Ameriprise 2005 Annual Report Download - page 78

76 |Ameriprise Financial, Inc.
Trading Securities and Equity Method Investments in
Hedge Funds
Trading securities and equity method investments in hedge
funds are primarily comprised of seed money investments in
mutual funds and hedge funds managed by the Company, as
well as publicly traded mutual funds and other hedge funds
managed by third parties. There were $27 million, $50 million,
and $71 million of net pretax gains for the years ended
December 31, 2005, 2004 and 2003, respectively, related to
trading securities and equity method investments in hedge
funds held at each balance sheet date.
4. Variable Interest Entities
The variable interest entities for which the Company was con-
sidered the primary beneficiary and which were consolidated
beginning December 31, 2003, relate to structured invest-
ments, including a CDO and three SLTs, which were both
managed and partially-owned by the Company. The consoli-
dated CDO contains debt issued to investors that is
non-recourse to the Company and solely supported by a portfo-
lio of high-yield bonds and loans. The Company manages the
portfolio of high-yield bonds and loans for the benefit of CDO
debt held by investors and retains an interest in the residual
and rated debt tranches of the CDO structure. The consoli-
dated SLTs provide returns to investors primarily based on the
performance of an underlying portfolio of high-yield loans
which were managed by the Company. One of the SLTs origi-
nally consolidated was liquidated in 2004 and the remaining
two SLTs were liquidated in 2005 resulting in no SLTs being
consolidated as of December 31, 2005. The 2005 and 2004
results of operations (reported in net investment income)
include income of $14 million, compared to non-cash charges
of $28 million, respectively, related to the liquidation of the
SLTs. The $28 million non-cash charge in 2004 was comprised
of $24 million pretax, related to the complete liquidation of
one SLT, and $4 million pretax, related to the then expected
impact of liquidating the two remaining SLTs.
Ongoing results of operations related to the consolidated CDO
are non-cash items and primarily relate to interest earned on
the portfolio of high-yield bonds, gains and losses on the sale
of bonds and loans and interest paid on the CDO debt and, to
a much lesser extent, interest income on loans and provision
expense for loan loss reserves. Changes in value of the portfo-
lio of high-yield bonds will be reflected within other
comprehensive income (loss) unless a decline in value is
determined to be other-than-temporary, in which case a charge
will be recorded within the results of operations. These
impacts will be dependent upon market factors during such
time and will result in periodic net operating income or
expense. The Company expects, in the aggregate, such operat-
ing income or expense related to the CDO, including the
December 31, 2003 FIN 46 implementation non-cash charge
of $88 million pretax ($57 million after-tax), to reverse them-
selves over time as the structure matures, because the debt
issued to the investors in the consolidated CDO is non-
recourse to the Company, and further reductions in the value
of the related assets will be absorbed by the third party
investors.
The following table presents the consolidated assets, essen-
tially all of which are restricted, and other balances related to
these entities at December 31:
2005 2004
(in millions)
Restricted cash $– $543
Available-for-Sale securities(a) 214 249
Derivative financial instruments(b) –43
Loans and other assets 10 10
Total assets $224 $845
Debt $283 $317
Deferred tax liability 38
Other liabilities –119
Total liabilities $286 $444
(a) Securities are classified as Available-for-Sale and include $8 million
($5 million after-tax) and $22 million ($14 million after-tax) of unreal-
ized appreciation as of December 31, 2005 and 2004, respectively.
(b) Represents the estimated fair market value of the total return swap
derivatives related to the consolidated SLTs, which had a notional
amount of $1.8 billion as of December 31, 2004.
The Company has other significant variable interests for which
it is not the primary beneficiary and, therefore, does not con-
solidate. These interests are represented by carrying values of
$37 million of CDO residual tranches managed by the
Company, $178 million of affordable housing partnerships and
approximately $115 million related to AMEX Assurance. For
the CDOs managed by the Company, the Company has evalu-
ated its variability in losses and returns considering its
investment levels, which are less than 50% of the residual
tranches, and the fee received from managing the structures
and has determined that consolidation is not required. The
Company manages approximately $6.0 billion of underlying
collateral within the CDO structures it manages. The
Company’s maximum exposure to loss as a result of its invest-
ment in these entities is represented by the carrying values.
The Company is a limited partner in affordable housing part-
nerships in which the Company has a less than 50% interest
in the partnerships and receives the benefits and accepts the
risks consistent with other limited partners. In the limited
cases in which the Company has a greater than 50% interest
in affordable housing partnerships, it was determined that the
relationship with the general partner is an agent relationship
and the general partner was most closely related to the part-
nership as it is the key decision maker and controls the
operations. The Company’s maximum exposure to loss as a
result of its investment in these entities is represented by the
carrying values.