Ameriprise 2006 Annual Report Download - page 98

for the rider using actuarial models, which simulate various
economic scenarios. The Company economically hedges the
exposure related to the GMWB provision using various equity
futures, interest rate swaps and structured derivatives.
The Company earns fees from the management of equity
securities in variable annuities, variable insurance, its own
mutual funds and other managed assets. The amount of fees
is generally based on the value of the portfolios, and thus is
subject to fluctuation with the general level of equity market
values. To reduce the sensitivity of the Company’s fee revenues
to the general performance of equity markets, the Company
from time to time enters into various combinations of financial
instruments such as equity market put and collar options that
mitigate the negative effect on fees that would result from a
decline in the equity markets.
The Company enters into financial futures and equity swaps to
manage its exposure to price risk arising from seed money
investments made in proprietary mutual funds for which the
related gains and losses are recorded currently in earnings.
The futures contracts generally mature within four months and
the related gains and losses are reported currently in
earnings. As of December 31, 2006 and 2005, the fair value
of the financial futures and equity swaps was not significant.
Embedded Derivatives
The equity component of the annuity and investment certificate
product obligations are considered embedded derivatives.
Additionally, certain annuities contain GMWB and GMAB
provisions, which are also considered embedded derivatives.
The fair value of the embedded derivatives is included as part
of the stock market investment certificate reserves or equity
indexed annuities. The changes in fair values of the embedded
derivatives are reflected in the interest credited to account values
as it relates to annuity and investment certificate products
with returns tied to the performance of equity markets. The
changes in fair values of the GMWB and GMAB embedded
derivatives are reflected in benefits, claims, losses and settle-
ment expenses. At December 31, 2006 and 2005, the total
fair value of these instruments, excluding the host contract,
was a net liability of $81 million and $84 million, respectively.
The Company has also recorded derivative liabilities for the fair
value of call features embedded in certain fixed-rate corporate
debt investments. These liabilities were $7 million and $6 million
at December 31, 2006 and 2005, respectively. The change in fair
values of these calls is reflected in net investment income.
22. Other Expenses
Other expenses consisted of the following:
Years Ended December 31,
2006 2005 2004
(in millions)
Professional and consultant fees $ 391 $ 327 $ 234
Information technology and
communications 157 220 284
Facilities and equipment 181 143 142
Advertising and promotion 107 125 154
Legal and regulatory 157 204 87
Travel and meetings 90 82 66
Printing and distribution 91 81 85
Minority interest 65 ——
Other 159 237 283
Other expenses capitalized as DAC (311) (317) (293)
Total $ 1,087 $ 1,102 $ 1,042
23. Income Taxes
The components of income tax provision on income before dis-
continued operations and accounting change were as follows:
Years Ended December 31,
2006 2005 2004
(in millions)
Current income tax:
Federal $84 $ 121 $ 286
State and local 19 17 14
Foreign 39 15 21
Total current income tax 142 153 321
Deferred income tax:
Federal 51 36 (26)
State and local (16) ——
Foreign (11) (2) (8)
Total deferred income tax 24 34 (34)
Total income tax provision $ 166 $ 187 $ 287
The geographic sources of income before income tax provision,
discontinued operations and accounting change were as
follows:
Years Ended December 31,
2006 2005 2004
(in millions)
United States $ 705 $ 687 $ 1,071
Foreign 92 58 41
Total $ 797 $ 745 $ 1,112
96 Ameriprise Financial, Inc. 2006 Annual Report