Ameriprise 2006 Annual Report Download - page 87

Investment Certificates
The Company offers fixed rate investment certificates primarily
in amounts ranging from $1,000 to $1 million with terms
ranging from three to 36 months. The Company generally
invests the proceeds from these certificates in fixed and
variable rate securities. The Company may hedge the interest
rate risks under these obligations with derivative instruments.
As of December 31, 2006 and 2005, there were no outstanding
derivatives to hedge these interest rate risks.
Certain investment certificate products have returns tied to
the performance of equity markets. The Company guarantees
the principal for purchasers who hold the certificate for the full
52-week term and purchasers may participate in increases in
the stock market based on the S&P 500 Index, up to a maxi-
mum return. Purchasers can choose 100% participation in the
market index up to the cap or 25% participation plus fixed
interest with a combined total up to the cap. Current in-force
certificates have maximum returns of 6% or 7%. The equity
component of these certificates is considered an embedded
derivative and is accounted for separately. The change in fair
values of the embedded derivative reserve is reflected in
interest credited to account values. As a means of economically
hedging its obligation under the principal guarantee and stock
market return provisions, the Company purchases and writes
index options and enters into futures contracts. Changes in the
fair value of these hedge derivatives are included in net
investment income. The notional amounts and fair value
assets (liabilities) of these options and futures were as follows:
December 31,
2006 2005
Notional Fair Notional Fair
Amount Value Amount Value
(in millions)
Purchased options
and futures $ 901 $ 104 $ 1,040 $ 74
Written options (962) (56) (1,094) (38)
Certificates Marketed through American Express
During the third quarter 2005, the Company agreed with
American Express Bank Limited (“AEB”), a subsidiary of
American Express, to execute an orderly wind-down of the
certificate business marketed through AEB and American Express
Bank International (“AEBI”). This agreement was effected
through amendments to the existing contracts with AEB and
AEBI. Under these amendments, as of October 1, 2005, AEB
and AEBI no longer market or offer certificate products of the
Company. However, compensation at reduced rates will
continue to be paid to AEB and AEBI under the agreements
until the earlier of the date upon which the business sold or
marketed previously by AEB and AEBI no longer remains in
effect or termination of the agreements.
15. Debt
Debt and the stated interest rates were as follows:
Outstanding Stated
Balance Interest Rate
December 31, December 31,
2006 2005 2006 2005
(in millions)
Senior notes due 2010 $ 800 $ 800 5.4% 5.4%
Senior notes due 2015 700 700 5.7 5.7
Junior subordinated
notes due 2066 500 —7.5 —
Medium-term notes
due 2006 —50 —6.6
Fixed and floating rate
notes due 2011:
Floating rate
senior notes 85 151 5.9 5.2
Fixed rate notes 85 79 8.6 8.6
Fixed rate senior notes 46 46 7.2 7.2
Fixed rate notes 9713.3 13.3
Total $ 2,225 $ 1,833
On November 23, 2005, the Company issued $1.5 billion of
unsecured senior notes (“senior notes”) including $800 million
of five-year senior notes which mature November 15, 2010 and
$700 million of 10-year senior notes which mature
November 15, 2015, and incurred debt issuance costs of
$7 million. Interest payments are due semi-annually on May 15
and November 15. The Company may redeem the senior notes,
in whole or in part, at any time at its option at the redemption
price specified in the prospectus supplement filed with the SEC
on November 22, 2005. The proceeds from the issuance were
used to repay the approximately $1.4 billion balance
outstanding on a bridge loan and to provide capital for other
general corporate purposes.
In June 2005, the Company entered into interest rate swap
agreements totaling $1.5 billion which qualified as cash flow
hedges related to planned debt offerings. The Company
terminated the swap agreements in November 2005 when the
senior notes were issued. The related gain on the swap agree-
ments of $71 million was recorded to accumulated other
comprehensive income and is being amortized as a reduction
to interest expense over the period in which the hedged cash
flows are expected to occur. Considering the impact of the
hedge credits, the effective interest rates on the senior notes
due 2010 and 2015 are 4.8% and 5.2%, respectively.
On May 26, 2006, the Company issued $500 million of
unsecured junior subordinated notes (“junior notes”) and
incurred debt issuance costs of $6 million. For the initial 10-year
period, the junior notes carry a fixed interest rate of 7.5% payable
semi-annually in arrears on June 1 and December 1. From
June 1, 2016 until the maturity date, interest on the junior notes
will accrue at an annual rate equal to the three-month LIBOR plus
a margin equal to 290.5 basis points, payable quarterly in
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Ameriprise Financial, Inc. 2006 Annual Report