Ameriprise 2005 Annual Report Download - page 48

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46 |Ameriprise Financial, Inc.
respectively, of below investment grade securities (excluding net
unrealized appreciation and depreciation), which were recorded as
a result of the adoption of FIN 46. These assets are not available
for our general use as they are for the benefit of the CDO-debt
holders, and reductions in value of such investments will be fully
absorbed by the third party investors. Excluding the impacts of FIN
46, investments include $2.6 billion at December 31, 2005 and
$2.8 billion at December 31, 2004 of below investment grade
securities (excluding net unrealized appreciation and deprecia-
tion). They represent 6.7% of our investment portfolio at
December 31, 2005, down from 7.2% at December 31, 2004.
Non-performing assets relative to invested assets (excluding
short-term cash positions) were not substantial at both
December 31, 2005 and December 31, 2004.
As of December 31, 2005, we continued to hold investments
in CDOs that we manage that were not consolidated pursuant
to the adoption of FIN 46 as we were not considered the pri-
mary beneficiary. As a condition to managing certain CDOs, we
are generally required to invest in the residual or “equity”
tranche of the CDO, which is typically the most subordinated
tranche of securities issued by the CDO entity. As an investor
in the residual tranche of CDOs, our return correlates to the
performance of portfolios of high-yield bonds and/or bank
loans comprising the CDOs. Our exposure as an investor is
limited solely to our aggregate investment in the CDOs, and we
have no obligations or commitments, contingent or otherwise,
that could require any further funding of such investments. As
of December 31, 2005, the carrying values of the CDO resid-
ual tranches we manage were $37 million.
Our exposure to CDOs and other structured investments, namely
SLTs, was significantly higher in prior periods. During the second
quarter of 2005, we sold all of our retained interest in a CDO-
related securitization trust and realized a net pretax gain of $36
million. The carrying value of this retained interest was $705 mil-
lion at December 31, 2004, of which $523 million was
considered investment grade. Additionally, we have liquidated our
interest in all three SLTs which were previously consolidated
under FIN 46. One SLT was liquidated in 2004, resulting in a
cumulative net pretax charge of $24 million during the year
ended December 31, 2004 and the other two SLTs were liqui-
dated in 2004 and 2005 resulting in a $4 million pretax charge
in 2004 and a $14 million pretax gain for the year ended
December 31, 2005. There is no remaining exposure related to
these SLTs as of December 31, 2005.
Separate account assets represent funds held for the exclusive
benefit of variable annuity and variable life insurance contract
holders. These assets are generally carried at market value, and
separate account liabilities are equal to separate account assets.
We earn investment management, administration and other fees
from the related accounts. The increase in separate account
assets and liabilities to $41.6 billion as of December 31, 2005
compared to $35.9 billion as of December 31, 2004, resulted
from net inflows of $3.2 billion and market appreciation and for-
eign currency translation of $2.5 billion.
We hold reserves for current and future obligations that are prima-
rily related to fixed annuities, certain guaranteed payments under
variable annuities, face-amount certificates and life, disability and
long-term care insurance. Reserves related to fixed annuities,
guarantees under variable annuities and life, disability and long-
term care insurance are reflected in future policy benefits and
claims in our consolidated balance sheets. We record reserves
associated with our obligations related to face-amount certificates
under investment certificate reserves in our consolidated balance
sheets. Reserves for fixed annuities, universal life contracts and
face-amount certificates are equal to the underlying contract
accumulation values. Reserves for other life, disability and long-
term care insurance products are based on various assumptions,
including mortality rates, morbidity rates and policy persistency.
Liquidity and Capital Resources
Our legal entity organizational structure has an impact on our
ability to meet cash flow needs as an organization. Following is