Ameriprise Financial - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

None

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

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

Yes                            ý                                    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.

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

Yes                            o                                    No                                ý

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.

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, those variable interest entities (“VIEs”) in which it is the primary beneficiary and certain limited partnerships for which it is the general partner. The “Company” may refer to either Ameriprise Financial exclusively, to the consolidated group or to one or more subsidiaries of Ameriprise Financial. 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 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.

Certain reclassifications of prior period amounts have been made to conform to the current presentation. Additionally, all share and per share information for the three months ended March 31, 2005 have been retroactively adjusted for the stock split of the Company’s common shares as of September 30, 2005 into 246.2 million common shares. The Company also revised the presentation of its previously reported segment data for the three months ended March 31, 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 the Company (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the separation of the Company and the distribution of the Company’s common shares to American Express shareholders (the “Distribution”). Prior to the Distribution, the Company had been a wholly-owned subsidiary of American Express. For the periods preceding the Distribution, the Company 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, the Company made certain allocations of expenses that its management believes 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 February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140.”  SFAS No. 155 improves financial reporting by eliminating the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. It also improves financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact of SFAS No. 155 on the Company’s consolidated results of operations and financial condition.

On November 3, 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  FSP FAS 115-1 and FAS 124-1 address the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of loss. It also includes accounting considerations subsequent to the recognition of an

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2.              Recent Accounting Pronouncements (Continued)

other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. The effect of adopting FSP FAS 115-1 and FAS 124-1 on the Company’s consolidated results of operations and financial condition was not material.

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued 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 SFAS 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 is currently evaluating the impact of SOP 05-1 on the Company’s 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 is effective for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified after June 29, 2005. For general partners in all other limited partnerships, this guidance is 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 nonrecourse debt. The adoption of EITF 04-5 had no net effect on consolidated net income.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). This statement replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The effect of adopting SFAS 154 on the Company’s consolidated results of operations and financial condition was not material.

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 has continued to provide the Company with many of these services pursuant to a transition services agreement for transition periods of up to two years or more, if extended by mutual agreement of the Company and American Express. The Company will generally 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 include 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

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.              Separation and Distribution from American Express and Discontinued Operations (Continued)

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 assets, liabilities and operations of AEIDC in 2005 are shown as discontinued operations in the accompanying Consolidated Financial Statements. For the three months ended March 31, 2005, the discontinued operations of AEIDC included revenues and pretax income of $70 million and $13 million, respectively.

4.            Investments

The following is a summary of investments for the periods indicated:

Investments at March 31, 2006 included $178 million of trading securities of a consolidated limited partnership for which the Company is a general partner and was the result of the Company’s adoption of EITF 04-5 as of January 1, 2006. At December 31, 2005, prior to the Company’s adoption of EITF 04-5, investments included $153 million of trading securities of this limited partnership accounted for under the equity method.

Gross realized gains and losses on sales of Available-for-Sale securities and other-than-temporary impairment losses on Available-for-Sale securities included in net realized gains and losses were as follows:

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.              Debt

Debt at March 31, 2006 was as follows:

The floating rate revolving credit borrowings at March 31, 2006 are nonrecourse debt of limited partnerships for which the Company is the general partner, which was consolidated as a result of the Company’s adoption of EITF 04-5 as of January 1, 2006. This debt is related to certain property funds managed by Threadneedle Asset Management Holdings Ltd., of which $68 million is due in 2009 and $69 million is due in 2011. The debt will be extinguished with the cash flows from the sale of the investments held within the partnerships. Additionally, this debt is hedged using interest rate swaps which effectively convert the floating rates to a fixed rate.

The fixed and floating rate notes are related to a consolidated variable interest entity, or collateralized debt obligation (“CDO”), and are nonrecourse. These notes will be extinguished with the cash flows from the investments held within the portfolio of the CDO, which assets are held for the benefit of the CDO debt holders.

6.              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.

For the three months ended March 31, 2006, the Company recognized $24 million of expense related to awards under its 2005 ICP. For the three months ended March 31, 2005, the Company recognized expense of $14 million 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 $14 million during the three months ended March 31, 2005 related to a 2005 advisor incentive and retention 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 March 31, 2006, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 ICP was $205 million. That cost is expected to be recognized over a weighted-average period of 2.9 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 March 31, 2006 and December 31, 2005, treasury shares held for reissuance under the 2005 ICP were 513,671 shares and 107,504 shares, respectively.

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.              Retirement Plans and Other Profit Sharing Arrangements

The Company measures the obligations and related asset values for its pension and other postretirement benefit plans annually as of September 30. The components of the net periodic pension benefit cost for all defined benefit plans are as follows:

The net periodic postretirement benefit expense recognized for the three months ended March 31, 2006 and 2005 was $0.5 million and $0.6 million, respectively.

8.              Income Taxes

The Company’s effective tax rate was 24.0% for the three months ended March 31, 2006 compared to an effective tax rate on income before discontinued operations of 29.3% for the three months ended March 31, 2005. The lower effective tax rate primarily reflects lower nondeductible legal and regulatory cost of $3 million for the three months ended March 31, 2006 compared with $35 million for the three months ended March 31, 2005.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses realized for tax return purposes and capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. The deferred tax assets include $231 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 March 31, 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)

9.              Earnings per Common Share

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share:

Basic weighted average shares for the three months ended March 31, 2006 include 2.0 million of vested, nonforfeitable restricted stock units and 3.8 million of nonvested, restricted stock awards that are forfeitable but receive dividends. Potentially dilutive securities include non-qualified stock options and other share-based awards. The Company had no dilutive shares outstanding for the three months ended March 31, 2005, because all share-based compensation was granted on American Express common shares until September 30, 2005. Under the Company’s EBA with American Express, all American Express stock options and restricted stock awards held by the Company’s employees which were not vested on or before December 31, 2005 were substituted with an award based on the Company’s common stock.

10.       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. The two main operating segments are aligned with the financial solutions the Company offers to address its clients’ needs. 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.

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

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.       Segment Information (Continued)

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 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., 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 owned assets and net investment income the Company earns on assets on the Company’s consolidated balance sheets related to this segment.

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:

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AMERIPRISE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.       Segment Information (Continued)

The following is a summary of segment revenues, pretax segment income (loss) and a reconciliation to income (loss) before income tax provision and consolidated net income for the three months ended March 31:

11.       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, financial condition or credit ratings.

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

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11.       Contingencies (Continued)

compensation paid to its financial advisors; supervision of its financial advisors; operational and data privacy issues; and sales of, or brokerage or revenue sharing practices relating to, other companies’ REIT shares, mutual fund shares or other investment products.

Other open regulatory matters relate, among other things, to the portability (or network transferability) of the Company’s RiverSource mutual funds, the suitability of product recommendations made to retail financial planning clients, licensing matters related to sales by its financial advisors to out-of-state clients and net capital and reserve calculations. The Company has also received a number of inquiries in connection with its notification of the theft of a laptop computer containing certain client and financial advisor information. These open 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 Securities America, Inc. The number of regulatory reviews and investigations has increased in recent years with regard to many firms in the financial services industry, including the Company. The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.

In March 2006, a purported class action captioned Maddox, et al. v. Ameriprise Financial, Inc. (Case No. BC349215) was filed in the Superior Court of California, County of Los Angeles. The suit alleges that certain present and former employee advisors in California are entitled to overtime pay and other wages and that the Company made wrongful deductions from their wages. Plaintiffs allege that the Company’sactions were in violation of the California Labor Code and Business & Professional Code, and seek recovery of unspecified overtime and penalties.

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 22, 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 has moved to dismiss certain claims in the complaint.

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 the date on which a formal stipulation of settlement is signed. 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.

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.

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11.       Contingencies (Continued)

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.

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. Regarding revenue sharing, the plan will address how such funds will be distributed to benefit customers that purchased the particular mutual funds between 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.

During the course of 2005 the Company reached settlements with four states in regulatory matters regarding supervisory practices, financial advisor misappropriations of customer funds, 529 plan and Class B mutual fund sales practices, incentives for AEFA’s branded financial advisors to sell both its proprietary mutual funds and other companies’ mutual funds, the sale of proprietary mutual fund products to financial planning clients, and the matters raised in the SEC and NASD enforcement actions described above. As part of these state settlements the Company agreed, in certain instances, to provide restitution and to independent consultant review of certain of its practices and policies, including certain of its sales and advice supervisory practices. One such review was delivered in January 2006, and the Company has commenced implementation of the recommended enhancements. The Company will continue to meet its obligations under these settlements throughout 2006. There are pending investigations and demands made by regulators of other states regarding matters substantially similar to those which have settled, as well as the open matters described above, and there can be no assurance that any one or more of these investigations, demands and matters will settle or otherwise conclude without a material adverse effect on the Company’s consolidated results of operations, financial condition or credit ratings.

12.       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

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12.       Related Party Transactions (Continued)

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 $2 million during the three months ended March 31, 2005 in revenues from American Express. During the three months ended March 31, 2005, the Company received approximately $9 million 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.

13.       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. This authorization, effective until December 31, 2006, was fully utilized in connection with the purchase of the Company’s common stock from Berkshire, discussed in Note 12 above. 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 three months ended March 31, 2006, the Company completed a $275 million share repurchase representing 6.4 million shares of its common stock, as discussed in Note 12 above.

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 pursuant to the 2005 ICP are recorded as a treasury share purchase. During the three months ended March 31, 2006 and on a cumulative basis through March 31, 2006, the restricted shares forfeited under the 2005 ICP and recorded as treasury shares were 0.1 million shares. During the three months ended March 31, 2006, pursuant to the ICP, the Company reacquired 0.4 million shares of common stock through the surrender of restricted shares upon vesting and paid in the aggregate $15 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)

14.       Regulatory Requirements

Certain of the Company’s wholly-owned subsidiaries are subject to regulatory capital requirements. Actual capital and regulatory capital requirements for such subsidiaries were:

15.       Subsequent Events

On May 2, 2006, Ameriprise Financial and its subsidiary Ameriprise Trust Company entered into a definitive agreement with Wachovia Bank, N.A. (“Wachovia”) providing for the sale to Wachovia of the Company’s defined contribution plan recordkeeping business. Consummation of the transaction is subject to certain conditions, including clearance by the U.S. Department of Justice under the Hart-Scott-Rodino Act.

On May 5, 2006, the Company filed a “shelf” registration statement on Form S-3. The shelf filing provides the Company with the flexibility to sell any combination of debt securities, warrants, purchase contracts, securities units, preferred stock, depositary shares and common stock of the Company, as well as capital and common securities that may be issued by up to four Delaware statutory trusts sponsored by the Company. The debt securities that may be offered include senior debt, senior subordinated debt and junior subordinated debt.

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

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and related notes presented in Item 1. This discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under “Forward-Looking Statements.”  We believe it is useful to read our MD&A in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2006, as well as our current reports on Form 8-K and other publicly available information.

Overview

We are a leading financial planning and services company with more than 12,000 financial advisors and registered representatives that provide solutions for clients’ asset accumulation, income management and insurance protection needs. Our financial advisors deliver tailored solutions to clients through a comprehensive and personalized financial planning approach built on a long-term relationship with a knowledgeable advisor. We specialize in meeting the retirement-related financial needs of the mass affluent. We also offer asset management and 401(k) products and services to institutional clients. We have two main operating segments:  Asset Accumulation and Income (“AA&I”) and Protection, as well as a Corporate and Other (“Corporate”) segment. Our two main operating segments are aligned with the financial solutions we offer to address our clients’ needs. The products and services we provide retail customers, and to a lesser extent, institutional customers, are the primary source of our revenues and net income. Revenues and net income are significantly impacted by the relative investment performance, total value and composition of assets we manage and administer for our retail and institutional clients. These factors, in turn, are largely determined by overall investment market performance and the depth and breadth of our individual client relationships.

It is our management’s priority to increase shareholder value over a multi-year horizon by achieving our financial targets, on average and over time. We measure progress against these goals excluding the impact of the separation from American Express Company (“American Express”), specifically, discontinued operations, non-recurring separation costs and AMEX Assurance Company (“AMEX Assurance”). Our financial targets are:

•      Annual revenue growth of 6 to 8 percent,

•      Annual net income growth of 10 to 13 percent, and

•      Return on average equity of 12 to 15 percent.

Our revenues in the first quarter of 2006 were $1.9 billion, an increase of 10% over the same period last year after excluding $74 million of AMEX Assurance revenues from the prior year. Income before discontinued operations, AMEX Assurance and non-recurring separation costs rose 17% to $189 million in the first quarter of 2006 from $161 million in the first quarter of 2005. Adjusted return on equity for the trailing twelve months ended March 31, 2006 was 10.4% compared to adjusted return on equity of 10.2% for the year ended December 31, 2005. During 2006, as part of our capital redeployment plan, our management may evaluate the use of an earnings per common share measure as an additional financial target.

Our results for the first quarter of 2006 were attributable to three main drivers:

•      Mass affluent client acquisition,

•      Improving advisor productivity, and

•      Increasing our owned, managed and administered assets.

During the first quarter of 2006, the number of mass affluent clients with $100,000 or more in assets or comparable product values with us increased 11% from the same quarter in 2005. Our marketing programs were a key driver of this increase. We believe that our focus on personal relationships, together with our strengths in financial planning and product development, allows us to better address our clients’ financial needs, including the financial needs of our target market segment, the mass affluent. This focus also puts us in a strong position to capitalize on significant demographic and market trends, which we believe will continue to drive increased demand for financial planning and the other financial services we provide, particularly among the mass affluent.

For the first quarter of 2006, our gross dealer concession (“GDC”) per branded advisor, an internal measure of advisor productivity, increased by 17% over the same period last year. We attribute the increase in productivity to a favorable market

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Capital Structure

Prior to the Distribution, American Express provided a capital contribution to our company of approximately $1.1 billion to fund costs related to the Separation and Distribution, to adequately support strong debt ratings for our company on the Distribution and to indemnify us for the after-tax cost of $65 million with respect to the comprehensive settlement of a consolidated securities class action lawsuit. We replaced our inter-company indebtedness with American Express, initially with a bridge loan from selected financial institutions, and on November 23, 2005 through the issuance of $1.5 billion of unsecured senior debt securities with 5- and 10-year maturities.

Non-recurring Separation Costs

Since the Separation announcement through March 31, 2006, we have incurred $360 million of pretax non-recurring separation costs, and expect to incur a total of approximately $875 million. These costs include advisor and employee retention program costs, costs associated with establishing the Ameriprise Financial brand and costs to separate and reestablish our technology platforms. In addition, we have incurred higher ongoing expenses associated with establishing ourselves as an independent company.

Transfer of Businesses

Effective August 1, 2005, we transferred our 50% ownership interest and the related assets and liabilities of our subsidiary, American Express International Deposit Company (“AEIDC”) to American Express. The assets, liabilities and results of operations of AEIDC are classified as discontinued operations. Effective September 30, 2005, we entered into an agreement to sell our interest in the AMEX Assurance legal entity to American Express within two years after the Distribution for approximately $115 million. This transaction, combined with the ceding of all travel insurance and card related business to American Express effective July 1, 2005, created a variable interest entity for which we are not the primary beneficiary. Accordingly, we deconsolidated AMEX Assurance as of September 30, 2005.

Services and Operations Provided by American Express

American Express has historically provided to us a variety of corporate and other support services, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. Following the Distribution, American Express has continued to provide the Company with many of these services pursuant to a transition services agreement for transition periods of up to two years or more, if extended by mutual agreement of the Company and American Express. The Company will generally 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. Other than technology-related expenses, we currently expect that the aggregate costs we will pay to American Express under the transition services agreement for continuing services and the costs for establishing or procuring the services that have historically been provided to us by American Express will not significantly differ from the amounts reflected in our historical consolidated financial statements.

For the periods preceding the Distribution, we prepared our consolidated financial statements as if we had been a stand-alone company. In the preparation of our consolidated financial statements for those periods, we made certain allocations of expenses that our management believes to be a reasonable reflection of costs we would have otherwise incurred as a stand-alone company but were paid by American Express. Our consolidated financial statements presented may not be indicative of our consolidated results of operations, financial condition or cash flows in the future or what our consolidated results of operations, financial condition or cash flows would have been had we been a separate, stand-alone entity during all periods presented.

Recent Accounting Pronouncements

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

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Non-GAAP Financial Information

We follow accounting principles generally accepted in the United States (“GAAP”). The accompanying discussion includes information on both a GAAP and non-GAAP basis. The non-GAAP presentation in this report excludes items that are a direct result of the separation from American Express, which consist of discontinued operations, AMEX Assurance and non-recurring separation costs. Our non-GAAP financial measures, which we view as important indicators of financial performance, include:

•      Total expenses excluding separation costs and AMEX Assurance;

•      Adjusted earnings (adjusted to exclude AMEX Assurance and separation costs);

•      Income tax provision before discontinued operations and non-recurring separation costs excluding AMEX Assurance;

•      Income before discontinued operations and non-recurring separation costs excluding AMEX Assurance;

•      Separation costs, after-tax;

•      Pretax segment income excluding AMEX Assurance;

•      Pretax segment loss before separation costs; and

•      Return on average equity excluding the impact of the separation, or adjusted return on equity, using as the numerator adjusted earnings for the last twelve months and as the denominator a five point average of equity excluding both the assets and liabilities of discontinued operations and equity allocated to expected non-recurring separation costs as of the last preceding four quarters and the current quarter.

Management believes that the presentation of these non-GAAP financial measures excluding these specific income statement impacts best reflects the underlying performance of our ongoing operations and facilitates a more meaningful trend analysis. These non-GAAP measures are also used for goal setting, certain compensation related to our annual incentive award program and evaluating our performance on a basis comparable to that used by securities analysts.

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Consolidated Results of Operations

The following table presents our consolidated results of operations for the three months ended March 31, 2006 and 2005 and the impact of the deconsolidation of AMEX Assurance effective September 30, 2005 discussed previously:

The following non-GAAP measures are referred to in the accompanying discussion:

#       Variance of 100% or greater.

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Owned, Managed and Administered Assets

We earn management fees on our owned separate account assets based on the market value of assets held in the separate accounts. We record the income associated with our owned investments, including net realized gains and losses associated with these investments and other-than-temporary impairments of these investments, as net investment income. For managed assets, we receive management fees based on the value of these assets. We generally report these fees as management, financial advice and service fees. We may also receive distribution fees based on the value of these assets. We generally record fees received from administered assets as distribution fees.

Fluctuations in our owned, managed and administered assets impact our revenues. Our owned, managed and administered assets are impacted by market movements and net flows of client assets. Net flows of client assets are a measure of new sales of, or deposits into, our products offset by redemptions of, or withdrawals from, our products. Net flows can have a significant impact on our results of operations due to their impact on our revenues and expenses. The following table presents information regarding our owned assets, which are included in our consolidated balance sheets, and our managed and administered assets, which are not recorded on our consolidated balance sheets: