Ameriprise 2006 Annual Report Download - page 66

include management, financial advice and service fees,
distribution fees, net investment income and premiums.
Management, Financial Advice and Service Fees
Management, financial advice and service fees relate primarily
to fees earned on proprietary mutual funds, separate account
and wrap account assets, as well as fees from structured
investments and employee benefit plan and institutional invest-
ment management and administration services. The Company’s
management and risk fees are generally computed as a
contractual rate applied to the underlying asset values and are
generally accrued daily and collected monthly. Many of the
Company’s mutual funds have a performance incentive adjust-
ment (“PIA”). The PIA increases or decreases the level of
management fees received based on the specific fund’s relative
performance as measured against a designated external index.
The Company recognizes PIA fee revenue on a 12 month
rolling performance basis. Employee benefit plan and
institutional investment management and administration
services fees are negotiated and are also generally based on
underlying asset values. The Company may receive
performance-based incentive fees from structured investments
and hedge funds that it manages, which are recognized as
revenue at the end of the performance period. Fees from
financial planning and advice services are recognized when the
financial plan is delivered.
Distribution Fees
Distribution fees primarily include point-of-sale fees (such as
front-load mutual fund fees), premium expense charges on
fixed and variable universal life insurance and asset-based
fees (such as 12b-1 distribution and servicing-related fees)
that are generally based on a contractual fee as a percentage
of assets and recognized when earned. Distribution fees also
include fees received under marketing support arrangements for
sales of mutual funds and other products of other companies,
such as through the Company’s wrap accounts, 401(k) plans
and on a direct basis, as well as surrender charges on fixed and
variable universal life insurance and annuities.
Net Investment Income
Net investment income primarily includes interest income on
fixed maturity securities classified as Available-for-Sale,
commercial mortgage loans on real estate, policy loans, other
investments and cash and cash equivalents; mark-to-market of
trading securities and certain derivatives; pro rata share of net
income or loss of equity method investments in hedge funds;
and realized gains and losses on the sale of securities and
charges for securities determined to be other-than-temporarily
impaired. Interest income is accrued as earned using the
effective interest method, which makes an adjustment of the
yield for security premiums and discounts on all performing
fixed maturity securities classified as Available-for-Sale, exclud-
ing structured securities, and commercial mortgage loans on
real estate so that the related security or loan recognizes a
constant rate of return on the outstanding balance throughout
its term. For beneficial interests in structured securities, the
excess cash flows attributable to a beneficial interest over the
initial investment are recognized as interest income over the
life of the beneficial interest using the effective yield method.
Realized gains and losses on securities, other than trading
securities and equity method investments in hedge funds, are
recognized using the specific identification method on a trade
date basis and charges are recorded when securities are
determined to be other-than-temporarily impaired. Net invest-
ment income also includes interest expense on non-recourse
debt of a consolidated CDO and municipal bond structure.
Premiums
Premium revenues include premiums on auto and home
insurance and traditional life, disability income and long term
care insurance. Premiums on auto and home insurance are
net of reinsurance premiums and are recognized ratably over
the coverage period. Premiums on traditional life, disability
income and long term care insurance are net of reinsurance
ceded and are recognized as revenue when due.
Other Revenues
Other revenues include certain charges assessed on fixed and
variable universal life insurance and annuities, which consist of
cost of insurance charges, certain variable annuity guaranteed
benefit rider charges and administration charges against
contractholder account balances and are recognized as revenue
when assessed. Premiums paid by fixed and variable universal
life and annuity contractholders are considered deposits and
are not included in revenue. Other revenues related to universal
and variable universal life insurance and variable annuities
were $516 million, $462 million and $444 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
Other revenues also include revenues related to certain limited
partnerships that were consolidated beginning in 2006.
Expenses
Compensation and Benefits
Compensation and benefits represent compensation-related
expenses associated with employees and sales commissions
and other compensation paid to financial advisors and
registered representatives, net of amounts capitalized and
amortized as part of DAC.
The Company measures and recognizes the cost of share-
based awards granted to employees and directors based on
the grant-date fair value of the award. The fair value of each
option is estimated on the grant date using a Black-Scholes
option-pricing model and is charged to expense on a straight-
line basis over the vesting period. The Company recognizes
the cost of share-based awards granted to independent
contractors on a mark-to-market basis over the vesting period.
Interest Credited to Account Values
Interest credited to account values represents amounts earned
on fixed account values associated with fixed and variable
universal life and annuity contracts, equity indexed annuities and
investment certificates in accordance with contract provisions.
64 Ameriprise Financial, Inc. 2006 Annual Report