Ameriprise 2007 Annual Report Download - page 42

business in 2006 increased $168 million over 2005, reflecting strong
net inflows in wrap accounts and strong growth in sales of direct
investments as well as market appreciation. The growth in brokerage
revenues was partially offset by a decline in distribution fees related to
RiverSource mutual funds of $15 million largely due to lower mutual
fund asset balances. This shift is driven by clients migrating from
transaction-based fee arrangements to asset-based fee arrangements,
where the asset-based fees are paid over time and are included in
management and financial advice fees. Distribution fees also
increased due to an increase in 12b-1 fees which reflected higher
levels of mutual fund assets.
Net investment income for the year ended December 31, 2006
decreased $25 million from the year ended December 31, 2005,
primarily driven by lower average account balances in fixed annuities,
the fixed portion of variable annuities and certificates. Included in
net investment income were net realized investment gains of
$51 million in 2006 compared to $66 million in 2005. Net realized
investment gains in 2006 included a gain of $23 million related to
recoveries on WorldCom securities. Net realized investment gains in
2005 included a $36 million net gain on the sale of our retained
interests in a collateralized debt obligation (“CDO”) securitization
trust. Net gains on trading securities and equity method investments
in hedge funds were $20 million higher in 2006.
Premiums in 2006 were impacted by the deconsolidation of AMEX
Assurance, which had premiums of $127 million in 2005. This
impact was offset by premium increases of $45 million in auto and
home and $27 million in disability income and long term care insur-
ance. Disability income and long term care premiums in 2006
included an increase in premiums of $15 million as a result of a
review of our long term care reinsurance arrangement during the
third quarter of 2006.
Other revenues in 2006 included $77 million related to the consoli-
dation of certain limited partnerships holding client assets we manage
and $66 million from the sale of our defined contribution record-
keeping business. The expenses related to the consolidated limited
partnerships and the sale of our defined contribution recordkeeping
business are primarily reflected in general and administrative expense.
Other revenues in 2006 also reflect $18 million from recognizing
previously deferred cost of insurance revenues. The balance of the
increase in other revenues was primarily driven by increases in cost of
insurance revenues for VUL and UL products and in variable annuity
living benefit rider fees.
The increase in banking and deposit interest expense was driven by
increases in interest expense related to the debt of a variable interest
entity and bank deposits acquired in the second half of 2006. 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.
Expenses
Total expenses reflect the impact of DAC unlocking. In 2006, we
recorded a net benefit from DAC unlocking of $25 million, primarily
comprised of a $38 million benefit in DAC amortization expense and
a $12 million increase in benefits, claims, losses and settlement
expenses. DAC unlocking in 2005 resulted in a $67 million reduc-
tion to DAC amortization.
The DAC unlocking net benefit in 2006 primarily reflected a
$25 million benefit from modeling increased product persistency and
a $15 million benefit from modeling improvements in mortality,
offset by negative impacts of $8 million from modeling lower variable
product fund fee revenue and $8 million from model changes related
to variable life second to die insurance.
The DAC unlocking net benefit in 2005 primarily reflected a
$32 million benefit from modeling improvements in mortality, a
$33 million benefit from lower surrender rates than previously
assumed and higher associated surrender charges and a $2 million net
benefit from other changes in DAC valuation assumptions.
The increase in distribution expenses primarily reflects higher
commissions paid driven by overall business growth as reflected by
the 18% growth in gross dealer concession (“GDC”) and higher
assets under management. Distribution expenses in 2005 included
$34 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.
Interest credited to fixed accounts reflects a decrease of $64 million
related to a continued decline in fixed annuity account balances.
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
40 Ameriprise Financial 2007 Annual Report