Ameriprise 2006 Annual Report Download - page 34

advisor and higher advisor assets under management.
Compensation and benefits-field in 2005 included $37 million
related to AMEX Assurance as well as the favorable impact of
a $9 million ceding commission related to the assumption of
errors and omissions (“E&O”) reserves from AMEX Assurance.
The increase in compensation and benefits–non-field was
primarily attributable to higher costs associated with being an
independent company, including higher management and
administration costs, as well as higher performance-based
compensation as a result of strong overall results as well as
investment management performance. In addition, we
recorded $15 million of severance and other costs related to
the sale of our defined contribution recordkeeping business
and $25 million of other severance costs primarily related to
our technology functions and ongoing reengineering initiatives
to improve efficiencies in our business.
Interest credited to account values reflects a decrease related
to annuities of $64 million partially offset by a net increase
related to certificates of $12 million. The decrease related to
annuities was primarily attributable to a continued decline in
fixed annuity account balances. Interest credited for certificates
increased as a result of higher short-term interest rates and,
to a lesser extent, stock market appreciation, but were
partially offset by a decrease in interest credited due to lower
average certificate balances. The related benefit from
economically hedging stock market certificates and equity
indexed annuities is reflected in net investment income.
Benefits, claims, losses and settlement expenses increased in
2006 primarily as a result of higher life and health related
expenses as well as a net increase in expenses related to
auto and home. These increases were partially offset by a
decrease in expenses related to our variable annuity products
of $11 million. VUL/UL expenses increased $37 million in
2006, of which $12 million was related to the DAC unlocking
reserve increase, $7 million was related to additional claims
expense in connection with the recognition of previously
deferred cost of insurance revenues and the balance was
primarily volume-related. Health related expenses increased
$21 million in 2006 and were primarily due to higher claims and
reserves related to long term care and disability income. In
2005, these expenses reflected the addition of $13 million to
long term care maintenance expense reserves. Auto and home
had a net increase in expenses of $11 million. Volume-driven
loss reserves attributable to higher average auto and home
policy counts were partially offset by a $21 million net
reduction in reserves primarily reflecting improvement in
2004 and 2005 accident year results. Expenses in 2005
included the assumption of $9 million in E&O reserves from
AMEX Assurance and a net reduction to AMEX Assurance
expenses of $12 million.
The increase in DAC amortization in 2006 reflects the impact of
DAC unlocking related to amortization in each year. In addition,
we had higher DAC amortization related to auto and home
insurance and variable annuities, partially offset by lower DAC
amortization related to our proprietary mutual funds. DAC
unlocking resulted in a net reduction in amortization of $38 million
in 2006 compared to a reduction of $67 million in 2005. DAC
amortization related to auto and home insurance products in
2006 included an adjustment to decrease DAC balances by
$28 million as well as $17 million of higher DAC amortization
primarily as a result of increased business and shorter
amortization periods compared to 2005. Continued growth in
our variable annuity business contributed to higher DAC
balances and a net increase in DAC amortization on variable
annuities of $16 million. DAC amortization related to proprietary
mutual funds declined $26 million as a result of a lower
proprietary mutual fund DAC balance and lower redemption
write-offs. AMEX Assurance had DAC amortization of
$17 million in 2005. The adoption of SOP 05-1 is expected
to result in an increase in DAC amortization in 2007. The
expected increase to amortization expense may vary depending
upon future changes in underlying valuation assumptions.
The increase in interest and debt expense in 2006 reflects
the higher cost of debt associated with establishing our long-
term capital structure after the Distribution. Our $1.6 billion
of intercompany debt with American Express prior to the
Distribution was replaced with $1.5 billion of senior notes. In
addition, we issued $500 million of junior notes in May 2006.
The senior and junior notes have higher interest costs than
the intercompany debt. Interest expense in 2006 on the
senior and junior notes was $75 million and $23 million,
respectively, compared to interest expense in 2005 of
$53 million on the intercompany debt and $8 million on the
senior notes. Also included in interest and debt expense in
2006 is $6 million of interest on non-recourse debt of certain
consolidated limited partnerships.
Separation costs incurred in 2006 were primarily associated
with separating and reestablishing our technology platforms
and establishing the Ameriprise Financial brand. Separation
costs incurred in 2005 were primarily associated with advisor
and employee retention programs, rebranding and technology.
We expect to continue to incur non-recurring separation costs
through the end of 2007, which will include the remaining
technology costs.
32 Ameriprise Financial, Inc. 2006 Annual Report