UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
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 number 1-32525

AMERIPRISE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

 

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.

 

AMERIPRISE FINANCIAL, INC.

FORM 10-Q

INDEX

				Page No.
Part I.	Financial Information:
	Item 1.	Financial Statements
		Consolidated Statements of Income – Three Months and Nine Months Ended September 30, 2006 and 2005		3
		Consolidated Balance Sheets – September 30, 2006 and December 31, 2005		4
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2006 and 2005		5
		Consolidated Statements of Shareholders’ Equity – Nine Months Ended September 30, 2006 and 2005		7
		Notes to Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
	Item 4.	Controls and Procedures		49
Part II.	Other Information:
	Item 1.	Legal Proceedings		50
	Item 1A.	Risk Factors		50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
	Item 6.	Exhibits		50
	Signatures			51
	Exhibit Index			E-1

 

2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share amounts)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Revenues
Management, financial advice and service fees		$	720		$	687		$	2,151		$	1,927
Distribution fees		300			296			926			873
Net investment income		542			561			1,638			1,667
Premiums		244			202			693			751
Other revenues		171			127			571			397
Total revenues		1,977			1,873			5,979			5,615
Expenses
Compensation and benefits		756			703			2,261			1,995
Interest credited to account values		317			337			948			976
Benefits, claims, losses and settlement expenses		233			190			685			646
Amortization of deferred acquisition costs		87			49			368			319
Interest and debt expense		32			16			83			52
Separation costs		87			92			238			168
Other expenses		248			305			802			841
Total expenses		1,760			1,692			5,385			4,997
Income before income tax provision and discontinued operations		217			181			594			618
Income tax provision		43			58			134			171
Income before discontinued operations		174			123			460			447
Income from discontinued operations, net of tax		—			2			—			16
Net income		$	174		$	125		$	460		$	463
Basic Earnings per Common Share
Income before discontinued operations		$	0.71		$	0.50		$	1.86		$	1.82
Income from discontinued operations, net of tax		—			—			—			0.05
Net income		$	0.71		$	0.50		$	1.86		$	1.87
Diluted Earnings per Common Share
Income before discontinued operations		$	0.71		$	0.50		$	1.85		$	1.82
Income from discontinued operations, net of tax		—			—			—			0.05
Net income		$	0.71		$	0.50		$	1.85		$	1.87
Weighted average common shares outstanding:
Basic		244.5			246.2			247.6			246.2
Diluted		246.4			246.2			249.3			246.2
Cash dividends declared per common share		$	0.11		$	—		$	0.33		$	—

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

		September 30,			December 31,
		2006			2005
		(unaudited)
Assets
Cash and cash equivalents		$	3,309		$	2,474
Investments		36,198			39,100
Receivables		2,504			2,172
Deferred acquisition costs		4,423			4,182
Separate account assets		48,834			41,561
Restricted and segregated cash		1,059			1,067
Other assets		3,177			2,565
Total assets		$	99,504		$	93,121
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits and claims		$	30,794		$	32,731
Customer deposits		6,391			6,641
Accounts payable and accrued expenses		1,952			1,757
Debt		2,254			1,833
Separate account liabilities		48,834			41,561
Other liabilities		1,526			911
Total liabilities		91,751			85,434
Shareholders’ Equity:
Common shares ($.01 par value; shares authorized, 1,250,000,000; shares issued, 252,571,142 and 249,998,206, respectively)		3			2
Additional paid-in capital		4,291			4,091
Retained earnings		4,123			3,745
Treasury shares, at cost (10,457,760 and 122,652 shares, respectively)		(438		)	—
Accumulated other comprehensive loss, net of tax		(226		)	(151		)
Total shareholders’ equity		7,753			7,687
Total liabilities and shareholders’ equity		$	99,504		$	93,121

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

		Nine Months Ended
		September 30,
		2006			2005
Cash Flows from Operating Activities
Net income		$	460		$	463
Less: Income from discontinued operations, net of tax		—			16
Income before discontinued operations		460			447
Adjustments to reconcile income before discontinued operations to net cash provided by operating activities:
Amortization of deferred acquisition and sales inducement costs		406			347
Capitalization of deferred acquisition and sales inducement costs		(647		)	(582		)
Depreciation and amortization		134			131
Deferred income taxes		16			65
Share-based compensation		83			36
Excess tax benefits from share-based compensation		(24		)	—
Net realized investment gains		(25		)	(50		)
Other-than-temporary impairments and provision for loan losses		2			3
Premium and discount amortization on Available-for-Sale and other securities		94			123
Changes in operating assets and liabilities:
Segregated cash		152			(50		)
Trading securities and equity method investments in hedge funds, net		145			89
Future policy benefits and claims, net		52			7
Receivables		(286		)	(174		)
Other assets, other liabilities, accounts payable and accrued expenses, net		154			(6		)
Net cash provided by operating activities		716			386
Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales		2,125			3,477
Maturities, sinking fund payments and calls		2,552			2,705
Purchases		(2,233		)	(6,428		)
Open securities transactions payable and receivable, net		34			(466		)
Proceeds from sales and maturities of mortgage loans on real estate		381			446
Funding of mortgage loans on real estate		(308		)	(375		)
Proceeds from sales of other investments		109			152
Purchase of other investments		(116		)	(125		)
Purchase of land, buildings, equipment and software		(115		)	(95		)
Proceeds from sale of land, buildings, equipment and other		66			—
Proceeds from transfer of AMEX Assurance deferred acquisition costs		—			117
Deconsolidation of AMEX Assurance		—			(29		)
Change in restricted cash		(54		)	528
Cash transferred to American Express related to AEIDC		—			(572		)
Acquisition of bank deposits and loans, net		951			—
Other, net		(2		)	1
Net cash provided by (used in) investing activities		3,390			(664		)

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(in millions)

 

		Nine Months Ended
		September 30,
		2006			2005
Cash Flows from Financing Activities
Investment certificates:
Payments from certificate owners		1,239			2,706
Interest credited to account values		153			143
Certificate maturities and cash surrenders		(2,431		)	(2,291		)
Policyholder and contractholder account values:
Consideration received		980			1,227
Interest credited to account values		795			833
Surrenders and other benefits		(3,620		)	(2,450		)
Proceeds from issuance of debt, net of issuance costs		516			1,351
Principal repayments of debt		(252		)	(11		)
Payable to American Express, net		—			(1,316		)
Capital transactions with American Express, net		—			1,256
Dividends paid to American Express		—			(53		)
Dividends paid to shareholders		(82		)	—
Repurchase of common shares		(438		)	—
Exercise of stock options		11			—
Excess tax benefits from share-based compensation		24			—
Universal life insurance policy loans:
Repayment		71			71
Issuance		(96		)	(77		)
Customer deposits and other, net		(162		)	(73		)
Net cash provided by (used in) financing activities		(3,292		)	1,316
Cash Flows from Discontinued Operations
Net cash provided by operating activities		—			46
Net cash used in investing activities		—			(10		)
Net cash provided by financing activities		—			482
Net cash provided by discontinued operations		—			518
Effect of exchange rate changes on cash		21			(14		)
Net increase in cash and cash equivalents		835			1,542
Cash and cash equivalents at beginning of period		2,474			1,078
Cash and cash equivalents at end of period		$	3,309		$	2,620
Cash and cash equivalents of discontinued operations included above:
At beginning of period		$	—		$	54
At end of period		$	—		$	—
Supplemental Disclosures:
Interest paid		$	57		$	74
Income taxes paid, net		$	185		$	94
Non-cash dividend of AEIDC to American Express		$	—		$	164

 

See Notes to Consolidated Financial Statements.

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AMERIPRISE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(in millions, except share amounts)

 

		Number of Outstanding Shares		Common Shares			Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2004		100		$	—		$	2,907		$	3,415		$	—		$	380		$	6,702
Comprehensive income:
Net income										463									463
Change in unrealized holding gains on securities, net																(409		)	(409		)
Change in unrealized derivative losses, net																17			17
Foreign currency translation adjustment																(8		)	(8		)
Total comprehensive income																			63
Cash dividends paid to American Express										(53		)							(53		)
Non-cash dividends paid to American Express										(164		)							(164		)
Share-based incentive employee compensation plan							(67		)										(67		)
Stock split of common shares issued and outstanding		246,148,900		2			(2		)										—
Capital transactions with American Express, net							1,256												1,256
Balances at September 30, 2005		246,149,000		$	2		$	4,094		$	3,661		$	—		$	(20	)	$	7,737
Balances at December 31, 2005		249,875,554		$	2		$	4,091		$	3,745		$	—		$	(151	)	$	7,687
Comprehensive income:
Net income										460									460
Change in unrealized holding losses on securities, net																(74		)	(74		)
Change in unrealized derivative gains, net																(5		)	(5		)
Foreign currency translation adjustment																4			4
Total comprehensive income																			385
Dividends paid to shareholders										(82		)							(82		)
Treasury shares		(10,335,108	)										(438		)				(438		)
Share-based compensation plans		2,572,936		1			200												201
Balances at September 30, 2006		242,113,382		$	3		$	4,291		$	4,123		$	(438	)	$	(226	)	$	7,753

 

See Notes to Consolidated Financial Statements.

 

7

AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.                 Basis of Presentation

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

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  The interim financial information in this report has not been audited.  In the opinion of management, all adjustments necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods have been made.  All adjustments made were of a normal, recurring nature.  Results of operations reported for interim periods are not necessarily indicative of results for the entire year.  These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes which are incorporated by reference in the Annual Report on Form 10-K of Ameriprise Financial, Inc. for the year ended December 31, 2005, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2006.

Customer deposits on the Consolidated Balance Sheets include payments from investment certificate owners and deposits of banking and brokerage customers. Reclassifications of prior period amounts have been made to conform to the current presentation.  The Company revised the presentation of its previously reported segment data for the three months and nine months ended September 30, 2005 to conform to the segment reporting changes implemented by the Company as of January 1, 2006.

On February 1, 2005, the American Express Company (“American Express”) Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders.  Effective as of the close of business on September 30, 2005, American Express completed the Separation of Ameriprise Financial and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”).  Prior to the Distribution, Ameriprise Financial had been a wholly owned subsidiary of American Express.  For the periods preceding the Distribution, Ameriprise Financial prepared its Consolidated Financial Statements as if it had been a stand-alone company.  In the preparation of the Consolidated Financial Statements for the periods preceding the Distribution, Ameriprise Financial made certain allocations of expenses that its management believed to be a reasonable reflection of costs it would have otherwise incurred as a stand-alone company but were paid by American Express.

2.                 Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Comprehensive income will also include gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. In addition, SFAS 158 requires an employer to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits and transition asset or obligation. These requirements are effective for the fiscal years ending after December 15, 2006. SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position. This requirement is effective for fiscal years ending after December 15, 2008. The Company does not believe the impact of the adoption of SFAS 158 will have a material effect on the consolidated results of operations and financial condition.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.                 Recent Accounting Pronouncements (continued)

Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted provided that the entity has not issued financial statements for any period within the year of adoption. The provisions of SFAS 157 are required to be applied prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except for certain financial instruments as defined in SFAS 157 which will require retrospective application of SFAS 157. The transition adjustment, if any, will be recognized as a cumulative-effect adjustment to the opening balance of retained earnings for the fiscal year of adoption. The Company is currently evaluating the impact of SFAS 157 on its consolidated results of operations and financial condition.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 does not change the SEC staff’s previous positions in SAB 99, “Materiality,” regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. In the initial year of adoption, the cumulative effect of applying SAB 108, if any, will be recorded as an adjustment to the beginning balance of retained earnings. The Company is currently evaluating the impact of SAB 108 on its consolidated results of operations and financial condition.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated results of operations and financial condition.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155: (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. At adoption, the fair value election may also be applied to hybrid financial instruments that have been bifurcated under SFAS 133 prior to adoption of this Statement. Any changes resulting from the adoption of this Statement should be recognized as a cumulative effect adjustment to beginning retained earnings. The Company is currently evaluating the impact of SFAS 155 on its consolidated results of operations and financial condition.

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.”  SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company currently accounts for many types of internal replacements as continuations of the existing contract and does not consider these transactions as surrenders in setting deferred acquisition cost (“DAC”) valuation assumptions.  Some of these transactions will not qualify as

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.                 Recent Accounting Pronouncements (continued)

continuations under SOP 05-1 and the Company may need to increase certain policy surrender assumptions and record a reduction in DAC as a cumulative change in accounting principle when it adopts SOP 05-1. This may result in quarterly DAC amortization expense that is higher or lower than under the Company’s current accounting policy. The Company is currently evaluating the impact of SOP 05-1 on its consolidated results of operations and financial condition.

In June 2005, the FASB approved Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 provides guidance on whether a partnership should be consolidated by one of its partners. EITF 04-5 was effective for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements were modified after June 29, 2005. For general partners in all other limited partnerships, this guidance was effective no later than January 1, 2006. The adoption of EITF 04-5 resulted in the consolidation of certain limited partnerships for which the Company is the general partner. The effect of this consolidation as of January 1, 2006 was a net increase in total assets and total liabilities of $427 million, consisting of $14 million of investments (net of $153 million of investments as of December 31, 2005 previously accounted for under the equity method), $89 million of restricted cash, $324 million of other assets, $291 million of other liabilities and $136 million of non-recourse debt. The adoption of EITF 04-5 had no net effect on consolidated net income.

3.                 Separation and Distribution from American Express and Discontinued Operations

American Express has historically provided a variety of corporate and other support services for the Company, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. Following the Distribution, American Express continued to provide the Company with many of these services pursuant to transition services agreements for periods of up to two years or more, if extended by mutual agreement of the Company and American Express. The Company has terminated or will terminate a particular service after it has completed the procurement of the designated service through arrangements with third parties or through the Company’s own employees.

The Company has incurred significant non-recurring separation costs as a result of the Distribution. These costs have primarily included advisor and employee retention program costs, costs associated with establishing the Ameriprise Financial brand and costs to separate and reestablish the Company’s technology platforms.

Effective July 1, 2005, the Company’s subsidiary, AMEX Assurance Company (“AMEX Assurance”), ceded 100% of its travel insurance and card related business offered to American Express customers to an American Express subsidiary for an arm’s length ceding fee. The Company entered into an agreement to sell the AMEX Assurance legal entity to a subsidiary of American Express within two years after the Distribution for a fixed price equal to the net book value of AMEX Assurance as of the Distribution or approximately $115 million. These transactions created a variable interest entity under GAAP for which the Company is not the primary beneficiary. Accordingly, the Company deconsolidated AMEX Assurance for GAAP purposes as of September 30, 2005.

Effective August 1, 2005, the Company transferred its 50% ownership interest and the related assets and liabilities of its subsidiary, American Express International Deposit Company (“AEIDC”), to American Express for $164 million through a non-cash dividend equal to the net book value excluding $26 million of net unrealized investment losses of AEIDC. In connection with the AEIDC transfer, American Express paid the Company a $164 million capital contribution. The results of operations and cash flows of AEIDC in 2005 are shown as discontinued operations in the accompanying Consolidated Financial Statements. For the three months and nine months ended September 30, 2005, the discontinued operations of AEIDC included revenues of $24 million and $165 million, respectively, and pretax income of $3 million and $25 million, respectively.

4.                 Ameriprise Bank, FSB

On September 29, 2005, the Company and American Express Bank, FSB (“AEBFSB”), a subsidiary of American Express, entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which the Company agreed to purchase assets and assume liabilities, primarily consumer loans and deposits of AEBFSB, upon obtaining a federal savings bank charter. In

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.                 Ameriprise Bank, FSB (continued)

September 2006, the Company and AEBFSB entered into amendments to the Agreement, pursuant to which the Company agreed to acquire the assets and liabilities from AEBFSB in three phases. Ameriprise Bank, FSB (“Ameriprise Bank”), a wholly owned subsidiary of the Company, commenced operations in September 2006 subsequent to obtaining the charter and began to execute the agreement with AEBFSB. For the first phase, which closed on September 18, 2006, Ameriprise Bank acquired $12 million of customer loans, assumed $963 million of customer deposits and received cash of $951 million from AEBFSB. Ameriprise Bank recorded the assets acquired and liabilities assumed at fair value. Ameriprise Bank completed the second phase of the agreement in October 2006 with the purchase of $49 million of customer loans for cash consideration. For the final phase, approximately $440 million in customer loans are expected to be purchased by Ameriprise Bank in November 2006 for cash consideration.

Separately, on October 23, 2006, the Company acquired $33 million of secured loans from American Express Credit Corporation. These loans were made to the Company’s customers and are secured by the customers’ investment assets and/or insurance policies and will be serviced by Ameriprise Bank.

5.                 Investments

The following is a summary of investments:

		September 30, 2006			December 31, 2005
		(in millions)
Available-for-Sale securities, at fair value		$	31,512		$	34,217
Mortgage loans on real estate, net		3,071			3,146
Trading securities, at fair value and equity method investments in hedge funds		551			676
Policy loans		645			616
Other investments		419			445
Total		$	36,198		$	39,100

 

The Company began consolidating certain limited partnerships as a result of its adoption of EITF 04-5 as of January 1, 2006. The fair value of trading securities of certain of these consolidated limited partnerships was $179 million at September 30, 2006 and was $167 million as of January 1, 2006. At December 31, 2005, prior to the Company’s adoption of EITF 04-5, the fair value of trading securities under the equity method related to these limited partnerships was $153 million.

The following is a summary of Available-for-Sale securities by type:

September 30, 2006		Amortized Cost			Gross Unrealized Investment Gains			Gross Unrealized Investment Losses			Fair Value
		(in millions)
Corporate debt securities		$	17,464		$	175		$	(389	)	$	17,250
Mortgage and other asset-backed securities		12,685			36			(228		)	12,493
Structured investments		43			—			—			43
State and municipal obligations		1,030			30			(4		)	1,056
U.S. government and agencies obligations		375			14			(6		)	383
Foreign government bonds and obligations		113			15			—			128
Common and preferred stocks		52			7			—			59
Other debt		100			—			—			100
Total		$	31,862		$	277		$	(627	)	$	31,512

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.                 Investments (continued)

December 31, 2005		Amortized Cost			Gross Unrealized Investment Gains			Gross Unrealized Investment Losses			Fair Value
		(in millions)
Corporate debt securities		$	18,632		$	291		$	(300	)	$	18,623
Mortgage and other asset-backed securities		14,071			50			(211		)	13,910
Structured investments		37			—			—			37
State and municipal obligations		879			23			(5		)	897
U.S. government and agencies obligations		377			17			(7		)	387
Foreign government bonds and obligations		128			17			—			145
Common and preferred stocks		11			3			—			14
Other debt		204			—			—			204
Total		$	34,339		$	401		$	(523	)	$	34,217

 

The majority of the gross unrealized investment losses related to corporate debt securities and substantially all of the gross unrealized investment losses related to mortgage and other asset-backed securities were attributable to changes in interest rates. A small portion of the gross unrealized investment losses, particularly related to corporate debt securities, was also attributable to credit spreads and specific issuer credit events.

Gross realized investment gains and losses on Available-for-Sale securities and other-than-temporary impairments on Available-for-Sale securities included in net investment income were as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
		(in millions)
Gross realized investment gains		$	15		$	14		$	38		$	107
Gross realized investment losses		—			(20		)	(13		)	(57		)
Other-than-temporary impairments		(1		)	(1		)	(2		)	(2		)

 

6.                 Debt

Debt was as follows:

		Outstanding Balance						Stated Interest Rate
		September 30, 2006			December 31, 2005			September 30, 2006		December 31, 2005
		(in millions)
Senior notes due 2010		$	800		$	800		5.4	%	5.4	%
Senior notes due 2015		700			700			5.7		5.7
Junior subordinated notes due 2066		500			—			7.5		—
Medium-term notes due 2006		—			50			—		6.6
Fixed and floating rate notes due 2011:
Floating rate senior notes		117			151			5.9		5.2
Fixed rate notes		83			79			8.6		8.6
Fixed rate senior notes		46			46			7.2		7.2
Fixed rate notes		8			7			13.3	%	13.3	%
Total		$	2,254		$	1,833

 

On May 26, 2006, the Company issued $500 million of unsecured junior subordinated notes (“junior notes”) and incurred debt issuance costs of $6 million. For the initial ten-year period, the junior notes carry a fixed interest rate of 7.518% payable semi-annually in arrears on June 1 and December 1. From June 1, 2016 until the maturity date, interest on the junior notes will accrue at an annual rate equal to the three-month LIBOR plus a margin equal to 290.5 basis points, payable quarterly in arrears. The Company has the option to defer interest payments, subject to certain limitations. In addition, interest payments are mandatorily deferred if the Company does not meet specified capital adequacy, net income or shareholders’ equity levels. Upon an optional or

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.                 Debt (continued)

mandatory deferral, the Company is subject to certain restrictions on dividends or distributions related to its capital stock, as well as payments of principal, interest or guarantees related to debt securities issued by the Company or its subsidiaries that rank equally with or junior to the junior notes. The junior notes mature June 1, 2066. The Company may redeem the junior notes, in whole or in part, on or after June 1, 2016 at the par redemption amount specified in the indenture agreement, as amended, provided that if the junior notes are not redeemed in whole, at least $50 million aggregate principal amount of the junior notes (excluding any junior notes held by the Company or any of its affiliates) remains outstanding after the redemption. Prior to June 1, 2016, the Company may redeem the junior notes in whole but not in part at any time at the make-whole redemption amount specified in the indenture agreement, as amended. The net proceeds from the issuance were for general corporate purposes.

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

The Company began consolidating certain limited partnerships, including certain property fund limited partnerships, as a result of its adoption of EITF 04-5 as of January 1, 2006. The property funds of these limited partnerships are managed by the Company’s subsidiary, Threadneedle Asset Management Holdings Ltd. The effect of this consolidation included an increase of $136 million in non-recourse debt related to the property funds. On September 1, 2006, the partnerships repaid the outstanding non-recourse debt following a restructuring of the partnership capital.

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

7.                 Deferred Acquisition Costs

Changes in deferred acquisition costs were as follows:

		2006			2005
		(in millions)
Balance, January 1		$	4,182		$	3,956
Capitalization of acquisition costs		554			508
DAC transfer related to AMEX Assurance ceding arrangement		—			(117		)
Amortization, excluding impact of changes in assumptions		(406		)	(386		)
Amortization, impact of annual third quarter changes in DAC-related assumptions		38			67
Impact of change in net unrealized securities losses		55			60
Balance, September 30		$	4,423		$	4,088

 

8.                 Share-Based Compensation

The Ameriprise Financial 2005 Incentive Compensation Plan (“2005 ICP”), approved as of September 30, 2005, allows for the grant of stock and cash incentive awards to employees, directors and independent contractors, including stock options, restricted stock awards, restricted stock units, performance shares and similar awards. In accordance with the Employee Benefits Agreement (“EBA”) entered into between the Company and American Express as part of the Distribution, all American Express stock options and restricted stock awards held by the Company’s employees which had not vested on or before December 31, 2005 were substituted by a stock option or restricted stock award issued under the 2005 ICP. All American Express stock options and restricted stock awards held by the Company’s employees that vested on or before December 31, 2005 remained American Express stock options or restricted stock awards. In addition, the Ameriprise Financial Deferred Equity Program for Independent Financial Advisors, approved as of September 30, 2005, provides independent financial advisors with a tax deferred method to own the Company’s stock.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8.                 Share-Based Compensation (continued)

For the three months and nine months ended September 30, 2006, the Company recognized expense of $27 million and $83 million, respectively, related to awards under these share-based compensation plans. For the three months and nine months ended September 30, 2005, the Company recognized expense of $14 million and $36 million, respectively, related to American Express stock options and American Express restricted stock awards granted to the Company’s employees. In addition, the Company recognized separation costs of $22 million and $58 million during the three months and nine months ended September 30, 2005, respectively, related to a 2005 advisor retention and incentive bonus program. The bonuses earned under this program through December 31, 2005 were converted to 2.0 million share-based awards effective as of the vesting date of January 1, 2006.

As of September 30, 2006, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the share-based compensation plans was $190 million. That cost is expected to be recognized over a weighted-average period of 3.1 years. Pursuant to the 2005 ICP, restricted shares that are forfeited or, at the holder’s option, are withheld to offset tax withholding obligations that occur upon vesting and release of restricted shares, are recorded as treasury shares. At September 30, 2006 and December 31, 2005, treasury shares held for reissuance under the 2005 ICP were 703,057 shares and 107,504 shares, respectively.

9.                 Income Taxes

The Company’s effective tax rates were 19.8% and 22.6% for the three months and nine months ended September 30, 2006, respectively. The Company’s effective tax rates on income before discontinued operations for the three months and nine months ended September 30, 2005 were 32.0% and 27.7%, respectively. The effective tax rates are impacted by the levels of pretax income relative to tax advantaged items in each period. The effective tax rates for the three months and nine months ended September 30, 2006 reflect a $13 million tax benefit related to the finalization of the prior year tax returns. The effective tax rates for the three months and nine months ended September 30, 2005 reflect the net effect of a $20 million tax expense applicable to prior years and a $7 million tax benefit related to the finalization of the prior year tax returns. The effective tax rate for the nine months ended September 30, 2005 also reflects $3 million in tax benefits related to an IRS audit of prior years tax returns.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses realized for tax return purposes and capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Deferred tax assets at September 30, 2006 included $180 million in capital loss carryforwards that expire December 31, 2009. Based on analysis of the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable the Company to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets was established as of September 30, 2006 and December 31, 2005.

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

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.          Earnings per Common Share

The computations of basic and diluted earnings per share for the three months and nine months ended September 30, 2006 and 2005 are as follows:

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
		(in millions, except per share amounts)
Numerator:
Income before discontinued operations		$	174		$	123		$	460		$	447
Income from discontinued operations, net of tax		—			2			—			16
Net income		$	174		$	125		$	460		$	463
Denominator:
Basic: Weighted average common shares outstanding		244.5			246.2			247.6			246.2
Effect of potentially dilutive nonqualified stock options and other share-based awards		1.9			—			1.7			—
Diluted: Weighted average common shares outstanding		246.4			246.2			249.3			246.2
Basic EPS:
Income before discontinued operations		$	0.71		$	0.50		$	1.86		$	1.82
Income from discontinued operations, net of tax		—			—			—			0.05
Net income		$	0.71		$	0.50		$	1.86		$	1.87
Diluted EPS:
Income before discontinued operations		$	0.71		$	0.50		$	1.85		$	1.82
Income from discontinued operations, net of tax		—			—			—			0.05
Net income		$	0.71		$	0.50		$	1.85		$	1.87

 

Basic weighted average shares for the three months and nine months ended September 30, 2006 include 1.3 million and 1.8 million, respectively, of vested, nonforfeitable restricted stock units and 3.9 million and 3.9 million, respectively, of nonvested, restricted stock awards that are forfeitable but receive nonforfeitable dividends. Potentially dilutive securities include nonqualified stock options and other share-based awards. The Company had no dilutive shares outstanding for the three months and nine months ended September 30, 2005, because all share-based compensation was granted on American Express common shares until September 30, 2005. Under the EBA, all American Express stock options and restricted stock awards held by the Company’s employees who were not vested on or before December 31, 2005 were substituted with an award based on the Company’s common stock.

11.          Segment Information

The Company has two main operating segments:  Asset Accumulation and Income (“AA&I”) and Protection, as well as a Corporate and Other (“Corporate”) segment. Effective January 1, 2006, the Company implemented a new automated internal business unit revenue and expense reporting process to better reflect how management reviews and evaluates the operations of its segments. These changes, which were applied retroactively to all segment information for all periods presented, had no effect on consolidated results of operations or financial position.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11.          Segment Information (continued)

The new process required the following changes in segment information as previously presented:

·              the realignment of the Company’s subsidiary, Securities America Financial Corporation (“SAFC”), under the AA&I segment from the Corporate segment;

·              the reallocation of all interest on corporate debt from the AA&I and Protection segments to the Corporate segment;

·              the reallocation of investment income to segments to better reflect management’s determination of liabilities and capital required for each segment;

·              the reallocation of technology expenses from the Corporate segment to the AA&I and Protection segments to occur on a quarterly rather than an annual basis;

·              the reallocation of certain corporate overhead expenses from the AA&I and Protection segments to the Corporate segment, such as certain senior management compensation and related expense and expenses attributable to the Corporate Secretary, Public Affairs and Investor Relations departments, as well as other corporate-related activities, as they do not directly relate to the AA&I and Protection segments; and

·              the reallocation of excess capital not required by the AA&I and Protection segments and related investment income to the Corporate segment.

The AA&I segment offers products and services, both the Company’s and other companies’, to help the Company’s retail clients address identified financial objectives related to asset accumulation and income management. Products and services in this segment are related to financial advice services, asset management, brokerage and banking, and include mutual funds, wrap accounts, variable and fixed annuities, brokerage accounts and investment certificates. This operating segment also serves institutional clients by providing investment management services in separately managed accounts, sub-advisory, alternative investments and 401(k) markets. The Company earns revenues in this segment primarily through fees it receives based on managed assets and annuity separate account assets. These fees are impacted by both market movements and net asset flows. The Company also earns net investment income on owned assets, principally supporting the fixed annuity business and capital supporting the business, and distribution fees on sales of mutual funds and other products. This segment includes the results of SAFC, which through its operating subsidiary, Securities America, Inc. (“SAI”), operates its own separately branded distribution network.

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

The Corporate segment consists of income derived from financial planning fees, corporate level assets and unallocated corporate expenses. This segment also includes non-recurring costs associated with the Company’s separation from American Express.

The following is a summary of assets by segment:

		September 30,			December 31,
		2006			2005
		(in millions)
Asset Accumulation and Income		$	79,475		$	75,382
Protection		16,758			14,492
Corporate and Other		3,271			3,247
Total assets		$	99,504		$	93,121

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11.          Segment Information (continued)

The following is a summary of segment revenues, pretax segment income (loss) and reconciliation to consolidated income before income tax provision and discontinued operations and consolidated net income:

Three Months Ended September 30,		Asset Accumulation and Income			Protection			Corporate and Other			Eliminations			Consolidated
		(in millions)
2006
Revenue from external customers		$	1,418		$	492		$	67		$	—		$	1,977
Intersegment revenue		5			6			—			(11		)	—
Total revenues		$	1,423		$	498		$	67		$	(11	)	$	1,977
Income (loss) before income tax provision		$	192		$	151		$	(126	)	$	—		$	217
Income tax provision														43
Net income														$	174
2005
Revenue from external customers		$	1,383		$	441		$	49		$	—		$	1,873
Intersegment revenue		1			5			1			(7		)	—
Total revenues		$	1,384		$	446		$	50		$	(7	)	$	1,873
Income (loss) before income tax provision and discontinued operations		$	184		$	132		$	(135	)	$	—		$	181
Income tax provision														58
Income before discontinued operations														123
Income from discontinued operations, net of tax														2
Net income														$	125

 

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11.          Segment Information (continued)

Nine Months Ended September 30,		Asset Accumulation and Income			Protection			Corporate and Other			Eliminations			Consolidated
		(in millions)
2006
Revenue from external customers		$	4,324		$	1,450		$	205		$	—		$	5,979
Intersegment revenue		14			17			—			(31		)	—
Total revenues		$	4,338		$	1,467		$	205		$	(31	)	$	5,979
Income (loss) before income tax provision		$	642		$	317		$	(365	)	$	—		$	594
Income tax provision														134
Net income														$	460
2005
Revenue from external customers		$	4,005		$	1,462		$	148		$	—		$	5,615
Intersegment revenue		2			15			2			(19		)	—
Total revenues		$	4,007		$	1,477		$	150		$	(19	)	$	5,615
Income (loss) before income tax provision and discontinued operations		$	529		$	375		$	(286	)	$	—		$	618
Income tax provision														171
Income before discontinued operations														447
Income from discontinued operations, net of tax														16
Net income														$	463

 

12.          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 the Company 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.

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

As with other financial services firms, the level of regulatory activity and inquiry concerning the Company’s businesses remains elevated. The Company from time to time receives requests for information from, and has been subject to examination or investigation by, the SEC, National Association of Securities Dealers, Inc. (“NASD”) and various other regulatory authorities concerning its business activities and practices, including:  sales and product or service features of, or disclosures pertaining to, financial plans, its mutual funds, annuities, insurance products and brokerage services; non-cash compensation paid to its financial advisors; supervision of its financial advisors; operational and data privacy issues including issues relating to the theft of a laptop computer containing certain client information; compliance with postal regulations; and sales of, or brokerage or revenue sharing practices relating to, other companies’ real estate investment trust shares, mutual fund shares or other investment products. These matters relate to the activities of various Ameriprise Financial legal entities, including Ameriprise Financial Services, Inc. (formerly known as “American Express Financial Advisors Inc.” or “AEFA”), American Enterprise Investment Services, Inc. (its clearing broker-dealer subsidiary) and SAI. The number of regulatory reviews and investigations has increased

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

12.          Contingencies (continued)

in recent years with regard to many firms in the financial services industry, including the Company. The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.

On May 15, 2006, a NASD panel issued a decision regarding customer claims relating to suitability, disclosures, supervision and certain other sales practices in an arbitration proceeding captioned Wayland Adams et al vs. David McFadden and Securities America, Inc. (brought by a group of 44 claimants). The arbitrators ruled against SAI, and awarded the plaintiffs approximately $22 million. On September 14, 2006, SAI entered into a settlement with the NASD whereby SAI agreed to pay $13.8 million of the arbitration award to claimants, as well as a fine of $2.5 million. SAI also agreed to hire an independent consultant to review and recommend changes in SAI’s compliance procedures. SAI continues to appeal the portion of the arbitration award (approximately $8 million) pertaining to punitive damages and attorneys’ fees.

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

In October 2005, the Company reached a comprehensive settlement regarding the consolidated securities class action lawsuit filed against the Company, its former parent and affiliates in October 2004 called “In re American Express Financial Advisors Securities Litigation.”  The settlement, under which the Company denies any liability, includes a one-time payment of $100 million to the class members. The class members include individuals who purchased mutual funds in the Company’s Preferred Provider Program, Select Group Program, or any similar revenue sharing program, purchased mutual funds sold under the American Express® or AXP® brand; or purchased for a fee financial plans or advice from the Company between March 10, 1999 and through April 1, 2006. The settlement will be submitted to the Court for approval. Two lawsuits making similar allegations (based solely on state causes of actions) are pending in the United States District Court for the Southern District of New York: “Beer v. American Express Company and American Express Financial Advisors” and “You v. American Express Company and American Express Financial Advisors.”  Plaintiffs have moved to remand the cases to state court. The Court’s decision on the remand motion is pending. For the three months and nine months ended September 30, 2005, the Company recorded loss provisions to increase its litigation reserves for these matters of $70 million and $100 million, respectively.

In November 2002, a suit, now captioned Haritos et al. v. American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The suit was filed by plaintiffs who purport to represent a class of all persons that have purchased financial plans from the Company’s advisors from November 1997 through July 2004. Plaintiffs allege that the sale of the plans violates the Investment Advisers Act of 1940. The suit seeks an unspecified amount of damages, rescission of the investment advisor plans and restitution of monies paid for such plans. On January 3, 2006, the Court granted the parties joint stipulation to stay the action pending the approval of the proposed settlement in the putative class action described above, “In re American Express Financial Advisors Securities Litigation.”

In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc. was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to the Company’s motion to dismiss the complaint, the Court dismissed one of plaintiffs’ four claims and granted plaintiffs limited discovery. Discovery is currently set to end in March 2007.

On December 1, 2005, the Company announced settlement of two SEC enforcement matters relating to disclosure of certain revenue sharing programs and alleged market timing practices during periods before the Distribution. Under the terms of the settlements the Company is required to develop plans of distribution with the assistance of an independent distribution consultant.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

12.          Contingencies (continued)

Regarding revenue sharing, the plan will address how such funds will be distributed to benefit customers that purchased the particular mutual funds from January 1, 2001 through August 31, 2004. A second plan will address how funds will be distributed to benefit investors in the Company’s mutual funds for market-timing activity that took place between January 1, 2002 and September 30, 2003. The distribution plans will be subject to final approval by the SEC. As part of the settlements, the Company also agreed to certain undertakings regarding disclosure, compliance and training. The Company will continue to meet its obligations under these settlements.

13.          Related Party Transactions

The Company may engage in transactions in the ordinary course of business with significant shareholders or their subsidiaries, between the Company and its directors and officers or with other companies whose directors or officers may also serve as directors or officers for the Company or its subsidiaries. The Company carries out these transactions on customary terms. The transactions have not had a material impact on the Company’s consolidated results of operations or financial condition.

Berkshire Hathaway Inc. (“Berkshire”) and subsidiaries owned approximately 12% of the Company’s common stock at December 31, 2005. On March 29, 2006, the Company entered into a Stock Purchase and Sale Agreement with Warren E. Buffet and Berkshire to repurchase 6.4 million shares of the Company’s common stock. The repurchase was completed on March 29, 2006 at a price per share equal to the March 29, 2006 closing price of $42.91 and reduced Berkshire’s ownership of the Company’s common stock to approximately 9.8% of common shares then outstanding. The Company or its subsidiaries may engage in reinsurance or other commercial transactions with Berkshire or its subsidiaries and pay or receive fees in these transactions. The Company does not believe that these transactions are material to it or to Berkshire.

The Company has entered into various transactions with American Express in the normal course of business. The Company earned approximately $4 million and $10 million during the three months and nine months ended September 30, 2005, respectively, in revenues from American Express. During the three months and nine months ended September 30, 2005, the Company received approximately $8 million and $26 million, respectively, of reimbursements from American Express for the Company’s participation in certain corporate initiatives. As a result of the Separation, the Company determined it appropriate to reflect the reimbursements as a capital contribution rather than reductions to expense amounts.

14.          Common Share Repurchases

In January 2006, the Company’s Board of Directors authorized the repurchase of up to 2 million shares of common stock of the Company. In March 2006, the Company’s Board of Directors authorized the expenditure of up to $750 million for the repurchase of shares of the Company’s common stock through March 31, 2008. During the nine months ended September 30, 2006, the Company repurchased a total of 9.7 million shares of its common stock under these programs for an aggregate cost of $422 million. As of September 30, 2006, the Company had purchased all shares under the January 2006 authorization and has $414 million remaining under the March 2006 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. During the nine months ended September 30, 2006, the restricted shares forfeited under the 2005 ICP and recorded as treasury shares were 0.2 million shares. During the nine months ended September 30, 2006, the Company reacquired 0.4 million shares of common stock through the surrender of restricted shares upon vesting and paid in the aggregate $16 million related to the holders’ income tax obligations on the vesting date.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

15.          Sale of Defined Contribution Recordkeeping Business

On June 1, 2006, the Company completed the sale of its defined contribution recordkeeping business for $66 million. The Company incurred $30 million of expenses related to the sale and realized a pretax gain of $36 million. The expenses included a write-down of capitalized software development costs of $17 million and severance costs of $12 million. The administered assets transferred in connection with this sale were approximately $17 billion. The Company continues to manage approximately $13 billion of defined contribution assets.

The buyer of the business is subject to a contingent payment to be paid to the Company based on the level of client revenues retained by the buyer after 18 months from the sale closing date. The payment, if any, will not be determined or paid until the fourth quarter of 2007 and is not expected to be material.

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