UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                         to

 

Commission File No. 1-32525

 

AMERIPRISE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3180631

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer 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

 

Not Applicable

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

 

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

Yesx     Noo

 

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

 

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

 

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

Yeso     Nox

 

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

 

Class

 

Outstanding at October 29, 2007

Common Stock (par value $.01 per share)

 

231,896,538 shares

 

 



 

AMERIPRISE FINANCIAL, INC.

 

FORM 10-Q

 

INDEX

 

Part I.

Financial Information:

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income – Three months and nine months ended September 30, 2007 and 2006

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2007 and December 31, 2006

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows – Nine months ended September 30, 2007 and 2006

 

5

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2007 and 2006

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

40

 

 

 

 

 

PART II.

Other Information:

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

41

 

 

 

 

 

 

Item 1A.

Risk Factors

 

41

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

 

Item 6.

Exhibits

 

41

 

 

 

 

 

 

Signatures

 

42

 

 

 

 

 

 

Exhibit Index

 

E-1

 

2



 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

 

 

 

 

 

 

 

 

Management, financial advice and service fees

 

$

878

 

$

720

 

$

2,532

 

$

2,151

 

Distribution fees

 

352

 

300

 

1,111

 

926

 

Net investment income

 

552

 

542

 

1,555

 

1,638

 

Premiums

 

246

 

244

 

725

 

693

 

Other revenues

 

174

 

171

 

524

 

571

 

Total revenues

 

2,202

 

1,977

 

6,447

 

5,979

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

855

 

756

 

2,602

 

2,261

 

Interest credited to account values

 

282

 

317

 

872

 

948

 

Benefits, claims, losses and settlement expenses

 

383

 

233

 

832

 

685

 

Amortization of deferred acquisition costs

 

128

 

87

 

387

 

368

 

Interest and debt expense

 

29

 

32

 

93

 

83

 

Separation costs

 

60

 

87

 

208

 

238

 

Other expenses

 

248

 

248

 

775

 

802

 

Total expenses

 

1,985

 

1,760

 

5,769

 

5,385

 

Income before income tax provision

 

217

 

217

 

678

 

594

 

Income tax provision

 

19

 

43

 

119

 

134

 

Net income

 

$

198

 

$

174

 

$

559

 

$

460

 

 

 

 

 

 

 

 

 

 

 

Earnings per Common Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.84

 

$

0.71

 

$

2.35

 

$

1.86

 

Diluted

 

0.83

 

0.71

 

2.32

 

1.85

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

235.4

 

244.5

 

237.8

 

247.6

 

Diluted

 

239.2

 

246.4

 

241.4

 

249.3

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.15

 

$

0.11

 

$

0.41

 

$

0.33

 

 

See Notes to Consolidated Financial Statements.

 

3



 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,972

 

$

2,717

 

Investments

 

31,161

 

35,553

 

Separate account assets

 

62,371

 

53,848

 

Receivables

 

3,079

 

2,960

 

Deferred acquisition costs

 

4,502

 

4,499

 

Restricted and segregated cash

 

1,206

 

1,236

 

Other assets

 

3,563

 

3,359

 

Total assets

 

$

109,854

 

$

104,172

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Future policy benefits and claims

 

$

28,051

 

$

30,033

 

Separate account liabilities

 

62,371

 

53,848

 

Customer deposits

 

6,029

 

6,707

 

Debt

 

2,197

 

2,225

 

Accounts payable and accrued expenses

 

1,688

 

1,788

 

Other liabilities

 

1,760

 

1,646

 

Total liabilities

 

102,096

 

96,247

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common shares ($.01 par value; shares authorized,1,250,000,000; shares issued, 255,684,444 and 252,909,389, respectively)

 

3

 

3

 

Additional paid-in capital

 

4,593

 

4,353

 

Retained earnings

 

4,591

 

4,268

 

Treasury shares, at cost (23,267,227 and 11,517,958 shares, respectively)

 

(1,180

)

(490

)

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

Net unrealized securities losses

 

(226

)

(187

)

Net unrealized derivatives losses

 

(5

)

(1

)

Foreign currency translation adjustment

 

(15

)

(18

)

Defined benefit plans

 

(3

)

(3

)

Total accumulated other comprehensive loss

 

(249

)

(209

)

Total shareholders’ equity

 

7,758

 

7,925

 

Total liabilities and shareholders’ equity

 

$

109,854

 

$

104,172

 

 

See Notes to Consolidated Financial Statements.

 

4



 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

559

 

$

460

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Capitalization of deferred acquisition and sales inducement costs

 

(682

)

(647

)

Amortization of deferred acquisition and sales inducement costs

 

423

 

406

 

Depreciation and amortization

 

126

 

134

 

Deferred income taxes

 

48

 

16

 

Share-based compensation

 

110

 

83

 

Net realized investment gains

 

(28

)

(25

)

Other-than-temporary impairments and provision for loan losses

 

(21

)

2

 

Premium and discount amortization on Available-for-Sale and other securities

 

84

 

94

 

Changes in operating assets and liabilities:

 

 

 

 

 

Segregated cash

 

107

 

152

 

Trading securities and equity method investments in hedge funds, net

 

(10

)

145

 

Future policy benefits and claims, net

 

281

 

(40

)

Receivables

 

(128

)

(286

)

Accounts payable and accrued expenses

 

(114

)

188

 

Other, net

 

(20

)

34

 

Net cash provided by operating activities

 

735

 

716

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

Proceeds from sales

 

3,021

 

2,125

 

Maturities, sinking fund payments and calls

 

2,139

 

2,552

 

Purchases

 

(982

)

(2,233

)

Open securities transactions payable and receivable, net

 

83

 

34

 

Proceeds from sales and maturities of commercial mortgage loans

 

410

 

381

 

Funding of commercial mortgage loans

 

(338

)

(308

)

Proceeds from sale of AMEX Assurance

 

115

 

 

Proceeds from sales of other investments

 

106

 

109

 

Purchase of other investments

 

(56

)

(116

)

Purchase of land, buildings, equipment and software

 

(238

)

(115

)

Proceeds from sale of land, buildings, equipment and other

 

8

 

66

 

Change in restricted cash

 

(82

)

(54

)

Acquisition of bank deposits and loans, net

 

 

951

 

Other, net

 

(5

)

(2

)

Net cash provided by investing activities

 

4,181

 

3,390

 

 

See Notes to Consolidated Financial Statements.

 

5



 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(in millions)

 

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Cash Flows from Financing Activities

 

 

 

 

 

Investment certificates and banking time deposits:

 

 

 

 

 

Proceeds from additions

 

647

 

1,239

 

Interest credited to account values

 

152

 

153

 

Maturities, withdrawals and cash surrenders

 

(1,612

)

(2,431

)

Change in other customer deposits

 

135

 

(164

)

Policyholder and contractholder account values:

 

 

 

 

 

Consideration received

 

795

 

980

 

Interest credited to account values

 

720

 

795

 

Surrenders and other benefits

 

(3,736

)

(3,620

)

Proceeds from issuance of debt, net of issuance costs

 

 

516

 

Principal repayments of debt

 

(28

)

(252

)

Dividends paid to shareholders

 

(98

)

(82

)

Repurchase of common shares

 

(690

)

(438

)

Exercise of stock options

 

30

 

11

 

Excess tax benefits from share-based compensation

 

40

 

24

 

Policy loans:

 

 

 

 

 

Repayments

 

85

 

71

 

Issuances

 

(115

)

(96

)

Other, net

 

2

 

2

 

Net cash used in financing activities

 

(3,673

)

(3,292

)

Effect of exchange rate changes on cash

 

12

 

21

 

Net increase in cash and cash equivalents

 

1,255

 

835

 

Cash and cash equivalents at beginning of period

 

2,717

 

2,474

 

Cash and cash equivalents at end of period

 

$

3,972

 

$

3,309

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

Interest paid

 

$

75

 

$

63

 

Income taxes paid

 

$

92

 

$

185

 

 

See Notes to Consolidated Financial Statements.

 

6



 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(in millions, except share amounts)

 

 

 

Number of
Outstanding
Shares

 

Common
Shares

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Treasury
Shares

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2005

 

249,875,554

 

$

2

 

$

4,091

 

$

3,745

 

$

 

$

(151

)

$

7,687

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

460

 

 

 

460

 

Change in net unrealized securities losses

 

 

 

 

 

 

(74

)

(74

)

Change in net unrealized derivative gains

 

 

 

 

 

 

(5

)

(5

)

Foreign currency translation adjustment

 

 

 

 

 

 

4

 

4

 

Total comprehensive income

 

 

 

 

 

 

 

385

 

Dividends paid to shareholders

 

 

 

 

(82

)

 

 

(82

)

Treasury shares

 

(10,335,108

)

 

 

 

(438

)

 

(438

)

Share-based compensation plans

 

2,572,936

 

1

 

200

 

 

 

 

201

 

Balances at September 30, 2006

 

242,113,382

 

$

3

 

$

4,291

 

$

4,123

 

$

(438

)

$

(226

)

$

7,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2006

 

241,391,431

 

$

3

 

$

4,353

 

$

4,268

 

$

(490

)

$

(209

)

$

7,925

 

Change in accounting principles

 

 

 

 

(138

)

 

 

(138

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

559

 

 

 

559

 

Change in net unrealized securities losses

 

 

 

 

 

 

(39

)

(39

)

Change in net unrealized derivatives losses

 

 

 

 

 

 

(4

)

(4

)

Foreign currency translation adjustment

 

 

 

 

 

 

3

 

3

 

Total comprehensive income

 

 

 

 

 

 

 

519

 

Dividends paid to shareholders

 

 

 

 

(98

)

 

 

(98

)

Treasury shares

 

(11,749,269

)

 

 

 

(690

)

 

(690

)

Share-based compensation plans

 

2,775,055

 

 

186

 

 

 

 

186

 

Other, net

 

 

 

54

 

 

 

 

54

 

Balances at September 30, 2007

 

232,417,217

 

$

3

 

$

4,593

 

$

4,591

 

$

(1,180

)

$

(249

)

$

7,758

 

 

See Notes to Consolidated Financial Statements.

 

7



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.   Basis of Presentation

 

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

 

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

 

2.   Recent Accounting Pronouncements

 

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide ‘Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provided clarification on the definition of an investment company. In October 2007, the Financial Accounting Standards Board (“FASB”) indefinitely deferred the effective date of SOP 07-1 with the intention of re-deliberating the guidance provided. The Company will delay evaluating the impact of adopting SOP 07-1 until after the FASB finalizes its deliberations.

 

In May 2007, the FASB issued FASB Staff Position (“FSP”) FASB Interpretation No. (“FIN”) 46(R)-7, “Application of FIN 46(R) to Investment Companies” (“FSP 46(R)-7”). FSP 46(R)-7 is dependent upon clarification of the definition of an investment company as provided in SOP 07-1 and is effective upon the adoption of that SOP. The Company will delay evaluating the impact of adopting FSP 46(R)-7 until after the FASB finalizes its deliberations.

 

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

 

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

 

8



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

2.   Recent Accounting Pronouncements (continued)

 

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

 

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

 

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

 

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

 

3.   Separation and Distribution from American Express

 

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

 

American Express has historically provided a variety of corporate and other support services for the Company, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. Following the Distribution, American Express provided 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. As of September 30, 2007, the Company has terminated all of these service agreements and has completed the separation from American Express.

 

9



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

3.   Separation and Distribution from American Express (continued)

 

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.

 

As of September 30, 2005, we entered into an agreement to sell the AMEX Assurance Company (“AMEX Assurance”) legal entity to 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. The sale was completed on September 30, 2007 for a sale price of $115 million.

 

4.   Investments

 

The following is a summary of investments:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Available-for-Sale securities, at fair value

 

$

26,564

 

$

30,880

 

Commercial mortgage loans, net

 

3,007

 

3,056

 

Trading securities, at fair value, and equity method investments in hedge funds

 

596

 

579

 

Policy loans

 

683

 

652

 

Other investments

 

311

 

386

 

Total

 

$

31,161

 

$

35,553

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Gross realized gains from sales

 

$

16

 

$

15

 

$

50

 

$

38

 

Gross realized losses from sales

 

(1

)

 

(22

)

(13

)

Other-than-temporary impairments

 

 

(1

)

(2

)

(2

)

 

In the third quarter of 2007, the Company recorded a $23 million decrease to the allowance for loan losses on commercial mortgage loans.

 

5.   Deferred Acquisition Costs

 

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

 

The balances of and changes in DAC were as follows:

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Balance at January 1

 

$

4,499

 

$

4,182

 

Cumulative effect of SOP 05-1 adoption

 

(204

)

 

Capitalization of acquisition costs

 

585

 

554

 

Amortization, excluding impact of changes in assumptions

 

(383

)

(384

)

Amortization, impact of annual third quarter changes in DAC-related assumptions

 

(16

)

38

 

Amortization, impact of other quarter changes in DAC-related assumptions

 

12

 

(22

)

Impact of change in net unrealized securities losses

 

9

 

55

 

Balance at September 30

 

$

4,502

 

$

4,423

 

 

10



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

6.   Future Policy Benefits and Claims and Separate Account Liabilities

 

Future policy benefits and claims consisted of the following:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Fixed annuities

 

$

14,968

 

$

16,841

 

Equity indexed annuities accumulated host values

 

255

 

267

 

Equity indexed annuities embedded derivatives

 

60

 

50

 

Variable annuities fixed sub-accounts

 

5,542

 

5,975

 

Guaranteed minimum withdrawal benefits variable annuity guarantees

 

76

 

(12

)

Guaranteed minimum accumulation benefits variable annuity guarantees

 

12

 

(5

)

Other variable annuity guarantees

 

27

 

31

 

Total annuities

 

20,940

 

23,147

 

Variable universal life (“VUL”)/universal life insurance

 

2,565

 

2,562

 

Other life, disability income and long-term care insurance

 

4,041

 

3,852

 

Auto and home insurance

 

400

 

381

 

Policy claims and other policyholders’ funds

 

105

 

91

 

Total

 

$

28,051

 

$

30,033

 

 

Separate account liabilities consisted of the following:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Variable annuity variable sub-accounts

 

$

51,587

 

$

43,515

 

VUL insurance variable sub-accounts

 

6,446

 

5,772

 

Threadneedle investment liabilities

 

4,338

 

4,561

 

Total

 

$

62,371

 

$

53,848

 

 

7.   Customer Deposits

 

Customer deposits consisted of the following:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Fixed rate certificates

 

$

2,745

 

$

3,540

 

Stock market based certificates

 

1,038

 

1,041

 

Stock market embedded derivative reserves

 

46

 

48

 

Other

 

80

 

91

 

Less: accrued interest classified in other liabilities

 

(37

)

(42

)

Total investment certificate reserves

 

3,872

 

4,678

 

Brokerage deposits

 

1,101

 

1,176

 

Banking deposits

 

1,056

 

853

 

Total

 

$

6,029

 

$

6,707

 

 

11



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

8.   Debt

 

Debt and the stated interest rates were as follows:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

Outstanding
Balance

 

Stated
Interest Rate

 

Outstanding
Balance

 

Stated
Interest Rate

 

 

 

(in millions)

 

 

 

(in millions)

 

 

 

Senior notes due 2010

 

$

800

 

5.4

%

$

800

 

5.4

%

Senior notes due 2015

 

700

 

5.7

 

700

 

5.7

 

Junior subordinated notes due 2066

 

500

 

7.5

 

500

 

7.5

 

Fixed and floating rate notes due 2011:

 

 

 

 

 

 

 

 

 

Floating rate senior notes

 

56

 

5.9

 

84

 

5.9

 

Fixed rate notes

 

86

 

8.6

 

86

 

8.6

 

Fixed rate senior notes

 

46

 

7.2

 

46

 

7.2

 

Fixed rate notes

 

9

 

13.3

 

9

 

13.3

 

Total

 

$

2,197

 

 

 

$

2,225

 

 

 

 

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

 

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

 

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

 

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

 

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

 

9.   Share-Based Compensation

 

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

 

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

 

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

 

12



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

9.     Share-Based Compensation (continued)

 

For the three months and nine months ended September 30, 2007, the Company recognized expense of $35 million and $110 million, respectively, related to awards under these share-based compensation plans. For the three months and nine months ended September 30, 2006, the Company recognized expense of $27 million and $83 million, respectively, related to awards under these share-based compensation plans.

 

As of September 30, 2007, there was $199 million of total unrecognized compensation cost related to non-vested awards under the Company’s share-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

 

10.  Other Expenses

 

Other expenses consisted of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Professional and consultant fees

 

$

123

 

$

84

 

$

328

 

$

260

 

Information technology and communications

 

45

 

40

 

109

 

141

 

Facilities and equipment

 

41

 

47

 

131

 

141

 

Advertising and promotion

 

24

 

22

 

76

 

84

 

Legal and regulatory

 

16

 

27

 

64

 

98

 

Travel and meetings

 

23

 

22

 

74

 

61

 

Printing and distribution

 

20

 

23

 

75

 

74

 

Minority interest

 

(3

)

35

 

24

 

63

 

Other

 

41

 

27

 

149

 

112

 

Other expenses capitalized as DAC

 

(82

)

(79

)

(255

)

(232

)

Total

 

$

248

 

$

248

 

$

775

 

$

802

 

 

11.  Income Taxes

 

The Company’s effective tax rates were 8.8% and 17.6% for the three months and nine months ended September 30, 2007, respectively. The Company’s effective tax rates for the three months and nine months ended September 30, 2006 were 19.8% and 22.6%, respectively. The effective tax rate for the three months ended September 30, 2007 was impacted by a $21 million tax benefit related to our plan to begin repatriating earnings of certain Threadneedle entities through dividends and a $7 million tax benefit related to the finalization of the prior year tax return. The effective tax rate for the three months ended September 30, 2006 was impacted by a $13 million tax benefit related to the finalization of the prior year tax return. The effective tax rates are also impacted by the levels of pretax income relative to tax advantaged items, including the dividends received deduction, in each period.

 

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

 

Effective January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation of FIN 48 the Company recognized a $4 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of the date of adoption the Company had $113 million of gross unrecognized tax benefits. If recognized, approximately $57 million, net of federal tax benefits, would affect the effective tax rate. As of September 30, 2007, the Company had $109 million of gross unrecognized tax benefits. If recognized, approximately $42 million, net of federal tax benefits, would affect the effective tax rate.

 

13



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11.  Income Taxes (continued)

 

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized no net change in interest and penalties for the three months ended September 30, 2007 and a net reduction of interest and penalties of $7 million for the nine months ended September 30, 2007. The Company had $16 million and $9 million for the payment of interest and penalties accrued at January 1, 2007 and September 30, 2007, respectively.

 

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company it is estimated that the total amount of unrecognized tax benefits and interest may decrease by $15 million to $18 million in the next 12 months.

 

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

 

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

 

12.  Earnings per Common Share

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

198

 

$

174

 

$

559

 

$

460

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic: Weighted-average common shares outstanding

 

235.4

 

244.5

 

237.8

 

247.6

 

Effect of potentially dilutive nonqualified stock options and other share-based awards

 

3.8

 

1.9

 

3.6

 

1.7

 

Diluted: Weighted-average common shares outstanding

 

239.2

 

246.4

 

241.4

 

249.3

 

Earnings per Common Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.84

 

$

0.71

 

$

2.35

 

$

1.86

 

Diluted

 

0.83

 

0.71

 

2.32

 

1.85

 

 

Basic weighted average common shares for the three months and nine months ended September 30, 2007 included 1.4 million and 1.7 million, respectively, of vested, nonforfeitable restricted stock units and 3.5 million and 3.6 million, respectively, of non-vested restricted stock awards and restricted stock units that are forfeitable but receive nonforfeitable dividends. Basic weighted average common shares for the three months and nine months ended September 30, 2006 included 1.4 million and 1.8 million, respectively, of vested, nonforfeitable restricted stock units and 3.7 million and 3.7 million, respectively, of non-vested restricted stock awards and restricted stock units that are forfeitable but receive nonforfeitable dividends. Potentially dilutive securities include nonqualified stock options and other share-based awards.

 

14



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13.  Segment Information

 

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

 

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

 

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

 

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

 

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

 

The following is a summary of assets by segment:

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Asset Accumulation and Income

 

$

86,439

 

$

83,308

 

Protection

 

19,812

 

17,360

 

Corporate and Other

 

3,603

 

3,504

 

Total assets

 

$

109,854

 

$

104,172

 

 

15



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13.  Segment Information (continued)

 

The following is a summary of segment operating results:

 

 

 

Asset
Accumulation
and Income

 

Protection

 

Corporate
and Other

 

Eliminations

 

Consolidated

 

 

 

(in millions)

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

1,615

 

$

510

 

$

77

 

$

 

$

2,202

 

Intersegment revenue

 

4

 

8

 

 

(12

)

 

Total revenues

 

$

1,619

 

$

518

 

$

77

 

$

(12

)

$

2,202

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax provision

 

$

259

 

$

73

 

$

(115

)

$

 

$

217

 

Income tax provision

 

 

 

 

 

 

 

 

 

19

 

Net income

 

 

 

 

 

 

 

 

 

$

198

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

1,418

 

$

492

 

$

67

 

$

 

$

1,977

 

Intersegment revenue

 

5

 

6

 

 

(11

)

 

Total revenues

 

$

1,423

 

$

498

 

$

67

 

$

(11

)

$

1,977

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax provision

 

$

192

 

$

151

 

$

(126

)

$

 

$

217

 

Income tax provision

 

 

 

 

 

 

 

 

 

43

 

Net income

 

 

 

 

 

 

 

 

 

$

174

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

4,719

 

$

1,501

 

$

227

 

$

 

$

6,447

 

Intersegment revenue

 

13

 

25

 

 

(38

)

 

Total revenues

 

$

4,732

 

$

1,526

 

$

227

 

$

(38

)

$

6,447

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax provision

 

$

769

 

$

276

 

$

(367

)

$

 

$

678

 

Income tax provision

 

 

 

 

 

 

 

 

 

119

 

Net income

 

 

 

 

 

 

 

 

 

$

559

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

4,324

 

$

1,450

 

$

205

 

$

 

$

5,979

 

Intersegment revenue

 

14

 

17

 

 

(31

)

 

Total revenues

 

$

4,338

 

$

1,467

 

$

205

 

$

(31

)

$

5,979

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax provision

 

$

642

 

$

317

 

$

(365

)

$

 

$

594

 

Income tax provision

 

 

 

 

 

 

 

 

 

134

 

Net income

 

 

 

 

 

 

 

 

 

$

460

 

 

16



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

14.  Related Party Transactions

 

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

 

Davis Selected Advisors, L.P. or its affiliates (“Davis”) owned approximately 9% of the Company’s common stock at June 30, 2007. In the ordinary course of business, the Company obtains investment advisory or sub-advisory services from Davis. The Company, or the mutual funds or other clients to which the Company provides advisory services, pay fees to Davis for its services. In the ordinary course of business, Davis pays fees to the Company for distribution services of Davis’ products to the Company’s clients.

 

FMR Corp. or its affiliates (“FMR”) owned approximately 7% of the Company’s common stock at June 30, 2007. In the ordinary course of business, the Company pays fees to FMR for distribution services of RiverSource Funds to FMR’s clients and FMR pays fees to the Company for distribution services of FMR’s investment products to the Company’s clients.

 

On March 29, 2006, the Company entered into a Stock Purchase and Sale Agreement with Warren E. Buffett and Berkshire to repurchase 6.4 million shares of the Company’s common stock. The repurchase was completed on March 29, 2006 at a price per share equal to the March 29, 2006 closing price of $42.91 and reduced Berkshire’s ownership of the Company’s common stock to approximately 9.8% of common shares then outstanding. Berkshire’s ownership of the Company’s common stock was further reduced to approximately 1% at June 30, 2007.

 

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

 

15.  Common Share Repurchases

 

In January 2006, the Company’s Board of Directors authorized the repurchase of up to 2 million shares of the Company’s common stock. In March 2006, the Company’s Board of Directors authorized the expenditure of up to $750 million for the repurchase of additional shares through March 31, 2008. In March 2007, the Company’s Board of Directors authorized the expenditure of up to an additional $1.0 billion for the repurchase of shares through March 15, 2009. During the nine months ended September 30, 2007 and 2006, the Company repurchased a total of 11.1 million shares and 9.7 million shares, respectively, of its common stock for an aggregate cost of $665 million and $422 million, respectively. As of September 30, 2007, the Company had purchased all shares under the January 2006 and March 2006 authorizations and had $701 million remaining under the March 2007 authorization.

 

The Company may also reacquire shares of its common stock under its 2005 ICP related to restricted stock awards. Restricted shares that are forfeited before the vesting period has lapsed are recorded as treasury shares. In addition, the holders of restricted shares may elect to surrender a portion of their shares on the vesting date to cover their income tax obligations. These vested restricted shares reacquired by the Company and the Company’s payment of the holders’ income tax obligations are recorded as a treasury share purchase. The restricted shares forfeited under the 2005 ICP and recorded as treasury shares were 0.2 million during both the nine months ended September 30, 2007 and 2006. For the nine months ended September 30, 2007 and 2006, the Company reacquired 0.4 million shares and 0.4 million shares, respectively, of its common stock through the surrender of restricted shares upon vesting and paid in the aggregate $25 million and $16 million, respectively, related to the holders’ income tax obligations on the vesting date.

 

17



 

AMERIPRISE FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

16.  Contingencies

 

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

 

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

 

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

 

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

 

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

 

The settlement of the class action lawsuit filed in October 2004 called “In re American Express Financial Advisors Securities Litigation” was approved by the Court on July 18, 2007. The Court issued an Order and Final Judgment that dismissed the Class Action Complaint with prejudice, released the defendants from all liability for the claims asserted and any other claims based upon the same core allegations, and enjoined class members from asserting such claims in the future. In August 2007 an objector filed an appeal, primarily contesting the attorney’s fees allocation. The settlement will not be implemented until the appeal is resolved.

 

In March 2006, a lawsuit captioned Good, et al. v. Ameriprise Financial, Inc. et al. (Case No. 00-cv-01027) was filed in the United States District Court for the District of Minnesota. The lawsuit has been brought as a putative class action and plaintiffs purport to represent all of the Company’s advisors who sold shares of REITs and tax credit limited partnerships between March 2000 and March 2006. Plaintiffs seek unspecified compensatory and restitutionary damages as well as injunctive relief, alleging that the Company incorrectly calculated commissions owed advisors for the sale of these products. In September 2007, the Company moved for summary judgment on all claims and is awaiting the Court’s ruling on the motion.

 

The Company previously reported two adverse arbitration awards issued in 2006 by FINRA (then known as the National Association of Securities Dealers) panels against Securities America, Inc. and former registered representatives of SAI. Those arbitrations involved customer claims relating to suitability, disclosures, supervision and certain other sales practices. Other clients of those former registered representatives have presented claims.

 

In October 2007, the State of New Hampshire commenced an action against the Company captioned In the Matter of Ameriprise Financial, Inc., Ameriprise Financial Services, Inc. & Larry Post. The action includes claims of New Hampshire statutory violations related to the alleged failure to deliver financial plans sold to clients, instances of forgery and failure to supervise.

 

18



 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements” that follow and our Consolidated Financial Statements and Notes presented in Item 1. We believe it is useful to read our MD&A in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2007, as well as our current reports on Form 8-K and other publicly available information.

 

Overview

 

We are the leading financial planning and services company with approximately 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 their financial goals or form of protection while they are accepting an appropriate range and level of risk. 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, non-recurring separation costs. Our financial targets are:

 

                  Annual revenue growth of 6% to 8%,

 

                  Annual earnings per diluted share growth of 12% to 15%, and

 

                  Return on equity of 12% to 15%.

 

Our revenues in the third quarter of 2007 were $2.2 billion, an increase of 11% over the same period last year. The increase in revenues primarily reflected growth in our fee-based businesses, including growth in management, financial advice and services fees and distribution fees, primarily driven by continued strong net inflows in wrap accounts and annuity variable accounts and market appreciation.

 

Our consolidated net income for the three months ended September 30, 2007 was $198 million, up $24 million, or 14%, from net income of $174 million for the three months ended September 30, 2006. Our adjusted earnings, which exclude after-tax non-recurring separation costs, rose 3% to $237 million for the three months ended September 30, 2007 from $231 million for the three months ended September 30, 2006. Our earnings per diluted share for the third quarter of 2007 were $0.83, an increase of 17% from $0.71 for the third quarter of 2006. Our adjusted earnings per diluted share were $0.99 for the three months ended September 30, 2007, up 5% from $0.94 for the three months ended September 30, 2006.

 

Return on equity for the trailing twelve months ended September 30, 2007 was 9.4% compared to 7.6% for the trailing twelve months ended September 30, 2006. Adjusted return on equity for the trailing twelve months ended September 30, 2007 rose to 12.4% from 11.2% for the trailing twelve months ended September 30, 2006.

 

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, cash sales and owned, managed and administered assets. Our mass affluent and affluent client groups as of September 30, 2007 increased 11% since September 30, 2006. The percentage of our clients with a financial plan at September 30, 2007 was 45% compared to 44% at September 30, 2006. While our franchisee advisors increased 2%, the total number of advisors decreased 3% from the prior year quarter, as we hired fewer employee advisors and continued to focus on further strengthening employee advisor productivity and distribution economics. Advisor productivity increased from the year-ago period as reflected by a 14% growth in total gross dealer concession (“GDC”) compared to the third quarter of 2006, primarily driven by continued strength in variable annuity sales, wrap account net inflows and growth in sales of direct investments. Our franchisee advisor retention rate as of September 30, 2007 remained high at 93%, which was consistent with the year-ago period.

 

19



 

Our owned, managed and administered assets increased to $491.6 billion at September 30, 2007, a net increase of 12% from September 30, 2006 assets of $440.0 billion. For the third quarter of 2007, we had net inflows in RiverSource annuity variable accounts of $1.3 billion and net inflows in Ameriprise Financial and Securities America, Inc. (“SAI”) wrap accounts of $2.6 billion, which reflects our clients increasingly choosing fee-based products within their portfolios. Our certificate and annuity fixed accounts had total net outflows of $1.3 billion for the three months ended September 30, 2007, reflecting the current interest rate environment and our strategy to focus on less capital-intensive products. RiverSource managed retail funds had net inflows of $0.4 billion in the third quarter of 2007 compared to net outflows of $0.6 billion in the same period of 2006. This improvement in net flows resulted from increased mutual fund and annuity variable account sales, with sales of long-term mutual funds increasing 84% compared to the prior year period. Administered assets increased over the year-ago period primarily due to increased brokerage activity and market appreciation.

 

Significant Factors Affecting our Results of Operations and Financial Condition

 

Share Repurchase

 

In March 2007, our Board of Directors authorized the expenditure of up to $1 billion for the repurchase of shares of our common stock through March 15, 2009. This authorization was in addition to a Board authorization in March 2006 for the expenditure of up to $750 million for the repurchase of shares through the end of March 2008 and a Board authorization in January 2006 to repurchase up to 2 million shares by the end of 2006. Through September 30, 2007, we have purchased 21.8 million shares under these programs for an aggregate cost of $1.1 billion. As of September 30, 2007, we had purchased all shares under the January 2006 and March 2006 authorizations and had $701 million remaining under the March 2007 authorization.

 

Sale of our Defined Contribution Recordkeeping Business

 

On June 1, 2006, we completed the sale of our defined contribution recordkeeping business and recognized $66 million of revenues and $30 million of expenses in connection with the sale. In addition, the buyer of the business is subject to a contingent payment to be paid to us based on the level of client revenues retained by the buyer after 18 months from the sale closing date. While we believe the payment is likely, it will not be determined or paid until December 2007. 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 experienced expense savings related to this sale, and the sale has not had a material impact on pretax income. We continue to manage approximately $11.1 billion of defined contribution assets under investment management only contracts, as of September 30, 2007.

 

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. In the second half of 2006, Ameriprise Bank acquired $493 million of customer loans and assumed $963 million of customer deposits from American Express Bank, FSB, a subsidiary of American Express, and received cash of $470 million in connection with these transactions. Ameriprise Bank offers a suite of borrowing, cash management and personal trust products and services, primarily through our branded advisors. We are currently building our banking platform, and do not expect it to be a significant contributor to earnings in the near term.

 

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.

 

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.

 

20



 

Separation Costs

 

Since the Separation announcement through September 30, 2007, we have incurred $862 million of non-recurring separation costs. These costs are primarily associated with establishing the Ameriprise Financial brand, separating and reestablishing our technology platforms and advisor and employee retention programs. We expect to incur approximately $25 million to $30 million in costs in the fourth quarter of 2007, reflecting all remaining costs from the Separation, which was completed as of September 30, 2007.

 

Services and Operations Provided by American Express

 

American Express has historically provided 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 provided 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. As of September 30, 2007, the Company has terminated all of these service agreements and has completed the separation from American Express.

 

Sale of AMEX Assurance Company (“AMEX Assurance”)

 

As of September 30, 2005, we entered into an agreement to sell the AMEX Assurance legal entity to 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. The sale was completed on September 30, 2007 for a sale price of $115 million.

 

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 and other asset-based fees we earn, the “spread” income generated on our annuities, banking and deposit products and universal life (“UL”) insurance products, the value of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) assets associated with variable annuity and variable UL products, the values of liabilities for guaranteed benefits associated with our variable annuities and the values of derivatives held to hedge these benefits.

 

For additional information regarding our sensitivity to equity risk and interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk.”

 

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 2 to our Consolidated Financial Statements.

 

Non-GAAP Financial Information

 

We follow accounting principles generally accepted in the United States (“GAAP”). This report includes information on both a GAAP and non-GAAP basis. The non-GAAP presentation in this report excludes non-recurring separation costs. Our non-GAAP financial measures, which we view as important indicators of financial performance, include:

 

                  expenses excluding non-recurring separation costs;

 

                  adjusted earnings or net income excluding non-recurring separation costs;

 

                  adjusted earnings per diluted share; and

 

                  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 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 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.

 

21



 

A reconciliation of non-GAAP measures is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except per share amounts)

 

Consolidated Income Data

 

 

 

 

 

 

 

 

 

Net income

 

$

198

 

$

174

 

$

559

 

$

460

 

Add: Separation costs, after-tax

 

39

 

57

 

135

 

155

 

Adjusted earnings

 

$

237

 

$

231

 

$

694

 

$

615

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares

 

239.2

 

246.4

 

241.4

 

249.3

 

Adjusted earnings per diluted share

 

$

0.99

 

$

0.94

 

$

2.87

 

$

2.47

 

 

 

 

 

 

 

 

 

 

 

Separation costs

 

$

60

 

$

87

 

$

208

 

$

238

 

Less: Tax benefit attributable to separation costs

 

21

 

30

 

73

 

83

 

Separation costs, after-tax

 

$

39

 

$

57

 

$

135

 

$

155

 

 

 

 

Twelve Months Ended
September 30,

 

 

 

2007

 

2006

 

 

 

(in millions, except percentages)

 

Return on Equity

 

 

 

 

 

Return on equity

 

9.4

%

7.6

%

 

 

 

 

 

 

Net income

 

$

730

 

$

571

 

Add: Separation costs, after-tax

 

215

 

236

 

Adjusted earnings

 

$

945

 

$

807

 

 

 

 

 

 

 

Equity

 

$

7,753

 

$

7,550

 

Less: Equity allocated to expected separation costs

 

102

 

336

 

Adjusted equity

 

$

7,651

 

$

7,214

 

 

 

 

 

 

 

Adjusted return on equity

 

12.4

%

11.2

%

 

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 net flows of client assets and market movements. Owned assets are also affected by changes in our capital structure. During the third quarter of 2007, RiverSource retail funds had $0.4 billion in net inflows compared to net outflows of $0.6 billion during the prior year quarter. Overall, during the third quarter of 2007, we had net inflows in our managed assets of $2.0 billion in Ameriprise Financial wrap accounts, $0.6 billion in SAI wrap accounts and $0.3 billion in RiverSource institutional funds, and had $1.3 billion in net inflows in our owned RiverSource annuity variable accounts. In addition, we had net outflows in our owned certificate and fixed annuity assets of $1.3 billion during the third quarter of 2007, reflecting a continued trend of net outflows in these assets as clients choose other products in the current interest rate environment and as we focus on fee-based products.

 

Threadneedle Asset Management Holdings Limited (“Threadneedle”) acquired Convivo Capital Management Limited on October 1, 2007, improving our alternative investment capabilities.

 

22



 

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:

 

 

 

September 30,

 

 

 

 

 

2007

 

2006

 

% Change

 

 

 

(in billions, except percentages)

 

Owned Assets:

 

 

 

 

 

 

 

Separate accounts(1)

 

$

62.4

 

$

48.8

 

28

%

Investments

 

31.2

 

36.2

 

(14

)

Other(2)

 

9.2

 

7.7

 

19

 

Total Owned Assets

 

102.8

 

92.7

 

11

 

Managed Assets:

 

 

 

 

 

 

 

Managed Assets—Retail

 

 

 

 

 

 

 

RiverSource Mutual Funds

 

63.2

 

57.6

 

10

 

Threadneedle(3) Mutual Funds

 

18.4

 

15.6

 

18

 

Ameriprise Financial Wrap Account Assets

 

79.6

 

59.9

 

33

 

SAI Wrap Account Assets

 

13.3

 

10.2

 

30

 

Total Managed Assets—Retail

 

174.5

 

143.3

 

22

 

Managed Assets—Institutional

 

 

 

 

 

 

 

RiverSource

 

29.7

 

26.8

 

11

 

Threadneedle(3)

 

111.5

 

108.0

 

3

 

Total Managed Assets—Institutional

 

141.2

 

134.8

 

5

 

Managed Assets—Retirement Services

 

 

 

 

 

 

 

RiverSource Collective Funds

 

9.3

 

11.0

 

(15

)

Managed Assets—Eliminations(4)

 

(9.6

)

(5.7

)

(68

)

Total Managed Assets

 

315.4

 

283.4

 

11

 

Administered Assets

 

73.4

 

63.9

 

15

 

Total Owned, Managed and Administered Assets

 

$

491.6

 

$

440.0

 

12