibits electronically filed herewith. All other exhibit numbers indicate exhibits previously filed and are hereby incorporated herein by reference. Exhibits numbered 10.5 through 10.26 and Exhibits numbered 10.28, 10.29, 10.31, 10.33 and 10.34 are management contracts or compensatory plans or arrangements. Exhibit Description 3.1 Amended and Restated Certificate of Incorporation of Ameriprise Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 3.2* Amended and Restated Bylaws of Ameriprise Financial, Inc., as amended on November 28, 2006. 4.1 Form of Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to Form 10 Registration Statement, File No. 1-32525, filed on August 19, 2005). 4.2 Indenture dated as of October 5, 2005, between the Registrant and U.S. Bank National Association, trustee (incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3, File No. 333-128834, filed on October 5, 2005). 4.3 First Supplemental Junior Subordinated Debt Indenture, dated as of May 26, 2006, between Ameriprise Financial, Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, File No. 1-32525, filed on May 26, 2006). 4.4 Form of 7.518% Junior Subordinated Notes due 2066 of the Company (incorporated by reference to Exhibit 4.2 to the to the Current Report on Form 8-K, File No. 1-32525, filed on May 26, 2006). Other instruments defining the rights of holders of long-term debt securities of the registrant are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The registrant agrees to furnish copies of these instruments to the SEC upon request. 10.1 Separation and Distribution Agreement between American Express and Ameriprise Financial, Inc., dated August 24, 2005 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, File No. 1-32525, filed on August 30, 2005). 10.2 Transition Services Agreement by and between American Express and Ameriprise Financial, Inc., dated as of September 30, 2005 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.3 Tax Allocation Agreement by and between American Express and Ameriprise Financial, Inc., dated as of September 30, 2005 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.4 Employee Benefits Agreement by and between American Express and Ameriprise Financial, Inc., dated as of September 30, 2005 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.5 Amended and Restated Ameriprise Financial 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8, File No. 333-128789, filed on October 5, 2005). E-1
  • 60. 10.6 Ameriprise Financial Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.7* Ameriprise Financial Supplemental Retirement Plan. 10.8 Form of Ameriprise Financial 2005 Incentive Compensation Plan Master Agreement for Substitution Awards (incorporated by reference to Exhibit 10.8 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.9 Form of Ameriprise Financial 2005 Incentive Compensation Plan Agreement for Assumed Portfolio Grant Awards (incorporated by reference to Exhibit 10.9 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.10 Form of Ameriprise Financial 2005 Incentive Compensation Plan Agreement for Assumed Performance Grants (incorporated by reference to Exhibit 10.10 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.11 Key Employee Retention Award for Mr. Berman (incorporated by reference to Exhibit 10.11 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.12 Key Employee Retention Award for Mr. Heath (incorporated by reference to Exhibit 10.12 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.13 Key Employee Retention Award for Mr. Truscott (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to Form 10 Registration Statement, File No. 1-32525, filed on August 15, 2005). 10.14 Letter sent by American Express to Mr. Cracchiolo (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, File No. 1-32525, filed on August 30, 2005). 10.15 Ameriprise Financial Form of Award Certificate — Non-Qualified Stock Option Award (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.16 Ameriprise Financial Form of Award Certificate — Restricted Stock Award (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.17 Ameriprise Financial Form of Award Certificate — Restricted Stock Unit Award (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.18 Ameriprise Financial Form of Agreement — Cash Incentive Award (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.19 Ameriprise Financial Long-Term Incentive Award Program Guide (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.20 Ameriprise Financial Deferred Share Plan for Outside Directors (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K, File No. 1-32525, filed on October 4, 2005). 10.21 Compensatory Arrangements for CEO (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on August 30, 2005). 10.22 CEO Security and Compensation Arrangements (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on October 31, 2005). 10.23 Completion/Retention Awards (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on October 31, 2005). 10.24 Ameriprise Financial, Inc. Senior Executive Severance Plan, as amended November 14, 2005 (incorporated by reference to Exhibit 10.24 of the Annual Report on Form 10-K, File No. 1-32525, filed on March 8, 2006). E-2
  • 61. 10.25 Restricted Stock Awards in lieu of Key Executive Life Insurance Program (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on November 18, 2005). 10.26 Treatment of Portfolio Grants and Portfolio Grant for CEO (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on December 21, 2005). 10.27 Ameriprise Financial, Inc. Deferred Equity Program for Independent Financial Advisors (incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K, File No. 1-32525, filed on March 8, 2006). 10.28 Ameriprise Financial Annual Incentive Award Plan, adopted effective as of September 30, 2005 (incorporated by reference to Exhibit 10.28 of the Annual Report on Form 10-K, File No. 1-32525. filed on March 8, 2006). 10.29 Form of Indemnification Agreement for directors, Chief Executive Officer, Chief Financial Officer, General Counsel and Principal Accounting Officer and any other officers designated by the Chief Executive Officer (incorporated by reference to Exhibit 10.29 of the Annual Report on Form 10-K, File No. 1-32525, filed on March 8, 2006). 10.30 Credit Agreement, dated as of September 30, 2005, among Ameriprise Financial, Inc., the lenders listed therein, Wells Fargo Bank, National Association, Citibank, N.A., Bank of America, N.A., HSBC Bank USA, National Association, Wachovia Bank, National Association and Citigroup Global Markets, Inc. (incorporated by reference to Exhibit 10.31 of the Annual Report on Form 10-K, File No. 1-32525, filed on March 8, 2006). 10.31 2006 Annual Incentive Awards (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1 -32525, filed on March 27, 2006). 10.32 Stock Purchase and Sale Agreement, dated as of March 29, 2006, by and among Warren E. Buffett, Berkshire Hathaway Inc. and Ameriprise Financial, Inc. (incorporated by reference to Item 99.1 of the Current Report on Form 8-K, File No. 1-32525, filed on March 30, 2006). 10.33 2006-2008 Long-Term Performance Plan Goals (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. 1-32525, filed on July 3, 2006). 10.34 Long-Term Performance Pool Plan for 2007 and 2008 (incorporated by reference to Item 1.01 of the Current Report on Form 8-K, File No. File No. 1-32525, filed on July 3, 2006). 12* Ratio of Earnings to Fixed Charges. 13* Portions of the Ameriprise Financial, Inc. 2006 Annual Report to Shareholders, which, except for those sections incorporated herein by reference, are furnished solely for the information of the SEC and are not to be deemed “filed.” 16.1 Letter from Ernst & Young LLP addressed to the Securities and Exchange Commission, dated June 6, 2005, regarding change in certifying accountant (incorporated by reference to Exhibit 16.1 to Form 10 Registration Statement, File No. 1-32525, filed on June 7, 2005). 16.2 Letter from PricewaterhouseCoopers LLP addressed to the Securities and Exchange Commission, dated June 3, 2005, regarding change in certifying accountant (incorporated by reference to Exhibit 16.2 to Form 10 Registration Statement, File No. 1-32525, filed on June 7, 2005). 21* Subsidiaries of Ameriprise Financial, Inc. 23* Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. 24 Powers of attorney (included on Signature Page). 31.1* Certification of James M. Cracchiolo pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 31.2* Certification of Walter S. Berman pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. E-3
  • 62. 32* Certification of James M. Cracchiolo and Walter S. Berman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. E-4
  • 63. Exhibit 3.2 The By-Laws Of Ameriprise Financial, Inc., As Amended And Restated As Of November 28, 2006 Article I Stockholders Section 1.01. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, or, within the sole discretion of the Board of Directors, by remote electronic communication technologies and at such date and at such time, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. Section 1.02. Special Meetings. Special meetings of the stockholders may be called at any time by the Chairman of the Board, Chief Executive Officer (or, in the event of his or her absence or disability, by the President or any Executive Vice President), or by the Board of Directors. A special meeting shall be called by the Chairman of the Board, Chief Executive Officer (or, in the event of his or her absence or disability, by the President or any Executive Vice President), or by the Secretary of the Corporation pursuant to a resolution approved by a majority of the entire Board of Directors. Such special meetings of the stockholders shall be held at such places, within or without the State of Delaware, or, within the sole discretion of the Board of Directors, by remote electronic communication technologies, as shall be specified in the respective notices or waivers of notice thereof. Any power of the stockholders of the Corporation to call a special meeting is specifically denied. Section 1.03. Notice Of Meetings; Waiver. (a) The Secretary of the Corporation or any Assistant Secretary shall cause written notice of the place, if any, date and hour of each meeting of the stockholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, to be given personally by mail or by electronic transmission, or as otherwise provided in these By- Laws, not fewer than ten (10) nor more than sixty (60) days prior to the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given personally to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the record of stockholders of the Corporation, or, if a stockholder shall have filed with the Secretary of the Corporation a written request that notices to such stockholder be mailed to some other address, then directed to such stockholder at such other address. Such further notice shall be given as may be required by law. (b) A written waiver of any notice of any annual or special meeting signed by
  • 64. the person entitled thereto, or a waiver by electronic transmission by the person entitled to notice, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders need be specified in a written waiver of notice. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. (c) For notice given by electronic transmission to a stockholder to be effective, such stockholder must consent to the Corporation’s giving notice by that particular form of electronic transmission. A stockholder may revoke consent to receive notice by electronic transmission by written notice to the Corporation. A stockholder’s consent to notice by electronic transmission is automatically revoked if the Corporation is unable to deliver two consecutive electronic transmission notices and such inability becomes known to the Secretary of the Corporation, any Assistant Secretary, the transfer agent or other person responsible for giving notice. (d) Notices are deemed given (i) if by facsimile, when faxed to a number where the stockholder has consented to receive notice; (ii) if by electronic mail, when mailed electronically to an electronic mail address at which the stockholder has consented to receive such notice; (iii) if by posting on an electronic network (such as a website or chatroom) together with a separate notice to the stockholder of such specific posting, upon the later to occur of (A) such posting or (B) the giving of the separate notice of such posting; or (iv) if by any other form of electronic communication, when directed to the stockholder in the manner consented to by the stockholder. (e) If a stockholder meeting is to be held via electronic communications and stockholders will take action at such meeting, the notice of such meeting must: (i) specify the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present and vote at such meeting; and (ii) provide the information required to access the stockholder list. A waiver of notice may be given by electronic transmission. Section 1.04. Quorum. Except as otherwise required by law or by the Certificate of Incorporation, at each meeting of stockholders the presence in person or by proxy of the holders of record of a majority in voting power of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither he entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any subsidiary of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.05. Voting. If, pursuant to Section 5.05 of these By-Laws, a record 2
  • 65. date has been fixed, every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one (1) vote for each share outstanding in his or her name on the books of the Corporation at the close of business on such record date. If no record date has been fixed, then every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one (1) vote for each share of stock standing in his or her name on the books of the Corporation at the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, Directors shall be elected by the appropriate method provided for in Section 1.11 of these By-Laws, and in all other matters, the affirmative vote of the majority of shares present in person or represented by proxy at a meeting and voting on the subject matter shall be the act of the stockholders. Section 1.06. Voting By Ballot. No vote of the stockholders on an election of Directors need be taken by written ballot or by electronic transmission unless otherwise required by law. Any vote not required to be taken by ballot or by electronic transmission may be conducted in any manner approved by the Board of Directors prior to the meeting at which such vote is taken. Section 1.07. Adjournment. If a quorum is not present at any meeting of the stockholders, the stockholders present in person or by proxy shall have the power to adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, if any, date and hour thereof are announced at the meeting at which the adjournment is taken, provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.05 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. Section 1.08. Proxies. Any stockholder entitled to vote at any meeting of the stockholders may authorize another person or persons to vote at any such meeting and express such vote on behalf of him or her by proxy. A stockholder may authorize a valid proxy by executing a written instrument signed by such stockholder, or by causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person designated as the holder of the proxy, a proxy solicitation firm or a like authorized agent. No such proxy shall be voted or acted upon after the expiration of three (3) years from the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing 3
  • 66. with the Secretary of the Corporation either an instrument in writing revoking the proxy or another duly executed proxy bearing a later date. Proxies by telegram, cablegram or other electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of a writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 1 .09. Organization Procedure. At every meeting of stockholders the presiding officer shall be the Chairman of the Board or, in the event of his or her absence or disability, a presiding officer chosen by the Board of Directors. The Secretary of the Corporation, or in the event of his or her absence or disability, an Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary of the Corporation, an appointee of the presiding officer, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be determined by such presiding officer. Section 1.10. Notice Of Stockholder Business And Nominations. (a) Annual Meetings Of Stockholders. (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation’s notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 1.10 and at the time of the annual meeting, (ii) is entitled to vote at the meeting and (3) complies with the notice procedures set forth in this Section 1.10. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this Section 1.10, the stockholder must have given timely notice thereof in writing or by electronic transmission to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth (120th) day and not later than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely 4
  • 67. must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting and the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder’s notice as described above. To be in proper form, a stockholder’s notice to the Secretary of the Corporation must: (A) set forth, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, if any, (2) the class or series and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, if any, as of the date of such notice (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date), and (3) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of Directors in a contested election pursuant to Section 14 of the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (the “Exchange Act”); (B) if the notice relates to any business other than the nomination of a Director that the stockholder proposes to bring before the meeting, set forth (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder and beneficial owner, if any, in such business and (2) a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder; (C) set forth, as to each person, if any, whom the stockholder proposes to nominate for election or reelection as a Director (1) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of Directors in a contested election pursuant to Section 14 of the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a Director if elected) and (2) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed 5
  • 68. nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a Director or executive officer of such registrant; and (D) with respect to each nominee for election or reelection to the Board of Directors, include the completed and signed questionnaire, representation and agreement required by Section 1.12 of these By-Laws. The Corporation may require any proposed nominee to furnish such other information, documents, affidavits, or certifications as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent Director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Section 1.10 to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for Director or specifying the size of the increased Board of Directors at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 1.10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings Of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that Directors shall be elected at such meeting, by any stockholder of the Corporation who (A) is a stockholder of record at the time of giving of notice provided for in this Section 1.10 and at the time of the special meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures set forth in this Section 1.10. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more Directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may 6
  • 69. be) for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by clause (a)(ii) of this Section 1.10 (including the completed and signed questionnaire, representation and agreement required by Section 1.12 of these By-Laws and any other information, documents, affidavits, or certifications required by the Corporation) shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such a special meeting and the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder notice as described above. (c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.10 shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.10, and if any proposed nomination or business is not in compliance with the Section 1.10, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 1.10, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (iii) Notwithstanding the forgoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.10. Nothing in this Section 1.10 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series of Preferred Stock, if any, to elect Directors if so provided under any applicable Preferred Stock Certificate of Designation (as defined in the Certificate of Incorporation). 7
  • 70. Section 1.11. Required Vote For Directors. (a) Majority Vote. Except as otherwise provided in paragraph (c) of this Section 1.11 in the case of a contested election, each Director to be elected by stockholders shall be elected by the vote of the majority of the votes cast at any meeting for the election of Directors at which a quorum is present. For purposes of this Section 1.11, a majority of votes cast shall mean that the number of shares voted “for” exceeds 50% of the number of votes cast with respect to that Director’s election. Votes cast shall include votes to withhold authority in each case and exclude abstentions with respect to that Director’s election. (b) Mandatory Tender Of Resignation. If a nominee for Director who is an incumbent Director is not elected and no successor has been elected at such meeting, the Director shall promptly tender his or her resignation to the Board of Directors unless he or she has previously tendered a resignation to become effective upon such nominee’s failure to receive the required vote for re- election pursuant to paragraph (a) of this Section 1.11 at the next meeting at which such nominee would stand for re-election. The Nominating and Governance Committee shall make a recommendation to the Board of Directors as to whether to reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation, taking into account the Nominating and Governance Committee’s recommendation, and publicly disclose (by a press release, a filing with the Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within ninety (90) days from the date of the certification of the election results. The Nominating and Governance Committee in making its recommendation, and the Board of Directors in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The Director who tenders his or her resignation shall not vote on the recommendation of the Nominating and Governance Committee or the decision of the Board of Directors with respect to his or her resignation. If such incumbent Director’s resignation is not accepted by the Board of Directors, such Director shall continue to serve until the next annual meeting and until his or her successor is duly elected, or his or her earlier resignation or removal. If a Director’s resignation is accepted by the Board of Directors pursuant to this Section 1.11, or if a nominee for Director is not elected and the nominee is not an incumbent Director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of Section 2.14 of these By-Laws or may decrease the size of the Board of Directors pursuant to the provisions of Section 2.02 of these By-Laws. (c) Plurality Vote. In the event of a contested election of Directors, paragraphs (a) and (b) of this Section 1.11 shall not apply and Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and voting for nominees in the election of Directors at any meeting for the election of directors at which a quorum is present. For purposes of this Section1.11, a contested election shall mean any election of Directors in which the number of candidates for election as Directors exceeds the number of Directors to be elected. 8
  • 71. Section 1.12. Submission Of Questionnaire, Representation, And Agreement. (a) To be eligible to be a nominee for election or reelection as a Director of the Corporation, a person must deliver (in accordance with the time periods prescribed for delivery of notice under Section 1.10(a)(ii) of these By-Laws) to the Secretary of the Corporation at the principal executive offices of the Corporation a completed and signed questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary of the Corporation upon written request) and a signed representation and agreement (in the form provided by the Secretary of the Corporation upon written request) that such person (i) will abide by the requirements of Section 1.11 (b) of these By-Laws, (ii) is not and will not become a party to (A) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a Director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (B) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a Director of the Corporation, with such person’s fiduciary duties under applicable law, (iii) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a Director that has not been disclosed therein, and (iv) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a Director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation. Section 1.13. Inspectors Of Elections. Preceding any meeting of the stockholders, the Board of Directors shall appoint one (1) or more persons to act as Inspectors of Elections, and may designate one (1) or more alternate inspectors. In the event no inspector or alternate is able to act, the person presiding at the meeting shall appoint one (1) or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall: (a) ascertain the number of shares outstanding and the voting power of each; (b) determine the shares represented at a meeting and the validity of proxies and ballots; (c) specify the information relied upon to determine the validity of electronic transmissions in accordance With Section 1.08 hereof; (d) count all votes and ballots; 9
  • 72. (e) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; (f) certify his or her determination of the number of shares represented at the meeting, and his or her count of all votes and ballots; (g) appoint or retain other persons or entities to assist in the performance of the duties of inspector; and (h) when determining the shares represented and the validity of proxies and ballots, be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 1.08 of these By-Laws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this section the inspector, at the time of his or her certification pursuant to paragraph (f) of this section, shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector’s belief that such information is accurate and reliable. Section 1.14. Opening And Closing Of Polls. The date and time for the opening and the closing of the polls for each matter to be voted upon at a stockholder meeting shall be announced at the meeting. The inspector shall be prohibited from accepting any ballots, proxies or votes or any revocations thereof or changes thereto after the closing of the polls, unless the Delaware Court of Chancery upon application by a stockholder shall determine otherwise. Section 1.15. No Stockholder Action By Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is specifically denied. Article II Board Of Directors Section 2.01. General Powers. Except as may otherwise be provided by law, the Certificate of Incorporation or these By- Laws, the property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all the powers of the Corporation, Section 2.02. Number Of Directors. Subject to the rights of the holders of any class or series of Preferred Stock, if any, the number of Directors shall be fixed from 10
  • 73. time to time exclusively pursuant to a resolution adopted by a majority of the entire Board of Directors; provided, however, that the Board of Directors shall at no time consist of fewer than three (3) Directors. Section 2.03. Classified Board Of Directors; Election Of Directors. The Directors of the Corporation, subject to the rights of the holders of shares of any class or series of Preferred Stock, shall be classified with respect to the time for which they severally hold office, into three (3) classes, as nearly equal in number as possible, one class (“Class I”) whose initial term expires at the 2006 annual meeting of stockholders, another class (“Class II”) whose initial term expires at the 2007 annual meeting of stockholders, and another class (“Class Ill”) whose initial term expires at the 2008 annual meeting of stockholders, with each class to hold office until its successors are elected and qualified. Except as otherwise provided in Sections 2.12 and 2.13 of these By-Laws, at each annual meeting of stockholders of the Corporation, and subject to the rights of the holders of shares of any class or series of Preferred Stock, the successors of the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Section 2.04. The Chairman Of The Board. The Directors shall elect from among the members of the Board a “Chairman of the Board”. The Chairman of the Board shall be deemed an officer of the Corporation and shall have such duties and powers as set forth in these By-Laws or as shall otherwise be conferred upon the Chairman of the Board from time to time by the Board of Directors. The Chairman of the Board may be the Chief Executive Officer of the Corporation. The Chairman of the Board shall, if present, preside over all meetings of the Stockholders and of the Board of Directors. The Board of Directors shall by resolution establish a procedure to provide for an acting Chairman of the Board in the event the most recently elected Chairman of the Board is unable to serve or act in that capacity. Section 2.05. Annual And Regular Meetings. The annual meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held after the annual meeting of the stockholders and may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined notice thereof need not be given. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date and hour of such meetings. Notice of regular meetings need not be given, provided, however, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, to each Director who shall not have been present at the meeting at which such action was taken, addressed to him or her at his or her usual place of business, or shall be delivered to him or her personally. Notice 11
  • 74. of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. Section 2.06. Special Meetings: Notice. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, Chief Executive Officer (or, in the event of his or her absence or disability, by the President or any Executive Vice President), or by the Board of Directors pursuant to the following sentence, at such place (within or without the State of Delaware), date and hour as maybe specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors also may be held whenever called pursuant to a resolution approved by a majority of the entire Board of Directors. Special meetings of the Board of Directors may be called on twenty-four (24) hours’ notice, if notice is given to each Director personally or by telephone, including a voice messaging system, or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, or on five (5) days’ notice, if notice is mailed to each Director, addressed to him or her at his or her usual place of business or to such other address as any Director may request by notice to the Secretary. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting, and any business may be transacted thereat. Section 2.07. Quorum: Voting. At all meetings of the Board of Directors, the presence of at least a majority of the total authorized number of Directors shall constitute a quorum for the transaction of business. Except as otherwise required bylaw, the vote of at least a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.08. Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.05 of these By-Laws shall be given to each Director. Section 2.09. Action Without A Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing or by electronic transmission, and such writing, writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors. Such filing may be in paper form or in electronic form. Section 2.10. Regulations: Manner Of Acting. To the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws, the Board of 12
  • 75. Directors may adopt by resolution such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board of Directors and the individual Directors shall have no power in their individual capacities unless expressly authorized by the Board of Directors. Section 2.11. Action By Telephonic Communications. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 2.12. Voluntary Resignation. Any Director may voluntarily resign at any time by submitting an electronic transmission or by delivering a written notice of resignation, signed by such Director, to the Chairman of the Board or the Secretary of the Corporation. Unless otherwise specified in the notice of resignation, such resignation shall take effect immediately upon its receipt by the Chairman of the Board or the Secretary of the Corporation. This Section 2.12 shall not apply to any tender of resignation required by Section 1.11(b) of these By-Laws, which Section 1.11(b) alone shall govern any such mandatory tender of resignation by a Director. A Director who is required to tender his or her resignation pursuant to Article I, Section 1.11 (b) of these By-Laws may instead submit his or her voluntary resignation pursuant to this Section 2.12, provided that: (i) the Chairman of the Board or the Secretary of the Corporation receives the written notice of voluntary resignation no later than five (5) days after the date of the certification of the election results for the meeting of stockholders at which the director was nominated for re-election; and (ii) such resignation shall take effect immediately upon its receipt by the Chairman of the Board or the Secretary of the Corporation, regardless of any other effective date specified in the notice of resignation. Section 2.13. Removal Of Directors. Subject to the rights of the holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, any Director may be removed at any time, but only for cause, upon the affirmative vote of the holders of a majority of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of Directors. Any vacancy in the Board of Directors caused by any such removal may be filled at a meeting duly called by the stockholders entitled to vote for the election of the Director so removed. If such stockholders do not fill such vacancy at such meeting, such vacancy may be filled in the manner provided in Section 2.14 of these By-Laws. Section 2.14. Vacancies And Newly Created Directorships. Subject to the rights of the holders of any class or series of Preferred Stock, if any, to elect additional Directors under specified circumstances, and except as provided in Section 2.13, if any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of’ Directors shall be increased, the Directors then in office shall continue to act, and such vacancies and newly created Directorships 13
  • 76. may be filled by a majority of the Directors then in office, although less than a quorum. Any Director filling a vacancy shall be of the same class as that of the Director whose death, resignation, removal or other event caused the vacancy, and any Director filling a newly created Directorship shall be of the class specified by the Board of Directors at the time the newly created Directorships were created. A Director elected to fill a vacancy or a newly created Directorship shall hold office until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal. Section 2.15. Compensation. The amount, if any, which each Director shall be entitled to receive as compensation for such Director’s services as such shall be fixed from time to time by resolution of the Board of Directors. Section 2.16. Reliance On Accounts And Reports, Etc. A Director, or a member of any committee designated by the Board of Directors shall, in the performance of such Director’s or member’s duties, be fully protected in relying in good faith upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees designated by the Board of Directors, or by any other person as to the matters the Director or the member reasonably believes are within such other person’s professional or expert competence and who the Director or member reasonably believes or determines has been selected with reasonable care by or on behalf of the Corporation. Article III Committees Section 3.01. Committees. The Board of Directors, by resolution adopted by the affirmative vote of a majority of Directors then in office, may designate from among its members one (1) or more committees of the Board of Directors, each committee to consist of such number of Directors as from time to time may be fixed by the Board of Directors. Any such committee shall serve at the pleasure of the Board of Directors. Each such committee shall have the powers and duties delegated to it by the Board of Directors, subject to the limitations set forth in applicable Delaware law. The Board of Directors may appoint a Chairman of any committee, who shall preside at meetings of any such committee. The Board of Directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of such committee, upon request of the Chairman of the Board or the Chairman of such committee. Section 3.02. Powers. Each committee shall have and may exercise such powers of the Board of Directors as may be provided by resolution or resolutions of the Board of Directors. No committee shall have the power or authority: to approve or adopt, or recommend to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to the stockholders for approval; or to adopt, amend or repeal the By-Laws of the Corporation. 14
  • 77. Section 3.03. Proceeding. Each such committee may fix its own rules of procedure and may meet at such place (within or without the State of Delaware), at such time and upon such notice, if any, as it shall determine from time to time. Each such committee shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 3.04. Quorum and Manner of Acting. Except as may be otherwise provided in the resolution creating such committee, at all meetings of any committee, the presence of members (or alternate members) constituting a majority of the total authorized membership of such committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such committee. Any action required or permitted to he taken at any meeting of any such committee may be taken without a meeting, if all members of such committee shall consent to such action in writing or by electronic transmission and such writing, writings or electronic transmission or transmissions are filed with the minutes of the proceedings of the committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. The members of any such committee shall act only as a committee, and the individual members of such committee shall have no power in their individual capacities unless expressly authorized by the Board of Directors. Section 3.05. Action by Telephonic Communications. Unless otherwise provided by the Board of Directors, members of any committee may participate in a meeting of such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 3.06. Absent or Disqualified Members. In the absence or disqualification of a member of any committee, if no alternate member is present to act in his or her stead, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 3.07. Resignations. Any member (and any alternate member) of any committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Board of Directors or the Chairman of the Board. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.08. Removal. Any member (and any alternate member) of any committee may be removed at any time, either for or without cause, by resolution adopted by a majority of the whole Board of Directors. 15
  • 78. Section 3.09. Vacancies. If any vacancy shall occur in any committee, by reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. Article IV Officers Section 4.01. Chief Executive Officer. The Board of Directors shall select a Chief Executive Officer to serve at the pleasure of the Board of Directors who shall (a) supervise the carrying out of policies adopted or approved by the Board of Directors, (b) exercise a general supervision and superintendence over all the business and affairs of the Corporation, and (c) possess such other powers and perform such other duties as may be assigned to him or her by these By-Laws, as may from time to time be assigned by the Board of Directors and as may be incident to the office of Chief Executive Officer. Section 4.02. Secretary Of The Corporation. The Board of Directors shall appoint a Secretary of the Corporation to serve at the pleasure of the Board of Directors. The Secretary of the Corporation shall (a) keep minutes of all meetings of the stockholders and of the Board of Directors, (b) authenticate records of the Corporation and (c) in general, have such powers and perform such other duties as may be assigned to him or her by these By-Laws, as may from time to time be assigned to him or her by the Board of Directors or the Chief Executive Officer and as may be incident to the office of Secretary of the Corporation. Section 4.03. Other Officers Elected By Board Of Directors. At any meeting of the Board of Directors, the Board of Directors may elect a President, Vice Presidents, a Chief Financial Officer, a Treasurer, Assistant Treasurers, Assistant Secretaries, or such other officers of the Corporation as the Board of Directors may deem necessary, to serve at the pleasure of the Board of Directors. Other officers elected by the Board of Directors shall have such powers and perform such duties as may be assigned to such officers by or pursuant to authorization of the Board of Directors or by the Chief Executive Officer. Section 4.04. Other Officers. The Board of Directors may authorize the Corporation to elect or appoint other officers, including Vice Presidents, Assistant Treasurers, Assistant Secretaries and other officers of the Corporation, each of whom shall serve at the pleasure of the Corporation. Officers elected or appointed by the Corporation shall have such powers and perform such duties as may be assigned to them by the Corporation. Section 4.05. Removal And Resignation; Vacancies. Any officer may be removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors, the Chief Executive Officer or the Secretary. Unless otherwise 16
  • 79. specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled by or pursuant to authorization of the Board of Directors. Section 4.06. Authority And Duties Of Officers. The officers of the Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. Article V Capital Stock Section 5.01. Certificates of Stock, Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation, by the Chairman of the Board, the Chief Executive Officer or the President, and by the Chief Financial Officer, the Treasurer or an Assistant Treasurer, or the Secretary of the Corporation or an Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws. Section 5.02. Signatures; Facsimile. All signatures on the certificate referred to in Section 5.01 of these By-Laws may be in facsimile, engraved or printed form, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile, engraved or printed signature has been placed upon a certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it maybe issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 5.03. Lost, Stolen Or Destroyed Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Corporation of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Corporation may require the owner of such lost, stolen or destroyed certificate, or his or her legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. 17
  • 80. Section 5.04. Transfer Of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to the laws of the General Corporation Law of the State of Delaware. Subject to the provisions of the Certificate of Incorporation and these By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. Section 5.05. Record Date. In order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty (60) nor fewer than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.06. Registered Stockholders. Prior to due surrender of a certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the Corporation to do so. Section 5.07. Transfer Agent And Registrar. The Board of Directors may appoint one (1) or more transfer agents and one (1) or more registrars, and may require 18
  • 81. all certificates representing shares to bear the signature of any such transfer agents or registrars. Article VI Indemnification Section 6.01. Nature Of Indemnity. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (a “Proceeding”), whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a Director or officer, of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such a Proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such Proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe his or her conduct was unlawful; except that in the case of a Proceeding by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall be limited to expenses (including attorneys’ fees) actually and reasonably incurred by such person in the defense or settlement of such Proceeding, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, but subject to Section 6.05 of these By-Laws, the Corporation shall not be obligated to indemnify a Director or officer of the Corporation in respect of a Proceeding (or part thereof) instituted by such Director or officer, unless such Proceeding (or part thereof) has been authorized by the Board of Directors. The termination of any Proceeding by judgment, order settlement, conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal Proceeding, had reasonable cause to believe that his or her conduct was unlawful. 19
  • 82. Section 6.02. Successful Defense. To the extent that a present or former Director or officer of the Corporation has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 6.01 hereof or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Section 6.03. Determination That Indemnification Is Proper. Any indemnification of a present or former Director or officer of the Corporation under Section 6.01 hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the present or former Director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 6.01 hereof. Any indemnification of a present or former employee or agent of the Corporation under Section 6.01 hereof (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the present or former employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 hereof. Any such determination shall be made, with respect to a person who is a Director or officer at the time of such determination, (1) by a majority vote of the Directors who are not parties to such Proceeding, even though less than a quorum, or (2) by a committee of such Directors designated by majority vote of such Directors, even though less than a quorum, or (3) if there are no such Directors, or if such Directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. Section 6.04. Advance Payment Of Expenses. Expenses (including attorneys’ fees) incurred by a Director or officer in defending any civil, criminal, administrative or investigative Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys’ fees) incurred by former Directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. The Board of Directors may authorize the Corporation’s counsel to represent such Director, officer, employee or agent in any Proceeding, whether or not the Corporation is a party to such Proceeding. Section 6.05. Procedure For Indemnification Of Directors And Officers. Any indemnification of a Director or officer of the Corporation under Sections 6.O1 and 6.02, or advance of costs, charges and expenses to a Director or officer under Section 6.04 of these By-Laws, shall be made promptly, and in any event within thirty (30) days, upon the written request of the Director or officer. If a determination by the Corporation that the Director or officer is entitled to indemnification pursuant to this Article VI is required, and the Corporation fails to respond within thirty (30) days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty 20
  • 83. (30) days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the Director or officer in any court of competent jurisdiction. Such person’s costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. It shall be a defense to any such Proceeding (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.04 of these By-Laws where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 6.01 of these By-Laws, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6.06. Survival; Preservation Of Other Rights. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each Director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware Genera! Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any Proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a “contract right” may not be modified retroactively without the consent of such Director, officer, employee or agent. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.07. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director or officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person or on such person’s behalf in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VI. 21
  • 84. Section 6.08. Severability. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to a Proceeding, whether civil, criminal, administrative or investigative, including a Proceeding by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. Article VII Offices Section 7.01. Initial Registered Office. The registered office of the Corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 N. Orange Street in the City of Wilmington, County of New Castle. Section 7.02. Other Offices. The Corporation may maintain offices or places of business at such other locations within or without the State of Delaware as the Board of Directors may from tine to time determine or as the business of the Corporation may require. Article VIII General Provisions Section 8.01. Dividends. Subject to any applicable provisions of law and the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, or shares of the Corporation’s capital stock. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. Section 8.02. Execution Of Instruments. The Board of Directors may authorize, or provide for the authorization of, officers, employees or agents to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization must be in writing or by electronic transmission and 22
  • 85. may be general or limited to specific contracts or instruments. Section 8.03. Voting As Stockholder. Unless otherwise determined by resolution of the Board of Directors, the Chief Executive Officer, the President, any Executive Vice President or any Senior Vice President shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. Article IX Amendment Of By-Laws These By-Laws maybe amended, altered or repealed by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting or at any regular or special meeting of the stockholders upon the affirmative vote of the holders of three-fourths (3/4) or more of the combined voting power of the outstanding shares of the Corporation entitled to vote generally in the election of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting. Article X Construction In the event of any conflict between the provisions of these By-Laws as in effect from time to time and the provisions of the Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling. 23
  • 86. Exhibit 10.7 AMERIPRISE FINANCIAL SUPPLEMENTAL RETIREMENT PLAN Restated as Amended Through January 1, 2007 I. HISTORY AND EFFECTIVE DATES OF THE PLAN A. History and Purpose The Ameriprise Financial Supplemental Retirement Plan (the “Plan”) was adopted by Ameriprise Financial, Inc. effective October 1, 2005. The Plan is hereby amended and restated in its entirety effective January 1, 2007. The Plan is intended to supplement retirement benefits provided under the Ameriprise Financial Retirement Plan, the Ameriprise Financial 401(k) Plan (for pay periods ending prior to December 31, 2006), and any other retirement and savings plans sponsored by the Company, for a select group of management or highly compensated individuals. The Plan is intended to be and shall be construed and operated as a “top-hat plan” under Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and Section 2520.104-23 of the United States Department of Labor Regulations. B. Effective Date This Ameriprise Financial Supplemental Retirement Plan became effective October 1, 2005. Effective as of the close of business on September 30, 2005, the American Express Company effectuated the distribution of all of the outstanding securities of Ameriprise Financial, Inc. to the shareholders of the American Express Company in a tax- free spin-off under the Code (the “Spin-Off”). On that date, the Company ceased to be a participating employer in the American Express Company’s tax-qualified retirement plans and the components of such plans covering Company participants were transferred to new plans established by the Company in a transaction that complied with Section 414(l) of the Code. In connection with this transaction, the component of the American Express Company Supplemental Retirement Plan (the “AXP Plan”) covering Company participants was similarly transferred to the Company. Effective as of the close of business on September 30, 2005, the Company and its subsidiaries ceased to be participating companies, and employees and retirees of the Company and its subsidiaries ceased to be participants, in the AXP Plan. The Plan is hereby amended to discontinue contributions to Participants in excess of the limits under the 401(k) Plan for pay periods ending on or after January 1, 2007, and to reflect certain other design changes.
  • 87. C. Transition Rules Opening Account Balances and Participation. Unless otherwise expressly set forth herein, the account balance as (1) of the close of business on September 30, 2005 of any individual who had accumulated benefits under the AXP Plan, the responsibility for which was transferred to the Company pursuant to the Employee Benefits Agreement by and between the American Express Company and the Company (the “EBA”), shall be the account balance such Participant had in the AXP Plan immediately before the Spin-Off. For purposes of this transition rule only, “Participant” shall include individuals with accrued benefits under the AXP Plan, the responsibility for which was transferred to the Company under the EBA. A Participant who became an Employee of the Company and Participant under the Plan shall accrue benefits and receive distributions of such benefits, including benefits accrued under the AXP Plan, as set forth below in the Plan. A Participant who had accrued benefits under the AXP Plan, but did not become an Employee of the Company accruing additional benefits under the Plan, shall have benefits solely as set forth in, and shall receive payments from the Company solely in accordance with, the terms of the AXP Plan as in effect on September 30, 2005. Plan Elections and Designations. Notwithstanding anything herein to the contrary and in accordance with the (2) requirements of the EBA, all beneficiary designations, deferral election forms, investment elections, payment form elections, and qualified domestic relations orders creating rights for alternate payees in effect under the AXP Plan as of September 30, 2005 shall be deemed to be effective with respect to the Plan. For purposes of this Section, investment elections relating to the American Express Company Stock Fund under the AXP Plan shall be deemed to apply to the Company Stock Fund under the Plan. Calculation of Limitations. Notwithstanding anything herein to the contrary, for purposes of calculating the (3) Section 415 Limitations and the Section 401(a)(17) Limitation, compensation and benefits accrued under the AXP Plan (and the underlying AXP qualified retirement plans) and/or while a Participant was employed by the American Express Company or its affiliates during 2005 shall be taken into consideration under the Plan for the 2005 Plan Year. II. DEFINITIONS As used in the Plan, the following terms have the meanings indicated below: “Administrator” means the Compensation and Benefits Committee, including any individual(s) to whom the Compensation A. and Benefits Committee delegates authority under the Plan, or such other committee or individual(s) authorized to act as the Administrator by the Compensation and Benefits Committee. “Affiliate” means any corporation or other trade or business under common control with the Company, as further defined in B. the Company’s Qualified Retirement Plans. 2
  • 88. “Beneficiary” means the individual or entity designated by the Participant in accordance with procedures established by the C. Administrator to receive benefits under the Plan in the event of the Participant’s death. “Change in Control” has the meaning given such term in the Ameriprise Financial 2005 Incentive Compensation Plan, as D. amended. “Code” means the Internal Revenue Code of 1986, as amended, together with official interpretations, guidance, or E. regulations issued thereunder. “Company” means Ameriprise Financial, Inc. and any of its subsidiaries and Affiliates which have become participating F. employers in a Qualified Retirement Plan. “Compensation” means, with respect to excess benefits calculated with reference to a particular Qualified Retirement Plan, G. “Compensation” as defined in the applicable Qualified Retirement Plan, as the context implies, provided that the Compensation and Benefits Committee may, in its discretion, designate additional or different items, such as the value of certain equity awards, as Compensation for purposes of one or more of the benefits provided under the Plan. “Compensation and Benefits Committee” means the Compensation and Benefits Committee of Ameriprise Financial, H. Inc.’s Board of Directors, or such successor committee as may be designated by Ameriprise Financial, Inc.’s Board of Directors. “Deferral Plan” means the Ameriprise Financial Deferred Compensation Plan, or any similar or successor non-qualified I. plan for the deferral of compensation in accordance with Section 409A. “Defined Termination” has the meaning given such term in the Senior Executive Severance Plan. J. “Employee” means an elected or appointed officer of the Company or any other individual the Administrator identifies as an K. employee of the Company, and whose compensation is reported on a Form W-2, regardless of whether the use of such form is subsequently determined to be erroneous. “Insiders” means such Participants who are or may be required to file reports under Section 16(a) of the Securities Exchange L. Act of 1934, as amended, with respect to equity securities of Ameriprise Financial, Inc. “401(k) Plan” means the Ameriprise Financial 401(k) Plan, as amended. M. “Participant” means an eligible Employee who accrues benefits under the Plan. N. “Plan Year” means the calendar year with reference to which benefits are determined under the Plan. O. 3
  • 89. “Qualified Retirement Plan” means the Retirement Plan and the 401(k) Plan, as the context may imply. P. “Retirement Plan” means the Ameriprise Financial Retirement Plan, as amended. Q. “Section 401(a)(17) Limitation” refers to the limitation on the dollar amount of Compensation which may be taken into R. account under the Qualified Retirement Plans under Section 401(a)(17) of the Code. “Section 409A” means Section 409A of the Code, as amended, together with official interpretations, guidance, or regulations S. issued thereunder. “Section 415 Limitations” refer to the limitations on benefits for defined benefit pension plans and defined contribution T. plans which are imposed by Section 415 of the Code. “Senior Executive Severance Plan” means the Ameriprise Financial Senior Executive Severance Plan, as amended. U. III. ADMINISTRATION The Plan shall be administered by the Administrator. The Administrator shall have full power, authority and discretion to A. interpret, construe and administer the Plan, and such interpretation and construction thereof and actions taken thereunder shall be binding on all persons for the purposes so stated by the Administrator. The Administrator may correct any defect, supply any omission or reconcile any inconsistency in the Plan in the manner and B. to the extent the Administrator deems necessary or desirable. Any decision of the Administrator in the administration of the Plan shall be final and conclusive and binding upon all Participants and Beneficiaries. IV. ELIGIBILITY TO PARTICIPATE IN THE PLAN Participation in the Plan shall be limited to Employees who meet the requirements of Section IV(B)(1) and (2) below, and A. shall automatically occur for such Employees, provided that the Administrator may designate, on a case-by-case basis, Employees or categories of Employees who shall not be eligible to participate in all or any portion of the Plan. To become a Participant in the Plan, an Employee must: B. be a participant under a Qualified Retirement Plan maintained by the Company. Participation by an Employee in a (1) Qualified Retirement Plan shall be determined pursuant to and in accordance with the eligibility criteria applicable under such Qualified Retirement Plan; and for the relevant Plan Year: (2) 4
  • 90. be credited with Compensation earned from the Company in an amount in excess of the applicable Code (a) Section 401(a)(17) Limitation or accrue benefits under a Qualified Retirement Plan in excess of the Section 415 Limitation; or have deferred Compensation under a Deferral Plan and be classified as a level “Grade Band 50” personnel (b) or greater (as such classification is defined by the Compensation and Benefits Committee from time-to- time); provided, however, that the Compensation and Benefits Committee may, in its sole discretion, set a different required pay level or grade for participation in the Plan. V. BENEFITS UNDER THE PLAN A. Benefits Under the Retirement Plan For purposes of this Section V(A), capitalized terms not otherwise defined herein shall have the same meaning set forth in the Retirement Plan. (1) Benefits in Excess of Limits Under the Retirement Plan If a Participant is a participant under the Retirement Plan, other than a terminated participant, the Company (a) shall establish a book reserve account to be determined as follows: Initial Book Reserve Account Balance. A Participant’s initial book reserve account balance (i) shall be zero unless the Participant was a participant in the AXP Plan. A Participant who was a participant in the AXP Plan shall have an initial book reserve account balance equal to his or her book reserve account balance in the AXP Plan on September 30, 2005. Contribution Credits. There shall be credited to a Participant’s book reserve account, in (ii) accordance with Section V(D), an amount equal to the excess, if any, of: (x) the Contribution Credits that would have been credited to a Participant’s Defined Benefit Account Balance under the Retirement Plan for the Plan Year if the Plan’s definition of Compensation was used, the Section 401(a)(17) Limitation was ignored, and the Participant had not elected or been required to defer the receipt of any Compensation through non-qualified deferrals pursuant to a Deferral Plan, over (y) the actual Contribution Credits credited to the Participant’s Defined Benefit Account Balance under the Retirement Plan for the Plan Year. In the event a Participant terminates from service as a result of a disability, as determined under the Retirement Plan, this Section V(A)(1)(ii) will apply as if the Section 401(a)(17) 5
  • 91. Limitation and Section 415 Limitations applied to the deemed Compensation considered by the Retirement Plan. Certain Participants, as determined by the Company in its sole discretion, may be deemed to have rendered (b) five (5) additional Years of Service under the Plan. For each such Participant, subject to such terms and conditions as the Company may impose upon such benefits by special agreement with such Participant (in the event of a conflict with this paragraph, such special agreement shall control), an additional amount shall be credited to the Participant’s book reserve account equal to the excess, if any of: (x) the total cumulative Contribution Credits that would have been credited to the Participant’s book reserve account under Section V(A)(1)(a) had the Participant rendered such additional Years of Service under the Retirement Plan, over (y) the actual total cumulative Contribution Credits credited to the Participant’s book reserve account under Section V(A)(1)(a) as of the date the Employee is eligible for such benefits under the Plan. Subject to the terms of the special agreement with each such Participant, such amounts shall be calculated and credited in accordance with Section V(D) under procedures to be determined from time to time by the Administrator and consistently applied to similarly situated Employees. Unless otherwise determined by the Administrator or agreed in a special agreement with the Participant, amounts credited under this Section V(A)(1)(b) shall be subject to five (5) year vesting, and such amounts shall be forfeited by the Participant if the Participant’s service with the Company terminates for any reason other than death or disability (as defined in the Retirement Plan) before five (5) years of actual service have been rendered to the Company by such Participant. The formula of the benefits for a Plan Year under this Section V(A)(1) shall be determined by the (c) Administrator and applied in a uniform manner for all similarly situated Employees. (2) Benefits Restricted to Vested Portion The benefits credited under this Section V(A) at the time of distribution to a Participant shall be restricted to a Participant’s vested portion. Unless otherwise expressly provided in the Plan, a Participant’s vested portion shall be determined under the vesting provisions of the Retirement Plan. Any non-vested portion of amounts credited to a Participant hereunder shall be forfeited. (3) Additional Accounts The Administrator may, in its sole and exclusive discretion, establish additional book reserve accounts from time to time. The procedures to reflect and credit increases, decreases, interest, dividends, and other income, gains and losses shall be determined by the Administrator in its sole and exclusive discretion. 6
  • 92. B. Benefits in Excess of Limits Under the 401(k) Plan For purposes of this Section V(B), capitalized terms not otherwise defined herein shall have the same meaning set forth in the 401(k) Plan. If a Participant is a participant in the 401(k) Plan for a Plan Year ending on or before December 31, 2006, the Company shall establish book reserve accounts under the Plan on behalf of such Participant. A Participant’s initial book reserve account balance shall be zero unless the Participant was a participant in the AXP Plan. A Participant who was a participant in the AXP Plan shall have an initial balance in each book reserve account equal to such Participant’s book reserve account balance in the equivalent account under the AXP Plan on September 30, 2005. The following amounts shall be credited to the Participant’s book reserve accounts as described in Section (V)(D): Company Stock Contribution Allocation. For pay periods ending on or before December 31, 2006, an amount (1) shall be credited to the Participant’s book reserve account for each Plan Year equal to: (a) one-percent (1%), or such other amount as may be set by the Compensation and Benefits Committee for some or all Participants, of the sum of: (i) the Participant’s Compensation, calculated without the Section 401(a)(17) Limitation or Section 415 Limitations, plus (ii) that portion of a Participant’s Compensation deferred during such Plan Year pursuant to a Deferral Plan, minus (b) the amount actually allocated as a Company Stock Contribution to the account of the Participant under the 401(k) Plan. Company Profit-Sharing Contribution Allocation. For pay periods ending on or before December 31, 2006, an (2) amount shall be credited to the Participant’s book reserve account for each Plan Year equal to: (a) the Company Profit-Sharing Contribution percentage utilized for purposes of the 401(k) Plan for that Plan Year for such Participant times the sum of: (i) the Participant’s Compensation, calculated without the Section 401(a)(17) Limitation or Section 415 Limitations, plus (ii) that portion of a Participant’s Compensation deferred during such Plan Year pursuant to a Deferral Plan, minus (b) the amount actually allocated as a Company Profit-Sharing Contribution to the account of the Participant under the 401(k) Plan. Unless otherwise expressly provided in the Plan, Benefits credited under this Section V(B)(2) at the time of distribution shall be restricted to a Participant’s vested portion as determined under the applicable provisions of the 401(k) Plan. Any non-vested portion of such deferred compensation to be paid shall be forfeited. Company Matching Contribution Allocation. For pay periods ending on or before December 31, 2006, a (3) Company matching contribution, whether or not the Participant actually elects to defer Compensation under the 401 (k) Plan, for each Plan Year equal to three percent (3%), or such other amount as may be set by the Compensation and Benefits Committee for some or all Participants, of: (a) that portion of the Participant’s Compensation which was deferred during the Plan Year pursuant to a Deferral Plan, plus (b) that portion of the Participant’s Compensation (not including the amounts deferred as described in clause (a) 7
  • 93. above) in excess of the Section 401(a)(17) Limitation, shall be contributed and allocated to the account of a Participant by the Company as a matching contribution on behalf of such Participant; provided, however, for purposes of this Company matching contribution, Compensation shall not be subject to the Section 401(a)(17) Limitation. The Administrator may, in its discretion, establish additional book reserve accounts from time to time. The procedures to reflect and credit increases, decreases, interest, dividends, and other income, gains and losses shall be determined by the Administrator in its sole and exclusive discretion. C. Benefits Upon a Change in Control If a Participant who is eligible to receive benefits under the Senior Executive Severance Plan experiences a Defined Termination, then the Participant shall be entitled to an additional benefit under this Plan in an amount equal to the contributions that would have been made by the Company on behalf of the Participant under the Qualified Retirement Plan, the Retirement Plan or this Plan (and other similar plans of the Company), during a period equal to the number of weeks of severance pay to which the Participant is entitled under the Senior Executive Severance Plan, as in effect immediately prior to the Change in Control, assuming compensation per week during such period of an amount equal to the Participant’s weekly severance benefit under the Senior Executive Severance Plan (for avoidance of doubt, without consideration of any offsets which may be provided in such plan against severance benefits, such as termination pay, office closing amounts, and the like). The full amount of such benefit shall be credited to the Participant’s book reserve accounts, as described in Section (V)(D), effective as of the date of the Defined Termination. D. Crediting of Accounts Amounts described in this Section V shall be credited to a book reserve account established for a Participant at such (1) times and in such manner as may be determined by the Administrator. In making such credits, the Administrator shall generally attempt to, but shall not be required to, credit accounts at a time and in a manner as similar as possible to the time and manner for the crediting of similar amounts under the Qualified Retirement Plans; provided that, unless the Administrator determines otherwise, amounts credited to an account with respect to the application of the Section 415 Limitations to the Retirement Plan shall be credited upon the commencement of the benefit payment under the Retirement Plan, and may, pursuant to rules determined by the Administrator, include for purposes of such calculation years of service, compensation, and other crediting information accrued under the AXP Plan. The Administrator shall apply such procedures consistently to similarly situated Participants. Amounts described in Section V(B)(1) shall be initially credited to a book reserve account established for a (2) Participant which shall be denominated in units (“Units”). For purposes of the Plan, the price and value of a Unit shall be 8
  • 94. determined by the Administrator in a manner determined by the Administrator to be reasonably consistent with similar determinations made under the 401(k) Plan Company Stock Fund (the “Stock Fund”). Amounts described in Sections V(B)(2), V(B)(3) and V(C) shall be credited to a book reserve account established (3) for a Participant which shall contain various subaccounts selected by the Administrator in its sole and exclusive discretion, representing the various investment funds available to a Participant under the 401(k) Plan as provided for in the Plan; provided that, unless otherwise determined by the Administrator, no subaccount shall be established under the Plan to coincide with any self-directed brokerage account which may be available under the 401(k) Plan. E. Payment of Benefits Any benefits payable under the Plan shall be paid in cash from the general assets of the Company in the form (1) elected by the Participant subject to the following: In accordance with rules and procedures adopted by the Administrator in compliance with Section 409A, (a) existing Participants, including Participants (other than those in pay status on December 31, 2004) who were participants under the AXP Plan, may make distribution elections as follows: Participants who have not previously made an initial distribution election, whether under the Plan (i) or under the AXP Plan, may make such an initial election on or before the date set by the Administrator. Participants who have previously made an initial distribution election, whether under the Plan or (ii) under the AXP Plan, but who have not previously modified such election under paragraph V(E)(1) (c), whether under the Plan or under the AXP Plan, may change such distribution election on or before the date set by the Administrator, to elect any payment form permissible under Section V (E)(1)(b) and Section 409A, regardless of whether such distribution election lengthens or shortens the period over which payments from the Plan shall be made. For the avoidance of doubt, any such distribution which accelerates payments from the Plan shall not cause any reduction in the amounts otherwise payable hereunder. Notwithstanding Section V(E)(1)(c), if made on or before the date set by the Administrator in accordance with this paragraph, such subsequent election shall be made in accordance with Section 409A, but, to the extent permitted under Section 409A transition guidance, need not comply with the requirement regarding a minimum additional deferral period of five (5) years. In addition, an election made on or before the date 9
  • 95. set by the Administrator that shortens the period over which payments from the Plan shall be made is not subject to the requirement that such election be made twelve (12) months prior to its effective date. However, any such subsequent election made under this paragraph shall constitute a modification for purposes of the one (1) time limitation contained in Section V(E)(1)(c), and no additional modification will thereafter be permitted under Section V(E)(1)(c) hereof. Employees who first become Participants after December 31, 2005 may make an initial (iii) distribution election in accordance with rules and procedures adopted by the Administrator in compliance with Section 409A. Participants who have previously made both a distribution election and a modification to such (iv) distribution election, whether under the Plan or the AXP Plan, shall be subject to the rules of Section V(E)(1)(c) prohibiting any further changes to their distribution elections. However, any such Participant who was not in pay status under the AXP Plan on December 31, 2004 and who previously made a modification to an initial distribution election which accelerated the time period for payments from the Plan shall not have any reduction in the amounts otherwise payable hereunder (notwithstanding Section V(E)(1)(b)(ii) of the AXP Plan). A Participant may elect to receive benefits in a single lump-sum payment or in annual installments payable (b) over a period of five (5), ten (10) or fifteen (15) consecutive calendar years. Except as provided in Section V(E)(1)(c) below, a Participant may not modify such Participant’s initial distribution election described in the preceding sentence. Such election shall apply to the payment of all benefits under the Plan, including benefits accrued under the AXP Plan (except for benefits that were in pay status under the AXP Plan on December 31, 2004). If a Participant fails to make a valid, timely distribution election in accordance with Section V(E)(1)(a) and the rules and procedures adopted by the Administrator, such Participant shall be deemed to have made an initial distribution election to receive benefits in the form of a single lump sum. Payment of benefits shall be made as follows: (i) if a Participant has elected (or is deemed to have elected) a lump sum payment, it shall be made on the first January 1 or July 1 which is at least six (6) months following the Participant’s separation from service for any reason from the Company, or as soon thereafter as administratively feasible (provided, however, that all such payments made in 2006 shall be made on July 1); 10
  • 96. and (ii) if a Participant has elected annual installment payments, they shall begin on July 1 of the calendar year following the Participant’s separation from service for any reason from the Company, or as soon thereafter as administratively feasible, and shall continue on each July 1 thereafter for the period selected by the Participant. A Participant who has experienced a separation from service, as defined in Section 409A, and has begun receiving payments as set forth above, shall continue receiving any remaining payments according to the terms in effect on the date of such Participant’s separation from service, even if later re-employed by the Company. Change in Payment Procedures. A Participant who has not previously modified an initial distribution (c) election, whether under the Plan or under the AXP Plan, may make a one (1) time modification to such Participant’s initial distribution election to elect a payment form that lengthens the period over which payments from the Plan shall be made. To be effective, such a modification shall be made by filing a written notice of modification in such form and manner as the Administrator may prescribe; provided, however, that the modification must comply with Section 409A, including requirements regarding: (i) a minimum additional deferral period of five (5) years; and (ii) the additional deferral election not being effective until twelve (12) months after it is made. A Participant may not change the payment method after separation from service. The benefits of a Participant under the Plan are subject to the terms of any severance plan of the Company (d) or an Affiliate applicable to such Participant, which plans may provide for the reduction of such benefits in accordance with the terms thereof. Upon a Participant’s death, benefits under the Plan shall be payable in cash to a Participant’s Beneficiary designated (2) pursuant to V(E)(3) below. If a Participant dies while still actively employed by the Company, such payment shall be made as a single lump-sum payment on the first January 1 or July 1 which is at least six (6) months following the Participant’s death. If a Participant elects annual installment payments and dies after such installment payments have commenced, any remaining installment payments shall be made to such Participant’s Beneficiary designated pursuant to V(E)(3) below as a single lump-sum payment made on the first January 1 or July 1 which is at least six (6) months following the Participant’s death. A Participant shall designate such Participant’s Beneficiary or Beneficiaries entitled to receive benefits under the (3) Plan by filing written notice of such designation with the Administrator in such form as the Administrator may prescribe. A Participant may revoke or modify such designation at any time by a further written designation in such form as the Administrator may prescribe. A Participant’s Beneficiary designation shall be deemed automatically revoked in the event of the death of the Beneficiary or, if the Beneficiary is the Participant’s 11
  • 97. spouse, in the event of dissolution of marriage. If no designation is in effect at the time benefits payable under the Plan become due, the Beneficiary shall be deemed to be the Participant’s surviving spouse, if any, and if not, the Participant’s estate. Upon the request of a Participant and based on a showing of an unforeseeable emergency as defined by Section (4) 409A, the Administrator may, in its sole discretion, vary the manner and time of making the distributions provided in this Section V(E) to the extent permitted by Section 409A. F. Subaccounts, Investment Performance and Transfers For each Participant, the book reserve accounts established pursuant to Section V(A) shall be increased by the (1) Imputed Earnings Credit (as such term is defined in the Retirement Plan), not less frequently than annually, under procedures and at times determined by the Administrator and consistently applied for similarly situated Participants. Such earnings shall be credited at the same interest rate and computed in a similar manner (to the extent administratively feasible) as Imputed Earnings Credits are computed under the Retirement Plan for each Plan Year. Subject to Section V(F)(4) below, and to such rules as may be adopted by the Administrator, the performance of the (2) book reserve account established for each Participant pursuant to Section V(E)(2) shall reflect the performance of the Stock Fund. Such book reserve account shall reflect such increases or decreases in value from time to time, whether from dividends, gains, losses or otherwise, as may be experienced by the Stock Fund. Subject to Section VI hereof, and to such rules as may be adopted by the Administrator, a Participant may elect to transfer credits to the book reserve account established pursuant to Section V(E)(2) to or from such account to or from one or more subaccounts established pursuant to Section V(E)(3), in a manner similar to the rules for such transfers under the 401(k) Plan. Notwithstanding the above, effective immediately upon a Change in Control, to the extent a book reserve account established on behalf of a Participant reflects, or by the terms of the Plan should in the future reflect, the performance of the Stock Fund, it shall thereafter reflect the performance of the 401(k) Plan Income Fund. For each Participant, credits to the book reserve account established pursuant to Section V(E)(3) shall be made to (3) such subaccounts thereunder as directed by such Participant. If more than one subaccount is selected, a Participant must designate, on a form or other medium acceptable to the Administrator, in one percent (1%) increments, the amounts to be credited to each subaccount. A Participant shall be allowed to amend such designation consistent with the frequency of investment changes offered the Participant under rules governing the 401(k) Plan for a given Plan Year. Subject to Section V(F)(4) below, for each Participant, the performance of such subaccounts shall reflect the performance of the investment fund under the 401(k) 12
  • 98. Plan that such subaccount represents. Each such subaccount shall reflect such increases or decreases in value from time to time, whether from dividends, gains, losses or otherwise, as that experienced by the related investment fund under the 401(k) Plan. Subject to Section VI hereof, credits to such subaccounts may be transferred to any other subaccount under the Plan on such terms and at such times as permitted with respect to the related investment funds under the 401(k) Plan, and to such rules as may be adopted by the Administrator. If a Participant fails to affirmatively designate one or more subaccounts pursuant to this Section V(F)(3), subject to rules established by the Administrator, such Participant shall be deemed to have selected either a default account selected by the Administrator or, to the extent feasible, the subaccount(s) that relate to the Participant’s investment direction under the 401(k) Plan; provided, however, to the extent an Insider has directed 401(k) Plan amounts to the Stock Fund, such Insider shall be deemed to have selected the subaccount relating to the 401(k) Plan Income Fund. Notwithstanding the foregoing, the Administrator may, in its sole discretion, provide that one or more investment funds available under the 401(k) Plan, including any self-directed brokerage account which may be available under the 401(k) Plan, shall not be available for designation under the Plan. Subject to Section V(E)(3), the subaccounts shall be valued subject to such reasonable rules and procedures as the (4) Administrator may adopt and apply to all Participants similarly situated with an effort to value such subaccounts as if amounts designated were invested in at similar times and in manners, subject to administrative convenience, as amounts are invested, and subject to the same market fluctuation factors used in valuing such investments in the 401 (k) Plan. VI. SPECIAL RESTRICTIONS The provisions of this Section VI shall apply to Insiders. Such provisions shall apply during all periods that Insiders are A. subject to reporting under Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), including any period following cessation of Insider status during which such Insiders are required to report transactions pursuant to Rule 16a-2(b) (or its successor) under the Exchange Act. At such time as any Insider ceases to be subject to Section 16(a) reporting (and any period contemplated by Rule 16a-2(b) has expired), this Section VI shall cease to be applicable to such Participant. This Section VI shall be automatically applicable to any person who, on and after the date hereof, becomes an Insider. For B. purposes of the foregoing, the effective date of this Section shall be the date the person becomes an Insider. Notwithstanding anything in the Plan to the contrary, (1) except as set forth below, credits to the account of an Insider C. pursuant to Section V(D) may not be made to any subaccount that reflects the performance of the Stock Fund, (2) credits made pursuant to Section V(D) to the account of an Insider at any time may not be transferred to any book 13
  • 99. reserve account or subaccount that reflects the performance of the Stock Fund, and (3) credits made to an Insider’s book reserve account pursuant to Section V(D)(2) at any time and credits to the account of an Insider pursuant to Section V(D) that were made to a subaccount that reflects the performance of the Stock Fund (which credits could only have been made when such individual was not an Insider) may not be transferred, withdrawn, paid out or otherwise changed, other than (a) pursuant to Section V(D)(1) or (2) (but only at such time as such person is no longer an Insider), or (b) pursuant to the forfeiture provisions contained in the last sentence of Section V(B)(2). It is intended that the crediting of amounts to the accounts of Insiders that represents the performance of the Stock Fund is D. intended to qualify for exemption from Section 16 under Rule 16b-3(d) under the Exchange Act. The Administrator shall, with respect to Insiders, administer and interpret all Plan provisions in a manner consistent with such exclusion. VII. CLAIMS PROCEDURES A Participant or Beneficiary who believes that he or she is being denied a benefit to which he or she is entitled under the Plan A. may file a written request for such benefit with the Administrator, setting forth his or her claim for benefits. The Administrator shall reply to any claim filed under Section VII(A) within ninety (90) days of receipt, unless it determines B. to extend such reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, such reply shall include a written explanation, using language calculated to be understood by the Participant or Beneficiary, setting forth: the specific reason or reasons for such denial; (1) the specific reference to relevant provisions of the Plan on which such denial is based; (2) a description of any additional material or information necessary for the Participant or Beneficiary to perfect his or (3) her claim and an explanation why such material or such information is necessary; appropriate information as to the steps to be taken if the Participant or Beneficiary wishes to submit the claim for (4) review; the time limits for requesting a review under Sections VII(C) and (D); and (5) the Participant’s or Beneficiary’s right to bring an action for benefits under Section 502 of ERISA. (6) Within sixty (60) days after the receipt by the Participant or Beneficiary of the written explanation described above, the C. Participant or Beneficiary may request in writing that the Administrator review its determination. The Participant or Beneficiary, or his or her 14
  • 100. duly authorized representative, may, but need not, review the relevant documents and submit issues and comment in writing for consideration by the Administrator. If the Participant or Beneficiary does not request a review of the initial determination within such sixty (60) day period, the Participant or Beneficiary shall be barred and estopped from challenging the determination. After considering all materials presented by the Participant or Beneficiary, the Administrator will render a written decision, D. setting forth the specific reasons for the decision and containing specific references to the relevant provisions of the Plan on which the decision is based. The decision on review shall normally be made within sixty (60) days after the Administrator’s receipt of the Participant’s or Beneficiary’s claim or request. If an extension of time is required for a hearing or other special circumstances, the Participant or Beneficiary shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reasons and the relevant Plan provisions and the Participant’s or Beneficiary’s right to bring an action for benefits under Section 502 of ERISA. All decisions on review shall be final and shall bind all parties concerned. No legal or equitable action for benefits under the Plan may be brought after the earliest of ninety (90) days after the claim E. denial or one year after the date the cause of action accrued. For this purpose, a cause of action is considered to have accrued when the person bringing the legal action knew, or in the exercise of reasonable diligence should have known, that a plan party has clearly repudiated the claim or legal position which is the subject of the action, regardless of whether such person has filed a claim for benefits. The Administrator’s decisions are final. VIII. GENERAL PROVISIONS Nothing in the Plan shall create, or be construed to create, a trust of any kind or fiduciary relationship between the Company A. and the Participant, such Participant’s designated Beneficiary, or any other person. Any funds deferred under the provisions of the Plan shall be construed for all purposes as a part of the general funds of the Company, and any right to receive payments from the Company under the Plan shall be no greater than the right of any unsecured general creditor. The Company may, but need not, purchase any securities or instruments as a means of hedging its obligations to any Participant under the Plan. The right of any Participant, or other person, to the payment of deferred compensation under the Plan shall not be assigned, B. transferred, pledged or encumbered except by the laws of descent and distribution. Participation in the Plan shall not be construed as conferring upon the Participant the right to continue in the employ of the C. Company as an executive or in any other capacity. The Company expressly reserves the right to dismiss any employee at any time without liability for the effect such dismissal might have upon such employee hereunder. 15
  • 101. Any deferred compensation payable under the Plan shall not be deemed salary or other compensation to the Participant for D. the purpose of computing the benefits under any plan or arrangement (including but not limited to any “employee benefit plan” under ERISA) except as expressly provided in such plan or arrangement. The Company makes no representations or warranties and assumes no responsibility as to the tax consequences to any E. Participant who enters into a deferred compensation agreement with the Company pursuant to the Plan. Further, payment by the Company to a Participant (or to a Participant’s Beneficiary or Beneficiaries) in accordance with the terms of the Plan, including any designation of Beneficiary on file with the Administrator at the time of such Participant’s death, shall be binding on all interested parties and persons, including such Participant’s heirs, executors, administrators and assigns, and shall discharge the Company, its directors, officers and employees from all claims, demands, actions or causes of action of every kind arising out of or on account of Participant’s participation in the Plan, known or unknown, for himself or herself, his or her heirs, executors, administrators and assigns. Any agreement executed pursuant to the Plan shall be deemed to include the above provision of this Section VIII(E). The Board of Directors or its delegate may, at any time, amend or terminate the Plan, provided that the Board may not reduce F. or modify the amount of any benefit payable to a Participant or any Beneficiary receiving benefit payments at the time the Plan is amended or terminated. The Administrator may prescribe a form of agreement to be used by a Participant and the Company, to the extent deemed G. necessary, to defer compensation under the Plan. The Plan and all actions taken hereunder shall be governed by and construed in accordance with the laws of the state of New H. York. Notwithstanding the above and any other provision herein to the contrary, to the extent permitted by Section 409A without I. excise tax or penalty, effective immediately upon a Change of Control, the entire value of each Participant’s book reserve accounts under the Plan shall be maintained in a trust (the “Trust”) established by the Company for this purpose and the Company shall transfer to the Trust an amount sufficient to fund the entire value of each Participant’s book reserve accounts. The Trust is intended to be classified for federal income tax purposes as a “grantor trust” within the meaning of Subpart E, Part I, Subchapter J, Chapter 1, Subtitle A of the Code. Notwithstanding anything in the Plan, the Retirement Plan or the 401(k) Plan to the contrary, any amount otherwise due or J. payable under the Plan may be forfeited, or its payment suspended, at the discretion of the Administrator, to apply toward or recover any claim the Company may have against the Participant, including but not limited to, for the enforcement of the Company’s Detrimental Conduct Provisions under its long-term incentive award plan, to recover a debt to the Company or to recover a benefit overpayment under a Company benefit plan or program. 16
  • 102. The Company shall be entitled to deduct from any payment under the Plan, regardless of the form of such payment, the K. amount of all applicable income and employment taxes, if any, required by law to be withheld with respect to such payment or may require the Participant to pay to it such tax prior to and as a condition of the making of such payment. No person connected with the Plan in any capacity, including, but not limited to, the Company and its directors, officers, L. agents and employees, makes any representation, commitment, or guarantee that any tax treatment, including, but not limited to, Federal, state and local income, estate and gift tax treatment, will be applicable to any amounts deferred under the Plan, or paid to or for the benefit of a Participant or Beneficiary under the Plan, or that such tax treatment will apply to or be available to a Participant or Beneficiary on account of participation in the Plan. Neither the establishment of the Plan nor any modification thereof, nor the creation of any account under the Plan, nor the M. payment of any benefits under the Plan shall be construed as giving to any Participant or other person any legal or equitable right against the Company, or any officer or employer thereof except as provided by law or by any Plan provision. No person (including the Company) in any way guarantees any Participant’s book reserve account from loss or depreciation, whether caused by poor investment performance of a deemed investment or the inability to realize upon an investment due to an insolvency affecting an investment vehicle or any other reason. In no event shall the Company or any successor, employee, officer, director or stockholder of the Company, be liable to any person on account of any claim arising by reason of the provisions of the Plan or of any instrument or instruments implementing its provisions (except that the Company shall make benefit payments in accordance with the terms of the Plan), or for the failure of any Participant, Beneficiary or other person to be entitled to any particular tax consequences with respect to the Plan, or any credit or distribution hereunder. If any provision of the Plan is held to be illegal or void, such illegality or invalidity shall not affect the remaining provisions N. of the Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. For all purposes of the Plan, where the context admits, the singular shall include the plural, and the plural shall include the singular. Headings of Articles and Sections herein are inserted only for convenience of reference and are not to be considered in the construction of the Plan. The Plan is intended to comply with Section 409A, and shall be interpreted, operated and administered consistent with this O. intent. To the extent the terms of the Plan fail to qualify for exemption from or to satisfy the requirements of Section 409A, the Plan may be operated in compliance with Section 409A pending amendment to the extent authorized by the Internal Revenue Service. In such circumstances, the Plan will be administered in a manner which adheres as closely as possible to its existing terms while complying with Section 409A. ***** 17
  • 103. Exhibit 12 AMERIPRISE FINANCIAL, INC. COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES Years Ended December 31, 2006 2005 2004 2003 2002 (dollars in millions) Earnings: Income before income tax provision (benefit), discontinued operations and accounting change $ 797 $ 745 $ 1,112 $ 873 $ 861 Interest and debt expense(1) 127 87 64 44 31 Interest portion of rental expense(2) 29 26 26 24 23 Amortization of capitalized interest — 1 1 1 1 Equity method investees and minority interests (1 ) (1) — 1 — Total earnings (a) $ 952 $ 859 $ 1,202 $ 943 $ 916 Fixed charges: Interest and debt expense(1) $ 127 $ 87 $ 64 $ 44 $ 31 Interest portion of rental expense(2) 29 26 26 24 23 Capitalized interest — — — — 4 Total fixed charges (b) $ 156 $ 113 $ 90 $ 68 $ 58 Ratio of earnings to fixed charges (a/b) 6.1 7.6 13.4 13.9 15.8 (1) Interest on non-recourse debt of a consolidated collateralized debt obligation is included in interest and debt expense provided in the table above. This interest is recorded in net investment income on the Consolidated Statements of Income as provided in Exhibit 13. (2) The interest portion of rental expense represents one-third of rental expense relating to operating leases.
  • 104. Exhibit 13 [PORTIONS OF THE AMERIPRISE FINANCIAL, INC. 2006 ANNUAL REPORT TO SHAREHOLDERS] Management’s Discussion and Analysis 22 Quantitative and Qualitative Disclosures About Market Risks 48 Forward-Looking Statements 53 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54 Management’s Report on Internal Control over Financial Reporting 55 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 56 Report of Independent Registered Public Accounting Firm 57 Consolidated Statements of Income 58 Consolidated Balance Sheets 59 Consolidated Statements of Cash Flows 60 Consolidated Statements of Shareholders’ Equity 62 Notes to Consolidated Financial Statements 63 Consolidated Five-Year Summary of Selected Financial Data 104 Glossary of Selected Terminology 105 Performance Graph 106 General Information 108 Ameriprise Financial, Inc. 2006 Annual Report 21
  • 105. Management’s Discussion and Analysis You should read the following discussion and analysis of our consolidated results of operations and financial condition in conjunction with the “Forward-Looking Statements,” our Consolidated Financial Statements and Notes and the “Consolidated Five-Year Summary of Selected Financial Data” that follow and the “Risk Factors” included in our Annual Report on Form 10-K. Certain key terms and abbreviations are defined in the Glossary of Selected Terminology. Overview We are a leading financial planning and services company with more than 12,000 financial advisors and registered representatives that provides solutions for clients’ asset accumulation, income management and insurance protection needs. We seek to deliver solutions through a comprehensive financial planning approach built on a long-term client relationship with a knowledgeable financial advisor and to help clients achieve their identified financial goals by providing investment, insurance and other financial products that position them to realize a positive return or form of protection while they are accepting an appropriate range and level of risks. We specialize in meeting the retirement-related financial needs of the mass affluent and affluent. We also offer asset management products and services to institutional clients. We have two main operating segments: Asset Accumulation and Income (“AA&I”) and Protection, as well as a Corporate and Other (“Corporate”) segment. Our two main operating segments are aligned with the financial solutions we offer to address our clients’ needs. The products and services we provide retail clients and, to a lesser extent, institutional clients, are the primary source of our revenues and net income. Revenues and net income are significantly impacted by the relative investment performance and the total value and composition of assets we manage and administer for our retail and institutional clients as well as the distribution fees we receive from other companies. These factors, in turn, are largely determined by overall investment market performance and the depth and breadth of our individual client relationships. It is our management’s priority to increase shareholder value over a multi-year horizon by achieving our on-average, over-time financial targets. We measure progress against these goals excluding the impact of our separation from American Express Company (“American Express”), specifically, discontinued operations, non-recurring separation costs and AMEX Assurance Company (“AMEX Assurance”). Our financial targets, adjusted to exclude these impacts, are: • Annual revenue growth of 6% to 8%, • Annual earnings growth of 10% to 13%, and • Return on equity of 12% to 15%. For 2006, both our revenue growth and earnings growth, excluding the impact of the separation, exceeded our targets. Our return on equity, excluding the impact of the separation, ended the year within 20 basis points of our near-term 12% to 15% goal. Our revenues for 2006 were $8.1 billion, an increase of 11% over 2005 when $138 million of revenues attributable to AMEX Assurance are excluded from 2005. The strong adjusted revenue growth in 2006 reflects fundamental improvement in asset-based fees, distribution fees and premiums as a result of increasing advisor productivity and market appreciation. These performance improvements were partially offset by lower net investment income due to declining annuity fixed account and certificate balances. Our consolidated net income for the year ended December 31, 2006 was $631 million, up $73 million from income before discontinued operations of $558 million for the year ended December 31, 2005. Return on equity excluding discontinued operations for the year ended December 31, 2006 was 8.3% compared to 8.0% for the year ended December 31, 2005. Our adjusted earnings, which exclude after-tax non-recurring separation costs from both 2006 and 2005 and discontinued operations and AMEX Assurance from 2005, rose 25% to $866 million in 2006 from $693 million in 2005. Adjusted return on equity for the year ended December 31, 2006 rose to 11.8% from 10.2% for the year ended December 31, 2005. We continue to establish Ameriprise Financial as a financial services leader as we focus on meeting the financial needs of the mass affluent and affluent, as evidenced by growth in our mass affluent and affluent client groups, financial plans, cash sales and owned, managed and administered assets. Our mass affluent and affluent client groups increased 10% since year end last year. The percentage of our clients with a financial plan at the end of 2006 was 45% compared to 44% last year. We increased our branded advisor count and substantially increased advisor productivity. Gross dealer concession (“GDC”) per branded advisor increased 18% in 2006 compared to 2005, primarily driven by strong equity markets, wrap account net inflows and growth in sales of direct investments. Our annual franchisee advisor retention as of December 31, 2006 improved to 93%, up from the annual retention rate of 91% as of the end of 2005. Our owned, managed and administered assets increased to $466.1 billion at December 31, 2006, a net increase of 9% from December 31, 2005 assets of $428.2 billion. Since December 31, 2005, we had net inflows in RiverSource annuity variable accounts of $5.3 billion and total net inflows in Ameriprise Financial and SAI wrap accounts of $8.1 billion. Our certificate and annuity fixed accounts had total net outflows of $5.0 billion since December 31, 2005, reflecting the current interest rate environment and our strategy to focus on products that offer a more attractive return on capital. RiverSource Funds 22
  • 106. had net outflows of $5.6 billion in 2006 compared to $10.3 billion in 2005. This improvement in net outflows was driven by increased sales and lower redemption rates in our branded advisor channel. Net outflows in RiverSource Funds in 2006 included $0.7 billion of outflow related to American Express repositioning its 401(k) offerings. Administered assets are lower at December 31, 2006 compared to December 31, 2005, primarily as a result of the sale of our defined contribution recordkeeping business in the second quarter of 2006, which had administered assets of $16.7 billion at the time of sale and $15.4 billion at December 31, 2005. Significant Factors Affecting our Results of Operations and Financial Condition Share Repurchase In March 2006, our Board of Directors authorized the expenditure of up to $750 million for the repurchase of shares of our common stock through the end of March 2008. This authorization was in addition to a Board authorization in January 2006 to repurchase up to 2 million shares by the end of 2006. Through December 31, 2006, we have purchased 10.7 million shares under these programs for an aggregate cost of $470 million. As of December 31, 2006, we had purchased all shares under the January 2006 authorization and have $366 million remaining under the March 2006 authorization. Sale of our Defined Contribution Recordkeeping Business We completed the sale of our defined contribution recordkeeping business during the second quarter of 2006, which added $66 million to total 2006 revenues and generated a net pretax gain of $36 million. The administered assets transferred in connection with this sale were approximately $16.7 billion. Although our defined contribution recordkeeping business generated approximately $60 million in annual revenue, we will experience expense savings related to this sale and do not anticipate a material impact on pretax income. We continue to manage approximately $11.8 billion of defined contribution assets, primarily index and stable value collective accounts, under investment management only contracts. Launch of Ameriprise Bank, FSB and Acquisition of Bank Deposits and Loans In September 2006, we obtained our federal savings bank charter and launched Ameriprise Bank, FSB (“Ameriprise Bank”), a wholly- owned subsidiary. Ameriprise Bank acquired $12 million of customer loans and assumed $963 million of customer deposits from American Express Bank, FSB (“AEBFSB”), a subsidiary of American Express, and received cash of $951 million in connection with the transaction. Subsequently, in October and November of 2006, Ameriprise Bank purchased for cash consideration a total of $481 million of customer loans from AEBFSB. Ameriprise Bank offers a suite of borrowing, cash management and personal trust products and services, primarily through our branded advisors. New Financing Arrangements On May 26, 2006, we issued $500 million principal amount of junior subordinated notes due 2066 (“junior notes”). These junior notes carry a fixed interest rate of 7.518% for the first 10 years and a variable interest rate thereafter. These junior notes receive at least a 75% equity credit by the majority of our credit rating agencies for purposes of their calculation of our debt to total capital ratio. The net proceeds from the issuance were for general corporate purposes. On November 23, 2005, we issued $800 million principal amount of 5.35% senior unsecured notes due November 15, 2010 and $700 million principal amount of 5.65% senior unsecured notes due November 15, 2015 (“senior notes”). The proceeds from the senior notes were used to repay a bridge loan, which was drawn on September 28, 2005 to repay American Express for intercompany loans, and for other general corporate purposes. In September 2005, we also obtained an unsecured revolving credit facility of $750 million expiring in September 2010 from various third-party financial institutions. Under the terms of the credit agreement we may increase the amount of this facility to $1.0 billion. Through December 31, 2006, we have not had borrowings under this facility but have had outstanding letters of credit, which were $5 million at December 31, 2006. Separation from American Express Our separation from American Express resulted in specifically identifiable impacts to our consolidated results of operations and financial condition. Separation and Distribution On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in our company (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 our company and the distribution of our common shares to American Express shareholders (the “Distribution”). Prior to the Distribution, we had been a wholly-owned subsidiary of American Express. Capital Structure Prior to the Distribution, American Express provided a capital contribution to our company of approximately $1.1 billion to fund costs related to the Separation and Distribution and to adequately support strong debt ratings for our company on the Distribution. We replaced our intercompany indebtedness with American Express, initially with a bridge loan from selected financial institutions, and on November 23, 2005 through the issuance of $1.5 billion of senior notes. Separation Costs Since the Separation announcement through December 31, 2006, we have incurred $654 million of non-recurring separation costs and expect to incur a total of approximately $875 million. These costs are primarily associated with establishing the 23
  • 107. Ameriprise Financial brand, separating and reestablishing our technology platforms and advisor and employee retention programs. We expect to continue to incur non-recurring separation costs through the end of 2007, which will include remaining technology costs. In addition to non-recurring separation costs, we have incurred higher ongoing expenses associated with establishing ourselves as an independent company. Transfer of Businesses Effective August 1, 2005, we transferred our 50% ownership interest and the related assets and liabilities of our subsidiary, American Express International Deposit Company (“AEIDC”) to American Express. The results of operations and cash flows of AEIDC are classified as discontinued operations. Effective September 30, 2005, we entered into an agreement to sell our interest in the AMEX Assurance legal entity to American Express on or before September 30, 2007 for approximately $115 million. This transaction, combined with the ceding of all travel insurance and card related business to American Express effective July 1, 2005, created a variable interest entity for which we are not the primary beneficiary. Accordingly, we deconsolidated AMEX Assurance as of September 30, 2005. Services and Operations Provided by American Express American Express has historically provided to us a variety of corporate and other support services, 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 us with many of these services pursuant to transition services agreements for periods of up to two years or more, if extended by mutual agreement between us and American Express. We have terminated or will terminate a particular service after we have completed the procurement of the designated service through arrangements with third parties or through our own employees. Other than technology related expenses, we currently expect that the aggregate costs we will pay to American Express under the transition services agreements for continuing services and the costs for establishing or procuring the services that have historically been provided to us by American Express will not significantly differ from the amounts reflected in our historical Consolidated Financial Statements. For the periods preceding the Distribution, we prepared our Consolidated Financial Statements as if we had been a stand-alone company. In the preparation of our Consolidated Financial Statements for those periods, we made certain allocations of expenses that our management believed to be a reasonable reflection of costs we would have otherwise incurred as a stand-alone company but were paid by American Express. Equity Markets and Interest Rates Equity market and interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset management fees we earn and the “spread” income generated on our annuities, face-amount certificates and universal life insurance products. Asset management fees, which we include within management, financial advice and services fees, are generally based on the market value of the assets we manage. The interest spreads we earn on our annuity, universal life insurance and face-amount certificate products are the difference between the returns we earn on the investments that support our obligations on these products and the amounts we must credit contractholders and policyholders. Improvements in equity markets generally lead to increased value in our managed and separate account assets, while declines in equity markets generally lead to decreased value in these assets. Market appreciation continued to favorably impact results in 2006. Interest rate spreads continued to contract in 2006, primarily due to rising short-term interest rates, which have driven higher crediting rates on our face-amount certificate products. For additional information regarding our sensitivity to equity risk and interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risks.” Critical Accounting Policies The accounting and reporting policies that we use affect our Consolidated Financial Statements. Certain of our accounting and reporting policies are critical to an understanding of our results of operations and financial condition and, in some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of our Consolidated Financial Statements. The accounting and reporting policies we have identified as fundamental to a full understanding of our results of operations and financial condition are described below. See Note 2 to our Consolidated Financial Statements for further information about our accounting policies. Valuation of Investments The most significant component of our investments is our Available-for-Sale securities, which we generally carry at fair value within our Consolidated Balance Sheets. The fair value of approximately 96% of our Available-for-Sale securities at December 31, 2006 were determined by quoted market prices. We record unrealized securities gains (losses) in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as deferred acquisition costs (“DAC”), to reflect the expected impact on their carrying values had the unrealized securities gains (losses) been realized as of the respective balance sheet dates. At December 31, 2006, we had net unrealized pretax losses on Available-for-Sale securities of $328 million. We recognize gains and losses in our results of operations upon disposition of the securities. We also recognize losses in our results of operations when our management determines that a decline in value is other-than-temporary. This determination requires the exercise of 24
  • 108. judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default or bankruptcy. We also consider the extent to which cost exceeds fair value and the duration of that difference and our management’s judgment about the issuer’s current and prospective financial condition, as well as our ability and intent to hold until recovery. As of December 31, 2006, we had $598 million in gross unrealized losses that related to $22.4 billion of Available-for-Sale securities, of which $19.8 billion have been in a continuous unrealized loss position for 12 months or more. These investment securities had a ratio of 97% of fair value to amortized cost at December 31, 2006. As part of our ongoing monitoring process, our management determined that a majority of the gross unrealized losses on these securities is attributable to changes in interest rates. Additionally, because we have the ability as well as the intent to hold these securities for a time sufficient to recover our amortized cost, we concluded that none of these securities was other-than-temporarily impaired at December 31, 2006. Deferred Acquisition Costs For our annuity and life, disability income and long term care insurance products, our DAC balances at any reporting date are supported by projections that show our management expects there to be adequate premiums or estimated gross profits after that date to amortize the remaining DAC balances. These projections are inherently uncertain because they require our management to make assumptions about financial markets, anticipated mortality and morbidity levels and policyholder behavior over periods extending well into the future. Projection periods used for our annuity products are typically 10 to 25 years, while projection periods for our life, disability income and long term care insurance products are often 50 years or longer. Our management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions. For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are our management’s best estimates. Our management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made. For other life, disability income and long term care insurance products, the assumptions made in calculating our DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if our management concludes experience will be so adverse that DAC is not recoverable or if premium rates charged for the contract are changed. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in our consolidated results of operations. For annuity and life, disability income and long term care insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about interest rates are the primary factor used to project interest margins, while assumptions about rates credited to policyholder accounts and equity market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Our management must also make assumptions to project maintenance expenses associated with servicing our annuity and insurance businesses during the DAC amortization period. The client asset value growth rate is the rate at which variable annuity and variable universal life insurance contract values are assumed to appreciate in the future. The rate is net of asset fees and anticipates a blend of equity and fixed income investments. Our management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. We use a mean reversion method as a guideline in setting near-term client asset value growth rates based on a long-term view of financial market performance as well as actual historical performance. In periods when market performance results in actual contract value growth at a rate that is different than that assumed, we reassess the near-term rate in order to continue to project our best estimate of long-term growth. The near-term growth rate is reviewed to ensure consistency with our management’s assessment of anticipated equity market performance. DAC amortization expense recorded in a period when client asset value growth rates exceed our near-term estimate will typically be less than in a period when growth rates fall short of our near-term estimate. The long-term client asset value growth rate is based on an equity return assumption of 8%, net of management fees, with adjustments made for fixed income allocations. If we increased or decreased our assumption related to this growth rate by 100 basis points, the impact on the DAC balance would be an increase or decrease of approximately $35 million. 25
  • 109. We monitor other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, each could impact our DAC balances. For example, if we increased or decreased our interest margin on our universal life insurance and on the fixed portion of our variable universal life insurance products by 10 basis points, the impact on the DAC balance would be an increase or decrease of approximately $5 million. Additionally, if we extended or reduced the amortization periods by one year for variable annuities to reflect changes in premium paying persistency and/or surrender assumptions, the impact on the DAC balance would be an increase or decrease of approximately $32 million. The amortization impact of extending or reducing the amortization period any additional years is not linear. The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless our management identifies a significant deviation over the course of the quarterly monitoring, our management reviews and updates these DAC amortization assumptions annually in the third quarter of each year. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results. In periods prior to 2007, our policy has been to treat certain internal replacement transactions as continuations and to continue amortization of DAC associated with the existing contract against revenues from the new contract. We will account for many of these transactions differently as a result of adopting American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”), effective January 1, 2007. See Note 3 to our Consolidated Financial Statements for additional information about the effect of our adoption of SOP 05-1. For additional information about our accounting policies for amortization and capitalization of DAC, see Note 2 and Note 3 to our Consolidated Financial Statements. For details regarding the balances of and changes in DAC for the years ended December 31, 2006, 2005 and 2004, see Note 10 to our Consolidated Financial Statements. Derivative Financial Instruments and Hedging Activities The fair values of our derivative financial instruments are determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. We currently designate derivatives as cash flow hedges or hedges of net investment in foreign operations or, in certain circumstances, do not designate derivatives as accounting hedges. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings. Any ineffective portion of the gain or loss is also reported currently in earnings as a component of net investment income. For derivative financial instruments that qualify as net investment hedges in foreign operations, the effective portions of the change in fair value of the derivatives are recorded in accumulated other comprehensive income (loss) as part of the foreign currency translation adjustment. Any ineffective portions of net investment hedges in foreign operations are recognized in net investment income during the period of change. For derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings, generally as a component of net investment income. These derivatives primarily provide economic hedges to equity market exposures. Examples include structured derivatives, options and futures that economically hedge the equity components of certain annuity and certificate liabilities, equity swaps and futures that economically hedge exposure to price risk arising from proprietary mutual fund seed money investments and foreign currency forward contracts to economically hedge foreign currency transaction exposures. For further details on the types of derivatives we use and how we account for them, see Note 21 to our Consolidated Financial Statements. Income Tax Accounting Income taxes, as reported in our Consolidated Financial Statements, represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with our operations. We provide for income taxes based on amounts that we believe we will ultimately owe. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items and the realization of certain offsets and credits. In the event that the ultimate tax treatment of items or the realization of offsets or credits differs from our estimates, we may be required to significantly change the provision for income taxes recorded in our Consolidated Financial Statements. In connection with the provision for income taxes, our Consolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among our 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 26
  • 110. 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. Our life insurance subsidiaries will not be able to file a consolidated U.S. federal income tax return with the other members of our affiliated group for five tax years following the Distribution, which will result in net operating and capital losses, credits and other tax attributes generated by one group not being available to offset income earned or taxes owed by the other group during the period of non-consolidation. This lack of consolidation could affect our ability to fully realize certain of our deferred tax assets, including the capital losses. We are required to establish a valuation allowance for any portion of our deferred tax assets that our management believes will not be realized. It is likely that our management will need to identify and implement appropriate planning strategies to ensure our ability to realize our deferred tax asset relating to capital losses and avoid the establishment of a valuation allowance with respect to it. In the opinion of our management, it is currently more likely than not that we will realize the benefit of our deferred tax assets, including our capital loss deferred tax asset; therefore, no such valuation allowance has been established. Recent Accounting Pronouncements For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 3 to our Consolidated Financial Statements. Sources of Revenues and Expenses We earn revenues from fees received in connection with mutual funds, wrap accounts, assets managed for institutions and separate accounts related to our variable annuity and variable life insurance products. Our protection and annuity products generate revenues through premiums and other charges collected from policyholders and contractholders. We also earn investment income on owned assets supporting these products. We incur various operating costs, primarily compensation and benefits expenses, the majority of which are related to compensating our distribution channel, interest credited to investment certificates and fixed annuities and provision for losses and benefits for annuities and protection products. For information regarding the components of revenues and expenses, see Note 2 to our Consolidated Financial Statements. Our Segments Effective January 1, 2006, we realigned our subsidiary, Securities America Financial Corporation (“SAFC”), under our AA&I segment from our Corporate segment and reallocated certain revenue and expense items and excess capital to better reflect how our management reviews and evaluates the operations of our segments. These changes, which were applied retroactively to all segment information for all years presented, had no effect on our consolidated results of operations or financial position. The reallocated items included (i) the reallocation of all interest on corporate debt from the AA&I and Protection segments to the Corporate segment; (ii) the reallocation of investment income to segments to better reflect management’s determination of liabilities and capital required for each segment; (iii) the reallocation of certain corporate overhead expenses from the AA&I and Protection segments to the Corporate segment; and (iv) the reallocation of excess capital not required by the AA&I and Protection segments and related investment income to the Corporate segment. Our AA&I segment offers products and services, both our own and other companies’, to help our 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. We earn revenues in this segment primarily through fees we receive based on managed assets and annuity separate account assets. These fees are impacted by both market movements and net asset flows. We also earn net investment income on owned assets, principally supporting the fixed annuity and certificates businesses and capital supporting the business, and distribution fees on sales of mutual funds and other products. This segment includes the results of SAFC, which through its operating subsidiary, Securities America, Inc. (“SAI”), operates its own separately branded distribution network. Our Protection segment offers a variety of protection products, both our own 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 our retail clients. We earn revenues in this operating segment primarily through premiums, fees and charges that we receive to assume insurance-related risk, fees we receive on assets supporting variable universal life separate account balances and net investment income on owned assets supporting insurance reserves and capital supporting the business. Our 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 costs associated with our separation from American Express. Non-GAAP Financial Information We follow accounting principles generally accepted in the United States (“U.S. GAAP”). This report includes information on both a U.S. GAAP and non-GAAP basis. The non-GAAP presentation in this report excludes items that are a direct result of the Separation and Distribution, which consist of discontinued operations, AMEX Assurance and non-recurring separation costs, and also excludes the cumulative effect of accounting 27
  • 111. change in 2004. Our non-GAAP financial measures, which we view as important indicators of financial performance, include: • adjusted revenues or revenues excluding AMEX Assurance; • revenue growth excluding the impact of our separation from American Express; • expenses excluding non-recurring separation costs and AMEX Assurance; • adjusted earnings or income before discontinued operations and cumulative effect of accounting change and excluding non- recurring separation costs and AMEX Assurance; • net income growth excluding the impact of our separation from American Express; and • return on equity excluding the impact of our separation from American Express, or adjusted return on equity, using as the numerator adjusted earnings for the last 12 months and as the denominator a five-point average of equity excluding both the assets and liabilities of discontinued operations and equity allocated to expected non-recurring separation costs as of the last day of the preceding four quarters and the current quarter. Management believes that the presentation of these non-GAAP financial measures excluding these specific income statement impacts best reflects the underlying performance of our ongoing operations and facilitates a more meaningful trend analysis. These non-GAAP measures are also used for goal setting, certain compensation related to our annual incentive award program and evaluating our performance on a basis comparable to that used by securities analysts. A reconciliation of non-GAAP measures is as follows: Years Ended December 31, 2006 2005 2004 (in millions) Consolidated Income Data Revenues $ 7,484 $ 7,027 $ 8,140 Less: AMEX Assurance revenues 138 260 — Adjusted revenues $ 7,346 $ 6,767 $ 8,140 Net income $ 574 $ 794 $ 631 Less: Income from discontinued operations, net of tax 16 40 — Add: Cumulative effect of accounting change, net of tax — 71 — Add: Separation costs, after-tax 191 — 235 Less: AMEX Assurance net income 56 102 — Adjusted earnings $ 693 $ 723 $ 866 Separation costs $ 293 $ — $ 361 Less: Tax benefit attributable to separation costs 102 — 126 Separation costs, after-tax $ 191 $ — $ 235 Years Ended December 31, 2006 2005 (in millions, except percentages) Return on Equity Return on equity excluding discontinued operations 8.0% 8.3% Income before discontinued operations 631 $ 558 $ Add: Separation costs, after-tax 191 235 Less: AMEX Assurance net income 56 — Adjusted earnings 866 $ 693 $ Equity excluding discontinued operations 7,588 $ 6,980 $ Less: Equity allocated to expected separation costs 168 273 Adjusted equity 7,315 $ 6,812 $ Adjusted return on equity 10.2% 11.8% Owned, Managed and Administered Assets We earn management fees on our owned separate account assets based on the market value of assets held in the separate accounts. We record the income associated with our owned investments, including net realized gains and losses associated with these investments and other-than-temporary impairments of these investments, as net investment income. For managed assets, we receive management fees based on the value of these assets. We generally report these fees as management, financial advice and service fees. We may also receive distribution fees based on the value of these assets. We generally record fees received from administered assets as distribution fees. Fluctuations in our owned, managed and administered assets impact our revenues. Our owned, managed and administered assets are impacted by market movements and net flows of client assets. Owned assets are also affected by changes in our capital structure. In 2006, we had net inflows in our financial advisor-managed assets of $6.3 billion in Ameriprise Financial wrap accounts and $1.8 billion in SAI wrap accounts and had $5.3 billion in net inflows in our owned RiverSource annuity variable accounts. We had net outflows in 2006 in our retail managed RiverSource mutual funds of $5.6 billion and in our owned certificate and fixed annuity assets of $5.0 billion, reflecting a continued trend of net outflows in these assets. The amount of net outflows in RiverSource Funds in 2006 included $0.7 billion of outflow related to American Express repositioning its 401(k) offerings. 28
  • 112. The following table presents information regarding our owned assets, which are included in our Consolidated Balance Sheets, and our managed and administered assets, which are not recorded on our Consolidated Balance Sheets: December 31, 2006 2005 2004 Amount % Change Amount % Change Amount (in billions, except percentages) Owned Assets: Separate accounts 29% $ 41.6 16% $ 35.9 $ 53.8 Investments 39.1 (3) 40.2 35.6 (9) Other(1) 6.2 5.1 7.8 22 26 Total owned assets 86.9 81.2 97.2 7 12 Managed Assets: Managed Assets—Retail RiverSource Mutual Funds 58.1 (11) 65.3 59.5 2 Threadneedle(2) Mutual Funds 14.0 15 12.2 16.6 19 Ameriprise Financial Wrap Account Assets 49.7 33 37.3 65.9 33 SAI Wrap Account Assets 8.0 5.1 10.5 57 31 Total managed assets—retail 129.8 119.9 152.5 8 17 Managed Assets—Institutional RiverSource 27.2 (12) 30.8 27.9 3 Threadneedle(2) 99.6 100.6 115.1 (1) 16 Total managed assets—institutional 126.8 131.4 143.0 (4) 13 Managed Assets—Retirement Services RiverSource Collective Funds 11.2 (7) 12.1 10.1 (10) Managed Assets—Eliminations(3) (3.8 ) (6.4) (5.8) 41 (53) Total managed assets 264.0 257.0 299.8 3 14 Administered Assets(4) 77.3 70.0 69.1 10 (11) Total Owned, Managed and Administered Assets 9$ 428.2 5$ 408.2 $ 466.1 (1) Includes cash and cash equivalents, restricted and segregated cash, receivables and other assets. (2) Threadneedle Asset Management Holdings Limited (“Threadneedle”) is a subsidiary of our company. (3) Includes eliminations for RiverSource mutual fund assets included in Ameriprise Financial wrap account assets. (4) Administered assets at December 31, 2005 and 2004 included $15.4 billion and $14.1 billion, respectively, related to our defined contribution recordkeeping business. The amount of administered assets transferred in connection with the sale of the defined contribution recordkeeping business in the second quarter of 2006 was $16.7 billion. 29
  • 113. Consolidated Results of Operations Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 The following table presents our consolidated results of operations for the years ended December 31, 2006 and 2005. The travel insurance and card related business of our AMEX Assurance subsidiary was ceded to American Express effective July 1, 2005. AMEX Assurance was deconsolidated on a U.S. GAAP basis effective September 30, 2005. The results of operations of AMEX Assurance that were consolidated during the year ended December 31, 2005 are also presented in the table below. Years Ended December 31, AMEX Assurance(1)(2) 2006 2005 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 2,578 $ 387 15% $ 3 $ 2,965 Distribution fees 1,150 150 13 — 1,300 Net investment income 2,241 (37 ) (2) 9 2,204 Premiums 979 (47 ) (5) 127 932 Other revenues 536 203 (1) 739 38 Total revenues 7,484 656 138 8,140 9 Expenses Compensation and benefits: Field 1,515 250 17 37 1,765 Non-field 1,135 213 — 1,348 19 Total compensation and benefits 2,650 463 17 37 3,113 Interest credited to account values 1,310 (46 ) (4) — 1,264 Benefits, claims, losses and settlement expenses 880 50 6 (12) 930 Amortization of deferred acquisition costs 431 41 10 17 472 Interest and debt expense 73 43 59 — 116 Separation costs 293 68 23 — 361 Other expenses (15 ) 1,102 14 1,087 (1) Total expenses 6,739 604 56 7,343 9 Income before income tax provision and discontinued operations 745 52 7 82 797 Income tax provision (21 ) 187 26 166 (11) Income before discontinued operations 558 73 13 56 631 Income from discontinued operations, net of (16 ) 16 — — tax # Net income $ 574 $ 57 $ 56 $ 631 10 # Variance of 100% or greater. (1) AMEX Assurance results of operations were consolidated in 2005 through September 30, 2005. (2) AMEX Assurance premiums in 2005 included $10 million in intercompany revenues related to errors and omissions coverage. 30
  • 114. Overall Consolidated net income for the year ended December 31, 2006 was $631 million, up $73 million from income before discontinued operations of $558 million for the year ended December 31, 2005. This income growth was positively impacted by strong net inflows in wrap accounts and variable annuities, as well as market appreciation. These positives were partially offset by lower net investment income due to declining annuity fixed account and certificate balances, higher performance related management incentive compensation and increased interest expense from establishing an independent capital structure. Income in both 2006 and 2005 was impacted by non-recurring separation costs of $361 million and $293 million, respectively ($235 million and $191 million, respectively, after-tax). Other significant items included in income for the years ended December 31, 2006 and 2005 were the impact of our annual third quarter detailed review of DAC valuation assumptions (“DAC unlocking”) and the impact of certain legal and regulatory costs. The pretax benefit from DAC unlocking in 2006 was $25 million ($16 million after-tax), compared to a benefit of $67 million ($44 million after-tax) in 2005. Certain legal and regulatory costs were $74 million ($48 million after-tax) in 2006 compared to $140 million ($91 million after-tax) in 2005. Income in 2006 was also impacted by the deconsolidation of AMEX Assurance, which had $56 million in after-tax income in 2005. Revenues Our revenue growth in management, financial advice and service fees was primarily driven by the growth in our fee-based businesses of our AA&I segment. Our AA&I segment had increases in fees related to brokerage and variable annuities of $252 million and $124 million, respectively, as well as higher Threadneedle revenues in 2006 due to higher market levels. These increases were partially offset by a decline in fees relative to 2005 of $37 million due to the sale of our defined contribution recordkeeping business in the second quarter of 2006. Strong broker-dealer activity and increased advisor productivity continued to drive up distribution fees. Distribution fees in our brokerage business in 2006 increased $156 million over 2005, reflecting strong net inflows in Ameriprise Financial and SAI wrap accounts and strong growth in sales of direct investments as well as market appreciation. The growth in brokerage revenues was partially offset by a decline in distribution fees related to RiverSource mutual funds of $15 million largely due to lower mutual fund asset balances. This shift is driven by clients migrating from transaction-based fee arrangements to asset-based fee arrangements, where the asset-based fees are paid over time and are included in management, financial advice and service fees. Net investment income for the year ended December 31, 2006 decreased $37 million from the year ended December 31, 2005, primarily driven by lower average account balances in fixed annuities, the fixed portion of variable annuities and certificates. Included in net investment income were net realized investment gains of $51 million in 2006 compared to $66 million in 2005. Net realized investment gains in 2006 included a gain of $23 million related to recoveries on WorldCom securities. Net realized investment gains in 2005 included a $36 million net gain on the sale of our retained interests in a collateralized debt obligation (“CDO”) securitization trust. Net gains on trading securities and equity method investments in hedge funds were $20 million higher in 2006. Premiums in 2006 were impacted by the deconsolidation of AMEX Assurance, which had premiums of $127 million in 2005. This impact was offset by premium increases of $45 million in auto and home and $27 million in disability income and long term care insurance. Disability income and long term care premiums in 2006 included an increase in premiums of $15 million as a result of a review of our long term care reinsurance arrangement during the third quarter of 2006. Other revenues in 2006 included $77 million related to the consolidation of certain limited partnerships holding client assets we manage and $66 million from the sale of our defined contribution recordkeeping business. The expenses related to the consolidated limited partnerships and the sale of our defined contribution recordkeeping business are primarily reflected in other expenses. Other revenues in 2006 also reflect $18 million from recognizing previously deferred cost of insurance revenues. The balance of the increase in other revenues was primarily driven by increases in cost of insurance revenues for variable universal life (“VUL”) and universal life (“UL”) products and in variable annuity living benefit rider fees. Expenses Total expenses reflect the impact of DAC unlocking. In 2006, we recorded a net benefit from DAC unlocking of $25 million, primarily comprised of a $38 million benefit in DAC amortization expense and a $12 million increase in benefits, claims, losses and settlement expenses. DAC unlocking in 2005 resulted in a $67 million reduction to DAC amortization. The DAC unlocking net benefit in 2006 primarily reflected a $25 million benefit from modeling increased product persistency and a $15 million benefit from modeling improvements in mortality, offset by negative impacts of $8 million from modeling lower variable product fund fee revenue and $8 million from model changes related to variable life second to die insurance. The DAC unlocking net benefit in 2005 primarily reflected a $32 million benefit from modeling improvements in mortality, a $33 million benefit from lower surrender rates than previously assumed and higher associated surrender charges and a $2 million net benefit from other changes in DAC valuation assumptions. The increase in compensation and benefits-field primarily reflects higher commissions paid driven by overall business growth as reflected by the 18% growth in GDC per branded 31
  • 115. advisor and higher advisor assets under management. Compensation and benefits-field in 2005 included $37 million related to AMEX Assurance as well as the favorable impact of a $9 million ceding commission related to the assumption of errors and omissions (“E&O”) reserves from AMEX Assurance. The increase in compensation and benefits–non-field was primarily attributable to higher costs associated with being an independent company, including higher management and administration costs, as well as higher performance-based compensation as a result of strong overall results as well as investment management performance. In addition, we recorded $15 million of severance and other costs related to the sale of our defined contribution recordkeeping business and $25 million of other severance costs primarily related to our technology functions and ongoing reengineering initiatives to improve efficiencies in our business. Interest credited to account values reflects a decrease related to annuities of $64 million partially offset by a net increase related to certificates of $12 million. The decrease related to annuities was primarily attributable to a continued decline in fixed annuity account balances. Interest credited for certificates increased as a result of higher short-term interest rates and, to a lesser extent, stock market appreciation, but were partially offset by a decrease in interest credited due to lower average certificate balances. The related benefit from economically hedging stock market certificates and equity indexed annuities is reflected in net investment income. Benefits, claims, losses and settlement expenses increased in 2006 primarily as a result of higher life and health related expenses as well as a net increase in expenses related to auto and home. These increases were partially offset by a decrease in expenses related to our variable annuity products of $11 million. VUL/UL expenses increased $37 million in 2006, of which $12 million was related to the DAC unlocking reserve increase, $7 million was related to additional claims expense in connection with the recognition of previously deferred cost of insurance revenues and the balance was primarily volume-related. Health related expenses increased $21 million in 2006 and were primarily due to higher claims and reserves related to long term care and disability income. In 2005, these expenses reflected the addition of $13 million to long term care maintenance expense reserves. Auto and home had a net increase in expenses of $11 million. Volume-driven loss reserves attributable to higher average auto and home policy counts were partially offset by a $21 million net reduction in reserves primarily reflecting improvement in 2004 and 2005 accident year results. Expenses in 2005 included the assumption of $9 million in E&O reserves from AMEX Assurance and a net reduction to AMEX Assurance expenses of $12 million. The increase in DAC amortization in 2006 reflects the impact of DAC unlocking related to amortization in each year. In addition, we had higher DAC amortization related to auto and home insurance and variable annuities, partially offset by lower DAC amortization related to our proprietary mutual funds. DAC unlocking resulted in a net reduction in amortization of $38 million in 2006 compared to a reduction of $67 million in 2005. DAC amortization related to auto and home insurance products in 2006 included an adjustment to decrease DAC balances by $28 million as well as $17 million of higher DAC amortization primarily as a result of increased business and shorter amortization periods compared to 2005. Continued growth in our variable annuity business contributed to higher DAC balances and a net increase in DAC amortization on variable annuities of $16 million. DAC amortization related to proprietary mutual funds declined $26 million as a result of a lower proprietary mutual fund DAC balance and lower redemption write-offs. AMEX Assurance had DAC amortization of $17 million in 2005. The adoption of SOP 05-1 is expected to result in an increase in DAC amortization in 2007. The expected increase to amortization expense may vary depending upon future changes in underlying valuation assumptions. The increase in interest and debt expense in 2006 reflects the higher cost of debt associated with establishing our long-term capital structure after the Distribution. Our $1.6 billion of intercompany debt with American Express prior to the Distribution was replaced with $1.5 billion of senior notes. In addition, we issued $500 million of junior notes in May 2006. The senior and junior notes have higher interest costs than the intercompany debt. Interest expense in 2006 on the senior and junior notes was $75 million and $23 million, respectively, compared to interest expense in 2005 of $53 million on the intercompany debt and $8 million on the senior notes. Also included in interest and debt expense in 2006 is $6 million of interest on non-recourse debt of certain consolidated limited partnerships. Separation costs incurred in 2006 were primarily associated with separating and reestablishing our technology platforms and establishing the Ameriprise Financial brand. Separation costs incurred in 2005 were primarily associated with advisor and employee retention programs, rebranding and technology. We expect to continue to incur non-recurring separation costs through the end of 2007, which will include the remaining technology costs. 32
  • 116. Other expenses in 2006 relative to 2005 are lower as a result of the deconsolidation of AMEX Assurance, which had $14 million of other expenses in 2005. For the year ended December 31, 2006, other expenses included $70 million of expense of certain consolidated limited partnerships and $14 million of expense, primarily related to the write-down of capitalized software, associated with the sale of our defined contribution recordkeeping business in the second quarter of 2006. Certain legal and regulatory costs were $74 million in 2006 compared to $140 million in 2005, of which $100 million was related to the settlement of a consolidated securities class action lawsuit. Income Taxes Our effective tax rate was 20.8% for the year ended December 31, 2006 compared to 25.1% for the year ended December 31, 2005. The lower effective tax rate in 2006 compared to 2005 was primarily due to the impact of a $16 million tax benefit as a result of a change in the effective state income tax rate applied to deferred tax assets as a result of the Distribution, and a $13 million tax benefit related to the true-up of the tax return for the year 2005 partially offset by lower levels of tax advantaged items in 2006. Additionally, the effective tax rate in 2005 was impacted by a $20 million tax expense applicable to prior years. 33
  • 117. Results of Operations by Segment Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 The following tables present summary financial information by segment and reconciliation to consolidated totals derived from Note 27 to our Consolidated Financial Statements for the years ended December 31, 2006 and 2005: Years Ended December 31, Percent Share Percent Share 2006 of Total 2005 of Total (in millions, except percentages) Total revenues Asset Accumulation and Income 73 % $ 5,350 71% $ 5,928 Protection 1,948 26 1,969 24 Corporate and Other 212 3 284 4 Eliminations (1 ) (26) — (41) Consolidated total revenues 100 % $ 7,484 100% $ 8,140 Total expenses Asset Accumulation and Income 69 % $ 4,634 69% $ 5,037 Protection 1,495 22 1,546 21 Corporate and Other 636 9 801 11 Eliminations (1 ) (26) — (41) Consolidated total expenses 100 % $ 6,739 100% $ 7,343 Pretax segment income (loss) Asset Accumulation and Income 112 % $ 716 96% $ 891 Protection 453 61 423 53 Corporate and Other (65 ) (424) (57) (517) Consolidated income before income tax provision and 100 % $ 745 100% $ 797 discontinued operations Asset Accumulation and Income The following table presents the results of operations of our AA&I segment for the years ended December 31, 2006 and 2005: Years Ended December 31, 2006 2005 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 2,316 $ 390 17% $ 2,706 Distribution fees 1,041 145 14 1,186 Net investment income 1,923 (124) (6) 1,799 Other revenues 70 167 237 # Total revenues 5,350 578 5,928 11 Expenses Compensation and benefits—field 1,266 271 21 1,537 Interest credited to account values 1,164 (45) (4) 1,119 Benefits, claims, losses and settlement expenses 52 (11) (21) 41 Amortization of deferred acquisition costs 323 16 5 339 Interest and debt expense — 15 — 15 Other expenses 1,829 157 1,986 9 Total expenses 4,634 403 5,037 9 Pretax segment income $ 716 $ 175 $ 891 24 # Variance of 100% or greater. 34
  • 118. Overall Our AA&I segment results for the year ended December 31, 2006 were led by the growth in our fee-based businesses. AA&I pretax segment income was also positively impacted by the sale of our defined contribution recordkeeping business in the second quarter of 2006, which generated a net gain of $36 million. These improvements to profitability were offset by the impact of lower account balances and spread compression in the fixed annuity and certificate products. Revenues Management, financial advice and service fees increased primarily as a result of growth in our wrap assets and variable account assets. Our brokerage business had an increase in management, financial advice and service fees of $252 million driven by net increases in Ameriprise Financial and SAI wrap account assets of 33% and 31%, respectively, since December 31, 2005. Management, financial advice and service fees related to variable annuities increased $124 million and were driven by higher levels of annuity variable account values, which increased 31% to $43.5 billion at December 31, 2006. The balance of the growth was primarily attributable to an increase in Threadneedle revenues, driven by higher market levels, partially offset by a decline in fees relative to 2005 of $37 million due to the sale of our defined contribution recordkeeping business. This decline in fees related to the defined contribution recordkeeping business was offset by expense savings subsequent to the sale. The growth in distribution fees was driven by our brokerage business, which had an increase of $156 million in 2006 over 2005. This growth reflects strong net inflows in Ameriprise Financial and SAI wrap accounts and strong growth in sales of direct investments as well as market appreciation. The growth in brokerage revenues was partially offset by a decline in distribution fees related to RiverSource mutual funds of $15 million largely due to lower mutual fund asset balances. This shift reflects an emerging preference of clients to migrate from transaction-based fee arrangements to asset-based fee arrangements, where the asset-based fees are paid over time and are included in management, financial advice and service fees. Net investment income declined $124 million compared to 2005. The decline was primarily attributable to declining average account balances in fixed annuities, the fixed portion of variable annuities and certificate products. Net realized investment gains were $40 million in 2006 compared to $42 million in 2005. Net realized investment gains in 2006 included an allocated gain of $18 million related to recoveries on WorldCom securities. Other revenues in 2006 included $77 million related to certain consolidated limited partnerships and $66 million from the sale of our defined contribution recordkeeping business. The expenses related to the consolidated limited partnerships and the sale of our defined contribution recordkeeping business are primarily reflected within other expenses. Expenses The increase in compensation and benefits-field reflects higher commissions paid driven by strong sales activity and higher advisor assets under management. Interest credited to account values reflects a decrease related to annuities of $64 million partially offset by a net increase related to certificates of $12 million. The decrease related to annuities was primarily attributable to lower average account balances in fixed annuities and the fixed portion of variable annuities. Interest credited for certificates increased as a result of higher short-term interest rates and, to a lesser extent, stock market appreciation, but were partially offset by a decrease in interest credited due to lower average certificate balances. The related benefit from economically hedging stock market certificates and equity indexed annuities is reflected in net investment income. The decrease in benefits, claims, losses and settlement expenses in 2006 was primarily attributable to our variable annuity business which had a decrease of $29 million in Guaranteed Minimum Withdrawal Benefit (“GMWB”) rider costs partially offset by an increase of $17 million in Guaranteed Minimum Death Benefit (“GMDB”) costs. DAC amortization in 2006 compared to 2005 primarily reflects the impact of DAC unlocking partially offset by the impact of other adjustments to variable annuity DAC. DAC unlocking in 2006 resulted in a net increase to DAC amortization of $14 million, reflecting an increase of $20 million related to variable annuities and a decrease of $6 million related to fixed annuities. DAC unlocking in 2005 resulted in a decrease to DAC amortization of $14 million, comprised of $5 million related to variable annuities and $9 million related to fixed annuities. Continued growth in our variable annuity business contributed to higher DAC balances and a net increase in DAC amortization of $16 million, which was mostly offset by a decline in DAC amortization of $26 million resulting from a lower proprietary mutual fund DAC balance and lower redemption write-offs. The adoption of SOP 05-1 is expected to result in an increase in DAC amortization in 2007. The expected increase to amortization expense may vary depending upon future changes in underlying valuation assumptions. Interest and debt expense for the year ended December 31, 2006 included $6 million of interest expense on non-recourse debt of certain consolidated limited partnerships as well as interest expense on cash collateral received from counterparties in securities lending activities. For the year ended December 31, 2006, other expenses, which primarily reflect allocated corporate and support function costs, included $70 million of expense of certain consolidated limited partnerships and $30 million of costs associated with the sale of our defined contribution recordkeeping business in the second quarter of 2006. The sale related costs were offset by expense savings related to the defined contribution recordkeeping business following the sale. Certain legal and regulatory costs attributable to the AA&I segment were $73 million in 2006 compared to $138 million in 2005, of which $100 million was related to the settlement of a consolidated securities class action lawsuit. 35
  • 119. Protection The following table presents the results of operations of our Protection segment for the years ended December 31, 2006 and 2005. The travel insurance and card related business of our AMEX Assurance subsidiary was ceded to American Express effective July 1, 2005. AMEX Assurance was deconsolidated on a U.S. GAAP basis effective September 30, 2005. The results of operations of AMEX Assurance, which had been reported in the Protection segment, are also included in the table below. Years Ended December 31, AMEX Assurance 2005(1)(2) 2006 2005 Change (in millions, except percentages) Revenues Management, financial advice and service fees 80 $ 67 $ 13 19% $ 3 $ Distribution fees 106 5 5 — 111 Net investment income 339 15 4 9 354 Premiums 1,001 (46 ) (5) 127 955 Other revenues 435 34 (1) 469 8 Total revenues 1,948 21 138 1,969 1 Expenses Compensation and benefits—field 115 (27 ) (23) 37 88 Interest credited to account values 146 (1 ) (1) — 145 Benefits, claims, losses and settlement expenses 828 61 7 (12) 889 Amortization of deferred acquisition costs 108 25 23 17 133 Other expenses (7 ) 298 14 291 (2) Total expenses 1,495 51 56 1,546 3 Pretax segment income 423 $ 453 $ (30 ) $ 82 $ (7) (1) AMEX Assurance results of operations were consolidated in 2005 through September 30, 2005. (2) AMEX Assurance premiums in 2005 included $10 million in intercompany revenues related to errors and omissions coverage. Overall Our Protection segment results for the year ended December 31, 2006 were driven by growth in our life insurance products and, to a lesser extent, auto and home insurance products. Protection segment results for the year ended December 31, 2005 included pretax income related to AMEX Assurance of $82 million. Revenues The increase in management, financial advice and service fees was primarily driven by fees generated from higher levels of VUL variable account values in 2006. Total life insurance in-force increased 9% in 2006 compared to 2005. Net investment income for the year ended December 31, 2006 increased $15 million compared to the year ended December 31, 2005. Higher net investment income related to the positive impact of increased assets and capital supporting the growth of our auto and home products and, to a lesser extent, our disability income and long term care products. This growth was partially offset by the impact of the deconsolidation of AMEX Assurance, which had net investment income in 2005 of $9 million. Net realized investment gains were $10 million in both 2006 and 2005. Net realized investment gains in 2006 included an allocated gain of $5 million related to WorldCom securities. Premiums in 2006 were impacted by the deconsolidation of AMEX Assurance, which had premiums of $127 million in 2005. This impact was offset by premium increases of $45 million in auto and home and $27 million in disability income and long term care. The growth in auto and home premiums was driven by higher average policy counts during 2006, which increased 9% over average policy counts in 2005. Disability income and long term care premiums in 2006 included an adjustment to increase premiums by $15 million as a result of a review of our long term care reinsurance arrangement during the third quarter of 2006. The increase in other revenues in 2006 was primarily related to VUL/UL products. The recognition of previously deferred cost of insurance revenues related to VUL/UL insurance added $18 million to 2006. The balance of the revenue growth was primarily volume-related. Expenses Compensation and benefits-field decreased in 2006 compared to 2005 primarily as a result of the deconsolidation of AMEX Assurance, which had expenses of $37 million in 2005. Compensation and benefits-field in 2005 also included the favorable impact of a $9 million ceding commission related to the assumption of E&O reserves from AMEX Assurance. Benefits, claims, losses and settlement expenses increased in 2006 primarily as a result of higher life and health related expenses as well as a net increase in expenses related to auto and home. VUL/UL expenses increased $34 million in 2006, of which $12 million was related to the DAC unlocking reserve 36
  • 120. increase discussed previously, $7 million was related to additional claims expense in connection with the recognition of previously deferred cost of insurance revenues and the balance was primarily volume-related. Health related expenses increased $21 million in 2006 and were primarily due to higher claims and reserves related to long term care and disability income. In 2005, these expenses reflected the addition of $13 million to long term care maintenance expense reserves. Auto and home had a net increase in expenses of $11 million. Volume-driven loss reserves attributable to higher average auto and home policy counts were partially offset by a $21 million net reduction in reserves primarily reflecting improvement in 2004 and 2005 accident year results. Expenses in 2005 included the assumption of $9 million in E&O reserves from AMEX Assurance and a net reduction to AMEX Assurance expenses of $12 million. Amortization of DAC in 2006 primarily reflects higher DAC amortization related to our auto and home products, partially offset by the impact of the deconsolidation of AMEX Assurance, which had $17 million of DAC amortization in 2005. We recognized $28 million of additional DAC amortization in 2006 as a result of an adjustment to DAC balances related to auto and home insurance products. DAC amortization related to auto and home insurance is also higher by $17 million in 2006 primarily as a result of the effect of increased business and shorter amortization periods compared to 2005. The total DAC unlocking benefit in both 2006 and 2005 primarily related to our VUL/UL products, which reduced DAC amortization by $52 million and $53 million, respectively. The adoption of SOP 05-1 is expected to result in an increase in DAC amortization in 2007. The expected increase to amortization expense may vary depending upon future changes in underlying valuation assumptions. Other expenses decreased in 2006 relative to 2005 as a result of the deconsolidation of AMEX Assurance, which had $14 million in other expenses in 2005. This decrease was partially offset by higher allocated corporate and support function costs, including non-field compensation and benefits, attributable to the Protection segment. Corporate and Other The following table presents the results of operations of our Corporate segment for the years ended December 31, 2006 and 2005: Years Ended December 31, 2006 2005 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 195 $ (5) (3)% $ 190 Distribution fees 3 — — 3 Net investment income (loss) (21 ) 80 # 59 Other revenues 35 (3) 32 (9) Total revenues 212 72 284 34 Expenses Compensation and benefits—field 156 6 4 162 Interest and debt expense 73 36 49 109 Separation costs 293 68 23 361 Other expenses 114 55 169 48 Total expenses 636 165 801 26 Pretax segment loss $ (517 ) $ (424 ) $ (93) (22) # Variance of 100% or greater. Overall Our Corporate pretax segment loss was $517 million for the year ended December 31, 2006, compared to $424 million for the year ended December 31, 2005. The higher pretax segment loss in 2006 was primarily due to the $68 million increase in separation costs, as well as higher interest and debt expense and other expenses, partially offset by the improvement in net investment income. Revenues Net investment income increased $80 million to income of $59 million for the year ended December 31, 2006 compared to a loss of $21 million for the year ended December 31, 2005. The improvement in 2006 compared to 2005 was primarily attributable to higher invested assets, partially offset by a decrease in net realized investment gains of $13 million. The net investment loss in 2005 was primarily the result of amortization of affordable housing investments. Expenses The increase in interest and debt expense in 2006 primarily reflects the higher cost of debt associated with the senior notes as compared to our intercompany debt with American Express prior to the Distribution, as well as interest on the junior notes issued in May 2006. Interest expense in 2006 on the senior and junior notes was $75 million and $23 million, 37
  • 121. respectively, compared to interest expense in 2005 of $53 million on the intercompany debt and $8 million on the senior notes. Separation costs incurred in 2006 were primarily associated with technology and rebranding. Separation costs incurred in 2005 were primarily associated with advisor and employee retention programs, rebranding and technology. Other expenses in 2006 reflect higher costs associated with being an independent entity, as well as higher expenses related to corporate projects and other corporate activities. In addition, we incurred $25 million of severance costs in 2006, primarily related to our technology functions and ongoing reengineering initiatives to improve efficiencies in our business. Consolidated Results of Operations Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 The following table presents our consolidated results of operations for the years ended December 31, 2005 and 2004. The travel insurance and card related business of our AMEX Assurance subsidiary was ceded to American Express effective July 1, 2005. AMEX Assurance was deconsolidated on a U.S. GAAP basis effective September 30, 2005. The results of operations of AMEX Assurance for the years ended December 31, 2005 and 2004 are also presented in the table below. Years Ended December 31, AMEX Assurance 2005(1)(2) 2004(1) 2005 2004 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 2,578 $ 2,248 $ 330 15 % $ 3$ 4 Distribution fees 1,150 1,101 49 4 — — Net investment income 2,241 2,137 104 5 9 12 Premiums 979 1,023 (44) (4 ) 127 245 Other revenues 536 518 18 (1) (1) 3 Total revenues 7,484 7,027 457 138 260 7 Expenses Compensation and benefits: Field 1,515 1,332 183 14 37 2 Non-field 1,135 956 179 — — 19 Total compensation and benefits 2,650 2,288 362 16 37 2 Interest credited to account values 1,310 1,268 42 3 — — Benefits, claims, losses and settlement expenses 880 828 52 6 (12) 42 Amortization of deferred acquisition costs 431 437 (6) (1 ) 17 33 Interest and debt expense 73 52 21 40 — — Separation costs 293 — 293 — — — Other expenses 1,102 1,042 60 14 30 6 Total expenses 6,739 5,915 824 56 107 14 Income before income tax provision, discontinued operations and accounting change 745 1,112 (367) (33 ) 82 153 Income tax provision 187 287 (100) 26 51 (35 ) Income before discontinued operations and accounting change 558 825 (267) (32 ) 56 102 Income from discontinued operations, net of tax 16 40 (24) (60 ) — — Cumulative effect of accounting — (71) 71 — — change, net of tax # Net income $ 574 $ 794 $ (220) (28 ) $ 56 $ 102 # Variance of 100% or greater. (1) AMEX Assurance results of operations were consolidated in 2005 through September 30, 2005 and for all of 2004. (2) AMEX Assurance premiums in 2005 included $10 million in intercompany revenues related to errors and omissions coverage. 38
  • 122. Overall Consolidated net income for the year ended December 31, 2005 was $574 million, down $220 million from $794 million for the year ended December 31, 2004. Income before discontinued operations and accounting change declined $267 million to $558 million in 2005. Income for the year ended December 31, 2005 was negatively impacted by non-recurring separation costs of $293 million ($191 million after-tax) and the comprehensive settlement of a consolidated securities class action lawsuit of $100 million ($65 million after- tax). Other significant items included in income for the year ended December 31, 2005 were a benefit from the third quarter DAC unlocking of $67 million ($44 million after-tax), $66 million in net realized investment gains ($43 million after-tax) and $56 million in after-tax income from AMEX Assurance. Included in net income for the year ended December 31, 2004 were a benefit from the third quarter DAC unlocking of $24 million ($16 million after-tax), $9 million in net realized investment gains ($6 million after-tax) and $102 million in after-tax income from AMEX Assurance. Revenues Our revenue growth in management, financial advice and service fees was primarily driven by higher average assets under management due to net inflows and market appreciation, which led to increases in Ameriprise Financial wrap fees of $163 million, an increase in advisory and trust fees, including the Threadneedle impact of $93 million, and an increase in separate account fees of $77 million. These increases were partially offset by declines of $36 million in fees related to managing our proprietary mutual funds. The increase in distribution fees was primarily driven by a $61 million increase attributable to strong net inflows and favorable market impacts related to wrap accounts, a $33 million increase in fees from strong sales of non-proprietary mutual funds held outside of wrap accounts and $32 million related to SAI. These increases were partially offset by declines in fees of $44 million from lower sales of real estate investment trust (“REIT”) products and a $33 million decrease from lower distribution fees on RiverSource mutual funds. Net investment income for the year ended December 31, 2005 increased $104 million from the year ended December 31, 2004. This increase was driven by a $2.0 billion increase in average earning assets, inclusive of cash equivalents. Included in net investment income in 2005 are $66 million in net realized investment gains, which included a $36 million net gain on the sale of our retained interests in a CDO securitization trust. Net realized investment gains in 2004 were $9 million, which included $28 million of non-cash charges related to the liquidation of secured loan trusts. Also included in 2005 net investment income were $39 million in gains on trading securities and equity method investments in hedge funds and $19 million in gains from options hedging outstanding stock market certificates and equity indexed annuities. This compares to $54 million in gains on trading securities and equity method investments in hedge funds and $32 million in gains from options hedging outstanding stock market certificates and equity indexed annuities in 2004. During the year ended December 31, 2005, gross realized gains and losses on the sale of Available-for-Sale securities were $137 million and $64 million, respectively, and other-than-temporary impairments were $21 million. This compares to gross realized gains and losses on the sale of Available-for-Sale securities of $65 million and $21 million, respectively, and other- than-temporary impairments of $2 million for the year ended December 31, 2004. Our auto and home insurance premiums increased $71 million in 2005, driven by a 15% growth in average auto and home policies in- force. Most of the increase in policies in-force was generated through the Costco alliance, which was renewed in January 2006 for an additional five-year period. In addition, disability income insurance premiums grew $11 million in 2005. These increases in premiums were more than offset by the impact of the deconsolidation of AMEX Assurance, which had premiums of $127 million in 2005 compared to $245 million in 2004. The increase in other revenues reflects cost of insurance and other contract charges, which rose $18 million in 2005 primarily as a result of a 7% increase in variable and fixed universal life contracts in-force. Agency fees from franchisee financial advisors increased $6 million partially offset by decreases in other revenues of $5 million. Expenses The increase in compensation and benefits-field was primarily due to increased sales force compensation driven by strong sales activity and higher wrap account assets. GDC was up 10% during this same period. Compensation and benefits-field in 2005 also included $35 million in ceding commissions paid to American Express related to AMEX Assurance. Compensation and benefits-non-field increased primarily as a result of increased management incentives, higher benefit costs and merit adjustments. In addition, compensation and benefits-non-field also reflect the additional ongoing costs associated with being an independent entity, including higher management and administration costs. The increase in interest credited to account values was primarily driven by a $59 million increase in interest credited to certificate holders. These increases were due to higher certificate reserve volume and increased crediting rates driven by the higher short-term interest rate environment. This increase was partially offset by a $19 million decrease in the interest credited on fixed annuities due to declines in the related account balances. Benefits, claims, losses and settlement expenses increased primarily as a result of higher expenses related to auto and home, life and long term care offset by a $54 million decline from the impact of ceding the AMEX Assurance reserves in 2005. Higher average auto and home insurance policies in-force resulted in an increase of $69 million and an increase in benefit expenses and reserves on life and long term care insurance contracts drove expense up $37 million. The net decrease in DAC amortization in 2005 reflects the impact of the net benefit of DAC unlocking related to amortization in each year, offset primarily by the impact of an adjustment to increase DAC amortization related to certain insurance and annuity products in 2004. The net benefit from 39
  • 123. the annual third quarter DAC unlocking was $67 million in 2005 compared to a net benefit of $24 million in 2004. The $67 million DAC unlocking net benefit for the third quarter of 2005 primarily reflected a $32 million benefit from modeling improvements in mortality, a $33 million benefit from lower surrender rates than previously assumed and higher associated surrender charges and a $2 million net benefit from other changes in DAC valuation assumptions. The $24 million DAC unlocking net benefit for the third quarter of 2004 consisted of a $13 million benefit as a result of changes from previously assumed surrender and lapse rates, a $4 million benefit from changes in previously assumed mortality rates and a $7 million benefit from other changes in DAC valuation assumptions. In addition to the DAC unlocking, DAC amortization in 2004 was reduced by $66 million in the first quarter as a result of lengthening amortization periods for certain insurance and annuity products in conjunction with our adoption of AICPA SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” Equity market conditions and other factors resulted in increased amortization of DAC in 2005 compared to 2004, particularly for our growing variable annuity business. Somewhat offsetting the impacts of these increases was amortization of DAC associated with mutual funds, which was down $33 million. Sales of the classes of mutual fund shares for which we defer acquisition costs have declined sharply in recent years, leading to lower DAC balances and less DAC amortization. The increase in interest and debt expense in 2005 primarily reflects higher short-term interest rates during 2005 as compared to 2004. Separation costs incurred in 2005 of $293 million were primarily associated with advisor and employee retention programs, establishing the Ameriprise Financial brand and separating and reestablishing our technology platforms. Other expenses in 2005 included $100 million related to the comprehensive settlement of a consolidated securities class action lawsuit. Also included in 2005 are costs related to mutual fund industry regulatory matters of approximately $40 million, compared to approximately $80 million of similar costs incurred in 2004. See Note 24 to our Consolidated Financial Statements for additional information. Income Taxes The effective tax rate was 25.1% for the year ended December 31, 2005 compared to 25.8% for the year ended December 31, 2004. The lower effective tax rate and income taxes in 2005 relative to 2004 are principally due to the impact of relatively lower levels of pretax income compared to tax-advantaged items in 2005. Additionally, taxes applicable to prior years represent a $20 million tax expense in 2005 and a $20 million tax benefit in 2004. Results of Operations by Segment Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 The following tables present summary financial information by segment and reconciliation to consolidated totals derived from Note 27 to our Consolidated Financial Statements for the years ended December 31, 2005 and 2004: Years Ended December 31, Percent Share Percent Share 2005 of Total 2004 of Total (in millions, except percentages) Total revenues Asset Accumulation and Income $ 5,350 71 % $ 4,960 71% Protection 1,948 26 1,919 27 Corporate and Other 212 3 151 2 Eliminations (26) — (3) — Consolidated total revenues 100 % $ $ 7,484 7,027 100% Total expenses Asset Accumulation and Income $ 4,634 69 % $ 4,231 72% Protection 1,495 22 1,416 24 Corporate and Other 636 9 271 4 Eliminations (26) — (3) — Consolidated total expenses 100 % $ $ 6,739 5,915 100% Pretax segment income (loss) Asset Accumulation and Income $ 716 96 % $ 729 66% Protection 453 61 503 45 Corporate and Other (57 ) (424) (120) (11) Consolidated income before income tax provision and discontinued $ 745 100 % $ 1,112 100% operations 40
  • 124. Asset Accumulation and Income The following table presents the results of operations of our AA&I segment for the years ended December 31, 2005 and 2004: Years Ended December 31, 2005 2004 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 2,316 $ 2,050 $ 266 13% Distribution fees 1,041 998 43 4 Net investment income 1,923 1,843 80 4 Other revenues 70 69 1 1 Total revenues 5,350 4,960 390 8 Expenses Compensation and benefits—field 1,266 1,133 133 12 Interest credited to account values 1,164 1,125 39 3 Benefits, claims, losses and settlement expenses 52 52 — — Amortization of deferred acquisition costs 323 306 17 6 Other expenses 1,829 1,615 214 13 Total expenses 4,634 4,231 403 10 Pretax segment income $ 716 $ 729 $ (13) (2) Overall Our AA&I pretax segment income was $716 million for the year ended December 31, 2005, down $13 million, or 2%, from $729 million for the year ended December 31, 2004. Revenues Management, financial advice and service fees increased primarily as a result of strong inflows and market appreciation driving a $135 million increase in fees attributable to our wrap accounts, a $72 million rise due to increases in variable annuity asset levels and an additional $77 million of revenue from Threadneedle. Also contributing to the overall increase was the growth in assets managed at SAI, which resulted in higher advice fees. The total increase was partially offset by fee declines of $36 million related to the net outflows in proprietary mutual funds. The growth in distribution fees was driven by a $61 million increase attributable to strong net inflows and favorable market impacts related to wrap accounts and a $33 million increase in fees from strong sales of non-proprietary mutual funds held outside of wrap accounts. In addition, greater sales activity at SAI during 2005 resulted in an increase in distribution fees of $32 million. These increases were partially offset by declines in fees of $44 million from lower sales of REIT products and a $33 million decrease from lower distribution fees on RiverSource mutual funds. The increase in net investment income in 2005 compared to 2004 was driven by higher average invested assets offset by lower investment yields. Net investment income in 2005 included an increase in net realized investment gains of $36 million compared to 2004. Net investment income included market driven appreciation of $19 million, a decline of $13 million from the prior year, related to options hedging outstanding stock market certificates and equity indexed annuities. Expenses Compensation and benefits-field in 2005 compared to 2004 reflect higher commissions paid driven by stronger sales activity and higher wrap account assets. The increase in interest credited to account values reflects a $59 million increase related to certificate products, driven by both higher interest crediting rates and higher average volumes. This increase was partially offset by a $19 million decrease in interest credited to fixed annuity products due primarily to average volume declines. Benefits, claims, losses and settlement expenses reflect a decline in incurred claims related to GMDB and gain gross-up (“GGU”) rider contracts as a result of equity market conditions. This was offset by growth in the value of GMWB rider contracts resulting from strong sales, as well as other items. Amortization of DAC was $323 million in 2005 compared to $306 million in 2004. DAC amortization in 2005 was reduced by $14 million as a result of the annual DAC assessment performed in the third quarter, while DAC amortization in 2004 was reduced by $43 million in the first quarter as a result of lengthening amortization periods on certain variable annuity products in conjunction with our adoption of SOP 03-1 and by $8 million as a result of the annual DAC assessment in the third quarter. Equity market conditions and other factors also resulted in increased amortization of DAC in 2005 compared to 2004, particularly for our growing variable annuity business. Somewhat offsetting the impacts of these increases was amortization of DAC associated with mutual funds, which was down $33 million. Sales of the classes of mutual fund shares for which we defer acquisition costs have declined sharply in recent years, leading to lower DAC balances and less DAC amortization. 41
  • 125. Other expenses increased primarily as a result of higher non-field compensation and benefits attributable to management incentives, higher benefit costs and merit adjustments, and the $100 million comprehensive settlement of a consolidated securities class action lawsuit, partially offset by a decrease in mutual fund industry regulatory costs of approximately $40 million. Protection The following table presents the results of operations of our Protection segment for the years ended December 31, 2005 and 2004. The travel insurance and card related business of our AMEX Assurance subsidiary was ceded to American Express effective July 1, 2005. AMEX Assurance was deconsolidated on a U.S. GAAP basis effective September 30, 2005. The results of operations of AMEX Assurance for periods ending prior to the deconsolidation were reported in our Protection segment and are also included in the table below. Years Ended December 31, AMEX Assurance 2005(1)(2) 2004(1) 2005 2004 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 67 $ 58 $ 9 16 % $ 3$ 4 Distribution fees 106 105 1 1 — — Net investment income 339 313 26 8 9 12 Premiums 1,001 1,023 (22 ) (2 ) 127 245 Other revenues 435 420 15 (1) (1) 4 Total revenues 1,948 1,919 29 138 260 2 Expenses Compensation and benefits—field 115 90 25 28 37 2 Interest credited to account values 146 143 3 2 — — Benefits, claims, losses and settlement expenses 828 776 52 7 (12) 42 Amortization of deferred acquisition costs 108 131 (23 ) (18 ) 17 33 Other expenses 298 276 22 14 30 8 Total expenses 1,495 1,416 79 56 107 6 Pretax segment income $ 453 $ 503 $ (50 ) (10 ) $ 82 $ 153 (1) AMEX Assurance results of operations were consolidated in 2005 through September 30, 2005 and for all of 2004. (2) AMEX Assurance premiums in 2005 included $10 million in intercompany revenues related to errors and omissions coverage. Overall Our Protection pretax segment income for the year ended December 31, 2005 declined $50 million to $453 million compared to pretax segment income of $503 million for the year ended December 31, 2004. The deconsolidation of AMEX Assurance resulted in a decline in pretax segment income of $71 million. This decline was partially offset by the growth in our auto and home insurance business. Revenues Net investment income increased $26 million to $339 million in 2005 compared to 2004. The increase was primarily due to higher average invested assets during 2005 primarily attributable to auto and home insurance. Premiums in 2005 were negatively impacted by the deconsolidation of AMEX Assurance, which had premiums of $127 million in 2005 compared to $245 million in 2004. This decrease was primarily offset by a $71 million rise in premiums from auto and home insurance products. Other revenues increased primarily as a result of a $13 million increase in the cost of insurance on higher average variable and fixed universal life policies in-force. Expenses Compensation and benefits-field in 2005 reflect $35 million in ceding commissions paid to American Express related to AMEX Assurance. Benefits, claims, losses and settlement expenses in 2005 reflect a $69 million increase as a result of higher average auto and home insurance policies in-force, a $17 million increase due to higher life insurance in-force levels and a $13 million increase in the expense for future policy benefits in 2005 related to the inclusion of an explicit maintenance reserve for long term care insurance. These increases are net of a $54 million decline related to the impact of ceding the AMEX Assurance reserves in 2005. Amortization of DAC was $108 million in 2005 compared to $131 million in 2004. DAC amortization in 2005 was reduced by $53 million as a result of the annual DAC assessment performed in the third quarter, while DAC amortization in 2004 was reduced by $23 million in the first quarter as a result of lengthening amortization periods on certain life insurance products in conjunction with our adoption of SOP 03-1 and by $16 million as a result of the annual DAC assessment in the third quarter. The deconsolidation of AMEX Assurance resulted in a decrease in DAC amortization in 2005 of $16 million. 42
  • 126. Corporate and Other The following table presents the results of operations of our Corporate segment for the years ended December 31, 2005 and 2004: Years Ended December 31, 2005 2004 Change (in millions, except percentages) Revenues Management, financial advice and service fees $ 195 $ 140 $ 55 39% Distribution fees 3 — 3 — Net investment loss (21 ) (19 ) (2) (11) Other revenues 35 30 5 17 Total revenues 212 151 61 40 Expenses Compensation and benefits—field 156 109 47 43 Interest and debt expense 73 52 21 40 Separation costs 293 — 293 — Other expenses 114 110 4 4 Total expenses 636 271 365 # Pretax segment loss $ (424 ) $ (120 ) $ (304) # # Variance of 100% or greater. Overall Our Corporate pretax segment loss was $424 million for the year ended December 31, 2005, compared to $120 million in 2004. The higher pretax segment loss in 2005 was primarily the result of $293 million of separation costs. Revenues The growth in management, financial advice and service fees in 2005 was primarily driven by an increase in financial planning revenue. The net investment losses in 2005 and 2004 were primarily the result of amortization of affordable housing investments. Expenses The compensation and benefits-field increase was primarily related to the increase in financial planning revenue. The increase in interest and debt expense in 2005 primarily reflects higher short-term interest rates during the year ended December 31, 2005 as compared to the year ended December 31, 2004. Separation costs incurred in 2005 of $293 million were primarily associated with advisor and employee retention programs, rebranding and technology. Liquidity and Capital Resources We maintained substantial liquidity during the year ended December 31, 2006. At December 31, 2006, we had $2.7 billion in cash and cash equivalents, up slightly from the balance at December 31, 2005 of $2.5 billion. We have additional liquidity available through an unsecured revolving credit facility for $750 million that expires in September 2010. Under the terms of the underlying credit agreement, we can increase this facility to $1.0 billion. Available borrowings under this facility are reduced by any outstanding letters of credit. We have had no borrowings under this credit facility and had $5 million of outstanding letters of credit at December 31, 2006. We believe cash flows from operating activities, available cash balances and our availability of revolver borrowings will be sufficient to fund our operating liquidity needs. Investments are principally funded by sales of insurance, annuities and investment certificates and by reinvested income. Maturities of these investments are largely matched with the expected future payments of insurance and annuity obligations. Our total investments at December 31, 2006 and 2005 included investments held by our insurance subsidiaries of $29.6 billion and $32.5 billion, respectively. Our Available-for-Sale investments primarily include corporate debt securities and mortgage and other asset-backed securities, which had fair values of $16.8 billion and $12.3 billion, respectively, at December 31, 2006 compared to $18.6 billion and $13.9 billion, respectively, at December 31, 2005. Our Available-for-Sale corporate debt securities comprise a diverse portfolio, with the largest concentrations of the portfolio in the following industries: 34% in banking and finance, 21% in utilities and 13% in media. Investments also included $3.1 billion of commercial mortgage loans on real estate as of both December 31, 2006 and 2005. At December 31, 2006 and 2005, 69% and 70%, respectively, of our Available-for-Sale investment portfolio was rated A or better, while 7% of our Available-for-Sale investment portfolio was below investment grade at both dates. Ameriprise Financial, Inc. is primarily a parent holding company for the operations carried out by our wholly-owned subsidiaries. Because of our holding company structure, our ability to meet our cash requirements, including the payment of dividends on our common stock, substantially depends upon the receipt of dividends from our subsidiaries, particularly our life insurance subsidiary, RiverSource Life Insurance Company 43
  • 127. (“RiverSource Life,” formerly IDS Life Insurance Company), our face-amount certificate subsidiary, Ameriprise Certificate Company (“ACC”), our retail introducing broker-dealer subsidiary, Ameriprise Financial Services, Inc. (“AMPF”), our clearing broker-dealer subsidiary, American Enterprise Investment Services, Inc. (“AEIS”), our auto and home insurance subsidiary, IDS Property Casualty Insurance Company (“IDS Property Casualty”), doing business as Ameriprise Auto & Home Insurance, and our investment advisory company, RiverSource Investments LLC. The payment of dividends by many of our subsidiaries is restricted and certain of our subsidiaries are subject to regulatory capital requirements. Actual capital and regulatory capital requirements for such subsidiaries were as follows: Actual Capital Regulatory December 31, Capital 2006 2005 Requirement (in millions, except percentages) RiverSource Life(1)(2)(3) $ 3,270 $ 590 $ 3,511 RiverSource Life Insurance Co. of New York(1)(3)(4) 308 38 348 IDS Property Casualty(1)(5)(6) 448 115 523 AMEX Assurance(1)(3)(6) 115 6 118 Ameriprise Insurance Company(1)(5) — 2 47 ACC(7) 333 256 279 Threadneedle(8) 187 133 222 Ameriprise Bank(9) N/A 169 169 AMPF(5)(7) 47 # 85 Ameriprise Trust Company(5) 47 40 49 AEIS(5)(7) 97 6 38 SAI(5)(7) 15 # 2 RiverSource Distributors, Inc.(5)(7) N/A # # # Amounts are less than $1 million. (1) Actual capital is determined on a statutory basis. (2) Effective December 31, 2006, American Enterprise Life Insurance Company and American Partners Life Insurance Company, formerly wholly-owned subsidiaries of RiverSource Life, were merged with and into RiverSource Life. (3) Regulatory capital requirement as of December 31, 2006 is based on the most recent statutory risk-based capital filing. (4) Effective December 31, 2006, American Centurion Life Assurance Company, formerly a wholly-owned subsidiary of RiverSource Life, was merged with and into RiverSource Life Insurance Co. of New York (formerly IDS Life Insurance Company of New York). (5) Regulatory capital requirement is based on the applicable regulatory requirement, calculated as of December 31, 2006. (6) IDS Property Casualty uses certain insurance licenses held by AMEX Assurance. The AMEX Assurance travel insurance and card related business was ceded to American Express effective July 1, 2005, and was deconsolidated on a U.S. GAAP basis effective September 30, 2005. Effective September 30, 2005, we entered into an agreement to sell the AMEX Assurance legal entity to American Express on or before September 30, 2007. (7) Actual capital is determined on an adjusted U.S. GAAP basis. (8) Actual capital and regulatory capital requirements are determined in accordance with U.K. regulatory legislation. Both actual capital and regulatory capital requirements are as of June 30, 2006, based on the most recent required U.K. filing. (9) Ameriprise Bank holds capital in compliance with the Federal Deposit Insurance Corporation policy regarding de novo depository institutions. In addition to the particular regulations restricting dividend payments and establishing subsidiary capitalization requirements, we take into account the overall health of the business, capital levels and risk management considerations in determining a dividend strategy for payments to our company from our subsidiaries, and in deciding to use cash to make capital contributions to our subsidiaries. The following table sets out the dividends paid to our company (including extraordinary dividends paid with necessary advance notifications to regulatory authorities), net of capital contributions made by our company, and the dividend capacity (amount within the limitations of the applicable regulatory authorities as further described below) for the following subsidiaries: Years Ended December 31, 2006 2005 2004 (in millions) Dividends paid/(contributions made), net RiverSource Life 300 $ (270) $ 930 $ Ameriprise Bank N/A N/A (172 ) AEIS 15 61 82 ACC 25 — 70 RiverSource Investments, LLC — — 60 RiverSource Service Corporation 61 62 60 Threadneedle — — 43 Ameriprise Trust Company 5 15 42 SAFC — — (25 ) AMPF (100) 20 (20 ) IDS Property Casualty 52 87 6 Other — — 4 Total $ 450 $ (212) $ 1,175 Dividend capacity RiverSource Life(1) $ 380 $ 449 $ 328 Ameriprise Bank N/A N/A — AEIS 105 151 114 ACC(2) 54 15 93 RiverSource Investments, LLC 37 N/A 173 RiverSource Service Corporation 88 94 68 Threadneedle 18 — 87 Ameriprise Trust Company 5 3 4 SAFC 14 15 — AMPF — 103 84 IDS Property Casualty(3) 31 18 35 Other 9 9 8 Total dividend capacity $ 741 $ 857 $ 994 44
  • 128. (1) The dividend capacity for RiverSource Life is based on the greater of (1) the previous year’s statutory net gain from operations or (2) 10% of the previous year-end statutory capital and surplus. Dividends that, together with the amount of other distributions made within the preceding 12 months, exceed this statutory limitation are referred to as “extraordinary dividends” and require advance notice to the Minnesota Department of Commerce, RiverSource Life’s primary state regulator, and are subject to potential disapproval. On May 15 and September 26, 2006, RiverSource Life paid extraordinary dividends of $100 million on each date to our company. Prior to the payment of each of these dividends, RiverSource Life made the required advance notice to the Minnesota Department of Commerce and received a response from it stating that it did not object to the payment of these dividends. RiverSource Life exceeded the statutory limitation during 2004, as reflected above by paying $930 million to our company, a portion of which was an extraordinary dividend. Notice of non-disapproval was received from the Minnesota Department of Commerce prior to paying these extraordinary dividends. (2) The dividend capacity for ACC is based on capital held in excess of regulatory requirements. For AMPF and AEIS, the dividend capacity is based on an internal model used to determine the availability of dividends, while maintaining net capital at a level sufficiently in excess of minimum levels defined by Securities and Exchange Commission rules. (3) The dividend capacity for IDS Property Casualty is based on the lesser of (1) 10% of the previous year-end capital and surplus or (2) the greater of (a) net income (excluding realized gains) of the previous year or (b) the aggregate net income of the previous three years excluding realized gains less any dividends paid within the first two years of the three-year period. Dividends that, together with the amount of other distributions made within the preceding 12 months, exceed this statutory limitation are referred to as “extraordinary dividends” and require advance notice to the Office of the Commissioner of Insurance of the State of Wisconsin, the primary state regulator of IDS Property Casualty, and are subject to potential disapproval. For IDS Property Casualty, dividends paid in 2004 and the dividend capacity in 2004 increased significantly due to the inclusion of AMEX Assurance as a subsidiary of IDS Property Casualty. The portion of dividends paid by IDS Property Casualty in 2005 in excess of the dividend capacity set forth in the table above were extraordinary dividends and received approval from the Office of the Commissioner of Insurance of the State of Wisconsin. Operating Activities Net cash provided by operating activities for the year ended December 31, 2006 was $619 million compared to $975 million for the year ended December 31, 2005, a decrease of $356 million. For the year ended December 31, 2005, net cash provided by operating activities was $975 million compared to $812 million for the year ended December 31, 2004. This increase reflects a net decrease in trading securities and equity method investments in hedge funds and a net increase in accounts payable and accrued expenses partially offset by lower net income. Investing Activities Our investing activities primarily relate to our Available-for-Sale investment portfolio. Further, this activity is significantly affected by the net outflows of our investment certificate, fixed annuity and universal life products reflected in financing activities. Net cash provided by investing activities for the year ended December 31, 2006 was $3.5 billion compared to net cash used in investing activities of $255 million for the year ended December 31, 2005, a cash flow improvement of $3.8 billion. Purchases of Available-for-Sale securities decreased $5.9 billion to $2.8 billion in 2006 compared to $8.7 billion in 2005. Proceeds from sales of Available-for-Sale securities in 2006 decreased $1.8 billion to $2.5 billion from $4.3 billion in 2005. Net cash used in investing activities for the year ended December 31, 2005 was $255 million compared to $1.6 billion for the year ended December 31, 2004. This change resulted primarily from a net increase of $2.3 billion in proceeds from the sales of Available- for-Sale securities, partially offset by a net increase of $1.4 billion in purchases of Available-for-Sale securities in 2005 compared to 2004. Financing Activities Net cash used in financing activities was $3.9 billion for the year ended December 31, 2006 compared to net cash provided by financing activities of $177 million for the year ended December 31, 2005, a decrease of $4.1 billion. This decline in cash flow was primarily due to higher surrenders and other benefits related to fixed annuities, lower sales of certificate products and a net decrease related to debt and capital transactions. Cash used for surrenders and other benefits on policyholder and contractholder account values, most of which related to fixed annuities, increased $1.5 billion in 2006 compared to 2005. Cash flows related to payments we receive from certificate owners declined $1.3 billion in 2006 compared to 2005, while cash used for certificate maturities and cash surrenders decreased $544 million. The reduction in sales and increase in maturities was the result of the American Express Bank Limited and American Express Bank International business wind-down and a sales promotion that was in effect during a portion of the 2005 period, offset somewhat by a sales promotion that began in late 2006 and ended in early 2007. Our new debt issued in 2006 was primarily related to the issuance of $500 million of junior notes. In 2005, we obtained a $1.4 billion bridge loan and issued $1.5 billion of senior notes. We repaid $284 million of debt in 2006 compared to $1.4 billion in 2005. On May 26, 2006, we issued $500 million of junior notes and incurred debt issuance costs of $6 million. These junior notes are due in 2066 and carry a fixed interest rate of 7.518% for the first 10 years, converting to a variable interest rate thereafter. The proceeds from the issuance were for general corporate purposes. On November 23, 2005, we issued $800 million principal amount of 5.35% unsecured senior notes due November 15, 2010 and $700 million principal amount of 5.65% senior notes due November 15, 2015. Considering the impact of hedge credits, the effective interest rates on the senior notes due 2010 and 2015 are 4.8% and 5.2%, respectively. The proceeds from the issues were used to replace the $1.4 billion bridge loan and for other general corporate purposes. We repaid our $50 million medium-term notes in February 2006. In addition, $168 million of nonrecourse debt related to the consolidated property fund limited partnerships was repaid in September 2006 following a restructuring of the 45
  • 129. partnership capital. In addition, nonrecourse debt related to a consolidated CDO declined $58 million to $225 million at December 31, 2006 compared to $283 million at December 31, 2005. In 2005, we entered into an unsecured bridge loan facility in the amount of $1.4 billion and repaid $1.3 billion of American Express intercompany debt. Our capital transactions in 2006 primarily related to the repurchase of our common stock and dividends paid to our shareholders. In 2005, our capital transactions primarily related to the $1.1 billion capital contribution from American Express in connection with the Separation and Distribution and a capital contribution of $164 million in connection with the transfer of AEIDC to American Express. We used total cash of $470 million in 2006 for the purchase of 10.7 million treasury shares under our share repurchase programs. We used our existing working capital to fund these share repurchases, and we currently intend to fund additional share repurchases through existing working capital, future earnings and other customary financing methods. Pursuant to the Ameriprise Financial 2005 Incentive Compensation Plan, we reacquired 0.4 million shares of our common stock in 2006 through the surrender of restricted shares upon vesting and paid in the aggregate $20 million related to the holders’ income tax obligations on the vesting date. We paid regular quarterly cash dividends to our shareholders totaling $108 million for the year ended December 31, 2006, or $0.11 per common share for each quarterly period. In 2005, we paid $27 million of cash dividends to our shareholders during the quarterly period ended December 31, 2005. On January 25, 2007, our Board of Directors declared a regular quarterly cash dividend of $0.11 per common share. The dividend is payable February 16, 2007 to our shareholders of record at the close of business on February 5, 2007. We have $366 million remaining under a share repurchase program authorized by our Board of Directors. This share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and factors, these purchases may be commenced or suspended at any time without prior notice. We expect to use internally generated cash for these expenditures. We generated net cash from financing activities of $177 million for the year ended December 31, 2005 compared to $691 million for the year ended December 31, 2004. Cash used for certificate maturities and cash surrenders increased $1.3 billion. This use of cash flow was partially offset by the debt and capital transactions in 2005 discussed previously as well as a decrease in dividends paid to American Express in 2005 compared to 2004. Dividend payments to American Express were $53 million in 2005 compared to $1.3 billion in 2004. The dividends paid to American Express in 2004 included extraordinary dividends received from RiverSource Life of $930 million. Contractual Commitments The contractual obligations identified in the table below include both our on and off-balance sheet transactions that represent material expected or contractually committed future obligations. Payments due by period as of December 31, 2006 are as follows: Payments due in year ending 2008- 2010- 2012 and Contractual Obligations Total 2007 2009 2011 Thereafter (in millions) Balance Sheet: Debt(1) $ — $ — $ 1,025 $ 1,200 $ 2,225 Insurance and annuities(2) 3,517 6,329 5,506 29,247 44,599 Investment certificates(3) 4,242 476 — — 4,718 Off-Balance Sheet: Lease obligations 95 132 111 327 665 Purchase obligations(4) 47 28 2 — 77 Interest on debt(5) 137 273 225 2,199 2,834 Total $ 8,038 $ 7,238 $ 6,869 $ 32,973 $ 55,118 (1) See Note 15 to our Consolidated Financial Statements for more information about our debt. (2) These scheduled payments are represented by reserves of approximately $30 billion at December 31, 2006 and are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions. Actual payment obligations may differ if experience varies from these assumptions. Separate account liabilities have been excluded as associated contractual obligations would be met by separate account assets. (3) The payments due by year are based on contractual term maturities. However, contractholders have the right to redeem the investment certificates earlier and at their discretion subject to surrender charges, if any. Redemptions are most likely to occur in periods of substantial increases in interest rates. (4) The purchase obligation amounts include expected spending by period under contracts that were in effect at December 31, 2006. Minimum contractual payments associated with purchase obligations, including termination payments, were $6 million. (5) Interest on debt was estimated based on rates in effect as of December 31, 2006. 46
  • 130. Total loan funding commitments were $617 million at December 31, 2006. For additional information relating to these contractual commitments, see Note 24 to our Consolidated Financial Statements. Off-Balance Sheet Arrangements During the year ended December 31, 2006, we closed on three structured investments that we manage. The structures currently have approximately $1.6 billion issued but can increase to approximately $1.8 billion when fully subscribed. As a condition to managing these investments, we were required to invest approximately $5 million in the residual or “equity” tranche of each facility, which is the most subordinated tranche of securities issued by the structured investment entities. As an investor in the residual tranche, our return correlates to the performance of the portfolio of high-yield investments comprising the structured investments. Our exposure as an investor is limited solely to our aggregate investment in these facilities and we have no obligation, contingent or otherwise, that could require any further funding of the investments. The structured investments are considered variable interest entities but are not consolidated as we are not considered the primary beneficiary. Recent Developments We are assessing a comment from the Minnesota Department of Commerce related to disability income insurance received as part of its routine financial examination of RiverSource Life for each of the five years in the period ended December 31, 2005. Our management does not believe that there will be a material adverse effect on consolidated results of operations and financial condition upon resolution of this comment. 47
  • 131. Quantitative and Qualitative Disclosures About Market Risks Interest rate, equity price, and foreign currency risks are the market risks to which we have material exposure. To evaluate interest rate and equity price risk we perform sensitivity testing which measures the impact on pretax income from the sources listed below for a 12 month period following a hypothetical 100 basis point increase in interest rates and a hypothetical 10% decline in equity markets. At December 31, 2006, aggregating our exposure from all sources of interest rate risk net of financial derivatives hedging that exposure detailed below, we estimate a negative impact of $34 million on pretax income for the 12 month period if, hypothetically, interest rates had increased by 100 basis points and remain at that level for 12 months. This compares with an estimate of $43 million made at December 31, 2005 for 12 months following a hypothetical 100 basis point increase in interest rates at December 31, 2005. At December 31, 2006, aggregating our exposure from all sources of equity price risk net of financial derivatives hedging that exposure detailed below, we estimate a negative impact of $127 million on pretax income for the 12 month period if, hypothetically, equity markets had declined by 10% and remain at that level for 12 months. This compares with an estimate of $84 million made at December 31, 2005 for 12 months following a hypothetical 10% drop in equity markets at December 31, 2005. The numbers below show our estimate of the pretax impact of these hypothetical market moves, net of hedging, as of December 31, 2006. Following the table is a discussion by source of risk and the portfolio management techniques and derivative financial instruments we use to mitigate these risks. Net Risk Exposure to Pretax Income Sources of Market Risk Interest Rate Equity Price (in millions) Asset-based management and 12b-1 fees $ (12) $ (105) Variable annuities and variable universal life (“VUL”) products 12 (38) Fixed annuities, fixed portion of variable annuities, fixed portion of VUL and fixed insurance products (22) — Flexible savings and other fixed rate certificates (4) — Deferred acquisition costs (“DAC”) (8) 16 Total $ (34) $ (127) Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming the composition of invested assets and liabilities does not change in the 12 month period following the market shock and assuming the increase in interest rates produces a parallel shift in the yield curve. The selection of a 100 basis point interest rate increase and a 10% equity market decline should not be construed as a prediction of future market events. Asset-Based Management and 12b-1 Fees We earn asset-based management fees on our owned separate account assets and managed assets. At December 31, 2006, the value of these assets was $53.8 billion and $299.8 billion, respectively. We also earn distribution fees on our managed assets. These sources of revenue are subject to both interest rate and equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. We do not hedge the interest rate risk of this exposure. We hedge a portion of the equity price risk of the exposure with purchased equity index puts which had the following notional amounts and fair value assets: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased puts $ 490 $ 8 $ 721 $ 16 48
  • 132. Interest Rate Risk—Asset-Based Management and 12b-1 Fees At December 31, 2006, we estimate the interest rate risk from this exposure on pretax income if, hypothetically, interest rates had increased immediately by 100 basis points and remain at that level for 12 months to be a negative $12 million for the 12 month period. We do not hedge this exposure. Equity Price Risk—Asset-Based Management and 12b-1 Fees At December 31, 2006, we estimate the equity price risk from this exposure before hedging on pretax income if, hypothetically, equity markets decreased immediately by 10% and remain at that level for 12 months to be a negative impact of $133 million for the 12 month period. Under this scenario we would expect a $28 million offset from our purchased equity puts, for an impact, net of hedging, of a negative $105 million. Variable Annuities and VUL Products With variable annuities and VUL products, the policyholder chooses how the premiums are invested. They can choose equity or nonequity investments and those investments are carried in separate account assets. Annuity payouts, VUL cash value and death benefits fluctuate with the performance of the investments that the policyholder chooses. Therefore, for these products, policyholders assume the bulk of the investment risk. We face interest rate and equity price risk on these products from two primary sources: the management fees we earn on separate account assets and the guaranteed benefits associated with our variable annuities. Management fees on separate account assets are hedged along with other management fees. These hedges are discussed in “Asset- Based Management and 12b-1 Fees” earlier in this section. The guaranteed benefits associated with our variable annuities are guaranteed minimum withdrawal benefit (“GMWB”), guaranteed minimum accumulation benefit (“GMAB”), guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) options. Each of the guaranteed benefits mentioned above guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets. The total value of all variable annuity contracts has grown from $39.8 billion at December 31, 2005 to $49.2 billion at December 31, 2006. These contract values include GMWB contracts which have grown from $2.5 billion at December 31, 2005 to $7.2 billion at December 31, 2006. Reserve liabilities for the guaranteed benefits are recorded in future policy benefits and claims on our Consolidated Balance Sheets. At December 31, 2006, the reserve for the GMWB was a negative $12 million compared with a reserve of positive $9 million at December 31, 2005. The negative reserve indicates that we expect the GMWB fees charged to more than offset the future benefits to be paid to policyholders under the guaranteed benefit provisions. At December 31, 2006, the reserve for the other variable annuity guaranteed benefits, GMAB, GMDB and GMIB, was $26 million compared with $21 million at December 31, 2005. We manage the market risk on the guaranteed benefits by product design and by the use of financial derivatives which hedge the GMWB. The design of the GMWB is an example of how we use product design to manage risk. First, the GMWB provision requires that policyholders invest their funds in one of five asset allocation models, thus ensuring diversification across asset classes and underlying funds, reducing the likelihood that payouts from the guaranteed benefits will be required to compensate policyholders for investment losses. Second, the GMWB provision does not offer automatic annual percentage increases to the guaranteed amount, thus preventing the guaranteed amount from growing during a down market. In addition to product design, we have implemented a comprehensive hedging program which utilizes a primarily static hedging approach. A primarily static hedging approach improves our mitigation of market dislocation and operational risks as compared to a primarily dynamic hedging approach. Currently we only hedge our GMWB. The notional amounts and fair value assets (liabilities) of derivatives hedging our GMWB were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased puts $ 1,410 $ 171 $ 629 $ 95 Interest rate swaps — — 359 (1) Written S&P 500 futures(1) — — (111 ) — (1) These Standard & Poor’s (“S&P”) 500 futures are cash settled daily and, therefore, have no fair value. Interest Rate Risk—Variable Annuities The GMWB creates obligations which are carried at fair value separately from the underlying host variable annuity contract. Changes in fair value of the GMWB are recorded through earnings with fair value calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB liability. At December 31, 2006, if interest rates had increased by, hypothetically, 100 basis points 49
  • 133. and remain at that level for 12 months, we estimate that the fair value would decrease by $57 million with a favorable impact to pretax income. The GMWB interest rate exposure is hedged with a portfolio of customized equity index puts and interest rate swaps. At December 31, 2006, we had equity puts with a notional amount of $1.4 billion, and interest rate swaps with a notional amount of $359 million. Terms of the swaps designate us as the variable rate payor. If interest rates were to increase we would have to pay more to the swap counterparty, and the fair value of our equity puts would decrease, resulting in a negative impact to our pretax income. For a hypothetical 100 basis point increase in interest rates sustained for a 12 month period, we estimate that the negative impact of the derivatives on pretax income would be $53 million. The net impact on pretax income after hedging would be a favorable $4 million. Our GMAB creates interest rate risk in the same way as the GMWB discussed above—the fair value of the guaranteed benefits changes with changes in interest rates. For a hypothetical 100 basis point increase in interest rates at December 31, 2006 sustained for 12 months, the fair value of the GMAB would decrease by $8 million, with a corresponding favorable impact on our pretax income. We do not hedge the interest rate exposure on the GMAB. Separate account assets are held for the exclusive benefit of variable annuity and VUL contractholders. We do, however, receive asset- based investment management fees on fixed income investments our annuity and VUL policyholders have in the separate accounts. An increase in interest rates would decrease fixed rate separate account assets and decrease related fees with a negative impact to pretax income. This exposure is included in “Interest Rate Risk—Asset-Based Management and 12b-1 Fees” earlier in this section. Equity Price Risk—Variable Annuities and VUL Products The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions regardless of the performance of the investment assets. For this reason, when equity markets decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to earnings. We estimate the negative impact on pretax income before hedging to be $42 million if, hypothetically, equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months. Of the $42 million, $7 million is attributable to our GMWB. Currently, we only hedge our GMWB. Our hedging program is static which reduces our risk to major disruptions in the market and severe liquidity events because our program does not rely on frequent dynamic rebalancing and the ability to trade in the market. In addition, the primarily static nature of the hedge reduces the likelihood of operational and execution errors. The core derivative instrument with which we hedge the equity price risk of our GMWB is a long-dated structured equity put contract; this core instrument is supplemented with equity futures. The equity put contracts had a notional amount of $1.4 billion at December 31, 2006. If, hypothetically, equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months we estimate a positive impact to pretax income of $4 million from the puts and futures. The net equity price exposure to pretax income from all of our variable annuity guaranteed benefits would be a negative $38 million. A decline in equity markets would also reduce the asset-based management fees we earn on equity market investments that our annuity and VUL policyholders have in separate accounts. This exposure is included in “Equity Price Risk—Asset-Based Management and 12b-1 Fees” earlier in this section. Fixed Annuities, Fixed Portion of Variable Annuities, Fixed Portion of VUL and Fixed Insurance Products Interest rate exposures arise primarily with respect to the fixed account portion of RiverSource Life’s annuity and insurance products and its investment portfolio. We guarantee an interest rate to the holders of these products. Premiums collected from clients are primarily invested in fixed rate securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments. Therefore, in an increasing rate environment, higher interest rates are reflected in crediting rates to clients sooner than in rates earned on invested assets resulting in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. We have $26.5 billion in reserves in future policy benefits and claims on our Consolidated Balance Sheets at December 31, 2006 to recognize liabilities created by these products. To hedge against the risk of higher interest rates we have purchased swaption contracts which had the following notional amounts and fair value assets: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased swaptions $ 1,200 $ 8 $ 1,200 $ 2 50
  • 134. If interest rates had increased by, hypothetically, 100 basis points at December 31, 2006 and remain at that level for 12 months we estimate the impact on pretax income for the 12 month period to be a negative $22 million. Flexible Savings and Other Fixed Rate Certificates We have interest rate risk from our flexible savings and other fixed rate certificates. These are investment certificates ranging in amounts from $1,000 to $1 million with terms ranging from three to 36 months. We guarantee an interest rate to the holders of these products. Payments collected from clients are primarily invested in fixed rate securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients generally reset at shorter intervals than the yield on underlying investments. This exposure is not currently hedged although we monitor our investment strategy and make modifications based on our changing liabilities and the expected rate environment. We have $3.5 billion in reserves included in customer deposits at December 31, 2006 to cover the liabilities associated with these products. At December 31, 2006, we estimate the interest rate risk from this exposure on pretax income for the 12 month period following a hypothetical increase of 100 basis points in interest rates to be a negative $4 million. Equity Indexed Annuities Our equity indexed annuity product is a single premium annuity issued with an initial term of seven years. The annuity guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation value upon renewal plus a return that is linked to the performance of the S&P 500 Index. The equity-linked return is based on a participation rate initially set at between 50% and 90% of the S&P 500 Index which is guaranteed for the initial seven-year term when the contract is held to full term. Of the $30.0 billion in future policy benefits and claims at December 31, 2006, $317 million relates to the liabilities created by this product. The notional amounts and fair value assets (liabilities) of derivatives hedging this product were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased calls 37 $ 197 $ 27 $ 151 $ Purchased Knock-in-Puts 129 3 86 3 Written Knock-in-Puts (101) (1) (67 ) (1) Purchased S&P 500 futures(1) 32 — 34 — (1) These S&P 500 futures are cash settled daily and, therefore, have no fair value. Interest Rate Risk—Equity Indexed Annuities Most of the proceeds from the sale of equity indexed annuities are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. We earn income from the difference between the return earned on invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount credited is affected by changes in interest rates. We estimate that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2006 and remain at that level for 12 months our unhedged exposure would be a negative impact of $2 million on pretax income for the 12 month period offset by a positive impact of nearly $2 million from our hedging strategy for an immaterial net exposure. Equity Price Risk—Equity Indexed Annuities The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity markets. To hedge this exposure, a portion of the proceeds from the sale of equity indexed annuities are used to purchase futures, calls and puts which generate returns to replicate what we must credit to client accounts. In conjunction with purchasing puts we also write puts. Pairing purchased puts with written puts allows us to better match the characteristics of the liability. For this product we estimate that if, hypothetically, the equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months, the impact to pretax income for the 12 month period without hedging would be a positive $15 million. The impact of our hedging strategy offsets that gain for an immaterial net exposure. Stock Market Certificates Stock market certificates are purchased for amounts generally from $1,000 to $1 million for terms of 52 weeks which can be extended to a maximum of 14 terms. For each term the certificate holder can choose to participate 100% in any percentage increase in the S&P 500 Index up to a maximum return or choose partial participation in any increase in the S&P 500 Index plus a fixed rate of interest guaranteed in advance. If partial participation is selected, the total of equity-linked return and guaranteed rate of interest cannot exceed the maximum return. Reserves for our stock market certificates are included in 51
  • 135. customer deposits on our Consolidated Balance Sheets. Of the $6.5 billion in customer deposits at December 31, 2006, $1.1 billion pertain to stock market certificates. The notional amounts and fair value assets (liabilities) of derivatives hedging this product were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased calls $ 900 $ 104 $ 1,039 $ 74 Written calls (56) (1,094) (38) (962 ) Purchased S&P 500 futures(1) 1 — 1 — (1) These S&P 500 futures are cash settled daily and, therefore, have no fair value. Interest Rate Risk—Stock Market Certificates Stock market certificates have some interest rate risk as changes in interest rates affect the fair value of the payout to be made to the certificate holder. This exposure to interest rate changes is hedged by the derivatives listed above. We estimate that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2006 and remain at that level for 12 months our unhedged exposure would be a negative impact of $1 million on pretax income for the 12 month period offset by a positive impact of the same amount from our hedging strategy for an immaterial net exposure. Equity Price Risk—Stock Market Certificates As with the equity indexed annuities, the equity-linked return to investors creates equity price risk exposure. We seek to minimize this exposure with purchased futures and call spreads that replicate what we must credit to client accounts. We estimate that if, hypothetically, equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months the impact to pretax income for the 12 month period without hedging would be a positive $27 million. The impact of our hedging strategy offsets that gain for an immaterial net exposure. DAC For annuity and universal life products, DAC are amortized on the basis of estimated gross profits. Estimated gross profits are a proxy for pretax income prior to the recognition of DAC amortization expense. When events occur that reduce or increase current period estimated gross profits, DAC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income. Interest Rate Risk—DAC An increase in interest rates would result in a significant decrease in guaranteed living benefit reserves associated with our variable annuity products, with the decrease partially offset by changes in hedge asset values. This would result in increased estimated gross profits and increased DAC amortization. We estimate that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2006 and remain at that level for 12 months, the negative impact to pretax income from increased DAC amortization would be $8 million. Equity Price Risk—DAC A decline in equity markets would result in reduced fee revenue and an increase in guaranteed death and living benefit reserves associated with our variable annuity products, with the increase partly offset by changes in hedge asset values. This would result in decreased estimated gross profits and decreased DAC amortization. We estimate that if, hypothetically, equity markets had declined by 10% at December 31, 2006, the positive impact to pretax income from decreased DAC amortization would be $16 million over a 12 month period. Foreign Currency Risk We have foreign currency risk because of our net investment in Threadneedle Asset Management Holdings Limited. We hedge this risk by entering into foreign currency forward contracts which are adjusted monthly. At December 31, 2006, we had forward currency contracts with a notional value of 425 million British pounds (“GBP”) hedging 433 million GBP of exposure. Our foreign currency risk is immaterial after hedging. Interest Rate Risk on External Debt Interest rate risk on our external debt is not material. The interest rate on the $1.5 billion of senior unsecured notes is fixed and the interest rate on the $500 million of junior subordinated notes is fixed until June 1, 2016. We have floating rate debt of $85 million related to our consolidated collateralized debt obligation securitization trust which is not hedged but on which the interest rate risk to pretax income is not material. Credit Risk Our potential derivative credit exposure to each counterparty is aggregated with all of our other exposures to the counterparty to determine compliance with established credit and market risk limits at the time we enter into a derivative transaction. Credit exposures may take into account enforceable netting arrangements. Before executing a new type or structure of derivative contract, we determine the variability of the contract’s potential market and credit exposures and whether such variability might reasonably be expected to create exposure to a counterparty in excess of established limits. 52
  • 136. Forward-Looking Statements This report contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those described in these forward-looking statements. We have made various forward-looking statements in this report. Examples of such forward-looking statements include: • statements of our plans, intentions, expectations, objectives or goals, including those relating to the establishment of our new brands, our mass affluent and affluent client acquisition strategy and our competitive environment; • statements about our future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States; and • statements of assumptions underlying such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements. Such factors include, but are not limited to: • changes in the interest rate and equity market environments; • changes in the regulatory environment, including ongoing legal proceedings and regulatory actions; • our investment management performance; • effects of competition in the financial services industry and changes in our product distribution mix and distribution channels; • our capital structure as a stand-alone company, including our ratings and indebtedness, and limitations on our subsidiaries to pay dividends; • risks of default by issuers of investments we own or by counterparties to derivative or reinsurance arrangements; • experience deviations from our assumptions regarding morbidity, mortality and persistency in certain of our annuity and insurance products; • the impact of our separation from American Express; • our ability to establish our new brands; and • general economic and political factors, including consumer confidence in the economy. We caution you that the foregoing list of factors is not exhaustive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements. 53
  • 137. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Our Consolidated Financial Statements for the years ended December 31, 2005 and 2004 have been audited by Ernst & Young LLP, our independent registered public accounting firm. Through 2004, Ernst & Young LLP provided audit services to our company as part of the audit services it provided to American Express Company (“American Express”). In 2004, the American Express Audit Committee of its Board of Directors determined to request proposals from auditing firms for their 2005 audit. This request was made pursuant to the American Express Audit Committee charter, which requires a detailed review of the outside audit firm at least every 10 years. At a meeting held on November 22, 2004, the American Express Audit Committee approved the future engagement of PricewaterhouseCoopers LLP as the independent registered public accountants for the year ended December 31, 2005 and dismissed Ernst & Young LLP for 2005. This decision also applied to our company. Ernst & Young LLP continued as auditors of American Express and our company for the year ended December 31, 2004. Ernst & Young LLP’s reports on our Consolidated Financial Statements for the year ended December 31, 2004 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of our Consolidated Financial Statements for the year ended December 31, 2004, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. During the two most recent years and subsequent interim period preceding the dismissal of Ernst & Young LLP, there were no “reportable events” (as defined in Regulation S-K, Item 304(a)(1)(v)). In connection with our separation from American Express, on February 18, 2005, the American Express Audit Committee of its Board of Directors dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP to be the independent registered public accountants of our company for the year ended December 31, 2005. PricewaterhouseCoopers LLP continued as the independent registered public accounting firm for the consolidated financial statements of American Express for 2005. PricewaterhouseCoopers LLP did not issue any report on our Consolidated Financial Statements for either of 2005 or 2004. During the period from November 22, 2004 and through February 18, 2005, there were no disagreements between our company and PricewaterhouseCoopers LLP on any matters of accounting principles or practices, financial statement disclosures or auditing scope or procedures, which, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference to the matter in their report. There have been no “reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K, during the period between November 22, 2004 to February 18, 2005. 54
  • 138. Management’s Report on Internal Control over Financial Reporting The management of Ameriprise Financial, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that: • Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on management’s assessment and those criteria, we believe that, as of December 31, 2006, the Company’s internal control over financial reporting is effective. Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an audit report appearing on the following page on our assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. 55
  • 139. Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Shareholders of Ameriprise Financial, Inc. We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Ameriprise Financial, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Ameriprise Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Ameriprise Financial, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Ameriprise Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements of Ameriprise Financial, Inc. and our report dated February 26, 2007, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Minneapolis, Minnesota February 26, 2007 56
  • 140. Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Ameriprise Financial, Inc. We have audited the accompanying consolidated balance sheets of Ameriprise Financial, Inc. (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ameriprise Financial, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ameriprise Financial, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2007 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Minneapolis, Minnesota February 26, 2007 57
  • 141. Consolidated Statements of Income Ameriprise Financial, Inc. Years Ended December 31, 2006 2005 2004 (in millions, except per share amounts) Revenues Management, financial advice and service fees $ 2,578 $ 2,248 $ 2,965 Distribution fees 1,150 1,101 1,300 Net investment income 2,241 2,137 2,204 Premiums 979 1,023 932 Other revenues 536 518 739 Total revenues 7,484 7,027 8,140 Expenses Compensation and benefits 2,650 2,288 3,113 Interest credited to account values 1,310 1,268 1,264 Benefits, claims, losses and settlement expenses 880 828 930 Amortization of deferred acquisition costs 431 437 472 Interest and debt expense 73 52 116 Separation costs 293 — 361 Other expenses 1,102 1,042 1,087 Total expenses 6,739 5,915 7,343 Income before income tax provision, discontinued operations and accounting change 745 1,112 797 Income tax provision 187 287 166 Income before discontinued operations and accounting change 558 825 631 Income from discontinued operations, net of tax 16 40 — Cumulative effect of accounting change, net of tax — (71) — Net income $ 574 $ 794 $ 631 Basic Earnings per Common Share Income before discontinued operations and accounting change $ 2.26 $ 3.35 $ 2.56 Income from discontinued operations, net of tax 0.06 0.16 — Cumulative effect of accounting change, net of tax — (0.29) — Net income $ 2.32 $ 3.22 $ 2.56 Diluted Earnings per Common Share Income before discontinued operations and accounting change $ 2.26 $ 3.35 $ 2.54 Income from discontinued operations, net of tax 0.06 0.16 — Cumulative effect of accounting change, net of tax — (0.29) — Net income $ 2.32 $ 3.22 $ 2.54 Weighted average common shares outstanding: Basic 247.1 246.2 246.5 Diluted 247.2 246.2 248.5 Cash dividends declared per common share $ 0.11 $ — $ 0.44 See Notes to Consolidated Financial Statements. 58
  • 142. Consolidated Balance Sheets Ameriprise Financial, Inc. December 31, 2006 2005 (in millions, except share data) Assets Cash and cash equivalents $ 2,474 $ 2,717 Investments 39,100 35,553 Separate account assets 41,561 53,848 Receivables 2,172 2,960 Deferred acquisition costs 4,182 4,499 Restricted and segregated cash 1,067 1,236 Other assets 2,565 3,359 Total assets $ 93,121 $ 104,172 Liabilities and Shareholders’ Equity Liabilities: Future policy benefits and claims $ 32,731 $ 30,033 Separate account liabilities 41,561 53,848 Customer deposits 6,641 6,525 Debt 1,833 2,225 Accounts payable and accrued expenses 1,757 1,984 Other liabilities 911 1,632 Total liabilities 85,434 96,247 Shareholders’ Equity: Common shares ($.01 par value; shares authorized, 1,250,000,000; shares issued, 252,909,389 and 249,998,206, respectively) 2 3 Additional paid-in capital 4,091 4,353 Retained earnings 3,745 4,268 Treasury shares, at cost (11,517,958 and 122,652 shares, respectively) — (490) Accumulated other comprehensive loss, net of tax: Net unrealized securities losses (129) (187) Net unrealized derivatives gains (losses) 6 (1) Foreign currency translation adjustment (25) (18) Defined benefit plans (3) (3) Total accumulated other comprehensive loss (151) (209) Total shareholders’ equity 7,687 7,925 Total liabilities and shareholders’ equity $ 104,172 $ 93,121 See Notes to Consolidated Financial Statements. 59
  • 143. Consolidated Statements of Cash Flows Ameriprise Financial, Inc. Years Ended December 31, 2006 2005 2004 (in millions) Cash Flows from Operating Activities Net income $ 574 $ 794 $ 631 Less: Income from discontinued operations, net of tax (16) (40) — Income before discontinued operations 558 754 631 Adjustments to reconcile income before discontinued operations to net cash provided by operating activities: Cumulative effect of accounting change, net of tax — 71 — Capitalization of deferred acquisition and sales inducement costs (787) (692) (870 ) Amortization of deferred acquisition and sales inducement costs 471 471 520 Depreciation and amortization 164 161 166 Deferred income taxes 34 (34) 24 Share-based compensation 55 38 113 Excess tax benefits from share-based compensation — — (52 ) Net realized investment gains (74) (45) (52 ) Other-than-temporary impairments and provision for loan losses 22 13 2 Premium and discount amortization on Available-for-Sale and other securities 156 178 124 Changes in operating assets and liabilities: Segregated cash (73) 105 (54 ) Trading securities and equity method investments in hedge funds, net 179 (61) 119 Future policy benefits and claims, net 21 5 53 Receivables (70) (325) (203 ) Other assets, other liabilities, accounts payable and accrued expenses, net 319 173 98 Net cash provided by operating activities 975 812 619 Cash Flows from Investing Activities Available-for-Sale securities: Proceeds from sales 4,336 2,034 2,454 Maturities, sinking fund payments and calls 4,060 3,199 3,434 Purchases (8,685) (7,300) (2,782 ) Open securities transactions payable and receivable, net (26) 35 15 Proceeds from sales and maturities of commercial mortgage loans on real estate 590 581 512 Funding of commercial mortgage loans on real estate (486) (326) (422 ) Proceeds from sales of other investments 206 268 149 Purchase of other investments (168) (222) (135 ) Purchase of land, buildings, equipment and software (141) (125) (187 ) Proceeds from sale of land, buildings, equipment and other — 3 66 Proceeds from transfer of AMEX Assurance deferred acquisition costs 117 — — Deconsolidation of AMEX Assurance (29) — — Change in restricted cash 542 300 (16 ) Acquisition of bank deposits and loans, net — — 437 Cash transferred to American Express related to AEIDC (572) — — Other, net (2 ) 1 3 Net cash provided by (used in) investing activities (255) (1,550) 3,523 See Notes to Consolidated Financial Statements. 60
  • 144. Consolidated Statements of Cash Flows Ameriprise Financial, Inc. Years Ended December 31, 2006 2005 2004 (in millions) Cash Flows from Financing Activities Investment certificates: Payments from certificate owners 3,244 3,286 1,945 Interest credited to account values 199 140 212 Certificate maturities and cash surrenders (3,628) (2,375) (3,084 ) Policyholder and contractholder account values: Consideration received 1,532 2,350 1,267 Interest credited to account values 1,111 1,128 1,052 Surrenders and other benefits (3,330) (2,716) (4,869 ) Proceeds from issuances of debt, net of issuance costs 2,843 18 516 Principal repayments of debt (1,391) (78) (284 ) Payable to American Express, net (1,576) 263 — Capital transactions with American Express, net 1,256 40 — Dividends paid to American Express (53) (1,325) — Dividends paid to shareholders (27) — (108 ) Repurchase of common shares — — (490 ) Exercise of stock options — — 20 Excess tax benefits from share-based compensation — — 52 Policy loans: Repayments 89 82 108 Issuances (103) (93) (140 ) Customer deposits and other, net (37) (109) (134 ) Capital contributions to discontinued operations — (15) — Dividends received from discontinued operations 48 95 — Net cash provided by (used in) financing activities (3,937 ) 177 691 Cash Flows from Discontinued Operations Net cash provided by operating activities 46 229 — Net cash used in investing activities (10) (1,093) — Net cash provided by financing activities 482 898 — Net cash provided by discontinued operations 518 34 — Effect of exchange rate changes on cash (19) 13 38 Net increase in cash and cash equivalents 1,396 — 243 Cash and cash equivalents at beginning of year 1,078 1,078 2,474 Cash and cash equivalents at end of year $ 2,474 $ 1,078 $ 2,717 Cash and cash equivalents of discontinued operations included above: At beginning of year $ 54 $ 20 $ — At end of year — 54 — Supplemental Disclosures: Interest paid $ 93 $ 43 $ 123 Income taxes paid, net 146 319 219 Non-cash dividend of AEIDC to American Express 164 — — See Notes to Consolidated Financial Statements. 61
  • 145. Consolidated Statements of Shareholders’ Equity Ameriprise Financial, Inc. Accumulated Number of Additional Other Outstanding Common Paid-In Retained Treasury Comprehensive Shares Shares Capital Earnings Shares Income (Loss) Total (in millions, except share data) Balances at December 31, 2003 100 $ — $ 2,867 $ 3,946 $ — $ 475 $7,288 Other comprehensive income: Net income — — — 794 — — 794 Change in net unrealized securities gains — — — — — (77 ) (77) Change in net unrealized derivatives losses — — — — — (12 ) (12) Foreign currency translation adjustment (6) — — — — — (6) Total other comprehensive income — — — — — — 699 Cash dividends paid to American Express — — — (1,325) — — (1,325) Capital transactions with American Express, net — — 40 — — — 40 Balances at December 31, 2004 100 — 2,907 3,415 — 380 6,702 Other comprehensive income: Net income — — — 574 — — 574 Change in net unrealized securities gains — — — — — (554 ) (554 ) Change in net unrealized derivatives losses — — — — — 34 34 Minimum pension liability adjustment — — — — — (2) (2) Foreign currency translation adjustment (9) — — — — — (9) Total other comprehensive income — — — — — — 43 Dividends paid to shareholders — — — (27) — — (27 ) Cash dividends paid to American Express — — — (53) — — (53 ) Non-cash dividends paid to American Express — — — (164) — — (164) Transfer of pension obligations and assets from American Express Retirement Plan — — (18) — — — (18 ) Treasury shares (122,652 ) — — — — — — Share-based compensation plans 3,834,058 — (52) — — — (52 ) Stock split of common shares issued and outstanding 246,164,048 2 (2) — — — — Capital transactions with American Express, net — — 1,256 — — — 1,256 Balances at December 31, 2005 (151 ) 249,875,554 2 4,091 3,745 — 7,687 Other comprehensive income: Net income — — — 631 — — 631 Change in net unrealized securities losses — — — — — (58 ) (58) Change in net unrealized derivatives gains — — — — — (7) (7) Adjustment to initially apply FASB Statement No. 158, net of tax — — — — — (3) (3) Minimum pension liability adjustment — — — — — 3 3 Foreign currency translation adjustment 7 — — — — — 7 Total other comprehensive income — — — — — — 573 Dividends paid to shareholders — — — (108) — — (108) Transfer of pension obligations and assets from American Express Retirement Plan — — (5) — — — (5) Treasury shares (11,395,306) — — — (490 ) — (490) Share-based compensation plans 2,911,183 1 267 — — — 268 Balances at December 31, 2006 241,391,431 $ 3 $ 4,353 $ 4,268 $ (490 ) $ (209 ) $7,925 See Notes to Consolidated Financial Statements. 62
  • 146. Notes to Consolidated Financial Statements 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”). 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 its 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 foreign operations of Threadneedle and resulting foreign currency translation adjustments have not been significant to the Company’s consolidated results of operations and financial condition. The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain reclassifications of prior period amounts have been made to conform to the current presentation. 2. Summary of Significant Accounting Policies Principles of Consolidation The Company consolidates all entities in which it holds a greater than 50% voting interest, except for variable interest entities and limited partnerships which are consolidated when certain conditions are met and immaterial seed money investments in mutual and hedge funds, which are accounted for as trading securities. Entities in which the Company holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. Additionally, other investments in hedge funds in which the Company holds an interest that is less than 50% are accounted for under the equity method. All other investments are accounted for under the cost method where the Company owns less than a 20% voting interest and does not exercise significant influence, or as Available-for-Sale or trading securities, as applicable. The Company also consolidates all variable interest entities (“VIEs”) for which it is considered to be the primary beneficiary. The determination as to whether an entity is a VIE is based on the amount and characteristics of the entity’s equity. The determination as to whether the Company is considered to be the primary beneficiary is based on whether the Company will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual return, or both. Beginning January 1, 2006, the Company consolidates certain limited partnerships that are not VIEs, for which the Company is the general partner and is determined to control the limited partnership. As a general partner, the Company is presumed to control the limited partnership unless the limited partners have the ability to dissolve the partnership or have substantive participating rights. All material intercompany transactions and balances between or among Ameriprise Financial and its subsidiaries and affiliates have been eliminated in consolidation. Qualifying Special Purpose Entities (“QSPEs”) are not consolidated. Such QSPEs included a securitization trust containing a majority of the Company’s rated collateralized debt obligations (“CDOs”) for which the Company sold all of its retained interests in 2005. Management evaluates other entities in which the Company has an interest, is the sponsor or transferor using control, risk and reward criteria. Segment Reporting The Company has two main operating segments: Asset Accumulation and Income (“AA&I”) and Protection, as well as a Corporate and Other (“Corporate”) segment. 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. Foreign Currency Translation Net assets of foreign subsidiaries, whose functional currency is other than the U.S. dollar, are translated into U.S. dollars based upon exchange rates prevailing at the end of each year. The resulting translation adjustment, along with any related hedge and tax effects, are included in accumulated other comprehensive income (loss). Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to non-functional currency transactions, including non-U.S. operations where the functional currency is the U.S. dollar, are reported net in other revenues in the Consolidated Statements of Income. Amounts Based on Estimates and Assumptions Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other- than-temporary impairments, valuation of deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, derivative financial instruments and hedging activities, income taxes and recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ. Revenues The Company generates revenue from a wide range of investment and insurance products. Principal sources of revenue 63
  • 147. include management, financial advice and service fees, distribution fees, net investment income and premiums. Management, Financial Advice and Service Fees Management, financial advice and service fees relate primarily to fees earned on proprietary mutual funds, separate account and wrap account assets, as well as fees from structured investments and employee benefit plan and institutional investment management and administration services. The Company’s management and risk fees are generally computed as a contractual rate applied to the underlying asset values and are generally accrued daily and collected monthly. Many of the Company’s mutual funds have a performance incentive adjustment (“PIA”). The PIA increases or decreases the level of management fees received based on the specific fund’s relative performance as measured against a designated external index. The Company recognizes PIA fee revenue on a 12 month rolling performance basis. Employee benefit plan and institutional investment management and administration services fees are negotiated and are also generally based on underlying asset values. The Company may receive performance-based incentive fees from structured investments and hedge funds that it manages, which are recognized as revenue at the end of the performance period. Fees from financial planning and advice services are recognized when the financial plan is delivered. Distribution Fees Distribution fees primarily include point-of-sale fees (such as front-load mutual fund fees), premium expense charges on fixed and variable universal life insurance and asset-based fees (such as 12b-1 distribution and servicing-related fees) that are generally based on a contractual fee as a percentage of assets and recognized when earned. Distribution fees also include fees received under marketing support arrangements for sales of mutual funds and other products of other companies, such as through the Company’s wrap accounts, 401(k) plans and on a direct basis, as well as surrender charges on fixed and variable universal life insurance and annuities. Net Investment Income Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial mortgage loans on real estate, policy loans, other investments and cash and cash equivalents; mark-to-market of trading securities and certain derivatives; pro rata share of net income or loss of equity method investments in hedge funds; and realized gains and losses on the sale of securities and charges for securities determined to be other-than-temporarily impaired. Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale, excluding structured securities, and commercial mortgage loans on real estate so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term. For beneficial interests in structured securities, the excess cash flows attributable to a beneficial interest over the initial investment are recognized as interest income over the life of the beneficial interest using the effective yield method. Realized gains and losses on securities, other than trading securities and equity method investments in hedge funds, are recognized using the specific identification method on a trade date basis and charges are recorded when securities are determined to be other-than-temporarily impaired. Net investment income also includes interest expense on non-recourse debt of a consolidated CDO and municipal bond structure. Premiums Premium revenues include premiums on auto and home insurance and traditional life, disability income and long term care insurance. Premiums on auto and home insurance are net of reinsurance premiums and are recognized ratably over the coverage period. Premiums on traditional life, disability income and long term care insurance are net of reinsurance ceded and are recognized as revenue when due. Other Revenues Other revenues include certain charges assessed on fixed and variable universal life insurance and annuities, which consist of cost of insurance charges, certain variable annuity guaranteed benefit rider charges and administration charges against contractholder account balances and are recognized as revenue when assessed. Premiums paid by fixed and variable universal life and annuity contractholders are considered deposits and are not included in revenue. Other revenues related to universal and variable universal life insurance and variable annuities were $516 million, $462 million and $444 million for the years ended December 31, 2006, 2005 and 2004, respectively. Other revenues also include revenues related to certain limited partnerships that were consolidated beginning in 2006. Expenses Compensation and Benefits Compensation and benefits represent compensation-related expenses associated with employees and sales commissions and other compensation paid to financial advisors and registered representatives, net of amounts capitalized and amortized as part of DAC. The Company measures and recognizes the cost of share-based awards granted to employees and directors based on the grant-date fair value of the award. The fair value of each option is estimated on the grant date using a Black-Scholes option-pricing model and is charged to expense on a straight-line basis over the vesting period. The Company recognizes the cost of share-based awards granted to independent contractors on a mark-to-market basis over the vesting period. Interest Credited to Account Values Interest credited to account values represents amounts earned on fixed account values associated with fixed and variable universal life and annuity contracts, equity indexed annuities and investment certificates in accordance with contract provisions. 64
  • 148. Benefits, Claims, Losses and Settlement Expenses Benefits, claims, losses and settlement expenses consist of amounts paid and changes in liabilities held for anticipated future benefit payments under insurance policies and annuity contracts, including benefits paid under optional variable annuity guaranteed benefit riders, along with costs to process and pay such amounts. Amounts are net of benefit payments recovered or expected to be recovered under reinsurance contracts. Benefits, claims, losses and settlement expenses also include amortization of deferred sales inducement costs (“DSIC”). Amortization of Deferred Acquisition Costs Direct sales commissions and other costs deferred as DAC associated with the sale of annuity, insurance and certain mutual fund products are amortized over time. For annuity and universal life contracts, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period. For certain mutual fund products, DAC are generally amortized over fixed periods on a straight-line basis adjusted for redemptions. For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made. For other life, disability income and long term care insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC is not recoverable or if premium rates charged for the contract are changed. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in consolidated results of operations. For annuity, life, disability income and long term care insurance products, key assumptions underlying those long-term projections include interest rates (both earning rates on invested assets and rates credited to policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about interest rates are the primary factor used to project interest margins, while assumptions about rates credited to policyholder accounts and equity market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing the Company’s annuity and insurance businesses during the DAC amortization period. The client asset value growth rate is the rate at which variable annuity and variable universal life insurance contract values are assumed to appreciate in the future. The rate is net of asset fees and anticipates a blend of equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. The Company uses a mean reversion method as a guideline in setting near-term client asset value growth rates based on a long-term view of financial market performance as well as actual historical performance. In periods when market performance results in actual contract value growth at a rate that is different than that assumed, management reassesses the near-term rate in order to continue to project management’s best estimate of long-term growth. The near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. DAC amortization expense recorded in a period when client asset value growth rates exceed management’s near-term estimate will typically be less than in a period when growth rates fall short of management’s near-term estimate. The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless our management identifies a significant deviation over the course of the quarterly monitoring, our management reviews and updates these DAC amortization assumptions annually in the third quarter of each year. Interest and Debt Expense Interest and debt expense primarily includes interest on debt, the impact of interest rate hedging activities and amortization of debt issuance costs, as well as interest on cash collateral received from counterparties in securities lending activities. Separation Costs Separation costs include expenses related to the Company’s separation from American Express. These costs are primarily associated with establishing the Ameriprise Financial brand, 65
  • 149. separating and reestablishing the Company’s technology platforms and advisor and employee retention programs. Other Expenses Other expenses primarily include professional and consultant fees, information technology and communications, facilities and equipment, advertising and promotion and legal and regulatory. Other expenses are net of amounts capitalized as DAC. Other expenses also include expenses related to certain limited partnerships that were consolidated beginning in 2006, which primarily consist of the portion of net income of these partnerships not owned by the Company. Advertising costs are charged to expense in the year in which the advertisement first takes place, except for certain direct-response advertising costs primarily associated with the solicitation of auto and home insurance products. Direct-response advertising expenses directly attributable to the sale of auto and home insurance products are capitalized and generally amortized over the life of the policy. Income Taxes The Company’s provision for income taxes represents the net amount of income taxes that the Company expects to pay or to receive from various taxing jurisdictions in connection with its operations. The Company provides for income taxes based on amounts that the Company believes it will ultimately owe. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items and the realization of certain offsets and credits. Balance Sheet Cash and Cash Equivalents Cash equivalents include time deposits and other highly liquid investments with original maturities of 90 days or less. Investments Investments consist of the following: Available-for-Sale Securities Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet date. Gains and losses are recognized in consolidated results of operations upon disposition of the securities. In addition, losses are also recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default or bankruptcy. The Company also considers the extent to which cost exceeds fair value, the duration of that difference and management’s judgment about the issuer’s current and prospective financial condition, as well as the Company’s ability and intent to hold until recovery. Fair value is generally based on quoted market prices. However, the Company’s Available-for-Sale securities portfolio also contains structured investments of various asset quality, including CDOs (backed by high- yield bonds and bank loans), which are not readily marketable. As a result, the carrying values of these structured investments are based on future cash flow projections that require a significant degree of management judgment as to the amount and timing of cash payments, defaults and recovery rates of the underlying investments and, as such, are subject to change. Commercial Mortgage Loans on Real Estate, Net Commercial mortgage loans on real estate, net reflect principal amounts outstanding less allowances for loan losses. The allowance for loan losses is measured as the excess of the loan’s recorded investment over the present value of its expected principal and interest payments discounted at the loan’s effective interest rate, or the fair value of collateral. Additionally, the level of the allowance for loan losses considers other factors, including historical experience, economic conditions and geographic concentrations. Management regularly evaluates the adequacy of the allowance for loan losses and believes it is adequate to absorb estimated losses in the portfolio. The Company generally stops accruing interest on commercial mortgage loans for which interest payments are delinquent more than three months. Based on management’s judgment as to the ultimate collectibility of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan. Trading Securities and Equity Method Investments in Hedge Funds Trading securities and equity method investments in hedge funds include common stocks, underlying investments of consolidated hedge funds, hedge fund investments managed by third parties and seed money investments. Trading securities are carried at fair value with unrealized and realized gains (losses) recorded within net investment income. The carrying value of equity method investments in hedge funds reflects the Company’s original investment and its share of earnings or losses of the hedge funds subsequent to the date of investment, and approximates fair value. Policy Loans Policy loans include life insurance policy, annuity and investment certificate loans. These loans are carried at the aggregate of the unpaid loan balances, which do not exceed the cash surrender values of underlying products. Other Investments Other investments reflect the Company’s interest in affordable housing partnerships and syndicated loans. Affordable housing partnerships are carried at amortized cost, as the Company has no influence over the operating or financial policies of the 66
  • 150. general partner. Syndicated loans reflect amortized cost less allowance for losses. Separate Account Assets and Liabilities Separate account assets and liabilities are primarily funds held for the exclusive benefit of variable annuity and variable life insurance contractholders. The Company receives investment management fees, mortality and expense risk fees, guarantee fees and cost of insurance charges from the related accounts. Included in separate account liabilities are investment liabilities of Threadneedle which represent the value of the units in issue of the pooled pension funds which are offered by Threadneedle’s subsidiary, Threadneedle Pensions Limited. Receivables Receivables include reinsurance recoverable, consumer banking loans, accrued investment income, brokerage customer receivables, premiums due and other receivables. Reinsurance The Company reinsures a portion of the risks associated with its life and long term care insurance products through reinsurance agreements with unaffiliated insurance companies. Reinsurance is used in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and to effect business-sharing arrangements. To minimize exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers prior to entering into new reinsurance treaties and on a periodic basis during the terms of the treaties. The Company remains primarily liable as the direct insurer on all risks reinsured. Generally, the Company reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products. The Company began reinsuring risks at this level beginning in 2001 for term life insurance and 2002 for variable and universal life insurance. Policies issued prior to these dates are not subject to the same reinsurance levels. The maximum amount of life insurance risk retained by the Company is $750,000 on any policy insuring a single life and $1.5 million on any flexible premium survivorship variable life policy. For existing long term care policies except those sold by RiverSource Life Insurance Co. of New York prior to 1996, the Company retained 50% of the risk and the remaining 50% of the risk was ceded on a coinsurance basis to affiliates of Genworth Financial, Inc. (“Genworth”). Reinsurance recoverable from Genworth related to the Company’s long term care liabilities was $945 million at December 31, 2006, while amounts recoverable from each other reinsurer were much smaller. Risk on variable life and universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis. The Company retains all risk for new claims on disability income contracts. Risk is currently managed by limiting the amount of disability insurance written on any one individual. The Company also retains all accidental death benefit and almost all waiver of premium risk. For the years ended December 31, 2006, 2005 and 2004, net premiums earned on life, long term care and disability income insurance products were $394 million, $370 million and $352 million, respectively, which included reinsurance assumed of $3 million, $2 million and $4 million, respectively, and were net of amounts ceded under all reinsurance agreements of $170 million, $176 million and $160 million, respectively. Reinsurance recovered from reinsurers was $115 million, $106 million and $73 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company also reinsures a portion of the risks associated with our personal auto and home insurance products through two types of reinsurance agreements with unaffiliated reinsurance companies. We purchase reinsurance with a limit of $5 million per loss and we retain $350,000 per loss. We purchase catastrophe reinsurance and retain $6 million of loss per event with loss recovery up to $74 million per event. Consumer Banking Loans Included in receivables at December 31, 2006 are consumer banking loans of $506 million, net of allowance for loan losses. The lending portfolio primarily consists of home equity lines of credit and secured and unsecured lines of credit. Brokerage Customer Receivables At December 31, 2006 and 2005, brokerage customer receivables included receivables that represent credit extended to brokerage customers to finance their purchases of securities on margin of $196 million and $248 million, respectively, and other customer receivables of $39 million and $31 million, respectively. Brokerage margin loans are generally collateralized by securities with market values in excess of the amounts due. Deferred Acquisition Costs DAC represent the costs of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity and insurance products and, to a lesser extent, certain mutual fund products. These costs are deferred to the extent they are recoverable from future profits or premiums. Restricted and Segregated Cash Total restricted cash at December 31, 2006 and 2005 was $120 million and $5 million, respectively, which cannot be utilized for operations. The Company’s restricted cash at December 31, 2006 primarily related to certain limited partnerships that were consolidated beginning in 2006. Restricted cash at December 31, 2005 primarily related to Threadneedle. At both December 31, 2006 and 2005, amounts segregated under federal and other regulations reflect resale agreements of $1.1 billion segregated in special bank accounts for the benefit of the Company’s brokerage customers. The Company’s policy is to take possession of securities purchased under agreements to resell. Such securities are valued daily and additional collateral is obtained when appropriate. 67
  • 151. Other Assets Other assets include land, buildings, equipment and software, goodwill and other intangible assets, deferred sales inducement costs, derivatives and other miscellaneous assets. Other assets in 2006 also include assets related to consolidated limited partnerships. Land, Buildings, Equipment and Software Land, buildings, equipment and software are carried at cost less accumulated depreciation or amortization. The Company capitalizes certain costs to develop or obtain software for internal use. The Company generally uses the straight-line method of depreciation and amortization over periods ranging from three to 30 years. At December 31, 2006 and 2005, land, buildings, equipment and software were $705 million and $658 million, respectively, net of accumulated depreciation of $781 million and $668 million, respectively. Depreciation and amortization expense for the years ended December 31, 2006, 2005 and 2004 was $128 million, $144 million and $133 million, respectively. Goodwill and Other Intangible Assets Goodwill represents the amount of an acquired company’s acquisition cost in excess of the fair value of assets acquired and liabilities assumed. The Company evaluates goodwill for impairment annually and whenever events and circumstances make it likely that impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting unit. In determining whether impairment has occurred, the Company uses a comparative market multiples approach. Intangible assets are amortized over their estimated useful lives unless they are deemed to have indefinite useful lives. The Company evaluates intangible assets for impairment annually and whenever events and circumstances make it likely that impairment may have occurred, such as a significant adverse change in the business climate. For intangible assets subject to amortization, impairment is recognized if the carrying amount is not recoverable or the carrying amount exceeds the fair value of the intangible asset. Deferred Sales Inducement Costs DSIC consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. Derivative Financial Instruments and Hedging Activities Derivative financial instruments are recorded at fair value within other assets or other liabilities. The fair value of the Company’s derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. The Company currently designates derivatives as cash flow hedges or hedges of net investment in foreign operations or, in certain circumstances, does not designate derivatives as accounting hedges. Additionally, the Company has also designated derivatives as fair value hedges. For derivative financial instruments that qualify as fair value hedges, changes in the fair value of the derivatives as well as of the corresponding hedged assets, liabilities or firm commitments are recognized in current earnings as a component of net investment income. If a fair value hedge is de-designated or terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings to match the earnings pattern of the hedged item. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income. If a hedge is de-designated or terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is recognized into earnings over the period that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately. For derivative financial instruments that qualify as net investment hedges in foreign operations, the effective portions of the change in fair value of the derivatives are recorded in accumulated other comprehensive income (loss) as part of the foreign currency translation adjustment. Any ineffective portions of net investment hedges are recognized in net investment income during the period of change. For derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings, generally as a component of net investment income. Derivative financial instruments that are entered into for hedging purposes are designated as such at the time the Company enters into the contract. For all derivative financial instruments that are designated for hedging activities, the Company formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. The Company formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value 68
  • 152. or cash flows of hedged items. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue the application of hedge accounting. Future Policy Benefits and Claims Fixed Annuities and Variable Annuity Guarantees Future policy benefits and claims related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status. Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges. The majority of the variable annuity contracts offered by the Company contain guaranteed minimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. The Company also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits. In addition, the Company offers contracts containing guaranteed minimum income benefit (“GMIB”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions. In determining the liabilities for variable annuity death benefits and GMIB, the Company projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management will review and, where appropriate, adjust its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will review and update these assumptions annually in the third quarter of each year. The variable annuity death benefit liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees). If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments. GMWB and GMAB provisions are considered embedded derivatives and are recorded at fair value. The fair value of these embedded derivatives is based on the present value of future benefits less applicable fees charged for the provision. Changes in fair value are reflected in benefits, claims, losses and settlement expenses. Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the market value of embedded equity options. Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2006, depending on year of issue, with an average rate of approximately 5.9%. Life, Disability Income and Long Term Care Insurance Future policy benefits and claims related to life, disability income and long term care insurance include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, disability income and long term care policies as claims are incurred in the future. Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values. Accumulation values are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts withdrawn by policyholders. Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported disability income and long term care claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for the Company’s experience. Interest rates used with disability income claims range from 3.0% to 8.0% at December 31, 2006, with an average rate of 5.0%. Interest rates used with long term care claims range from 4.0% to 7.0% at December 31, 2006, with an average rate of 4.4%. Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported. Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, disability income and long term care policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets 69
  • 153. supporting the liability. Anticipated mortality and morbidity rates are based on established industry mortality and morbidity tables, with modifications based on the Company’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life range from 4.0% to 10.0% at December 31, 2006, depending on policy form, issue year and policy duration. Anticipated interest rates for disability income are 7.5% at policy issue grading to 5.0% over five years. Anticipated discount rates for long term care are currently 5.4% at December 31, 2006 grading up to 9.4% over 40 years. Where applicable, benefit amounts expected to be recoverable from other insurers who share in the risk are separately recorded as reinsurance recoverable within receivables. The Company issues only non-participating life and health insurance policies, which do not pay dividends to policyholders from realized policy margins. Auto and Home Reserves Auto and home reserves include amounts determined from loss reports on individual claims, as well as amounts, based on historical loss experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the reserve amounts are adequate at December 31, 2006 and 2005, the ultimate liability may be in excess of or less than the amounts provided. The Company’s methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in consolidated results of operations in the period such adjustments are made. Customer Deposits Customer deposits primarily include investment certificate reserves and banking and brokerage customer deposits. Investment certificates may be purchased either with a lump sum or installment payments. Certificate product owners are entitled to receive, at maturity, a definite sum of money. Payments from certificate owners are credited to investment certificate reserves. Investment certificate reserves generally accumulate interest at specified percentage rates. Reserves are maintained for advance payments made by certificate owners, accrued interest thereon and for additional credits in excess of minimum guaranteed rates and accrued interest thereon. On certificates allowing for the deduction of a surrender charge, the cash surrender values may be less than accumulated investment certificate reserves prior to maturity dates. Cash surrender values on certificates allowing for no surrender charge are equal to certificate reserves. Certain certificates offer a return based on the relative change in a stock market index. The certificates with an equity-based return contain embedded derivatives, which are carried at fair value within other liabilities. The fair value of these embedded derivatives incorporates current market data inputs. Changes in fair value are reflected in interest credited to account values. Banking customer deposits are amounts payable to banking customers who hold money market, savings, checking accounts and certificates of deposit with Ameriprise Bank, FSB. Brokerage customer deposits are amounts payable to brokerage customers related to credit balances and other customer funds pending completion of securities transactions. The Company pays interest on certain customer credit balances and the interest is included in interest and debt expense. Other Liabilities Other liabilities include derivatives and miscellaneous liabilities and in 2006 also include minority interests of consolidated limited partnerships. 3. Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 consolidated results of operations and financial condition. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 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. Early adoption is permitted provided that the entity has not issued financial statements for any period within the year of adoption. 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 SFAS 157 on its consolidated results of operations and financial condition. 70
  • 154. In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 does not change the SEC staff’s previous positions in SAB No. 99, “Materiality,” regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 was effective for fiscal years ending after November 15, 2006. The effect of adopting SAB 108 on the Company’s consolidated results of operations and financial condition was insignificant. 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. The effect of adopting FIN 48 on the Company’s consolidated results of operations and financial condition was not material. 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 on the Company’s results of operations and financial condition is not expected to be significant. Effective January 1, 2006, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 provides guidance on whether a limited partnership or similar entity that is not a VIE should be consolidated by one of its partners. EITF 04-5 was effective for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements were modified after June 29, 2005. For general partners in all other limited partnerships, this guidance was effective no later than January 1, 2006. The adoption of EITF 04-5 resulted in the consolidation of certain limited partnerships for which the Company is the general partner. The effect of this consolidation as of January 1, 2006 was a net increase in total assets and total liabilities of $427 million, consisting of $14 million of investments (net of $153 million of investments as of December 31, 2005 previously accounted for under the equity method), $89 million of restricted cash, $324 million of other assets, $291 million of other liabilities and $136 million of non-recourse debt. The adoption of EITF 04-5 had no net effect on consolidated net income. Effective January 1, 2006, the Company adopted SFAS No. 154, “Accounting Changes and Error Corrections,” (“SFAS 154”). This Statement replaced APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changed the requirements for the accounting for and reporting of a change in accounting principle. The effect of adopting SFAS 154 on the Company’s consolidated results of operations and financial condition was insignificant. Effective January 1, 2006, the Company adopted FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1 and FAS 124-1”). FSP FAS 115-1 and FAS 124-1 address the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The impact of the adoption of FSP FAS 115-1 and FAS 124-1 on the Company’s consolidated results of operations and financial condition was not material. In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“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 by insurance enterprises for DAC associated with any insurance or annuity contract that is internally replaced with another contract or significantly modified. SOP 05-1 is effective for transactions occurring in fiscal years beginning after December 15, 2006. The Company has accounted for many of these transactions as contract continuations and has continued amortization of existing DAC against revenue from the new or modified contract. In addition, the Company has not anticipated these transactions in establishing amortization periods or other DAC valuation assumptions. Many of these 71
  • 155. transactions no longer qualify as continuations under SOP 05-1. Effective with the Company’s adoption of SOP 05-1 as of January 1, 2007, the Company will account for such transactions as contract terminations, which will result in accelerated DAC amortization. As a result of adopting SOP 05-1, the Company has determined that in the first quarter of 2007, it will record as a cumulative change in accounting principle a pretax reduction to DAC of approximately $210 million and an after-tax decrease to retained earnings of approximately $137 million. The adoption of SOP 05-1 is also expected to result in an increase in DAC amortization in 2007. The expected increase to amortization expense may vary depending upon future changes in underlying valuation assumptions. Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires entities to measure and recognize the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature. The effect of adopting SFAS 123(R) on the Company’s consolidated results of operations and financial condition, using a modified prospective application, was insignificant. In March 2005, the SEC issued SAB No. 107 (“SAB 107”), which summarizes the staff’s views regarding share-based payment arrangements for public companies. The Company took into account the views included in SAB 107 in its adoption of SFAS 123(R). Effective January 1, 2004, the Company adopted SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). SOP 03-1 provides guidance on: (i) the classification and valuation of long-duration contract liabilities; (ii) the accounting for sales inducements; and (iii) separate account presentation and valuation. The adoption of SOP 03-1 resulted in a cumulative effect of accounting change that reduced first quarter 2004 results by $71 million ($109 million pretax). The cumulative effect of accounting change consisted of: (i) $43 million pretax from establishing additional liabilities for certain variable annuity guaranteed benefits ($33 million) and from considering these liabilities in valuing DAC and DSIC associated with those contracts ($10 million); and (ii) $66 million pretax from establishing additional liabilities for certain variable universal life and single pay universal life insurance contracts under which contractual costs of insurance charges are expected to be less than future death benefits ($92 million) and from considering these liabilities in valuing DAC associated with those contracts ($26 million offset). Prior to the Company’s adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. Amounts expensed in 2004 to establish and maintain additional liabilities for certain variable annuity guaranteed benefits were $53 million (of which $33 million was part of the adoption charges described previously). The Company’s accounting for separate accounts was already consistent with the provisions of SOP 03-1 and, therefore, there was no impact related to this requirement. The AICPA released a series of technical practice aids (“TPAs”) in September 2004, which provide additional guidance related to, among other things, the definition of an insurance benefit feature and the definition of policy assessments in determining benefit liabilities, as described within SOP 03-1. The TPAs did not have a material effect on the Company’s calculation of liabilities that were recorded in the first quarter of 2004 upon adoption of SOP 03-1. 4. 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. In preparation for the disposition, Ameriprise Financial approved a stock split of its 100 common shares entirely held by American Express into 246 million common shares. 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”). The Distribution was effectuated through a pro-rata dividend to American Express shareholders consisting of one share of Ameriprise Financial common stock for every five shares of American Express common stock owned by its shareholders on September 19, 2005, the record date. Prior to August 1, 2005, Ameriprise Financial was named American Express Financial Corporation. In connection with the Separation and Distribution, Ameriprise Financial entered into the following transactions with American Express: • Effective August 1, 2005, the Company transferred its 50% ownership interest and the related assets and liabilities of its subsidiary, American Express International Deposit Company (“AEIDC”), to American Express for $164 million through a non-cash dividend equal to the net book value excluding $26 million of net unrealized investment losses of AEIDC. In connection with the AEIDC transfer, American Express paid the Company a $164 million capital contribution. The results of operations and cash flows of AEIDC are shown as discontinued operations in the accompanying Consolidated Financial Statements. • Effective July 1, 2005, the Company’s subsidiary, AMEX Assurance Company (“AMEX Assurance”), ceded 100% of its travel insurance and card related business offered to American Express customers to an American Express subsidiary in return for an arm’s length ceding fee. As of September 30, 2005, the Company entered into an agreement to sell the AMEX Assurance legal entity to American Express on or before September 30, 2007 for a fixed price equal to the net book value of AMEX Assurance 72
  • 156. as of the Distribution, which was approximately $115 million. These transactions created a variable interest entity, for U.S. GAAP purposes, for which the Company is not the primary beneficiary. Accordingly, the Company deconsolidated AMEX Assurance for U.S. GAAP purposes as of September 30, 2005. • A tax allocation agreement with American Express was signed effective September 30, 2005. • American Express provided the Company a capital contribution of approximately $1.1 billion, which is in addition to the $164 million capital contribution noted above. • Ameriprise Financial and American Express completed the split of the American Express Retirement Plan, which resulted in additional pension liability in 2006 and 2005 of $5 million and $32 million, respectively, and adjustments to additional paid in capital in 2006 and 2005 of $5 million and $18 million (net of tax), respectively. As a result of the Distribution, Ameriprise Financial entered into an unsecured bridge loan in the amount of $1.4 billion. That loan was drawn down in September 2005 and was repaid using proceeds from a $1.5 billion senior note issuance in November 2005. 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. During the years ended December 31, 2006 and 2005, $361 million ($235 million after-tax) and $293 million ($191 million after-tax), respectively, of such costs were incurred. 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. The Company has terminated or will terminate a particular service after it has completed the procurement of the designated service through arrangements with third parties or through the Company’s own employees. 5. Acquisition of Bank Deposits and Loans On September 29, 2005, the Company and American Express Bank, FSB (“AEBFSB”), a subsidiary of American Express, entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which the Company agreed to purchase assets and assume liabilities, primarily consumer loans and deposits of AEBFSB, upon obtaining a federal savings bank charter. In September 2006, the Company and AEBFSB entered into amendments to the Agreement, pursuant to which the Company agreed to acquire the assets and liabilities from AEBFSB in three phases. Ameriprise Bank, FSB (“Ameriprise Bank”), a wholly-owned subsidiary of the Company, commenced operations in September 2006 subsequent to obtaining the charter and performed the agreement with AEBFSB. For the first phase, which closed on September 18, 2006, Ameriprise Bank acquired $12 million of customer loans, assumed $963 million of customer deposits and received cash of $951 million from AEBFSB. Ameriprise Bank completed the second phase of the agreement in October 2006 with the purchase of $49 million of customer loans for cash consideration and completed the final phase in November 2006 with the purchase of $432 million in customer loans for cash consideration. The assets acquired and liabilities assumed were recorded at fair value. Separately, on October 23, 2006, the Company purchased $33 million of secured loans from American Express Credit Corporation for cash consideration. These loans were made to the Company’s customers and are secured by the customers’ investment assets and/or insurance policies and will be serviced by Ameriprise Bank. The Company recorded the loans purchased at fair value. 6. Discontinued Operations The components of earnings from the discontinued operations of AEIDC were as follows: Years Ended December 31, 2005 2004 (in millions) Net investment income $ 165 $ 222 Expenses: Interest credited to account values 104 84 Other expenses 36 77 Total expenses 140 161 Income before income tax provision 25 61 Income tax provision 9 21 Income from discontinued operations, net of tax $ 16 $ 40 73
  • 157. 7. Sale of Defined Contribution Recordkeeping Business On June 1, 2006, the Company completed the sale of its defined contribution recordkeeping business for $66 million. For the year ended December 31, 2006, the Company incurred $30 million of expenses related to the sale and realized a pretax gain of $36 million. The expenses included a write-down of capitalized software development costs of $17 million and severance costs of $11 million. The administered assets transferred in connection with this sale were approximately $16.7 billion. The Company continues to manage approximately $11.8 billion of defined contribution assets. The buyer of the business is subject to a contingent payment to be paid to the Company based on the level of client revenues retained by the buyer after 18 months from the sale closing date. The payment, if any, will not be determined or paid until the fourth quarter of 2007 and is not expected to be material. 8. Variable Interest Entities The consolidated variable interest entities for which the Company was considered the primary beneficiary relate to structured entities, both managed and partially-owned by the Company. The consolidated structured entities primarily consist of a CDO, which contains debt issued to investors that is non-recourse to the Company and is largely supported by a portfolio of high-yield bonds and loans. The Company manages the portfolio of high-yield bonds and loans for the benefit of CDO debt held by investors and retains an interest in the residual and rated debt tranches of the CDO structure. The Company also consolidates a structured entity which contains debt obligations of $18 million issued to investors that is non-recourse to the Company and supported by a $30 million portfolio of municipal bonds. The following table presents the consolidated assets, essentially all of which are restricted, and other balances related to the consolidated structured entities: December 31, 2006 2005 (in millions) Restricted cash $ — $ 1 Available-for-Sale securities(1) 245 192 Loans and other assets 10 6 Total assets $ 255 $ 199 Debt $ 283 $ 225 Accounts payable(2) 18 18 Deferred tax liability 3 3 Total liabilities $ 304 $ 246 (1) Securities are classified as Available-for-Sale and include $10 million ($7 million after-tax) and $9 million ($6 million after-tax) of unrealized appreciation as of December 31, 2006 and 2005, respectively. (2) Represents the non-recourse debt obligations of a consolidated structured entity supported by a $30 million portfolio of municipal bonds. Ongoing results of operations related to the consolidated CDO are non-cash items and primarily relate to interest earned on the portfolio of high-yield bonds, gains and losses on the sale of bonds and loans and interest paid on the CDO debt and, to a much lesser extent, interest income on loans and provision expense for loan loss reserves. Changes in value of the portfolio of high-yield bonds will be reflected within other comprehensive income (loss) unless a decline in value is determined to be other-than-temporary, in which case a charge will be recorded within the consolidated results of operations. These impacts will be dependent upon market factors during such time and will result in periodic net operating income or expense. The Company expects, in the aggregate, such operating income or expense related to the CDO to reverse itself over time as the structure matures, because the debt issued to the investors in the consolidated CDO is non-recourse to the Company, and further reductions in the value of the related assets will be absorbed by the third party investors. During the years ended December 31, 2005 and 2004, the Company had consolidated secured loan trusts (“SLTs”) which provided returns to investors primarily based on the performance of an underlying portfolio of high-yield loans and which were managed by the Company. One of the consolidated SLTs was liquidated in 2004 and the remaining two SLTs were liquidated in 2005, resulting in no consolidated SLTs at December 31, 2005. Consolidated results of operations for the year ended December 31, 2005 included investment income related to the liquidated SLTs of $14 million. Consolidated results of operations for the year ended December 31, 2004 included non-cash charges related to the liquidated SLTs of $28 million, comprised of a $24 million charge related to the complete liquidation of one SLT in 2004 and a $4 million charge related to the expected impact of liquidating the two remaining SLTs in 2005. The Company has other significant variable interests for which it is not the primary beneficiary and, therefore, does not consolidate. These interests are represented by carrying values of $46 million of CDOs managed by the Company, $134 million of affordable housing partnerships and approximately $115 million related to AMEX Assurance. For the CDOs managed by the Company, the Company has evaluated its variability in losses and returns considering its investment levels, which are less than 50% of the residual tranches, and the fee received from managing the structures and has determined that consolidation is not required. The Company manages approximately $7 billion of underlying collateral within the CDOs it manages. The Company’s maximum exposure to loss as a result of its investment in these entities is represented by the carrying values. The Company is a limited partner in affordable housing partnerships in which the Company has a less than 50% interest in the partnerships and receives the benefits and accepts the risks consistent with other limited partners. In the limited cases in which the Company has a greater than 50% interest in affordable housing partnerships, it was determined that the relationship with the general partner is an agent relationship and the general 74
  • 158. partner was most closely related to the partnership as it is the key decision maker and controls the operations. The Company’s maximum exposure to loss as a result of its investment in these entities is represented by the carrying values. AMEX Assurance maintains the required licenses to offer insurance in various states and both IDS Property Casualty Insurance Company (“IDS Property Casualty”), a subsidiary of the Company, and American Express utilize those licenses to offer their products in exchange for a ceding fee. AMEX Assurance entered into separate reinsurance agreements with IDS Property Casualty and American Express to transfer insurance related risks to the respective companies. Effective September 30, 2005, the Company entered into an agreement to sell its interest in the AMEX Assurance legal entity to American Express on or before September 30, 2007 for a fixed price. This transaction, combined with the ceding of all travel and other card insurance business to American Express, created a variable interest entity for which the Company has a significant interest but is not the primary beneficiary based on the Company’s variability in losses and returns relative to other variable interest holders. Accordingly, the Company deconsolidated AMEX Assurance as of September 30, 2005. The consolidated results of operations for the nine months ended September 30, 2005 and year ended December 31, 2004 included AMEX Assurance, which had net income in those periods of $56 million and $103 million, respectively. The maximum exposure to loss as a result of the Company’s interest in AMEX Assurance is its carrying value determined by the agreed-upon fixed sales price, which was approximately $115 million. 9. Investments The following is a summary of investments: December 31, 2006 2005 (in millions) Available-for-Sale securities, at fair value $ 34,217 $ 30,880 Commercial mortgage loans on real estate, net 3,146 3,056 Trading securities, at fair value, and equity method investments in hedge funds 676 579 Policy loans 616 652 Other investments 445 386 Total $ 39,100 $ 35,553 The Company began consolidating certain limited partnerships as a result of its adoption of EITF 04-5 as of January 1, 2006. The fair value of trading securities of certain of these consolidated limited partnerships was $189 million at December 31, 2006 and was $167 million as of January 1, 2006. At December 31, 2005, prior to the Company’s adoption of EITF 04-5, the Company’s interests in these limited partnerships were accounted for as trading securities under the equity method, for which the fair value was $153 million. Available-for-Sale Securities Available-for-Sale securities distributed by type were as follows: December 31, 2006 Gross Gross Amortized Unrealized Unrealized Fair Description of Securities Cost Gains Losses Value (in millions) Corporate debt securities $ 17,026 $ 169 $ (364) $ 16,831 Mortgage and other asset-backed securities 12,524 30 (224) 12,330 Structured investments 46 — — 46 State and municipal obligations 1,042 32 (4) 1,070 U.S. government and agencies obligations 370 14 (6) 378 Foreign government bonds and obligations 117 18 — 135 Common and preferred stocks 53 7 — 60 Other debt 30 — — 30 Total $ 31,208 $ 270 $ (598) $ 30,880 75
  • 159. December 31, 2005 Gross Gross Amortized Unrealized Unrealized Fair Description of Securities Cost Gains Losses Value (in millions) Corporate debt securities $ 18,632 $ 291 $ (300) $ 18,623 Mortgage and other asset-backed securities 14,071 50 (211) 13,910 Structured investments 37 — — 37 State and municipal obligations 879 23 (5) 897 U.S. government and agencies obligations 377 17 (7) 387 Foreign government bonds and obligations 128 17 — 145 Common and preferred stocks 11 3 — 14 Other debt 204 — — 204 Total $ 34,339 $ 401 $ (523) $ 34,217 At December 31, 2006 and 2005, fixed maturity securities, excluding net unrealized appreciation and depreciation, comprised approximately 87% and 88%, respectively, of the Company’s total investments. These securities were rated by Moody’s and Standard & Poor’s (“S&P”), except for approximately $1.4 billion and $1.2 billion of securities at December 31, 2006 and 2005, respectively, which were rated by the Company’s internal analysts using criteria similar to Moody’s and S&P. Ratings on investment grade securities are presented using S&P’s convention and, if the two agencies’ ratings differ, the lower rating was used. A summary by rating, excluding net unrealized appreciation and depreciation, was as follows: December 31, Rating 2006 2005 AAA 43% 44% AA 7 9 A 19 17 BBB 23 24 Below investment grade 7 7 Total 100% 100% At December 31, 2006 and 2005, approximately 42% and 44%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer were greater than 10% of shareholders’ equity. The following table provides information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position: December 31, 2006 Less than 12 months 12 months or more Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses (in millions) Corporate debt securities $ 1,416 $ (19) $ 10,881 $ (345 ) $ 12,297 $ (364) Mortgage and other asset-backed securities 1,134 (7) 8,617 (217 ) 9,751 (224) Structured investments 23 — — — 23 — State and municipal obligations 12 — 90 (4 ) 102 (4) U.S. government and agencies obligations 11 — 246 (6 ) 257 (6) Foreign government bonds and obligations — — 3 — 3 — Common and preferred stocks — — 4 — 4 — Total $ 2,596 $ (26) $ 19,841 $ (572 ) $ 22,437 $ (598) 76
  • 160. December 31, 2005 Less than 12 months 12 months or more Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses (in millions) Corporate debt securities $ 8,445 $ (187) $ 2,771 $ (113 ) $ 11,216 $ (300) Mortgage and other asset-backed securities 7,886 (114) 2,875 (97 ) 10,761 (211) Structured investments 10 — — — 10 — State and municipal obligations 172 (4) 24 (1 ) 196 (5) U.S. government and agencies obligations 193 (4) 97 (3 ) 290 (7) Foreign government bonds and obligations 13 — — — 13 — Common and preferred stocks — — 5 — 5 — Total $ 16,719 $ (309) $ 5,772 $ (214 ) $ 22,491 $ (523) In evaluating potential other-than-temporary impairments, the Company considers the extent to which amortized cost exceeds fair value and the duration of that difference. A key metric in performing this evaluation is the ratio of fair value to amortized cost. The following table summarizes the unrealized losses by ratio of fair value to amortized cost as of December 31, 2006: Less than 12 months 12 months or more Total Number Gross Number Gross Number Gross Ratio of Fair Value of Fair Unrealized of Fair Unrealized of Fair Unrealized to Amortized Cost Securities Value Losses Securities Value Losses Securities Value Losses (in millions, except number of securities) 95%–100% 242 $ 2,595 $ (26) 966 $ 18,671 $ (484) 1,208 $ 21,266 $ (510) 90%–95% — — — 63 1,075 (73) 63 1,075 (73) 80%–90% 1 1 — 7 95 (15) 8 96 (15) Total 243 $ 2,596 $ (26) 1,036 $ 19,841 $ (572) 1,279 $ 22,437 $ (598) A majority of the gross unrealized losses related to corporate debt securities and substantially all of the gross unrealized losses related to mortgage and other asset-backed securities were attributable to changes in interest rates. A portion of the gross unrealized losses, particularly related to corporate debt securities, was also attributable to credit spreads and specific issuer credit events. As noted in the table above, a significant portion of the gross unrealized losses relates to securities that have a fair value to amortized cost ratio of 95% or above, resulting in an overall 97% ratio of fair value to amortized cost for all securities with an unrealized loss. From an overall perspective, the gross unrealized losses were not concentrated in any individual industries or with any individual securities. However, the securities with a fair value to amortized cost ratio of 80%-90% primarily relate to the auto, home building and gaming industries. The largest unrealized loss associated with an individual issuer, excluding GNMA, FNMA and FHLMC mortgage-backed securities, was $5 million. The securities related to this issuer have a fair value to amortized cost ratio of 95%-100% and have been in an unrealized loss position for more than 12 months. There were no securities with a fair value to amortized cost ratio less than 80% in the portfolios. The Company monitors the investments and metrics described previously on a quarterly basis to identify and evaluate investments that have indications of possible other-than-temporary impairments. As stated earlier, the Company’s ongoing monitoring process has revealed that a significant portion of the gross unrealized losses on its Available-for-Sale securities are attributable to changes in interest rates. Additionally, the Company has the ability and intent to hold these securities for a time sufficient to recover its amortized cost and has, therefore, concluded that none had other-than-temporary impairment at December 31, 2006. The change in net unrealized securities gains (losses) in other comprehensive income includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period (holding gains (losses)); (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales and other-than-temporary impairments of Available-for-Sale securities (reclassification of realized gains (losses)); and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC and annuity liabilities to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates. 77
  • 161. The following table presents the components of the change in net unrealized securities gains (losses), net of tax, included in other comprehensive income: Years Ended December 31, 2006 2005 2004 (in millions) Net unrealized securities gains (losses) at January 1 $ (129) $ 425 $ 502 Holding gains (losses), net of tax of $54, $303 and $12, respectively (562) 22 (101) Reclassification of realized gains, net of tax of $17, $18 and $15, respectively (34) (27) (33) DAC, DSIC and annuity liabilities, net of tax of $41, $30 and $30, respectively 55 (56) 76 Net realized securities losses related to discontinued operations, net of tax of nil, $7 and $9, respectively (13) (16) — Net unrealized securities gains (losses) at December 31 $ (187) $ (129) $ 425 Available-for-Sale securities by maturity at December 31, 2006 were as follows: Amortized Fair Cost Value (in millions) Due within one year $ 820 $ 822 Due after one year through five years 8,031 7,978 Due after five years through 10 years 7,711 7,545 Due after 10 years 2,023 2,099 18,585 18,444 Mortgage and other asset-backed securities 12,524 12,330 Structured investments 46 46 Common and preferred stocks 53 60 Total $ 31,208 $ 30,880 The expected payments on mortgage and other asset-backed securities and structured investments may not coincide with their contractual maturities. As such, these securities, as well as common and preferred stocks, were not included in the maturities distribution. Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, were as follows: Years Ended December 31, 2006 2005 2004 (in millions) Gross realized gains from sales 66 $ 137 $ 65 $ Gross realized losses from sales (64) (21) (14 ) Other-than-temporary impairments (21) (2) (2 ) The $2 million of other-than-temporary impairments in 2006 related to a corporate bond held in the consolidated CDO. The $21 million of other-than-temporary impairments in 2005 primarily related to corporate debt securities within the auto industry which were downgraded in 2005 and subsequently deteriorated throughout the year in terms of their fair value to amortized cost ratio. The $2 million of other-than-temporary impairments in 2004 related to four issuers within corporate debt securities. The consolidated CDO included corporate debt securities with a fair value at December 31, 2006 and 2005 of $160 million and $214 million, respectively. The debt securities are largely high-yield bonds and, although they are in the Available-for-Sale category, they are not available for the general use of the Company as they are for the benefit of CDO debt holders. As of December 31, 2004, the Company held retained interests in a nonconsolidated CDO securitization to which it transferred a majority of its rated CDO securities. The retained interests had a carrying value of $705 million, of which $523 million was considered investment grade. The Company sold all of its retained interests in the CDO securitization during 2005 generating a $36 million net gain. Commercial Mortgage Loans on Real Estate, Net The following is a summary of commercial mortgage loans on real estate: December 31, 2006 2005 (in millions) Commercial mortgage loans on real estate $ 3,096 $ 3,190 Less: allowance for loan losses (44) (40) Commercial mortgage loans on real estate, net $ 3,056 $ 3,146 Commercial mortgage loans are first mortgages on real estate. The Company holds the mortgage documents, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements. At December 31, 2006 and 2005, the Company’s recorded investment in impaired commercial mortgage loans on real estate was nil and $14 million, respectively, with related allowances for loan losses of nil and $4 million, respectively. During 2006 and 2005, the average recorded investment in impaired commercial mortgage loans on real estate was $3 million and $8 million, respectively. For the years ended December 31, 2006, 2005 and 2004, the Company recognized interest income related to impaired commercial mortgage loans on real estate of nil, nil and $1 million, respectively. 78
  • 162. The balances of and changes in the allowance for loan losses were as follows: Years Ended December 31, 2006 2005 2004 (in millions) Balance at January 1 44 $ 49 $ 54 $ Provision for loan losses — 9 — Foreclosures, write-offs and loan sales (5) (14) (4) Balance at December 31 40 $ 44 $ 49 $ Concentrations of credit risk of commercial mortgage loans on real estate by region were as follows: December 31, 2006 2005 On-Balance Funding On-Balance Funding Sheet Commitments Sheet Commitments (in millions) Commercial mortgage loans by U.S. region: North Central $ 919 $ 6 $ 813 $ 22 Atlantic 920 22 921 40 Mountain 390 16 332 13 Pacific 422 27 446 15 South Central 351 24 374 2 New England 188 21 210 2 3,190 116 3,096 94 Less: allowance for loan losses (44) — (40) — Total $ 3,146 $ 116 $ 3,056 $ 94 Concentrations of credit risk of commercial mortgage loans on real estate by property type were as follows: December 31, 2006 2005 On-Balance Funding On-Balance Funding Sheet Commitments Sheet Commitments (in millions) Commercial mortgage loans by U.S. property type: Office buildings $ 1,170 $ 31 $ 1,064 $ 4 Shopping centers and retail 754 36 763 71 Apartments 504 10 519 2 Industrial buildings 492 19 495 12 Hotels and motels 99 6 95 4 Medical buildings 65 3 58 — Retirement homes 5 — — — Other 101 11 102 1 3,190 116 3,096 94 Less: allowance for loan losses (44) — (40) — Total $ 3,146 $ 116 $ 3,056 $ 94 Commitments to fund commercial mortgages were made in the ordinary course of business. The funding commitments at December 31, 2006 and 2005 approximate fair value. Trading Securities and Equity Method Investments in Hedge Funds Trading securities and equity method investments in hedge funds were primarily comprised of investments in mutual funds managed by the Company, securities within consolidated hedge funds and other hedge funds managed by third parties. Net gains related to trading securities and equity method investments in hedge funds for the years ended December 31, 2006, 2005 and 2004 were $41 million, $27 million and $50 million, respectively. 79
  • 163. 10. Deferred Acquisition Costs and Deferred Sales Inducement Costs The balances of and changes in DAC were as follows: Years Ended December 31, 2006 2005 2004 (in millions) Balance at January 1 $ 4,182 $ 3,956 $ 3,743 Impact of SOP 03-1 — 20 — Capitalization of acquisition costs 693 621 744 DAC transfer related to AMEX Assurance ceding arrangement (117) — — Amortization, excluding impact of changes in assumptions (498) (517) (498 ) Amortization, impact of annual third quarter changes in DAC-related assumptions 67 24 38 Amortization, impact of other quarter changes in DAC-related assumptions(1) — 56 (12 ) Impact of change in net unrealized securities losses 81 9 45 Balance at December 31 $ 4,499 $ 4,182 $ 3,956 (1) Amount in 2006 was primarily related to a $28 million reduction to DAC balances (and increase to DAC amortization expense) related to auto and home insurance products, partially offset by $15 million of other adjustments to decrease DAC amortization expense. Amount in 2004 was primarily related to a $66 million reduction in DAC amortization expense to reflect the lengthening of the amortization periods for certain annuity and life insurance products impacted by the Company’s adoption of SOP 03-1 on January 1, 2004, partially offset by a $10 million increase in amortization expense due to a long term care DAC valuation system conversion. The balances of and changes in DSIC were as follows: Years Ended December 31, 2006 2005 2004 (in millions) Balance at January 1 $ 370 $ 303 $ 279 Impact of SOP 03-1 — (3) — Capitalization of sales inducements 94 71 126 Amortization (40) (34) (48) Impact of change in net unrealized securities losses (gains) 13 (10) 4 Balance at December 31 $ 452 $ 370 $ 303 11. Goodwill and Other Intangibles Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are instead subject to impairment tests. Management completed goodwill impairment tests during the years ended December 31, 2006, 2005 and 2004. Such tests did not indicate impairment. Definite-lived intangible assets consisted of the following: December 31, 2006 2005 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount (in millions) Customer relationships 26 $ 35 $ (8) $ 27 $ 39 $ (13) $ Contracts 138 (33) 105 140 (44) 96 Other 128 (22) 106 144 (33) 111 Total 233 $ 301 $ (63) $ 238 $ 323 $ (90) $ As of December 31, 2006 and 2005, the Company did not have identifiable intangible assets with indefinite useful lives. The aggregate amortization expense for these intangible assets during the years ended December 31, 2006, 2005 and 2004 was $20 million, $28 million and $29 million, respectively. These assets have a weighted-average useful life of 12 years. 80
  • 164. Estimated amortization expense associated with intangible assets is as follows: (in millions) 2007 $ 26 2008 24 2009 24 2010 22 2011 18 The changes in the carrying amount of goodwill reported in the Company’s segments were as follows: Asset Accumulation and Income Protection Consolidated (in millions) Balance at January 1, 2005(1) $ 582 $ 51 $ 633 Acquisitions 5 — 5 Foreign currency translation and other adjustments(2) (61 ) — (61) Balance at December 31, 2005(1) 526 51 577 Acquisitions 4 — 4 Foreign currency translation and other adjustments(2) 57 — 57 Balance at December 31, 2006 $ 587 $ 51 $ 638 (1) Balances have been retroactively adjusted to reflect changes in segments effective January 1, 2006. (2) Primarily reflects foreign currency translation adjustments related to Threadneedle. 12. Future Policy Benefits and Claims and Separate Account Liabilities Future policy benefits and claims consisted of the following: December 31, 2006 2005 (in millions) Fixed annuities $ 16,841 $ 18,793 Equity indexed annuities accumulated host values 296 267 Equity indexed annuities embedded derivative reserve 38 50 Variable annuities fixed sub-accounts 6,999 5,975 GMWB variable annuity guarantees 9 (12) Other variable annuity guarantees 21 26 Total annuities 26,156 23,147 VUL/UL insurance contract reserves 2,552 2,562 Other life, disability income and long term care insurance 3,604 3,852 Auto and home reserves 327 381 Policy claims and other policyholders’ funds 92 91 Total $ 30,033 $ 32,731 Separate account liabilities consisted of the following: December 31, 2006 2005 (in millions) Variable annuity contract reserves $ 33,152 $ 43,515 VUL insurance contract reserves 4,775 5,772 Threadneedle investment liabilities 3,634 4,561 Total $ 41,561 $ 53,848 81
  • 165. Fixed Annuities Fixed annuities include both deferred and payout contracts. Deferred contracts offer a guaranteed minimum rate of interest and security of the principal invested. Payout contracts guarantee a fixed income payment for life or the term of the contract. The Company generally invests the proceeds from the annuity deposits in fixed rate securities. The interest rate risks under these obligations are partially hedged with derivative instruments. These derivatives are cash flow hedges of interest credited on forecasted sales rather than a hedge of in-force risk. These derivatives consisted of interest rate swaptions with a notional value of $1.2 billion at both December 31, 2006 and 2005. The fair value of these swaptions was $2 million and $8 million at December 31, 2006 and 2005, respectively. Equity Indexed Annuities The Index 500 Annuity, the Company’s equity indexed annuity product, is a single premium deferred fixed annuity. The contract is issued with an initial term of seven years and interest earnings are linked to the S&P 500 Index. This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders. The Company generally invests the proceeds from the annuity deposits in fixed rate securities and hedges the equity risk with derivative instruments. The equity component of these annuities is considered an embedded derivative and is accounted for separately. The change in fair value of the embedded derivative reserve is reflected in interest credited to account values. As a means of economically hedging its obligation under the stock market return provision, the Company purchases and writes index options and enters into futures contracts. The changes in the fair value of these hedge derivatives are included in net investment income. The notional amounts and fair value assets (liabilities) of these options and futures were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased options and futures 40 $ 358 $ 30 $ 271 $ Written options (101) (1) (67 ) (1) Variable Annuities Purchasers of variable annuities can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for variable annuity contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders. Most of the variable annuity contracts issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB, GGU and GMIB provisions. The GMWB and GMAB provisions are considered embedded derivatives and are accounted for separately. The changes in fair values of these embedded derivative reserves are reflected in benefits, claims, losses and settlement expenses. The negative reserve in GMWB at December 31, 2006 reflects that under current conditions and expectations, the Company believes the applicable fees charged for the rider will more than offset the future benefits paid to policyholders under the rider provisions. The Company does not currently hedge its risk under the GMAB, GMDB, GGU and GMIB provisions. The total value of variable annuity contracts with GMWB riders increased from $2.5 billion at December 31, 2005 to $7.2 billion at December 31, 2006. As a means of economically hedging its obligation under the GMWB provisions, the Company purchases structured equity put options, enters into interest rate swaps and trades equity futures contracts. The changes in the fair value of these hedge derivatives are included in net investment income. The notional amounts and fair value assets (liabilities) of these options, swaps and futures were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased options $ 1,410 $ 171 $ 629 $ 95 Interest rate swaps — — 359 (1) Sold equity futures — — (111 ) — Insurance Liabilities VUL/UL is the largest group of insurance policies written by the Company. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for VUL contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders. The Company also offers term and whole life insurance as well as disability products. The Company no longer offers long term care products but has in-force policies from prior years. Ameriprise Auto & Home Insurance offers auto and home coverage directly to customers and through marketing alliances. Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims and obligations for anticipated future claims. Threadneedle Investment Liabilities Threadneedle provides a range of unitized pooled pension funds, which invest in property, stocks, bonds and cash. These funds are part of the long-term business fund of Threadneedle’s subsidiary, Threadneedle Pensions Limited. The investments are selected by the clients and are based on the level of risk they are willing to assume. All investment performance, net of fees, is passed through to the investors. The value of the liabilities represents the value of the units in issue of the pooled pension funds. 82
  • 166. 13. Variable Annuity Guarantees The majority of the variable annuity contracts offered by the Company contain GMDB provisions. The Company also offers GGU provisions on variable annuities with death benefit provisions and contracts containing GMIB provisions. The Company has established additional liabilities for these variable annuity death benefits and GMIB provisions. The variable annuity contracts offered by the Company may also contain GMWB and GMAB provisions, which are considered embedded derivatives. The Company has established additional liabilities for these embedded derivatives at fair value. The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on equity market performance. Most of the GMWB in-force guarantee that over a period of approximately 14 years the client can withdraw an amount equal to what has been paid into the contract, regardless of the performance of the underlying funds. In May 2006, the Company began offering an enhanced withdrawal benefit that gives policyholders a choice to withdraw 6% per year for the life of the policyholder or 7% per year until the amount withdrawn is equal to the guaranteed amount. At issue, the guaranteed amount is equal to the amount deposited, but the guarantee can be increased annually to the account value (a “step-up”) in the case of favorable market performance. Variable annuity contract owners age 79 or younger at contract issue can also obtain the principal-back guarantee by purchasing the optional GMAB rider for an additional charge, which provides a guaranteed contract value at the end of a 10-year waiting period. The following table provides summary information related to all variable annuity guarantees for which the Company has established additional liabilities: December 31, Variable Annuity Guarantees by Benefit Type(1) 2006 2005 (in millions, except age) Contracts with GMDB providing for return of premium: Total contract value $ 9,107 $ 17,418 Contract value in separate accounts $ 7,410 $ 15,859 Net amount at risk(2) $ 17 $ 13 Weighted average attained age 60 61 Contracts with GMDB providing for six-year reset: Total contract value $ 24,608 $ 23,544 Contract value in separate accounts $ 20,362 $ 20,058 Net amount at risk(2) $ 763 $ 227 Weighted average attained age 61 61 Contracts with GMDB providing for one-year ratchet: Total contract value $ 5,129 $ 6,729 Contract value in separate accounts $ 4,211 $ 5,902 Net amount at risk(2) $ 45 $ 26 Weighted average attained age 61 61 Contracts with GMDB providing for five-year ratchet: Total contract value $ 537 $ 907 Contract value in separate accounts $ 502 $ 870 Net amount at risk(2) $ — $ — Weighted average attained age 56 57 Contracts with other GMDB: Total contract value $ 456 $ 586 Contract value in separate accounts $ 390 $ 530 Net amount at risk(2) $ 16 $ 11 Weighted average attained age 63 64 Contracts with GGU death benefit: Total contract value $ 620 $ 811 Contract value in separate accounts $ 536 $ 730 Net amount at risk(2) $ 35 $ 62 Weighted average attained age 61 62 Contracts with GMIB: Total contract value $ 793 $ 928 Contract value in separate accounts $ 712 $ 853 Net amount at risk(2) $ 16 $ 14 Weighted average attained age 60 61 Contracts with GMWB: Total contract value $ 2,542 $ 4,791 Contract value in separate accounts $ 2,510 $ 4,761 Benefit amount in excess of account value $ 1 $ — Weighted average attained age 60 61 83
  • 167. December 31, Variable Annuity Guarantees by Benefit Type(1) 2006 2005 (in millions, except age) Contracts with GMWB for life: Total contract value 2,396 $ — $ Contract value in separate accounts 2,349 $ — $ Benefit amount in excess of account value —$ — $ Weighted average attained age — 63 Contracts with GMAB: Total contract value 1,350 $ 161 $ Contract value in separate accounts 1,340 $ 161 $ Benefit amount in excess of account value —$ 1 $ Weighted average attained age 56 55 (1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. (2) Represents current death benefit less total contract value for GMDB, amount of gross up for GGU and accumulated guaranteed minimum benefit base less total contract value for GMIB and assumes the actuarially remote scenario that all claims become payable on the same day. Additional liabilities (assets) and incurred claims (adjustments) were: Year Ended December 31, 2006 GMDB & GGU GMIB GMWB GMAB (in millions) Liability balance at January 1 $ 16 $ 4$ 9$ 1 Reported claims 8 — — — Liability (asset) balance at December 31 26 5 (12) (5) Incurred claims (adjustments) (sum of reported and change in liability (asset)) 18 1 (21) (6) Year Ended December 31, 2005 GMDB & GGU GMIB GMWB GMAB (in millions) Liability balance at January 1 $ 29 $ 3 $ 1 $ — Reported claims 12 — — — Liability balance at December 31 16 4 9 1 Incurred claims (adjustments) (sum of reported and change in liability) (1 ) 1 8 1 The liabilities for guaranteed benefits are supported by general account assets. Changes in these liabilities are included in benefits, claims, losses and settlement expenses. Contract values in separate accounts were invested in various equity, bond and other funds as directed by the contractholder. No gains or losses were recognized on assets transferred to separate accounts for the periods presented. 14. Customer Deposits Customer deposits consisted of the following: December 31, 2006 2005 (in millions) Fixed rate certificates 3,540 $ 3,687 $ Stock market based certificates 1,094 1,041 Stock market embedded derivative reserve 36 48 Certificates marketed through American Express 732 4 Other 100 87 Less: accrued interest classified in other liabilities (31) (42) Total investment certificate reserves 5,618 4,678 Brokerage deposits 1,023 994 Banking deposits — 853 Total 6,525 $ 6,641 $ 84
  • 168. Investment Certificates The Company offers fixed rate investment certificates primarily in amounts ranging from $1,000 to $1 million with terms ranging from three to 36 months. The Company generally invests the proceeds from these certificates in fixed and variable rate securities. The Company may hedge the interest rate risks under these obligations with derivative instruments. As of December 31, 2006 and 2005, there were no outstanding derivatives to hedge these interest rate risks. Certain investment certificate products have returns tied to the performance of equity markets. The Company guarantees the principal for purchasers who hold the certificate for the full 52-week term and purchasers may participate in increases in the stock market based on the S&P 500 Index, up to a maximum return. Purchasers can choose 100% participation in the market index up to the cap or 25% participation plus fixed interest with a combined total up to the cap. Current in-force certificates have maximum returns of 6% or 7%. The equity component of these certificates is considered an embedded derivative and is accounted for separately. The change in fair values of the embedded derivative reserve is reflected in interest credited to account values. As a means of economically hedging its obligation under the principal guarantee and stock market return provisions, the Company purchases and writes index options and enters into futures contracts. Changes in the fair value of these hedge derivatives are included in net investment income. The notional amounts and fair value assets (liabilities) of these options and futures were as follows: December 31, 2006 2005 Notional Fair Notional Fair Amount Value Amount Value (in millions) Purchased options and futures 104 $ 1,040 $ 74 $ 901 $ Written options (1,094) (38) (962) (56 ) Certificates Marketed through American Express During the third quarter 2005, the Company agreed with American Express Bank Limited (“AEB”), a subsidiary of American Express, to execute an orderly wind-down of the certificate business marketed through AEB and American Express Bank International (“AEBI”). This agreement was effected through amendments to the existing contracts with AEB and AEBI. Under these amendments, as of October 1, 2005, AEB and AEBI no longer market or offer certificate products of the Company. However, compensation at reduced rates will continue to be paid to AEB and AEBI under the agreements until the earlier of the date upon which the business sold or marketed previously by AEB and AEBI no longer remains in effect or termination of the agreements. 15. Debt Debt and the stated interest rates were as follows: Outstanding Stated Balance Interest Rate December 31, December 31, 2006 2005 2006 2005 (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 Medium-term notes due 2006 50 6.6 — — Fixed and floating rate notes due 2011: Floating rate senior notes 151 5.2 85 5.9 Fixed rate notes 79 8.6 85 8.6 Fixed rate senior notes 46 7.2 46 7.2 Fixed rate notes 7 9 13.3 13.3 Total $1,833 $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. The Company may redeem the senior notes, in whole or in part, at any time at its option at the redemption price specified in the prospectus supplement filed with the SEC on November 22, 2005. The proceeds from the issuance were used to repay the approximately $1.4 billion balance outstanding on a bridge loan and to provide capital for other general corporate purposes. 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”) 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 85
  • 169. arrears. The Company has the option to defer interest payments, subject to certain limitations. In addition, interest payments are mandatorily deferred if the Company does not meet specified capital adequacy, net income or shareholders’ equity levels. Upon an optional or mandatory deferral, the Company is subject to certain restrictions on dividends or distributions related to its capital stock, as well as payments of principal, interest or guarantees related to debt securities issued by the Company or its subsidiaries that rank equally with or junior to the junior notes. In addition, in connection with an optional or mandatory deferral, the Company may also be required to sell shares of its common stock to make interest payments. The junior notes mature June 1, 2066. The Company may redeem the junior notes, in whole or in part, on or after June 1, 2016 at the par redemption amount specified in the indenture agreement, as amended, provided that if the junior notes are not redeemed in whole, at least $50 million aggregate principal amount of the junior notes (excluding any junior notes held by the Company or any of its affiliates) remains outstanding after the redemption. Prior to June 1, 2016, the Company may redeem the junior notes in whole but not in part at any time at the make-whole redemption amount specified in the indenture agreement, as amended. The net proceeds from the issuance were for general corporate purposes. The $50 million of unsecured medium-term notes were issued in 1994 in a private placement to institutional investors. The medium- term notes were repaid in 2006. The Company began consolidating certain limited partnerships, including certain property fund limited partnerships, as a result of its adoption of EITF 04-5 as of January 1, 2006. The property funds of these limited partnerships are managed by the Company’s subsidiary, Threadneedle. The effect of this consolidation as of January 1, 2006 included an increase of $136 million in non-recourse debt related to the property funds. In September 2006, the partnerships repaid the outstanding non-recourse debt following a restructuring of the partnership capital. The fixed and floating rate notes due 2011 are non-recourse debt of a 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 December 31, 2006 and 2005, no borrowings were outstanding under this facility. Outstanding letters of credit issued against this facility were $5 million and $1 million as of December 31, 2006 and 2005, 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 December 31, 2006 and 2005. The Company paid to American Express $1.5 billion in September 2005 to close out a $1.1 billion revolving credit facility, pay off a $253 million fixed rate loan and settle a $136 million net intercompany payable. The proceeds from the bridge loan mentioned above were used to repay these obligations. On August 5, 2005, the Company repaid $270 million of intercompany debt and accrued interest related to construction financing using cash received from the transfer of the Company’s 50% ownership interest in AEIDC to American Express and proceeds from the sale of the Company’s interest in a CDO securitization trust. At December 31, 2006, future maturities of debt were as follows: (in millions) 2007 $ — 2008 — 2009 — 2010 800 2011 225 Thereafter 1,200 Total future maturities $ 2,225 16. 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 described below, the transactions have not had a material impact on the Company’s consolidated results of operations or financial condition. Berkshire Hathaway Inc. (“Berkshire”) and subsidiaries owned approximately 3% and 12% of the Company’s common stock at December 31, 2006 and 2005, respectively. 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. Davis Selected Advisors, L.P. or its affiliates (“Davis”) owned approximately 9% and 8% of the Company’s common stock at December 31, 2006 and 2005, respectively. 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 that the Company provides advisory services to, 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. 86
  • 170. FMR Corp. or its affiliates (“FMR”) owned approximately 7% and 6% of the Company’s common stock at December 31, 2006 and 2005, respectively. 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. 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. The Company has entered into various transactions with American Express in the normal course of business. The Company earned approximately $10 million and $11 million during the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively, in revenues from American Express. The Company received approximately $26 million and $70 million for the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively, of reimbursements from American Express for the Company’s participation in certain corporate initiatives. As a result of the Separation, the Company determined it appropriate to reflect certain reimbursements previously received from American Express for costs incurred related to certain American Express corporate initiatives as capital contributions rather than reductions to expense amounts. These amounts were approximately $26 million and $41 million for the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively. 17. 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. In accordance with the Employee Benefits Agreement (“EBA”) entered into between the Company and American Express as part of the Distribution, all American Express stock options and restricted stock awards held by the Company’s employees which had not vested on or before December 31, 2005 were substituted with a stock option or restricted stock award issued under the Ameriprise Financial 2005 Incentive Compensation Plan. All American Express stock options and restricted stock awards held by the Company’s employees that vested on or before December 31, 2005 remained American Express stock options or restricted stock awards. Cash payments for income taxes in 2006 were reduced by $35 million for tax benefits related to the American Express awards that vested on or before December 31, 2005. The components of the Company’s share-based compensation expense, net of forfeitures, were as follows: Years Ended December 31, 2006 2005 2004 (in millions) Stock options $ 22 $ 16 $ 35 Restricted stock awards 33 22 46 Restricted stock units — — 32 Total $ 55 $ 38 $ 113 For the years ended December 31, 2006, 2005, and 2004, the total income tax benefit recognized by the Company related to the share- based compensation expense was $39 million, $19 million and $13 million, respectively. As of December 31, 2006, there was $178 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 3.0 years. Ameriprise Financial 2005 Incentive Compensation Plan The Ameriprise Financial 2005 Incentive Compensation Plan (“2005 ICP”), adopted as of September 30, 2005, allows for the grant of stock and cash incentive awards to employees, directors and independent contractors, including stock options, restricted stock awards, restricted stock units, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction. Under the 2005 ICP, 37.9 million shares of the Company’s common stock have been approved for issuance. Stock Options Stock options granted under the 2005 ICP have an exercise price not less than 100% of the current fair market value of a share of common stock on the grant date and a maximum term of 10 years. The stock options granted generally vest ratably at 25% per year over four years. The Plan provides for accelerated vesting of option awards based on age and length of service. Stock options granted are expensed on a straight-line basis over the option vesting period based on the estimated fair value of the awards on the date of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used for stock option grants in 2006: Dividend yield 1.0% Expected volatility 27% Risk-free interest rate 4.5% Expected life of stock option (years) 4.5 The dividend yield assumption assumes the Company’s dividend payout would continue with no changes. The expected volatility was based on historical and implied volatilities experienced by a 87
  • 171. peer group of companies and the limited trading experience of the Company’s shares. The risk free interest rate for periods within the expected option life is based on the U.S. Treasury yield curve in effect at the grant date. The expected life of the option is based on experience while the Company was a part of American Express and subsequent experience after the Distribution. The weighted average grant date fair value for options granted during 2006 and 2005 was $12.08 and $9.61, respectively. The weighted average grant date fair value of American Express options granted to the Company’s employees in 2005 and 2004 was $12.59 and $13.27, respectively, using a Black-Scholes option-pricing model with the assumptions determined by American Express. The Company has compared the pre-distribution fair value of the American Express options as of September 30, 2005 to the post- distribution fair value of the substituted options under the 2005 ICP using the Company’s stock volatility and other applicable assumptions and determined there was no incremental value associated with the substituted awards. Therefore, the grant date fair values as determined while the Company was a part of American Express will be expensed over the remaining vesting periods for those substituted options. A summary of the Company’s stock option activity is presented below (shares and intrinsic value in millions): Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term (Years) Value Outstanding at January 1, 2006 11.3 $ 31.60 Granted 2.8 43.78 Exercised (0.7) 26.11 Forfeited (0.6) 32.31 Outstanding at December 31, 2006 12.8 34.34 8.1 $ 258 Exercisable at December 31, 2006 2.9 30.88 7.6 68 The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised was $16 million during the year ended December 31, 2006. No options granted under the 2005 ICP were exercised in 2005. Restricted Stock Awards Restricted stock awards granted under the 2005 ICP generally vest ratably at 25% per year over four years or at the end of five years. The Plan provides for accelerated vesting of restricted stock awards based on age and length of service. Compensation expense for restricted stock awards is based on the market price of Ameriprise Financial stock on the date of grant and is amortized on a straight- line basis over the vesting period. Quarterly dividends are paid on restricted stock, as declared by the Company’s Board of Directors, during the vesting period and are not subject to forfeiture. Certain advisors receive a portion of their compensation in the form of restricted stock awards which are subject to forfeiture based on future service requirements. The Company provides a match of these restricted stock awards equal to one half of the restricted stock awards earned. A summary of the Company’s restricted stock award activity is presented below (shares in millions): Weighted Average Grant Date Shares Fair Value Non-vested shares at January 1, 2006 3.7 $ 31.09 Granted 1.4 44.53 Vested (1.1) 29.43 Forfeited (0.3) 35.05 Non-vested shares at December 31, 2006 3.7 36.50 The fair value of restricted stock vesting during the year ended December 31, 2006 was $51 million. Restricted Stock Units In 2005, the Company awarded bonuses to advisors under an advisor and incentive bonus program. The bonuses were converted to 2.0 million share-based awards under the 2005 ICP effective as of the vesting date of January 1, 2006. These awards will be issued in three annual installments beginning in 2006 in the form of Ameriprise Financial common stock. Separation costs of $82 million were recognized during the year ended December 31, 2005 for these bonuses. The number of restricted stock units granted was b