10-Q 1 a10-11884_110q.htm 10-Q

Table of Contents

 

 

 

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 June 30, 2010

 

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.)

 

 

 

1099 Ameriprise Financial Center, Minneapolis, Minnesota

 

55474

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (612) 671-3131

 

Former name, former address and former fiscal year, if changed since last report:  Not Applicable

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

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

 

Class

 

Outstanding at July 23, 2010

Common Stock (par value $.01 per share)

 

251,048,544 shares

 

 

 



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

 

FORM 10-Q

 

INDEX

 

Part I.

Financial Information:

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations — Three months and six months ended June 30, 2010 and 2009

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets — June 30, 2010 and December 31, 2009

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009

 

5

 

 

 

 

 

 

 

Consolidated Statements of Equity — Six months ended June 30, 2010 and 2009

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

 

Item 2.

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

 

40

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

84

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

84

 

 

 

 

 

Part II.

Other Information:

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

85

 

 

 

 

 

 

Item 1A.

Risk Factors

 

85

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

86

 

 

 

 

 

 

Item 6.

Exhibits

 

86

 

 

 

 

 

 

Signatures

 

87

 

 

 

 

 

 

Exhibit Index

 

E-1

 

2



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

955

 

$

606

 

$

1,729

 

$

1,160

 

Distribution fees

 

453

 

351

 

844

 

662

 

Net investment income

 

654

 

511

 

1,244

 

929

 

Premiums

 

299

 

269

 

581

 

535

 

Other revenues

 

236

 

175

 

491

 

384

 

Total revenues

 

2,597

 

1,912

 

4,889

 

3,670

 

Banking and deposit interest expense

 

20

 

38

 

41

 

80

 

Total net revenues

 

2,577

 

1,874

 

4,848

 

3,590

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Distribution expenses

 

621

 

432

 

1,146

 

816

 

Interest credited to fixed accounts

 

231

 

237

 

459

 

442

 

Benefits, claims, losses and settlement expenses

 

298

 

587

 

652

 

687

 

Amortization of deferred acquisition costs

 

171

 

(125

)

289

 

161

 

Interest and debt expense

 

74

 

28

 

138

 

54

 

General and administrative expense

 

716

 

600

 

1,337

 

1,181

 

Total expenses

 

2,111

 

1,759

 

4,021

 

3,341

 

Pretax income

 

466

 

115

 

827

 

249

 

Income tax provision

 

68

 

28

 

133

 

46

 

Net income

 

398

 

87

 

694

 

203

 

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

(8

)

221

 

(22

)

Net income attributable to Ameriprise Financial

 

$

259

 

$

95

 

$

473

 

$

225

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Ameriprise Financial, Inc. common shareholders

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

0.41

 

$

1.81

 

$

1.00

 

Diluted

 

0.98

 

0.41

 

1.78

 

0.99

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

261.1

 

228.8

 

260.9

 

225.6

 

Diluted

 

265.3

 

230.0

 

265.1

 

226.8

 

Cash dividends paid per common share

 

$

0.18

 

$

0.17

 

$

0.35

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

 

Net investment income:

 

 

 

 

 

 

 

 

 

Net investment income before impairment losses on securities

 

$

655

 

$

542

 

$

1,275

 

$

995

 

Total other-than-temporary impairment losses on securities

 

 

(30

)

(32

)

(55

)

Portion of loss recognized in other comprehensive income

 

(1

)

(1

)

1

 

(11

)

Net impairment losses recognized in net investment income

 

(1

)

(31

)

(31

)

(66

)

Net investment income

 

$

654

 

$

511

 

$

1,244

 

$

929

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,827

 

$

3,097

 

Investments

 

36,526

 

36,938

 

Separate account assets

 

58,029

 

58,129

 

Receivables

 

4,906

 

4,435

 

Deferred acquisition costs

 

4,123

 

4,334

 

Restricted and segregated cash

 

1,272

 

1,452

 

Other assets

 

5,643

 

4,286

 

Total assets before consolidated investment entities

 

114,326

 

112,671

 

 

 

 

 

 

 

Consolidated Investment Entities:

 

 

 

 

 

Cash

 

570

 

181

 

Investments, at fair value

 

5,437

 

36

 

Receivables (includes $45 and nil, respectively, at fair value)

 

92

 

49

 

Other assets, at fair value

 

685

 

833

 

Total assets of consolidated investment entities

 

6,784

 

1,099

 

Total assets

 

$

121,110

 

$

113,770

 

 

 

 

 

 

 

Liabilities and Equity Liabilities:

 

 

 

 

 

Future policy benefits and claims

 

$

30,677

 

$

30,886

 

Separate account liabilities

 

58,029

 

58,129

 

Customer deposits

 

8,421

 

8,554

 

Short-term borrowings

 

484

 

 

Long-term debt

 

2,684

 

1,868

 

Accounts payable and accrued expenses

 

1,050

 

918

 

Other liabilities

 

3,166

 

3,093

 

Total liabilities before consolidated investment entities

 

104,511

 

103,448

 

 

 

 

 

 

 

Consolidated Investment Entities:

 

 

 

 

 

Debt (includes $5,048 and nil, respectively, at fair value)

 

5,296

 

381

 

Accounts payable and accrued expenses

 

21

 

28

 

Other liabilities (includes $151 and $30, respectively, at fair value)

 

163

 

41

 

Total liabilities of consolidated investment entities

 

5,480

 

450

 

Total liabilities

 

109,991

 

103,898

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Ameriprise Financial, Inc.:

 

 

 

 

 

Common shares ($.01 par value; shares authorized, 1,250,000,000; shares issued, 299,053,176 and 295,839,581, respectively)

 

3

 

3

 

Additional paid-in capital

 

5,869

 

5,748

 

Retained earnings

 

5,658

 

5,276

 

Appropriated retained earnings of consolidated investment entities

 

620

 

 

Treasury shares, at cost (47,014,926 and 40,744,090 shares, respectively)

 

(2,259

)

(2,023

)

Accumulated other comprehensive income, net of tax

 

607

 

265

 

Total Ameriprise Financial, Inc. shareholders’ equity

 

10,498

 

9,269

 

Noncontrolling interests

 

621

 

603

 

Total equity

 

11,119

 

9,872

 

Total liabilities and equity

 

$

121,110

 

$

113,770

 

 

See Notes to Consolidated Financial Statements.

 

4


 


Table of Contents

 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

694

 

$

203

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Capitalization of deferred acquisition and sales inducement costs

 

(259

)

(405

)

Amortization of deferred acquisition and sales inducement costs

 

324

 

167

 

Depreciation, amortization and accretion, net

 

48

 

81

 

Deferred income tax expense

 

426

 

90

 

Share-based compensation

 

70

 

86

 

Net realized investment gains

 

(39

)

(97

)

Other-than-temporary impairments and provision for loan losses

 

35

 

82

 

Net (income) loss attributable to noncontrolling interests

 

(221

)

22

 

Changes in operating assets and liabilities before consolidated investment entities:

 

 

 

 

 

Restricted and segregated cash

 

22

 

150

 

Trading securities and equity method investments, net

 

7

 

(327

)

Future policy benefits and claims, net

 

54

 

379

 

Receivables

 

(490

)

27

 

Brokerage deposits

 

(39

)

(123

)

Accounts payable and accrued expenses

 

83

 

(74

)

Derivatives collateral, net

 

533

 

(1,588

)

Other, net

 

(12

)

(192

)

Changes in operating assets and liabilities of consolidated investment entities

 

80

 

(27

)

Net cash provided by (used in) operating activities

 

1,316

 

(1,546

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

Proceeds from sales

 

1,906

 

2,359

 

Maturities, sinking fund payments and calls

 

3,204

 

2,500

 

Purchases

 

(4,188

)

(10,188

)

Proceeds from sales and maturities of commercial mortgage loans

 

107

 

158

 

Funding of commercial mortgage loans

 

(82

)

(57

)

Proceeds from sales of other investments

 

92

 

28

 

Purchase of other investments

 

(40

)

(10

)

Purchase of investments by consolidated investment entities

 

(1,010

)

 

Proceeds from sales and maturities of investments by consolidated investment entities

 

933

 

 

Return of capital in investments of consolidated investment entities

 

2

 

 

Purchase of land, buildings, equipment and software

 

(54

)

(35

)

Change in policy and certificate loans, net

 

(6

)

13

 

Acquisitions

 

(866

)

 

Change in consumer banking loans and credit card receivables, net

 

(196

)

(52

)

Other, net

 

(8

)

3

 

Net cash used in investing activities

 

(206

)

(5,281

)

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

(in millions)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Cash Flows from Financing Activities

 

 

 

 

 

Investment certificates and banking time deposits:

 

 

 

 

 

Proceeds from additions

 

$

554

 

$

1,798

 

Maturities, withdrawals and cash surrenders

 

(1,120

)

(1,780

)

Change in other banking deposits

 

463

 

1,097

 

Policyholder and contractholder account values:

 

 

 

 

 

Consideration received

 

833

 

3,726

 

Net transfers (to) from separate accounts

 

(1,277

)

239

 

Surrenders and other benefits

 

(692

)

(1,224

)

Deferred premium options, net

 

(77

)

(6

)

Proceeds from issuance of common stock

 

 

869

 

Issuances of debt, net of issuance costs

 

744

 

491

 

Repayments of debt

 

 

(87

)

Change in short-term borrowings, net

 

484

 

 

Dividends paid to shareholders

 

(91

)

(74

)

Repurchase of common shares

 

(206

)

(9

)

Exercise of stock options

 

45

 

 

Excess tax benefits from share-based compensation

 

5

 

1

 

Borrowings of consolidated investment entities

 

30

 

41

 

Repayments of debt of consolidated investment entities

 

(50

)

 

Noncontrolling interests investments in subsidiaries

 

29

 

2

 

Distributions to noncontrolling interests

 

(40

)

(38

)

Other, net

 

(2

)

 

Net cash (used in) provided by financing activities

 

(368

)

5,046

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(12

)

22

 

Net increase (decrease) in cash and cash equivalents

 

730

 

(1,759

)

Cash and cash equivalents at beginning of period

 

3,097

 

6,228

 

Cash and cash equivalents at end of period

 

$

3,827

 

$

4,469

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

Interest paid on debt before consolidated investment entities

 

$

61

 

$

58

 

Income taxes paid, net

 

53

 

3

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

 

 

 

Ameriprise Financial, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appropriated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings of

 

 

 

Other

 

 

 

 

 

 

 

Number of

 

 

 

Additional

 

 

 

Consolidated

 

 

 

Comprehensive

 

Non-

 

 

 

 

 

Outstanding

 

Common

 

Paid-In

 

Retained

 

Investment

 

Treasury

 

Income

 

controlling

 

 

 

 

 

Shares

 

Shares

 

Capital

 

Earnings

 

Entities

 

Shares

 

(Loss)

 

Interests

 

Total

 

 

 

(in millions, except share data)

 

Balances at January 1, 2009

 

216,510,699

 

$

3

 

$

4,688

 

$

4,586

 

$

 

$

(2,012

)

$

(1,091

)

$

289

 

$

6,463

 

Change in accounting principles, net of tax

 

 

 

 

132

 

 

 

(132

)

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

225

 

 

 

 

(22

)

203

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized securities losses

 

 

 

 

 

 

 

737

 

 

737

 

Change in noncredit related im-pairments on securities and net unrealized securities losses on previously impaired securities

 

 

 

 

 

 

 

35

 

 

35

 

Change in net unrealized derivatives losses

 

 

 

 

 

 

 

(1

)

 

(1

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

66

 

33

 

99

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,073

 

Issuance of common stock

 

36,000,000

 

 

869

 

 

 

 

 

 

869

 

Dividends paid to shareholders

 

 

 

 

(74

)

 

 

 

 

(74

)

Noncontrolling interests investments in subsidiaries

 

 

 

 

 

 

 

 

2

 

2

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(38

)

(38

)

Repurchase of common shares

 

(624,538

)

 

 

 

 

(9

)

 

 

(9

)

Share-based compensation plans

 

3,152,251

 

 

84

 

 

 

 

 

 

84

 

Balances at June 30, 2009

 

255,038,412

 

$

3

 

$

5,641

 

$

4,869

 

$

 

$

(2,021

)

$

(386

)

$

264

 

$

8,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2010

 

255,095,491

 

$

3

 

$

5,748

 

$

5,276

 

$

 

$

(2,023

)

$

265

 

$

603

 

$

9,872

 

Change in accounting principles

 

 

 

 

 

473

 

 

 

 

473

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

473

 

 

 

 

221

 

694

 

Net income reclassified to appropriated retained earnings

 

 

 

 

 

147

 

 

 

(147

)

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized securities gains

 

 

 

 

 

 

 

379

 

 

379

 

Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities

 

 

 

 

 

 

 

2

 

 

2

 

Change in net unrealized derivatives gains

 

 

 

 

 

 

 

(2

)

 

(2

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(37

)

(45

)

(82

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

991

 

Dividends paid to shareholders

 

 

 

 

(91

)

 

 

 

 

(91

)

Noncontrolling interests investments in subsidiaries

 

 

 

 

 

 

 

 

29

 

29

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(40

)

(40

)

Repurchase of common shares

 

(6,270,836

)

 

 

 

 

(236

)

 

 

(236

)

Share-based compensation plans

 

3,213,595

 

 

121

 

 

 

 

 

 

121

 

Balances at June 30, 2010

 

252,038,250

 

$

3

 

$

5,869

 

$

5,658

 

$

620

 

$

(2,259

)

$

607

 

$

621

 

$

11,119

 

 

See Notes to Consolidated Financial Statements.

 

7



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

1.  Basis of Presentation

 

Ameriprise Financial, Inc. is a holding company, which primarily conducts business through its subsidiaries to provide financial planning and products and services that are designed to be utilized as solutions for clients’ cash and liquidity, asset accumulation, income, protection and estate and wealth transfer needs. The Company’s foreign operations in the United Kingdom (“UK”) are conducted through its subsidiary, Threadneedle Asset Management Holdings Sàrl (“Threadneedle”).

 

The accompanying Consolidated Financial Statements include the accounts of Ameriprise Financial, Inc., companies in which it directly or indirectly has a controlling financial interest and variable interest entities (“VIEs”) in which it is the primary beneficiary (collectively, the “Company”). The income or loss generated by consolidated entities which will not be realized by the Company’s shareholders is attributed to noncontrolling interests in the Consolidated Statements of Operations. Noncontrolling interests are the ownership interests in subsidiaries not attributable, directly or indirectly, to Ameriprise Financial, Inc. and are classified as equity within the Consolidated Balance Sheets. The Company excluding noncontrolling interests is defined as Ameriprise Financial. All material intercompany transactions and balances have been eliminated in consolidation. See Note 3 for additional information related to the consolidated VIEs.

 

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. Except for the adjustments described below, all adjustments made were of a normal recurring nature.

 

In the second quarter of 2010, the Company made an adjustment for revisions to certain calculations in its valuation of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”), which resulted in increases to the DAC and DSIC balances and decreases to amortization of DAC and benefits expense totaling $33 million. The impact to net income attributable to Ameriprise Financial was $21 million.

 

In the second quarter of 2010, the Company purchased an additional $6 million ownership interest in Cofunds, a leading investment platform that provides distribution access to over 1,300 funds from over 90 UK fund managers. This additional investment increased the Company’s ownership percentage from 16% to 20%, and as a result, the Company adopted the equity method of accounting and recorded a retrospective adjustment to the investment balance, results of operations and retained earnings as if the equity method had been in effect during all previous periods in which the investment was held. The effect of the change to the Company’s prior period consolidated results of operations and financial condition was not material.

 

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. 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2010.

 

The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued.

 

2.  Recent Accounting Pronouncements

 

Adoption of New Accounting Standards

 

Consolidation of Variable Interest Entities

 

In June 2009, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to the consolidation of VIEs. The standard amends the guidance on the determination of the primary beneficiary of a VIE from a quantitative model to a qualitative model and requires additional disclosures about an enterprise’s involvement in VIEs. Under the new qualitative model, the primary beneficiary must have both the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive gains that could be potentially significant to the VIE. In February 2010, the FASB amended this guidance to defer application of the consolidation requirements for certain investment funds. The standards are effective for interim and annual reporting periods beginning after November 15, 2009. The Company adopted the standards effective January 1, 2010 and consolidated certain collateralized debt obligations (“CDOs”). As a result of the adoption, the Company recorded a $5.5 billion increase to assets and a $5.1 billion increase to liabilities. The difference between the fair value of the assets and liabilities of the CDOs was recorded as a cumulative effect increase of $473 million to appropriated retained earnings of consolidated investment entities. Such amounts are recorded as appropriated retained earnings as the CDO note holders, not Ameriprise Financial, ultimately will receive the benefits or absorb the losses associated with the assets and liabilities of the

 

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Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

CDOs. Subsequent to the adoption, the net change in fair value of the assets and liabilities of the CDOs will be recorded as net income (loss) attributable to noncontrolling interests and as an adjustment to appropriated retained earnings of consolidated investment entities. See Note 3 for additional information related to the application of the amended VIE consolidation model and the required disclosures.

 

Subsequent Events

 

In February 2010, the FASB amended the accounting standards related to the recognition and disclosure of subsequent events. The amendments remove the requirement to disclose the date through which subsequent events are evaluated for SEC filers. The standard is effective upon issuance and shall be applied prospectively. The Company adopted the standard in the first quarter of 2010. The adoption did not have any effect on the Company’s consolidated results of operations and financial condition.

 

Fair Value

 

In January 2010, the FASB updated the accounting standards related to disclosures on fair value measurements. The standard expands the current disclosure requirements to include additional detail about significant transfers between Levels 1 and 2 within the fair value hierarchy and presents activity in the rollforward of Level 3 activity on a gross basis. The standard also clarifies existing disclosure requirements related to the level of disaggregation to be used for assets and liabilities as well as disclosures on the inputs and valuation techniques used to measure fair value. The standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements related to the Level 3 rollforward, which are effective for interim and annual periods beginning after December 15, 2010. The Company adopted the standard in the first quarter of 2010, except for the additional disclosures related to the Level 3 rollforward, which the Company will adopt in the first quarter of 2011. The adoption did not have any effect on the Company’s consolidated results of operations and financial condition.

 

Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”)

 

In April 2009, the FASB updated the accounting standards for the recognition and presentation of other-than-temporary impairments. The standard amends existing guidance on other-than-temporary impairments for debt securities and requires that the credit portion of other-than-temporary impairments be recorded in earnings and the noncredit portion of losses be recorded in other comprehensive income (loss) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery of its cost basis. The standard requires separate presentation of both the credit and noncredit portions of other-than-temporary impairments on the financial statements and additional disclosures. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At the date of adoption, the portion of previously recognized other-than-temporary impairments that represent the noncredit related loss component shall be recognized as a cumulative effect of adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income (loss). The Company adopted the standard in the first quarter of 2009 and recorded a cumulative effect increase to the opening balance of retained earnings of $132 million, net of DAC and DSIC amortization, certain benefit reserves and income taxes, and a corresponding increase to accumulated other comprehensive loss, net of impacts to DAC and DSIC amortization, certain benefit reserves and income taxes. See Note 4 for the required disclosures.

 

Future Adoption of New Accounting Standards

 

Receivables

 

In July 2010, the FASB updated the accounting standards for disclosures about the credit quality of financing receivables and the allowance for credit losses. The standard requires additional disclosure related to the credit quality of financing receivables, troubled debt restructurings and significant purchases or sales of financing receivables during the period. The standard requires that these disclosures and existing disclosures be presented on a disaggregated basis, similar to the manner that the entity uses to evaluate its credit losses. Disclosures of information as of the end of a reporting period are effective for interim and annual periods ending after December 15, 2010 and disclosures of activity that occurred during a reporting period are effective for interim and annual periods beginning after December 15, 2010. The Company is currently evaluating the impact of the standard on its disclosures. The Company’s adoption of the standard will not impact its consolidated results of operations and financial condition.

 

How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

 

In April 2010, the FASB updated the accounting standards regarding accounting for investment funds determined to be VIEs. Under this standard an insurance enterprise would not be required to consolidate a voting-interest investment fund when it

 

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Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

holds the majority of the voting interests of the fund through its separate accounts. In addition, the enterprise would not consider the interests held through separate accounts in evaluating its economic interests in a VIE, unless the separate account contract holder is a related party. The standard is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2010. The adoption of the standard is not expected to have a material impact on the Company’s consolidated results of operations and financial condition.

 

3.  Consolidated Investment Entities

 

The Company provides asset management services to various CDOs and other investment products (collectively, “investment entities”), which are sponsored by the Company for the investment of client assets in the normal course of business. Certain of these investment entities are considered to be VIEs while others are considered to be voting rights entities (“VREs”). The Company consolidates certain of these investment entities.

 

Variable Interest Entities

 

A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest (including substantive voting rights, the obligation to absorb the entity’s losses, or the rights to receive the entity’s returns) or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A VIE is required to be assessed for consolidation under two models:

 

·          If the VIE is a money market fund or is an investment company, or has the financial characteristics of an investment company, and the following is true:

 

(i)             the entity does not have an explicit or implicit obligation to fund the investment company’s losses; and

 

(ii)          the investment company is not a securitization entity, asset-backed financing entity, or an entity formally considered a qualifying special purpose entity,

 

then, the VIE will be consolidated by the entity that determines it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. Examples of entities that are likely to be assessed for consolidation under this framework include hedge funds, property funds, private equity funds and venture capital funds.

 

·          If the VIE does not meet the criteria above, the VIE will be consolidated by the entity that determines it has both:

 

(i)             the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and

 

(ii)          the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

The Company’s CDOs are generally assessed for consolidation under this framework.

 

When determining whether the Company stands to absorb the majority of the VIE’s expected losses or receive a majority of the VIE’s expected returns, it analyzes the design of the VIE to identify the variable interests it holds. Then the Company quantitatively determines whether its variable interests will absorb a majority of the VIE’s variability. If the Company determines it has control over the activities that most significantly impact the economic performance of the VIE and it will absorb a majority of the VIE’s expected variability, the Company consolidates the VIE. The calculation of variability is based on an analysis of projected probability-weighted cash flows based on the design of the particular VIE. When determining whether the Company has the power and the obligation to absorb losses or rights to receive benefits from the VIE that could potentially be significant, the Company qualitatively determines if its variable interests meet these criteria. If the Company consolidates a VIE under either scenario, it is referred to as the VIE’s primary beneficiary.

 

Investment Entities

 

Collateralized Debt Obligations

 

The Company provides collateral management services to CDOs which are considered VIEs. These CDOs are asset-backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by a CDO, offering investors various maturity and credit risk characteristics. The debt securities issued by the CDOs are non-recourse to the Company. The CDO’s debt holders have recourse only to the assets of the CDO. The assets the CDOs collateralize cannot be used by the Company. Scheduled debt payments are based on the performance of the CDO’s collateral pool. The Company generally earns management fees from the CDOs based on the par value of outstanding debt and, in certain instances, may also receive performance-based fees. In the normal course of business, the Company has invested in certain CDOs, generally taking an insignificant portion of the unrated, junior subordinated debt.

 

For certain of the CDOs, the Company has determined that consolidation is required as it has power over the CDOs and holds a variable interest in the CDOs for which the Company has the potential to receive significant benefits or the potential obligation

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

to absorb significant losses. For other CDOs managed by the Company, the Company has determined that consolidation is not required as the Company does not hold a variable interest in the CDOs.

 

Other Investment Products

 

The Company provides investment advice and related services to private, pooled investment vehicles organized as limited partnerships, limited liability companies or foreign (non-U.S.) entities. Certain of these pooled investment vehicles are considered VIEs while others are VREs. For investment management services, the Company generally earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The Company provides seed money occasionally to certain of these funds. For certain of the pooled investment vehicles, the Company has determined that consolidation is required as the Company stands to absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected residual returns. For other VIE pooled investment vehicles, the Company has determined that consolidation is not required because the Company is not expected to absorb the majority of the expected losses or receive the majority of the expected residual returns. For the pooled investment vehicles which are VREs, the Company consolidates the structure when it has a controlling financial interest.

 

The Company also provides investment advisory, distribution and other services to the RiverSource, Columbia, and Threadneedle mutual fund families. The Company has determined that consolidation is not required for these mutual funds.

 

In addition, the Company may invest in structured investments including VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, commercial mortgage backed securities, and residential mortgage backed securities. The Company includes these investments in Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to its relative size, position in the capital structure of these entities, and the Company’s lack of power over the structures. See Note 4 for additional information about these structured investments.

 

The Company’s maximum exposure to loss as a result of its investment in structured investments is limited to its carrying value. The Company has no obligation to provide further financial or other support to these structured investments nor has the Company provided any support to these structured investments.

 

The following tables reflect the impact of consolidated investment entities on the Consolidated Balance Sheet as of June 30, 2010 and the Consolidated Statements of Operations for the three and six months ended June 30, 2010:

 

 

 

June 30, 2010

 

 

 

Before

 

Consolidated

 

 

 

 

 

 

 

Consolidation

 

Investment Entities

 

Eliminations

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

114,413

 

$

6,784

 

$

(87

)

$

121,110

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

104,511

 

5,480

 

 

109,991

 

Total Ameriprise Financial shareholders’ equity

 

9,902

 

683

 

(87

)

10,498

 

Noncontrolling interests equity

 

 

621

 

 

621

 

Total liabilities and equity

 

$

114,413

 

$

6,784

 

$

(87

)

$

121,110

 

 

 

 

Three Months Ended June 30, 2010

 

 

 

Before

 

Consolidated

 

 

 

 

 

 

 

Consolidation

 

Investment Entities

 

Eliminations

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

$

2,386

 

$

201

 

$

(10

)

$

2,577

 

Total expenses

 

2,059

 

62

 

(10

)

2,111

 

Pretax income

 

327

 

139

 

 

466

 

Income tax provision

 

68

 

 

 

68

 

Net income

 

259

 

139

 

 

398

 

Net income attributable to noncontrolling interests

 

 

139

 

 

139

 

Net income attributable to Ameriprise Financial

 

$

259

 

$

 

$

 

$

259

 

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

 

 

Six Months Ended June 30, 2010

 

 

 

Before

 

Consolidated

 

 

 

 

 

 

 

Consolidation

 

Investment Entities

 

Eliminations

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

$

4,530

 

$

337

 

$

(19

)

$

4,848

 

Total expenses

 

3,924

 

116

 

(19

)

4,021

 

Pretax income

 

606

 

221

 

 

827

 

Income tax provision

 

133

 

 

 

133

 

Net income

 

473

 

221

 

 

694

 

Net income attributable to noncontrolling interests

 

 

221

 

 

221

 

Net income attributable to Ameriprise Financial

 

$

473

 

$

 

$

 

$

473

 

 

The following tables present the balances of assets and liabilities held by consolidated investment entities at June 30, 2010 measured at fair value on a recurring basis:

 

 

 

June 30, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

442

 

$

6

 

$

448

 

Common stocks

 

2

 

56

 

 

58

 

Other structured investments

 

 

37

 

10

 

47

 

Syndicated loans

 

 

4,843

 

 

4,843

 

Trading securities

 

 

41

 

 

41

 

Total investments

 

2

 

5,419

 

16

 

5,437

 

Receivables

 

 

45

 

 

45

 

Other assets

 

 

3

 

682

 

685

 

Total assets at fair value

 

$

2

 

$

5,467

 

$

698

 

$

6,167

 

Liabilities

 

 

 

 

 

 

 

 

 

Debt

 

 

 

5,048

 

5,048

 

Other liabilities

 

 

151

 

 

151

 

Total liabilities at fair value

 

$

 

$

151

 

$

5,048

 

$

5,199

 

 

 

 

December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

Trading securities

 

$

 

$

36

 

$

 

$

36

 

Total investments

 

 

36

 

 

36

 

Other assets

 

 

2

 

831

 

833

 

Total assets at fair value

 

$

 

$

38

 

$

831

 

$

869

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

30

 

 

30

 

Total liabilities at fair value

 

$

 

$

30

 

$

 

$

30

 

 

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Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30:

 

 

 

2010

 

2009

 

 

 

Corporate
Debt
Securities

 

Other
Structured
Investments

 

Other
Assets

 

Debt

 

Other
Assets

 

 

 

(in millions)

 

Balance, April 1

 

$

15

 

$

6

 

$

870

 

$

(5,144

)

$

262

 

Cumulative effect of accounting change

 

 

 

 

 

 

Total gains (losses) included in:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

(1

)(1)

(1

)(1)

(34

)(2)

77

(1)

(15

)(3)

Comprehensive income

 

 

 

(14

)

 

39

 

Purchases, sales, issuances and settlements, net

 

(8

)

5

 

(140

)

19

 

55

 

Balance, June 30

 

$

6

 

$

10

 

$

682

 

$

(5,048

)

$

341

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized gains (losses) included in income relating to assets held at June 30

 

$

(1)

$

(1)

$

(5

)(4)

$

77

(1)

$

(15

)(3)

 


(1)   Included in net investment income in the Consolidated Statements of Operations.

(2)   Represents a $33 million loss included in other revenues and a $1 million loss included in net investment income in the Consolidated Statements of Operations.

(3)   Included in other revenues in the Consolidated Statements of Operations.

(4)   Represents a $4 million loss included in other revenues and a $1 million loss included in net investment income in the Consolidated Statements of Operations.

 

 

 

2010

 

2009

 

 

 

Corporate
Debt
Securities

 

Other
Structured
Investments

 

Other
Assets

 

Debt

 

Other
Assets

 

 

 

(in millions)

 

Balance, January 1

 

$

 

$

 

$

831

 

$

 

$

287

 

Cumulative effect of accounting change

 

15

 

5

 

 

(4,962

)

 

Total gains (losses) included in:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

(1

)(1)

1

(1)

21

(2)

(106

)(1)

(34

)(3)

Comprehensive income

 

 

 

(64

)

 

33

 

Purchases, sales, issuances and settlements, net

 

(8

)

4

 

(106

)

20

 

55

 

Balance, June 30

 

$

6

 

$

10

 

$

682

 

$

(5,048

)

$

341

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized gains (losses) included in income relating to assets held at June 30

 

$

(1)

$

1

(1)

$

50

(4)

$

(106

)(1)

$

(29

)(3)

 


(1)   Included in net investment income in the Consolidated Statements of Operations.

(2)   Represents a $22 million gain included in other revenue and a $1 million loss included in net investment income in the Consolidated Statements of Operations.

(3)   Included in other revenues in the Consolidated Statements of Operations.

(4)   Represents a $51 million gain included in other revenues and a $1 million loss included in net investment income in the Consolidated Statements of Operations.

 

The Company has elected the fair value option within the consolidation standards issued June 2009 for the financial assets and liabilities of the consolidated CDOs. Management believes that the use of the fair value option better matches the changes in fair value of assets and liabilities related to the CDOs.

 

For receivables, other assets and other liabilities of the consolidated CDOs, the carrying value approximates fair value as the nature of these assets and liabilities have historically been short term and the receivables have been collectible. The fair value of these assets and liabilities is classified as Level 2. The fair value of syndicated loans is obtained from nationally-recognized pricing services and is classified as Level 2. Other assets consist primarily of properties held in consolidated pooled investment vehicles managed by Threadneedle. The fair value of these properties is determined using discounted cash flows and market comparables. Inputs into the valuation of these properties include: rental cash flows, current occupancy, historical vacancy rates, tenant history and assumptions regarding how quickly the property can be occupied and at what rental rates. Given the significance of the unobservable inputs to these measurements, these assets are classified as Level 3. The fair value of the CDO’s debt is valued using a discounted cash flow methodology. Inputs used to determine the expected cash flows include assumptions about default and recovery rates of the CDO’s underlying assets. Given the significance of the unobservable inputs to this fair value measurement, the CDO debt is classified as Level 3. Other liabilities consist primarily of short securities held in consolidated hedge funds. The fair value of these

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

securities is obtained from nationally-recognized pricing services and is classified as Level 2. See Note 10 for a description of the Company’s determination of the fair value of investments.

 

The following table presents the fair value and unpaid principal balance of assets and liabilities carried at fair value under the fair value option as of June 30, 2010:

 

 

 

(in millions)

 

Syndicated loans

 

 

 

Unpaid principal balance

 

$

5,226

 

Excess unpaid principal over fair value

 

(383

)

Fair value

 

$

4,843

 

 

 

 

 

Fair value of loans more than 90 days past due

 

181

 

Fair value of loans in non-accrual status

 

162

 

Difference between fair value and unpaid principal of loans more than 90 days past due, loans in non-accrual status or both

 

83

 

Debt

 

 

 

Unpaid principal balance

 

6,002

 

Excess unpaid principal over fair value

 

(954

)

Carrying value at estimated fair value

 

$

5,048

 

 

Interest income from loans, bonds and structured investments is recorded based on contractual rates in net investment income. Gains and losses related to changes in the fair value of investments and gains and losses on sales of investments are recorded in net investment income. Interest expense on debt is recorded in interest and debt expense with gains and losses related to changes in the fair value of debt recorded in net investment income.

 

Total gains and losses recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $100 million and $128 million for the three months and six months ended June 30, 2010, respectively. The majority of the syndicated loans and debt have floating rates, as such changes in their fair values are primarily attributable to changes in credit spreads.

 

Debt of the consolidated investment entities and the stated interest rates as of June 30, 2010 were as follows:

 

 

 

Carrying Value

 

Stated Interest Rate

 

 

 

(in millions)

 

 

 

Debt of consolidated CDOs due 2012-2021

 

$

5,048

 

1.0

%

Floating rate revolving credit borrowings due 2014

 

183

 

5.9

 

Floating rate revolving credit borrowings due 2014

 

38

 

5.0

 

Floating rate revolving credit borrowings due 2015

 

27

 

4.9

 

Total

 

$

5,296

 

 

 

 

The debt of the consolidated CDOs has both fixed and floating interest rates. The stated interest rate of the debt of consolidated CDOs is a weighted average rate based on the principal and stated interest rate according to the terms of each CDO structure, which range from 0% to 14.1%. The carrying value of the debt of the consolidated CDOs represents the fair value of the aggregate debt as of June 30, 2010. The carrying value of the floating rate revolving credit borrowings represent the outstanding principal amount of debt of certain consolidated pooled investment vehicles managed by Threadneedle. The fair value of this debt was $248 million as of June 30, 2010.

 

At June 30, 2010, future maturities of debt were as follows:

 

 

 

(in millions)

 

2011

 

$

 

2012

 

21

 

2013

 

150

 

2014

 

221

 

2015

 

383

 

Thereafter

 

5,475

 

Total future maturities

 

$

6,250

 

 

14



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

4.  Investments

 

The following is a summary of Ameriprise Financial investments:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Available-for-Sale securities, at fair value

 

$

32,216

 

$

32,546

 

Commercial mortgage loans, net

 

2,631

 

2,663

 

Trading securities

 

547

 

556

 

Policy loans

 

725

 

720

 

Other investments

 

407

 

453

 

Total

 

$

36,526

 

$

36,938

 

 

Available-for-Sale securities distributed by type were as follows:

 

 

 

June 30, 2010

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Noncredit
OTTI
(1)

 

 

 

(in millions)

 

Corporate debt securities

 

$

14,855

 

$

1,279

 

$

(56

)

$

16,078

 

$

10

 

Residential mortgage backed securities

 

7,497

 

372

 

(396

)

7,473

 

(149

)

Commercial mortgage backed securities

 

4,369

 

314

 

(2

)

4,681

 

 

Asset backed securities

 

1,921

 

90

 

(45

)

1,966

 

(17

)

State and municipal obligations

 

1,605

 

66

 

(63

)

1,608

 

 

U.S. government and agencies obligations

 

168

 

10

 

 

178

 

 

Foreign government bonds and obligations

 

93

 

17

 

 

110

 

 

Common and preferred stocks

 

53

 

2

 

(7

)

48

 

 

Other debt obligations

 

74

 

 

 

74

 

 

Total

 

$

30,635

 

$

2,150

 

$

(569

)

$

32,216

 

$

(156

)

 

 

 

December 31, 2009

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Noncredit
OTTI
(1)

 

 

 

(in millions)

 

Corporate debt securities

 

$

15,336

 

$

894

 

$

(107

)

$

16,123

 

$

12

 

Residential mortgage backed securities

 

8,050

 

218

 

(498

)

7,770

 

(152

)

Commercial mortgage backed securities

 

4,437

 

196

 

(20

)

4,613

 

 

Asset backed securities

 

1,984

 

72

 

(62

)

1,994

 

(18

)

State and municipal obligations

 

1,472

 

21

 

(76

)

1,417

 

 

U.S. government and agencies obligations

 

379

 

9

 

(1

)

387

 

 

Foreign government bonds and obligations

 

95

 

14

 

(1

)

108

 

 

Common and preferred stocks

 

52

 

1

 

(10

)

43

 

 

Other structured investments

 

22

 

36

 

 

58

 

21

 

Other debt obligations

 

33

 

 

 

33

 

 

Total

 

$

31,860

 

$

1,461

 

$

(775

)

$

32,546

 

$

(137

)

 


(1)   Represents the amount of other-than-temporary impairment losses in Accumulated Other Comprehensive Income. Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.

 

15



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

At both June 30, 2010 and December 31, 2009, fixed maturity securities comprised approximately 88% of Ameriprise Financial investments. These securities were rated by Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings Ltd. (“Fitch”), except for approximately $1.3 billion and $1.2 billion of securities at June 30, 2010 and December 31, 2009, respectively, which were rated by the Company’s internal analysts using criteria similar to Moody’s, S&P and Fitch. Ratings on fixed maturity securities are presented using the median of ratings from Moody’s, S&P and Fitch. If only two of the ratings are available, the lower rating is used. A summary of fixed maturity securities by rating was as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

Ratings

 

Amortized
Cost

 

Fair Value

 

Percent of
Total Fair
Value

 

Amortized
Cost

 

Fair Value

 

Percent of
Total Fair
Value

 

 

 

(in millions, except percentages)

 

AAA

 

$

12,367

 

$

13,091

 

41

%

$

13,003

 

$

13,396

 

41

%

AA

 

1,746

 

1,840

 

6

 

1,616

 

1,601

 

5

 

A

 

4,329

 

4,579

 

14

 

4,778

 

4,910

 

15

 

BBB

 

10,019

 

10,900

 

34

 

10,261

 

10,802

 

33

 

Below investment grade

 

2,121

 

1,758

 

5

 

2,150

 

1,794

 

6

 

Total fixed maturities

 

$

30,582

 

$

32,168

 

100

%

$

31,808

 

$

32,503

 

100

%

 

At June 30, 2010 and December 31, 2009, approximately 31% and 34%, 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 total equity.

 

The following tables provide 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:

 

 

 

June 30, 2010

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Description of Securities

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

89

 

$

471

 

$

(17

)

91

 

$

651

 

$

(39

)

180

 

$

1,122

 

$

(56

)

Residential mortgage backed securities

 

39

 

533

 

(6

)

165

 

809

 

(390

)

204

 

1,342

 

(396

)

Commercial mortgage backed securities

 

14

 

76

 

 

3

 

40

 

(2

)

17

 

116

 

(2

)

Asset backed securities

 

14

 

143

 

(3

)

33

 

160

 

(42

)

47

 

303

 

(45

)

State and municipal obligations

 

30

 

112

 

(1

)

114

 

355

 

(62

)

144

 

467

 

(63

)

U.S. government and agencies obligations

 

1

 

43

 

 

 

 

 

1

 

43

 

 

Foreign government bonds and obligations

 

2

 

1

 

 

 

 

 

2

 

1

 

 

Common and preferred stocks

 

2

 

 

 

3

 

43

 

(7

)

5

 

43

 

(7

)

Other structured investments

 

 

 

 

6

 

 

 

6

 

 

 

Total

 

191

 

$

1,379

 

$

(27

)

415

 

$

2,058

 

$

(542

)

606

 

$

3,437

 

$

(569

)

 

16


 


Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

 

 

December 31, 2009

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Description of Securities

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

139

 

$

1,095

 

$

(18

)

193

 

$

1,368

 

$

(89

)

332

 

$

2,463

 

$

(107

)

Residential mortgage backed securities

 

80

 

1,566

 

(51

)

172

 

904

 

(447

)

252

 

2,470

 

(498

)

Commercial mortgage backed securities

 

37

 

373

 

(4

)

36

 

348

 

(16

)

73

 

721

 

(20

)

Asset backed securities

 

16

 

126

 

(3

)

38

 

207

 

(59

)

54

 

333

 

(62

)

State and municipal obligations

 

64

 

318

 

(10

)

135

 

389

 

(66

)

199

 

707

 

(76

)

U.S. government and agencies obligations

 

5

 

133

 

(1

)

 

 

 

5

 

133

 

(1

)

Foreign government bonds and obligations

 

 

 

 

2

 

4

 

(1

)

2

 

4

 

(1

)

Common and preferred stocks

 

2

 

 

 

3

 

39

 

(10

)

5

 

39

 

(10

)

Other structured investments

 

 

 

 

6

 

 

 

6

 

 

 

Total

 

343

 

$

3,611

 

$

(87

)

585

 

$

3,259

 

$

(688

)

928

 

$

6,870

 

$

(775

)

 

As part of Ameriprise Financial’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to credit spreads. The primary driver of lower unrealized losses at June 30, 2010 was the decline of interest rates during the period.

 

The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Operations for other-than-temporary impairments related to credit losses on securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

Beginning balance of credit losses on securities held for which a portion of other-than-temporary impairment was recognized in other comprehensive income

 

$

290

 

$

282

 

$

263

 

$

258

 

Additional amount related to credit losses for which an other-than-temporary impairment was not previously recognized

 

 

 

15

 

8

 

Reductions for securities sold during the period (realized)

 

 

(3

)

 

(3

)

Additional increases to the amount related to credit losses for which an other-than-temporary impairment was previously recognized

 

1

 

31

 

13

 

47

 

Ending balance of credit losses on securities held as of June 30 for which a portion of other-than-temporary impairment was recognized in other comprehensive income

 

$

291

 

$

310

 

$

291

 

$

310

 

 

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; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC, benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.

 

17



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following table presents a rollforward of the net unrealized securities gains (losses) on Available-for-Sale securities included in accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

Accumulated Other

 

 

 

Net

 

 

 

Comprehensive Income

 

 

 

Unrealized

 

 

 

(Loss) Related to Net

 

 

 

Securities

 

Deferred

 

Unrealized Securities

 

 

 

Gains (Losses)

 

Income Tax

 

Gains (Losses)

 

 

 

(in millions)

 

Balance at January 1, 2009

 

$

(1,478

)

$

517

 

$

(961

)

Cumulative effect of accounting change

 

(203

)(1)

71

 

(132

)

Net unrealized securities gains arising during the period (3)

 

1,499

 

(525

)

974

 

Reclassification of gains included in net income

 

(31

)

11

 

(20

)

Impact of DAC, DSIC, benefit reserves and reinsurance recoverables

 

(280

)

98

 

(182

)

Balance at June 30, 2009

 

$

(493

)

$

172

 

$

(321

)(2)

 

 

 

 

 

 

 

 

Balance at January 1, 2010

 

$

474

 

$

(164

)

$

310

 

Net unrealized securities gains arising during the period (3)

 

898

 

(315

)

583

 

Reclassification of gains included in net income

 

(8

)

3

 

(5

)

Impact of DAC, DSIC, benefit reserves and reinsurance recoverables

 

(305

)

107

 

(198

)

Balance at June 30, 2010

 

$

1,059

 

$

(369

)

$

690

(2)

 


(1)   Amount represents the cumulative effect of adopting a new accounting standard on January 1, 2009.  See Note 2 for additional information on the adoption impact.

(2)   At June 30, 2010 and 2009, Accumulated Other Comprehensive Income Related to Net Unrealized Securities Gains included $(82) million and $(97) million, respectively, of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.

(3)   Net unrealized securities gains arising during the period include other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income during the period.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

(in millions)

 

Gross realized gains from sales

 

$

7

 

$

57

 

$

40

 

$

109

 

Gross realized losses from sales

 

 

(11

)

(1

)

(12

)

Other-than-temporary impairments related to credit

 

(1

)

(31

)

(31

)

(63

)

 

The other-than-temporary impairments for the three months and six months ended June 30, 2010 primarily related to credit losses on non-agency residential mortgage backed securities. The other-than-temporary impairments for the three months and six months ended June 30, 2009 related to credit losses on non-agency residential mortgage backed securities and corporate debt securities primarily in the gaming industry.

 

Available-for-Sale securities by contractual maturity at June 30, 2010 were as follows:

 

 

 

Amortized Cost

 

Fair Value

 

 

 

(in millions)

 

Due within one year

 

$

1,714

 

$

1,750

 

Due after one year through five years

 

6,176

 

6,496

 

Due after five years through 10 years

 

4,773

 

5,269

 

Due after 10 years

 

4,132

 

4,533

 

 

 

16,795

 

18,048

 

Residential mortgage backed securities

 

7,497

 

7,473

 

Commercial mortgage backed securities

 

4,369

 

4,681

 

Asset backed securities

 

1,921

 

1,966

 

Common and preferred stocks

 

53

 

48

 

Total

 

$

30,635

 

$

32,216

 

 

18



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities and asset backed securities are not due at a single maturity date. As such, these securities, as well as common and preferred stocks, were not included in the maturities distribution.

 

Trading Securities

 

Net recognized gains related to trading securities held at June 30, 2010 and 2009 were $9 million and $19 million, respectively, for the six months then ended.

 

5.  Deferred Acquisition Costs and Deferred Sales Inducement Costs

 

The balances of and changes in DAC were as follows:

 

 

 

2010

 

2009

 

 

 

(in millions)

 

Balance at January 1

 

$

4,334

 

$

4,383

 

Capitalization of acquisition costs

 

233

 

366

 

Amortization

 

(289

)

(161

)

Impact of change in net unrealized securities gains

 

(155

)

(227

)

Balance at June 30

 

$

4,123

 

$

4,361

 

 

The balances of and changes in DSIC, which is included in other assets, were as follows:

 

 

 

2010

 

2009

 

 

 

(in millions)

 

Balance at January 1

 

$

524

 

$

518

 

Capitalization of sales inducement costs

 

26

 

39

 

Amortization

 

(35

)

(6

)

Impact of change in net unrealized securities gains

 

(22

)

(33

)

Balance at June 30

 

$

493

 

$

518

 

 

6.  Future Policy Benefits and Claims and Separate Account Liabilities

 

Future policy benefits and claims consisted of the following:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Fixed annuities

 

$

16,633

 

$

16,558

 

Equity indexed annuities (“EIA”) accumulated host values

 

123

 

159

 

EIA embedded derivatives

 

3

 

9

 

Variable annuity fixed sub-accounts

 

4,918

 

6,127

 

Variable annuity guaranteed minimum withdrawal benefits (“GMWB”)

 

842

 

204

 

Variable annuity guaranteed minimum accumulation benefits (“GMAB”)

 

247

 

100

 

Other variable annuity guarantees

 

14

 

12

 

Total annuities

 

22,780

 

23,169

 

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

 

2,643

 

2,595

 

Other life, disability income and long term care insurance

 

4,744

 

4,619

 

Auto, home and other insurance

 

392

 

380

 

Policy claims and other policyholders’ funds

 

118

 

123

 

Total

 

$

30,677

 

$

30,886

 

 

Separate account liabilities consisted of the following:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Variable annuity variable sub-accounts

 

$

49,176

 

$

48,982

 

VUL insurance variable sub-accounts

 

4,989

 

5,239

 

Other insurance variable sub-accounts

 

41

 

46

 

Threadneedle investment liabilities

 

3,823

 

3,862

 

Total

 

$

58,029

 

$

58,129

 

 

19



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

7.  Variable Annuity and Insurance Guarantees

 

The majority of the variable annuity contracts offered by the Company contain guaranteed minimum death benefit (“GMDB”) provisions. 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 with GMWB and GMAB provisions. The Company previously offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.

 

Certain universal life contracts offered by the Company provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.

 

The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:

 

 

 

June 30, 2010

 

December 31, 2009

 

Variable Annuity
Guarantees by
Benefit Type
(1)

 

Total
Contract
Value

 

Contract
Value in
Separate
Accounts

 

Net
Amount
at Risk
(2)

 

Weighted
Average
Attained
Age

 

Total
Contract
Value

 

Contract
Value in
Separate
Accounts

 

Net
Amount
at Risk
(2)

 

Weighted
Average
Attained
Age

 

 

 

(in millions, except age)

 

GMDB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return of premium

 

$

31,381

 

$

29,706

 

$

1,420

 

62

 

$

30,938

 

$

28,415

 

$

974

 

61

 

Five/six-year reset

 

12,781

 

10,209

 

1,117

 

62

 

13,919

 

11,223

 

929

 

61

 

One-year ratchet

 

6,839

 

6,311

 

1,030

 

63

 

7,081

 

6,400

 

873

 

63

 

Five-year ratchet

 

1,249

 

1,196

 

59

 

60

 

1,256

 

1,171

 

38

 

59

 

Other

 

528

 

497

 

120

 

67

 

549

 

516

 

95

 

67

 

Total — GMDB

 

$

52,778

 

$

47,919

 

$

3,746

 

62

 

$

53,743

 

$

47,725

 

$

2,909

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GGU death benefit

 

$

845

 

$

783

 

$

71

 

64

 

$

853

 

$

775

 

$

70

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMIB

 

$

559

 

$

518

 

$

158

 

64

 

$

628

 

$

582

 

$

126

 

63

 

GMWB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB

 

$

3,937

 

$

3,913

 

$

564

 

64

 

$

4,196

 

$

4,067

 

$

454

 

64

 

GMWB for life

 

15,913

 

15,810

 

1,169

 

63

 

14,988

 

14,333

 

795

 

63

 

Total — GMWB

 

$

19,850

 

$

19,723

 

$

1,733

 

63

 

$

19,184

 

$

18,400

 

$

1,249

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMAB

 

$

2,936

 

$

2,924

 

$

228

 

56

 

$

2,926

 

$

2,853

 

$

153

 

56

 

 


(1)   Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.

(2)   Represents the current guaranteed benefit amount in excess of the current contract value. GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract.

 

Changes in additional liabilities were as follows:

 

 

 

GMDB & GGU

 

GMIB

 

GMWB

 

GMAB

 

UL

 

 

 

(in millions)

 

Liability balance at January 1, 2009

 

$

55

 

$

12

 

$

1,471

 

$

367

 

$

7

 

Incurred claims

 

12

 

(1

)

(887

)

(187

)

6

 

Paid claims

 

(42

)

 

 

 

(1

)

Liability balance at June 30, 2009

 

$

25

 

$

11

 

$

584

 

$

180

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability balance at January 1, 2010

 

$

6

 

$

6

 

$

204

 

$

100

 

$

15

 

Incurred claims

 

11

 

1

 

638

 

147

 

8

 

Paid claims

 

(10

)

 

 

 

(3

)

Liability balance at June 30, 2010

 

$

7

 

$

7

 

$

842

 

$

247

 

$

20

 

 

20


 


Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Mutual funds:

 

 

 

 

 

Equity

 

$

28,605

 

$

29,379

 

Bond

 

18,023

 

16,537

 

Other

 

2,397

 

2,889

 

Total mutual funds

 

$

49,025

 

$

48,805

 

 

8.  Customer Deposits

 

Customer deposits consisted of the following:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Fixed rate certificates

 

$

2,575

 

$

3,172

 

Stock market based certificates

 

841

 

852

 

Stock market embedded derivative reserve

 

11

 

26

 

Other

 

54

 

59

 

Less: accrued interest classified in other liabilities

 

(7

)

(33

)

Total investment certificate reserves

 

3,474

 

4,076

 

Brokerage deposits

 

1,855

 

1,894

 

Banking deposits

 

3,092

 

2,584

 

Total

 

$

8,421

 

$

8,554

 

 

9.  Debt

 

The balances and the stated interest rates of outstanding debt of Ameriprise Financial were as follows:

 

 

 

Outstanding Balance

 

Stated Interest Rate

 

 

 

June 30,
2010

 

December 31,
2009

 

June 30,
2010

 

December 31,
2009

 

 

 

(in millions)

 

 

 

 

 

Senior notes due 2010

 

$

340

 

$

340

 

5.4

%

5.4

%

Senior notes due 2015

 

727

(1)

700

 

5.7

 

5.7

 

Senior notes due 2019

 

317

(1)

300

 

7.3

 

7.3

 

Senior notes due 2020

 

772

(1)

 

5.3

 

 

Senior notes due 2039

 

200

 

200

 

7.8

 

7.8

 

Junior subordinated notes due 2066

 

322

 

322

 

7.5

 

7.5

 

Municipal bond inverse floater certificates due 2021

 

6

 

6

 

0.3

 

0.3

 

Total long-term debt

 

2,684

 

1,868

 

 

 

 

 

Total short-term borrowings

 

484

 

 

 

 

 

 

Total

 

$

3,168

 

$

1,868

 

 

 

 

 

 


(1) Amounts include the fair value of associated fair value hedges on the Company’s long-term debt and any unamortized discounts.

 

Long-term debt

 

On March 11, 2010, Ameriprise Financial issued $750 million aggregate principal amount of unsecured senior notes which mature on March 15, 2020, and incurred debt issuance costs of $6 million. Interest payments are due semi-annually in arrears on March 15 and September 15, commencing September 15, 2010.

 

During the six months ended June 30, 2009, Ameriprise Financial extinguished $135 million aggregate principal amount of its junior subordinated notes due 2066 in open market transactions and recognized a gain of $57 million in other revenues.

 

Short-term borrowings

 

During 2010, the Company entered into repurchase agreements in exchange for cash, which it accounts for as a secured borrowing. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities, agency residential mortgage backed securities and corporate debt securities to collateralize its obligation under the repurchase agreements. The fair value of the securities pledged, which are recorded in investments, was $549 million at June 30, 2010. The

 

21



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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

amount of the Company’s liability as of June 30, 2010 was $491 million, consisting of $484 million recorded in short-term borrowings for the repurchase agreements and $7 million recorded in other liabilities for accrued interest and cash collateral posted by counterparties. The weighted average interest rate on the repurchase agreements was 0.54% as of June 30, 2010.

 

10.  Fair Values of Assets and Liabilities

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.

 

Valuation Hierarchy

 

The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

 

Level 1            Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.

 

Level 2            Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

Level 3            Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Determination of Fair Value

 

The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

 

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

 

Assets

 

Cash Equivalents

 

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. The Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.

 

Investments (Trading Securities and Available-for-Sale Securities)

 

When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques. Level 1 securities include U.S. Treasuries and seed money in funds traded in active markets. Level 2 securities include agency mortgage backed securities, commercial mortgage backed securities, asset backed securities, municipal and corporate bonds, U.S. and foreign government and agency securities, and seed money and other investments in certain hedge funds. The fair value of these Level 2 securities is based on a market approach with prices obtained from nationally-recognized pricing services. Observable inputs used to value these securities can include: reported trades, benchmark yields, issuer spreads and broker/dealer quotes. Level 3 securities include non-agency residential mortgage backed securities, commercial mortgage backed securities, asset backed securities, corporate bonds and seed money in property funds. The fair value of these Level 3 securities is typically based on a single broker quote, except for the valuation of non-agency residential mortgage backed securities.  The Company believes the market for non-agency residential mortgage backed securities is inactive and effective March 31, 2010, the Company returned to using prices from nationally-recognized pricing services to determine the fair value of non-agency residential mortgage backed securities because the difference between these prices and the results of the Company’s discounted cash flows was not significant.

 

22



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Separate Account Assets

 

The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.

 

Other Assets

 

Derivatives that are measured using quoted prices in active markets, such as foreign exchange forwards, or derivatives that are exchanged-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements.

 

Liabilities

 

Future Policy Benefits and Claims

 

The Company values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions (such as, market implied equity volatility and the LIBOR swap curve) and incorporate significant unobservable inputs related to contractholder behavior assumptions (such as withdrawals and lapse rates) and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of the Company’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits and claims. The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its equity indexed annuities. The inputs to these calculations are primarily market observable and include interest rates, volatilities, and equity index levels. As a result, these measurements are classified as Level 2.

 

Customer Deposits

 

The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its stock market certificates. The inputs to these calculations are primarily market observable and include interest rates, volatilities, and equity index levels. As a result, these measurements are classified as Level 2.

 

Other Liabilities

 

Derivatives that are measured using quoted prices in active markets, such as foreign exchange forwards, or derivatives that are exchanged-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and options.

 

Securities sold not yet purchased include highly liquid investments which are short-term in nature. Level 1 securities include U.S. Treasuries and securities traded in active markets. The remaining securities sold not yet purchased are measured using amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.

 

23



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following tables present the balances of assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:

 

 

 

June 30, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

103

 

$

3,493

 

$

 

$

3,596

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

14,835

 

1,243

 

16,078

 

Residential mortgage backed securities

 

 

3,300

 

4,173

 

7,473

 

Commercial mortgage backed securities

 

 

4,537

 

144

 

4,681

 

Asset backed securities

 

 

1,524

 

442

 

1,966

 

State and municipal obligations

 

 

1,608

 

 

1,608

 

U.S. government and agencies obligations

 

21

 

157

 

 

178

 

Foreign government bonds and obligations

 

 

110

 

 

110

 

Common and preferred stocks

 

 

44

 

4

 

48

 

Other debt obligations

 

 

74

 

 

74

 

Total Available-for-Sale securities

 

21

 

26,189

 

6,006

 

32,216

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seed money

 

103

 

64

 

18

 

185

 

Investments segregated for regulatory purposes

 

5

 

10

 

 

15

 

Other

 

 

343

 

 

343

 

Total Trading securities

 

108

 

417

 

18

 

543

 

Separate account assets

 

 

58,029

 

 

58,029

 

Other assets:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

509

 

 

509

 

Equity derivatives

 

 

1,050

 

 

1,050

 

Other

 

2

 

2

 

1

 

5

 

Total Other assets

 

2

 

1,561

 

1

 

1,564

 

Total assets at fair value

 

$

234

 

$

89,689

 

$

6,025

 

$

95,948

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Future policy benefits and claims:

 

 

 

 

 

 

 

 

 

EIA embedded derivatives

 

$

 

$

3

 

$

 

$

3

 

GMWB and GMAB embedded derivatives

 

 

 

1,083

 

1,083

 

Total Future policy benefits and claims

 

 

3

 

1,083

 

1,086

 

Customer deposits

 

 

11

 

 

11

 

Other liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

278

 

 

278

 

Equity derivatives

 

 

421

 

 

421

 

Credit derivatives

 

 

10

 

 

10

 

Other

 

 

4

 

 

4

 

Total Other liabilities

 

 

713

 

 

713

 

Total liabilities at fair value

 

$

 

$

727

 

$

1,083

 

$

1,810

 

 

24



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

 

 

 

December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

Cash equivalents

 

$

57

 

$

2,733

 

$

 

$

2,790

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

14,871

 

1,252

 

16,123

 

Residential mortgage backed securities

 

 

3,788

 

3,982

 

7,770

 

Commercial mortgage backed securities

 

 

4,541

 

72

 

4,613

 

Asset backed securities

 

 

1,539

 

455

 

1,994

 

State and municipal obligations

 

 

1,417

 

 

1,417

 

U.S. government and agencies obligations

 

64

 

323

 

 

387

 

Foreign government bonds and obligations

 

 

108

 

 

108

 

Common and preferred stocks

 

 

39

 

4

 

43

 

Other structured investments

 

 

 

58

 

58

 

Other debt obligations

 

 

33

 

 

33

 

Total Available-for-Sale securities

 

64

 

26,659

 

5,823

 

32,546

 

Trading securities

 

101

 

436

 

16

 

553

 

Separate account assets

 

 

58,129

 

 

58,129

 

Other assets

 

1

 

815

 

 

816

 

Total assets at fair value

 

$

223

 

$

88,772

 

$

5,839

 

$

94,834

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

$

 

$

9

 

$

299

 

$

308

 

Customer deposits

 

 

26

 

 

26

 

Other liabilities

 

1

 

937

 

 

938

 

Total liabilities at fair value

 

$

1

 

$

972

 

$

299

 

$

1,272

 

 

The following tables provide a summary of changes in Level 3 assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:

 

 

 

 

 

Total Gains (Losses)

 

Purchases,

 

 

 

 

 

 

 

 

 

Included in

 

Sales,

 

 

 

 

 

 

 

Balance,

 

 

 

Other

 

Issuances

 

Transfers

 

Balance,

 

 

 

April 1,

 

Net

 

Comprehensive

 

and

 

In/(Out) of

 

June 30,

 

 

 

2010

 

Income

 

Income

 

Settlements, Net

 

Level 3

 

2010

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,258

 

$

1

 

$

24

 

$

(40

)

$

 

$

1,243

 

Residential mortgage backed securities

 

3,885

 

21

 

120

 

147

 

 

4,173

 

Commercial mortgage backed securities

 

80

 

1

 

1

 

62

 

 

144

 

Asset backed securities

 

459

 

4

 

10

 

(8

)

(23

)

442

 

Common and preferred stocks

 

4

 

 

 

 

 

4

 

Total Available-for-Sale securities

 

5,686

 

27

(1)

155

 

161

 

(23

)(3)

6,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

16

 

1

(1)

 

1

 

 

18

 

Other assets

 

 

1

(1)

 

 

 

1

 

Future policy benefits and claims:

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB embedded derivatives

 

(193

)

(851

)(2)

 

(39

)

 

(1,083

)

 


(1)

Included in net investment income in the Consolidated Statements of Operations.

(2)

Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

(3)

Represents a security transferred to Level 2 as the fair value is now obtained from a nationally-recognized pricing service. Previously, the fair value of the security was based on broker quotes.

 

25



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

 

 

 

 

Total Gains (Losses)

 

Purchases,

 

 

 

 

 

 

 

 

 

Included in

 

Sales,

 

 

 

 

 

 

 

Balance,

 

 

 

Other

 

Issuances

 

Transfers

 

Balance,

 

 

 

April 1,

 

Net

 

Comprehensive

 

and

 

In/(Out) of

 

June 30,

 

 

 

2009

 

Income

 

Income

 

Settlements, Net

 

Level 3

 

2009

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,088

 

$

 

$

54

 

$

36

 

$

 

$

1,178

 

Residential mortgage backed securities

 

2,734

 

20

 

102

 

595

 

 

3,451

 

Commercial mortgage backed securities

 

3

 

 

 

61

 

 

64

 

Asset backed securities

 

286

 

7

 

1

 

85

 

 

379

 

Common and preferred stocks

 

10

 

 

 

 

 

10

 

Other structured investments

 

38

 

 

13

 

(2

)

 

49

 

Other debt obligations

 

5

 

 

 

(5

)

 

 

Total Available-for-Sale securities

 

4,164

 

27

(1)

170

 

770

 

 

5,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

25

 

(5

)(1)

4

 

(1

)

 

23

 

Other assets

 

125

 

(33

)(2)

 

(91

)

 

1

 

Future policy benefits and claims

 

(1,516

)

773

(2)

 

(16

)

 

(759

)

 


(1)

Included in net investment income in the Consolidated Statements of Operations.

(2)

Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

 

The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred.

 

The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities of Ameriprise Financial held at June 30 for the three months then ended:

 

 

 

2010

 

2009

 

 

 

Net Investment
Income

 

Benefits, Claims,
Losses and
Settlement
Expenses

 

Net Investment
Income

 

Benefits, Claims,
Losses and
Settlement
Expenses

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

 

$

 

$

 

Residential mortgage backed securities

 

20

 

 

(5

)

 

Commercial mortgage backed securities

 

1

 

 

 

 

Asset backed securities

 

4

 

 

2

 

 

Common and preferred stock

 

 

 

 

 

Other structured investments

 

 

 

 

 

Total Available-for-Sale securities

 

25

 

 

(3

)

 

Trading securities

 

2

 

 

(3

)

 

Other assets

 

 

 

 

 

Future policy benefits and claims

 

 

(852

)

 

766

 

 

26



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following tables provide a summary of changes in Level 3 assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:

 

 

 

 

 

Total Gains (Losses)

 

Purchases,

 

 

 

 

 

 

 

 

 

Included in

 

Sales,

 

 

 

 

 

 

 

Balance,

 

 

 

Other

 

Issuances

 

Transfers

 

Balance,

 

 

 

January 1,

 

Net

 

Comprehensive

 

and

 

In/(Out) of

 

June 30,

 

 

 

2010

 

Income

 

Income

 

Settlements, Net

 

Level 3

 

2010

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,252

 

$

1

 

$

43

 

$

(53

)

$

 

$

1,243

 

Residential mortgage backed securities

 

3,982

 

15

 

196

 

(20

)

 

4,173

 

Commercial mortgage backed securities

 

72

 

1

 

10

 

61

 

 

144

 

Asset backed securities

 

455

 

8

 

28

 

(26

)

(23

)

442

 

Common and preferred stocks

 

4

 

 

 

 

 

4

 

Other structured investments

 

58

 

2

 

2

 

(62

)

 

 

Total Available-for-Sale securities

 

5,823

 

27

(1)

279

 

(100

)

(23

)(3)

6,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

16

 

2

(1)

(1

)

1

 

 

18

 

Other assets

 

 

1

(1)

 

 

 

1

 

Future policy benefits and claims:

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB embedded derivatives

 

(299

)

(716

)(2)

 

(68

)

 

(1,083

)

 


(1)

Included in net investment income in the Consolidated Statements of Operations.

(2)

Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

(3)

Represents a security transferred to Level 2 as the fair value is now obtained from a nationally-recognized pricing service. Previously, the fair value of the security was based on broker quotes.

 

 

 

 

 

Total Gains (Losses)

 

Purchases,

 

 

 

 

 

 

 

 

 

Included in

 

Sales,

 

 

 

 

 

 

 

Balance,

 

 

 

Other

 

Issuances

 

Transfers

 

Balance,

 

 

 

January 1,

 

Net

 

Comprehensive

 

and

 

In/(Out) of

 

June 30,

 

 

 

2009

 

Income

 

Income

 

Settlements, Net

 

Level 3

 

2009

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,120

 

$

 

$

79

 

$

(7

)

$

(14

)

$

1,178

 

Residential mortgage backed securities

 

1,208

 

12

 

108

 

2,123

 

 

3,451

 

Commercial mortgage backed securities

 

3

 

 

 

61

 

 

64

 

Asset backed securities

 

222

 

9

 

(5

)

153

 

 

379

 

Common and preferred stocks

 

10

 

 

 

 

 

10

 

Other structured investments

 

50

 

(3

)

6

 

(4

)

 

49

 

Other debt obligations

 

 

 

 

 

 

 

Total Available-for-Sale securities

 

2,613

 

18

(1)

188

 

2,326

 

(14

)(3)

5,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

30

 

(5

)(1)

3

 

(5

)

 

23

 

Other assets

 

200

 

(36

)(2)

 

(163

)

 

1

 

Future policy benefits and claims

 

(1,832

)

1,104

(2)

 

(31

)

 

(759

)

 


(1)

Included in net investment income in the Consolidated Statements of Operations.

(2)

Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.

(3)

Represents a security transferred to Level 2 as the fair value is now obtained from a nationally-recognized pricing service. Previously, the fair value of the security was based on broker quotes.

 

27



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities of Ameriprise Financial held at June 30 for the six months then ended:

 

 

 

2010

 

2009

 

 

 

Net Investment
Income

 

Benefits, Claims,
Losses and
Settlement
Expenses

 

Net Investment
Income

 

Benefits, Claims,
Losses and
Settlement
Expenses

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

 

$

 

$

 

Residential mortgage backed securities

 

15

 

 

(13

)

 

Commercial mortgage backed securities

 

1

 

 

 

 

Asset backed securities

 

7

 

 

4

 

 

Common and preferred stock

 

 

 

 

 

Other structured investments

 

 

 

(3

)

 

Total Available-for-Sale securities

 

23

 

 

(12

)

 

Trading securities

 

2

 

 

(3

)

 

Other assets

 

 

 

 

 

Future policy benefits and claims

 

 

(719

)

 

1,088

 

 

During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.

 

The following table provides the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities Ameriprise Financial measured at fair value on a recurring basis.

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

 

 

(in millions)

 

(in millions)

 

Financial Assets

 

 

 

 

 

 

 

 

 

Commercial mortgage loans, net

 

$

2,631

 

$

2,747

 

$

2,663

 

$

2,652

 

Policy loans

 

725

 

788

 

720

 

795

 

Receivables

 

1,725

 

1,329

 

1,387

 

1,055

 

Restricted and segregated cash

 

1,272

 

1,272

 

1,633

 

1,633

 

Other investments and assets

 

383

 

377

 

439

 

442

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

$

15,449

 

$

15,666

 

$

15,540

 

$

15,657

 

Investment certificate reserves

 

3,463

 

3,445

 

4,050

 

4,053

 

Banking and brokerage customer deposits

 

4,947

 

4,947

 

4,478

 

4,478

 

Separate account liabilities

 

4,180

 

4,180

 

4,268

 

4,268

 

Debt and other liabilities

 

3,306

 

3,471

 

2,365

 

2,407

 

 

Investments

 

The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for the Company’s estimate of the amount recoverable on the loan.

 

The fair value of policy loans is determined using discounted cash flows.

 

28



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Receivables

 

The fair value of consumer banking loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.

 

Loans held for sale are measured at the lower of cost or market and fair value is based on what secondary markets are currently offering for loans with similar characteristics.

 

Brokerage margin loans are measured at outstanding balances, which are a reasonable estimate of fair value because of the sufficiency of the collateral and short term nature of these loans.

 

Restricted and Segregated Cash

 

Restricted and segregated cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value.

 

Amounts segregated under federal and other regulations may also reflect resale agreements and are measured at the cost at which the securities will be sold. This measurement is a reasonable estimate of fair value because of the short time between entering into the transaction and its expected realization and the reduced risk of credit loss due to pledging U.S. government-backed securities as collateral.

 

Other Investments and Assets

 

Other investments and assets primarily consist of syndicated loans. The fair value of syndicated loans is obtained from a nationally-recognized pricing service.

 

Future Policy Benefits and Claims

 

The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior, and the Company’s nonperformance risk specific to these liabilities. The fair value of other liabilities including non-life contingent fixed annuities in payout status, equity indexed annuity host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner.

 

Customer Deposits

 

The fair value of investment certificate reserves is determined by discounting cash flows using discount rates that reflect current pricing for assets with similar terms and characteristics, with adjustments for early withdrawal behavior, penalty fees, expense margin and the Company’s nonperformance risk specific to these liabilities.

 

Banking and brokerage customer deposits are liabilities with no defined maturities and fair value is the amount payable on demand at the reporting date.

 

Separate Account Liabilities

 

Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. Carrying value is a reasonable estimate of the fair value as it represents the exit value as evidenced by withdrawal transactions between contractholders and the Company. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.

 

Debt and Other Liabilities

 

Debt fair value is based on quoted prices in active markets, when available. If quoted prices are not available fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques such as present value of cash flows.

 

The fair value of short-term borrowings is determined by discounting cash flows.  A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk.

 

29



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11.  Derivatives and Hedging Activities of Ameriprise Financial

 

Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity, foreign exchange and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.

 

The Company uses derivatives as economic hedges and accounting hedges. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives, by type of derivative and product:

 

 

 

Balance

 

Asset

 

Balance

 

Liability

 

Derivatives designated

 

Sheet

 

June 30,

 

December 31,

 

Sheet

 

June 30,

 

December 31,

 

as hedging instruments

 

Location

 

2010

 

2009

 

Location

 

2010

 

2009

 

 

 

 

 

(in millions)

 

 

 

(in millions)

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

Other assets

 

$

 

$

19

 

 

 

$

 

$

 

Asset-based distribution fees

 

Other assets

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

 

Other assets

 

74

 

 

 

 

 

 

Total qualifying hedges

 

 

 

84

 

19

 

 

 

 

 

 

Derivatives not designated
as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Other assets

 

425

 

176

 

Other liabilities

 

278

 

280

 

Interest rate lock commitments

 

Other assets

 

 

1

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Other assets

 

1,012

 

425

 

Other liabilities

 

388

 

474

 

GMDB

 

Other assets

 

1

 

 

Other liabilities

 

 

2

 

EIA

 

Other assets

 

 

2

 

 

 

 

 

EIA embedded derivatives

 

 

 

 

 

Future policy benefits and claims

 

3

 

9

 

Stock market certificates

 

Other assets

 

37

 

166

 

Other liabilities

 

27

 

141

 

Stock market certificates embedded derivatives

 

 

 

 

 

Customer deposits

 

11

 

26

 

Seed money

 

 

 

 

 

Other liabilities

 

 

1

 

P2 deferral plan

 

 

 

 

 

Other liabilities

 

6

 

 

Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Other assets

 

 

12

 

Other liabilities

 

10

 

 

Foreign exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Seed money

 

Other assets

 

2

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB embedded derivatives(1)

 

 

 

 

 

Future policy benefits and claims

 

1,083

 

299

 

Total non-designated

 

 

 

1,477

 

782

 

 

 

1,806

 

1,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

1,561

 

$

801

 

 

 

$

1,806

 

$

1,232

 

 


(1)    The fair values of GMWB and GMAB embedded derivatives fluctuate primarily based on changes in equity, interest rate and credit markets.

 

See Note 10 for additional information regarding the Company’s fair value measurement of derivative instruments.

 

30



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Derivatives Not Designated as Hedges

 

The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:

 

 

 

 

 

Amount of Gain (Loss) on

 

 

 

 

 

Derivatives Recognized in Income

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Derivatives not designated as

 

Location of Gain (Loss) on

 

June 30,

 

June 30,

 

hedging instruments

 

Derivatives Recognized in Income

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(in millions)

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Benefits, claims, losses and settlement expenses

 

$

185

 

$

(262

)

$

211

 

$

(385

)

Equity

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Benefits, claims, losses and settlement expenses

 

747

 

(851

)

574

 

(790

)

GMDB

 

Benefits, claims, losses and settlement expenses

 

8

 

 

5

 

 

EIA

 

Interest credited to fixed accounts

 

(1

)

 

 

(2

)

EIA embedded derivatives

 

Interest credited to fixed accounts

 

4

 

 

6

 

1

 

Stock market certificates

 

Banking and deposit interest expense

 

(5

)

4

 

(2

)

1

 

Stock market certificates embedded derivatives

 

Banking and deposit interest expense

 

5

 

(5

)

2

 

(5

)

Seed money

 

Net investment income

 

5

 

(10

)

3

 

 

Credit

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Benefits, claims, losses and settlement expenses

 

(20

)

(22

)

(30

)

(22

)

Foreign exchange

 

 

 

 

 

 

 

 

 

 

 

Seed money

 

General and administrative expense

 

(1

)

(4

)

1

 

(1

)

Other

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB embedded derivatives

 

Benefits, claims, losses and settlement expenses

 

(890

)

757

 

(784

)

1,073

 

Total

 

 

 

$

37

 

$

(393

)

$

(14

)

$

(130

)

 

The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to various products and transactions of the Company.

 

The majority of the Company’s annuity contracts contain GMDB provisions, which may result in a death benefit payable that exceeds the contract accumulation value when market values of customers’ accounts decline. Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of considerations received at the beginning of the contract period, after a specified holding period, respectively. The Company economically hedges the exposure related to non-life contingent GMWB and GMAB provisions using various equity futures, equity options, total return swaps, interest rate swaptions, interest rate swaps and credit default swaps. In 2009, the Company entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009. At June 30, 2010, the gross notional amount of these contracts was $45.3 billion and $74 million for the Company’s GMWB and GMAB provisions and GMDB provisions, respectively. At December 31, 2009, the gross notional amount of these contracts was $38.7 billion and $77 million for the Company’s GMWB and GMAB provisions and GMDB provisions, respectively. The premium associated with certain of the above options is paid or received semi-annually over the life of the option contract.

 

The following is a summary of the payments the Company is scheduled to make and receive for these options:

 

 

 

Premiums Payable

 

Premiums Receivable

 

 

 

(in millions)

 

2010(1)

 

$

118

 

$

2

 

2011

 

228

 

4

 

2012

 

208

 

3

 

2013

 

185

 

2

 

2014

 

160

 

1

 

2015-2024

 

530

 

4

 

 


(1) 2010 amounts represent the amounts payable and receivable for the period from July 1, 2010 to December 31, 2010.

 

31



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.

 

Equity indexed annuities and stock market certificate products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to equity indexed annuities and stock market certificate products will positively or negatively impact earnings over the life of these products. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and occasionally enters into futures contracts. The gross notional amount of these derivative contracts was $1.6 billion at June 30, 2010 and December 31, 2009.

 

The Company enters into forward contracts, futures and total return swaps to manage its exposure to price risk arising from seed money investments made in proprietary investment products. The gross notional amount of these contracts was $165 million and $191 million at June 30, 2010 and December 31, 2009, respectively.

 

The Company enters into foreign currency forward contracts to economically hedge its exposure to certain receivables and obligations denominated in non-functional currencies. The gross notional amount of these contracts was $18 million and $7 million at June 30, 2010 and December 31, 2009, respectively.

 

In the first quarter of 2010, the Company entered into a total return swap to economically hedge its exposure to equity price risk of Ameriprise Financial, Inc. common stock granted as part of its Deferred Equity Program for Independent Financial Advisors. As part of the contract, the Company expects to cash settle the difference between the value of a fixed number of shares at the contract date (which may be increased from time to time) and the value of those shares over an unwind period ending on December 31, 2010. The gross notional value of this contract was $25 million at June 30, 2010.

 

Embedded Derivatives

 

Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the equity indexed annuity and stock market investment certificate product obligations are also considered embedded derivatives. These embedded derivatives are bifurcated from their host contracts and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As noted above, the Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.

 

Cash Flow Hedges

 

The Company has designated and accounts for the following as cash flow hedges: (i) interest rate swaps to hedge certain asset-based distribution fees (ii) interest rate swaps to hedge interest rate exposure on debt, (iii) interest rate lock agreements to hedge interest rate exposure on debt issuances and (iv) swaptions used to hedge the risk of increasing interest rates on forecasted fixed premium product sales.

 

Amounts associated with the effective portion of designated cash flow hedges are recorded in accumulated other comprehensive income. The Company reclassifies these amounts into earnings as the forecasted transactions impact earnings. Any ineffectiveness is recorded in earnings immediately. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, any amount recorded in accumulated other comprehensive income attributable to the hedging relationship will be reclassified to earnings over the period that the forecasted transactions are expected to occur. If the forecasted transactions are no longer probable of occurring, hedge accounting will cease and amounts previously recorded in accumulated other comprehensive income will be reclassified to earnings immediately. At June 30, 2010 the Company had $1 million of net unrealized gains recorded in accumulated other comprehensive income.

 

At June 30, 2010, the Company expects to reclassify net pretax gains of $6 million that will be recorded as a reduction to interest and debt expense, offset by net pretax losses of $6 million that will be recorded in net investment income in the next 12 months.

 

32



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

No hedge relationships were discontinued during the periods ended June 30, 2010 and 2009 due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the three months and six months ended June 30, 2010 and 2009,  amounts recognized in earnings related to cash flow hedges due to ineffectiveness were immaterial. The following table shows the impact of the effective portion of the Company’s cash flow hedges on the Consolidated Statements of Operations and the Consolidated Statements of Equity for the periods ended June 30, 2010 and 2009:

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

Other Comprehensive Income on Derivatives

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Derivatives designated as hedging instruments

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

Interest on debt

 

$

 

$

 

$

(10

)

$

 

Asset-based distribution fees

 

9

 

 

9

 

 

Total

 

$

9

 

$

 

$

(1

)

$

 

 

 

 

Amount of Gain (Loss) Reclassified from

 

 

 

Accumulated Comprehensive Income into Income

 

Location of Gain (Loss) Reclassified from Accumulated

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Other Comprehensive Income into Income

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

Interest and debt expense

 

$

2

 

$

2

 

$

4

 

$

4

 

Net investment income

 

(1

)

(1

)

(3

)

(3

)

Total

 

$

1

 

$

1

 

$

1

 

$

1

 

 

Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 25 years and relates to forecasted debt interest payments.

 

Fair Value Hedges

 

During the first quarter of 2010, the Company entered into and designated three interest rate swaps to convert senior notes due 2015, 2019 and 2020 from fixed rate debt to floating rate debt. The swaps have identical terms as the underlying debt being hedged so no ineffectiveness is expected to be realized. The Company recognizes gains and losses on the derivatives and the related hedged items within interest and debt expense. The following table shows the amounts recognized in income for the periods ended June 30, 2010:

 

 

 

 

 

Amount of Gain Recognized
in Income on Derivative

 

Derivatives designated

 

Location of Gain

 

Three Months Ended

 

Six Months Ended

 

as hedging instruments

 

Recorded into Income

 

June 30, 2010

 

June 30, 2010

 

 

 

 

 

(in millions)

 

Fair Value hedges

 

 

 

 

 

 

 

Fixed rate debt

 

Interest and debt expense

 

$

 

$

6

 

Total

 

 

 

$

 

$

6

 

 

Credit Risk

 

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. As of June 30, 2010 and December 31, 2009, the Company held $480 million and $103 million, respectively, in cash and cash equivalents and recorded a corresponding liability in other liabilities for collateral the Company is obligated to return to counterparties. As of June 30, 2010 and December 31, 2009, the Company had accepted additional collateral consisting of various securities with a fair value of $83 million and $22 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of June 30, 2010 and December 31, 2009, the Company’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $303 million and $83 million, respectively.

 

33



Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

Certain of the Company’s derivative instruments contain provisions that adjust the level of collateral the Company is required to post based on the Company’s debt rating (or based on the financial strength of the Company’s life insurance subsidiaries for contracts in which those subsidiaries are the counterparty). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company’s debt does not maintain a specific credit rating (generally an investment grade rating) or the Company’s life insurance subsidiary does not maintain a specific financial strength rating. If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. At June 30, 2010 and December 31, 2009, the aggregate fair value of all derivative instruments in a net liability position containing such credit risk features was $38 million and $297 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of June 30, 2010 and December 31, 2009 was $34 million and $269 million, respectively. If the credit risk features of derivative contracts that were in a net liability position at June 30, 2010 and December 31, 2009 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $4 million and $28 million, respectively.

 

12.  Income Taxes

 

The Company’s effective tax rates were 14.6% and 24.4% for the three months ended June 30, 2010 and 2009, respectively. The Company’s effective tax rates were 16.1% and 18.4% for the six months ended June 30, 2010 and 2009, respectively. The decrease in the effective tax rate primarily reflects benefits from tax planning and completion of certain audits which offset the impact of an increase in pretax income relative to tax advantaged items for the three months and six months ended June 30, 2010.

 

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. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, i) future taxable income exclusive of reversing temporary differences and carryforwards, ii) future reversals of existing taxable temporary differences, iii) taxable income in prior carryback years, and iv) tax planning strategies. 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 has been established as of June 30, 2010 and December 31, 2009.

 

Included in the Company’s deferred income tax assets are tax benefits related to net operating loss carryforwards of $35 million which will expire beginning December 31, 2025. As a result of the Company’s ability to file a consolidated U.S. federal income tax return including the Company’s life insurance subsidiaries in 2010, as well as the expected level of taxable income, management believes the Company’s tax credit carryforwards will be utilized in the current year and therefore are reflected in the current tax accounts and not reflected as a deferred tax asset.

 

As of June 30, 2010 and December 31, 2009, the Company had $34 million of gross unrecognized tax benefits and $33 million of gross unrecognized tax expense, respectively. If recognized, approximately $64 million and $81 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2010 and December 31, 2009, respectively, would affect the effective tax rate.

 

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net reduction of $10 million and $20 million in interest and penalties for the three months and six months ended June 30, 2010, respectively. At June 30, 2010 and December 31, 2009, the Company had a receivable of $32 million and $12 million, respectively, related to accrued interest and penalties.

 

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 gross unrecognized tax benefits may decrease by $10 million to $15 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, completed its field examination of the Company’s U.S. income tax returns for 1997 through 2002 during 2008 and completed its field examination of 2003 through 2004 in the third quarter of 2009. However,

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

for federal income tax purposes these years continue to remain open as a consequence of certain issues under appeal. In the fourth quarter of 2008, the IRS commenced an examination of the Company’s U.S. income tax returns for 2005 through 2007, of which the second stub period 2005 through 2007 for the non-life group, and 2006 through 2007 for the life group was completed in the second quarter of 2010. The first stub 2005 period for the non-life group and the full year 2005 for the life group is expected to be completed in the third quarter of 2010. The Company’s or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2008.

 

On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Management believes that the IRS will concede this issue for open tax years and it is likely that any regulations that would result from a regulation project would apply prospectively only. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that we receive.

 

13.   Guarantees and Contingencies

 

Guarantees

 

Certain property fund limited partnerships that the Company consolidates have floating rate revolving credit borrowings of $248 million as of June 30, 2010. Certain Threadneedle subsidiaries guarantee the repayment of outstanding borrowings up to the value of the assets of the partnerships. The debt is secured by the assets of the partnerships and there is no recourse to Ameriprise Financial.

 

Owing to conditions then-prevailing in the credit markets and the isolated defaults of unaffiliated structured investment vehicles held in the portfolios of money market funds advised by its Columbia Management Investment Advisers, LLC subsidiary (the “2a-7 Funds”), the Company closely monitored the net asset value of the 2a-7 Funds during 2008 and through the date of this report and, as circumstances warranted from time to time, injected capital into one or more of the 2a-7 Funds. Management believes that the market conditions which gave rise to those circumstances have significantly diminished. The Company has not provided a formal capital support agreement or net asset value guarantee to any of the 2a-7 Funds.

 

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. Uncertain economic conditions heightened volatility in the financial markets, such as those which have been experienced from the latter part of 2007 through 2009, and significant recently enacted financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the financial services industry generally.

 

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/or has been subject to examination or claims by, the SEC, the Financial Industry Regulatory Authority, the Office of Thrift Supervision, state insurance and securities regulators, state attorneys general and various other governmental and quasi-governmental authorities on behalf of themselves or clients concerning the Company’s business activities and practices, and the practices of the Company’s financial advisors. Pending matters about which the Company has during recent periods received such information requests or claims include: sales and product or service features of, or disclosures pertaining to, mutual funds, annuities, equity and fixed income securities, insurance products, brokerage services, financial plans and other advice offerings; supervision of the Company’s financial advisors; supervisory practices in connection with financial advisors’ outside business activities; sales practices and supervision associated with the sale of fixed and variable annuities and non-exchange traded (or “private placement”) securities; information security; the delivery of financial plans and the suitability of investments and product selection processes. The number of reviews and investigations has increased in recent years with regard to many firms in the financial services industry, including Ameriprise Financial. The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

These legal and regulatory proceedings and disputes 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, in addition to further claims, examinations or adverse publicity that could have a material adverse effect on the Company’s consolidated financial condition or results of operations.

 

Certain legal and regulatory proceedings 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 were 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 ‘40 Act). The plaintiffs alleged that fees allegedly paid to the defendants by the funds for investment advisory and administrative services were excessive. Plaintiffs seek an order declaring that defendants have violated the ‘40 Act and awarding unspecified damages including excessive fees allegedly paid plus interest and other costs. On July 6, 2007, the district court granted the Company’s motion for summary judgment, dismissing all claims with prejudice. Plaintiffs appealed the district court’s decision, and on April 8, 2009, the U.S. Court of Appeals for the Eighth Circuit reversed the district court’s decision, and remanded the case for further proceedings. The Company filed with the United States Supreme Court a Petition for Writ of Certiorari to review the judgment of the Court of Appeals in this case in light of the Supreme Court’s anticipated review of a similar excessive fee case captioned Jones v. Harris Associates. On March 30, 2010, the Supreme Court issued its ruling in Jones v. Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth Circuit’s decision in this case and remanded it to the Eighth Circuit for further consideration in light of the Supreme Court’s decision in Jones v. Harris Associates. Without any further briefing or argument, on June 4, 2010, the Eighth Circuit remanded the case to the district court for further consideration in light of the Supreme Court’s decision in Jones v. Harris Associates. The district court has ordered briefing and oral argument on the impact of the Jones v. Harris Associates decision. Opening briefs will be submitted September 1, 2010. Response briefs will be submitted September 15, 2010. Oral argument will be held September 22, 2010.

 

In July 2009, two issuers of private placement interests (Medical Capital Holdings, Inc./Medical Capital Corporation and affiliated corporations and Provident Shale Royalties, LLC and affiliated corporations) sold by the Company’s subsidiary Securities America, Inc. (“SAI”) were the subject of SEC actions against those entities and individuals associated with them, which has resulted in the filing of several putative class action lawsuits naming both SAI and Ameriprise Financial, and numerous FINRA arbitrations and state court actions naming SAI primarily but occasionally also naming Ameriprise Financial, as well as related regulatory inquiries. The putative class actions and arbitrations generally allege violations of state and/or federal securities laws in connection with SAI’s sales of these private placement interests. These actions were commenced in September 2009 and thereafter. Currently, five arbitrations have been scheduled for hearings later this year, in November and December 2010, with the other scheduled arbitration hearings set to begin in 2011 and 2012. Motions to dismiss have been filed or will be filed in all of the putative class actions. On January 26, 2010, the Commonwealth of Massachusetts filed an Administrative Complaint against SAI, and on February 16, 2010, SAI filed an Answer. At this time, an Administrative Hearing in this matter has been scheduled to commence on August 30, 2010. On April 15, 2010, four Medical Capital-related class actions were centralized and moved to the Central District of California by order of the United States Judicial Panel on Multidistrict Litigation under the caption “In re: Medical Capital Securities Litigation.” On June 23, 2010, another Medical Capital-related class action was ordered transferred to the Central District of California by the Judicial Panel on Multidistrict Litigation, and then on July 1, 2010, plaintiffs in that action voluntarily dismissed the action without prejudice. On June 3, 2010, the Judicial Panel on Multidistrict Litigation issued an order denying centralization of the Provident Shale-related class actions which remain pending in Texas and Idaho federal courts. On July 26, 2010, the court in the Texas Provident Shale class action granted the motion to dismiss as to the securities law claim against SAI, held that the securities law claim against Ameriprise Financial could not proceed without an underlying claim against SAI, and denied the motion as to the common law claim for breach of fiduciary duty in the absence of sufficient facts for determination of the issue. Plaintiffs in the Texas class action have until August 27, 2010 to amend their complaint one final time. On June 22, 2010, the Liquidating Trustee of the Provident Liquidating Trust filed an adversary action in the Provident bankruptcy proceeding naming SAI on behalf of both the Provident Liquidating Trust and a number of individual Provident investors who are alleged to have assigned their claims. The action by the Liquidating Trustee generally alleges the same types of claims as are alleged in the class actions as well as a claim under the Bankruptcy Code.

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

14.  Earnings per Share Attributable to Ameriprise Financial Common Shareholders

 

The computations of basic and diluted earnings per share attributable to Ameriprise Financial common shareholders are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Ameriprise Financial

 

$

259

 

$

95

 

$

473

 

$

225

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic: Weighted-average common shares outstanding

 

261.1

 

228.8

 

260.9

 

225.6

 

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

 

4.2

 

1.2

 

4.2

 

1.2

 

Diluted: Weighted-average common shares outstanding

 

265.3

 

230.0

 

265.1

 

226.8

 

Earnings per share attributable to Ameriprise Financial common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

0.41

 

$

1.81

 

$

1.00

 

Diluted

 

0.98

 

0.41

 

1.78

 

0.99

 

 

15.  Segment Information

 

The Company’s five segments are Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other.

 

The following is a summary of assets by segment:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Advice & Wealth Management

 

$

11,009

 

$

11,098

 

Asset Management

 

6,357

 

5,951

 

Annuities

 

77,227

 

77,037

 

Protection

 

16,953

 

16,758

 

Corporate & Other

 

9,564

 

2,926

 

Total assets

 

$

121,110

 

$

113,770

 

 

The following is a summary of segment operating results:

 

 

 

Three Months Ended June 30, 2010

 

 

 

Advice &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth

 

Asset

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

Management

 

Management

 

Annuities

 

Protection

 

& Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

Revenue from external customers

 

$

766

 

$

541

 

$

581

 

$

518

 

$

191

 

$

 

$

2,597

 

Intersegment revenue

 

220

 

22

 

49

 

3

 

 

(294

)

 

Total revenues

 

986

 

563

 

630

 

521

 

191

 

(294

)

2,597

 

Banking and deposit interest expense

 

17

 

1

 

 

 

3

 

(1

)

20

 

Net revenues

 

969

 

562

 

630

 

521

 

188

 

(293

)

2,577

 

Pretax income

 

$

85

 

$

56

 

$

133

 

$

135

 

$

57

 

$

 

466

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

68

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

398

 

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

139

 

Net income attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

$

259

 

 

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Table of Contents

 

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

 

 

Three Months Ended June 30, 2009

 

 

 

Advice &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth

 

Asset

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

Management

 

Management

 

Annuities

 

Protection

 

& Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

Revenue from external customers

 

$

617

 

$

282

 

$

545

 

$

481

 

$

(13

)

$

 

$

1,912

 

Intersegment revenue

 

206

 

12

 

17

 

16

 

 

(251

)

 

Total revenues

 

823

 

294

 

562

 

497

 

(13

)

(251

)

1,912

 

Banking and deposit interest expense

 

38

 

1

 

 

 

(1

)

 

38

 

Net revenues

 

785

 

293

 

562

 

497

 

(12

)

(251

)

1,874

 

Pretax income (loss)

 

$

(2

)

$

(12

)

$

94

 

$

110

 

$

(75

)

$

 

115

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

87

 

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

Net income attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

$

95

 

 

 

 

Six Months Ended June 30, 2010

 

 

 

Advice &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth

 

Asset

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

Management

 

Management

 

Annuities

 

Protection

 

& Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

Revenue from external customers

 

$

1,482

 

$

892

 

$

1,161

 

$

1,008

 

$

346

 

$

 

$

4,889

 

Intersegment revenue

 

404

 

41

 

71

 

20

 

2

 

(538

)

 

Total revenues

 

1,886

 

933

 

1,232

 

1,028

 

348

 

(538

)

4,889

 

Banking and deposit interest expense

 

38

 

1

 

 

 

3

 

(1

)

41

 

Net revenues

 

1,848

 

932

 

1,232

 

1,028

 

345

 

(537

)

4,848

 

Pretax income

 

$

136

 

$

74

 

$

253

 

$

254

 

$

110

 

$

 

827

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

133

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

694

 

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

221

 

Net income attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

$

473

 

 

 

 

Six Months Ended June 30, 2009

 

 

 

Advice &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth

 

Asset

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

Management

 

Management

 

Annuities

 

Protection

 

& Other

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

Revenue from external customers

 

$

1,147

 

$

532

 

$

1,022

 

$

964

 

$

5

 

$

 

$

3,670

 

Intersegment revenue

 

443

 

22

 

32

 

29

 

1

 

(527

)

 

Total revenues

 

1,590

 

554

 

1,054

 

993

 

6

 

(527

)

3,670

 

Banking and deposit interest expense

 

79

 

1

 

 

 

1

 

(1

)

80

 

Net revenues

 

1,511

 

553

 

1,054

 

993

 

5

 

(526

)

3,590

 

Pretax income (loss)

 

$

(63

)

$

(20

)

$

223

 

$

222

 

$

(113

)

$

 

249

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

203

 

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

Net income attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

$

225

 

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

16.  Acquisition of Long-Term Asset Management Business of Columbia Management Group

 

On April 30, 2010, the Company acquired the long-term asset management business of Columbia Management from Bank of America for $927 million. This acquisition further enhances the scale and performance of the Company’s retail mutual fund and institutional management businesses.

 

The Company recorded indefinite lived intangible assets, including fund investment management contracts and trade names, of $672 million, definite lived intangible assets of $113 million, tangible assets, including prepaid expense and fixed assets, of $3 million, and deferred tax assets of $11 million. The remaining cost of $128 million was allocated to goodwill. Included in the purchase price is a $31 million payable which is expected to be settled with Bank of America in the fourth quarter of 2010 and $30 million of assumed liabilities. The assets, liabilities and goodwill recorded as part of the acquisition were allocated to the Company’s Asset Management segment. The Company is amortizing the definite lived intangible assets using a projected cash flow method.

 

Definite-lived intangible assets acquired during the three months ended June 30, 2010 were as follows:

 

 

 

Amount Assigned

 

Weighted Average
Amortization Period

 

 

 

(in millions)

 

(in years)

 

Customer relationships

 

$

68

 

10

 

Contracts

 

45

 

5

 

Total

 

$

113

 

8

 

 

17.  Common Share Repurchases

 

In May 2010, the Company’s Board of Directors authorized the expenditure of up to $1.5 billion for the repurchase of the Company’s common stock through the date of its 2012 annual meeting. During the six months ended June 30, 2010, the Company repurchased a total of 5.7 million shares of its common stock for an aggregate cost of $220 million. There were no share repurchases during the six months ended June 30, 2009. As of June 30, 2010, the Company had $1.3 billion remaining under the share repurchase 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. For the six months ended June 30, 2010 and 2009, the restricted shares forfeited under the 2005 ICP and recorded as treasury shares were 0.1 million and 0.2 million, respectively. For the six months ended June 30, 2010 and 2009, the Company reacquired 0.4 million shares of its common stock in each period through the surrender of restricted shares upon vesting and paid in the aggregate $16 million and $8 million, respectively, related to the holders’ income tax obligations on the vesting date.

 

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AMERIPRISE FINANCIAL, INC.

 

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. Our Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2010 (“2009 10-K”), as well as our current reports on Form 8-K and other publicly available information.

 

Overview

 

We provide financial planning, products and services that are designed to be utilized as solutions for our clients’ cash and liquidity, asset accumulation, income, protection and estate and wealth transfer needs. Our model for delivering these solutions is centered on building long-term personal relationships between our affiliated advisors and clients, and in the case of our products distributed through unaffiliated advisors, by supporting those advisors in building strong client relationships. We believe that our focus on personal relationships, together with our strengths in financial planning and product development, allow us to better address the evolving financial needs of our clients and our primary target market segment, the mass affluent and affluent, which we define as households with investable assets of more than $100,000.

 

Our branded affiliated advisors’ financial planning and advisory process is designed to provide comprehensive advice, when appropriate, to address our clients’ cash and liquidity, asset accumulation, income, protection, and estate and wealth transfer needs. This approach allows us to recommend actions and a range of product solutions consisting of investment, annuity, insurance, banking and other financial products that help clients attain over time a return or form of protection while accepting what they determine to be an appropriate range and level of risk. Our focus puts us in a strong position to capitalize on significant demographic and market trends, which we believe will continue to drive increased demand for our financial planning and other financial services. Our focus on deep client-advisor relationships has been central to the ability of our business model to succeed through the extreme market conditions of 2008 and 2009, and we believe it will help us to respond to future market cycles.

 

Our multi-platform network of affiliated financial advisors is the primary means by which we develop personal relationships with retail clients. As of June 30, 2010, we had a network of 11,684 financial advisors and registered representatives (“affiliated financial advisors”). We refer to the affiliated financial advisors who use our brand name as our branded advisors, and those who do not use our brand name but who are affiliated as registered representatives of ours, as our unbranded advisors. The financial product solutions we offer through our affiliated advisors include both our own products and services and the products of other companies. Our branded advisor network is the primary distribution channel through which we offer our investment and annuity products and services, as well as a range of banking and protection products. Our asset management, annuity and Auto and Home protection products are also distributed through unaffiliated advisors and affinity relationships. We offer our branded advisors training, tools, leadership, marketing programs and other field and centralized support to assist them in delivering advice and product solutions to clients. We support unaffiliated advisors with strong sales and service support and our solutions which they provide to clients. We believe our approach not only improves the products and services we provide to their clients, but allows us to reinvest in enhanced services for clients and increase support for financial advisors. Our integrated model of financial planning, diversified product manufacturing and affiliated and non-affiliated product distribution affords us a better understanding of our clients, which allows us to better manage the risk profile of our businesses. We believe our focus on meeting clients’ needs through personal financial planning results in more satisfied clients with deeper, longer lasting relationships with our company and a higher retention of experienced financial advisors.

 

We have four main operating segments: Advice & Wealth Management, Asset Management, Annuities and Protection, as well as our Corporate & Other segment. Our four 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 affected by 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.

 

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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 our continued leadership in financial planning, a client retention percentage rate of 91%, and our status as a top ten ranked firm within core portions of each of our four main operating segments, including the size of our U.S. advisor force, long-term U.S. mutual fund assets, variable annuity sales and variable universal life (“VUL”) sales.

 

Equity price, credit 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 VUL 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 price and interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk.”

 

In June 2009, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to the required consolidation of certain variable interest entities (“VIEs”). We adopted the accounting standard effective January 1, 2010 and recorded as a cumulative change in accounting principle an increase to appropriated retained earnings of consolidated investment entities of $473 million and consolidated approximately $5.5 billion of client assets and $5.1 billion of liabilities in VIEs onto our Consolidated Balance Sheets that were not previously consolidated. Management views the VIE assets as client assets and the liabilities have recourse only to those assets. While the economics of our business have not changed, the financial statements were impacted. Prior to adoption, we consolidated certain property funds and hedge funds. These entities and the VIEs consolidated as of January 1, 2010, are defined as consolidated investment entities (“CIEs”). Changes in the valuation of the CIE assets and liabilities impact pretax income. The net income of the CIEs is reflected in net income attributable to noncontrolling interests. The results of operations of the CIEs are reflected in the Corporate & Other segment. On a consolidated basis, the management fees we earn for the services we provide to the CIEs and the related general and administrative expenses are eliminated and the changes in the assets and liabilities related to the CIEs, primarily debt and underlying bank loans, are reflected in net investment income. We continue to include the fees in the management and financial advice fees line within our Asset Management segment.

 

Management believes that operating measures, which exclude net realized gains/losses, integration charges and the impact of consolidating CIEs, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. Management uses certain of these non-GAAP measures to evaluate our financial performance on a basis comparable to that used by some securities analysts and investors. Also, certain of these non-GAAP measures are taken into consideration, to varying degrees, for purposes of business planning and analysis and for certain compensation-related matters. Throughout our Management’s Discussion and Analysis, these non-GAAP measures are referred to as operating measures. While the consolidation of the CIEs impacts our balance sheet and income statement, our exposure to these entities is unchanged and there is no impact to the underlying business results. The CIEs we manage have the following characteristics:

 

·          They were formed on behalf of institutional investors to obtain a diversified investment portfolio and were not formed in order to obtain financing for Ameriprise Financial.

·          Ameriprise Financial receives customary, industry standard management fees for the services it provides to these CIEs and has a fiduciary responsibility to maximize the investors’ returns.

·          Ameriprise Financial does not have any obligation to provide financial support to the CIEs, does not provide any performance guarantees of the CIEs and has no obligation to absorb the investors’ losses.

·          Management excludes the impact of consolidating the CIEs on assets, liabilities, pretax income and equity for setting our financial performance targets and annual incentive award compensation targets.

 

It is management’s priority to increase shareholder value over a multi-year horizon by achieving our on-average, over-time financial targets.

 

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Our financial targets are:

 

·          Net operating revenue growth of 6% to 8%,

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

·          Operating return on equity excluding accumulated other comprehensive income of 12% to 15%.

 

On April 30, 2010, we acquired the long-term asset management business of Columbia Management from Bank of America for $927 million (the “Columbia Management Acquisition”). The acquisition further enhances the scale and performance of our retail mutual fund and institutional management businesses. Included in the purchase price is a $31 million payable which is expected to be settled with Bank of America in the fourth quarter of 2010 and $30 million of assumed liabilities. We recorded the assets and liabilities acquired at fair value and allocated the remaining costs to goodwill and intangible assets. We incurred pretax non-recurring integration costs related to the Columbia Management Acquisition of $53 million and $58 million for the three months and six months ended June 30, 2010, respectively. In total, we have incurred $65 million of pretax non-recurring integration costs through June 30, 2010, and expect to incur between $130 million and $160 million in total of such costs through 2011. These costs include system integration costs, proxy and other regulatory filing costs, employee reduction and retention costs, and investment banking, legal and other acquisition costs.

 

In the fourth quarter of 2008, we completed the acquisitions of H&R Block Financial Advisors, Inc., subsequently renamed Ameriprise Advisor Services, Inc. (“AASI”), J.&W. Seligman & Co., Incorporated (“Seligman”) and Brecek & Young Advisors, Inc. to expand our retail distribution and asset management businesses. The cost of the acquisitions was $787 million, which included the purchase price and transaction costs. We recorded the assets and liabilities acquired at fair value and allocated the remaining costs to goodwill and intangible assets. We incurred integration charges related to these acquisitions of $4 million and $25 million for the three months ended June 30, 2010 and 2009, respectively, and $6 million and $44 million for the six months ended June 30, 2010 and 2009, respectively.

 

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 consolidated 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. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” in our 2009 10-K.

 

Recent Accounting Pronouncements

 

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations and financial condition, see Note 2 to our Consolidated Financial Statements.

 

Owned, Managed and Administered Assets

 

Owned assets include certain assets on our Consolidated Balance Sheets for which we do not provide investment management services and do not recognize management fees, such as investments in non-affiliated funds held in the separate accounts of our life insurance subsidiaries, as well as restricted and segregated cash and receivables.

 

Managed assets include managed external client assets and managed owned assets. At January 1, 2010, we consolidated approximately $5.5 billion of client assets in VIEs onto our Consolidated Balance Sheets that were not previously consolidated. Prior to January 1, 2010, these assets were included in managed external client assets and were subsequently included in managed owned assets. Managed external client assets include client assets for which we provide investment management services, such as the assets of the RiverSource funds (including Seligman and Threadneedle branded funds) and the Columbia funds, assets of institutional clients and client assets held in wrap accounts. Managed external client assets also include assets managed by sub-advisors selected by us. Managed external client assets are not reported on our Consolidated Balance Sheets. Managed owned assets include certain assets on our Consolidated Balance Sheets for which we provide investment management services and recognize management fees in our Asset Management segment, such as the assets of the general account, RiverSource Variable Product funds held in the separate accounts of our life insurance subsidiaries and client assets of CIEs.

 

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Investors in the mutual funds and face amount certificates we advise may redeem shares on each business day, provided that redemption orders are submitted in a timely fashion. For our institutional clients, advisory contracts may generally be terminated (and managed assets redeemed) upon 30 days’ written notice. However, we may in limited circumstances negotiate customized termination provisions with certain clients during the contracting process, or we may waive negotiated notice periods at our discretion. Investors in the private investment funds we sponsor can generally redeem shares as of each month end upon 30-days advance written notice, with limited exceptions. In addition, the notice requirements for our private investment funds may be waived or reduced at the discretion of the applicable fund.

 

Administered assets include assets for which we provide administrative services such as client assets invested in other companies’ products that we offer outside of our wrap accounts. These assets include those held in clients’ brokerage accounts. We generally record fees received from administered assets as distribution fees. We do not exercise management discretion over these assets and do not earn a management fee. These assets are not reported on our Consolidated Balance Sheets.

 

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 related to credit losses on 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 and financial advice fees. We may also receive distribution fees based on the value of these assets.

 

Our owned, managed and administered assets are impacted by net flows of client assets, market movements and foreign exchange rates. Owned assets are also affected by changes in our capital structure.

 

The following table presents detail regarding our owned, managed and administered assets:

 

 

 

June 30,

 

 

 

 

 

2010

 

2009

 

Change

 

 

 

(in billions, except percentages)

 

Owned Assets

 

$

20.2

 

$

32.5

 

(38

)%

Managed Assets(1):

 

 

 

 

 

 

 

Domestic

 

327.4

 

134.8

 

NM

 

International

 

89.3

 

82.5

 

8

 

Wrap account assets

 

96.9

 

79.0

 

23

 

Eliminations(2)

 

(21.9

)

(11.3

)

(94

)

Total Managed Assets

 

491.7

 

285.0

 

73

 

Administered Assets

 

88.4

 

79.8

 

11

 

Total Owned, Managed and Administered Assets

 

$

600.3

 

$

397.3

 

51

%

 


NM Not Meaningful.

(1) Includes managed external client assets and managed owned assets.

(2) Includes eliminations for Domestic mutual fund assets included in wrap account assets and Domestic assets sub-advised by Threadneedle.

 

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Consolidated Results of Operations for the Three Months Ended June 30, 2010 and 2009

 

In June 2009, the FASB updated the accounting standards related to the required consolidation of certain VIEs. We adopted the accounting standard effective January 1, 2010 and recorded as a cumulative change in accounting principle an increase to appropriated retained earnings of consolidated investment entities of $473 million and consolidated approximately $5.5 billion of client assets and $5.1 billion of liabilities in VIEs onto our Consolidated Balance Sheets that were not previously consolidated. Management views the VIE assets as client assets and the liabilities have recourse only to those assets. While the economics of our business have not changed, the financial statements were impacted. Prior to adoption, we consolidated certain property funds and hedge funds. These entities and the VIEs consolidated as of January 1, 2010, are defined as CIEs. Changes in the valuation of the CIE assets and liabilities impact pretax income. The net income of the CIEs is reflected in net income attributable to noncontrolling interests. On a consolidated basis, the management fees we earn for the services we provide to the CIEs and the related general and administrative expenses are eliminated and the changes in the assets and liabilities related to the CIEs, primarily debt and underlying bank loans, are reflected in net investment income.

 

Management believes that operating measures, which exclude net realized gains/losses, integration charges and the impact of consolidating CIEs, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents our consolidated results of operations:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

955

 

$

(10

)

$

965

 

$

606

 

$

(1

)

$

607

 

$

358

 

59

%

Distribution fees

 

453

 

 

453

 

351

 

 

351

 

102

 

29

 

Net investment income

 

654

 

162

 

492

 

511

 

7

 

504

 

(12

)

(2

)

Premiums

 

299

 

 

299

 

269

 

 

269

 

30

 

11

 

Other revenues

 

236

 

46

 

190

 

175

 

(7

)

182

 

8

 

4

 

Total revenues

 

2,597

 

198

 

2,399

 

1,912

 

(1

)

1,913

 

486

 

25

 

Banking and deposit interest expense

 

20

 

 

20

 

38

 

1

 

37

 

(17

)

(46

)

Total net revenues

 

2,577

 

198

 

2,379

 

1,874

 

(2

)

1,876

 

503

 

27

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

621

 

 

621

 

432

 

 

432

 

189

 

44

 

Interest credited to fixed accounts

 

231

 

 

231

 

237

 

 

237

 

(6

)

(3

)

Benefits, claims, losses and settlement expenses

 

298

 

 

298

 

587

 

 

587

 

(289

)

(49

)

Amortization of deferred acquisition costs

 

171

 

 

171

 

(125

)

 

(125

)

296

 

NM

 

Interest and debt expense

 

74

 

45

 

29

 

28

 

 

28

 

1

 

4

 

General and administrative expense

 

716

 

64

 

652

 

600

 

25

 

575

 

77

 

13

 

Total expenses

 

2,111

 

109

 

2,002

 

1,759

 

25

 

1,734

 

268

 

15

 

Pretax income

 

466

 

89

 

377

 

115

 

(27

)

142

 

235

 

NM

 

Income tax provision

 

68

 

(18

)

86

 

28

 

(7

)

35

 

51

 

NM

 

Net income

 

398

 

107

 

291

 

87

 

(20

)

107

 

184

 

NM

 

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

139

 

 

(8

)

(8

)

 

 

%

Net income attributable to Ameriprise Financial

 

$

259

 

$

(32

)

$

291

 

$

95

 

$

(12

)

$

107

 

$

184

 

NM

 

 


NM Not Meaningful.

(1)   Includes the elimination of management fees we earn for services provided to the CIEs and the related expense, revenues and expenses of the CIEs, net realized gains/losses and integration charges. Income tax provision is calculated using the statutory tax rate of 35% on applicable adjustments.

 

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The following table presents the components of the adjustments in the table above:

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

CIEs

 

Adjustments (1)

 

Adjustments

 

CIEs

 

Adjustments (1)

 

Adjustments

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

(10

)

$

 

$

(10

)

$

(1

)

$

 

$

(1

)

Distribution fees

 

 

 

 

 

 

 

Net investment income

 

155

 

7

 

162

 

1

 

6

 

7

 

Premiums

 

 

 

 

 

 

 

Other revenues

 

46

 

 

46

 

(7

)

 

(7

)

Total revenues

 

191

 

7

 

198

 

(7

)

6

 

(1

)

Banking and deposit interest expense

 

 

 

 

1

 

 

1

 

Total net revenues

 

191

 

7

 

198

 

(8

)

6

 

(2

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

 

 

 

Interest credited to fixed accounts

 

 

 

 

 

 

 

Benefits, claims, losses and settlement

 

 

 

 

 

 

 

Amortization of deferred acquisition costs

 

 

 

 

 

 

 

Interest and debt expense

 

45

 

 

45

 

 

 

 

General and administrative expense

 

7

 

57

 

64

 

 

25

 

25

 

Total expenses

 

52

 

57

 

109

 

 

25

 

25

 

Pretax income

 

139

 

(50

)

89

 

(8

)

(19

)

(27

)

Income tax provision

 

 

(18

)

(18

)

 

(7

)

(7

)

Net income

 

139

 

(32

)

107

 

(8

)

(12

)

(20

)

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

 

139

 

(8

)

 

(8

)

Net income attributable to Ameriprise Financial

 

$

 

$

(32

)

$

(32

)

$

 

$

(12

)

$

(12

)

 


(1) Other adjustments include net realized gains/losses and integration charges.

 

Overall

 

Net income attributable to Ameriprise Financial increased $164 million to $259 million for the three months ended June 30, 2010 compared to $95 million for the prior year period. Operating net income attributable to Ameriprise Financial increased $184 million to $291 million for the three months ended June 30, 2010 compared to $107 million for the prior year period driven by higher asset-based revenues as well as two months of earnings from the Columbia Management Acquisition.

 

Net Revenues

 

Net revenues increased $703 million, or 38%, to $2.6 billion for the three months ended June 30, 2010 compared to $1.9 billion for the prior year period. Operating net revenues exclude net realized gains/losses and revenues of the CIEs and include the fees we earn from services provided to the CIEs. Operating net revenues increased $503 million, or 27%, to $2.4 billion for the three months ended June 30, 2010 compared to $1.9 billion for the prior year period driven primarily by growth in asset-based management fees and distribution fees resulting from higher asset levels and increased client activity. Higher asset levels reflected period-over-period market appreciation, the Columbia Management Acquisition and retail net inflows.

 

Management and financial advice fees increased $349 million, or 58%, to $955 million for the three months ended June 30, 2010 compared to $606 million for the prior year period. Operating management and financial advice fees include the fees we earn from services provided to the CIEs. Operating management and financial advice fees increased $358 million, or 59%, to $965 million for the three months ended June 30, 2010 compared to $607 million for the prior year period primarily due to higher asset levels reflecting period-over-period market appreciation, the Columbia Management Acquisition and retail net inflows. The daily average S&P 500 Index increased 27% compared to the prior year period. Wrap account assets increased $17.9 billion, or 23%, to $96.9 billion at June 30, 2010 due to net inflows and period-over-period market appreciation. Total Asset Management managed assets increased $199.2 billion, or 93%, compared to the prior year period primarily due to the Columbia Management Acquisition and the period-over-period appreciation in the S&P 500 Index.

 

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Distribution fees increased $102 million, or 29%, to $453 million for the three months ended June 30, 2010 compared to $351 million in the prior year period primarily due to higher asset levels driven by growth in assets from the Columbia Management Acquisition and period-over-period market appreciation and increased client activity.

 

Net investment income increased $143 million, or 28%, to $654 million for the three months ended June 30, 2010 compared to $511 million in the prior year period. Operating net investment income excludes net realized gains/losses and changes in the assets and liabilities of CIEs, primarily debt and underlying bank loans. Operating net investment income decreased $12 million, or 2%, to $492 million for the three months ended June 30, 2010 compared to $504 million for the prior year period reflecting lower investment income related to certificates due to net outflows resulting from the run-off of certificate rate promotions, as well as lower average yields on assets related to certificates and the implementation of changes to the Portfolio Navigator program (“PN program”) offered in connection with our variable life and annuity products. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This reallocation in part resulted in a shift of assets from interest bearing investments in the general account into separate accounts. In addition, we recognized unfavorable mark-to-market adjustments on seed money investments in the second quarter of 2010 compared to gains in the prior year period. These decreases were partially offset by an increase in net investment income due to higher investment yields and increased account balances related to assets supporting our Protection business and higher fixed annuity account balances.

 

Premiums increased $30 million, or 11%, to $299 million for the three months ended June 30, 2010 compared to $269 million for the three months ended June 30, 2009, primarily due to growth in Auto and Home premiums driven by higher volumes, as well as higher sales of immediate annuities with life contingencies. Auto and Home policy counts increased 9% period-over-period.

 

Other revenues increased $61 million, or 35%, to $236 million for the three months ended June 30, 2010 compared to $175 million in the prior year period. Operating other revenues exclude revenues of consolidated property funds. Operating other revenues increased $8 million, or 4%, to $190 million for the three months ended June 30, 2010 compared to $182 million in the prior year period primarily due to an increase in our guaranteed benefit rider fees on variable annuities resulting from higher business volumes, partially offset by an $8 million benefit in the second quarter of 2009 from repurchasing our 7.5% junior subordinated notes due 2066 (“junior notes”) at a discount.

 

Banking and deposit interest expense decreased $18 million, or 47%, to $20 million for the three months ended June 30, 2010 compared to $38 million in the prior year period primarily due to lower certificate balances as a result of the run-off of certificate rate promotions and a decrease in crediting rates on certificate products.

 

Expenses

 

Total expenses increased $352 million, or 20%, to $2.1 billion for the three months ended June 30, 2010 compared to $1.8 billion for the prior year period. Total operating expenses exclude integration charges and expenses of the CIEs. Total operating expenses increased $268 million, or 15%, to $2.0 billion for the three months ended June 30, 2010 compared to $1.7 billion for the prior year period primarily due to an increase in distribution expenses and general and administrative expense.

 

Distribution expenses increased $189 million, or 44%, to $621 million for the three months ended June 30, 2010 compared to $432 million in the prior year period as a result of period-over-period market appreciation, the Columbia Management Acquisition and higher advisor compensation from increased client activity.

 

Interest credited to fixed accounts decreased $6 million, or 3%, to $231 million for the three months ended June 30, 2010 compared to $237 million for the prior year period primarily due to lower average fixed annuity crediting rates. Average fixed annuities contract accumulation values increased $439 million, or 3%, compared to the prior year period. The average fixed annuity crediting rate excluding capitalized interest decreased to 3.9% in the second quarter of 2010 compared to 4.0% in the prior year period.

 

Benefits, claims, losses and settlement expenses decreased $289 million, or 49%, to $298 million for the three months ended June 30, 2010 compared to $587 million for the prior year period driven by a decrease in expenses from variable annuity benefit guarantees. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, decreased benefits expense by $64 million in the second quarter of 2010, primarily driven by the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. This decrease was partially offset by an increase in benefits expense of $17 million, net of DSIC, as a result of the implementation of changes to the PN program. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, increased benefits expense by $311 million in the second quarter of 2009 primarily due to the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. The negative impact of markets on DSIC amortization was $6 million in the second quarter of 2010 compared to a positive impact of $6 million in the prior year period. Benefits, claims, losses and settlement expenses related to our Auto and Home business and immediate annuities with life contingencies increased compared to the prior year period primarily due to higher business volumes.

 

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Amortization of DAC increased $296 million to $171 million for the three months ended June 30, 2010 compared to a benefit of $125 million in the prior year period. DAC amortization in the second quarter of 2010 increased $72 million due to market impacts, including $39 million offsetting lower variable annuity guaranteed living benefit expenses, net of hedges. In addition, DAC amortization increased due to higher variable annuity gross profits compared to the prior year period. These increases were partially offset by a $17 million decrease as a result of the implementation of changes to the PN program and a $28 million decrease related to an adjustment for revisions to certain calculations in our valuation of DAC. DAC amortization in the second quarter of 2009 decreased $245 million due to market impacts, including a $206 million benefit offsetting higher variable annuity guaranteed living benefits, net of hedges.

 

Interest and debt expense increased $46 million to $74 million for the three months ended June 30, 2010 compared to $28 million in the prior year period. Operating interest and debt expense excludes interest expense on CIE debt. Operating interest and debt expense increased $1 million, or 4%, to $29 million for the three months ended June 30, 2010 compared to $28 million in the prior year period.

 

General and administrative expense increased $116 million, or 19%, to $716 million for the three months ended June 30, 2010 compared to $600 million for the prior year period. Operating general and administrative expense excludes integration charges and expenses of the CIEs. Integration charges increased $32 million to $57 million for the three months ended June 30, 2010 compared to $25 million for the prior year period due to the Columbia Management Acquisition. Operating general and administrative expense increased $77 million, or 13%, to $652 million for the three months ended June 30, 2010 primarily due to two months of underlying operating expenses related to the Columbia Management Acquisition and higher incentive compensation accruals. General and administrative expense in the second quarter of 2010 included $8 million in higher expenses related to supporting the $1.00 net asset value of certain 2a-7 funds. These increases were partially offset by lower legal expenses compared to the prior year period.

 

Income Taxes

 

Our effective tax rate on net income including net income (loss) attributable to noncontrolling interests was 14.6% for the three months ended June 30, 2010, compared to 24.4% for the three months ended June 30, 2009. The decrease in our effective tax rate primarily reflects benefits from tax planning and completion of certain audits which offset the impact of an increase in pretax income relative to tax advantaged items. Our effective tax rate on net income excluding net income (loss) attributable to noncontrolling interests and the required consolidation of certain investment entities was 20.8% for the three months ended June 30, 2010, compared to 22.8% for the three months ended June 30, 2009.

 

On September 25, 2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Management believes that the IRS will concede this issue for open tax years and it is likely that any regulations that would result from a regulation project would apply prospectively only. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that we receive.

 

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Table of Contents

 

Results of Operations by Segment for the Three Months Ended June 30, 2010 and 2009

 

The following tables present summary financial information by segment:

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

GAAP

 

Adjustments

 

Operating

 

GAAP

 

Adjustments

 

Operating

 

 

 

(in millions, unaudited)

 

Advice & Wealth Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

969

 

$

1

 

$

968

 

$

785

 

$

(8

)

$

793

 

Expenses

 

884

 

4

 

880

 

788

 

16

 

772

 

Pretax income (loss)

 

$

85

 

$

(3

)

$

88

 

$

(3

)

$

(24

)

$

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

562

 

$

 

$

562

 

$

293

 

$

 

$

293

 

Expenses

 

506

 

48

 

458

 

305

 

9

 

296

 

Pretax income (loss)

 

$

56

 

$

(48

)

$

104

 

$

(12

)

$

(9

)

$

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annuities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

630

 

$

4

 

$

626

 

$

562

 

$

8

 

$

554

 

Expenses

 

497

 

 

497

 

468

 

 

468

 

Pretax income

 

$

133

 

$

4

 

$

129

 

$

94

 

$

8

 

$

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Protection

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

521

 

$

1

 

$

520

 

$

497

 

$

(1

)

$

498

 

Expenses

 

386

 

 

386

 

387

 

 

387

 

Pretax income

 

$

135

 

$

1

 

$

134

 

$

110

 

$

(1

)

$

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate & Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

188

 

$

202

 

$

(14

)

$

(12

)

$

 

$

(12

)

Expenses

 

131

 

67

 

64

 

62

 

1

 

61

 

Pretax loss

 

57

 

135

 

(78

)

(74

)

(1

)

(73

)

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

139

 

 

(8

)

(8

)

 

Pretax loss attributable to Ameriprise Financial

 

$

(82

)

$

(4

)

$

(78

)

$

(66

)

$

7

 

$

(73

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

(293

)

$

(10

)

$

(283

)

$

(251

)

$

(1

)

$

(250

)

Expenses

 

(293

)

(10

)

(283

)

(251

)

(1

)

(250

)

Pretax income

 

$

 

$

 

$

 

$

 

$

 

$

 

 

48


 


Table of Contents

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

Percent Share
of Total

 

2009

 

Percent Share
of Total

 

 

 

(in millions, except percentages)

 

Total net revenues

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

969

 

38

%

$

785

 

42

%

Asset Management

 

562

 

22

 

293

 

16

 

Annuities

 

630

 

24

 

562

 

30

 

Protection

 

521

 

20

 

497

 

26

 

Corporate & Other

 

188

 

7

 

(12

)

(1

)

Eliminations

 

(293

)

(11

)

(251

)

(13

)

Total net revenues

 

$

2,577

 

100

%

$

1,874

 

100

%

Total expenses

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

884

 

42

%

$

788

 

45

%

Asset Management

 

506

 

24

 

305

 

17

 

Annuities

 

497

 

24

 

468

 

27

 

Protection

 

386

 

18

 

387

 

22

 

Corporate & Other

 

131

 

6

 

62

 

3

 

Eliminations

 

(293

)

(14

)

(251

)

(14

)

Total expenses

 

$

2,111

 

100

%

$

1,759

 

100

%

Pretax income (loss) attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

85

 

26

%

$

(3

)

(2

)%

Asset Management

 

56

 

17

 

(12

)

(10

)

Annuities

 

133

 

41

 

94

 

76

 

Protection

 

135

 

41

 

110

 

89

 

Corporate & Other

 

(82

)

(25

)

(66

)

(53

)

Pretax income

 

$

327

 

100

%

$

123

 

100

%

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

Percent Share
of Total

 

2009

 

Percent Share
of Total

 

 

 

(in millions, except percentages)

 

Total operating net revenues

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

968

 

41

%

$

793

 

42

%

Asset Management

 

562

 

24

 

293

 

16

 

Annuities

 

626

 

26

 

554

 

29

 

Protection

 

520

 

22

 

498

 

27

 

Corporate & Other

 

(14

)

(1

)

(12

)

(1

)

Eliminations

 

(283

)

(12

)

(250

)

(13

)

Total operating net revenues

 

$

2,379

 

100

%

$

1,876

 

100

%

Total operating expenses

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

880

 

44

%

$

772

 

45

%

Asset Management

 

458

 

23

 

296

 

17

 

Annuities

 

497

 

25

 

468

 

27

 

Protection

 

386

 

19

 

387

 

22

 

Corporate & Other

 

64

 

3

 

61

 

3

 

Eliminations

 

(283

)

(14

)

(250

)

(14

)

Total operating expenses

 

$

2,002

 

100

%

$

1,734

 

100

%

Operating pretax income (loss) attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

88

 

23

%

$

21

 

15

%

Asset Management

 

104

 

28

 

(3

)

(2

)

Annuities

 

129

 

34

 

86

 

60

 

Protection

 

134

 

36

 

111

 

78

 

Corporate & Other

 

(78

)

(21

)

(73

)

(51

)

Operating pretax income

 

$

377

 

100

%

$

142

 

100

%

 

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Table of Contents

 

Advice & Wealth Management

 

Our Advice & Wealth Management segment provides financial planning and advice, as well as full service brokerage and banking services, primarily to retail clients through our financial advisors. Our affiliated financial advisors utilize a diversified selection of both affiliated and non-affiliated products to help clients meet their financial needs. A significant portion of revenues in this segment is fee-based, driven by the level of client assets, which is impacted by both market movements and net asset flows. We also earn net investment income on owned assets primarily from certificate and banking products. This segment earns revenues (distribution fees) for distributing non-affiliated products and earns intersegment revenues (distribution fees) for distributing our affiliated products and services provided to our retail clients. Intersegment expenses for this segment include expenses for investment management services provided by the Asset Management segment.

 

In addition to purchases of affiliated and non-affiliated 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.

 

The following table presents the changes in wrap account assets:

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

(in billions)

 

Balance at April 1

 

$

100.0

 

$

68.2

 

Net flows

 

2.3

 

2.8

 

Market appreciation (depreciation)

 

(5.4

)

8.0

 

Balance at June 30

 

$

96.9

 

$

79.0

 

 

Wrap account assets had net inflows of $2.3 billion for the three months ended June 30, 2010 compared to $2.8 billion in the prior year period and market depreciation of $5.4 billion in the second quarter of 2010 compared to market appreciation of $8.0 billion in the prior year period.

 

We provide securities execution and clearing services for our retail and institutional clients through our registered broker-dealer subsidiaries. As of June 30, 2010, we administered $88.4 billion in assets for clients, an increase of $8.6 billion compared to the prior year period.

 

Management believes that operating measures, which exclude net realized gains/losses and integration charges for our Advice & Wealth Management segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

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Table of Contents

 

The following table presents the results of operations of our Advice & Wealth Management segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

382

 

$

 

$

382

 

$

295

 

$

 

$

295

 

$

87

 

29

%

Distribution fees

 

511

 

 

511

 

423

 

 

423

 

88

 

21

 

Net investment income

 

70

 

1

 

69

 

82

 

(8

)

90

 

(21

)

(23

)

Other revenues

 

23

 

 

23

 

23

 

 

23

 

 

 

Total revenues

 

986

 

1

 

985

 

823

 

(8

)

831

 

154

 

19

 

Banking and deposit interest expense

 

17

 

 

17

 

38

 

 

38

 

(21

)

(55

)

Total net revenues

 

969

 

1

 

968

 

785

 

(8

)

793

 

175

 

22

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

588

 

 

588

 

478

 

 

478

 

110

 

23

 

General and administrative expense

 

296

 

4

 

292

 

310

 

16

 

294

 

(2

)

(1

)

Total expenses

 

884

 

4

 

880

 

788

 

16

 

772

 

108

 

14

%

Pretax income (loss)

 

$

85

 

$

(3

)

$

88

 

$

(3

)

$

(24

)

$

21

 

$

67

 

NM

 

 


NM Not Meaningful.

(1)             Adjustments include net realized gains/losses and integration charges.

 

Our Advice & Wealth Management segment pretax income was $85 million for the three months ended June 30, 2010 compared to a loss of $3 million in the prior year period. Our Advice & Wealth Management segment operating pretax income was $88 million for the three months ended June 30, 2010 compared to $21 million in the prior year period driven by higher asset-based revenues.

 

Net Revenues

 

Net revenues were $969 million for the three months ended June 30, 2010 compared to $785 million in the prior year period, an increase of $184 million, or 23%. Operating net revenues exclude net realized gains/losses. Operating net revenues were $968 million for the three months ended June 30, 2010 compared to $793 million in the prior year period, an increase of $175 million, or 22%, driven by growth in average fee-based assets.

 

Management and financial advice fees increased $87 million, or 29%, to $382 million for the three months ended June 30, 2010, driven by growth in average fee-based assets resulting from period-over-period market appreciation and retail net inflows. The daily average S&P 500 Index increased 27% compared to the prior year period. Wrap account assets increased $17.9 billion, or 23%, to $96.9 billion at June 30, 2010 due to period-over-period market appreciation and net inflows. Financial planning fees were higher for the three months ended June 30, 2010 compared to the prior year period.

 

Distribution fees increased $88 million, or 21%, to $511 million for the three months ended June 30, 2010, primarily driven by growth in average fee-based assets resulting from period-over-period market appreciation and retail net inflows, as well as increased brokerage transactional activity.

 

Net investment income decreased $12 million, or 15%, to $70 million for the three months ended June 30, 2010. Operating net investment income, which excludes net realized gains and losses, decreased $21 million, or 23%, to $69 million for the three months ended June 30, 2010, primarily due to lower invested assets resulting from net outflows in certificates due to the run-off of certificate rate promotions, as well as lower average yields on invested assets related to certificates.

 

Banking and deposit interest expense decreased $21 million, or 55%, to $17 million for the three months ended June 30, 2010, primarily due to lower certificate balances as a result of the run-off of certificate rate promotions, as well as a decrease in crediting rates on certificate products.

 

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Table of Contents

 

Expenses

 

Total expenses increased $96 million, or 12%, to $884 million for the three months ended June 30, 2010.  Total operating expenses, which exclude integration charges, increased $108 million, or 14%, to $880 million for the three months ended June 30, 2010 due to an increase in distribution expenses.

 

Distribution expenses increased $110 million, or 23%, to $588 million for the three months ended June 30, 2010, due to growth in average fee based assets driven by period-over-period market appreciation and retail net inflows, as well as higher advisor compensation from increased client activity.

 

General and administrative expense decreased $14 million, or 5%, to $296 million for the three months ended June 30, 2010 compared to $310 million for the prior year period. Operating general and administrative expense, which excludes integration charges, decreased $2 million, or 1%, to $292 million for the three months ended June 30, 2010 compared to $294 million for the prior year period, reflecting cost controls, partially offset by continued investment in marketing and a new brokerage platform.

 

Asset Management

 

Our Asset Management segment provides investment advice and investment products to retail and institutional clients. Columbia Management Investments Advisors, LLC (“Columbia Management Investments”, formerly RiverSource Investments, LLC) predominantly provides U.S. domestic products and services and Threadneedle predominantly provides international investment products and services. U.S. domestic retail products are distributed through the Advice & Wealth Management segment and also through unaffiliated advisors or other third parties, including distribution through Bank of America and its affiliates. International retail products are primarily distributed through third parties. Retail products include mutual funds, variable product funds underlying insurance and annuity separate accounts, separately managed accounts and collective funds. Asset Management products are also distributed directly to institutions through an institutional sales force. Institutional asset management products include traditional asset classes, separate accounts, individually managed accounts, collateralized loan obligations, hedge funds and property funds. Revenues in this segment are primarily earned as fees based on managed asset balances, which are impacted by both market movements and net asset flows. The asset management teams serving our Asset Management segment provide all intercompany asset management services, and the fees for all such services are reflected within the Asset Management segment results through intersegment allocations. Intersegment expenses for this segment include distribution expenses for services provided by the Advice & Wealth Management, Annuities and Protection segments.

 

We provide investment advisory, administration, transfer agency, distribution and other services to the Columbia funds and to the RiverSource funds (including the Seligman and Threadneedle branded funds), including closed-end funds and funds that serve as underlying investment options to variable insurance and annuity products. Prior to the Columbia Management Acquisition, the Columbia funds were managed by Columbia Management Advisors, an affiliate of Bank of America. The Seligman branded funds were managed by J. & W. Seligman Co. prior to its acquisition. We have begun and in the coming months, we intend to continue combining the “RiverSource Investments” branded elements of our asset management business with Columbia Management under the Columbia brand.

 

The following table presents the total domestic assets and number of funds managed by RiverSource funds and Columbia funds as of June 30, 2010:

 

 

 

Managed Assets

 

Number of Funds

 

 

 

(in billions)

 

 

 

RiverSource funds

 

$

88.7

 

141

 

Columbia funds

 

100.5

 

140

 

Other

 

0.9

 

N/A

 

 

 

$

190.1

 

281

 

 

N/A Not applicable.

 

Threadneedle will remain our international investment management platform. Threadneedle manages four Open Ended Investment Companies (“OEICs”) and two Societe d’Investissement A Capital Variable (“SICAV”) offerings. The four OEICs are Threadneedle Investment Funds ICVC (“TIF”), Threadneedle Specialist Investment Funds ICVC (“TSIF”), Threadneedle Focus Investment Funds (“TFIF”) and Threadneedle Advantage Portfolio Funds (“TPAF”). TIF, TSIF, TFIF and TPAF are structured as umbrella companies with a total of 51 (33, 13, 2 and 3, respectively) sub funds covering the world’s bond and equity markets. The two SICAVs are the Threadneedle (Lux) SICAV (“T(Lux)”) and World Express Funds 2 (“WEF2”). T(Lux) and WEF2 are structured as umbrella companies with a total of  34 (32 and 2, respectively) sub funds covering the world’s bond and equity markets. In addition, Threadneedle manages 13 unit trusts, 10 of which invest into the OEICs, 6 property unit trusts and 1 property fund of funds.

 

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Table of Contents

 

The following table presents the mutual fund performance of our retail Domestic and International funds:

 

 

 

June 30, 2010

 

June 30, 2009

 

Mutual Fund Performance Domestic

 

 

 

 

 

Equal Weighted Mutual Fund Rankings in top 2 Lipper Quartiles(1)

 

 

 

 

 

Equity - 12 month

 

49

%

37

%

Fixed income - 12 month

 

52

%

74

%

Equity - 3 year

 

48

%

42

%

Fixed income - 3 year

 

68

%

79

%

Equity - 5 year

 

75

%

59

%

Fixed income - 5 year

 

75

%

64

%

Asset Weighted Mutual Fund Rankings in top 2 Lipper Quartiles(2)

 

 

 

 

 

Equity - 12 month

 

73

%

39

%

Fixed income - 12 month

 

45

%

42

%

Equity - 3 year

 

61

%

40

%

Fixed income - 3 year

 

64

%

47

%

Equity - 5 year

 

88

%

67

%

Fixed income - 5 year

 

65

%

39

%

International

 

 

 

 

 

Equal Weighted Mutual Fund Rankings in top 2 S&P Quartiles(1)

 

 

 

 

 

Equity - 12 month

 

62

%

69

%

Fixed income - 12 month

 

40

%

73

%

Equity - 3 year

 

97

%

93

%

Fixed income - 3 year

 

80

%

73

%

Equity - 5 year

 

93

%

89

%

Fixed income - 5 year

 

67

%

70

%

 


(1)

Equal Weighted Rankings in Top 2 Quartiles: Counts the number of funds (RiverSource Class A and Columbia Class Z) with above median ranking divided by the total number of funds. Asset size is not a factor.

(2)

Asset Weighted Rankings in Top 2 Quartiles: Sums the assets of the funds (RiverSource Class A and Columbia Class Z) with above median ranking divided by the total sum of RiverSource Class A assets and Columbia Class Z assets. Funds with more assets will receive a greater share of the total percentage above or below median.

 

Beginning in the second quarter of 2010, mutual fund performance rankings are based on the performance of Class A fund shares for legacy RiverSource (including Seligman and Threadneedle) branded funds and on Class Z fund shares for legacy Columbia branded funds, as the majority of fund assets managed within the funds of each fund family are generally held in the designated share class. Prior to the second quarter of 2010, the mutual fund performance rankings were based solely on the performance of the legacy RiverSource Class A fund shares. Aggregated data shows only actively-managed mutual funds by affiliated investment managers. Aggregated data does not include mutual funds sub-advised by advisors not affiliated with Ameriprise Financial, Inc., RiverSource S&P 500 Index Fund, RiverSource Cash Management Fund and RiverSource Tax Free Money Market Fund. Aggregated equity rankings include RiverSource Portfolio Builder Series and other balanced and asset allocation funds that invest in both equities and fixed income. RiverSource Portfolio Builder Series funds are funds of mutual funds that may invest in third-party sub-advised funds.

 

We also offer Separately Managed Accounts, Individually Managed Accounts, management of Institutional Owned Assets, management of collateralized debt obligations, sub-advisory services for certain domestic and international mutual funds, hedge funds and RiverSource Trust Collective Funds and separate accounts for Ameriprise Trust Company clients.

 

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The following tables present the changes in Domestic and International managed assets:

 

 

 

March 31,

 

 

 

Market

 

Foreign

 

 

 

June 30,

 

 

 

2010

 

Net Flows

 

Depreciation

 

Exchange

 

Other

 

2010

 

 

 

(in billions)

 

Domestic Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

$

78.6

 

$

(2.3

)

$

(4.3

)

$

 

$

118.1

 

$

190.1

 

Institutional Funds

 

64.0

 

(2.5

)

(2.6

)

 

68.4

 

127.3

 

Alternative Funds

 

10.1

 

0.1

 

(0.2

)

 

 

10.0

 

Less: Eliminations

 

(0.1

)

0.1

 

 

 

 

 

Total Domestic Managed Assets

 

152.6

 

(4.6

)

(7.1

)

 

186.5

(1)

327.4

 

International Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

30.4

 

(0.5

)

(2.2

)

(0.5

)

0.1

 

27.3

 

Institutional Funds

 

65.0

 

(0.7

)

(3.3

)

(1.1

)

0.6

 

60.5

 

Alternative Funds

 

1.7

 

0.1

 

(0.3

)

 

 

1.5

 

Total International Managed Assets

 

97.1

 

(1.1

)

(5.8

)

(1.6

)

0.7

 

89.3

 

Less: Sub-Advised Eliminations

 

(3.7

)

 

 

 

0.3

 

(3.4

)

Total Managed Assets

 

$

246.0

 

$

(5.7

)

$

(12.9

)

$

(1.6

)

$

187.5

 

$

413.3

 

 


(1)             Includes assets due to the Columbia Management Acquisition.

 

 

 

 

 

 

 

Market

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

Appreciation/

 

Foreign

 

 

 

June 30,

 

 

 

2009

 

Net Flows

 

(Depreciation)

 

Exchange

 

Other

 

2009

 

 

 

(in billions)

 

Domestic Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

$

59.8

 

$

(0.8

)

$

7.0

 

$

 

$

 

$

66.0

 

Institutional Funds

 

56.4

 

0.4

 

3.0

 

 

 

59.8

 

Alternative Funds

 

9.1

 

 

 

 

 

9.1

 

Less: Eliminations

 

(0.1

)

 

 

 

 

(0.1

)

Total Domestic Managed Assets

 

125.2

 

(0.4

)

10.0

 

 

 

134.8

 

International Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

15.6

 

1.2

 

0.6

 

2.5

 

2.2

 

22.1

 

Institutional Funds

 

50.2

 

(0.6

)

0.6

 

7.6

 

0.6

 

58.4

 

Alternative Funds

 

2.5

 

(0.1

)

(0.7

)

0.3

 

 

2.0

 

Total International Managed Assets

 

68.3

 

0.5

 

0.5

 

10.4

 

2.8

 

82.5

 

Less: Sub-Advised Eliminations

 

(2.3

)

 

 

 

(0.9

)

(3.2

)

Total Managed Assets

 

$

191.2

 

$

0.1

 

$

10.5

 

$

10.4

 

$

1.9

 

$

214.1

 

 

The U.S. asset management business ended the second quarter of 2010 with $327.4 billion in managed assets and strong investment and wholesaling teams in place. Investment performance continued to be solid, complementing strong longer-term investment track records. In the second quarter of 2010, net outflows were $4.6 billion, including $2.1 billion from a single low-yielding institutional account and $0.8 billion in lower-margin sub-advised retail portfolios included in acquired assets, as well as integration-related outflows. Retail net outflows also reflected slower equity sales, consistent with the industry.

 

At Threadneedle, total managed assets were $89.3 billion at June 30, 2010, up 8% from the prior year period reflecting period-over-period market appreciation and net inflows, partially offset by negative foreign currency translation. Total net outflows of $1.1 billion in the second quarter of 2010 were primarily due to institutional outflows in Zurich-related portfolios. In addition, market volatility negatively impacted European retail investor behavior in the second quarter of 2010, dampening the positive trend in flows from prior quarters and contributing to net outflows in retail portfolios. Longer-term investment track records remained strong.

 

Management believes that operating measures, which exclude net realized gains/losses and integration charges for our Asset Management segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

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The following table presents the results of operations of our Asset Management segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

471

 

$

 

$

471

 

$

231

 

$

 

$

231

 

$

240

 

NM

 

Distribution fees

 

88

 

 

88

 

54

 

 

54

 

34

 

63

%

Net investment income

 

 

 

 

7

 

 

7

 

(7

)

(100

)

Other revenues

 

4

 

 

4

 

2

 

 

2

 

2

 

100

 

Total revenues

 

563

 

 

563

 

294

 

 

294

 

269

 

91

 

Banking and deposit interest expense

 

1

 

 

1

 

1

 

 

1

 

 

 

Total net revenues

 

562

 

 

562

 

293

 

 

293

 

269

 

92

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

186

 

 

186

 

85

 

 

85

 

101

 

NM

 

Amortization of deferred acquisition costs acquisition cots

 

5

 

 

5

 

6

 

 

6

 

(1

)

(17

)

General and administrative expense

 

315

 

48

 

267

 

214

 

9

 

205

 

62

 

30

 

Total expenses

 

506

 

48

 

458

 

305

 

9

 

296

 

162

 

55

%

Pretax income (loss)

 

$

56

 

$

(48

)

$

104

 

$

(12

)

$

(9

)

$

(3

)

$

107

 

NM

 

 


NM Not Meaningful.

(1)             Adjustments include integration charges.

 

Our Asset Management segment pretax income was $56 million for the three months ended June 30, 2010 compared to a loss of $12 million in the prior year period. Our Asset Management segment pretax operating income was $104 million for the three months ended June 30, 2010 compared to a loss of $3 million in the prior year period reflecting period-over-period market appreciation and two months of Columbia Management earnings.

 

Net Revenues

 

Net revenues increased $269 million, or 92%, to $562 million for the three months ended June 30, 2010, driven by an increase in management fees due to growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

Management and financial advice fees increased $240 million to $471 million for the three months ended June 30, 2010, primarily due to growth in assets from the Columbia Management Acquisition and period-over-period market appreciation. The daily average S&P 500 Index increased 27% compared to the prior year period. Total Asset Management managed assets increased $199.2 billion, or 93%, compared to the prior year period primarily due to the Columbia Management Acquisition and the period-over-period appreciation in the S&P 500 Index.

 

Distribution fees increased $34 million, or 63%, to $88 million for the three months ended June 30, 2010, primarily driven by growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

Net investment income decreased $7 million compared to the prior year period primarily due to unfavorable mark-to-market adjustments on seed money investments in the second quarter of 2010 compared to gains in the prior year period.

 

Expenses

 

Total expenses increased $201 million, or 66%, to $506 million for the three months ended June 30, 2010. Total operating expenses, which exclude integration charges, increased $162 million, or 55%, to $458 million for the three months ended June 30, 2010, primarily reflecting the increased distribution expenses and general and administrative expense from the Columbia Management Acquisition.

 

Distribution expenses increased $101 million to $186 million for the three months ended June 30, 2010, primarily due to growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

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General and administrative expense increased $101 million, or 47%, to $315 million for the three months ended June 30, 2010. Operating general and administrative expense, which excludes integration charges, increased $62 million, or 30%, to $267 million for the three months ended June 30, 2010, primarily due to the increased operating costs of Columbia Management.

 

Annuities

 

Our Annuities segment provides variable and fixed annuity products of RiverSource Life companies to retail clients primarily distributed through our affiliated financial advisors and to the retail clients of unaffiliated advisors through third-party distribution. Revenues for our variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. Revenues for our fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances. We also earn net investment income on owned assets supporting reserves for immediate annuities and for certain guaranteed benefits offered with variable annuities and on capital supporting the business. Intersegment revenues for this segment reflect fees paid by the Asset Management segment for marketing support and other services provided in connection with the availability of RiverSource VST Funds under the variable annuity contracts. Intersegment expenses for this segment include distribution expenses for services provided by the Advice & Wealth Management segment, as well as expenses for investment management services provided by the Asset Management segment.

 

Variable annuity ending balances increased 15% to $54.0 billion at June 30, 2010 driven by period-over-period market appreciation and positive net flows. Fixed annuity balances were $14.5 billion, up 1% from the prior year period. Lower fixed annuity sales in the second quarter of 2010 primarily reflected lower client demand due to a decline in our offered crediting rate.

 

Management believes that operating measures, which exclude net realized gains/losses for our Annuities segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the results of operations of our Annuities segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

130

 

$

 

$

130

 

$

104

 

$

 

$

104

 

$

26

 

25

%

Distribution fees

 

76

 

 

76

 

58

 

 

58

 

18

 

31

 

Net investment income

 

330

 

4

 

326

 

339

 

8

 

331

 

(5

)

(2

)

Premiums

 

42

 

 

42

 

23

 

 

23

 

19

 

83

 

Other revenues

 

52

 

 

52

 

38

 

 

38

 

14

 

37

 

Total revenues

 

630

 

4

 

626

 

562

 

8

 

554

 

72

 

13

 

Banking and deposit interest expense

 

 

 

 

 

 

 

 

 

Total net revenues

 

630

 

4

 

626

 

562

 

8

 

554

 

72

 

13

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

70

 

 

70

 

49

 

 

49

 

21

 

43

 

Interest credited to fixed accounts

 

194

 

 

194

 

201

 

 

201

 

(7

)

(3

)

Benefits, claims, losses and settlement expenses

 

58

 

 

58

 

351

 

 

351

 

(293

)

(83

)

Amortization of deferred acquisition costs

 

121

 

 

121

 

(182

)

 

(182

)

303

 

NM

 

General and administrative expense

 

54

 

 

54

 

49

 

 

49

 

5

 

10

 

Total expenses

 

497

 

 

497

 

468

 

 

468

 

29

 

6

 

Pretax income

 

$

133

 

$

4

 

$

129

 

$

94

 

$

8

 

$

86

 

$

43

 

50

%

 


NM Not Meaningful.

(1)             Adjustments include net realized gains.

 

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Table of Contents

 

Our Annuities segment pretax income was $133 million for the three months ended June 30, 2010 compared to $94 million in the prior year period. Our Annuities segment pretax operating income was $129 million for the three months ended June 30, 2010 compared to $86 million in the prior year period.

 

Net Revenues

 

Net revenues increased $68 million, or 12%, to $630 million for the three months ended June 30, 2010. Operating net revenues, which exclude net realized gains, increased $72 million, or 13%, to $626 million for the three months ended June 30, 2010.

 

Management and financial advice fees increased $26 million, or 25%, to $130 million for the three months ended June 30, 2010, due to higher fees on variable annuities driven by higher assets. Average variable annuities contract accumulation values increased $11.3 billion, or 29%, from the prior year period due to higher equity market levels and net inflows.

 

Distribution fees increased $18 million, or 31%, to $76 million for the three months ended June 30, 2010, due to higher fees on variable annuities driven by higher assets.

 

Net investment income decreased $9 million, or 3%, to $330 million for the three months ended June 30, 2010. Operating net investment income, which excludes net realized gains, decreased $5 million, or 2%, to $326 million for the three months ended June 30, 2010, reflecting the implementation of changes to the PN program. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This reallocation in part resulted in a shift of assets from interest bearing investments in the general account into separate accounts.

 

Premiums increased $19 million, or 83%, to $42 million for the three months ended June 30, 2010, due to higher sales of immediate annuities with life contingencies.

 

Other revenues increased $14 million, or 37%, to $52 million for the three months ended June 30, 2010, due to an increase in guaranteed benefit rider fees on variable annuities resulting from higher business volumes.

 

Expenses

 

Total expenses increased $29 million, or 6%, to $497 million for the three months ended June 30, 2010, primarily due to an increase in distribution expenses and amortization of DAC partially offset by a decrease in benefits, claims, losses and settlement expenses.

 

Distribution expenses increased $21 million, or 43%, to $70 million for the three months ended June 30, 2010, primarily due to higher variable annuity compensation.

 

Interest credited to fixed accounts decreased $7 million, or 3%, to $194 million for the three months ended June 30, 2010, primarily due to lower average fixed annuity crediting rates. Average fixed annuities contract accumulation values increased $439 million, or 3%, compared to the prior year period. The average fixed annuity crediting rate excluding capitalized interest decreased to 3.9% in the second quarter of 2010 compared to 4.0% in the prior year period.

 

Benefits, claims, losses and settlement expenses decreased $293 million, or 83%, to $58 million for the three months ended June 30, 2010, primarily driven by a decrease in expenses from variable annuity benefit guarantees. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, decreased benefits expense by $64 million in the second quarter of 2010, primarily driven by the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. This decrease was partially offset by an increase in benefits expense of $17 million, net of DSIC, as a result of the implementation of changes to the PN program. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, increased benefits expense by $311 million in the second quarter of 2009 primarily due to the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. The negative impact of markets on DSIC amortization was $6 million in the second quarter of 2010 compared to a positive impact of $6 million in the prior year period. Benefits, claims, losses and settlement expenses related to our immediate annuities with life contingencies increased compared to the prior year period primarily due to higher business volumes.

 

Amortization of DAC increased $303 million to $121 million for the three months ended June 30, 2010 compared to a benefit of $182 million in the prior year period. DAC amortization in the second quarter of 2010 increased $68 million due to market impacts, including $39 million offsetting lower variable annuity guaranteed living benefit expenses, net of hedges. In addition, DAC amortization increased due to higher variable annuity gross profits compared to the prior year period. These increases were partially offset by an $11 million decrease as a result of the implementation of changes to the PN program and a $21 million decrease related to an adjustment for revisions to certain calculations in our valuation of DAC. DAC amortization in the second quarter of 2009 decreased $239 million due to market impacts, including a $206 million benefit offsetting higher variable annuity guaranteed living benefits, net of hedges.

 

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Table of Contents

 

General and administrative expense increased $5 million, or 10%, to $54 million for the three months ended June 30, 2010 compared to $49 million for the prior year period primarily driven by additional expenses related to a new product introduction and the implementation of changes to the PN program.

 

Protection

 

Our Protection segment offers a variety of protection products to address the protection and risk management needs of our retail clients including life, disability income and property-casualty insurance. Life and disability income products are primarily distributed through our branded advisors. Our property-casualty products are sold direct, primarily through affinity relationships. We issue insurance policies through our life insurance subsidiaries and the property casualty companies. The primary sources of revenues for this segment are premiums, fees, and charges that we receive to assume insurance-related risk. We earn net investment income on owned assets supporting insurance reserves and capital supporting the business. We also receive fees based on the level of assets supporting variable universal life separate account balances. This segment earns intersegment revenues from fees paid by the Asset Management segment for marketing support and other services provided in connection with the availability of RiverSource VST Funds under the variable universal life contracts. Intersegment expenses for this segment include distribution expenses for services provided by the Advice & Wealth Management segment, as well as expenses for investment management services provided by the Asset Management segment.

 

Management believes that operating measures, which exclude net realized gains/losses for our Protection segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the results of operations of our Protection segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

13

 

$

 

$

13

 

$

11

 

$

 

$

11

 

$

2

 

18

%

Distribution fees

 

 24

 

 —

 

 24

 

 24

 

 —

 

 24

 

 —

 

 

Net investment income

 

 111

 

 1

 

 110

 

 97

 

 (1

)

 98

 

 12

 

12

 

Premiums

 

 264

 

 —

 

 264

 

 254

 

 —

 

 254

 

 10

 

4

 

Other revenues

 

 109

 

 —

 

 109

 

 111

 

 —

 

 111

 

 (2

)

(2

)

Total revenues

 

 521

 

 1

 

 520

 

 497

 

 (1

)

 498

 

 22

 

4

 

Banking and deposit interest expense

 

 

 

 

 

 

 

 

 

Total net revenues

 

 521

 

 1

 

 520

 

 497

 

 (1

)

 498

 

 22

 

4

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 9

 

 —

 

 9

 

 6

 

 —

 

 6

 

 3

 

50

 

Interest credited to fixed accounts

 

 37

 

 —

 

 37

 

 36

 

 —

 

 36

 

 1

 

3

 

Benefits, claims, losses and settlement expenses

 

 240

 

 —

 

 240

 

 236

 

 —

 

 236

 

 4

 

2

 

Amortization of deferred acquisition costs

 

 45

 

 —

 

 45

 

 51

 

 —

 

 51

 

 (6

)

(12

)

General and administrative expense

 

 55

 

 —

 

 55

 

 58

 

 —

 

 58

 

 (3

)

(5

)

Total expenses

 

 386

 

 —

 

 386

 

 387

 

 —

 

 387

 

 (1

)

 

Pretax income

 

$

135

 

$

1

 

$

134

 

$

110

 

$

(1

)

$

111

 

$

23

 

21

%

 


(1)             Adjustments include net realized gains/losses.

 

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Table of Contents

 

Our Protection segment pretax income was $135 million for the three months ended June 30, 2010, an increase of $25 million, or 23%, from $110 million in the prior year period. Our Protection segment pretax operating income was $134 million for the three months ended June 30, 2010, an increase of $23 million, or 21%, from $111 million in the prior year period.

 

Net Revenues

 

Net revenues increased $24 million, or 5%, to $521 million for the three months ended June 30, 2010. Operating net revenues, which exclude net realized gains or losses, increased $22 million, or 4%, to $520 million for the three months ended June 30, 2010, primarily due to an increase in net investment income and premiums.

 

Net investment income increased $14 million, or 14%, to $111 million for the three months ended June 30, 2010.  Operating net investment income, which excludes net realized gains or losses, increased $12 million, or 12%, to $110 million for the three months ended June 30, 2010, primarily due to higher investment yields and increased general account assets.

 

Premiums increased $10 million, or 4%, to $264 million for the three months ended June 30, 2010, due to growth in Auto and Home premiums driven by higher volumes. Auto and Home policy counts increased 9% period-over-period.

 

Expenses

 

Total expenses were essentially flat at $386 million for the three months ended June 30, 2010, as volume based expense increases were offset by a $6 million benefit from the implementation of changes to the PN program.

 

Benefits, claims, losses and settlement expenses increased $4 million, or 2%, to $240 million for the three months ended June 30, 2010, primarily due to higher volume-driven Auto and Home claims partially offset by favorable VUL/UL insurance claims.

 

Amortization of DAC decreased $6 million, or 12%, to $45 million for the three months ended June 30, 2010, reflecting a reduction in DAC amortization due to a $6 million benefit from the implementation of changes to the PN program and a $7 million adjustment for revisions to certain calculations in our valuation of DAC. The market impact on DAC amortization resulted in an increase of $4 million in the second quarter of 2010 compared to a benefit of $6 million in the prior year period.

 

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Corporate & Other

 

Our Corporate & Other segment consists of net investment income on corporate level assets, including excess capital held in our subsidiaries and other unallocated equity and other revenues from various investments as well as unallocated corporate expenses.

 

Management believes that operating measures, which exclude net realized gains/losses, integration charges and the impact of consolidating CIEs for our Corporate & Other segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the results of operations of our Corporate & Other segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

143

 

$

156

 

$

(13

)

$

(14

)

$

8

 

$

(22

)

$

9

 

41

%

Other revenues

 

48

 

46

 

2

 

1

 

(7

)

8

 

(6

)

(75

)

Total revenues

 

191

 

202

 

(11

)

(13

)

1

 

(14

)

3

 

21

 

Banking and deposit interest expense

 

3

 

 

3

 

(1

)

1

 

(2

)

5

 

NM

 

Total net revenues

 

188

 

202

 

(14

)

(12

)

 

(12

)

(2

)

(17

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

1

 

 

1

 

(1

)

(100

)

Interest and debt expense

 

74

 

45

 

29

 

28

 

 

28

 

1

 

4

 

General and administrative expense

 

57

 

22

 

35

 

33

 

1

 

32

 

3

 

9

 

Total expenses

 

131

 

67

 

64

 

62

 

1

 

61

 

3

 

5

 

Pretax income (loss)

 

57

 

135

 

(78

)

(74

)

(1

)

(73

)

(5

)

(7

)

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

139

 

 

(8

)

(8

)

 

 

 

Pretax loss attributable to Ameriprise Financial

 

$

(82

)

$

(4

)

$

(78

)

$

(66

)

$

7

 

$

(73

)

$

(5

)

(7

)%

 


NM Not Meaningful.

(1)             Includes revenues and expenses of the CIEs, net realized gains and integration charges.

 

60


 


Table of Contents

 

The following table presents the components of the adjustments in the table above:

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

CIEs

 

Adjustments (1)

 

Adjustments

 

CIEs

 

Adjustments (1)

 

Adjustments

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

155

 

$

1

 

$

156

 

$

1

 

$

7

 

$

8

 

Other revenues

 

46

 

 

46

 

(7

)

 

(7

)

Total revenues

 

201

 

1

 

202

 

(6

)

7

 

1

 

Banking and deposit interest expense

 

 

 

 

1

 

 

1

 

Total net revenues

 

201

 

1

 

202

 

(7

)

7

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

 

 

 

Interest and debt expense

 

45

 

 

45

 

 

 

 

General and administrative expense

 

17

 

5

 

22

 

1

 

 

1

 

Total expenses

 

62

 

5

 

67

 

1

 

 

1

 

Pretax income (loss)

 

139

 

(4

)

135

 

(8

)

7

 

(1

)

Less: Net income (loss) attributable to noncontrolling interests

 

139

 

 

139

 

(8

)

 

(8

)

Net income (loss) attributable to Ameriprise Financial

 

$

 

$

(4

)

$

(4

)

$

 

$

7

 

$

7

 

 


(1)    Other adjustments include net realized gains and integration charges.

 

Our Corporate & Other segment pretax loss attributable to Ameriprise Financial was $82 million for the three months ended June 30, 2010 compared to $66 million in the prior year period. Our Corporate & Other segment pretax operating loss attributable to Ameriprise Financial was $78 million for the three months ended June 30, 2010 compared to $73 million in the prior year period.

 

Net revenues increased $200 million to $188 million for the three months ended June 30, 2010 compared to the prior year period primarily reflecting revenues of CIEs. Operating net revenues, which exclude revenues of CIEs and net realized gains, decreased $2 million compared to the prior year period. Net investment income in the second quarter of 2010 primarily reflects changes in the assets and liabilities of CIEs, primarily debt and underlying bank loans. The decrease in operating net investment loss, which excludes revenues of CIEs and net realized gains, reflects lower transfer priced interest income allocated to the Annuities and Protection segments for maintaining excess liquidity. Other revenues in the second quarter of 2010 primarily reflect revenues of consolidated property funds. Operating other revenues, which exclude the revenues of consolidated property funds, decreased $6 million primarily due to an $8 million benefit in the second quarter of 2009 from repurchasing our junior notes at a discount.

 

Total expenses increased $69 million to $131 million for the three months ended June 30, 2010 compared to the prior year period primarily reflecting expenses of CIEs. Total operating expenses, which exclude expenses of CIEs and integration charges, increased $3 million, or 5%, compared to the prior year period due to $8 million in higher expenses related to supporting the $1.00 net asset value of certain 2a-7 funds partially offset by lower legal expenses.

 

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Table of Contents

 

Consolidated Results of Operations for the Six Months Ended June 30, 2010 and 2009

 

In June 2009, the FASB updated the accounting standard related to the required consolidation of certain VIEs. We adopted the accounting standard effective January 1, 2010. For additional information on the required consolidation of CIEs, refer to our discussion within the Overview section above.

 

Management believes that operating measures, which exclude net realized gains/losses, integration charges and the impact of consolidating CIEs, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents our consolidated results of operations:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

1,729

 

$

(19

)

$

1,748

 

$

1,160

 

$

(1

)

$

1,161

 

$

587

 

51

%

Distribution fees

 

844

 

 

844

 

662

 

 

662

 

182

 

27

 

Net investment income

 

1,244

 

246

 

998

 

929

 

23

 

906

 

92

 

10

 

Premiums

 

581

 

 

581

 

535

 

 

535

 

46

 

9

 

Other revenues

 

491

 

103

 

388

 

384

 

(19

)

403

 

(15

)

(4

)

Total revenues

 

4,889

 

330

 

4,559

 

3,670

 

3

 

3,667

 

892

 

24

 

Banking and deposit interest expense

 

41

 

 

41

 

80

 

2

 

78

 

(37

)

(47

)

Total net revenues

 

4,848

 

330

 

4,518

 

3,590

 

1

 

3,589

 

929

 

26

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

1,146

 

 

1,146

 

816

 

 

816

 

330

 

40

 

Interest credited to fixed accounts

 

459

 

 

459

 

442

 

 

442

 

17

 

4

 

Benefits, claims, losses and settlement expenses

 

652

 

 

652

 

687

 

 

687

 

(35

)

(5

)

Amortization of deferred acquisition costs

 

289

 

 

289

 

161

 

 

161

 

128

 

80

 

Interest and debt expense

 

138

 

85

 

53

 

54

 

 

54

 

(1

)

(2

)

General and administrative expense

 

1,337

 

76

 

1,261

 

1,181

 

46

 

1,135

 

126

 

11

 

Total expenses

 

4,021

 

161

 

3,860

 

3,341

 

46

 

3,295

 

565

 

17

 

Pretax income

 

827

 

169

 

658

 

249

 

(45

)

294

 

364

 

NM

 

Income tax provision

 

133

 

(19

)

152

 

46

 

(8

)

54

 

98

 

NM

 

Net income

 

694

 

188

 

506

 

203

 

(37

)

240

 

266

 

NM

 

Less: Net income (loss) attributable to noncontrolling interests

 

221

 

221

 

 

(22

)

(22

)

 

 

%

Net income attributable to Ameriprise Financial

 

$

473

 

$

(33

)

$

506

 

$

225

 

$

(15

)

$

240

 

$

266

 

NM

 

 


NM Not Meaningful.

(1)             Includes the elimination of management fees we earn for services provided to the CIEs and the related expense, revenues and expenses of the CIEs, net realized gains/losses and integration charges. Income tax provision is calculated using the statutory tax rate of 35% on applicable adjustments.

 

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The following table presents the components of the adjustments in the table above:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

CIEs

 

Adjustments (1)

 

Adjustments

 

CIEs

 

Adjustments (1)

 

Adjustments

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

(19

)

$

 

$

(19

)

$

(1

)

$

 

$

(1

)

Distribution fees

 

 

 

 

 

 

 

Net investment income

 

234

 

12

 

246

 

2

 

21

 

23

 

Premiums

 

 

 

 

 

 

 

Other revenues

 

103

 

 

103

 

(19

)

 

(19

)

Total revenues

 

318

 

12

 

330

 

(18

)

21

 

3

 

Banking and deposit interest expense

 

 

 

 

2

 

 

2

 

Total net revenues

 

318

 

12

 

330

 

(20

)

21

 

1

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

 

 

 

Interest credited to fixed accounts

 

 

 

 

 

 

 

Benefits, claims, losses and settlement

 

 

 

 

 

 

 

Amortization of deferred acquisition costs

 

 

 

 

 

 

 

Interest and debt expense

 

85

 

 

85

 

 

 

 

General and administrative expense

 

12

 

64

 

76

 

2

 

44

 

46

 

Total expenses

 

97

 

64

 

161

 

2

 

44

 

46

 

Pretax income

 

221

 

(52

)

169

 

(22

)

(23

)

(45

)

Income tax provision

 

 

(19

)

(19

)

 

(8

)

(8

)

Net income

 

221

 

(33

)

188

 

(22

)

(15

)

(37

)

Less: Net income (loss) attributable to noncontrolling interests

 

221

 

 

221

 

(22

)

 

(22

)

Net income attributable to Ameriprise Financial

 

$

 

$

(33

)

$

(33

)

$

 

$

(15

)

$

(15

)


(1)             Other adjustments include net realized gains/losses and integration charges.

 

Overall

 

Net income attributable to Ameriprise Financial for the six months ended June 30, 2010 was $473 million compared to $225 million for the prior year period. Operating net income attributable to Ameriprise Financial increased $266 million to $506 million for the six months ended June 30, 2010 compared to $240 million for the prior year period driven by higher asset-based revenues and higher income from spread products, as well as two months of earnings from the Columbia Management Acquisition.

 

Net Revenues

 

Net revenues increased $1.2 billion, or 35%, to $4.8 billion for the six months ended June 30, 2010 compared to $3.6 billion for the prior year period. Operating net revenues exclude net realized gains/losses and revenues of the CIEs and include the fees we earn from services we provided to the CIEs. Operating net revenues increased $929 million, or 26%, to $4.5 billion for the six months ended June 30, 2010 compared to $3.6 billion for the prior year period primarily driven by growth in asset-based management fees and distribution fees driven by higher asset levels and increased client activity, as well as higher net investment income from higher fixed annuity account balances and higher investment yields. Higher asset levels reflected period-over-period market appreciation, the Columbia Management Acquisition and retail net inflows.

 

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Management and financial advice fees increased $569 million, or 49%, to $1.7 billion for the six months ended June 30, 2010 compared to $1.2 billion for the prior year period. Operating management and financial advice fees include the fees we earn from services provided to the CIEs. Operating management and financial advice fees increased $587 million, or 51%, to $1.7 billion for the six months ended June 30, 2010 compared to $1.2 billion for the prior year period primarily due to period-over-period market appreciation on assets, the Columbia Management Acquisition and retail net inflows. The daily average S&P 500 Index increased 32% compared to the prior year period. Wrap account assets increased $17.9 billion, or 23%, to $96.9 billion at June 30, 2010 due to period-over-period market appreciation and net inflows. Total Asset Management managed assets increased $199.2 billion, or 93%, compared to the prior year period primarily due to the Columbia Management Acquisition and the period-over-period appreciation in the S&P 500 Index.

 

Distribution fees increased $182 million, or 27%, to $844 million for the six months ended June 30, 2010 compared to $662 million in the prior year period primarily due to higher asset-based fees driven by period-over-period market appreciation, the Columbia Management Acquisition, net inflows and increased client activity.

 

Net investment income increased $315 million, or 34%, to $1.2 billion for the six months ended June 30, 2010 compared to $929 million in the prior year period. Operating net investment income excludes net realized gains/losses and the changes in the assets and liabilities related to the CIEs, primarily debt and underlying bank loans. Operating net investment income increased $92 million, or 10%, to $998 million for the six months ended June 30, 2010 compared to $906 million for the prior year period primarily due to an $87 million increase in investment income on fixed maturity securities driven by higher fixed annuity account balances and higher investment yields, as well as higher investment yields and increased account balances related to assets supporting our Protection business, partially offset by lower investment income related to certificates.

 

Premiums increased $46 million, or 9%, to $581 million for the six months ended June 30, 2010, primarily due to growth in Auto and Home premiums driven by higher volumes, as well as higher sales of immediate annuities with life contingencies. Auto and Home policy counts increased 9% period-over-period.

 

Other revenues increased $107 million, or 28%, to $491 million for the six months ended June 30, 2010 compared to $384 million in the prior year period. Operating other revenues exclude revenues of consolidated property funds. Operating other revenues decreased $15 million, or 4%, to $388 million for the six months ended June 30, 2010 compared to $403 million in the prior year period primarily due to a $58 million benefit in the first half of 2009 from repurchasing our junior notes at a discount, partially offset by a $20 million benefit from the payments related to the Reserve Funds matter in the first quarter of 2010 and an increase in our guaranteed benefit rider fees on variable annuities resulting from higher business volumes.

 

Banking and deposit interest expense decreased $39 million, or 49%, to $41 million for the six months ended June 30, 2010 compared to $80 million in the prior year period primarily due to lower certificate balances as a result of the run-off of certificate rate promotions and a decrease in crediting rates on certificate products.

 

Expenses

 

Total expenses increased $680 million, or 20%, to $4.0 billion for the six months ended June 30, 2010 compared to $3.3 billion for the prior year period. Operating total expenses primarily exclude integration charges and expenses of the CIEs. Operating total expenses increased $565 million, or 17%, to $3.9 billion for the six months ended June 30, 2010 compared to $3.3 billion for the prior year period primarily due to an increase in distribution expenses, amortization of DAC and general and administrative expense.

 

Distribution expenses increased $330 million, or 40%, to $1.1 billion for the six months ended June 30, 2010 compared to $816 million in the prior year period as a result of period-over-period market appreciation, the Columbia Management Acquisition and higher advisor compensation from higher business levels.

 

Interest credited to fixed accounts increased $17 million, or 4%, to $459 million for the six months ended June 30, 2010 compared to $442 million for the prior year period primarily due to higher average fixed annuity account balances. Average fixed annuities contract accumulation values increased $1.1 billion, or 8%, compared to the prior year period. The average fixed annuity crediting rate excluding capitalized interest remained constant at 3.9% in the first half of 2010 compared to the prior year period.

 

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Benefits, claims, losses and settlement expenses decreased $35 million, or 5%, to $652 million for the six months ended June 30, 2010 compared to $687 million for the prior year period driven by a decrease in expenses from variable annuity benefit guarantees. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, decreased benefits expense by $41 million in the first half of 2010, primarily driven by the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. This decrease was partially offset by an increase in benefits expense of $17 million, net of DSIC, as a result of the implementation of changes to the PN program. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, increased benefits expense by $80 million in the first half of 2009 primarily due to the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. Benefits, claims, losses and settlement expenses related to our Auto and Home business and immediate annuities with life contingencies increased compared to the prior year period primarily due to higher business volumes.

 

Amortization of DAC increased $128 million, or 80%, to $289 million for the six months ended June 30, 2010 compared to $161 million in the prior year period. DAC amortization in the first half of 2010 increased $59 million due to market impacts, including $33 million offsetting lower variable annuity guaranteed living benefit expenses, net of hedges. DAC amortization also increased due to higher variable annuity gross profits compared to the prior year period. These increases were partially offset by a $17 million decrease as a result of the implementation of changes to the PN program and a $28 million decrease related to an adjustment for revisions to certain calculations in our valuation of DAC. DAC amortization in the first half of 2009 decreased $59 million due to market impacts, including a $60 million benefit offsetting higher variable annuity guaranteed living benefits, net of hedges.

 

Interest and debt expense increased $84 million to $138 million for the six months ended June 30, 2010 compared to $54 million in the prior year period. Operating interest and debt expense excludes interest expense on CIE debt. Operating interest and debt expense decreased $1 million, or 2%, to $53 million for the six months ended June 30, 2010 compared to $54 million in the prior year period.

 

General and administrative expense increased $156 million, or 13%, to $1.3 billion for the six months ended June 30, 2010 compared to $1.2 billion for the prior year period. Operating general and administrative expense, which excludes integration charges and expenses of the CIEs, increased $126 million, or 11%, to $1.3 billion for the six months ended June 30, 2010 primarily due to higher performance-driven compensation expense, higher expenses as a result of the Columbia Management Acquisition and higher expenses related to recognizing a substantial increase in Threadneedle’s estimated market valuation attributable to its incentive compensation program compared to the 2009 market valuation. General and administrative expense in the first half of 2010 included $8 million in higher expenses related to supporting the $1.00 net asset value of certain 2a-7 funds. These increases were partially offset by lower legal expenses compared to the prior year period.

 

Income Taxes

 

Our effective tax rate on net income including net income (loss) attributable to noncontrolling interests was 16.1% for the six months ended June 30, 2010, compared to 18.4% for the six months ended June 30, 2009. Our effective tax rate on net income excluding net income (loss) attributable to noncontrolling interests and the required consolidation of certain investment entities was 21.9% for the six months ended June 30, 2010, compared to 17.0% for the six months ended June 30, 2009.

 

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Table of Contents

 

Results of Operations by Segment for the Six Months Ended June 30, 2010 and 2009

 

The following tables present summary financial information by segment:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

GAAP

 

Adjustments

 

Operating

 

GAAP

 

Adjustments

 

Operating

 

 

 

(in millions, unaudited)

 

Advice & Wealth Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,848

 

$

 

$

1,848

 

$

1,511

 

$

(18

)

$

1,529

 

Expenses

 

1,712

 

6

 

1,706

 

1,575

 

28

 

1,547

 

Pretax income (loss)

 

$

136

 

$

(6

)

$

142

 

$

(64

)

$

(46

)

$

(18

)

Asset Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

932

 

$

1

 

$

931

 

$

553

 

$

(3

)

$

556

 

Expenses

 

858

 

53

 

805

 

573

 

16

 

557

 

Pretax income (loss)

 

$

74

 

$

(52

)

$

126

 

$

(20

)

$

(19

)

$

(1

)

Annuities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,232

 

$

7

 

$

1,225

 

$

1,054

 

$

28

 

$

1,026

 

Expenses

 

979

 

 

979

 

831

 

 

831

 

Pretax income

 

$

253

 

$

7

 

$

246

 

$

223

 

$

28

 

$

195

 

Protection

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,028

 

$

2

 

$

1,026

 

$

993

 

$

7

 

$

986

 

Expenses

 

774

 

 

774

 

771

 

 

771

 

Pretax income

 

$

254

 

$

2

 

$

252

 

$

222

 

$

7

 

$

215

 

Corporate & Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

345

 

$

339

 

$

6

 

$

5

 

$

(12

)

$

17

 

Expenses

 

235

 

121

 

114

 

117

 

3

 

114

 

Pretax loss

 

110

 

218

 

(108

)

(112

)

(15

)

(97

)

Less: Net income (loss) attributable to noncontrolling interests

 

221

 

221

 

 

(22

)

(22

)

 

Pretax loss attributable to Ameriprise Financial

 

$

(111

)

$

(3

)

$

(108

)

$

(90

)

$

7

 

$

(97

)

Eliminations

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

(537

)

$

(19

)

$

(518

)

$

(526

)

$

(1

)

$

(525

)

Expenses

 

(537

)

(19

)

(518

)

(526

)

(1

)

(525

)

Pretax income

 

$

 

$

 

$

 

$

 

$

 

$

 

 

66



Table of Contents

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

Percent Share
of Total

 

2009

 

Percent Share
of Total

 

 

 

(in millions, except percentages)

 

Total net revenues

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

1,848

 

38

%

$

1,511

 

42

%

Asset Management

 

932

 

19

 

553

 

16

 

Annuities

 

1,232

 

26

 

1,054

 

29

 

Protection

 

1,028

 

21

 

993

 

28

 

Corporate & Other

 

345

 

7

 

5

 

 

Eliminations

 

(537

)

(11

)

(526

)

(15

)

Total net revenues

 

$

4,848

 

100

%

$

3,590

 

100

%

Total expenses

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

1,712

 

43

%

$

1,575

 

47

%

Asset Management

 

858

 

21

 

573

 

17

 

Annuities

 

979

 

24

 

831

 

25

 

Protection

 

774

 

19

 

771

 

23

 

Corporate & Other

 

235

 

6

 

117

 

4

 

Eliminations

 

(537

)

(13

)

(526

)

(16

)

Total expenses

 

$

4,021

 

100

%

$

3,341

 

100

%

Pretax income (loss) attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

136

 

22

%

$

(64

)

(24

)%

Asset Management

 

74

 

12

 

(20

)

(7

)

Annuities

 

253

 

42

 

223

 

82

 

Protection

 

254

 

42

 

222

 

82

 

Corporate & Other

 

(111

)

(18

)

(90

)

(33

)

Pretax income

 

$

606

 

100

%

$

271

 

100

%

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

Percent Share
of Total

 

2009

 

Percent Share
of Total

 

 

 

(in millions, except percentages)

 

Total operating net revenues

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

1,848

 

41

%

$

1,529

 

43

%

Asset Management

 

931

 

21

 

556

 

15

 

Annuities

 

1,225

 

27

 

1,026

 

29

 

Protection

 

1,026

 

23

 

986

 

28

 

Corporate & Other

 

6

 

 

17

 

 

Eliminations

 

(556

)

(12

)

(525

)

(15

)

Total operating net revenues

 

$

4,480

 

100

%

$

3,589

 

100

%

Total operating expenses

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

1,706

 

45

%

$

1,547

 

48

%

Asset Management

 

805

 

21

 

557

 

17

 

Annuities

 

979

 

26

 

831

 

25

 

Protection

 

774

 

20

 

771

 

23

 

Corporate & Other

 

114

 

3

 

114

 

3

 

Eliminations

 

(556

)

(15

)

(525

)

(16

)

Total operating expenses

 

$

3,822

 

100

%

$

3,295

 

100

%

Operating pretax income (loss) attributable to Ameriprise Financial

 

 

 

 

 

 

 

 

 

Advice & Wealth Management

 

$

142

 

22

%

$

(18

)

(6

)%

Asset Management

 

126

 

19

 

(1

)

 

Annuities

 

246

 

37

 

195

 

66

 

Protection

 

252

 

38

 

215

 

73

 

Corporate & Other

 

(108

)

(16

)

(97

)

(33

)

Operating pretax income

 

$

658

 

100

%

$

294

 

100

%

 

67



Table of Contents

 

Advice & Wealth Management

 

Management believes that operating measures, which exclude net realized gains/losses and integration charges for our Advice & Wealth Management segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the changes in wrap account assets:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

(in billions)

 

Balance at January 1

 

$

94.9

 

$

72.8

 

Net flows

 

4.8

 

4.1

 

Market appreciation (depreciation)

 

(2.8

)

2.1

 

Balance at June 30

 

$

96.9

 

$

79.0

 

 

Wrap account assets had net inflows of $4.8 billion for the six months ended June 30, 2010 compared to $4.1 billion in the prior year period and market depreciation of $2.8 billion for the six months ended June 30, 2010 compared to period-over-period market appreciation of $2.1 billion in the prior year period.

 

The following table presents the results of operations of our Advice & Wealth Management segment:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

750

 

$

 

$

750

 

$

563

 

$

 

$

563

 

$

187

 

33

%

Distribution fees

 

947

 

 

947

 

854

 

 

854

 

93

 

11

 

Net investment income

 

144

 

 

144

 

133

 

(18

)

151

 

(7

)

(5

)

Other revenues

 

45

 

 

45

 

40

 

 

40

 

5

 

13

 

Total revenues

 

1,886

 

 

1,886

 

1,590

 

(18

)

1,608

 

278

 

17

 

Banking and deposit interest expense

 

38

 

 

38

 

79

 

 

79

 

(41

)

(52

)

Total net revenues

 

1,848

 

 

1,848

 

1,511

 

(18

)

1,529

 

319

 

21

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

1,124

 

 

1,124

 

940

 

 

940

 

184

 

20

 

General and administrative expense

 

588

 

6

 

582

 

635

 

28

 

607

 

(25

)

(4

)

Total expenses

 

1,712

 

6

 

1,706

 

1,575

 

28

 

1,547

 

159

 

10

%

Pretax income (loss)

 

$

136

 

$

(6

)

$

142

 

$

(64

)

$

(46

)

$

(18

)

$

160

 

NM

 

 


NM Not Meaningful.

(1)    Adjustments include net realized losses and integration charges.

 

Our Advice & Wealth Management segment pretax income was $136 million for the six months ended June 30, 2010 compared to a loss of $64 million in the prior year period. Our Advice & Wealth Management segment pretax operating income was $142 million for the six months ended June 30, 2010 compared to pretax operating loss of $18 million in the prior year period.

 

68


 

 


Table of Contents

 

Net Revenues

 

Net revenues were $1.8 billion for the six months ended June 30, 2010 compared to $1.5 billion in the prior year period, an increase of $337 million, or 22%. Operating net revenues, which exclude net realized losses, were $1.8 billion for the six months ended June 30, 2010 compared to $1.5 billion in the prior year period, an increase of $319 million, or 21%, driven by growth in average fee-based assets.

 

Management and financial advice fees increased $187 million, or 33%, to $750 million for the six months ended June 30, 2010, driven by growth in average fee-based assets resulting from period-over-period market appreciation and retail net inflows. The daily average S&P 500 Index increased 32% compared to the prior year period. Wrap account assets increased $17.9 billion, or 23%, to $96.9 billion at June 30, 2010 due to period-over-period market appreciation and net inflows. Financial planning fees were higher for the six months ended June 30, 2010 compared to the prior year period.

 

Distribution fees increased $93 million, or 11%, to $947 million for the six months ended June 30, 2010, primarily driven by growth in average fee-based assets resulting from period-over-period market appreciation and retail net inflows, as well as increased client activity, partially offset by lower intersegment distribution fees due to slower sales of fixed annuities compared to the prior year period.

 

Net investment income increased $11 million, or 8%, to $144 million for the six months ended June 30, 2010 compared to $133 million for the prior year period. Operating net investment income, which excludes net realized losses, decreased $7 million, or 5%, to $144 million for the six months ended June 30, 2010 compared to $151 million for the prior year period primarily due to lower invested assets resulting from net outflows in certificates due to the run-off of certificate rate promotions, as well as lower average yields on invested assets related to certificates.

 

Banking and deposit interest expense decreased $41 million, or 52%, to $38 million for the six months ended June 30, 2010, primarily due to lower certificate balances as a result of the run-off of certificate rate promotions, as well as a decrease in crediting rates on certificate products.

 

Expenses

 

Total expenses increased $137 million, or 9%, to $1.7 billion for the six months ended June 30, 2010. Total operating expenses, which exclude integration charges, increased $159 million, or 10%, to $1.7 billion for the six months ended June 30, 2010 due to an increase in distribution expenses partially offset by a decrease in general and administrative expense.

 

Distribution expenses increased $184 million, or 20%, to $1.1 billion for the six months ended June 30, 2010, primarily due to growth in average fee based assets driven by period-over-period market appreciation and retail net inflows, as well as higher advisor compensation from increased client activity.

 

General and administrative expense decreased $47 million, or 7%, to $588 million for the six months ended June 30, 2010 compared to the prior year period. Operating general and administrative expense, which excludes integration charges, decreased $25 million, or 4%, from the prior year period primarily reflecting cost controls partially offset by continued investment in marketing and a new brokerage platform.

 

69



Table of Contents

 

Asset Management

 

Management believes that operating measures, which exclude net realized gains/losses and integration charges for our Asset Management segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following tables present the changes in Domestic and International managed assets:

 

 

 

December 31,

 

 

 

Market

 

Foreign

 

 

 

June 30,

 

 

 

2009

 

Net Flows

 

Depreciation

 

Exchange

 

Other

 

2010

 

 

 

(in billions)

 

Domestic Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

$

76.9

 

$

(3.4

)

$

(1.5

)

$

 

$

118.1

 

$

190.1

 

Institutional Funds

 

62.3

 

(2.4

)

(1.7

)

 

69.1

 

127.3

 

Alternative Funds

 

9.9

 

0.3

 

(0.2

)

 

 

10.0

 

Less: Eliminations

 

(0.1

)

0.1

 

 

 

 

 

Total Domestic Managed Assets

 

149.0

 

(5.4

)

(3.4

)

 

187.2

(1)

327.4

 

International Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

29.1

 

0.8

 

(0.4

)

(2.3

)

0.1

 

27.3

 

Institutional Funds

 

66.8

 

(2.0

)

(0.3

)

(5.0

)

1.0

 

60.5

 

Alternative Funds

 

1.9

 

0.1

 

(0.3

)

(0.2

)

 

1.5

 

Total International Managed Assets

 

97.8

 

(1.1

)

(1.0

)

(7.5

)

1.1

 

89.3

 

Less: Sub-Advised Eliminations

 

(3.6

)

 

 

 

0.2

 

(3.4

)

Total Managed Assets

 

$

243.2

 

$

(6.5

)

$

(4.4

)

$

(7.5

)

$

188.5

 

$

413.3

 

 


(1)     Includes assets due to the Columbia Management Acquisition.

 

 

 

 

 

 

 

Market

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

Appreciation/

 

Foreign

 

 

 

June 30,

 

 

 

2008

 

Net Flows

 

(Depreciation)

 

Exchange

 

Other

 

2009

 

 

 

(in billions)

 

Domestic Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

$

63.9

 

$

(2.0

)

$

4.1

 

$

 

$

 

$

66.0

 

Institutional Funds

 

54.7

 

2.4

 

2.8

 

 

(0.1

)

59.8

 

Alternative Funds

 

9.4

 

(0.6

)

0.3

 

 

 

9.1

 

Less: Eliminations

 

(0.1

)

 

 

 

 

(0.1

)

Total Domestic Managed Assets

 

127.9

 

(0.2

)

7.2

 

 

(0.1

)

134.8

 

International Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Funds

 

16.3

 

1.9

 

(0.5

)

2.2

 

2.2

 

22.1

 

Institutional Funds

 

55.3

 

(1.9

)

(2.5

)

6.5

 

1.0

 

58.4

 

Alternative Funds

 

2.6

 

0.2

 

(1.0

)

0.2

 

 

2.0

 

Total International Managed Assets

 

74.2

 

0.2

 

(4.0

)

8.9

 

3.2

 

82.5

 

Less: Sub-Advised Eliminations

 

(2.5

)

 

 

 

(0.7

)

(3.2

)

Total Managed Assets

 

$

199.6

 

$

 

$

3.2

 

$

8.9

 

$

2.4

 

$

214.1

 

 

The U.S. asset management business ended the second quarter of 2010 with $327.4 billion in managed assets and strong investment and wholesaling teams in place. Investment performance continued to be solid, complementing strong longer-term investment track records. In the first half of 2010, net outflows were $5.4 billion, including $2.1 billion from a single low-yielding institutional account and $0.8 billion in lower-margin sub-advised retail portfolios included in acquired assets, as well as integration-related outflows. Retail net outflows also reflected slower equity sales, consistent with the industry.

 

At Threadneedle, total managed assets were $89.3 billion at June 30, 2010, up 8% from the prior year period reflecting period-over-period market appreciation and net inflows, partially offset by negative foreign currency translation. Total net outflows of $1.1 billion in the first half of 2010 were primarily due to institutional outflows in Zurich-related portfolios. Longer-term investment track records remained strong.

 

70



Table of Contents

 

The following table presents the results of operations of our Asset Management segment:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

778

 

$

 

$

778

 

$

440

 

$

 

$

440

 

$

338

 

77

%

Distribution fees

 

146

 

 

146

 

101

 

 

101

 

45

 

45

 

Net investment income

 

4

 

1

 

3

 

5

 

(3

)

8

 

(5

)

(63

)

Other revenues

 

5

 

 

5

 

8

 

 

8

 

(3

)

(38

)

Total revenues

 

933

 

1

 

932

 

554

 

(3

)

557

 

375

 

67

 

Banking and deposit interest expense

 

1

 

 

1

 

1

 

 

1

 

 

 

Total net revenues

 

932

 

1

 

931

 

553

 

(3

)

556

 

375

 

67

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

292

 

 

292

 

167

 

 

167

 

125

 

75

 

Amortization of deferred acquisition costs

 

11

 

 

11

 

12

 

 

12

 

(1

)

(8

)

General and administrative expense

 

555

 

53

 

502

 

394

 

16

 

378

 

124

 

33

 

Total expenses

 

858

 

53

 

805

 

573

 

16

 

557

 

248

 

45

%

Pretax income (loss)

 

$

74

 

$

(52

)

$

126

 

$

(20

)

$

(19

)

$

(1

)

$

127

 

NM

 

 


NM Not Meaningful.

(1)    Adjustments include net realized gains/losses and integration charges.

 

Our Asset Management segment pretax income was $74 million for the six months ended June 30, 2010 compared to a loss of $20 million in the prior year period. Our Asset Management segment pretax operating income was $126 million for the six months ended June 30, 2010 compared to a loss of $1 million in the prior year period reflecting period-over-period market appreciation and two months of earnings from business acquired in the Columbia Management Acquisition.

 

Net Revenues

 

Net revenues increased $379 million, or 69%, to $932 million for the six months ended June 30, 2010. Operating net revenues, which exclude net realized gains or losses, increased $375 million, or 67%, to $931 million for the six months ended June 30, 2010, primarily driven by an increase in management fees due to growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

Management and financial advice fees increased $338 million, or 77%, to $778 million for the six months ended June 30, 2010, primarily due to period-over-period market appreciation on assets, the Columbia Management Acquisition and retail net inflows. The daily average S&P 500 Index increased 32% compared to the prior year period. Total Asset Management managed assets increased $199.2 billion, or 93%, compared to the prior year period primarily due to the Columbia Management Acquisition and the period-over-period appreciation in the S&P 500 Index.

 

Distribution fees increased $45 million, or 45%, to $146 million for the six months ended June 30, 2010, primarily driven by growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

Net investment income decreased $1 million, or 5%, to $4 million for the six months ended June 30, 2010. Operating net investment income, which excludes net realized gains or losses, decreased $5 million compared to the prior year period primarily due to unfavorable mark-to-market adjustments on seed money investments in the first half of 2010 compared to gains in the prior year period.

 

Expenses

 

Total expenses increased $285 million, or 50%, to $858 million for the six months ended June 30, 2010. Total operating expenses, which exclude integration charges, increased $248 million, or 45%, to $805 million for the six months ended June 30, 2010, primarily reflecting the increased distribution expenses and general and administrative expense from the Columbia Management Acquisition and period-over-period market appreciation.

 

71



Table of Contents

 

Distribution expenses increased $125 million, or 75%, to $292 million for the six months ended June 30, 2010, primarily due to growth in assets from the Columbia Management Acquisition and period-over-period market appreciation.

 

General and administrative expense increased $161 million, or 41%, to $555 million for the six months ended June 30, 2010. Operating general and administrative expense, which excludes integration charges, increased $124 million, or 33%, to $502 million for the six months ended June 30, 2010, primarily due to the increased operating costs of Columbia Management Investments and higher expenses related to recognizing a substantial increase in Threadneedle’s estimated market valuation attributable to its incentive compensation program compared to the 2009 market valuation.

 

Annuities

 

Management believes that operating measures, which exclude net realized gains/losses for our Annuities segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

Variable annuity ending balances increased 15% to $54.0 billion at June 30, 2010 driven by period-over-period market appreciation and positive net flows. Fixed annuity balances were $14.5 billion, up 1% from the prior year period. Lower fixed annuity sales in the first half of 2010 primarily reflected lower client demand due to a decline in our offered crediting rate.

 

The following table presents the results of operations of our Annuities segment:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

257

 

$

 

$

257

 

$

194

 

$

 

$

194

 

$

63

 

32

%

Distribution fees

 

146

 

 

146

 

115

 

 

115

 

31

 

27

 

Net investment income

 

660

 

7

 

653

 

628

 

28

 

600

 

53

 

9

 

Premiums

 

73

 

 

73

 

47

 

 

47

 

26

 

55

 

Other revenues

 

96

 

 

96

 

70

 

 

70

 

26

 

37

 

Total revenues

 

1,232

 

7

 

1,225

 

1,054

 

28

 

1,026

 

199

 

19

 

Banking and deposit interest expense

 

 

 

 

 

 

 

 

 

Total net revenues

 

1,232

 

7

 

1,225

 

1,054

 

28

 

1,026

 

199

 

19

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

131

 

 

131

 

105

 

 

105

 

26

 

25

 

Interest credited to fixed accounts

 

386

 

 

386

 

370

 

 

370

 

16

 

4

 

Benefits, claims, losses and settlement expenses

 

176

 

 

176

 

222

 

 

222

 

(46

)

(21

)

Amortization of deferred acquisition costs

 

181

 

 

181

 

37

 

 

37

 

144

 

NM

 

General and administrative expense

 

105

 

 

105

 

97

 

 

97

 

8

 

8

 

Total expenses

 

979

 

 

979

 

831

 

 

831

 

148

 

18

 

Pretax income

 

$

253

 

$

7

 

$

246

 

$

223

 

$

28

 

$

195

 

$

51

 

26

%

 


NM Not Meaningful.

(1)    Adjustments include net realized gains/losses.

 

Our Annuities segment pretax income was $253 million for the six months ended June 30, 2010 compared to $223 million in the prior year period. Our Annuities segment pretax operating income was $246 million for the six months ended June 30, 2010 compared to $195 million in the prior year period.

 

Net Revenues

 

Net revenues increased $178 million, or 17%, to $1.2 billion for the six months ended June 30, 2010. Operating net revenues, which exclude net realized gains, increased $199 million, or 19%, to $1.2 billion for the six months ended June 30, 2010.

 

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Management and financial advice fees increased $63 million, or 32%, to $257 million for the six months ended June 30, 2010, due to higher fees on variable annuities driven by higher assets. Average variable annuities contract accumulation values increased $12.7 billion, or 34%, from the prior year period due to higher equity market levels and net inflows.

 

Distribution fees increased $31 million, or 27%, to $146 million for the six months ended June 30, 2010, due to higher fees on variable annuities driven by higher assets.

 

Net investment income increased $32 million, or 5%, to $660 million for the six months ended June 30, 2010. Operating net investment income, which excludes net realized gains, increased $53 million, or 9%, to $653 million for the six months ended June 30, 2010, primarily driven by higher fixed annuity account balances and higher investment yields, partially offset by the negative impact of the implementation of changes to the PN program. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This reallocation in part resulted in a shift of assets from interest bearing investments in the general account into separate accounts.

 

Premiums increased $26 million, or 55%, to $73 million for the six months ended June 30, 2010, due to higher sales of immediate annuities with life contingencies.

 

Other revenues increased $26 million, or 37%, to $96 million for the six months ended June 30, 2010, due to an increase in guaranteed benefit rider fees on variable annuities resulting from higher business volumes.

 

Expenses

 

Total expenses increased $148 million, or 18%, to $979 million for the six months ended June 30, 2010, primarily due to an increase in amortization of DAC.

 

Distribution expenses increased $26 million, or 25%, to $131 million for the six months ended June 30, 2010, primarily due to higher variable annuity compensation.

 

Interest credited to fixed accounts increased $16 million, or 4%, to $386 million for the six months ended June 30, 2010, primarily due to higher average fixed annuity account balances. Average fixed annuities contract accumulation values increased $1.1 billion, or 8%, compared to the prior year period. The average fixed annuity crediting rate excluding capitalized interest remained constant at 3.9% in the first half of 2010 compared to the prior year period.

 

Benefits, claims, losses and settlement expenses decreased $46 million, or 21%, to $176 million for the six months ended June 30, 2010, driven by a decrease in expenses from variable annuity benefit guarantees. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, decreased benefits expense by $41 million in the first half of 2010, primarily driven by the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. This decrease was partially offset by an increase in benefits expense of $17 million, net of DSIC, as a result of the implementation of changes to the PN program. The mark-to-market impact of variable annuity living benefits, net of hedges and DSIC, increased benefits expense by $80 million in the first half of 2009 primarily due to the impact of nonperformance spread on the valuation of living benefit liabilities, which we do not hedge. Benefits, claims, losses and settlement expenses related to our immediate annuities with life contingencies increased compared to the prior year period primarily due to higher business volumes.

 

Amortization of DAC increased $144 million to $181 million for the six months ended June 30, 2010 compared to $37 million in the prior year period. DAC amortization in the first half of 2010 increased $56 million due to market impacts, including $33 million offsetting lower variable annuity guaranteed living benefit expenses, net of hedges. DAC amortization also increased due to higher variable annuity gross profits compared to the prior year period. These increases were partially offset by an $11 million decrease as a result of the implementation of changes to the PN program and a $21 million decrease related to an adjustment for revisions to certain calculations in our valuation of DAC. DAC amortization in the first half of 2009 decreased $58 million due to market impacts, including a $60 million benefit offsetting higher variable annuity guaranteed living benefits, net of hedges.

 

General and administrative expense increased $8 million, or 8%, to $105 million for the six months ended June 30, 2010 compared to $97 million for the prior year period primarily driven by additional expenses related to a new product introduction and the implementation of changes to the PN program.

 

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Protection

 

Management believes that operating measures, which exclude net realized gains/losses for our Protection segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the results of operations of our Protection segment:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and financial advice fees

 

$

26

 

$

 

$

26

 

$

21

 

$

 

$

21

 

$

5

 

24

%

Distribution fees

 

48

 

 

48

 

48

 

 

48

 

 

 

Net investment income

 

214

 

2

 

212

 

197

 

7

 

190

 

22

 

12

 

Premiums

 

521

 

 

521

 

501

 

 

501

 

20

 

4

 

Other revenues

 

219

 

 

219

 

226

 

 

226

 

(7

)

(3

)

Total revenues

 

1,028

 

2

 

1,026

 

993

 

7

 

986

 

40

 

4

 

Banking and deposit interest expense

 

 

 

 

 

 

 

 

 

Total net revenues

 

1,028

 

2

 

1,026

 

993

 

7

 

986

 

40

 

4

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

17

 

 

17

 

11

 

 

11

 

6

 

55

 

Interest credited to fixed accounts

 

73

 

 

73

 

72

 

 

72

 

1

 

1

 

Benefits, claims, losses and settlement expenses

 

476

 

 

476

 

465

 

 

465

 

11

 

2

 

Amortization of deferred acquisition costs

 

97

 

 

97

 

112

 

 

112

 

(15

)

(13

)

General and administrative expense

 

111

 

 

111

 

111

 

 

111

 

 

 

Total expenses

 

774

 

 

774

 

771

 

 

771

 

3

 

 

Pretax income

 

$

254

 

$

2

 

$

252

 

$

222

 

$

7

 

$

215

 

$

37

 

17

%

 


(1)    Adjustments include net realized gains.

 

Our Protection segment pretax income was $254 million for the six months ended June 30, 2010, an increase of $32 million, or 14%, from $222 million in the prior year period. Our Protection segment pretax operating income was $252 million for the six months ended June 30, 2010, an increase of $37 million, or 17%, from $215 million in the prior year period.

 

Net Revenues

 

Net revenues increased $35 million, or 4%, to $1.0 billion for the six months ended June 30, 2010. Operating net revenues, which exclude net realized gains, increased $40 million, or 4%, to $1.0 billion for the six months ended June 30, 2010, primarily due to an increase in net investment income and premiums.

 

Management and financial advice fees increased $5 million, or 24%, to $26 million for the six months ended June 30, 2010, due to higher fees on VUL products driven by period-over-period market appreciation.

 

Net investment income increased $17 million, or 9%, to $214 million for the six months ended June 30, 2010. Operating net investment income, which excludes net realized gains, increased $22 million, or 12%, to $212 million for the six months ended June 30, 2010, primarily due to higher investment yields and increased general account assets.

 

Premiums increased $20 million, or 4%, to $521 million for the six months ended June 30, 2010, due to growth in Auto and Home premiums driven by higher volumes. Auto and Home policy counts increased 9% period-over-period.

 

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Expenses

 

Total expenses increased $3 million to $774 million for the six months ended June 30, 2010.

 

Benefits, claims, losses and settlement expenses increased $11 million, or 2%, to $476 million for the six months ended June 30, 2010, primarily due to higher volume-driven Auto and Home claims partially offset by favorable VUL/UL insurance claims.

 

Amortization of DAC decreased $15 million, or 13%, to $97 million for the six months ended June 30, 2010, reflecting a reduction in DAC amortization due to a $6 million benefit from the implementation of changes to the PN program and a $7 million adjustment for revisions to certain calculations in our valuation of DAC. The market impact on DAC amortization resulted in an increase of $3 million in the first half of 2010 compared to a benefit of $1 million in the prior year period.

 

Corporate & Other

 

The Corporate & Other segment includes the results of operations of CIEs. For additional information on the required consolidation of CIEs, refer to our discussion within the Overview section above.

 

Management believes that operating measures, which exclude net realized gains/losses, integration charges and the impact of consolidating CIEs for our Corporate & Other segment, best reflect the underlying performance of our 2010 and 2009 core operations and facilitate a more meaningful trend analysis. See our discussion on the use of these non-GAAP measures in the Overview section above.

 

The following table presents the results of operations of our Corporate & Other segment:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

GAAP

 

Adjustments(1)

 

Operating

 

GAAP

 

Adjustments(1)

 

Operating

 

Operating Change

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

222

 

$

236

 

$

(14

)

$

(34

)

$

9

 

$

(43

)

$

29

 

67

%

Other revenues

 

126

 

103

 

23

 

40

 

(19

)

59

 

(36

)

(61

)

Total revenues

 

348

 

339

 

9

 

6

 

(10

)

16

 

(7

)

(44

)

Banking and deposit interest expense

 

3

 

 

3

 

1

 

2

 

(1

)

4

 

NM

 

Total net revenues

 

345

 

339

 

6

 

5

 

(12

)

17

 

(11

)

(65

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

2

 

 

2

 

(2

)

(100

)

Interest and debt expense

 

138

 

85

 

53

 

54

 

 

54

 

(1

)

(2

)

General and administrative expense

 

97

 

36

 

61

 

61

 

3

 

58

 

3

 

5

 

Total expenses

 

235

 

121

 

114

 

117

 

3

 

114

 

 

 

Pretax income (loss)

 

110

 

218

 

(108

)

(112

)

(15

)

(97

)

(11

)

(11

)

Less: Net income (loss) attributable to noncontrolling interests

 

221

 

221

 

 

(22

)

(22

)

 

 

 

Pretax loss attributable to Ameriprise Financial

 

$

(111

)

$

(3

)

$

(108

)

$

(90

)

$

7

 

$

(97

)

$

(11

)

(11

)%

 


NM Not Meaningful.

(1)    Includes revenues and expenses of the CIEs, net realized gains and integration charges.

 

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The following table presents the components of the adjustments in the table above:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

CIEs

 

Adjustments (1)

 

Adjustments

 

CIEs

 

Adjustments (1)

 

Adjustments

 

 

 

(in millions, unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

234

 

$

2

 

$

236

 

$

2

 

$

7

 

$

9

 

Other revenues

 

103

 

 

103

 

(19

)

 

(19

)

Total revenues

 

337

 

2

 

339

 

(17

)

7

 

(10

)

Banking and deposit interest expense

 

 

 

 

2

 

 

2

 

Total net revenues

 

337

 

2

 

339

 

(19

)

7

 

(12

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expenses

 

 

 

 

 

 

 

Interest and debt expense

 

85

 

 

85

 

 

 

 

General and administrative expense

 

31

 

5

 

36

 

3

 

 

3

 

Total expenses

 

116

 

5

 

121

 

3

 

 

3

 

Pretax income (loss)

 

221

 

(3

)

218

 

(22

)

7

 

(15

)

Less: Net income (loss) attributable to noncontrolling interests

 

221

 

 

221

 

(22

)

 

(22

)

Net income (loss) attributable to Ameriprise Financial

 

$

 

$

(3

)

$

(3

)

$

 

$

7

 

$

7

 

 


(1)    Other adjustments include net realized gains and integration charges.

 

Our Corporate & Other segment pretax loss attributable to Ameriprise Financial was $111 million for the six months ended June 30, 2010 compared to $90 million in the prior year period. Our Corporate & Other segment pretax operating loss attributable to Ameriprise Financial was $108 million for the six months ended June 30, 2010 compared to $97 million in the prior year period.

 

Net revenues increased $340 million compared to the prior year period primarily reflecting revenues of CIEs. Operating net revenues, which exclude revenues of CIEs and net realized gains, decreased $11 million compared to the prior year period. Net investment income in the first half of 2010 primarily reflects changes in the assets and liabilities of CIEs, primarily debt and underlying bank loans. The decrease in operating net investment loss, which excludes revenues of CIEs and net realized gains, reflects lower transfer priced interest income allocated to the Annuities and Protection segments for maintaining excess liquidity. Other revenues in the first half of 2010 primarily reflect revenues of consolidated property funds.  Operating other revenues, which exclude revenues of consolidated property funds, decreased $36 million primarily due to a $58 million benefit in first half of 2009 from repurchasing our junior notes at a discount, partially offset by a $20 million benefit from the payments related to the Reserve Funds matter in the first quarter of 2010.

 

Total expenses increased $118 million compared to the prior year period reflecting expenses of CIEs. Total operating expenses, which exclude expenses of CIEs and integration charges, remained constant compared to the prior year period.

 

Market Risk

 

Equity price 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 face amount certificate products and UL insurance products, the value of DAC and 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.

 

The guaranteed benefits associated with our variable annuities are guaranteed minimum withdrawal benefits (“GMWB”), guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) options. Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.

 

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We continue to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. This program can generally be described as a “Static 3-Greek” hedging program. This style of hedging focuses mainly on first order sensitivities of the assets and liabilities; Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. We use various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to manage the risk exposures. The exposures are measured and monitored daily, and adjustments to the hedge portfolio are made as necessary.

 

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 or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities, stock market certificates and the associated hedge assets, we assumed no change in implied market volatility despite the 10% drop in equity prices.

 

The numbers below show our estimates of the pretax impacts on income from these hypothetical market movements, net of hedging, as of June 30, 2010:

 

 

 

Equity Price Exposure to Pretax Income

 

Equity Price Decline 10%

 

Before Hedge Impact

 

Hedge Impact

 

Net Impact

 

 

 

(in millions)

 

Asset-based management and distribution fees (1)

 

$

(184

)

$

 

$

(184

)

DAC and DSIC amortization (2) (3)

 

(116

)

 

(116

)

Variable annuity riders:

 

 

 

 

 

 

 

GMDB and GMIB (3)

 

(38

)

1

 

(37

)

GMWB

 

(77

)

88

 

11

 

GMAB

 

(25

)

29

 

4

 

DAC and DSIC amortization (4)

 

N/A

 

N/A

 

(6

)

Total variable annuity riders

 

(140

)

118

 

(28

)

Equity indexed annuities

 

1

 

(1

)

 

Stock market certificates

 

5

 

(5

)

 

Total

 

$

(434

)

$

112

 

$

(328

)

 

 

 

Interest Rate Exposure to Pretax Income

 

Interest Rate Increase 100 Basis Points

 

Before Hedge Impact

 

Hedge Impact

 

Net Impact

 

 

 

(in millions)

 

Asset-based management and distribution fees (1)

 

$

(22

)

$

 

$

(22

)

Variable annuity riders:

 

 

 

 

 

 

 

GMWB

 

257

 

(299

)

(42

)

GMAB

 

45

 

(51

)

(6

)

DAC and DSIC amortization (4)

 

N/A

 

N/A

 

18

 

Total variable annuity riders

 

302

 

(350

)

(30

)

Fixed annuities, fixed portion of variable annuities and fixed insurance products

 

14

 

 

14

 

Flexible savings and other fixed rate savings products

 

(6

)

 

(6

)

Total

 

$

288

 

$

(350

)

$

(44

)

 


N/A  Not Applicable.

(1)   Includes the impact of the Columbia Management Acquisition.

(2)   Market impact on DAC and DSIC amortization resulting from lower projected profits.

(3)   In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, we have not changed our assumed equity asset growth rates. This is a significantly more conservative estimate than if we assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. We make this same conservative assumption in estimating the impact from GMDB and GMIB riders.

(4)   Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.

 

The above results compare to estimated negative net impacts to pretax income of $287 million related to a 10% equity price decline and $75 million related to a 100 basis point increase in interest rates as of December 31, 2009. The increase in equity exposure at June 30, 2010 compared to December 31, 2009 is primarily due to the inclusion of Columbia Management in the asset-based management and distribution fees category at June 30, 2010.  The interest rate exposure decreased at June 30, 2010 due to the significant fall in rates from December 31, 2009.

 

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Table of Contents

 

Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins and with discount rates increased to reflect a current market estimate of our risk of nonperformance specific to these liabilities. Management has elected to hedge based on best estimate policyholder assumptions and explicitly does not hedge nonperformance spread risk. Net impacts shown in the above table from GMDB and GMIB reflect the fact that these guaranteed benefits are primarily retained by us and not hedged. In 2009, we entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.

 

Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming that implied market volatility does not change when equity values fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, we have not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor have we tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.

 

The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.

 

Fair Value Measurements

 

We report certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, properties held by our consolidated property funds, and most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions. Companies are not permitted to use market prices that are the result of a forced liquidation or distressed sale. We include actual market prices, or observable inputs, in our fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. We validate prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors.

 

Non-Agency Residential Mortgage Backed Securities Backed by Sub-prime, Alt-A or Prime Collateral

 

Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. Alt-A mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime but may not conform to government-sponsored standards. Prime mortgage lending is the origination of residential mortgage loans to customers with good credit profiles. We have exposure to each of these types of loans predominantly through mortgage backed and asset backed securities. The slowdown in the U.S. housing market, combined with relaxed underwriting standards by some originators, has led to higher delinquency and loss rates for some of these investments. Market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of our risk management process, an internal rating system is used in conjunction with market data as the basis of analysis to assess the likelihood that we will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment, we perform our own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds, loss severity, and geographic concentrations to determine if an other-than-temporary impairment should be recognized.

 

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The following table presents, as of June 30, 2010, our non-agency residential mortgage backed and asset backed securities backed by sub-prime, Alt-A or prime mortgage loans by credit rating and vintage year:

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB & Below

 

Total

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(in millions)

 

Sub-prime

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

2

 

$

2

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

2

 

$

2

 

2004

 

12

 

11

 

7

 

3

 

7

 

7

 

 

 

9

 

8

 

35

 

29

 

2005

 

37

 

36

 

40

 

40

 

30

 

30

 

8

 

8

 

23

 

18

 

138

 

132

 

2006

 

 

 

 

 

 

 

12

 

12

 

63

 

44

 

75

 

56

 

2007

 

 

 

 

 

4

 

4

 

 

 

6

 

1

 

10

 

5

 

2008

 

 

 

6

 

6

 

 

 

 

 

 

 

6

 

6

 

Re-Remic(1)

 

40

 

40

 

 

 

 

 

15

 

15

 

 

 

55

 

55

 

Total Sub-prime

 

$

91

 

$

89

 

$

53

 

$

49

 

$

41

 

$

41

 

$

35

 

$

35

 

$

101

 

$

71

 

$

321

 

$

285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alt-A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

19

 

$

20

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

19

 

$

20

 

2004

 

12

 

11

 

60

 

56

 

21

 

17

 

10

 

5

 

17

 

8

 

120

 

97

 

2005

 

5

 

4

 

38

 

29

 

29

 

23

 

14

 

10

 

255

 

171

 

341

 

237

 

2006

 

 

 

1

 

1

 

 

 

 

 

165

 

107

 

166

 

108

 

2007

 

 

 

 

 

 

 

 

 

204

 

109

 

204

 

109

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Re-Remic(1)

 

17

 

17

 

 

 

 

 

 

 

 

 

17

 

17

 

Total Alt-A

 

$

53

 

$

52

 

$

99

 

$

86

 

$

50

 

$

40

 

$

24

 

$

15

 

$

641

 

$

395

 

$

867

 

$

588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prime

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

256

 

$

254

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

256

 

$

254

 

2004

 

85

 

87

 

27

 

24

 

32

 

31

 

32

 

28

 

22

 

7

 

198

 

177

 

2005

 

16

 

19

 

35

 

38

 

62

 

63

 

21

 

21

 

196

 

138

 

330

 

279

 

2006

 

 

 

19

 

20

 

 

 

 

 

41

 

40

 

60

 

60

 

2007

 

40

 

42

 

 

 

 

 

 

 

14

 

11

 

54

 

53

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Re-Remic(1)

 

2,386

 

2,562

 

75

 

86

 

 

 

13

 

25

 

 

 

2,474

 

2,673

 

Total Prime

 

$

2,783

 

$

2,964

 

$

156

 

$

168

 

$

94

 

$

94

 

$

66

 

$

74

 

$

273

 

$

196

 

$

3,372

 

$

3,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

$

2,927

 

$

3,105

 

$

308

 

$

303

 

$

185

 

$

175

 

$

125

 

$

124

 

$

1,015

 

$

662

 

$

4,560

 

$

4,369

 

 


(1)             Re-Remics of mortgage backed securities are prior vintages with cash flows structured into senior and subordinated bonds. Credit enhancement on senior bonds is increased through the Re-Remic process. Total exposure to subordinate tranches was nil as of June 30, 2010.

 

Fair Value of Liabilities and Nonperformance Risk

 

Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for our obligations of our variable annuity riders, we consider the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, we adjust the valuation of variable annuity riders by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of our nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are adjusted to estimate the risk of our life insurance company subsidiaries not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of June 30, 2010. As our estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $115 million, net of DAC and DSIC amortization and income taxes, based on June 30, 2010 credit spreads.

 

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Liquidity and Capital Resources

 

Overview

 

We maintained substantial liquidity during the six months ended June 30, 2010. At June 30, 2010, we had $3.8 billion in cash and cash equivalents compared to $3.1 billion at December 31, 2009. We have additional liquidity available through an unsecured revolving credit facility for $750 million that expires in September 2010. We are currently reviewing replacement options for this credit facility. 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 $2 million of outstanding letters of credit at June 30, 2010.

 

In March 2010, we issued $750 million of 5.30% senior notes due 2020. A portion of the proceeds will be used to retire $340 million of debt maturing in November 2010. On April 30, 2010, we closed on the Columbia Management Acquisition for $927 million, of which $866 million was paid in the second quarter of 2010 with cash on hand. We assumed $30 million of liabilities and expect to settle the remaining $31 million payable with Bank of America in the fourth quarter of 2010. Our subsidiaries, Ameriprise Bank, FSB and RiverSource Life, are members of the Federal Home Loan Bank (“FHLB”) of Des Moines, which provides these subsidiaries with access to collateralized borrowings. As of June 30, 2010, we had no borrowings from the FHLB. In 2010, we entered into repurchase agreements to reduce reinvestment risk from higher levels of expected annuity net cash flows. Repurchase agreements allow us to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements at June 30, 2010 was $484 million, which is collateralized with commercial mortgage backed securities, agency residential mortgage backed securities and corporate debt securities from our investment portfolio. 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.

 

Dividends from Subsidiaries

 

Ameriprise Financial 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 or return of capital from our subsidiaries, particularly our life insurance subsidiary, RiverSource Life, our face-amount certificate subsidiary, Ameriprise Certificate Company (“ACC”), AMPF Holding Corporation, which is the parent company of our retail introducing broker-dealer subsidiary, Ameriprise Financial Services, Inc. (“AFSI”) and 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, Threadneedle, Columbia Management Investment Services Corp. and our investment advisory company, Columbia Management Investment Advisors, LLC. The payment of dividends by many of our subsidiaries is restricted and certain of our subsidiaries are subject to regulatory capital requirements.

 

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Actual capital and regulatory capital requirements for our wholly owned subsidiaries subject to regulatory capital requirements were as follows:

 

 

 

Actual Capital

 

Regulatory Capital Requirements

 

 

 

June 30,
2010

 

December 31,
2009

 

June 30,
2010

 

December 31,
2009

 

 

 

(in millions)

 

RiverSource Life(1)(2)

 

$

3,669

 

$

3,450

 

N/A

 

$

803

 

RiverSource Life of NY(1)(2)

 

327

 

286

 

N/A

 

44

 

IDS Property Casualty(1)(3)

 

412

 

405

 

137

 

133

 

Ameriprise Insurance Company(1)(3)

 

46

 

46

 

2

 

2

 

ACC(4)(5)

 

210

 

293

 

188

 

231

 

Threadneedle(6)

 

211

 

201

 

130

 

155

 

Ameriprise Bank, FSB(7)

 

264

 

255

 

256

 

231

 

AFSI(3)(4)

 

153

 

79

 

1

 

1

 

Ameriprise Captive Insurance Company(3)

 

30

 

28

 

18

 

12

 

Ameriprise Trust Company(3)

 

39

 

36

 

34

 

32

 

AEIS(3)(4)

 

110

 

133

 

31

 

29

 

Securities America, Inc.(3)(4)

 

13

 

15

 

#

 

#

 

RiverSource Distributors, Inc.(3)(4)

 

13

 

41

 

#

 

#

 

Columbia Management Investment Distributors, Inc.(3)(4)

 

32

 

13

 

#

 

#

 

 


N/A  Not applicable.

#

 

Amounts are less than $1 million.

(1)

 

Actual capital is determined on a statutory basis.

(2)

 

Regulatory capital requirement is based on the statutory risk-based filing.

(3)

 

Regulatory capital requirement is based on the applicable regulatory requirement, calculated as of June 30, 2010 and December 31, 2009.

(4)

 

Actual capital is determined on an adjusted GAAP basis.

(5)

 

ACC is required to hold capital in compliance with the Minnesota Department of Commerce and SEC capital requirements.

(6)

 

Actual capital and regulatory capital requirements are determined in accordance with U.K. regulatory legislation.

(7)

 

Ameriprise Bank is required to hold capital in compliance with the Office of Thrift Supervision (“OTS”) regulations and policies, which currently require a Tier 1 (core) capital ratio of not less than 7.5%.

 

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.

 

During the six months ended June 30, 2010, the parent holding company received cash dividends from its subsidiaries of $590 million and contributed cash to its subsidiaries of $20 million. Of the dividends received, $425 million came from RiverSource Life. During the six months ended June 30, 2009, the parent holding company received cash dividends from its subsidiaries of $18 million and contributed cash to its subsidiaries of $223 million.

 

Dividends Paid to Shareholders, Debt Repurchases and Share Repurchases

 

We paid regular quarterly cash dividends to our shareholders totaling $91 million and $74 million for the six months ended June 30, 2010 and 2009, respectively. On July 28, 2010, our Board of Directors declared a quarterly cash dividend of $0.18 per common share. The dividend will be paid on August 20, 2010 to our shareholders of record at the close of business on August 6, 2010.

 

On May 11, 2010, we announced that our board of directors authorized an expenditure of up to $1.5 billion for the repurchase of shares of our common stock through the date of our 2012 annual shareholders meeting. We intend to fund share repurchases through existing working capital, future earnings and other customary financing methods. The share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and other factors, these purchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means. In the second quarter of 2010, we repurchased a total of 5.7 million shares of our common stock at an average price of $38.43. As of June 30, 2010, we had $1.3 billion remaining under our share repurchase authorization.

 

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In the first half of 2009, we extinguished $135 million principal amount of our junior notes and $10 million principal amount of our senior notes due 2010. In the future, we may from time to time seek to retire or purchase additional outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise, without prior notice. Such repurchases, if any, will depend upon market conditions and other factors. The amounts involved could be material.

 

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2010 was $1.3 billion compared to net cash used in operating activities of $1.5 billion for the six months ended June 30, 2009. In the first half of 2009, operating cash was reduced by $1.6 billion due to a decrease in net cash collateral held related to derivative instruments, compared to an increase of $533 million in the first half of 2010. In addition, in the first half of 2009, operating cash was reduced by $454 million due to net purchases within our bond trading portfolio.

 

Investing Activities

 

Our investing activities primarily relate to our Available-for-Sale investment portfolio. Further, this activity is significantly affected by the net flows of our investment certificate, fixed annuity and universal life products reflected in financing activities.

 

Net cash used in investing activities decreased $5.1 billion to $206 million for the six months ended June 30, 2010 compared to $5.3 billion for the six months ended June 30, 2009, primarily due to a $6.0 billion decrease in cash used for purchases of Available-for-Sale securities, partially offset by cash paid of $866 million for the Columbia Management Acquisition in the second quarter of 2010.

 

Financing Activities

 

Net cash used in financing activities for the six months ended June 30, 2010 was $368 million compared to net cash provided by financing activities of $5.0 billion for the six months ended June 30, 2009. Net cash outflows related to policyholder and contractholder account values were $1.1 billion for the six months ended June 30, 2010 compared to net cash inflows of $2.7 billion for the prior year period. The $2.9 billion decrease in consideration received from policyholder and contractholder account values was primarily due to lower net inflows of fixed annuities compared to the prior year period. The $1.3 billion cash outflow for net transfers to separate accounts in the six months ended June 30, 2010 was primarily due to the implementation of changes to the PN program offered in connection with our variable life and annuity products. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This reallocation in part resulted in a shift of assets from interest bearing investments in the general account into separate accounts.

 

Cash received due to issuance of debt, net of repayments, increased $340 million for the six months ended June 30, 2010 compared to the prior year period. In the first half of 2010, net cash received related to repurchase agreements was $484 million. In the first half of 2009, we received cash of $869 million from the issuance of common stock. Cash used for the repurchase of common stock increased $197 million for the six months ended June 30, 2010 compared to the prior year period. Proceeds from sales of investment certificates decreased $1.2 billion compared to the prior year period primarily due to the run-off of certificate rate promotions.

 

Contractual Commitments

 

There have been no material changes to our contractual obligations disclosed in our 2009 10-K.

 

Off-Balance Sheet Arrangements

 

There have been no material changes in our off-balance sheet arrangements disclosed in our 2009 10-K.

 

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Forward-Looking Statements

 

This report contains forward-looking statements that reflect management’s plans, estimates and beliefs. Actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:

 

·          statements of the Company’s plans, intentions, expectations, objectives or goals, including those relating to asset flows, mass affluent and affluent client acquisition strategy, client retention, financial advisor retention, recruiting and enrollments, general and administrative costs; consolidated tax rate (including any expectations regarding the effectiveness or other terms of any regulatory change or interpretation applicable to the DRD), and excess capital position;

 

·          other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and

 

·          statements of assumptions underlying such statements.

 

The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on pace,” “project” 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 valuations, liquidity and volatility in the interest rate, credit default, equity market, and foreign exchange environments;

 

·          changes in relevant accounting standards, as well as changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation, including the recent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

 

·          investment management performance and consumer acceptance of the Company’s products;

 

·          effects of competition in the financial services industry and changes in product distribution mix and distribution channels;

 

·          changes to the Company’s reputation that may arise from employee or affiliated advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;

 

·          the Company’s capital structure, including indebtedness, limitations on subsidiaries to pay dividends, and the extent, manner, terms and timing of any share or debt repurchases management may effect as well as the opinions of rating agencies and other analysts and the reactions of market participants or the Company’s regulators, advisors, distribution partners or customers in response to any change or prospect of change in any such opinion;

 

·          changes to the availability of liquidity and the Company’s credit capacity that may arise due to shifts in market conditions, the Company’s credit ratings and the overall availability of credit;

 

·          risks of default, capacity constraint or repricing by issuers or guarantors of investments the Company owns or by counterparties to hedge, derivative, insurance or reinsurance arrangements or by manufacturers of products the Company distributes, experience deviations from the Company’s assumptions regarding such risks, the evaluations or the prospect of changes in evaluations of any such third parties published by rating agencies or other analysts, and the reactions of other market participants or the Company’s regulators, advisors, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;

 

·           with respect to VIE pooled investments the Company has determined do not require consolidation under GAAP, the realization by the Company that it does not have the power over the VIE pooled investments or hold a variable interest in these investments for which the Company has the potential to receive significant benefits or the potential obligation to absorb significant losses;

 

·          experience deviations from the Company’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing DAC and DSIC or market volatility underlying our valuation and hedging of guaranteed living benefit annuity riders;

 

·          changes in capital requirements that may be indicated, required or advised by regulators or rating agencies;

 

·          the impacts of the Company’s efforts to improve distribution economics and to grow third-party distribution of its products;

 

·          the ability to complete the acquisition opportunities the Company negotiates and to pursue other growth opportunities;

 

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·          the Company’s ability to realize the financial, operating and business fundamental benefits or to obtain regulatory approvals regarding integrations we plan for the acquisitions we have completed or have contracted to complete, as well as the amount and timing of integration expenses;

 

·          the ability and timing to realize savings and other benefits from re-engineering and tax planning;

 

·          changes in the capital markets and competitive environments induced or resulting from the partial or total ownership or other support by central governments of certain financial services firms or financial assets; and

 

·          general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services the Company consumes in the conduct of its business, and applicable legislation and regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding the financial services industry and publicly-held firms, and regulatory rulings and pronouncements.

 

Management cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that management is 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. Management undertakes no obligation to update publicly or revise any forward-looking statements. The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion included in Part I, Item 1A of our 2009 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” in this report is incorporated herein by reference. These disclosures should be read in conjunction with the “Quantitative and Qualitative Disclosures About Market Risk” discussion included as Part II, Item 7A of our Annual Report on Form 10-K for 2009 filed with the SEC on February 24, 2010.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain 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 in and pursuant to SEC regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our 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, under the supervision and 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 June 30, 2010.

 

Changes in Internal Control over Financial Reporting

 

On April 30, 2010, the Company completed its acquisition of the long-term asset management business of Columbia Management from Bank of America. The Company considers the acquisition reasonably likely to materially affect its internal control over financial reporting with respect to its Asset Management segment.  The Company has extended its internal control oversight and monitoring processes to include the assets acquired in the Columbia Management Acquisition. There were no other 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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

 

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Table of Contents

PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The information set forth in Note 13 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

 

ITEM 1A.  RISK FACTORS

 

Part I, Item 1A of our 2009 10-K sets forth information relating to the material risks and uncertainties that affect our business and common stock. In addition, the following factors should be read in conjunction with and supplement and amend the risk factors set forth in our 2009 10-K that may affect the Company’s business, financial condition and results of operations.

 

Changes in accounting standards could have a material impact on our financial statements.

 

From time to time, the FASB, the SEC, and other regulators change the financial accounting and reporting standards governing the preparation of our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. These changes are difficult to predict and can materially impact how we record and report our financial condition and results of operations and other financial data, even in instances where they may not have an economic impact on our business.

 

For example, the FASB updated the accounting standard related to the required consolidation of certain VIEs, effective January 1, 2010. We adopted the accounting standard effective January 1, 2010 and recorded as a cumulative change in accounting principle an increase to appropriated retained earnings of consolidated investment entities and consolidated client assets and liabilities in VIEs onto our consolidated balance sheets that were not previously consolidated. While the economics of our business have not changed, the financial statements were impacted. See “Adoption of New Accounting Standards — Consolidation of Variable Interest Entities” in Note 2 to the Consolidated Financial Statements set forth in this report, which portion is incorporated herein by reference. Further revisions to this standard, or proposed revisions to other standards, may have an additional impact on us, which cannot be predicted at this time.

 

Recent changes in the supervision and regulation of the financial industry, including those set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, could materially impact our results of operations, financial condition and liquidity.

 

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) into law.  The Act calls for sweeping changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures, and provide greater protections to individual consumers and investors.  Certain elements of the Act became effective immediately, though the details of many provisions are subject to additional studies and will not be known until final rules are adopted by applicable regulatory agencies.  The impact of the Act on the Company, the financial industry and the economy cannot be known until all such rules and regulations called for under the Act have been finalized, and, in some cases, implemented over time.

 

Accordingly, while the final contours of these reforms are not yet known, the Act is expected to impact the manner in which we market our products and services, manage our Company and its operations and interact with regulators, all of which could materially impact our results of operations, financial condition and liquidity.  Certain provisions of the Act that may impact our business include but are not limited to restrictions on proprietary trading, the establishment of a fiduciary standard for broker-dealers, the imposition of capital requirements on financial holding companies and greater oversight over derivatives trading.  Further, the Company and its subsidiaries will need to respond to changes to the framework for the supervision of U.S. financial institutions, including the creation of the Financial Stability Oversight Counsel and the abolishment of the Office of Thrift Supervision, which has been the primary regulator of both our banking subsidiary and the holding company. Moreover, to the extent the Act impacts the operations, financial condition, liquidity and capital requirements of unaffiliated financial institutions with whom we transact business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us.

 

On July 21, 2010, the SEC proposed certain measures that would establish a new framework to replace the requirements of Rule 12b-1 under the Investment Company Act of 1940, with respect to how mutual funds collect and pay fees to cover the costs of selling and marketing their shares.  The proposed changes are subject to public comment and, following any enactment, would be phased in over a number of years. As these measures are not final nor undergoing implementation throughout the financial services industry, the impact of changes such as those currently proposed cannot be predicted at this time.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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 second quarter of 2010:

 

 

 

(a)

 

(b)

 

(c)

 

(d)

 

Period

 

Total Number
of Shares
Purchased

 

Average Price
Paid Per Share

 

Total Number of
Shares Purchased as
part of Publicly
Announced Plans

or Programs(1)

 

Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs
(1)

 

April 1 to April 30, 2010

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

 

$

 

 

$

1,500,000,000

 

Employee transactions(2)

 

1,614

 

$

46.05

 

N/A

 

 

May 1 to May 31, 2010

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

2,102,800

 

$

39.15

 

2,102,800

 

$

1,417,683,029

 

Employee transactions(2)

 

484

 

$

46.36

 

N/A

 

 

June 1 to June 30, 2010

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

3,618,995

 

$

38.02

 

3,618,995

 

$

1,280,083,127

 

Employee transactions(2)

 

6,150

 

$

38.90

 

N/A

 

 

Totals

 

 

 

 

 

 

 

 

 

Share repurchase program

 

5,721,795

 

$

38.43

 

5,721,795

 

 

 

Employee transactions

 

8,248

 

$

40.74

 

N/A

 

 

 

 

 

5,730,043

 

 

 

5,721,795

 

 

 

 


(1)

 

On May 11, 2010, we announced that our Board of Directors authorized us to repurchase up to $1.5 billion worth of our common stock through the date of the company’s 2012 annual shareholders meeting. The share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and other factors, these purchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means.

(2)

 

Restricted shares withheld pursuant to the terms of awards under the amended and revised Ameriprise Financial 2005 Incentive Compensation Plan (the “Plan”) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Plan provides that the value of the shares withheld shall be the closing price of common stock of Ameriprise Financial, Inc. on the date the relevant transaction occurs.

 

ITEM 6.  EXHIBITS

 

The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

 

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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: August 4, 2010

By

/s/ Walter S. Berman

 

 

Walter S. Berman

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

 

 

 

 

 

Date: August 4, 2010

By

/s/ David K. Stewart

 

 

David K. Stewart

 

 

Senior Vice President and

 

 

Controller

 

 

(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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.

 

Exhibit

 

Description

 

 

 

3.1

 

Amended 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 April 30, 2010).

 

 

 

3.2

 

Amended and Restated Bylaws of Ameriprise Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, File No. 1-32525, filed on April 30, 2010).

 

 

 

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).

 

Other instruments defining 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.

 

 

 

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.

 

 

 

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.

 

 

 

101*

 

The following materials from Ameriprise Financial, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2010, formatted in XBRL: (i) Consolidated Statements of Operations for the three months and six months ended June 30, 2010 and 2009; (ii) Consolidated Balance Sheets at June 30, 2010 and December 31, 2009; (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009; (iv) Consolidated Statements of Equity for the six months ended June 30, 2010 and 2009; and (v) Notes to the Consolidated Financial Statements.

 

E-1