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PROSPECTUS SUPPLEMENT

Filed Pursuant to Rule 424(b)(5)
Registration No. 333-128834

PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 31, 2005

$1,500,000,000

AMERIPRISE FINANCIAL LOGO

5.35% Senior Notes due 2010
5.65% Senior Notes due 2015

        We will pay interest on the notes every May 15 and November 15 beginning May 15, 2006. We may redeem the notes, in whole or in part, at any time at our option at the redemption price specified herein. For a more detailed description of the notes, see "Description of the Notes" beginning on page S-9.

        We will only issue the notes in book-entry form registered in the name of the nominee of The Depository Trust Company. Beneficial interests in the notes will be shown on, and transfers of such interest will be made only through, records maintained by The Depository Trust Company and its participants, including Clearstream International and the Euroclear System. Except as described in this prospectus supplement, we will not issue notes in definitive form.

        The underwriters are offering the notes for sale both inside and outside the United States. We do not intend to apply to list the notes on any securities exchange. Currently, there is no public market for the notes.

        See "Risk Factors" beginning on page S-3 for a discussion of certain risks that you should consider in connection with an investment in the notes.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus to which it relates is truthful or complete. Any representation to the contrary is a criminal offense.


 
  Price to Public(1)
  Underwriting
Discounts and
Commissions

  Proceeds to
Ameriprise
Financial(2)


5.35% Senior Notes due 2010   99.997%   .35%   99.647%

5.65% Senior Notes due 2015   100.00%   .45%   99.550%

Total   $1,499,976,000   $5,950,000   $1,494,026,000

(1)
Plus accrued interest, if any, from November 23, 2005.
(2)
Before expenses in connection with the offering.

        Delivery of the notes in book-entry form only through the facilities of The Depository Trust Company, will be made on or about November 23, 2005.

Joint Book-Running Managers

Citigroup   Goldman, Sachs & Co.   JPMorgan

Co-Managers


Banc of America Securities LLC
Utendahl Capital Group, LLC
Wachovia Securities

November 18, 2005


        We have not, and the underwriters have not, authorized any dealer, salesperson or other person to give any information or to make any representation other than those contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. You must not rely upon any information or representation not contained or incorporated by reference in this prospectus supplement or the accompanying prospectus. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the registered securities to which they relate, nor do this prospectus supplement and the accompanying prospectus constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and the accompanying prospectus is accurate as of the dates on their respective covers. When we deliver this prospectus supplement and the accompanying prospectus or make a sale pursuant to this prospectus supplement and the accompanying prospectus, we are not implying that the information is current as of the date of the delivery or sale.



TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT

 
  Page
About this Prospectus Supplement   ii
Summary of the Offering   S-1
Risk Factors   S-3
Recent Developments   S-4
Use of Proceeds   S-5
Ratio of Earnings to Fixed Charges   S-5
Capitalization   S-6
Summary Consolidated Financial Data   S-7
Description of the Notes   S-9
Certain United States Federal Income Tax Considerations   S-12
Underwriting   S-15
Legal Matters   S-16
Incorporation of Certain Documents by Reference   S-17


PROSPECTUS

 
  Page
About this Prospectus   1
Where You Can Find More Information   1
Ameriprise Financial, Inc.   2
Ratio of Earnings to Fixed Charges   3
Forward-Looking Statements   3
Use of Proceeds   4
Description of Senior Debt Securities   4
Plan of Distribution   11
ERISA Matters   13
Legal Matters   15
Experts   15

        Appendix A—Information Statement of Ameriprise Financial, Inc. dated September 12, 2005.

i



ABOUT THIS PROSPECTUS SUPPLEMENT

        This document has three parts. The first part consists of this prospectus supplement, which describes the specific terms of this offering and the notes offered. The second part, the accompanying prospectus, provides more general information, some of which may not apply to this offering. If the description of the offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.

        The third part of this prospectus supplement (Appendix A) is a copy of our information statement dated September 12, 2005 prepared in connection with the distribution of our common stock by American Express Company on September 30, 2005. The information statement was included as an exhibit to our Current Report on Form 8-K filed on September 16, 2005.

        Before purchasing any notes, you should carefully read both this prospectus supplement, the accompanying prospectus and the information statement, together with the additional information described under the heading "Incorporation of Certain Documents by Reference" in this prospectus supplement.

        Unless otherwise indicated, all references in this prospectus supplement to "we," "our" or "Ameriprise Financial" refer to Ameriprise Financial, Inc. and its consolidated subsidiaries.

ii



SUMMARY OF THE OFFERING

        The following summary highlights information contained elsewhere in this prospectus supplement. You should read this summary in conjunction with the more detailed information appearing elsewhere in this prospectus supplement and accompanying prospectus.

Issuer   Ameriprise Financial, Inc.

Securities Offered

 

$800,000,000 principal amount of 5.35% Senior Notes due 2010 and $700,000,000 principal amount of 5.65% Senior Notes due 2015.

Use of Proceeds

 

We intend to use the net proceeds of this offering to refinance a $1.35 billion, 364-day bridge facility and the remainder for general corporate purposes. Net proceeds to us will be approximately $1,492,800,000, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Maturity Date

 

2010 notes: November 15, 2010
2015 notes: November 15, 2015

Interest Rate and Payment Dates

 

2010 notes: 5.35% payable May 15 and November 15 of each year, beginning on May 15, 2006
2015 notes: 5.65% payable May 15 and November 15 of each year, beginning on May 15, 2006

Ranking

 

Each series of notes will be general unsecured senior obligations of our company and will rank equally in right of payment with our existing and future unsubordinated debt. The notes will be structurally subordinated to all future and existing obligations of our subsidiaries.

Further Issuances

 

We may create and issue further notes ranking equally and ratably with the notes in all respects, so that such further notes shall be constituted and form a single series with the relevant series of notes and shall have the same terms as to status, redemption or otherwise as the relevant series of notes.

Redemption

 

We may redeem the notes, in whole or in part, at any time at our option prior to their respective maturities at prices equal to the greater of the principal amount thereof and the sum of the present values of the remaining scheduled payments of principal and interest in respect of the notes to be redeemed discounted to the date of redemption as described on page S-10 under "Description of the Notes—Optional Redemption," plus, in each case, accrued interest.

Markets

 

The notes are offered for sale in those jurisdictions both inside and outside the United States where it is legal to make such offers. See "Underwriting" beginning on page S-15.

Listing

 

We are not applying to list the notes on any securities exchange.

S-1



Rating

 

The notes have been assigned ratings of "A-" by Standard & Poor's Rating Services, "A3" by Moody's Investor Service, "A-" by Fitch Ratings and "a-" by A.M. Best. These ratings are not recommendations to buy, sell or hold the notes and are subject to revision or withdrawal by the rating agencies.

Form and Denomination

 

The notes will be issued in fully registered form in denominations of $2,000 and in integral multiples of $1,000 in excess of $2,000.

Trustee

 

The trustee for the notes is U.S. Bank National Association.

Governing Law

 

The indenture and the notes will be governed by the laws of the State of New York.

        For a more complete description of the terms of the notes, see "Description of the Notes" beginning on page S-9.

S-2



RISK FACTORS

        You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Our business is subject to a number of risks that may adversely affect our results.

        Our business is affected by many factors that may cause our business, financial condition or results of operations in the future to differ, possibly materially, from our current expectations or forecasts. A number of the factors that may affect our future results are discussed in our information statement, which is included as Appendix A to this prospectus supplement, in particular in the sections captioned "Risk Factors," "Our Business," "Our Business—Legal Proceedings," "Special Note About Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Changes in our credit ratings or the debt markets could adversely affect the price of the notes.

        The price for the notes depends on many factors, including:

        The condition of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Such fluctuations could have an adverse effect on the price of the notes.

        In addition, credit rating agencies continually review their ratings for the companies that they follow, including us. The credit rating agencies also evaluate a company's industry as a whole and may change their credit rating for us based on their overall view of our industry. A negative change in our rating could have an adverse effect on the price of the notes.

The notes will be unsecured and structurally subordinated to our subsidiaries' indebtedness.

        The notes are not guaranteed by any of our subsidiaries. As a result, liabilities, including indebtedness or guarantees of indebtedness, of each of our subsidiaries will rank effectively senior to the indebtedness represented by the notes, to the extent of such subsidiary's assets. This means that creditors of our subsidiaries will be paid from their assets before holders of the notes would have any claims to those assets. As of September 30, 2005, our subsidiaries had indebtedness of $310 million outstanding.

The notes will be effectively subordinated to our future secured indebtedness.

        The notes are not secured by any of our assets. As a result, our secured indebtedness will rank effectively senior to the indebtedness represented by the notes, to the extent of the value of the assets securing such indebtedness. As of September 30, 2005, we had no secured indebtedness and we have no present intention to incur significant amounts of secured indebtedness in the future. The indenture permits us to incur secured indebtedness in the future without equally and ratably securing the notes.

S-3


There are no financial covenants in the indenture.

        Neither we nor any of our subsidiaries are restricted from incurring additional debt or other liabilities, including secured debt or additional senior debt, under the indenture. If we incur additional debt or liabilities, our ability to pay our obligations on the notes could be adversely affected. We expect that we will from time to time incur additional debt and other liabilities. In addition, we are not restricted from paying dividends or issuing or repurchasing our securities under the indenture.

        There are no financial covenants in the indenture. You are not protected under the indenture in the event of a highly leveraged transaction, reorganization, change of control, restructuring, disposition of significant subsidiaries, merger or similar transaction that may adversely affect you, except to the extent described under "Description of Senior Debt Securities—Consolidation, Merger and Conveyance of Assets" in the accompanying prospectus.

An active trading market may not develop for the notes.

        There is no existing trading market for the notes and we do not expect to list them on any securities exchange or on the Nasdaq National Market. Although we have been informed by the underwriters that they intend to make a market in the notes after this offering is completed, they have no obligation to do so and may cease their market-making at any time without notice. In addition, market-making will be subject to the limits imposed by the Securities Act and the Exchange Act. If no active trading market develops, you may be unable to resell your notes at any price or at their fair market value.


RECENT DEVELOPMENTS

        Effective as of the close of business on September 30, 2005, American Express Company (American Express) completed the separation of our company and the distribution of our common shares to American Express shareholders (the Distribution). The Distribution was effectuated through a pro-rata dividend to American Express shareholders consisting of one share of Ameriprise common stock for every 5 shares of American Express common stock owned by its shareholders on September 19, 2005, the record date.

        We reached a comprehensive settlement regarding the consolidated securities class action lawsuit filed against our company, American Express and affiliates in October 2004 called, "In re American Express Financial Advisors Securities Litigation." The settlement, under which we deny any liability, includes a one-time payment of $100 million to the class members. The settlement is subject to court approval. The class members include individuals who purchased mutual funds in our Preferred Provider Program, Select Group Program, or any similar revenue sharing program; purchased mutual funds sold under the American Express® or AXP® brands or purchased for a fee financial plans or advice from our company between March 10, 1999 and through the date on which a formal stipulation of settlement is signed. Our litigation reserves are sufficient to cover the contingent liability for the settlement. The reserve for this litigation was increased by $70 million pretax, $46 million after-tax, at September 30, 2005 from the reserve at June 30, 2005. The impact of this reserve increase is reflected as an expense on our statement of operations for the quarter ended September 30, 2005.

S-4



USE OF PROCEEDS

        We estimate that the net proceeds to us from this offering will be approximately $1,492,800,000, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to refinance a $1.35 billion, 364-day bridge facility we entered into on September 28, 2005 and for general corporate purposes. The loan under the bridge facility bears interest at a floating rate based on a spread over one-, two-, three- or six-month LIBOR, as we may elect. The proceeds from the bridge facility were used to replace our intercompany debt payable to American Express Company.


RATIO OF EARNINGS TO FIXED CHARGES

        The following table sets forth our ratio of earnings to fixed charges for the periods indicated on an actual basis and pro forma basis that gives effect to the issuance of the notes offered hereby and repayment of the $1.35 billion bridge facility:

 
   
   
  Year Ended December 31,
 
  Nine Months Ended
September 30,
2005

 
  Pro Forma
   
   
   
   
   
 
  Actual
 
  Pro Forma
   
 
  Actual
  2004
  2004
  2003
  2002
  2001
  2000
Ratio of earnings to fixed charges   7.9x   9.4x   11.1x   14.5x   13.0x   13.9x   1.4x   24.3x

        The earnings component of our ratio of earnings to fixed charges is comprised of income before income tax provision, discontinued operations and accounting change plus interest and debt expense, interest portion of rental expense, amortization of capitalized interest and adjustments related to equity investees and minority interests in consolidated entities. The fixed charges component of our ratio of earnings to fixed charges is comprised of interest and debt expense, interest portion of rental expense and capitalized interest. The formula for this ratio calculation is earnings divided by fixed charges, each computed as described above.

        The pro forma ratio of earnings to fixed charges gives effect to the use of $1.35 billion of proceeds from the debt offering to refinance $1.35 billion of debt outstanding during 2004 and for the nine months ended September 30, 2005. This pro forma calculation is based on a blended interest rate on the notes of 5.06%, net of hedging transactions. The pro forma computation is consistent with the historical ratio of earnings to fixed charges described above, except that the pro forma adjustments reflect the difference between the historical amount of interest incurred during 2004 and the nine months ended September 30, 2005, and the interest that would have been incurred had the debt being offered been issued as of January 1, 2004 at its expected issue rate.

        A statement setting forth in detail the computation of the actual ratio of earnings to fixed charges is included as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on November 17, 2005, incorporated by reference into this prospectus supplement and the accompanying prospectus.

S-5



CAPITALIZATION

        The table below sets forth Ameriprise Financial's consolidated capitalization at September 30, 2005 on an actual basis and as adjusted to give effect to the issuance of the notes offered hereby, the net proceeds of which, after deducting underwriting discounts and commissions and estimated offering expenses payable by Ameriprise Financial, are expected to be approximately $1,492,800,000.

        You should read the table together with our consolidated financial statements and the notes thereto incorporated by reference into this prospectus supplement and accompanying prospectus.

 
  As of September 30, 2005
 
 
  Actual
  As Adjusted(a)
 
 
  Unaudited
(in millions)

 
Payable to American Express Company   $ 102   $ 102  
Short-term debt     1,351      
Long-term debt     360     1,860  
Shareholders' equity:              
  Common shares, par value $.01 per share     2     2  
  Additional paid-in capital     4,094     4,094  
  Retained earnings     3,661     3,661  
  Accumulated other comprehensive (loss) income     (20 )   (20 )
   
 
 
Total shareholders' equity     7,737     7,737  
   
 
 
Total capitalization   $ 9,550   $ 9,699  
   
 
 

(a)
As adjusted long-term debt reflects the issuance of the notes offered hereby and repayment of the $1.35 billion bridge facility.

S-6



SUMMARY CONSOLIDATED FINANCIAL DATA

        The following table sets forth summary consolidated financial information from our unaudited consolidated financial statements as of September 30, 2005 and 2004 and for the nine months ended September 30, 2005 and 2004 and unaudited consolidated financial statements as of December 31, 2004, 2003, 2002, 2001 and 2000 and for the five-year period ended December 31, 2004. The summary consolidated financial data presented below should be read in conjunction with our consolidated financial statements and the accompanying notes and the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the documents incorporated by reference into this prospectus supplement and the accompanying prospectus.

        Our consolidated financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including many changes that have occurred and will occur in the operations and capitalization of our company as a result of our separation and distribution from American Express Company, our former parent company.


Ameriprise Financial
Summary Consolidated Financial Data(a)

(Derived from Unaudited Financial Statements)

 
  Nine Months Ended
September 30,

  Years Ended December 31,
 
  2005
  2004(b)
  2004(b)
  2003(c)
  2002
  2001(d)
  2000
 
  (in millions)

Income Statement Data:                                          
Revenues   $ 5,615   $ 5,184   $ 7,027   $ 6,155   $ 5,575   $ 4,744   $ 6,244
Expenses     4,997     4,332     5,915     5,282     4,714     4,709     4,784
Income before discontinued operations and accounting change     447     599     825     694     632     91     1,021
Net income     463     559     794     725     674     87     1,025
Dividends paid to American Express Company     217     723     1,325     334     377     170     594
Capital contributions from American Express Company     1,256     32     40     594     28     549     68

S-7


 
  As of September 30,
  As of December 31,
 
  2005
  2004(b)
  2004(b)
  2003(c)
  2002
  2001(d)
  2000
 
  (in millions)

Balance Sheet Data:                                          
Investments   $ 39,454   $ 39,097   $ 40,232   $ 38,534   $ 34,683   $ 30,555   $ 28,318
Separate account assets     39,840     32,367     35,901     30,809     21,981     27,334     32,349
Total assets     92,274     88,502     93,113     85,384     74,448     71,718     73,341
Future policy benefits and claims     32,958     33,010     33,253     32,235     28,959     24,810     24,494
Investment certificate reserves     6,392     5,306     5,831     4,784     4,493     4,162     3,823
Payable to American Express     102     1,698     1,751     1,447     1,261     732     398
Short-term debt     1,351                        
Long-term debt     360     377     385     445     120     120     123
Separate account liabilities     39,840     32,367     35,901     30,809     21,981     27,334     32,349
Total liabilities     84,537     81,351     86,411     78,096     67,998     66,098     68,708
Shareholders' equity     7,737     7,151     6,702     7,288     6,450     5,620     4,633

S-8



DESCRIPTION OF THE NOTES

        The notes constitute senior debt securities described in the accompanying prospectus. This description supplements, and to the extent inconsistent therewith, replaces the descriptions of the general terms and provisions contained in "Description of Senior Debt Securities" in the accompanying prospectus.

        Each series of notes will be issued under the indenture dated October 5, 2005 entered into with U.S. Bank National Association, as trustee. We urge you to read the indenture because it, not the summaries below and in the accompanying prospectus, defines your rights. You may obtain a copy of the indenture from us without charge. See the section entitled "Where You Can Find More Information" in the accompanying prospectus.

General

        The notes will initially be issued in the following series and, as to each such series, with the following initial aggregate principal amount:

Series

  Principal
Amount

5.35% Senior Notes due November 15, 2010 (the "2010 Notes")   $ 800,000,000
5.65% Senior Notes due November 15, 2015 (the "2015 Notes")   $ 700,000,000

        The notes will be our unsecured obligations and will rank prior to all of our subordinated indebtedness and on an equal basis with all of our other senior unsecured indebtedness.

        The notes will be issued in fully registered form only, without coupons, in minimum denominations of $2,000 and additional incremental multiples of $1,000 in excess of $2,000. The notes will be represented by one or more global notes deposited with or on behalf of the Depository Trust Company, or DTC, or a nominee thereof. The trustee will initially act as paying agent and registrar for the notes. Except as otherwise provided in the indenture, the notes will be registered in the name of that depositary or its nominee. We will pay principal of, and premium, if any, and interest on the notes to the depositary or its nominee, as the case may be, as the registered owner or the holder of the global security. As provided by the indenture, at our option, interest may be paid at the trustee's corporate trust office or by check mailed to the registered address of the holder of record.

        Each series of notes will mature and bear interest as provided in the following table:

Series

  Maturity
  Interest Rate
  Record Dates
  Interest Payment Dates
2010 Notes   November 15, 2010   5.35 % May 1 and November 1   May 15 and November 15
2015 Notes   November 15, 2015   5.65 % May 1 and November 1   May 15 and November 15

Interest Provisions Related to the Notes

        Interest on each series of notes will accrue at the rate set forth for such series in the table above, payable semiannually commencing on May 15, 2006. We will pay interest as to each series of notes to those persons who were holders of record of such series on the record date preceding each interest payment date.

        Interest on each series of notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid as to such series, and will be computed on the basis of a 360-day year comprised of twelve 30-day months.

        If any interest payment date, date of redemption or the maturity date of any of the notes is not a business day, then payment of principal and interest will be made on the next succeeding business day.

S-9



No interest will accrue on the amount so payable for the period from such interest payment date, redemption date or maturity date, as the case may be, to the date payment is made.

Defeasance

        In some circumstances, we may elect to discharge our obligations on the notes through defeasance. See "Description of Senior Debt Securities—Defeasance of the Indenture and Senior Debt Securities" in the accompanying prospectus for more information about how we may do this.

        No service charge will be made for any registration of transfer or any exchange of notes, but we may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith.

Additional Notes

        We may from time to time, without notice to or the consent of the registered holders of the notes, create and issue further notes ranking equally and ratably with the notes in all respects, including having the same CUSIP number, so that such further notes shall be consolidated and form a single series with the relevant series of such notes and shall have the same terms as to status or otherwise as such relevant series of notes. No additional notes may be issued if an event of default has occurred and is continuing with respect to such notes.

Optional Redemption

        We may, at our option, at any time and from time to time redeem any series of notes in whole or in part on not less than 30 nor more than 60 days' prior notice mailed to the holders of the notes to be redeemed. The notes will be redeemable at a redemption price, plus accrued interest to the date of redemption, equal to the greater of (1) 100% of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed that would be due after the related redemption date but for such redemption (except that, if such redemption date is not an interest payment date, the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued thereon to the redemption date), discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points for the 2010 Notes and 20 basis points for the 2015 Notes.

        "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity (computed as of the second business day immediately preceding such redemption date) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

        "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the notes. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by us.

        "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Notes" or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, (a) the

S-10



average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if the trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all Quotations obtained.

        "Reference Treasury Dealer" means Citigroup Global Markets Inc., Goldman, Sachs & Co. and J.P. Morgan Securities Inc. and their successors and two other nationally recognized investment banking firms that are Primary Treasury Dealers specified from time to time by us, except that if any of the foregoing ceases to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), we are required to designate as a substitute another nationally recognized investment banking firm that is a Primary Treasury Dealer.

        "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the trustee by such Reference Treasury Dealer as of 3:30 p.m., New York City time, on the third business day preceding such redemption date.

        On and after any redemption date, interest will cease to accrue on the notes called for redemption. Prior to any redemption date, we are required to deposit with a paying agent money sufficient to pay the redemption price of and accrued interest on the notes to be redeemed on such date. If we are redeeming less than all the notes, the trustee under the indenture must select the notes to be redeemed by such method as the trustee deems fair and appropriate in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances.

Book-Entry System

        Upon issuance, all notes will be represented by one or more fully registered global certificates, each of which we refer to as a global security. Each such global security will be deposited with or on behalf of DTC, and registered in the name of DTC or a nominee thereof. Unless and until it is exchanged in whole or in part for notes in definitive form, no global security may be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor. Purchasers of the notes can hold beneficial interests in the global notes only through DTC, or through the accounts that Clearstream International and Euroclear System maintain as participants in DTC.

        A description of DTC's procedures with respect to the global securities is set forth in the section "Description of Senior Debt Securities—Global Securities" in the accompanying prospectus.

Listing

        We are not applying to list the notes on any securities exchange or the Nasdaq National Market.

S-11



CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

        The following is a summary of certain United States federal income tax considerations that may be relevant to persons considering the purchase of notes. This summary, which does not represent tax advice, is based on the Internal Revenue Code of 1986, as amended (the "Code"), regulations thereunder, rulings and decisions now in effect, all of which are subject to change (including changes in effective dates) or possible differing interpretations. This summary deals only with notes that will be held as capital assets and is only addressed to persons who purchase notes in the initial offering. It does not address tax considerations applicable to investors that may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies, dealers in securities or currencies, traders in securities electing to mark to market, persons that will hold notes as a position in a "straddle" or conversion transaction, or as part of a "synthetic security" or other integrated financial transaction, or persons that have a "functional currency" other than the U.S. dollar.

        Persons considering the purchase of notes should consult their own tax advisors in determining the tax consequences to them of the purchase, ownership and disposition of notes, including the application to their particular situation of the United States federal income tax considerations discussed below, as well as the application of state, local, foreign or other tax laws.

        As used under this heading "Certain United Federal Income Tax Considerations," the term "U.S. Holder" means a beneficial owner of a note that is (i) a citizen or resident of the United States; (ii) a corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof; (iii) an estate the income of which is subject to United States federal income taxation regardless of its source; or (iv) a trust if (A) a U.S. court is able to exercise primary supervision over the trust's administration and (B) one or more U.S. persons have the authority to control all of the trust's substantial decisions. As used under this heading "Certain United States Federal Income Tax Considerations," the term "Non-U.S. Holder" means a beneficial owner of a note that is not a U.S. Holder.

Tax Consequences to U.S. Holders

Payments of Interest.

        Payments of stated interest on a note will be taxable to a U.S. Holder as ordinary interest income at the time that such payments are accrued or are received (in accordance with the U.S. Holder's method of tax accounting).

Purchase, Sale, Exchange and Redemption.

        A U.S. Holder's tax basis in a note generally will equal the cost of such note to such holder. Upon the sale, exchange or redemption of a note, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount realized on the sale, exchange or redemption (less any accrued interest, which will be taxable as such) and the U.S. Holder's tax basis in such note. Such gain or loss recognized by a U.S. Holder generally will be long-term capital gain or loss if the U.S. Holder has held the note for more than one year at the time of disposition. Long-term capital gains recognized by an individual holder generally are subject to tax at a reduced rate. The deductibility of capital losses is subject to limitations.

Information Reporting and Backup Withholding.

        Under current United States federal income tax law, information reporting requirements apply with respect to payments made to U.S. Holders of notes unless an exemption exists. In addition, U.S. Holders who are not exempt will be subject to backup withholding tax in respect of such payments if they do not provide their taxpayer identification numbers ("TINs") to the Company or its paying agent

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and, in certain circumstances, fail to certify, under penalties of perjury, that they have furnished current TINs and have not been notified by the Internal Revenue Service that they are subject to backup withholding for failure to report interest and dividend payments. All individuals are subject to these requirements. In general, corporations, tax-exempt organizations and individual retirement accounts are exempt from these requirements.

Tax Consequences to Non-U.S. Holders

        Under present United States federal income and estate tax law, and subject to the discussion below concerning backup withholding:

        A Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with respect to interest income that is effectively connected with its U.S. trade or business. A Non-U.S. Holder with effectively connected income will, however, generally not be subject to withholding tax on interest income if, under current procedures, it delivers a properly completed IRS Form W-8ECI. Under certain circumstances, effectively connected interest income of a corporate Non-U.S. Holder may be subject to a "branch profits" tax imposed at a 30% rate.

        United States information reporting requirements and backup withholding tax will not apply to payments on a note if the beneficial owner (i) certifies its Non-U.S. Holder status under penalties of perjury, generally made, under current procedures, on IRS Form W-8BEN, or satisfies documentary evidence requirements for establishing that it is a Non-U.S. Holder, or (ii) otherwise establishes an exemption.

        Information reporting requirements will generally not apply to any payment of the proceeds of the sale of a note effected outside the United States by a foreign office of a foreign broker, provided that

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such broker derives less than 50% of its gross income for particular periods from the conduct of a trade or business in the United States, is not a controlled foreign corporation for United States federal income tax purposes, and is not a foreign partnership that, at any time during its taxable year, is 50% or more, by income or capital interest, owned by U.S. Holders or is engaged in the conduct of a United States trade or business.

        Backup withholding tax will generally not apply to the payment of the proceeds of the sale of a note effected outside the United States by a foreign office of any broker. However, information reporting requirements will be applicable to such payment unless (i) such broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and other conditions are met or (ii) the beneficial owner otherwise establishes an exemption. Information reporting requirements and backup withholding tax will apply to the payment of the proceeds of a sale of a note by the U.S. office of a broker, unless the beneficial owner certifies its Non-U.S. Holder status under penalties of perjury or otherwise establishes an exemption.

        The rules regarding withholding, backup withholding and information reporting for Non-U.S. Holders are complex, may vary depending on a holder's particular situation, and are subject to change. In addition, special rules apply to certain types of Non-U.S. Holders including partnerships, trusts and other entities treated as pass-through entities for United States federal income tax purposes. Non-U.S. Holders should accordingly consult their own tax advisors as to the specific methods to use and forms to complete to satisfy these rules.

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UNDERWRITING

        Citigroup Global Markets Inc., Goldman, Sachs & Co. and J.P. Morgan Securities Inc. are acting as representatives of the underwriters named below. Subject to the terms and conditions stated in the terms agreement dated the date of this prospectus supplement, each underwriter named below has, severally and not jointly, agreed to purchase, and we have agreed to sell to that underwriter, the principal amount of the notes set forth opposite the underwriter's name.

Underwriter

  Principal
Amount of
Senior Notes
Due 2010

  Principal
Amount of
Senior Notes
Due 2015

Citigroup Global Markets Inc.   $ 260,000,000   $ 227,500,000
Goldman, Sachs & Co.     260,000,000     227,500,000
J.P. Morgan Securities Inc.     160,000,000     140,000,000
Banc of America Securities LLC     40,000,000     35,000,000
Utendahl Capital Group, LLC     40,000,000     35,000,000
Wachovia Capital Markets, LLC     40,000,000     35,000,000
   
 
  Total   $ 800,000,000   $ 700,000,000

        The underwriting agreement provides that the obligations of the underwriters to purchase the notes included in this offering are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriting agreement also provides that the underwriters are obligated to purchase all of the notes if any are purchased.

        The underwriters propose to offer the notes initially at the respective public offering price on the cover page of this prospectus supplement and to selling group members at that price less a selling concession of .20% of the principal amount per note for the 2010 Notes and .30% of the principal amount per note for the 2015 Notes. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers.

        The notes are a new issue of securities with no established trading market. One or more of the underwriters intend to make a secondary market for the notes. However, they are not obligated to do so and may discontinue making a secondary market for the notes at any time without notice. No assurance can be given as to how liquid the trading market for the notes will be.

        The notes are offered for sale in those jurisdictions in the United States and elsewhere where it is lawful to make such offers.

        In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids.

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        These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the notes or preventing or retarding a decline in the market price of the notes. As a result the price of the notes may be higher than the price that might otherwise exist in the open market. These transactions, if commenced, may be discontinued at any time and without notice.

        We estimate that our out of pocket expenses for this offering will be approximately $1,226,000.

        We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

        J.P. Morgan Securities Inc. ("JPMorgan") will make the notes available for distribution on the Internet through a proprietary Web site and/or a third-party system operated by MarketAxess Corporation, an Internet-based communications technology provider. MarketAxess Corporation is providing the system as a conduit for communications between JPMorgan and its customers and is not a party to any transactions. MarketAxess Corporation, a registered broker-dealer, will receive compensation from JPMorgan based on transactions JPMorgan conducts through the system. JPMorgan will make the notes available to its customers through the Internet distributions, whether made through a proprietary or third-party system, on the same terms as distributions made through other channels.

        The underwriters and their affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for us and our affiliates in the ordinary course of business, for which they received, or will receive, customary fees and expenses. Affiliates of each of Citigroup Global Markets Inc., Goldman, Sachs & Co. and J.P. Morgan Securities Inc. are lenders under the $1.35 billion, 364-day bridge facility we entered into on September 28, 2005 and will receive more than 10% of the net proceeds from this offering when such facility is repaid. Accordingly, the offering will be conducted pursuant to the requirements of NASD Conduct Rule 2710(h).


LEGAL MATTERS

        John C. Junek, Esq., Executive Vice President and General Counsel of Ameriprise Financial, will pass upon the validity of the notes for us. As of September 30, 2005, Mr. Junek beneficially owned approximately 5,434 shares of our common stock having a fair market value of approximately $213,000 based on the closing price of our common stock on November 15, 2005. Certain additional legal matters will be passed upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. Certain legal matters will be passed upon for the underwriters or agents by Cleary Gottlieb Steen & Hamilton LLP, New York, New York. Cleary Gottlieb Steen & Hamilton LLP has from time to time acted as counsel for us and our subsidiaries or affiliates and may do so in the future.

S-16



INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

        We file annual, quarterly and current reports, proxy statements and other information with the SEC. See "Where You Can Find More Information" in the accompanying prospectus for information on the documents we incorporate by reference in this prospectus supplement and the accompanying prospectus.

        In addition to the documents listed in the accompanying prospectus, we incorporate by reference the following documents:

        Nothing in this prospectus supplement shall be deemed to incorporate information furnished but not filed with the SEC pursuant to Item 2.02 or Item 7.01 of Form 8-K.

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PROSPECTUS

         GRAPHIC

$1,700,000,000

Senior Debt Securities

        Ameriprise Financial, Inc. will provide the specific terms of these securities in supplements to this prospectus. You should read this prospectus and the accompanying prospectus supplement carefully before you invest.


        We may offer and sell securities to or through underwriters, dealers and agents, or directly to purchasers. The names and compensation of any underwriters or agents involved in the sale of securities will be described in the accompanying prospectus supplement.

        This prospectus may not be used to consummate a sale of these securities unless accompanied by a supplement to this prospectus.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus or any accompanying prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.


October 31, 2005



ABOUT THIS PROSPECTUS

        This prospectus is part of a registration statement we filed with the Securities and Exchange Commission, to which we refer as the SEC, using a shelf registration process. Under this process, we may sell from time to time the securities described in this prospectus for an initial aggregate purchase price of up to $1,700,000,000.

        This prospectus describes the general terms of these securities and the general manner in which we will offer the securities. Each time these securities are sold, this prospectus will be accompanied by a prospectus supplement that describes the specific terms of these securities and the specific manner in which they may be offered. You should read the prospectus supplement and this prospectus, along with the documents incorporated by reference and described under the heading "Where You Can Find More Information," before making your investment decision.

Where You Can Find More Information

        We file annual, quarterly, current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference room at 100 F Street NE, Washington, D.C. Please call the SEC at l-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's website at http://www.sec.gov. You can also access our SEC filings through our website at www.ameriprise.com.

        The SEC allows us to incorporate by reference the information we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information that we incorporate by reference is considered to be part of this prospectus.

        Information that we file later with the SEC will automatically update and supersede this information. This means that you must look at all of the SEC filings that we incorporate by reference to determine if any of the statements in this prospectus or in any documents previously incorporated by reference have been modified or superseded. We incorporate by reference into this prospectus the following documents:

        Nothing in this prospectus shall be deemed to incorporate information furnished but not filed with the SEC pursuant to Item 2.02 or Item 7.01 of Form 8-K.

        You may request a copy of these filings and any exhibit incorporated by reference in these filings at no cost, by writing or telephoning us at the following address or number:

Ameriprise Financial, Inc.
243 Ameriprise Financial Center
Minneapolis, MN 55474
(612) 671-1805
Attention: Investor Relations

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AMERIPRISE FINANCIAL, INC.

        We are a financial planning and financial services company that offers solutions for our clients' asset accumulation, income management and protection needs. As of June 30, 2005, we had over 2.7 million individual, business and institutional clients and a network of over 12,000 financial advisors and registered representatives, including registered representatives of our Securities America Financial Corporation subsidiary, who provide personalized financial planning, advisory and brokerage services.

        We strive to deliver financial solutions to our clients through a tailored approach focused on building a long-term personal relationship through financial planning that is responsive to our clients' evolving needs. The financial solutions we offer include both our own products and services and products of other companies. We believe that our focus on personal relationships with our clients, together with our strengths in financial planning and product development, puts us in a strong position to capitalize on significant demographic and market trends. We believe these trends will continue to drive increased demand for financial planning and the other financial services we provide, particularly among our target mass affluent market.

        We have two main operating segments aligned with the financial solutions we offer to address our clients' identified needs:

        Our asset accumulation and income business offers our own and other companies' mutual funds, as well as our own annuities and other asset accumulation and income management products and services to retail clients through our advisor network. We also offer our annuity products through outside channels, such as banks and broker-dealer networks. This operating segment also serves institutional clients in the separately managed account, sub-advisory and 401(k) markets, among others. We earn revenues in our asset accumulation and income segment primarily through fees we receive on assets we manage, the net investment income we earn on assets on our balance sheet related to this segment and distribution fees we earn on sales of mutual funds and other products.

        In our protection segment, we offer various life insurance, disability income and long-term care insurance products through our advisor network. We also offer personal auto and home insurance products on a direct basis to retail clients principally through our strategic marketing alliances. We earn revenue in this operating segment primarily through premiums and fees we receive to assume insurance-related risk and net investment income we earn on assets on our balance sheet related to this segment.

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RATIO OF EARNINGS TO FIXED CHARGES

        The following table sets forth our ratio of earnings to fixed charges for the periods indicated:

 
   
  Year Ended December 31,
 
 
  Six Months
Ended June 30,
2005

 
 
  2004
  2003
  2002
  2001
  2000
 
 
  (dollars in millions)

 
Earnings:                                      
  Income before income tax provision and accounting change   $ 459   $ 1,173   $ 941   $ 925   $ 63   $ 1,465  
  Interest and debt expense     36     52     45     32     26     21  
  Interest portion of rental expense     14     30     28     31     38     36  
  Amortization of capitalized interest     1     1     1     1     0     0  
  Equity method investees and minority interests     0     3     2     0     0     1  
   
 
 
 
 
 
 
Total earnings     510     1,259     1,017     989     127     1,523  
Fixed charges:                                      
  Interest and debt expense     36     52     45     32     26     21  
  Interest portion of rental expense     14     30     28     31     38     36  
  Capitalized interest     0     0     0     4     7     5  
   
 
 
 
 
 
 
Total fixed charges     50     82     73     67     71     62  
Ratio of earnings to fixed charges     10.2 x   15.3 x   14.0 x   14.9 x   1.8 x   24.4 x

        The earnings component of our ratio of earnings to fixed charges is comprised of income before income tax provision and accounting change plus interest and debt expense, interest portion of rental expense, amortization of capitalized interest and adjustments related to equity investees and minority interests in consolidated entities. The fixed charges component of our ratio of earnings to fixed charges is comprised of interest and debt expense, interest portion of rental expense and capitalized interest. The formula for this ratio calculation is earnings divided by fixed charges, each computed as described above.

        The information under the caption "Ratio of Earnings to Fixed Charges" corrects the information appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Ratio of Earnings to Fixed Charges" in our Registration Statement on Form 10, and in the related Information Statement dated September 12, 2005 filed on Form 8-K with the Securities and Exchange Commission on September 16, 2005, incorporated by reference into this prospectus.


FORWARD-LOOKING STATEMENTS

        This prospectus, the accompanying prospectus supplement and the information incorporated by reference in this prospectus include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Examples of such forward-looking statements include:

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        The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks, uncertainties and assumptions. Factors that could cause actual results to differ from these forward-looking statements include, but are not limited to, those discussed elsewhere in this prospectus, the accompanying prospectus supplement and the documents incorporated by reference in this prospectus. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.


USE OF PROCEEDS

        Except as may be otherwise set forth in the prospectus supplement accompanying this prospectus, we will use the proceeds we receive from the sale of the offered securities to refinance a $1.35 billion, 364-day bridge facility we entered into on September 28, 2005 and the remainder for general corporate purposes. The loan under the bridge facility bears interest at a floating rate based on a spread over one-, two-, three- or six-month LIBOR, as we may elect. The proceeds from the bridge facility were used to replace our intercompany debt payable to American Express Company.


DESCRIPTION OF SENIOR DEBT SECURITIES

        The senior debt securities covered by this prospectus will be our direct unsecured obligations. The senior debt securities will rank on an equal basis with all of our other senior unsecured and unsubordinated debt.

        The following description briefly sets forth certain general terms and provisions of the senior debt securities. The prospectus supplement for a particular series of senior debt securities will describe the particular terms of the senior debt securities we offer and the extent to which these general provisions may apply to that particular series of senior debt securities.

        Our senior debt securities will be issued under a senior debt indenture, with U.S. Bank National Association as trustee. The senior debt indenture is sometimes referred to in this prospectus as an "indenture". The indenture has been filed with the SEC and is incorporated by reference as an exhibit to this registration statement on Form S-3 under the Securities Act, of which this prospectus forms a part.

        The following summaries of certain provisions of the indenture are not complete and are qualified in their entirety by reference to the indenture. You should read the indenture for further information. Copies of the indenture may be obtained from us or the trustee. Where appropriate, we use parentheses to refer you to the particular sections of the indenture. Any reference to particular sections or defined terms of the indenture in any statement in this prospectus qualifies the entire statement and incorporates by reference the applicable definition into that statement.

General

        The indenture provides that we may issue senior debt securities from time to time under the indenture without limitation as to amount. We may issue the senior debt securities in one or more series with the same or different terms. We may not issue all senior debt securities of the same series at the same time. All senior debt securities of the same series need not bear interest at the same rate or mature on the same date. The indenture permits the appointment of a different trustee for each series of senior debt securities. If there is at any time more than one trustee under the indenture, the

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term "trustee" means each such trustee and will apply to each such trustee only with respect to those series of senior debt securities for which it is serving as trustee.

        We may sell senior debt securities at a substantial discount below their stated principal amount that bear no interest or below market rates of interest. The applicable prospectus supplement will describe the material federal income tax consequences and special investment considerations applicable to any such series of senior debt securities.

Terms Specified in the Prospectus Supplement

        You should read the applicable prospectus supplement relating to any series of senior debt securities for information with respect to the senior debt securities being offered, including:

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Payment

        Unless otherwise specified in the applicable prospectus supplement, principal and premium, if any, and interest, if any, on the senior debt securities will be payable initially at the principal corporate trust office of the trustee. If so provided in the applicable prospectus supplement, we may make payments of interest, subject to collection, by check mailed to the holders of record at the addresses registered with the trustee. (Sec. 12.02). The principal corporate trust office of the trustee on the date of this prospectus is 60 Livingston Avenue, St. Paul, Minnesota 55107-2292.

        If the principal of or premium, if any, or interest, if any, on any series of senior debt securities is payable in foreign currencies or foreign currency units, or if senior debt securities are sold for foreign currencies or foreign currency units, the restrictions, elections, material tax consequences, specific terms and other information with respect to such senior debt securities will be described in the applicable prospectus supplement.

Form of Senior Debt Securities

        We will issue each senior debt security in book-entry form, unless we specify otherwise in the applicable prospectus supplement. We may issue senior debt securities solely in fully registered form without coupons, solely in bearer form, with or without coupons, or both as registered securities and bearer securities. (Sec. 2.01).

Global Securities

        The senior debt securities of a series may be issued in whole or in part in the form of one or more global securities that will be deposited with or on behalf of a depositary identified in the applicable prospectus supplement. Global securities will be issued in registered form and may be in either temporary or permanent form.

        The related prospectus supplement will describe the specific terms of the depositary arrangement with respect to that series of senior debt securities. We anticipate that the following provisions will apply to all depositary arrangements.

        Unless otherwise specified in an applicable prospectus supplement, global securities to be deposited with or on behalf of a depositary will be registered in the name of that depositary or its nominee. Upon the issuance of a global security, the depositary for that global security will credit the respective principal amounts of the senior debt securities represented by such global security to the participants that have accounts with that depositary or its nominee. Ownership of beneficial interests in those global securities will be limited to participants in the depositary or persons that may hold interests through these participants.

        A participant's ownership of beneficial interests in these global securities will be shown on the records maintained by the depositary or its nominee. The transfer of a participant's beneficial interest will only be effected through these records. A person whose ownership of beneficial interests in these global securities is held through a participant will be shown on, and the transfer of that ownership interest within that participant will be effected only through, records maintained by the participant. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Limits and laws of this nature may impair your ability to transfer beneficial interests in a global security.

        Except as set forth below and in the indenture, owners of beneficial interests in the global security will not be entitled to receive senior debt securities of the series represented by that global security in definitive form and will not be considered to be the owners or holders of those senior debt securities under the global security. Because the depositary can act only on behalf of participants, which in turn act on behalf of indirect participants, the ability of beneficial owners of interests in a global security to

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pledge such interests to persons or entities that do not participate in the depositary system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. No beneficial owner of an interest in the global security will be able to transfer that interest except in accordance with the depositary's applicable procedures, in addition to those provided for under the applicable indenture and, if applicable, those of Euroclear Bank S.A./N.V., as operator of the Euroclear System, Clearstream International and/or any other relevant clearing system.

        We will make payment of principal of, premium, if any, and any interest on global securities to the depositary or its nominee, as the case may be, as the registered owner or the holder of the global security. None of us, the trustee, any paying agent or the securities registrar for those senior debt securities will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in a global security or for maintaining, supervising or reviewing any records relating to those beneficial ownership interests. (Sec. 3.09).

        We expect that the depositary for a permanent global security, upon receipt of any payment in respect of a permanent global security, will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of that global security as shown on the records of the depositary. We also expect that payments by participants to owners of beneficial interests in the global security held through those participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of those participants.

        We may at any time and in our sole discretion determine not to have any senior debt securities represented by one or more global securities. In such event, we will issue senior debt securities in definitive form in exchange for all of the global securities representing such senior debt securities. (Sec. 3.05).

        If set forth in the applicable prospectus supplement, an owner of a beneficial interest in a global security may, on terms acceptable to us and the depositary, receive senior debt securities of that series in definitive form. In that event, an owner of a beneficial interest in a global security will be entitled to physical delivery in definitive form of senior debt securities of the series represented by that global security equal in principal amount to that beneficial interest and to have those senior debt securities registered in its name.

Registered and Bearer Securities

        Registered securities may be exchangeable for other senior debt securities of the same series, registered in the same name, for the same aggregate principal amount in authorized denominations and will be transferable at any time or from time to time at the office of the trustee. The holder will not pay a service charge for any such exchange or transfer except for any tax or governmental charge incidental thereto. (Sec. 3.05). If permitted by applicable laws and regulations, the prospectus supplement will describe the terms upon which registered securities may be exchanged for bearer securities of the series. If any bearer securities are issued, any restrictions applicable to the offer, sale or delivery of bearer securities and the terms upon which bearer securities may be exchanged for registered securities of the same series will be described in the prospectus supplement.

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Consolidation, Merger and Conveyance of Assets

        Without the consent of the holders of any of the outstanding senior debt securities, we may consolidate with or merge into, or convey, transfer or lease all or substantially all of our properties and assets to any person or group of persons, provided that:

        The indenture does not restrict a merger or consolidation in which we are the surviving corporation. (Sec. 10.01).

Modification of the Indenture

        We may modify or amend the indenture without the consent of the holders of any of our outstanding senior debt securities for various enumerated purposes, including the naming, by a supplemental indenture, of a trustee other than U.S. Bank National Association, for a series of senior debt securities. We may modify or amend the indenture with the consent of the holders of a majority in aggregate principal amount of the senior debt securities of each series affected by the modification or amendment. However, no such modification or amendment may, without the consent of the holder of each affected senior debt security:

Events of Default, Notice and Waiver

        The indenture provides holders of senior debt securities with remedies if we fail to perform specific obligations, such as making payments on the senior debt securities. You should review these provisions carefully in order to understand what constitutes an event of default under the indenture.

        Unless stated otherwise in the prospectus supplement, an event of default with respect to any series of senior debt securities under the indenture will be:

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        The trustee may withhold notice to the holders of any series of senior debt securities of any default with respect to such series, except in the payment of principal, premium or interest, if it considers such withholding of notice in the interest of such holders. (Sec. 8.02).

        If an event of default with respect to any series of senior debt securities has occurred and is continuing, the trustee or the holders of not less than 25% in aggregate principal amount of the senior debt securities of that series may declare the principal of all the senior debt securities of such series to be due and payable immediately. (Sec. 7.02).

        The indenture contains a provision entitling the trustee to be indemnified by the holders before proceeding to exercise any right or power under the indenture at the request of any such holders. (Sec. 8.03). The indenture provides that the holders of a majority in aggregate principal amount of the outstanding senior debt securities of any series may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred upon the trustee, with respect to the senior debt securities of such series. (Sec. 7.12). The right of a holder to institute a proceeding with respect to the indenture is subject to certain conditions precedent, including notice and indemnity to the trustee. However, the holder has an absolute right to the receipt of principal of, premium, if any, and interest, if any, on the senior debt securities of any series on the respective stated maturities, as defined in the indenture, and to institute suit for the enforcement of these rights. (Sec. 7.07 and Sec. 7.08).

        The holders of not less than a majority in aggregate principal amount of the outstanding senior debt securities of any series may on behalf of the holders of all the senior debt securities of such series waive any past defaults. Each holder of a debt security affected by a default must consent to a waiver of:

        We will furnish to the trustee annual statements as to the fulfillment of our obligations under the indenture. (Sec. 9.04 and Sec. 12.05).

Concerning the Trustee

        Affiliates of U.S. Bank National Association, the current trustee under the indenture, may provide banking and corporate trust services to us and extend credit to us and many of our subsidiaries worldwide. The trustee may act as a depository of our funds and hold our common shares for the

9



benefit of its customers, including customers over whose accounts the trustee has discretionary authority. If a bank or trust company other than U.S. Bank National Association is to act as trustee for a series of senior debt securities, the applicable prospectus supplement will provide information concerning that other trustee.

Defeasance of the Indenture and Senior Debt Securities

        The indenture permits us to be discharged from our obligations under the indenture and the senior debt securities if we comply with the following procedures. This discharge from our obligations is referred to in this prospectus as defeasance. (Sec. 6.02).

        Unless the applicable prospectus supplement states otherwise, if we deposit with the trustee sufficient cash and/or U.S. government securities to pay and discharge the principal and premium, if any, and interest, if any, to the date of maturity of that series of senior debt securities, then from and after the ninety-first day following such deposit:

        Following defeasance, holders of the applicable senior debt securities would be able to look only to the defeasance trust for payment of principal and premium, if any, and interest, if any, on their senior debt securities.

        Defeasance may be treated as a taxable exchange of the related senior debt securities for obligations of the trust or a direct interest in the money or U.S. government securities held in the trust. In that case, holders of senior debt securities would recognize gain or loss as if the trust obligations or the money or U.S. government securities held in the trust, as the case may be, had actually been received by the holders in exchange for their senior debt securities. Holders thereafter might be required to include as income a different amount of income than in the absence of defeasance. We urge prospective investors to consult their own tax advisors as to the specific tax consequences of defeasance.

Restrictions as to Liens

        The indenture includes a covenant providing that we will not at any time directly or indirectly create, or allow to exist or be created, any mortgage, pledge, encumbrance or lien of any kind upon:

        However, liens of this nature are permitted if we provide that the senior debt securities will be secured by the lien equally and ratably with any and all other obligations also secured, for as long as any other obligations of that type are so secured. However, we may incur or allow to exist upon the stock of the principal subsidiaries liens for taxes, assessments or other governmental charges or levies

10



that are not yet due or are payable without penalty or that we are contesting in good faith, or liens of judgments that are on appeal or are discharged within 60 days. (Sec. 12.07(a)).

        This covenant will cease to be binding on us with respect to any series of the senior debt securities to which this covenant applies following discharge of those senior debt securities. (Sec. 12.07(b)).

11



PLAN OF DISTRIBUTION

        We may sell the securities described in this prospectus from time to time in one or more of the following ways:

        The prospectus supplement with respect to the offered securities will describe the terms of the offering, including:

        Only agents or underwriters named in the prospectus supplement are deemed to be agents or underwriters in connection with the securities offered thereby. If underwriters are used in the sale, the securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, either:

        The obligations of the underwriters to purchase the securities will be subject to various conditions precedent, and the underwriters will be obligated to purchase all of the securities offered by the prospectus supplement relating to those securities if any of those securities are purchased. Any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time.

        If so indicated in a prospectus supplement, we will authorize agents, underwriters or dealers to solicit offers by certain institutional investors to purchase securities providing for payment and delivery on a future date specified in such prospectus supplement. There may be limitations on the minimum amount that may be purchased by any institutional investor or on the portion of the aggregate principal amount of the particular securities that may be sold pursuant to those arrangements.

        Institutional investors to which offers may be made, when authorized, include, commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions we may approve. The obligations of any purchasers under this delayed delivery and payment arrangement will only be subject to the following two conditions:

12


        Underwriters will not have any responsibility in respect of the validity of such arrangements or the performance of us or institutional investors.

        In connection with an offering, the underwriters may purchase and sell securities in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by underwriters of a greater amount of securities than they are required to purchase in an offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the securities while an offering is in progress.

        The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the underwriters have repurchased securities sold by or for the account of the underwriter in stabilizing or short-covering transactions.

        These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the securities. As a result, the price of the securities may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on an exchange or automated quotation system, if the securities are listed on that exchange or admitted for trading on that automated quotation system, or in the over-the-counter market or otherwise.

        Agents and underwriters may be entitled under agreements entered into with us to indemnification by us against certain civil liabilities, including liabilities under the Securities Act, or to contribution with respect to payments which the agents or underwriters may be required to make in respect thereof. Agents and underwriters may be customers of, may engage in transactions with or perform services for us or our subsidiaries or affiliates in the ordinary course of business.

        In the underwriting agreement, a form of which is filed as an exhibit to this registration statement, the underwriters will agree to indemnify us in certain circumstances against certain liabilities.

        We estimate that total expenses for the offering, excluding underwriting or agency commissions or discounts, will be approximately $1,226,090.


ERISA MATTERS

        A fiduciary of a pension, profit-sharing or other employee benefit plan governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), should consider the fiduciary standards of ERISA in the context of the ERISA plan's particular circumstances before authorizing an investment in the offered securities. Among other factors, the fiduciary should consider whether such an investment is in accordance with the documents governing the ERISA plan and whether the investment is appropriate for the ERISA plan in view of its overall investment policy and diversification of its portfolio.

        Certain provisions of ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), prohibit employee benefit plans (as defined in Section 3(3) of ERISA) that are subject to Title I of ERISA, plans described in Section 4975(e)(1) of the Code (including, without limitation, individual retirement accounts and Keogh Plans), and entities whose underlying assets include plan assets by reason of a plan's investment in such entities (including, without limitation, as applicable, insurance company general accounts), from engaging in certain transactions involving "plan assets" with parties that are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to

13



the plan or entity. Governmental and other plans that are not subject to ERISA or to the Code may be subject to similar restrictions under federal, state or local law. Any employee benefit plan or other entity, to which such provisions of ERISA, the Code or similar law apply, proposing to acquire the offered securities should consult with its legal counsel.

        We, including our broker-dealer and trust company subsidiaries, provide services to many employee benefit plans. We and any of our direct or indirect subsidiaries may each be considered a "party in interest" and a "disqualified person" to a large number of plans. A purchase of offered securities by any plan with respect to which Ameriprise Financial, Inc. is a "party in interest" or a "disqualified person" would be likely to result in a prohibited transaction under ERISA and/or Section 4975 of the Code.

        Accordingly, unless otherwise provided in the related prospectus supplement, offered securities may not be purchased, held or disposed of by any plan or any other person investing "plan assets" of any plan that is subject to the prohibited transaction rules of ERISA or Section 4975 of the Code or other similar law, unless one of the following Prohibited Transaction Class Exemptions ("PTCE") issued by the United States Department of Labor or a similar exemption or exception, each as amended from time to time, applies to such purchase, holding and disposition:

        Unless otherwise provided in the related prospectus supplement, any purchaser of the offered securities or any interest therein will be deemed to have represented and warranted to Ameriprise Financial, Inc. on each day including the dates of its purchase of the offered securities through and including the date of disposition of such offered securities that either:

        Due to the complexity of these rules and the penalties imposed upon persons involved in prohibited transactions, it is important that any person considering the purchase of the offered securities with plan assets consult with its counsel regarding the consequences under ERISA and the Code, or other similar law, of the acquisition and ownership of offered securities and the availability of exemptive relief under the class exemptions listed above.

        Please consult the applicable prospectus supplement for further information with respect to a particular offering of securities.

14



LEGAL MATTERS

        John C. Junek, Esq., our Executive Vice President and General Counsel, will pass upon the validity of the securities for us. As of September 30, 2005, Mr. Junek beneficially owned approximately 5,434 shares of our common stock having a fair market value of approximately $196,000. Unless provided otherwise in the applicable prospectus supplement, certain legal matters will be passed upon for any underwriters or agents by Cleary Gottlieb Steen & Hamilton LLP, New York, New York. Cleary Gottlieb Steen & Hamilton LLP has from time to time acted as counsel for us and our subsidiaries or affiliates and may do so in the future.


EXPERTS

        The consolidated financial statements of Ameriprise Financial, Inc. as of December 31, 2004 and 2003, and for each of the years in the three-year period ended December 31, 2004, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon incorporated by reference herein. Such consolidated financial statements are incorporated by reference herein in reliance upon such report and upon the authority of said firm as experts in accounting and auditing.

15



Appendix A

Information Statement

GRAPHIC

COMMON STOCK
Par Value $.01 Per Share


        American Express Company is furnishing this information statement to its shareholders in connection with the distribution by American Express Company to its shareholders of all of its shares of common stock of our company, Ameriprise Financial, Inc. As of the date of this information statement, American Express Company owns all of our outstanding common stock.

        In this distribution, American Express Company will distribute all of its shares of our common stock on a pro rata basis to the holders of American Express Company common stock. Each of you, as a holder of American Express Company common stock, will receive one share of our common stock for each five shares of American Express Company common stock that you held at the close of business on September 19, 2005, the record date for the distribution. As discussed more fully in "The Distribution" section of this information statement, if you sell shares of American Express Company common stock in the "regular way" market between the record date and September 30, 2005, the distribution date, you will be selling your right to receive those shares of our common stock in the distribution. Immediately after the distribution is completed, we will be an independent public company.

        No general vote of American Express Company shareholders is required for the distribution to occur. No shareholder action is necessary for you to receive the shares of our common stock to which you are entitled in the distribution. This means that:

        Before September 15, 2005, there was no trading market for our common stock. On that date, trading of shares of our common stock is expected to begin on a "when issued" basis. Our common stock has been authorized for listing on The New York Stock Exchange, Inc. under the ticker symbol "AMP."

        As you review this information statement, you should carefully consider the matters described in the "Risk Factors" included elsewhere in this information statement.


        We are not asking you for a proxy and you are requested not to send us a proxy.


        The Securities and Exchange Commission and state securities regulators have not approved or disapproved any of these securities, or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.


        This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.


The date of this information statement is September 12, 2005.



TABLE OF CONTENTS

Summary   1

Risk Factors

 

14

Special Note about Forward-Looking Statements

 

34

The Distribution

 

35

Capitalization

 

40

Dividend Policy

 

41

Selected Consolidated Financial Data

 

42

Unaudited Pro Forma Financial Information

 

44

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

52

Our Business

 

94

Management

 

132

Our Relationship with American Express Company

 

157

Principal Shareholders

 

165

Description of Capital Stock

 

167

Indemnification of Directors and Officers

 

170

Change in Accountants

 

171

Where You Can Find More Information

 

172

Index to Financial Statements

 

F-1

i



SUMMARY

        This summary highlights selected information from this information statement relating to our company and our separation from American Express Company and the distribution of our common stock by American Express Company. We refer to these transactions in this information statement as the separation and distribution (and, at times, as the separation or as the distribution). For a more complete understanding of our business and the distribution, you should carefully read the entire information statement, including the risk factors and our consolidated historical and pro forma financial statements and notes to those statements, appearing elsewhere in this information statement.

        The information included in this information statement, including our consolidated financial statements, assumes the completion of all the transactions referred to in this information statement as the separation and distribution. Use in this information statement of the terms:


Our Company

        We are a financial planning and financial services company that offers solutions for our clients' asset accumulation, income management and protection needs. As of June 30, 2005, we had over 2.7 million individual, business and institutional clients and a network of over 12,000 financial advisors and registered representatives, including registered representatives of our Securities America Financial Corporation subsidiary, who provide personalized financial planning, advisory and brokerage services.

        We strive to deliver financial solutions to our clients through a tailored approach focused on building a long-term personal relationship through financial planning that is responsive to our clients' evolving needs. The financial solutions we offer include both our own products and services and products of other companies. We believe that our focus on personal relationships with our clients, together with our strengths in financial planning and product development, puts us in a strong position to capitalize on significant demographic and market trends. We believe these trends will continue to drive increased demand for financial planning and the other financial services we provide, particularly among our target mass affluent market.

        Our nationwide network of financial advisors and registered representatives is the means by which we develop personal relationships with our clients. Our branded advisor network—the financial advisors who operate under our brand name (numbering more than 10,500 at June 30, 2005)—is also the primary distribution channel through which we offer our asset accumulation and income management products and services, as well as our range of protection products. We believe that the integration of our advisors and the financial solutions we offer through our financial planning model enables us to better meet our clients' needs, which results in more satisfied clients with deeper, longer lasting relationships with our company and increased retention of experienced advisors. This also allows us to reinvest in enhanced services for our clients and support for our advisors.

        We have two main operating segments aligned with the financial solutions we offer to address our clients' identified needs:


Our asset accumulation and income business offers our own and other companies' mutual funds, as well as our own annuities and other asset accumulation and income management products and services

1


to retail clients through our advisor network. We also offer our annuity products through outside channels, such as banks and broker-dealer networks. This operating segment also serves institutional clients in the separately managed account, sub-advisory and 401(k) markets, among others. We earn revenues in our asset accumulation and income segment primarily through fees we receive on assets we manage, the net investment income we earn on assets on our balance sheet related to this segment and distribution fees we earn on sales of mutual funds and other products. In our protection segment, we offer various life insurance, disability income and long-term care insurance products through our advisor network. We also offer personal auto and home insurance products on a direct basis to retail clients principally through our strategic marketing alliances. We earn revenue in this operating segment primarily through premiums and fees we receive to assume insurance-related risk and net investment income we earn on assets on our balance sheet related to this segment.

        We also have a corporate and other segment, which consists of income derived from corporate level assets and unallocated corporate expenses, as well as the results of our subsidiary, Securities America Financial Corporation, which operates its own independent, separately branded distribution platform. Its over 1,500 registered representatives (at June 30, 2005) are part of our nationwide network of over 12,000 financial advisors and registered representatives. We also include costs associated with the separation and distribution in our corporate and other segment.

        In 2004, we generated $7,245 million in total revenues, $1,173 million in income before income tax provision and accounting change and $794 million in net income. As of June 30, 2005, we had $410.2 billion in owned, managed and administered assets worldwide compared to $375.6 billion as of June 30, 2004 as set forth below:

 
  As of June 30,
Asset Category

  2005
  2004
 
  (in billions)

Owned   $ 89.9   $ 81.6
Managed     248.2     228.0
Administered     72.1     66.0
   
 
  Total   $ 410.2   $ 375.6

        Owned assets includes certain assets on our balance sheet, principally investments in the general and separate accounts of our life insurance subsidiaries, as well as cash and cash equivalents, restricted and segregated cash and receivables. Managed assets includes client assets for which we provide investment management and other services, such as the assets of the AXP family of mutual funds, assets of institutional clients and assets held in our wrap accounts (retail accounts for which we receive a fee based on assets held in the account). Managed assets also includes assets managed by sub-advisors selected by us. Administered assets includes assets for which we provide administrative services, such as assets of our clients invested in other companies' products that we offer outside of our wrap accounts. Our investment management teams manage over 65% of our owned, managed and administered assets (which includes the portion of our owned assets and managed assets that are not sub-advised).

        For additional details regarding our owned, managed and administered assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        In connection with the separation and distribution, we have launched two new brand names for our businesses. We believe this dual brand strategy will provide greater flexibility in achieving our growth-related goals, in particular, our strategy to increase our presence in alternative distribution channels for our own products. We are using Ameriprise Financial as our holding company brand, as well as the name of our branded distribution network and our brand for certain retail products and services. Our branded financial advisors began doing business as The Personal Advisors of Ameriprise

2



Financial in early August 2005 and expect to associate our Ameriprise Financial brand with products that we market directly to clients, such as our personal auto and home protection products, 401(k), deposit and credit products and services, wrap accounts and retail brokerage services, as well as face-amount certificates (a form of investment certificate). We began marketing our mutual funds, annuities and protection products (other than personal auto and home) and our institutional separately managed account products under the RiverSource brand in early August 2005. Changes to the names of certain subsidiary legal entities and particular products and services will occur at a later time due to various legal and regulatory requirements.

Our Strengths

        We believe our strengths position our company to be the provider of choice to a growing base of mass affluent consumers, particularly as many of them reach their retirement phase of life. These strengths include our:

3



Our Strategy

        As an independent financial planning and financial services company with a nationwide presence, a diverse set of asset accumulation, income management and protection products and services and an industry leading reputation for financial planning, we believe we are well positioned to further strengthen our offerings to existing and new clients and deliver profitable growth to our shareholders. The strategies we have developed to accomplish these objectives include:

4


5



Our Business

Asset Accumulation and Income

        Our asset accumulation and income business offers a broad array of asset accumulation and income management products and services to help our clients address identified financial objectives. In 2004, approximately 68% of our revenues and 63% of our income before income tax provision and accounting change were attributable to our asset accumulation and income business. At June 30, 2005, we had $410.2 billion in owned, managed and administered assets, over 65% of which were managed by our investment management professionals.

        Retail Products and Services.    We offer our retail clients financial planning and other financial services through our nationwide network of financial advisors and registered representatives, as well as solutions to address our clients' identified cash management, fixed income and equity needs. These products include mutual funds, variable and fixed annuities, wrap accounts and face-amount certificates, and brokerage and other services, as well as deposit and credit products and personal trust services through service arrangements with American Express Bank, FSB, a subsidiary of American Express Company. At June 30, 2005, $118.1 billion, or 28.8% of our total owned, managed and administered assets as of such date, were managed on behalf of retail clients, including assets managed by Threadneedle. For the year ended December 31, 2004, our variable annuity products ranked 11th in new sales of variable annuities according to VARDS®, an independent variable annuity data provider. In addition to marketing our own products and services to retail clients through our nationwide network of financial advisors, we also market our own products and services to retail clients through strategic marketing alliances and local marketing programs for our branded advisors, and to employees of our corporate clients in on-site workshops through our Financial Education and Planning Services group, as well as our annuity products through third party banks and broker-dealers.

        Institutional Products and Services.    We offer separately managed account services to a variety of institutional clients, including pension plans, employee savings plans, foundations, endowments, corporations, governmental entities, high-net-worth individuals and not-for-profit organizations. We also provide investment management services for the general and separate accounts of insurance companies, including for our insurance company subsidiaries. At June 30, 2005, $124.7 billion, or 30.4% of our total owned, managed and administered assets as of such date, were managed for institutional clients (of which approximately $14.9 billion were managed for American Express Company and its subsidiaries), including assets managed by Threadneedle. In addition to asset management services, we also provide other alternative investment products, such as collateralized debt obligations, or CDOs, to our institutional clients.

        Retirement Products and Services.    We provide a variety of retirement services for our clients. The primary market for our retirement services is retirement plans with at least $10 million in assets, which are generally sponsored by mid- and large-size private employers, governmental entities and labor unions. We provide investment management services to collective investment funds held through our trust company subsidiary and offer additional services to employer-sponsored retirement plans. As of June 30, 2005, $11.3 billion, or 2.8% of our total owned, managed and administered assets as of such date, were managed for retirement services clients. This amount does not include AXP Funds held in retirement plans, which we include under assets managed for retail clients. Our trust company also provides trustee, custodial, record keeping, securities lending and common trust fund services for employer-sponsored retirement plans, including pension, profit-sharing, 401(k) and other qualified and non-qualified employee retirement plans as well as institutional asset custodial services to our affiliates.

        International Products and Services.    Outside the United States, we offer investment management products and services through Threadneedle, our U.K.-based investment management group. Threadneedle offers a wide range of asset management products and services, including segregated

6



asset management, mutual funds and hedge funds, to institutional clients and insurance companies, as well as to retail clients through intermediaries, banks and fund platforms in Europe. At June 30, 2005, the Threadneedle group of companies managed over $114.2 billion, or 27.8%, of our total owned, managed and administered assets, for both its retail and institutional clients. We include assets managed by Threadneedle in our aggregate retail and institutional managed assets.

Protection

        We offer a variety of protection products, including life insurance, disability income insurance, long-term care insurance, and personal auto and home insurance, to address the identified protection and risk management needs of our retail clients. We offer life, disability income and long-term care protection products primarily to our clients with financial plans and exclusively through our financial advisor network. We offer our personal auto and home protection products primarily on a direct basis through co-marketing alliances. Approximately 27% of our revenues and 42% of our income before income tax provision and accounting change in 2004 were attributable to our protection business.

        In 2004, our sales of individual life insurance, as measured by scheduled annual premiums, and excluding lump sum and excess premiums, consisted of 87% variable universal life, 3% fixed universal life and 10% traditional life. For the year ended December 31, 2004, we ranked second in sales of variable universal life based on total premiums (according to the Value™ survey prepared by Tillinghast-Towers Perrin, a consulting firm that provides research, consulting and other services to insurance and financial services companies worldwide), and seventh in sales of disability income insurance based on total premiums (according to LIMRA International®, an independent marketing and research organization).

Financial Strength and Credit Ratings

        In connection with the separation and distribution, both our principal life insurance subsidiary's financial strength ratings and our holding company credit ratings have been reviewed. Based on those reviews:

7


Holding company credit ratings are generally three notches lower than the financial strength ratings of a rated subsidiary for companies similar to ours with a comparable mix of business.


        Our headquarters are located at 707 2nd Avenue South, Minneapolis, Minnesota 55474 and our general telephone number is (612) 671-3131. We also maintain executive offices in New York, New York. We maintain an Internet site at http://www.ameriprise.com. Our website and the information contained on that site, or connected to that site, are not incorporated into our registration statement, of which this information statement is a part.

8



The Distribution

The following is a brief summary of the terms of the distribution.

Distributing company   American Express Company. After the distribution, American Express Company will not own any shares of our common stock.

Distributed company

 

Ameriprise Financial, which is currently a wholly-owned subsidiary of American Express Company. After the distribution, Ameriprise Financial will be an independent public company.

Distributed shares

 

All of the shares of Ameriprise Financial common stock owned by American Express Company, which will be 100% of our common stock outstanding immediately prior to the distribution. The number of shares that American Express Company will distribute to its shareholders will be reduced to the extent that cash payments are to be made in lieu of the issuance of fractional shares of our common stock, as described below.

Distribution ratio

 

One share of our common stock for every five shares of American Express Company stock that you hold at the close of business on the record date for the distribution.

Fractional shares

 

American Express Company will not distribute any fractional shares of our common stock to its shareholders. Instead, the transfer agent identified below will aggregate fractional shares into whole shares and sell them in the open market at prevailing market prices and distribute the proceeds pro rata to each person who otherwise would have been entitled to receive a fractional share in the distribution. You will not be entitled to any interest on the amount of payment made in lieu of a fractional share. See "The Distribution," included elsewhere in this information statement.

Record date

 

September 19, 2005 (5:00 p.m., New York City time).

Distribution date

 

September 30, 2005.

Distribution

 

On or about the distribution date, the transfer agent identified below will distribute the distributed shares of our common stock by crediting such shares to book-entry accounts established by the transfer agent for persons who were shareholders of American Express Company at the close of business on the record date. You will not be required to make any payment or surrender or exchange your American Express Company common stock or take any other action to receive your shares of our common stock. If you sell shares of American Express Company common stock in the "regular way" market between the record date and the distribution date, you will be selling your right to receive those shares of our common stock in the distribution. Registered shareholders will receive additional information from the transfer agent shortly after the distribution date. Beneficial shareholders will receive information from their brokerage firm.

9



 

 

Under the separation and distribution agreement, American Express Company may withdraw the proposed distribution without liability at any time prior to the time that the distribution is effected. See "Our Relationship with American Express Company—Agreements with American Express Company—Separation and Distribution Agreement," included elsewhere in this information statement.

Transfer agent

 

The Bank of New York.

Stock exchange listing

 

Our shares of common stock have been authorized for listing on The New York Stock Exchange, Inc. under the ticker symbol "AMP." Before September 15, 2005, there was no trading market for our common stock. On that date, trading of shares of our common stock is expected to begin on a "when issued" basis. See "The Distribution—Trading Between the Record Date and Distribution Date," included elsewhere in this information statement.

Incurrence of debt

 

In connection with the separation and distribution, we intend to obtain new financing to replace our current intercompany debt with American Express Company. For additional information relating to our planned financing arrangements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness," included elsewhere in this information statement.

Risks relating to the distribution and ownership of our common stock

 

The distribution and ownership of our common stock involve various risks. You should carefully read "Risk Factors," included elsewhere in this information statement.

Tax considerations

 

American Express Company has received a ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, the distribution will qualify as a transaction that is tax free under Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended. In addition, the distribution is conditioned upon the receipt by American Express Company of a favorable opinion of counsel confirming the distribution's tax free status, which American Express Company intends to obtain from Cleary Gottlieb Steen & Hamilton LLP, its special counsel. See "The Distribution—Certain U.S. Federal Income Tax Consequences of the Distribution," included elsewhere in this information statement, for a more detailed description of the U.S. federal income tax consequences of the distribution.

10



 

 

In connection with the distribution, we will be subject to restrictions on certain post-distribution actions, including significant transfers of our stock or assets, that could affect the qualification of the distribution as a tax free transaction. We will also generally indemnify American Express Company and its shareholders if the distribution fails to qualify as a tax free transaction for specified reasons. For additional information regarding these matters, see "Our Relationship with American Express Company—Agreements with American Express Company—Tax Allocation Agreement," included elsewhere in this information statement.

Dividend policy

 

We intend to pay cash dividends on our common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors, subject to regulatory and other constraints. See "Dividend Policy, " included elsewhere in this information statement.

Relationship with American Express Company

 

Prior to the distribution, we will enter into a separation and distribution agreement and several other agreements with American Express Company to effect the separation and distribution and provide a framework for our transitional relationships with American Express Company after the separation. For a discussion of these arrangements, see "Our Relationship with American Express Company—Agreements with American Express Company," included elsewhere in this information statement.

Shareholder inquiries

 

If you have any questions relating to the distribution, you should contact The Bank of New York at 1-800-463-5911 (Outside the U.S. and Canada call 1-212-815-3700).

11



Summary Consolidated Financial Data

        The following table sets forth summary consolidated financial information from our unaudited consolidated financial statements as of June 30, 2005 and 2004 and for the six months ended June 30, 2005 and 2004, audited consolidated financial statements as of December 31, 2004 and 2003 and for the three-year period ended December 31, 2004, and unaudited consolidated financial statements as of December 31, 2002, 2001 and 2000 and for the two-year period ended December 31, 2001. Our consolidated financial statements include various adjustments to amounts in our consolidated financial statements as a subsidiary of American Express Company. See Note 15 to our consolidated financial statements. The summary consolidated financial data presented below should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this information statement and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        Our consolidated financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including many changes that will occur in the operations and capitalization of our company as a result of our separation and distribution from American Express Company.


Ameriprise Financial
Summary Consolidated Financial Data

 
  Six Months Ended June 30,
  Years Ended December 31,
 
  2005(d)
  2004(a)(d)
  2004(a)(e)
  2003(b)(e)
  2002(e)
  2001(c)(d)
  2000(d)
 
  (in millions)

Income Statement Data:                                          
Revenues   $ 3,880   $ 3,575   $ 7,245   $ 6,361   $ 5,793   $ 4,981   $ 6,261
Expenses     3,421     2,952     6,072     5,420     4,868     4,918     4,796
Income before accounting change     338     431     865     738     674     110     1,025
Net income     338     360     794     725     674     87     1,025

Dividends paid to American Express Company

 

$


 

$

623

 

$

1,325

 

$

334

 

$

377

 

$

170

 

$

594

12


 
  As of June 30,
  As of December 31,
 
  2005(d)
  2004(a)(d)
  2004(a)(e)
  2003(b)(e)
  2002(d)
  2001(d)
  2000(d)
 
  (in millions)

Balance Sheet Data:                                          
Investments   $ 45,883   $ 43,006   $ 45,984   $ 43,264   $ 39,473   $ 35,020   $ 31,971
Separate account assets     37,433     32,908     35,901     30,809     21,981     27,334     32,349
Total assets     95,952     87,591     93,113     85,384     74,448     71,718     73,341
Future policy benefits and claims     33,169     32,699     33,253     32,235     28,959     24,810     24,494
Investment certificate reserves     12,174     9,517     11,332     9,207     8,666     8,227     7,348
Payable to American Express     1,838     1,755     1,869     1,562     1,395     830     398
Long-term debt     378     375     385     445     120     120     123
Separate account liabilities     37,433     32,908     35,901     30,809     21,981     27,334     32,349
Total liabilities     88,959     81,021     86,411     78,096     67,998     66,098     68,708
Shareholder's equity     6,993     6,570     6,702     7,288     6,450     5,620     4,633

(a)
Effective January 1, 2004, we adopted SOP 03-1, which resulted in a cumulative effect of accounting change that reduced first quarter 2004 results by $71 million ($109 million pretax). See Note 1 to our consolidated financial statements.

(b)
The consolidation of FIN 46-related entities in December 2003 resulted in a cumulative effect of accounting change that reduced 2003 net income through a non-cash charge of $13 million ($20 million pretax). See Note 1 to our consolidated financial statements.

(c)
In 2001, we recorded aggregate restructuring charges of $70 million ($107 million pretax). The aggregate restructuring charges consisted of $36 million for severance relating to the original plans to eliminate approximately 1,300 jobs (including off-shore outsourcing of certain client service positions related to advisor field office closings and headquarters re-engineering efforts) and $71 million of exit and asset impairment charges primarily relating to the consolidation of headquarters and advisor field office facilities.


During 2001, we also recognized pretax losses of approximately $1 billion (including $182 million and $826 million in the first and second quarters, respectively) from the write down and sale of certain high-yield debt securities. The second quarter pretax losses of $826 million included $403 million to recognize the impact of higher default rate assumptions on certain structured investments; $344 million to write down lower-rated securities (most of which were sold in 2001) in connection with our decision to lower our risk profile by reducing the size of our high-yield portfolio, allocating our investment portfolio toward stronger credits, and reducing the concentration of exposure to individual companies and industry sectors; and $79 million to write down certain other investments.


On January 1, 2001, we adopted the FASB's consensus on EITF Issue No. 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which resulted in a cumulative effect of accounting change that reduced 2001 results by approximately $22 million (approximately $34 million pretax).


Additionally, on January 1, 2001, we adopted SFAS No. 133, which resulted in a cumulative effect of accounting change that reduced 2001 results by approximately $1 million (approximately $2 million pretax).

(d)
Derived from unaudited consolidated financial statements.

(e)
Derived from audited consolidated financial statements included elsewhere in this information statement.

13



RISK FACTORS

        You should carefully consider each of the following risks and all of the other information set forth in this information statement. Some of the following risks relate to establishing our company as separate and independent from American Express Company. Other risks relate to our business. Finally, we describe risks relating to the securities markets and ownership of our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company in each of these categories of risk. However, the risks and uncertainties our company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

        If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.


Risks Relating to Our Separation from American Express Company

Our separation from American Express Company could adversely affect our business and profitability due to American Express Company's strong brand, reputation and capital base.

        As a subsidiary of American Express Company, we have marketed our products and services using the "American Express" brand name and logo, and we believe the association with American Express Company has provided us with preferred status among our clients, financial advisors and employees due to American Express Company's:

        Our separation from American Express Company may adversely affect our ability to attract and retain clients and their investments, which could result in outflows from our mutual funds, reduced sales of our other investment products, termination of our investment management relationships, or surrenders and withdrawals from our asset accumulation, income management and protection products. The loss of the American Express brand may also prompt some third party distributors to reconsider or terminate their distribution relationships with our company, such as our relationships with banks that distribute our annuities through their branch networks.

        The American Express brand and our affiliation with American Express Company have also been key aspects of our recruitment and retention of our branded financial advisors, both employees and franchisees, who make up our primary retail distribution channel. The separation from American Express Company and the loss of the brand may adversely affect our recruitment and retention of our branded financial advisors and the economics of our relationship with our branded financial advisors could be adversely affected, which could, in turn, have an adverse effect on our financial condition and results of operations.

        Our separation from American Express Company could also adversely affect our ability to attract and retain other key employees, including top-tier investment and research professionals to manage our own products.

        We cannot predict the effect that our separation from American Express Company will have on our business or our customers, financial advisors and employees.

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We will only have the right to use the American Express Company brand name and logo in a limited capacity for up to two years. If we fail to establish in a timely manner a new, independently recognized brand name with a strong reputation, our revenue and profitability could decline.

        In connection with the separation and distribution, we changed our corporate name to "Ameriprise Financial, Inc." and are operating under two new brand names, although we and our subsidiaries may use the American Express brand name and logo in conjunction with our brand name and logo for up to two years. Pursuant to the marketing and branding agreement, American Express Company will grant us the right to use the "American Express" brand name and logo in a limited capacity in conjunction with our brand name and logo for up to two years from the separation date. For more information regarding these arrangements, see "Our Relationship with American Express Company—Agreements with American Express Company—Marketing and Branding Agreement." When our right to use the American Express Company brand name and logo expires, we may not be able to maintain or enjoy comparable name recognition or status under our new brand. If we are unable to successfully manage the transition of our business to our new brand, the benefit we offer our branded financial advisors, customers and employees of having a recognized brand will be reduced, which could have an adverse effect on our revenue and profitability.

Client acquisition may be adversely affected by our separation from American Express Company.

        Although we have generally operated independently of American Express Company's other operations with respect to client services, we have relied on the American Express brand and cardmember relationships in acquiring clients as part of our retail growth strategy. As part of the marketing and branding arrangement with American Express Company, we will continue to market our products in a manner similar to the methods we currently use. However, overall response rates, marginal costs and profitability from these efforts may be negatively affected as a result of the change in our brand name. For additional information regarding this arrangement, see "Our Relationship with American Express Company—Agreements with American Express Company—Marketing and Branding Agreement." We cannot assure you that the clients we gained as a result of being affiliated with American Express Company will not move some or all of their existing business from us to another company or that we will be able to implement our mass affluent client acquisition strategy as cost-effectively when our cross-selling relationship with American Express Company is operated on an arm's length basis. Loss of a significant portion of these clients could negatively impact our results of operations and failure to acquire these clients could also have a negative impact on our business.

Our historical consolidated and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

        Our historical consolidated financial information included in this information statement does not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or those we will achieve in the future. This is primarily a result of the following factors:

15


        We have made adjustments based upon available information and assumptions that we believe are reasonable to reflect these factors, among others, in our pro forma financial information. However, our assumptions may prove not to be accurate, and accordingly, our pro forma financial information should not be assumed to be indicative of what our financial condition or results of operations actually would have been as a stand-alone company nor to be a reliable indicator of what our financial condition or results of operations actually may be in the future.

        For a description of the components of our historical consolidated financial information and adjustments to our pro forma financial information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—The Separation from American Express Company—Basis of Presentation" and our historical consolidated financial statements and pro forma financial information.

We will experience increased costs after the separation or as a result of the separation.

        We will need to replicate certain facilities, systems, infrastructure and personnel to which we will no longer have access after our separation from American Express Company. We will also need to make significant investments to develop our new brand and establish our ability to operate without access to American Express Company's existing operational and administrative infrastructure. These initiatives will be costly to implement. We currently estimate that we will incur approximately $875 million in total pretax, non-recurring separation costs. Approximately two-thirds of such costs are estimated to be incurred by December 31, 2006. Due to the scope and complexity of the underlying projects, the amount of total costs could be materially higher and the timing of incurrence of these costs is subject to change.

        American Express Company performs many important corporate functions for our operations, including information technology support, treasury, accounting, financial reporting, tax administration, human resource administration, marketing, legal, procurement and other services. We currently pay American Express Company for these services on a cost-allocation basis. Following the separation and distribution, American Express Company will continue to provide some of these services to us on a transitional basis, for which we will pay American Express Company arm's length rates generally based on American Express Company's direct and indirect costs. For more information regarding the transition arrangements, see "Our Relationship with American Express Company—Agreements with American Express Company—Transition Services Agreement." When we begin to operate these functions independently, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline.

        Prior to the separation, our business benefited from American Express Company's purchasing power when procuring goods and services, including office supplies and equipment, travel services and computer software licenses. As a stand-alone company, we may be unable to obtain goods and services at comparable prices or on terms as favorable as those obtained prior to the separation, which could decrease our overall profitability.

16


As part of the separation from American Express Company, we will refinance existing intercompany debt with external lenders, which could subject us to various restrictions and decrease our profitability.

        At or shortly prior to the separation, we expect to refinance our existing intercompany debt with American Express Company initially through a bridge facility. In October 2005, we intend to replace the bridge facility through the issuance of $1.5 billion of unsecured senior debt securities ranging in maturities from 5 to 30 years from issuance. We also intend to obtain an unsecured revolving credit facility at or shortly prior to the separation. These financing arrangements will contain customary restrictions, covenants and events of default. The terms of these financing arrangements and any future indebtedness may impose various restrictions and covenants on us (such as tangible net worth requirements) that could limit our ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities. In addition, our financing costs may be higher than they were as part of American Express Company. For a more detailed discussion of these borrowings and our liquidity following the separation and distribution, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness."

We may not have sufficient capital generation ability to meet our operating and regulatory capital requirements, and funding we do raise may adversely affect holders of our common stock through the issuance of more senior securities or through dilution.

        As a stand-alone company we may be required to maintain higher capital ratios to retain our credit ratings. In addition, we will need to cover volatility associated with variations in our operating, risk-based and regulatory capital requirements, including separation costs and contingent exposures, for example, in connection with our ongoing legal and regulatory matters. See "Our Business—Regulation" for more information regarding capital requirements and see "Our Business—Legal Proceedings" for more information regarding pending regulatory and legal proceedings. Although American Express Company has agreed to make a capital contribution to our company to cover, among other things, certain separation costs and the costs to establish our new brand, we cannot be certain that this capital contribution will be sufficient to cover all of our additional costs. If it is not sufficient, our financial condition could be adversely affected and our company credit ratings and/or the financial strength ratings of our insurance subsidiaries may be downgraded. For more information regarding the expected capital contribution from American Express Company, see "Our Relationship with American Express Company—Agreements with American Express Company—Separation and Distribution Agreement."

        In addition to the new financing arrangements we expect to enter into as part of the separation from American Express Company and the capital contribution we expect to receive from American Express Company, we may need to incur additional debt or issue equity in order to fund working capital, capital expenditures and product development requirements or to make acquisitions and other investments. If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have liquidation rights, preferences and privileges senior to those of holders of our common stock. If we raise funds through the issuance of equity, the issuance will dilute your ownership interest. We cannot assure you that debt or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain or grow our business. It may also be more expensive for us to raise funds through the issuance of additional debt than the cost of raising funds or issuing debt for our business while we were part of American Express Company.

17


As we build our information technology infrastructure and transition our data to our own systems, we could experience temporary business interruptions and incur substantial additional costs. In addition, we rely on American Express Company for disaster recovery and may experience difficulties in developing our own disaster recovery capability.

        After the separation, we will install and implement information technology infrastructure to support our business functions, including accounting and reporting, customer service and distribution. We anticipate this will involve significant costs. We may incur temporary interruptions in business operations if we cannot transition effectively from American Express Company's existing technology infrastructure (which covers hardware, applications, network, telephony, databases, backup and recovery solutions), as well as the people and processes that support them. We may not be successful in implementing our new technology infrastructure and transitioning our data, and we may incur substantially higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement the new infrastructure and transition our data, or our failure to implement the new infrastructure and transition our data successfully, could disrupt our business and have a material adverse effect on our profitability. In addition, technology service failures could have adverse regulatory consequences for our business and make us vulnerable to our competitors.

        We also rely on American Express Company's disaster recovery capabilities as part of our business continuity processes. After the separation from American Express Company, we will only have the right to use American Express Company's disaster recovery resources for up to two years. We will be required to develop and implement our own disaster recovery infrastructure and develop business continuity for our operations, which we anticipate will involve significant costs. We may not be successful in developing stand-alone disaster recovery capabilities and business continuity processes, and may incur substantially higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement new business continuity processes, or our failure to implement the new processes successfully, could disrupt our business and have a material adverse effect on our profitability in the event of a significant business disruption.

If the distribution does not qualify as a tax free transaction, tax could be imposed on both American Express Company shareholders and American Express Company.

        American Express Company has received a ruling from the Internal Revenue Service to the effect that the distribution will qualify as a transaction that is tax free under Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended, and intends to obtain an opinion of counsel from Cleary Gottlieb Steen & Hamilton LLP, its special counsel, confirming the distribution's tax free status. The ruling and opinion rely or will rely on certain facts and assumptions, and certain representations and undertakings from us, regarding the past and future conduct of our business and other matters. Notwithstanding the ruling and opinion, the Internal Revenue Service could determine on audit that the distribution should be treated as a taxable transaction, if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or if the distribution should become taxable for other reasons, including as a result of certain significant changes in our stock ownership after the distribution. In that case, the distribution could be treated as a taxable dividend and/or capital gain to you for U.S. federal income tax purposes. In addition, tax could be imposed on American Express Company based on the fair market value of our stock on the distribution date over American Express Company's tax basis in our stock. See "The Distribution—Certain U.S. Federal Income Tax Consequences of the Distribution."

We are agreeing to certain restrictions to preserve the treatment of the distribution as tax free to American Express Company and its shareholders, which will reduce our strategic and operating flexibility.

        As discussed above, the Internal Revenue Service ruling and opinion confirming the tax free status of the distribution will rely on certain representations and undertakings from us, and the tax free status

18



of the distribution could be affected if these representations and undertakings are not correct or are violated. In addition, current tax law generally creates a presumption that the distribution would be taxable to American Express Company, but not to its shareholders, if we or our shareholders were to engage in a transaction that would result in a 50% or greater change by vote or by value in our stock ownership during the four-year period beginning on the date that begins two years before the distribution date, unless it is established that the distribution and the transaction are not part of a plan or series of related transactions to effect such a change in ownership. In the case of such a 50% or greater change in our stock ownership, tax imposed on American Express Company in respect of the distribution would be based on the fair market value of our stock on the distribution date over American Express Company's tax basis in our stock.

        Under the tax allocation agreement that we will enter into with American Express Company, we will generally be prohibited, for a period of two years following the distribution, from (i) consenting to certain acquisitions of significant amounts of our stock; (ii) transferring significant amounts of our assets; (iii) failing to maintain certain components of our business as an active business; or (iv) engaging in certain other actions or transactions that could jeopardize the tax free status of the distribution, except in specified circumstances. In addition, we will generally be prohibited from consenting to certain acquisitions of significant amounts of our stock or assets, or from participating in certain other corporate transactions, unless the other parties to the transaction agree to be jointly and severally liable with us in respect of our indemnification obligation to American Express Company under the tax allocation agreement (described below). See "Our Relationship with American Express Company—Agreements with American Express Company—Tax Allocation Agreement."

We are agreeing to indemnify American Express Company and its shareholders for taxes and related losses resulting from certain actions that cause the distribution to fail to qualify as a tax free transaction.

        Under the tax allocation agreement that we will enter into with American Express Company we will generally indemnify American Express Company and its shareholders for taxes and related losses they suffer as a result of the distribution failing to qualify as a tax free transaction, if the taxes and related losses are attributable to (i) direct or indirect acquisitions of our stock or assets (regardless of whether we consent to such acquisitions); (ii) negotiations, understandings, agreements, or arrangements in respect of such acquisitions; or (iii) our failure to comply with certain representations and undertakings from us, including the restrictions described in the preceding risk factor. See "Our Relationship with American Express Company—Agreements with American Express Company—Tax Allocation Agreement." Our indemnity will cover both corporate level taxes and related losses imposed on American Express Company in the event of a 50% or greater change in our stock ownership described in the preceding risk factor, as well taxes and related losses imposed on both American Express Company and its shareholders if, due to our representations or undertakings being incorrect or violated, the distribution is determined to be taxable for other reasons.

        We currently estimate that the indemnification obligation to American Express Company for taxes due in the event of a 50% or greater change in our stock ownership could exceed $1.5 billion. This estimate, which does not take into account related losses such as interest, penalties, and other additions to tax, depends upon several factors that are beyond our control, including the fair market value of our stock on the distribution date. As a consequence, the indemnity to American Express Company could vary substantially from the estimate. Furthermore, the estimate does not address the potential indemnification obligation to both American Express Company and its shareholders in the event that, due to our representations or undertakings being incorrect or violated, the distribution is determined to be taxable for other reasons. In that event, the total indemnification obligation would likely be much greater.

19


Our separation from American Express Company could increase our U.S. federal income tax costs.

        Due to the separation, our life insurance subsidiaries will not be able to file a consolidated U.S. federal income tax return with the other members of our affiliated group until 2011. As a consequence, during this period, net operating and capital losses, credits, and other tax attributes generated by one group will not be available to offset income earned or taxes owed by the other group for U.S. federal income tax purposes. Any benefits relating to taxes arising from being part of the larger American Express Company group may also not be available. As a result of these and other inefficiencies, the aggregate amount of U.S. federal income tax that we pay may increase after the distribution, and we may in addition not be able to fully realize certain of our deferred tax assets.

The continued ownership of American Express Company common stock and options by our executive officers and some of our directors may create, or may create the appearance of, conflicts of interest.

        Because of their current or former positions with American Express Company, substantially all of our executive officers, including our Chairman and Chief Executive Officer and our Chief Financial Officer, and possibly some of our non-employee directors and director nominees, own American Express Company common stock and options to purchase American Express Company common stock. Although these holdings in the aggregate are insubstantial in relation to American Express Company as they currently represent, and are expected after the distribution to represent, less than 1% of American Express Company's outstanding common stock, the individual holdings of American Express Company stock and options to purchase that stock that will remain after the distribution may be significant for some of these persons compared to that person's total assets. Even though our board of directors will consist of a majority of directors who are independent from both American Express Company and our company and our executive officers who are currently employees of American Express Company will cease to be employees of American Express Company upon consummation of the distribution, ownership of American Express Company common stock and options to purchase American Express Company stock by our directors and officers after the separation may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for American Express Company than they do for us.


Risks Relating to Our Business

Interest rate fluctuations could adversely affect our business and profitability.

        Our insurance products and certain of our investment products are sensitive to interest rate fluctuations, and our future costs associated with such variations may differ from our historical costs. In addition, interest rate fluctuations could result in fluctuations in the valuation of certain minimum guaranteed benefits contained in some of our variable annuity products.

        During periods of increasing market interest rates, we must offer higher crediting rates on interest-sensitive products, such as fixed universal life insurance, fixed annuities and face-amount certificates, and we must increase crediting rates on inforce products to keep these products competitive. Because returns on invested assets may not increase as quickly as current interest rates, we may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets. In addition, increases in market interest rates may cause increased policy surrenders, withdrawals from life insurance policies and annuity contracts and requests for policy loans, as policyholders and contractholders seek to shift assets to products with perceived higher returns. This process may lead to an earlier than expected flow of cash out of our business. Also, increases in market interest rates may result in extension of the maturity of some of our investment assets. These earlier outflows and asset maturity extensions may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on our financial condition and results of operations. An increase in policy

20



surrenders and withdrawals also may require us to accelerate amortization of deferred acquisition costs or other intangibles or cause an impairment of goodwill, which would increase our expenses and reduce our net earnings.

        During periods of falling interest rates, our "spread," or the difference between the returns we earn on the investments that support our obligations under these products and the amounts that we must pay policyholders and contractholders, may be reduced. Because we may adjust the interest rates we credit on most of these products downward only at limited, pre-established intervals, and because some of them have guaranteed minimum crediting rates, our spreads could decrease and potentially become negative.

        Interest rate fluctuations also could have an adverse effect on the results of our investment portfolio. During periods of declining market interest rates, the interest we receive on variable interest rate investments decreases. In addition, during those periods, we are forced to reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of fixed income securities also may decide to prepay their obligations in order to borrow at lower market rates, which exacerbates the risk that we may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments. Interest rates declined to unusually low levels from 2001 to 2004. This contributed to a decrease in our weighted average investment yield from 6.16% for the year ended December 31, 2001 to 5.17% for the year ended December 31, 2004.

        For additional information regarding our investment portfolio, see "Our Business—Asset Accumulation and Income." For additional information regarding the sensitivity of the fixed income securities in our investment portfolio to interest rate fluctuations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risks."

Poor investment performance in our products could adversely affect our results of operations.

        We believe that investment performance is an important factor in the growth of our asset accumulation and income business. Poor investment performance could impair our revenues and earnings, as well as our prospects for growth, because:

Some of our mutual funds, including our AXP New Dimensions Fund, which represented 21% of our AXP mutual fund family managed assets (excluding variable portfolio funds sold through variable annuities and variable universal life contracts) as of June 30, 2005, have underperformed their Lipper peer groups (groups of funds with similar investment strategies) for the last three years. This has contributed to AXP Funds experiencing significant net outflows overall since 2000. We have also experienced net outflows in our institutional separately managed accounts over the last three years as a result of poor investment performance. In addition, in 2003 and 2004, we received lower management fee revenues due to downward adjustments of our management fees under our performance incentives. If we are unable to reverse the underperformance of these funds, if our funds generally fail to perform well on an absolute basis and in comparison to our peers, and if our institutional investment performance is poor in comparison to benchmarks, these outflow trends could continue or even accelerate and our revenues and earnings could decline.

21


A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and adversely affect our financial condition and results of operations.

        Financial strength ratings, which various ratings organizations publish as a measure of an insurance company's ability to meet contractholder and policyholder obligations, are important to maintaining public confidence in our products, the ability to market our products and our competitive position. Any downgrade in our financial strength ratings, or the announced potential for a downgrade, could have a significant adverse effect on our financial condition and results of operations in many ways, including:

        In connection with the separation and distribution, our principal life insurance subsidiary's financial strength ratings have been reviewed. Based upon those reviews, the financial strength ratings of IDS Life were confirmed at "Aa3" (Excellent) by Moody's with a stable outlook, confirmed at "A+" (Superior) by A.M. Best, and assigned a negative outlook, lowered to "AA-" (Very Strong) from "AA" (Very Strong) by Fitch at the time of the announcement, and confirmed upon review with a stable outlook, and assigned a new "AA-"(Very Strong) by Standard & Poor's with a stable outlook.

        Although we do not believe that the downgrade by Fitch or the assignment of a negative outlook by A.M. Best has negatively affected our business overall in any material respect, we cannot assure you that these ratings actions will not have an adverse effect over time or that our ratings will not be further downgraded in the future.

        The "Aa3" rating is the fourth-highest of Moody's 21 ratings categories. The "AA-" rating is the fourth-highest of Fitch's 24 ratings categories. The "A+" is the second-highest of A.M. Best's 16 ratings categories.

        In addition to the financial strength ratings of our insurance subsidiaries, ratings agencies also publish credit ratings for our company. Holding company credit ratings are generally three notches lower than the financial strength ratings of a rated subsidiary for companies similar to ours with a comparable mix of business. As a result of the recent reviews, Moody's lowered our senior debt rating to "A3" from "A2" (which had been lowered from "A1" at the time of the initial announcement of the separation and distribution by American Express) and assigned a stable outlook. Fitch assigned a new "A-" long-term issuer rating with a stable outlook, and we expect both Standard & Poor's and A.M. Best to issue a debt rating to our company at the time of our first senior debt issuance.

        Credit ratings have an impact on the interest rates we pay on the money we borrow, and our holding company ratings resulting from the recent reviews could increase our cost of borrowing, which could, in turn, have an adverse effect on our financial condition and results of operations. A further downgrade in our credit ratings could also increase our future cost of borrowing and have an adverse effect on our financial condition and results of operations.

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If we are unable to effectively manage the economics of changes in our product distribution mix and distribution channels, and other trends adversely affecting net flows in our product offerings, our results of operations could be adversely affected.

        In recent years, sales of our own mutual funds by our financial advisor network, including sales within our wrap account products (for which we receive a fee based on assets in the account), have declined as a percentage of our total mutual funds sales. We expect this trend to continue for the near-term. This is principally a result of the addition of mutual funds of other companies to our product offerings and clients' desire for expanded product choice. In addition, other critical factors such as shareholder demographics and increasing sales of alternative investment products have caused our AXP Funds to experience significant net outflows overall since 2000.

        In 2004, a substantial portion of the mutual funds sold by our advisors was comprised of the products of other companies. Generally, our profits from sales of other companies' mutual funds are lower than those from our own mutual funds. Part of our growth strategy is to expand alternative distribution channels for our own products. If we are unable to efficiently manage the economics of selling a growing proportion of mutual funds of other companies, to maintain an acceptable level of sales of our own products through our financial advisor network, to effectively develop third party distribution channels for our own mutual funds, or to expand the third party distribution channels for our annuity products, our results of operations could be adversely affected.

        Currently, our branded advisor network distributes annuity and protection products issued almost exclusively by our IDS Life companies. If our branded advisor distribution network is opened to annuity and protection products of other companies, we cannot assure you that there would not be a material adverse effect on our financial condition and results of operations.

Downturns and volatility in equity markets could adversely affect our business and profitability.

        Significant downturns and volatility in equity markets could have an adverse effect on our financial condition and results of operations. Market downturns and volatility may cause potential new purchasers of our products to refrain from purchasing products, such as mutual funds, variable annuities and variable universal life insurance, that have returns linked to the performance of the equity markets. Downturns may also cause current shareholders in our mutual funds and contractholders in our annuity and protection products to withdraw cash values from those products.

        Additionally, downturns and volatility in equity markets can have an adverse effect on the revenues and returns from our asset management services and wrap accounts. Because these products and services depend on fees related primarily to the value of assets under management, declines in the equity markets will reduce our revenues because the value of the investment assets we manage will be reduced. In addition, some of our variable annuity products contain guaranteed minimum death benefits and guaranteed minimum income, withdrawal and accumulation benefits. A significant market decline could result in guaranteed minimum benefits being higher than what current account values would support, which could have an adverse effect on our financial condition and results of operations.

        For additional information regarding the sensitivity of the equity securities in our investment portfolio to equity market fluctuations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures about Market Risks."

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The contracts governing the assets we manage are subject to termination on short notice. We also intend to submit new investment management agreements to shareholders of our AXP family of mutual funds for their approval. Termination or failure to obtain approval of our investment management and advisory contracts could have an adverse effect on our business.

        A significant portion of our revenue is derived from investment management agreements with our own AXP family of mutual funds that are terminable on 60 days' notice. Each investment management agreement with a mutual fund must be approved and renewed annually by the independent directors of each fund's board or its shareholders. Some of our investment management agreements may be terminated or may not be renewed.

        In addition, prior to the separation and distribution, we plan to transfer the investment management operations (including those for our mutual funds) that are currently located within our company to an existing wholly-owned asset management subsidiary. As part of this reorganization, the investment management agreements with our AXP family of mutual funds would be transferred to this subsidiary. We intend to submit new agreements to the shareholders of the mutual funds for approval at a meeting expected to be held during the first quarter of 2006, at which time our current investment management agreements are scheduled to expire. There can be no assurance that the mutual fund shareholders will approve the new agreements, or if approval is not obtained, that we will otherwise be able to continue our investment management relationship with the AXP family of mutual funds.

Investment management and other clients can withdraw assets from our management for a variety of reasons, which could lead to a decrease in our revenues and earnings.

        Although some contracts governing investment management services are subject to termination for failure to meet performance benchmarks, institutional and individual clients can generally terminate their relationships with us or our financial advisors at will or on relatively short notice. Our clients can also reduce the aggregate amount of managed assets or shift their funds to other types of accounts with different rate structures, for any number of reasons, including investment performance, changes in prevailing interest rates, changes in investment preferences, changes in our (or our advisors') reputation in the marketplace, changes in client management or ownership, loss of key investment management personnel and financial market performance. In a declining stock market, the pace of mutual fund redemptions and withdrawals of assets from other accounts could accelerate. Poor performance relative to other investment management firms may result in decreased purchases of fund shares, increased redemptions of fund shares and the loss of institutional or individual accounts. A reduction in managed assets, and the associated decrease in revenues and earnings, could have a material adverse effect on our business.

Defaults in our fixed income securities portfolio would adversely affect our earnings.

        Issuers of the fixed income securities that we own may default on principal and interest payments. As of June 30, 2005 and 2004, 6.5% and 7.6%, respectively, of our investment portfolio had ratings below investment-grade. Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those with investment-grade ratings, that default on their debt obligations, as occurred in 2001 and 2002. As of June 30, 2005 and 2004, we had fixed income securities in or near default (where the issuer had missed payment of principal or interest or entered bankruptcy) with a fair value of $3.9 million and $21.5 million, respectively. Default-related declines in the value of our fixed income securities portfolio could cause our net earnings to decline and could also require us to contribute capital to some of our regulated subsidiaries, which may require us to obtain funding during periods of unfavorable market conditions.

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As a holding company, we depend on the ability of our subsidiaries to transfer funds to us to pay dividends and to meet our obligations.

        We act as a holding company for our insurance and other subsidiaries. Dividends from our subsidiaries and permitted payments to us under our tax sharing arrangements with our subsidiaries are our principal sources of cash to pay shareholder dividends and to meet our other financial obligations. These obligations include our operating expenses and interest and principal on our borrowings and also include amounts we must pay to American Express Company under the tax allocation agreement and transition services agreement that we and American Express Company will enter into in connection with the separation and distribution. If the cash we receive from our subsidiaries pursuant to dividend payment and tax sharing arrangements is insufficient for us to fund any of these obligations, we may be required to raise cash through the incurrence of additional debt, the issuance of additional equity or the sale of assets. If any of this happens, it could adversely affect our financial condition and results of operations.

        Insurance and securities laws and regulations regulate the ability of many of our subsidiaries (such as our insurance and brokerage subsidiaries and our face-amount certificate company) to pay dividends or make other distributions. See "Our Business—Regulation." When we form our new banking subsidiary, its ability to pay dividends will also be regulated. In addition to the various regulatory restrictions that constrain our subsidiaries' ability to pay dividends to our company, the rating agencies impose various capital requirements on our company and our insurance company subsidiaries in order for us to maintain our ratings and the ratings of our insurance subsidiaries, which also constrains our and their ability to pay dividends.

Some of our investments are relatively illiquid.

        We invest a portion of our owned assets in privately placed fixed income securities, mortgage loans, policy loans, limited partnership interests, hedge funds, real estate and restricted investments held by securitization trusts, among others, all of which are relatively illiquid. These asset classes represented approximately 11.2% of the carrying value of our investment portfolio as of June 30, 2005. If we require significant amounts of cash on short notice in excess of our normal cash requirements, we may have difficulty selling these investments in a timely manner, or be forced to sell them for an amount less than we would otherwise have been able to realize, or both. For example, if an unexpected number of contractholders of our annuity products exercise their surrender right and we are unable to access other liquidity sources, we may have to quickly liquidate assets. Any inability to quickly dispose of illiquid investments could have an adverse effect on our financial condition and results of operations.

Intense competition could negatively affect our ability to maintain or increase our market share and profitability.

        Our businesses operate in intensely competitive industry segments. We compete based on a number of factors including name recognition, service, the quality of investment advice, investment performance, product features, price, perceived financial strength, and claims-paying and credit ratings. Our competitors include broker-dealers, financial advisors, asset managers, insurers and other financial institutions. Many of our businesses face competitors that have greater market share, offer a broader range of products, have greater financial resources, offer higher claims-paying or have higher credit ratings than we do.

We may be unable to attract and retain branded financial advisors.

        We are dependent on our network of branded financial advisors for a significant portion of the sales of our mutual funds, annuities, face-amount certificates and protection products. A significant number of our branded financial advisors operate as independent contractors under a uniform franchise

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agreement with our company. There can be no assurance that we will be successful in our efforts to recruit and retain new advisors to our network. If we are unable to attract and retain quality financial advisors, or our recruiting and retention costs increase significantly, our financial condition and results of operations could be materially adversely affected.

We may be unable to attract and retain key personnel.

        Our continued success depends to a substantial degree on our ability to attract and retain qualified personnel to conduct our fund management and investment advisory businesses, as well as senior management. The market for management talent, qualified fund managers, investment analysts and financial advisors is extremely competitive and has grown more so in recent periods due to industry growth. There can be no assurance that we will be successful in our efforts to recruit and retain the required personnel. If we are unable to attract and retain qualified individuals or our recruiting and retention costs increase significantly, our operations and financial results could be materially adversely affected.

If the counterparties to our reinsurance arrangements or to the derivative instruments we use to hedge our business risks default, we may be exposed to risks we had sought to mitigate, which could adversely affect our financial condition and results of operations.

        We use reinsurance to mitigate our risks in various circumstances. See "Our Business—Protection—Reinsurance." Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk with respect to our reinsurers. We cannot assure you that our reinsurers will pay the reinsurance recoverable owed to us now or in the future or that they will pay these recoverables on a timely basis. A reinsurer's insolvency or its inability or unwillingness to make payments under the terms of our reinsurance agreement could have an adverse effect on our financial condition and results of operations that could be material.

        In addition, we use derivative instruments to hedge various business risks. We enter into a variety of derivative instruments with a number of counterparties. If our counterparties fail to honor their obligations under the derivative instruments, our hedges of the related risk will be ineffective. That failure could have an adverse effect on our financial condition and results of operations that could be material.

Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

        We operate in highly regulated industries, and are required to obtain and maintain licenses for many of the businesses we operate in addition to being subject to regulatory oversight. Securities regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation. Various regulatory and governmental bodies have the authority to review our products and business practices and those of our employees and independent financial advisors and registered representatives and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our employees or independent financial advisors and registered representatives, are improper. See the risk factor entitled "—Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses" below. In addition, we are subject to heightened regulatory requirements relating to privacy and the protection of customer data. These regulations may constrain our ability to market our products and services to our potential customers and may make it more difficult for us to pursue our growth strategy. In addition to marketing constraints, we are continuing to refine our privacy policy to safeguard our client information and ensure compliance with applicable privacy regulations. Changes in privacy laws and regulations relating to use of credit bureau data could affect our ability to target prospective clients and manage appropriately our risks, which could negatively affect our profitability.

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        Compliance with applicable laws and regulations is time consuming and personnel-intensive. Changes in these laws and regulations may increase materially our direct and indirect compliance and other expenses of doing business. Our advisors may decide that the direct cost of compliance and the indirect cost of time spent on compliance matters outweigh the benefits of a career as a financial advisor, which could lead to advisor attrition. The costs of the compliance requirements we face, and the constraints they impose on our operations, could have a material adverse effect on our financial condition and results of operations. For a further discussion of the regulatory framework in which we operate, see "Our Business—Regulation." For more information regarding ongoing investigations, see "Our Business—Legal Proceedings."

Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses.

        We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our operations, both domestically and internationally. Pending legal and regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are typical of the industries and businesses in which we operate. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. See "Our Business—Legal Proceedings." Substantial legal liability in these or future legal or regulatory actions could have a material financial effect or cause significant reputational harm, which in turn could seriously harm our business prospects.

        As has been widely reported, the SEC, the NASD and several state attorneys general have brought numerous enforcement proceedings challenging several mutual fund industry practices, including late trading, market timing, disclosure of revenue sharing arrangements and inappropriate sales of (no front end load) Class B shares. On March 23, 2005, we announced that we had reached an agreement with the NASD to settle alleged violations of NASD rules arising from our sale of Class B shares. Our insurance subsidiaries have also been contacted by regulatory agencies for information relating to some of these investigations and are cooperating with those inquiries. Our involvement in these and other matters and the settlements we have reached are described in more detail under "Our Business—Regulation" and "—Legal Proceedings."

        An adverse outcome in one or more of these proceedings could have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

Competitive and regulatory pressures may require us to reduce the levels of our fees.

        Our profit margins and earnings are dependent in part on our ability to maintain current fee levels for the products and services that we offer. Competition within the financial services industry could lead us to reduce the fees that we charge our clients for products and services, and certain of our competitors have already implemented such reductions. See the risk factor entitled "—Intense competition could negatively affect our ability to maintain or increase our market share and profitability." In addition, we may be required to reduce our fee levels, or restructure the fees we charge, as a result of regulatory initiatives or proceedings that are either industry-wide or specifically targeted at our company. For example, our company and other industry participants are the subject of regulatory inquiries related to revenue sharing in connection with our distribution of mutual funds of other companies. As a result of these inquiries, we expect to adopt revised revenue sharing practices this year, which are likely to result in a reduction of revenue sharing rates and could result in a reduction in revenues. See the risk factor entitled "—Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth" and "Our Business—Legal Proceedings" for more information regarding this and other regulatory matters. Reductions or other

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changes in the fees that we charge for our products and services could reduce our revenues and earnings.

        In the years ended December 31, 2004 and 2003, we received approximately $1.1 billion and $1.0 billion, respectively, in revenues for distribution and servicing-related activity. A significant portion of these revenues was paid to us by our own AXP family of mutual funds in accordance with plans and agreements of distribution adopted under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, or Rule 12b-1. We believe that these fees are a critical element in the distribution of our own mutual funds. There have recently been suggestions from regulatory agencies and other industry participants that Rule 12b-1 fees in the mutual fund industry should be reconsidered and potentially reduced or eliminated. We believe that distribution and servicing-related fees paid to financial advisors will remain a key element in the mutual fund industry. However, an industry-wide reduction or restructuring of Rule 12b-1 fees could have a material adverse effect on our ability to distribute our own mutual funds and the fees we receive for distributing other companies' mutual funds, which could, in turn, have an adverse effect on our revenues and earnings.

Misconduct by our employees, advisors and registered representatives is difficult to detect and deter and could harm our business, results of operations or financial condition.

        Misconduct by our employees, advisors and registered representatives could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm. Misconduct can occur in each of our businesses and could include:

        We cannot always deter misconduct by our employees, advisors and registered representatives, and the precautions we take to prevent and detect this activity may not be effective in all cases. Prevention and detection among our branded franchisee advisors and our registered representatives, who are not employees of our company and tend to be located in small, decentralized offices, present additional challenges. Recently, misconduct by one of our financial advisors that we brought to the attention of the appropriate state securities regulator resulted in an adverse determination by the regulator regarding our supervision of advisors. Although we are taking corrective action responsive to the concerns raised by the regulator, we cannot assure you that the measures we adopt will successfully deter future advisor misconduct. We also cannot assure you that misconduct by our employees, advisors and registered representatives will not lead to a material adverse effect on our business, results of operations or financial condition.

If our reserves for future policy benefits and claims are inadequate, we may be required to increase our reserve liabilities, which could adversely affect our results of operations and financial condition.

        We establish reserve liabilities to provide for future obligations under our insurance policies, annuities and other investment products. Reserves do not represent an exact calculation of liability, but rather are estimates of expected net policy and contract benefits and claims payments over time. Our

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assumptions and estimates for establishing reserves require significant judgments and, therefore, are inherently uncertain. We cannot determine with precision the actual amounts that we will pay for benefit and claims payments, the timing of those payments, or whether the assets supporting our policy and contract liabilities will increase to the levels we estimate before payment of benefits or claims. We continually monitor our reserves. If we conclude that our reserves are insufficient to cover actual or expected policy and contract benefits and claims payments, we would be required to increase our reserves and incur income statement charges for the period in which we make the determination, which could adversely affect our results of operations and financial condition. For more information on how we set our reserves, see Note 1 to our consolidated financial statements included elsewhere in this information statement.

We may face losses if morbidity rates, mortality rates or unemployment rates differ significantly from our pricing expectations.

        We set prices for our life insurance, long-term care insurance, disability income insurance and some annuity products based upon expected claims and payment patterns, using assumptions for morbidity rates, or likelihood of sickness, and mortality rates, or likelihood of death, of our policyholders and contractholders. The long-term profitability of these products depends upon how our actual experience compares with our pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than our pricing assumptions, we could be required to make greater payments under long-term care insurance and disability income insurance policies and immediate annuity contracts than we had projected. Additionally, if mortality rates are higher than our pricing assumptions, we could be required to make greater payments under our life insurance policies and annuity contracts with guaranteed minimum death benefits than we had projected.

        The risk that our claims experience may differ significantly from our pricing assumptions is particularly significant for our long-term care insurance products notwithstanding our ability to implement future price increases. Long-term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years after pricing assumptions have been established. Moreover, as a relatively new product in the market, long-term care insurance does not have the extensive claims experience history of life insurance, and, as a result, our ability to forecast future claim rates for long-term care insurance is more limited than for life insurance.

We may face losses if there are significant deviations from our assumptions regarding the future persistency of our insurance policies and annuity contracts.

        The prices and expected future profitability of our life insurance and deferred annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, which is the probability that a policy or contract will remain in force from one period to the next. The effect of persistency on profitability varies for different products. For most of our life insurance and deferred annuity products, actual persistency that is lower than our persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy or contract. For the years ended December 31, 2004, 2003 and 2002, persistency in our life insurance, fixed annuity and variable annuity businesses has been slightly higher than we had assumed.

        For our long-term care insurance, actual persistency that is higher than our persistency assumptions could have a negative impact on profitability. If these policies remain in force longer than we assumed, then we could be required to make greater benefit payments than we had anticipated when we priced these products. This risk is particularly significant in our long-term care insurance business because we do not have the depth of experience that we have in many of our other businesses. As a result, our ability to predict persistency for long-term care insurance is more limited than for

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many other products. Some of our long-term care insurance policies have experienced higher persistency than we had assumed, which has resulted in adverse claims experience.

        Because our assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and claims may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of our products permit us to increase premiums during the life of the policy or contract, we cannot guarantee that these increases would be sufficient to maintain profitability. Additionally, some of these pricing changes require regulatory approval, which may not be forthcoming. Moreover, many of our products do not permit us to increase premiums or limit those increases during the life of the policy or contract. Significant deviations in experience from pricing expectations regarding persistency could have an adverse effect on the profitability of our products.

We may be required to accelerate the amortization of deferred acquisition costs, which would increase our expenses and reduce profitability.

        Deferred acquisition costs, or DAC, represent the costs of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life and disability income insurance and, to a lesser extent, marketing and promotional expenses for personal auto and home insurance, and distribution expense for certain mutual fund products. For annuity and insurance products, we amortize DAC over periods approximating the lives of the related policy or contract, generally as a percentage of premiums or estimated gross profits associated with that policy or contract. For certain mutual fund products, we generally amortize DAC over fixed periods on a straight-line basis.

        Our projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. We periodically review and, where appropriate, adjust our assumptions. When we change our assumptions, we may be required to accelerate the amortization of DAC or to record a charge to increase benefit reserves.

        During the first quarter of 2004 and in conjunction with the adoption of Statement of Position 03-1, or SOP 03-1 (which requires us to establish a liability for benefit features on insurance contracts if we expect to generate a gain in earlier years and losses in later years of the contract), we (1) established additional liabilities for insurance benefits that may become payable under variable annuity death benefit guarantees or on single pay universal life contracts, which prior to January 1, 2004 were expensed when payable, (2) established additional liabilities for certain variable universal life and single-pay universal life insurance contracts under which contractual costs of insurance charges are expected to be less than future death benefits and (3) considered these liabilities in valuing DAC associated with variable annuity guaranteed benefits or on variable insurance contracts as well as deferred sales inducement costs for certain variable annuity guaranteed benefits. As a result, we recognized a $109 million charge on establishing the future liabilities under death benefit guarantees and recognized a $66 million reduction in DAC amortization expense to reflect the lengthening of the amortization periods for certain products impacted by SOP 03-1. As of June 30, 2005 and December 31, 2004, we had $4.0 billion of DAC, and we amortized $437 million and $480 million of DAC as a current-period expense for the years ended December 31, 2004 and 2003, respectively. For more information regarding DAC and SOP 03-1, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Deferred Acquisition Costs" and "—Recent Accounting Pronouncements," respectively.

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Regulation XXX may have an adverse effect on our financial condition and results of operations by requiring us to increase our statutory reserves for term life and universal life insurance or incur higher operating costs.

        The Model Regulation entitled "Valuation of Life Insurance Policies," commonly known as "Regulation XXX," was promulgated by the National Association of Insurance Commissioners, or NAIC, and adopted by many states as of December 31, 2000. It requires insurers to establish additional statutory reserves for term and universal life insurance policies with long-term premium guarantees. Virtually all of our newly issued term and universal life insurance business is now affected by Regulation XXX.

        In response to this regulation, we have increased term life and universal life insurance statutory reserves, and implemented reinsurance actions to mitigate the impact of Regulation XXX. However, we cannot assure you that there will not be regulatory or other challenges to the actions we have taken to date. The result of those challenges could require us to increase statutory reserves above anticipated levels or incur higher operating costs at some point in the future.

        We also cannot assure you that we will be able to continue to implement actions to mitigate the impact of Regulation XXX on future sales of term and universal life insurance products. If we are unable to continue to implement those actions, we may be required to increase statutory reserves or incur higher operating costs than we currently anticipate. We also may have to implement measures that may be disruptive to our business. For example, because term and universal life insurance are particularly price-sensitive products, any increase in premiums charged on these products in order to compensate us for the increased statutory reserve requirements or higher costs of reinsurance may result in a significant loss of volume and adversely affect our life insurance operations.

Changes in U.S. federal income tax law could make some of our products less attractive to clients.

        Many of the products we issue or on which our businesses are based (including both insurance products and non-insurance products) enjoy favorable treatment under current U.S. federal income tax law. Changes in U.S. federal income tax law could thus make some of our products less attractive to clients.

Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

        We have devoted significant resources toward developing our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what our models indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

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Risks Relating to Our Common Stock

There is no market for our common stock, and once our common stock begins trading, the market price of our shares may fluctuate widely.

        There is no public market for our common stock. On September 15, 2005, in connection with the declaration by the board of directors of American Express Company of the distribution, our common stock is expected to begin trading publicly on a "when issued" basis. We have not set an initial price for our common stock. The price for our common stock will be established by the public markets.

        We cannot predict the prices at which our common stock may trade after the distribution. Indeed, the combined market prices of our common stock and American Express Company common stock after the distribution may not equal or exceed the market value of American Express Company common stock immediately before the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

        Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Substantial sales of common stock may occur in connection with this distribution, which could cause our stock price to decline.

        The shares of our common stock that American Express Company distributes to its shareholders generally may be sold immediately in the public market. Following the distribution, we believe (based on information as of August 5, 2005) that Warren Buffett, through Berkshire Hathaway Inc. and its subsidiaries, will beneficially own 12.22% of our common stock, Davis Selected Advisors, L.P. will beneficially own 5.50% of our common stock and FMR Corp. will beneficially own 5.09% of our common stock (see "Principal Shareholders"). We believe it is probable that some American Express Company shareholders, including possibly our principal shareholders, will sell our common stock received in the distribution, for reasons such as our business profile or market capitalization as an independent company not fitting their investment objectives. Moreover, index funds tied to the Standard & Poor's 500 Index, the Russell 1000 Index and other indices hold shares of American Express Company common stock. To the extent our common stock is not included in these indices, certain of these index funds will likely be required to sell the shares of our common stock that they receive in the distribution. The sale of significant amounts of our common stock or the perception in the market that this will occur may lower the market price of our common stock.

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Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.

        Our certificate of incorporation and bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making them unacceptably expensive to the raider and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. For more information, see "Description of Capital Stock—Anti-takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law."

        We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our shareholders.

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

        We have made various forward-looking statements in this information statement. Examples of such forward-looking statements include:

        The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements. Such factors, some of which are discussed under "Risk Factors," include, but are not limited to:

        We caution you that the foregoing list of factors is not exclusive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

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THE DISTRIBUTION

General

        On February 1, 2005, the American Express Company board of directors announced its intention to pursue the disposition of our company through the distribution of our common stock to American Express Company's shareholders.

        On August 24, 2005, the American Express Company board of directors approved the distribution of all of American Express Company's shares of our common stock to holders of American Express Company common stock. To effect the distribution, the American Express Company board declared a dividend on American Express Company common stock consisting of all of the shares of our common stock that American Express Company will own on the date of the distribution. These shares will represent 100% of our outstanding common stock immediately prior to the distribution. The dividend will be paid at 5:00 p.m., New York City time, on September 30, 2005, the distribution date, in the amount of one share of our common stock for every five shares outstanding of American Express Company common stock as described below to each shareholder on the record date.

        Please note that you will not be required to pay any cash or other consideration for the shares of our common stock distributed to you or to surrender or exchange your shares of American Express Company common stock to receive the dividend of our common stock.

Reasons for the Distribution

        Currently, American Express Company offers a variety of products and services worldwide in the payments and network processing businesses, including, among others, global card network services, charge cards and credit cards for consumers and businesses, American Express® Travelers Cheques and prepaid card products, business travel and management services and consumer travel services.

        American Express Company has concluded that the prospects of our business and its payments and network processing businesses would be improved if each business could deploy capital and management resources based on their own industry required returns and strategic goals and not in competition with the other businesses.

        Accordingly, American Express Company has indicated its primary motivation for the separation and distribution is to eliminate the competing demands between American Express Company's payments and network processing businesses and our business for capital and management resources, thus affording both our companies greater flexibility to manage, invest in and expand our businesses.

The Number of Shares You Will Receive

        For each five shares of American Express Company common stock that you own at 5:00 p.m., New York City time on September 19, 2005, the record date, you will receive one share of our common stock on the distribution date.

        It is important to note that if you sell your shares of American Express Company common stock between the record date and the distribution date in the "regular way" market, you will be selling your right to receive the share dividend in the distribution. Please see the following section "—Trading Between the Record Date and Distribution Date."

Trading Between the Record Date and Distribution Date

        Beginning on or shortly before the record date and until the distribution date, there will be two markets in American Express Company common stock: a "regular way" market and an "ex-distribution" market. Shares of American Express Company common stock that trade on the regular way market will trade with an entitlement to shares of our common stock distributed pursuant

35



to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you owned shares of American Express Company common stock at 5:00 p.m., New York City time, on the record date and sell those shares on the regular way market prior to the distribution date, you will also be selling the shares of our common stock that would have been distributed to you pursuant to the distribution. If you sell those shares of American Express Company common stock on the ex-distribution market prior to the distribution date, you will still receive the shares of our common stock that were to be distributed to you pursuant to your ownership of the shares of American Express Company common stock.

        Furthermore, beginning on or shortly before the record date and ending on the distribution date there will be a "when issued trading" market in our common stock. When issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when issued trading market will be a market for shares of our common stock that will be distributed to American Express Company shareholders on the distribution date. If you owned shares of American Express Company common stock at 5:00 p.m., New York City time, on the record date, then you are entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without the shares of American Express Company common stock you own, on the when issued trading market. On the first trading day following the distribution date, when issued trading with respect to our common stock will end and regular way trading will begin.

When and How You Will Receive the Dividend

        American Express Company will pay the dividend on September 30, 2005 by releasing its shares of our common stock to be distributed in the distribution to The Bank of New York, our transfer agent. As part of the distribution, we will adopt a book-entry share transfer and registration system for our common stock. This means that instead of receiving physical share certificates, registered holders of American Express Company common stock entitled to the distribution will have their shares of our common stock distributed on the date of the distribution credited to book-entry accounts established for them by the transfer agent. The transfer agent will mail an account statement to each such registered holder stating the number of shares of our common stock credited to the holder's account. After the distribution, you may request:

        For those holders of American Express Company common stock who hold their shares through a broker, bank or other nominee, the transfer agent will credit the shares of our common stock to the accounts of those nominees who are registered holders, who, in turn, will credit their customers' accounts with our common stock. We and American Express Company anticipate that brokers, banks and other nominees will generally credit their customers' accounts with our common stock on the same day that their accounts are credited, which is expected to be the distribution date.

        The transfer agent will not deliver any fractional shares of our common stock in connection with the distribution. Instead, the transfer agent will aggregate all fractional shares and sell them on behalf of those holders who otherwise would be entitled to receive a fractional share. We anticipate that these sales will occur as soon after the date of the distribution as practicable. Such holders will then receive a cash payment in an amount equal to their pro rata share of the total net proceeds of those sales. Such cash payment will be made to the holders in the same account in which the underlying shares are held. If you physically hold American Express Company stock certificates, your check for any cash that you may be entitled to receive instead of fractional shares of our common stock will follow separately.

36



None of American Express Company, our company or the transfer agent will guarantee any minimum sale price for the fractional shares of our common stock. Neither our company nor American Express Company will pay any interest on the proceeds from the sale of fractional shares.

Certain U.S. Federal Income Tax Consequences of the Distribution

        The following discussion summarizes certain U.S. federal income tax consequences of the distribution for a beneficial owner of American Express Company common stock that holds such common stock as a capital asset for tax purposes. The discussion is of a general nature and does not purport to deal with persons in special tax situations, including, for example, financial institutions, insurance companies, regulated investment companies, dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, tax exempt entities, persons holding American Express Company common stock in a tax-deferred or tax-advantaged account, or persons holding American Express Company common stock as a hedge against currency risk, as a position in a "straddle," or as part of a "hedging" or "conversion" transaction for tax purposes.

        For purposes of this summary, a "U.S. holder" is a beneficial owner of American Express Company common stock that is an individual U.S. citizen or resident, a U.S. domestic corporation or otherwise subject to U.S. federal income tax on a net income basis in respect of such common stock, and a "non-U.S. holder" is a beneficial owner of American Express Company common stock that is not a U.S. holder (and is not treated as a partnership for U.S. federal income tax purposes). We use the term "holder" to refer to both U.S. holders and non-U.S. holders.

        This summary does not address all of the tax considerations that may be relevant to a holder of American Express Company common stock. In particular, we do not address:

        This summary is based on laws, regulations, rulings, interpretations and decisions now in effect, all of which are subject to change, possibly on a retroactive basis. It is not intended to be tax advice.

        You should consult your own tax advisor as to all of the tax consequences of the distribution to you in light of your own particular circumstances, including the consequences arising under state, local and foreign tax laws, as well as possible changes in tax laws that may affect the tax consequences described herein.

        American Express Company has received a ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, the distribution will qualify as a transaction that is tax free under Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended. In addition, the distribution is conditioned upon the receipt by American Express Company of a favorable opinion of counsel confirming the distribution's tax free status, which American Express Company intends to obtain from Cleary Gottlieb Steen & Hamilton LLP, its special counsel. Except as otherwise noted, it is assumed for purposes of the following discussion that the distribution will so qualify.

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        Subject to the discussion below relating to the receipt of cash in lieu of fractional shares, if the distribution qualifies as tax free, then:

        Although an Internal Revenue Service ruling generally is binding on the Internal Revenue Service, if the facts, assumptions, representations or undertakings set forth in the ruling request are incorrect or violated in any material respect, the ruling may be retroactively modified or revoked by the Internal Revenue Service. An opinion of counsel represents counsel's best legal judgment but is not binding on the Internal Revenue Service or any court. If, on audit, the Internal Revenue Service held the distribution to be taxable, the above consequences would not apply and both American Express Company and its shareholders could be subject to tax.

        If the distribution were taxable to American Express Company and its shareholders, then:

38


        If, due to any of our representations or undertakings being incorrect or violated, the Internal Revenue Service held the distribution on audit to be taxable, we could be required to indemnify both American Express Company and its shareholders for the taxes described above and related losses. In addition, current tax law generally creates a presumption that the distribution would be taxable to American Express Company, but not to its shareholders, if we or our shareholders were to engage in a transaction that would result in a 50% or greater change by vote or by value in our stock ownership during the four-year period beginning on the date that begins two years before the distribution date, unless it is established that the distribution and the transaction are not part of a plan or series of related transactions to effect such a change in ownership. If the distribution were taxable to American Express Company due to such a 50% or greater change in our stock ownership, American Express Company would recognize a gain equal to the excess of the fair market value of our common stock on the date of the distribution over American Express Company's tax basis therein and we could be required to indemnify American Express Company for the tax on such gain and related losses. See "Our Relationship with American Express Company—Agreements with American Express Company—Tax Allocation Agreement."

        No fractional shares of our common stock will be issued in the distribution. All fractional shares resulting from the distribution will be aggregated and sold by the transfer agent, and the proceeds will be distributed to the owners of such fractional shares. A holder that receives cash in lieu of a fractional share of our common stock as a part of the distribution will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the holder's tax basis in the fractional share determined as described under "—General," above. An individual U.S. holder would generally be subject to U.S. federal income tax at a maximum rate of 15% with respect to such a capital gain, assuming that the U.S. holder had held all of its American Express Company common stock for more than one year. A non-U.S. holder would generally not be subject to U.S. federal income tax with respect to such a capital gain, unless the non-U.S. holder were an individual who was present in the United States for 183 days or more in the taxable year of the distribution and certain other conditions were met.

        Payments of cash in lieu of a fractional share of our common stock made in connection with the distribution may, under certain circumstances, be subject to "backup withholding" unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations and non-U.S. holders will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding does not constitute an additional tax, but is merely an advance payment that may be refunded or credited against a holder's U.S. federal income tax liability if the required information is supplied to the Internal Revenue Service.

        Current Treasury regulations require each U.S. holder who receives our common stock pursuant to the distribution to attach to its U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth such data as may be appropriate in order to show the applicability to the distribution of Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended. American Express Company will provide to each holder of record of American Express Company common stock as of the record date appropriate information to be included in such statement.

39



CAPITALIZATION

        The following table presents our historical capitalization at June 30, 2005 and our pro forma capitalization at that date reflecting the distribution as if the distribution had occurred on June 30, 2005. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable.

        The capitalization table below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the notes to those financial statements and "Unaudited Pro Forma Financial Information."


Ameriprise Financial
Capitalization Table

 
  As of June 30, 2005
 
 
  Historical
  Pro Forma(a)
 
 
  Unaudited
(in millions)

 
Payable to American Express Company   $ 1,838   $ (b)
Long-term debt     378     1,878 (c)
Shareholder's equity:              
  Common Stock, par value $.01 per share(d)              
  Additional paid-in capital     2,926     4,178 (d)
  Retained earnings     3,753     3,566  
  Accumulated other comprehensive income     314     314  
   
 
 
Total shareholder's equity     6,993     8,058  
   
 
 
Total capitalization   $ 9,209   $ 9,936  
   
 
 
(a)
As described more fully in "Unaudited Pro Forma Financial Information," the pro forma amounts include the following adjustments to reflect the transfer to American Express Company of our 50% ownership interest in American Express International Deposit Company (or AEIDC, our Cayman Islands joint venture with American Express Bank Ltd., a wholly-owned, indirect subsidiary of American Express Company): reductions of $186 million to Payable to American Express Company and $187 million to Retained earnings, as well as an increase of $187 million to Additional paid-in capital.

(b)
In addition to the adjustments described in note (a), reflects the settlement of the $1,652 million Payable to American Express Company initially with the proceeds from a bridge facility that management intends to have in place on or prior to the separation and distribution, and then, as described in more detail in note (c) below, $1.5 billion of unsecured senior debt financing, and cash. On August 5, 2005, we paid off the construction financing amount of the intercompany debt payable to American Express Company in the amount of $260 million.

(c)
Pro forma Long-term debt reflects $1.5 billion of unsecured senior debt financing ranging in maturities from 5 to 30 years from issuance and having an assumed blended effective interest expense of 4.85% based on (i) the risk free interest rate level locked in under forward starting interest rate swaps entered into in June 2005 that terminate in October 2005 (see Note 5 to the unaudited consolidated financial statements for the six months ended June 30, 2005), plus (ii) an estimated credit spread based on our current assumptions regarding our expected credit rating. Our actual interest expense related to the senior debt will be dependent on credit spreads prevailing at the time of issuance. At or shortly prior to the separation and distribution, we also intend to obtain an unsecured revolving credit facility.

(d)
Reflects the distribution of 248 million common shares to shareholders based on the distribution ratio of one share of our common stock for every five shares of American Express Company common stock had the distribution occurred on June 30, 2005. In addition to the adjustments described in note (a), pro forma Additional paid-in capital reflects the $1,065 million capital contribution from American Express Company.

40



DIVIDEND POLICY

        We intend to pay cash dividends on our common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors, and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal requirements, regulatory constraints, industry practice and other factors that the board of directors deems relevant.

        We are primarily a holding company and as a result, our ability to pay dividends in the future will depend on receiving dividends from our subsidiaries. Many of our subsidiaries (including our insurance and brokerage subsidiaries and our face-amount certificate company) are restricted in their ability to pay dividends to our company, and, when formed, our new banking subsidiary will also be similarly restricted. See "Our Business—Regulation" for more information regarding regulatory restrictions on our subsidiaries' ability to pay dividends. For more information regarding our plans to form a banking subsidiary, see "Our Business—Asset Accumulation and Income—Retail Products and Services—Deposit and Credit Products."

41



SELECTED CONSOLIDATED FINANCIAL DATA

        The following table sets forth selected consolidated financial information from our unaudited consolidated financial statements as of June 30, 2005 and 2004 and for the six months ended June 30, 2005 and 2004, audited consolidated financial statements as of December 31, 2004 and 2003 and for the three-year period ended December 31, 2004, and unaudited consolidated financial statements as of December 31, 2002, 2001 and 2000 and for the two-year period ended December 31, 2001. Our consolidated financial statements include various adjustments to amounts in our consolidated financial statements as a subsidiary of American Express Company. See Note 15 to our consolidated financial statements. The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this information statement and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        Our consolidated financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including many changes that will occur in the operations and capitalization of our company as a result of the separation and distribution from American Express Company.


Ameriprise Financial
Selected Consolidated Financial Data

 
  Six Months Ended
June 30,

  Years Ended December 31,
 
  2005(d)
  2004(a)(d)
  2004(a)(e)
  2003(b)(e)
  2002(e)
  2001(c)(d)
  2000(d)
 
  (in millions)


Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues   $ 3,880   $ 3,575   $ 7,245   $ 6,361   $ 5,793   $ 4,981   $ 6,261
Expenses     3,421     2,952     6,072     5,420     4,868     4,918     4,796
Income before accounting
change
    338     431     865     738     674     110     1,025
Net income     338     360     794     725     674     87     1,025

Dividends paid to American Express Company

 

$


 

$

623

 

$

1,325

 

$

334

 

$

377

 

$

170

 

$

594
 
  As of June 30,
  As of December 31,
 
  2005(d)
  2004(a)(d)
  2004(a)(e)
  2003(b)(e)
  2002(d)
  2001(d)
  2000(d)
 
  (in millions)

Balance Sheet Data:                                          
Investments   $ 45,883   $ 43,006   $ 45,984   $ 43,264   $ 39,473   $ 35,020   $ 31,971
Separate account assets     37,433     32,908     35,901     30,809     21,981     27,334     32,349
Total assets     95,952     87,591     93,113     85,384     74,448     71,718     73,341
Future policy benefits and claims     33,169     32,699     33,253     32,235     28,959     24,810     24,494
Investment certificate reserves     12,174     9,517     11,332     9,207     8,666     8,227     7,348
Payable to American Express     1,838     1,755     1,869     1,562     1,395     830     398
Long-term debt     378     375     385     445     120     120     123
Separate account liabilities     37,433     32,908     35,901     30,809     21,981     27,334     32,349
Total liabilities     88,959     81,021     86,411     78,096     67,998     66,098     68,708
Shareholder's equity     6,993     6,570     6,702     7,288     6,450     5,620     4,633

(a)
Effective January 1, 2004, we adopted SOP 03-1, which resulted in a cumulative effect of accounting change that reduced first quarter 2004 results by $71 million ($109 million pretax). See Note 1 to our consolidated financial statements.

42


(b)
The consolidation of FIN 46-related entities in December 2003 resulted in a cumulative effect of accounting change that reduced 2003 net income through a non-cash charge of $13 million ($20 million pretax). See Note 1 to our consolidated financial statements.

(c)
In 2001, we recorded aggregate restructuring charges of $70 million ($107 million pretax). The aggregate restructuring charges consisted of $36 million for severance relating to the original plans to eliminate approximately 1,300 jobs (including off-shore outsourcing of certain client service positions related to advisor field office closings and headquarters re-engineering efforts) and $71 million of exit and asset impairment charges primarily relating to the consolidation of headquarters and advisor field office facilities.


During 2001, we also recognized pretax losses of approximately $1 billion (including $182 million and $826 million in the first and second quarters, respectively) from the write down and sale of certain high-yield debt securities. The second quarter pretax losses of $826 million included $403 million to recognize the impact of higher default rate assumptions on certain structured investments; $344 million to write down lower-rated securities (most of which were sold in 2001) in connection with our decision to lower our risk profile by reducing the size of our high-yield portfolio, allocating our investment portfolio toward stronger credits, and reducing the concentration of exposure to individual companies and industry sectors; and $79 million to write down certain other investments.


On January 1, 2001, we adopted the FASB's consensus on EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which resulted in a cumulative effect of accounting change that reduced 2001 results by approximately $22 million (approximately $34 million pretax).


Additionally, on January 1, 2001, we adopted SFAS No. 133, which resulted in a cumulative effect of accounting change that reduced 2001 results by approximately $1 million (approximately $2 million pretax).

(d)
Derived from unaudited consolidated financial statements.

(e)
Derived from audited consolidated financial statements included elsewhere in this information statement.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

        The unaudited pro forma consolidated financial statements of our company presented below have been derived from our audited consolidated financial statements for the year ended December 31, 2004 and from our unaudited consolidated financial statements for the six months ended June 30, 2005. The pro forma adjustments and notes to the pro forma consolidated financial statements give effect to the distribution of our common stock by American Express Company and the separation and distribution agreement entered into with American Express Company, as well as the related transition services and other ancillary agreements entered into with American Express Company and with our financial advisors, employees and certain other parties. These unaudited pro forma consolidated financial statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto included elsewhere in this information statement.

        The unaudited pro forma consolidated statements of income for the year ended December 31, 2004 and the six months ended June 30, 2005 have been prepared as if the separation and distribution had occurred as of January 1, 2004. The unaudited pro forma consolidated balance sheet at June 30, 2005 has been prepared as if the separation and distribution had occurred on June 30, 2005. The pro forma adjustments are based upon the best information available and assumptions that management believes are reasonable. The unaudited pro forma consolidated financial statements are for illustrative and informational purposes only and are not intended to represent or be indicative of what our results of operations or financial position would have been had the separation and distribution and related agreements occurred on the dates indicated. The unaudited pro forma financial information also should not be considered representative of our future financial position or results of operations.

        The pro forma adjustments give effect to the following separation and distribution items:

44


        The pro forma adjustments do not give effect to:

 
  Six Months
Ended
June 30, 2005
(Actual)

  Remainder
of 2005
(Estimate)

  2005
Full Year
(Estimate)

  2006
Full Year
(Estimate)

  2007
& Beyond
(Estimate)

  Total
(Estimate)

 
  (Millions)

Marketing and re-branding   $ 13   $ 87   $ 100   $ 100   $ 100   $ 300
Technology     10     30     40     100     115     255
Advisor and employee retention(1)     44     66     110     20     40     170
Other(2)     9     81     90     30     30     150
   
 
 
 
 
 
Total   $ 76   $ 264   $ 340   $ 250   $ 285   $ 875
   
 
 
 
 
 

(1)
Includes special stock compensation awards recognized over the vesting period.

(2)
Other includes primarily legal and compliance, finance, procurement, client service and human resources costs.

45


46



Ameriprise Financial
Unaudited Pro Forma Consolidated Statements of Income

 
  Year ended December 31, 2004
 
   
  Pro Forma Adjustments
   
 
  Historical
  Reinsurance(a)
  Transferred
Business(b)

  Other
  Pro Forma
 
  (in millions, except per share data)

Revenues                              
Management, financial advice and service fees   $ 2,244   $ 1   $ 4   $     $ 2,249
Distribution fees     1,101                       1,101
Net investment income     2,359     (12 )   (222 )         2,125
Premiums     1,023     (246 )               777
Other revenues     518                       518
   
 
 
 
 
  Total revenues     7,245     (257 )   (218 )         6,770
   
 
 
 
 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Compensation and benefits     2,288     (2 )               2,286
Interest credited to account values     1,352           (84 )         1,268
Benefits, claims, losses and settlement expenses     828     (42 )               786
Amortization of deferred acquisition costs     437     (32 )               405
Interest and debt expense     52                 26   (c)   78
Other operating expense     1,115     (31 )   (73 )         1,011
   
 
 
 
 
  Total expenses     6,072     (107 )   (157 )   26     5,834
   
 
 
 
 

Income before income tax provision and accounting change

 

 

1,173

 

 

(150

)

 

(61

)

 

(26

)

 

936
Income tax provision     308     (51 )   (20 )   (9 )(e)   228
   
 
 
 
 
Income before accounting change   $ 865   $ (99 ) $ (41 ) $ (17 ) $ 708
   
 
 
 
 

Pro forma earnings per share(f)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                           $ 2.85
  Diluted                           $ 2.80

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Ameriprise Financial

Unaudited Pro Forma Consolidated Statements of Income

 
  Six Months ended June 30, 2005
 
   
  Pro Forma Adjustments
   
 
  Historical
  Reinsurance(a)
  Transferred
Business(b)

  Other
  Pro Forma
 
  (in millions, except per share data)

Revenues                              
Management, financial advice and service fees   $ 1,237   $   $ 3   $     $ 1,240
Distribution fees     577     (10 )               567
Net investment income     1,247     (6 )   (143 )         1,098
Premiums     549     (132 )               417
Other revenues     270                       270
   
 
 
 
 
  Total revenues     3,880     (148 )   (140 )         3,592
   
 
 
 
 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Compensation and benefits     1,292     (1 )               1,291
Interest credited to account values     725           (86 )         639
Benefits, claims, losses and settlement expenses     456     (39 )               417
Amortization of deferred acquisition costs     270     (17 )               253
Interest and debt expense     36                 8 (c)   44
Separation costs     76                 (76) (d)  
Other expense     566     (14 )   (32 )         520
   
 
 
 
 
  Total expenses     3,421     (71 )   (118 )   (68 )   3,164
   
 
 
 
 

Income before income tax provision and accounting change

 

 

459

 

 

(77

)

 

(22

)

 

68

 

 

428
Income tax provision     121     (26 )   (8 )   24   (e)   111
   
 
 
 
 
Income before accounting change   $ 338   $ (51 ) $ (14 ) $ 44   $ 317
   
 
 
 
 

Pro forma earnings per share(f)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                           $ 1.28
  Diluted                           $ 1.26

(a)
Reflects the reinsurance agreement, assuming it was in effect as of January 1, 2004, under which AMEX Assurance will cede 100% of the travel and other card insurance business of American Express Travel Related Services Company, a subsidiary of American Express Company, to Amexco, an insurance company subsidiary of American Express Company, in return for a ceding fee of $4 million in 2004 and $2 million for the first half of 2005. These ceding fees are recorded in Management, financial advice and service fees.

(b)
Reflects the transfer of our 50% ownership interest in AEIDC to American Express Company as though we had no ownership interest as of January 1, 2004. Thus, revenues of $222 million and $143 million, expenses of $157 million and $118 million, and income before accounting change of $41 million and $14 million for 2004 and the first half of 2005, respectively, have been excluded from the pro forma consolidated statements of income, while management and custodial fees of $4 million and $3 million for 2004 and the first half of 2005, respectively, that were previously eliminated in consolidation have now been included in revenues.

(c)
Reflects the net increase in interest expense that would have been realized in connection with the replacement of intercompany debt payable to American Express Company with $1.5 billion of senior debt and a new bridge facility to the extent the intercompany debt payable is assumed to exceed $1.5 billion. The increased interest expense amounts of $26 million and $8 million for 2004 and the first half of 2005, respectively, assume a blended senior debt interest expense of 4.85% for both periods and average bridge facility interest rates of 2.79% and 3.57% compared with the average blended historical rates of 3.04% and 3.82% for 2004 and the first half of 2005, respectively. The assumed 0.25% lower average interest rate on the bridge facility is based on a short-term LIBOR-based rate that is lower than the blended historical rate because the blended historical rate includes fixed-rate construction financing that bears interest at a rate higher than the LIBOR-based funding. In addition, on August 5, 2005, we paid off the construction financing amount of the intercompany debt payable to American Express Company in the amount of $260 million.

(d)
Reflects the removal of non-recurring separation charges that are directly attributable to the separation and distribution.

(e)
Reflects the tax attributes of the above pro forma adjustments at an incremental income tax rate of 35%. The computation of the pro forma income tax provision on a separate return basis as compared to the method used on a historical basis resulted in no additional adjustment.

48


(f)
Calculation of pro forma basic and diluted earnings per share:

 
  Year ended
December 31, 2004

  Six months ended
June 30, 2005

 
  (in millions, except per share amounts)

Numerator:            
  Income before accounting change   $ 708   $ 317
   
 
Denominator:            
  Basic: weighted average shares outstanding during the period     248     248
  Add: dilutive effect of stock options and restricted stock awards     5     5
   
 
  Diluted     253     253
   
 
Basic earnings per share:   $ 2.85   $ 1.28
   
 
Diluted earnings per share:   $ 2.80   $ 1.26
   
 

49



Ameriprise Financial

Unaudited Pro Forma Consolidated Balance Sheet

 
  At June 30, 2005
 
 
   
  Pro Forma Adjustments
   
 
 
  Historical
  Transferred
Business(a)

  Other
  Pro Forma
 
 
  (in millions)

 
Assets                          
Cash and cash equivalents   $ 2,510   $ (226 ) $ 1,035   (b)(c)(d) $ 3,319  
Investments     45,883     (5,676 )   (50) (c)   40,157  
Receivables     2,523     (47 )   50   (c)   2,526  
Deferred acquisition costs     4,032           (117) (c)   3,915  
Separate account assets     37,433                 37,433  
Restricted and segregated cash     1,241                 1,241  
Other assets     2,330     13           2,343  
   
 
 
 
 
    Total assets   $ 95,952   $ (5,936 ) $ 918   $ 90,934  
   
 
 
 
 

Liabilities and Shareholder's Equity

 

 

 

 

 

 

 

 

 

 

 

 

 
Liabilities:                          
Future policy benefits and claims     33,169                 33,169  
Investment certificate reserves     12,174     (5,747 )         6,427  
Accounts payable and accrued expenses     2,787                 2,787  
Payable to American Express Company     1,838     (186 )   (1,652 )(d)    
Long-term debt     378           1,500   (d)(e)   1,878  
Separate account liabilities     37,433                 37,433  
Other liabilities     1,180     (3 )   5   (e)   1,182  
   
 
 
 
 
    Total liabilities   $ 88,959   $ (5,936 ) $ (147 ) $ 82,876  
   
 
 
 
 

Shareholder's Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 
Common stock ($.01 par, 1,250 million shares authorized, and            issued and outstanding)                   (b)      
  Additional paid-in capital     2,926     187     1,065   (b)   4,178  
  Retained earnings     3,753     (187 )         3,566  
  Accumulated other comprehensive income (loss), net of tax:                          
    Net unrealized securities gains     376                 376  
    Net unrealized derivative losses     (40 )               (40 )
    Foreign currency translation adjustment     (21 )               (21 )
    Minimum pension liability     (1 )               (1 )
   
 
 
 
 
  Total accumulated other comprehensive income     314             314  
   
 
 
 
 
   
Total shareholder's equity

 

$

6,993

 

$


 

$

1,065

 

 

8,058

 
   
 
 
 
 
Total liabilities and shareholder's equity   $ 95,952   $ (5,936 ) $ 918   $ 90,934  
   
 
 
 
 

(a)
Reflects the transfer of our 50% ownership interest in AEIDC to American Express Company, accounted for as a net dividend of $187 million to American Express Company, and the receipt of $187 million cash in consideration of the transfer, accounted for as additional paid-in capital from American Express Company, as though the transfer had occurred on June 30, 2005. The transfer was completed effective August 1, 2005 in exchange for approximately $165 million in cash. (The reduction from the June 30, 2005 amount of $187 million primarily reflects a July 2005 dividend paid by AEIDC to its owners.)

50


(b)
Reflects the distribution of 248 million common shares to shareholders out of an assumed total 1,250 million authorized shares based on the distribution ratio of one share of our common stock for every five shares of American Express Company common stock as of June 30, 2005 and the capital contribution of $1,065 million by American Express Company to our company.

(c)
Reflects (1) the reinsurance agreement, assuming it was entered into on June 30, 2005, under which AMEX Assurance will cede 100% of the travel and other card insurance business of American Express Travel Related Services Company to Amexco, an insurance subsidiary of American Express Company, and (2) the acquisition of $117 million of deferred acquisition costs related to the ceded business by Amexco for $117 million of cash.

(d)
Reflects the replacement of $1,652 million intercompany debt payable to American Express Company initially with a new bridge facility, then with $1.5 billion senior debt expected to be issued in October 2005, as well as a cash payment of $147 million, net of a $5 million reduction described in note (e).

(e)
Reflects the assumption of $5 million of deferred compensation and incentive compensation payable to American Express Company employees who are transferring to our company as of the distribution date, and the corresponding decrease in the Payable to American Express Company.

51



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following information should be read in conjunction with our selected consolidated financial and operating data and the accompanying consolidated financial statements and related notes included elsewhere in this information statement. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this information statement, particularly in "Risk Factors" and "Special Note about Forward-Looking Statements."

        Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited consolidated financial statements as of December 31, 2004 and 2003 and for the three-year period ended December 31, 2004.

Overview

        We are a financial planning and financial services company that offers solutions for our clients' asset accumulation, income management and protection needs. As of June 30, 2005, we had over 2.7 million individual, business and institutional clients and a network of over 12,000 financial advisors and registered representatives, including registered representatives of our Securities America Financial Corporation subsidiary, who provide personalized financial planning, advisory and brokerage services.

        We have two main operating segments aligned with the financial solutions we offer to address our clients' needs:

        Our third operating segment, corporate and other, consists of income derived from corporate level assets and unallocated corporate expenses, as well as the results of our subsidiary, Securities America Financial Corporation, which operates its own independent, separately branded distribution platform. In addition, we include costs associated with the separation and distribution in this segment.

        In 2004, we generated $7,245 million in total revenues, up 13.9% from $6,361 million in 2003, primarily due to substantially higher management, financial advice and service fees, a significant portion of which was due to our September 2003 acquisition of Threadneedle, and to a lesser but important extent, an increase in our personal auto and home insurance premiums. We had $6,072 million in total expenses in 2004, a 12.0% increase from $5,420 million in 2003, primarily due to a significant increase in compensation and benefits, a significant portion of which was due to payments to Threadneedle employees and in its equity participation plan resulting from the annual valuation of Threadneedle's business, which more than offset declines in DAC amortization expense and interest credited to

52



account values. We had $1,173 million in income before income tax provision and accounting change for the year ended December 31, 2004, up 24.5% from $941 million in 2003, $865 million in income before accounting change for the year ended December 31, 2004, up 17.1% from $738 million in 2003, and had $794 million in net income in 2004, up 9.5% from $725 million in 2003.

        We earn revenues from fees received in connection with mutual funds, wrap accounts, assets managed for institutions and separate accounts related to our variable annuity and variable life insurance products. Our protection and annuity products generate revenues through premiums and other charges collected from policyholders and contractholders. We also earn investment income on owned assets (defined below) supporting these products. We incur various operating costs, primarily provision for losses and benefits for annuities, investment certificates and protection products, in addition to our compensation and benefits expenses.

        Management, financial advice and service fees.    Management, financial advice and service fees primarily represent management and service fees from managed assets (which we describe below under "—Other Factors Affecting our Financial Information and Results of Operations—Owned, Managed and Administered Assets"), as well as fees received for financial planning and other services. Management and service fees are generally based on the value of the managed assets, whereas financial advisory fees may be a flat fee, an hourly rate or a combination of the two.

        Distribution fees.    Distribution fees primarily include point-of-sale fees (such as front-end load mutual fund fees) 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. We also include fees received under revenue sharing arrangements for sales of mutual funds and other products of other companies, such as through our 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 predominantly consists of interest earned on fixed maturity securities classified as available-for-sale, mortgage loans on real estate and policy loans and net realized gains and losses on investment. Net realized gains and losses on investment consists of realized gains and losses on sales of securities and other than temporary impairments of securities held in our investment portfolio.

        Premiums.    Premiums consists of revenues on the traditional life, disability income, long-term care and personal auto and home insurance products of our protection segment.

        Other revenues.    Other revenues includes certain charges assessed on fixed and variable universal life insurance and annuities, including the cost of insurance on these products.

        Compensation and benefits.    Our principal source of expenses is compensation and benefits, which represents the compensation-related expenses associated with employees of our company, and sales commissions paid to our financial advisors and registered representatives. Most commissions are variable and generally vary with either sales to clients or the amounts of assets managed for clients. Field represents commissions, post-sale compensation, benefits and other costs associated with our financial advisor and registered representative network. Non-field represents human resources costs associated with our home office employees.

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        Interest credited to account values.    Interest credited to account values represents the amounts contributed to contractholder and policyholder account balances for annuities and universal life contracts and policies, as well as amounts credited to investment certificate holder account balances.

        Benefits, claims, losses and settlement expenses.    Benefits, claims, losses and settlement expenses represent losses and claims on annuities and protection products (including life, disability, long-term care and personal auto and home insurance). It also includes changes in the related incurred but not yet reported, or IBNR, reserves.

        Amortization of deferred acquisition costs.    The amortization of deferred acquisition costs, or DAC, is another significant source of expense for our company. DAC represent the costs of acquiring new protection, annuity and mutual fund business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life, disability income and long-term care insurance and, to a lesser extent, deferred marketing and promotion expenses on personal auto and home insurance and deferred distribution fees for certain mutual fund products. We defer these costs to the extent they are recoverable from future profits. For our annuity and protection products, we amortize DAC over periods approximating the lives of the business, principally as a percentage of premiums or estimated gross profits associated with the products, depending on the product's characteristics. For certain mutual fund products, we generally amortize DAC over fixed periods on a straight-line basis adjusted for redemptions. For more information regarding the assumptions underlying DAC amortization, see "—Critical Accounting Policies—Deferred Acquisition Costs" below.

        Other expenses.    Other expenses includes all other operating expenses of our company, such as legal and regulatory costs, technology and communication expenses and marketing and promotion expenses.

        On February 1, 2005, the American Express Company board of directors announced its intention to pursue the disposition of 100% of its shareholdings in our company through a tax-free distribution to American Express Company's shareholders. The distribution is expected to be completed in the third quarter of 2005, subject to certain conditions, including receipt of necessary regulatory approvals and the receipt of a favorable tax opinion, as well as final approval from American Express Company's board. We anticipate we will incur separation and distribution related expenses associated with establishing ourselves as an independent company. Cumulatively, these expenses are expected to be significant. Under current accounting, we will record these expenses in each quarter as incurred.

        In connection with the separation and distribution, we prepared our consolidated financial information as if we had been a stand-alone company for the periods presented. In the preparation of our consolidated financial information, we made certain allocations of expenses that our management believes to be a reasonable reflection of costs we would have otherwise incurred as a stand-alone company but that were paid by American Express Company. For more information regarding these allocations made in connection with the preparation of our consolidated financial statements, see Note 15 to our consolidated financial statements.

        The financial information presented in this information statement may not be indicative of our consolidated financial position, operating results or cash flows in the future or what our consolidated financial position, operating results or cash flows would have been had we been a separate, stand-alone entity during the periods presented. Our financial information presented in this information statement does not reflect any changes that will occur in our funding or operating costs as a result of the separation and distribution.

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        We also prepared unaudited pro forma financial information to make adjustments for and give effect to the separation and distribution of our common stock by American Express Company, the separation and distribution agreement, as well as the related transition services and other ancillary agreements with American Express Company and with our financial advisors, employees and certain other parties. Our pro forma financial information also gives effect to the transfer of our interest in AEIDC to American Express Company, which will have an effect on our future financial condition and results of operations. See "Unaudited Pro Forma Financial Information" included elsewhere in this information statement.

        In connection with the separation and distribution, American Express Company has indicated that it will provide additional capital to our company of approximately $1,065 million. The capital contribution is intended to provide adequate support for a senior debt rating of our company on the distribution date that will allow us to have efficient access to the capital markets, as well as to support the current financial strength ratings of our insurance subsidiaries.

        As part of the separation and distribution, we expect to replace our current intercompany indebtedness with American Express Company initially with a bridge facility from selected financial institutions (or American Express Company on arm's length terms, if such bridge facility is not available from third parties) on or prior to the distribution date. In October 2005, we intend to replace the bridge facility through the issuance of $1.5 billion of unsecured senior debt securities ranging in maturities from 5 to 30 years from issuance. We also intend to obtain an unsecured revolving credit facility on or shortly prior to the separation and distribution. For more information relating to our intercompany financing arrangements with American Express Company, see Notes 6 and 15 to our consolidated financial statements and "—Liquidity and Capital Resources—Description of Indebtedness."

        American Express has historically provided a variety of corporate and other support services for our businesses, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. For additional information on these arrangements, see Note 15 to our consolidated financial statements included elsewhere in this information statement. American Express will continue to provide us with many of these services pursuant to a transition services agreement for transition periods of up to two years following the separation and distribution, and we will arrange to procure other services pursuant to arrangements with third parties or through our own employees. Other than technology-related expenses, we currently expect that the aggregate costs we will pay to American Express under the transition services agreement for continuing services and the costs for establishing or procuring the services that have historically been provided by American Express will not significantly differ from the amounts reflected in our historical consolidated financial statements. However, we do expect to incur significant non-recurring costs for advertising and marketing to establish our new brands and to build our own technology infrastructure.

        Marketing and Re-Branding.    To establish our new brands we currently expect to incur non-recurring expenses of approximately $100 million in each of the years ending December 31, 2005 and 2006, and thereafter approximately $100 million. As part of the separation, we will be entering into a marketing and branding agreement with American Express that will grant us the right to use the "American Express" brand name and logo in a limited capacity for up to two years from the distribution date in conjunction with our brand name and logo and, for a transitional period, in the

55



names of certain of our products, services and subsidiaries, and that will also require us to provide certain marketing related services to American Express. We do not expect to make any significant cash payments to American Express in connection with the marketing and branding agreement. For additional information regarding the marketing and branding agreement, see "Our Relationship with American Express Company—Agreements with American Express Company—Marketing and Branding Agreement."

        Technology.    Following the separation, we will install and implement information technology infrastructure to support our business functions, including accounting and financial reporting, customer service and distribution. Together with our other planned upgrades to update our account opening, order management and servicing platforms for individual and corporate clients and to transition to an updated equity trading platform, we currently estimate that we will incur approximately $40 million and $100 million in non-recurring technology-related expenses in each of the years ending December 31, 2005 and 2006, and thereafter approximately $115 million.

        In addition to the separation and distribution from American Express Company, the following had a material impact on the comparability of, and are important to an understanding of, our financial condition and results of operations for the periods discussed below.

        On September 30, 2003, we acquired Threadneedle Asset Management Holdings Ltd. for £340 million in cash (or approximately $565 million at then prevailing exchange rates). In connection with the acquisition, we received a $564 million capital contribution from American Express Company, which was comprised of $536 million in cash and a $28 million non-cash reduction of liabilities owed to American Express Company. We also entered into profit-sharing arrangements for certain Threadneedle employees, one of which is based on an annual independent valuation of Threadneedle. For additional information relating to the Threadneedle profit-sharing arrangements, see Note 11 to our consolidated financial statements. We included Threadneedle in our consolidated financial statements as of September 30, 2003, and as a result, recorded $3.6 billion of assets and $3.0 billion of liabilities in our consolidated balance sheet, and added an additional $81.1 billion of owned, managed and administered assets. Approximately 5% of our 13.9% increase in revenue between 2003 and 2004 is attributable to the consolidation of Threadneedle, as well as 22% of the increase in owned, managed and administered assets in 2003. The acquisition had a modest effect on our net income.

        Equity markets and interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset management fees we earn and the "spread" income generated on our annuities, face-amount certificates and protection products. Asset management fees, which we include in management, financial advice and services fees, are generally based on the market value of the assets we manage. The interest spreads we earn on our annuity, protection and face-amount certificate products are the difference between the returns we earn on the investments that support our obligations on these products and the amounts we must pay contractholders and policyholders.

        Improvements in equity markets generally lead to increased value in our managed assets, where declines in equity markets generally lead to decreased value in our managed assets. Between 2002 and 2003, average equity markets decreased slightly, resulting in a slightly negative impact on our management fee revenues and net income. Between 2003 and 2004, average equity markets increased significantly, resulting in a significant favorable impact on our management fee revenues and net

56



income. Average equity markets were higher in the first half of 2005 compared to the first half of 2004, resulting in a favorable impact to our management fee revenue.

        Between 2002 and 2003, average interest rates decreased, resulting in a favorable impact to our interest rate spreads as the interest rates on our payment obligations decreased faster than the interest rates we were earning on our investments. Between 2003 and 2004, average interest rates increased, resulting in an unfavorable impact to our interest spreads on our face-amount certificates because these products generally reprice more quickly in line with market trends. However, our interest rate spreads on our annuities and protection products continued to increase in 2004 as a large portion of these contracts remained at guaranteed minimum rates payable to our clients as these contracts tend to reprice more slowly. Short-term interest rates were higher in the first half of 2005 compared to the first half of 2004, while long-term interest rates were slightly lower. This had an unfavorable impact on interest rate spreads from our face-amount certificate products but interest rate spreads on our annuities and protection products increased, due to improved investment performance and, as noted above, these products reprice more slowly than our face-amount certificate products.

        For additional information regarding our sensitivity to equity risk and interest rate risk, see "—Qualitative and Quantitative Disclosures about Market Risks" below and "Risk Factors."

        Our owned, managed and administered assets are impacted primarily by net flows of client assets. Net flows of client assets is a measure of new sales of, or deposits into, our products offset by redemptions of, or withdrawals from, our products. Net flows can have a significant impact on our results of operations due to their impact on our management fee revenues and interest spreads we earn based on our owned, managed and administered assets. Since 2002, in the aggregate, we have experienced net inflows in our protection, annuity, face-amount certificate, wrap account and other companies' products we offer. During the same time period, we experienced significant net outflows in our mutual fund and institutional product offerings.

        In the discussion below and elsewhere in this information statement, we present our owned, managed and administered assets as of the end of the periods indicated. These three categories of assets each include the following:

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        At June 30, 2005, we had approximately $410.2 billion in assets owned, managed and administered worldwide compared to approximately $375.6 billion at June 30, 2004.

        The accounting and reporting policies that we use affect our consolidated financial statements. Certain of our accounting and reporting policies are critical to an understanding of our results of operations and financial condition, and in some cases the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of our consolidated financial statements. The accounting and reporting policies we have identified as fundamental to a full understanding of our results of operation and financial condition are described below. See Note 1 to our consolidated financial statements for further discussion of our accounting policies.

        The most significant component of our investments is our available-for-sale securities. Generally, we carry our available-for-sale securities at fair value on our balance sheet and we record unrealized gains (losses) in accumulated other comprehensive income (loss) within equity, net of income tax provisions (benefits) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expected impacts on their carrying value had the unrealized gains (losses) been realized as of the respective balance sheet date. At December 31, 2004, we had net unrealized pretax gains on available-for-sale securities of $833 million. We recognize gains and losses in our results of operations upon disposition of the securities. We also recognize losses in our results of operations when our management determines that a decline in value is other-than-temporary. This determination requires the exercise of judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default or bankruptcy. We also consider the extent to which cost exceeds fair value and the duration of that difference, and our management's judgment about the issuer's current and prospective financial condition. The fair value of approximately 90% of our investment portfolio classified as available-for-sale as of December 31, 2004 is determined by quoted market prices. As of December 31, 2004, we had $191 million in gross unrealized losses that related to $13.4 billion of available-for-sale securities, of which $3.0 billion have been in a continuous unrealized loss position for 12 months or more. As part of

58


our ongoing monitoring process, our management determined that substantially all of the gross unrealized losses on these securities is attributable to changes in interest rates. Additionally, because we have the ability and intent to hold these securities for a time sufficient to recover our amortized cost, we concluded that none of these securities was other-than-temporarily impaired at December 31, 2004.

        Included in our available-for-sale securities are structured investments of various asset quality, including collateralized debt obligations, or CDOs, backed by high-yield bonds and bank loans. These structured investments are generally not readily marketable. The carrying values of these structured investments are based on future cash flow projections that require a significant degree of management judgment as to the amount and timing of cash payments, defaults and recovery rates of the underlying investments and, as such, are subject to change. The carrying value will vary if the actual cash flows differ from projections due to actual defaults or changes in estimated default or recovery rates. For additional information regarding our investment portfolio, see Notes 1 and 2 to our consolidated financial statements and "—Liquidity and Capital Resources—Investment Portfolio" below.

        When the Financial Accounting Standards Board, or FASB, finalizes its consideration of Emerging Issues Task Force Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (described below under "—Recent Accounting Pronouncements"), it may affect our investment securities valuation policy.

        For our annuity and life, disability income and long-term care insurance products, our DAC balances at any reporting date are supported by projections that show our management expects there to be adequate premiums or estimated gross profits after that date to amortize the remaining DAC balances. These projections are inherently uncertain because they require our management to make assumptions about financial markets, anticipated mortality and morbidity levels, and policyholder behavior over periods extending well into the future. Projection periods used for our annuity products are typically 10 to 25 years, while projection periods for our life, disability income and long-term care insurance products are often 50 years or longer. Our management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.

        For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are our management's best estimates. Our management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.

        For other life, disability income and long-term care insurance products, the assumptions made in calculating our DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and therefore are intended to provide for adverse deviations in experience and are revised only if our management concludes experience will be so adverse that DAC is not recoverable. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in our income statements.

59


        For annuity and life, disability income and long-term care insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about interest rates are the primary factor used to project interest margins, while assumptions about rates credited to policyholder accounts and equity market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Our management must also make assumptions to project maintenance expenses associated with servicing our annuity and insurance businesses during the DAC amortization period.

        The client asset value growth rate is the rate at which contract values are assumed to appreciate in the future. The rate is net of asset fees and anticipates a blend of equity and fixed income investments. Our management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a quarterly basis. We use a mean reversion method as a monthly guideline in setting near-term client asset value growth rates based on a long-term view of financial market performance as well as actual historical performance. In periods when market performance results in actual contract value growth at a rate that is different than that assumed, we will reassess the near-term rate in order to continue to project our best estimate of long-term growth. The near-term growth rate is reviewed to ensure consistency with our management's assessment of anticipated equity market performance. Our management is currently assuming a 7% long-term client asset value growth rate. If we increased or decreased our assumption related to this growth rate by 100 basis points, the impact on annual DAC amortization expense would be a decrease or increase of approximately $50 million.

        We monitor other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels, each quarter and, when assessed independently, each could impact our DAC balances. For example, if we increased or decreased our interest margin on our universal life insurance and on the fixed portion of our variable universal life insurance products by 10 basis points, the impact on DAC amortization expense would be a decrease or increase of approximately $5 million. Additionally, if we extended or reduced the amortization periods by one year for variable annuities to reflect changes in premium paying persistency and/or surrender assumptions, the impact on DAC amortization expense would be a decrease or increase of approximately $20 million. The amortization impact of extending or reducing the amortization period any additional years is not linear.

        The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions discussed above. Unless our management identifies a significant deviation over the course of the quarterly monitoring, our management reviews and updates these DAC amortization assumptions annually in the third quarter of each year. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results.

        For details regarding the balances of and changes in DAC for the years ended December 31, 2004, 2003 and 2002, see Note 4 to our consolidated financial statements.

        Income taxes, as reported in our consolidated financial statements, represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with our operations. We provide for income taxes based on amounts that we believe we will ultimately owe. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items and the realization of certain offsets and credits. In the event that the ultimate tax treatment of items or the realization of offsets or credits differ from our estimates, we may be required to significantly change the provision for income taxes recorded in our consolidated financial statements.

60


        In connection with provision for income taxes, our consolidated financial statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among our deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes.

        As discussed above, our life insurance subsidiaries will not be able to file a consolidated U.S. federal income tax return with the other members of our affiliated group until 2011, which will result in net operating and capital losses, credits, and other tax attributes generated by one group not being available to offset income earned or taxes owed by the other group during the period of non-consolidation. See "Risk Factors—Risks Relating to Our Separation from American Express Company—Our separation from American Express Company could increase our U.S. federal income tax costs." This lack of consolidation could affect our ability to fully realize certain of our deferred tax assets, including the capital losses referred to above.

        We are required to establish a valuation allowance for any portion of our deferred tax assets that our management believes will not be realized. It is likely that our management will need to identify and implement appropriate planning strategies to ensure our ability to realize our deferred tax asset relating to capital losses and avoid the establishment of a valuation allowance with respect to it. In the opinion of our management, it is currently more likely than not that we will realize the benefit of our deferred tax assets, including our capital loss deferred tax asset, and, therefore, no such valuation allowance has been established.

        In January 2003 (and subsequently revised in December 2003), the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN 46, which addresses consolidation by business enterprises of variable interest entities. FIN 46 requires a variable interest entity to be consolidated when an enterprise has a variable interest for which it is deemed to be the primary beneficiary. An enterprise is a primary beneficiary of a variable interest entity for purposes of FIN 46 if the enterprise will absorb a majority of the variable interest entity's expected losses, receive a majority of the variable interest entity's expected residual return, or both.

        As a result, we consolidated some variable interest entities related to our structured investments (a CDO and three secured loan trusts, or SLTs) that we both managed and partially owned as of December 31, 2003. The cumulative effect of this accounting change was a reduction in our 2003 net income through a non-cash charge of $13 million ($20 million pretax). The net charge was comprised of a $57 million ($88 million pretax) non-cash charge related to the consolidated CDO offset by a $44 million ($68 million pretax) non-cash gain related to the consolidated SLTs. Our 2004 results of operations include a $24 million pretax non-cash charge related to the complete liquidation of one SLT, and a $4 million pretax non-cash charge related to the expected impact of liquidating the two other SLTs (which have since been liquidated). See Note 3 to our consolidated financial statements for more information regarding our variable interest entities.

        In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 addresses (i) the classification and valuation of long-duration contract liabilities, (ii) accounting for sales inducements and (iii) separate

61


account presentation and valuation. The accounting change impacted both our asset accumulation and income and protection segments.

        We adopted SOP 03-1 effective January 1, 2004, and (1) established additional liabilities for insurance benefits that may become payable under variable annuity death benefit guarantees or on single pay universal life contracts, which prior to January 1, 2004 were expensed when payable, (2) established additional liabilities for certain variable universal life and single-pay universal life insurance contracts under which contractual costs of insurance charges are expected to be less than future death benefits and (3) considered these liabilities in valuing DAC associated with variable annuity guaranteed benefits or on variable insurance contracts as well as deferred sales inducement costs for certain variable annuity guaranteed benefits. The cumulative effect of accounting change was a $109 million reduction in pretax net income (or $71 million after taxes) recorded in the first quarter of 2004, which consisted of:

        In conjunction with the adoption of SOP 03-1, we also recorded a $66 million reduction in DAC amortization expense in the first quarter 2004, reflecting an adjustment associated with the lengthening of amortization periods for certain insurance and annuity products. Our accounting for separate accounts was already consistent with SOP 03-1 and no changes were required. For additional information relating to SOP 03-1, see Note 1 to our consolidated financial statements.

        In 2004, we expensed $53 million to establish and maintain additional liabilities for certain variable annuity guaranteed benefits ($33 million of which was part of adoption charges recorded in the first quarter of 2004) as compared to amounts expensed in 2003 and 2002 of $32 million and $37 million, respectively.

        In March 2004, the FASB's EITF reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, or EITF 03-1. EITF 03-1 provides accounting guidance regarding the determination of when an impairment of certain equity and debt securities and investments accounted for under the cost method should be considered other-than-temporary impairments and recognized in income. It also required income to be accrued on a level-yield basis following an impairment of debt securities, where reasonable estimates of the timing and amount of future cash flows can be made. In September 2004, the FASB issued staff position EITF 03-1-1 delaying the effective date of the accounting and measurement provisions of EITF 03-1 until further guidance is finalized, and it is not yet known what the effective date of the final staff position will be. Although the accounting and measurement provisions have been delayed, the disclosure requirements and the actual definition of impairment that are within EITF 03-1 have not been delayed. We will continue to monitor developments concerning EITF 03-1 and will evaluate the potential impact of EITF 03-1 on our financial condition and results of operations when the FASB provides additional guidance.

        For information regarding these and other recent accounting pronouncements and their expected impact on our future financial condition or results of operations, see Note 1 to our consolidated financial statements.

62


Results of Operations

        The following tables present our unaudited consolidated results of operations, information regarding our cash sales and our aggregate owned, managed and administered assets for the periods indicated. We include both of these additional operating statistics as we believe they are useful to an understanding of our results of operations. Cash sales represent cash received from clients for purchases of our asset accumulation and income products, as well as expected annual premiums for our protection products. Cash sales directly impact various revenue items in addition to being a significant factor in changes in our owned, managed and administered assets.

 
  Six months ended
June 30,

   
 
 
  2005
  2004
   
 
 
  Amount
  Amount
  % Change(a)
 
 
  Unaudited
(in millions)

   
 
Revenues                  
Management, financial advice and service fees   $ 1,237   $ 1,090   13.5   %
Distribution fees     577     586   (1.5 )%
Net investment income     1,247     1,151   8.5   %
Premiums     549     497   10.4   %
Other revenues     270     251   7.1   %
   
 
 
 
  Total revenues     3,880     3,575   8.5   %
   
 
 
 
Expenses                  
Compensation and benefits                  
  Field     733     682   7.4   %
  Non-field     559     448   24.7   %
   
 
 
 
  Total compensation and benefits     1,292     1,130   14.3   %
Interest credited to account values     725     656   10.6   %
Benefits, claims, losses and settlement expenses     456     400   14.0   %
Amortization of deferred acquisition costs     270     204   32.2   %
Interest and debt expense     36     24   48.6   %
Separation costs     76       #  
Other expenses     566     538   5.1   %
   
 
 
 
  Total expenses     3,421     2,952   15.8   %
   
 
 
 
Income before income tax provision and accounting change     459     623   (26.2 )%
Income tax provision     121     192   (36.9 )%
   
 
 
 
Income before accounting change     338     431   (21.4 )%
Cumulative effect of accounting change, net of tax         (71 ) #  
   
 
 
 
  Net income   $ 338   $ 360   (6.0 )%
   
 
 
 

Cash sales—product

 

 

 

 

 

 

 

 

 
Mutual funds   $ 19,660   $ 18,279   7.6   %
Annuities     4,456     4,098   8.7   %
Investment certificates     4,122     2,769   48.9   %
Life insurance and other protection products     640     568   12.7   %
Institutional products and services     4,277     4,256   0.5   %
Other     2,006     2,408   (16.7 )%
   
 
 
 
  Total cash sales   $ 35,161   $ 32,378   8.6   %
   
 
 
 

Percentage of cash sales generated by branded
financial advisors

 

 

56.9

%

 

53.6  

%

 

 

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

63


 
  As of June 30,
   
 
 
  2005
  2004
   
 
 
  Amount
  Amount
  % Change(a)
 
 
  (in billions)

   
 
Owned, Managed and Administered Assets                  

Owned Assets:

 

 

 

 

 

 

 

 

 
  Managed owned assets                  
    Separate accounts   $ 37.4   $ 32.9   13.8   %
    Investments     45.9     43.0   6.7   %
   
 
     
      Total managed owned assets     83.3     75.9   9.8   %
   
 
     
  Other(b)     6.6     5.7   16.5   %
   
 
     
      Total owned assets     89.9     81.6   10.2   %

Managed Assets:

 

 

 

 

 

 

 

 

 
  Managed Assets—Retail                  
    AXP Mutual Funds   $ 59.9   $ 65.5   (8.6 )%
    Threadneedle Mutual Funds     12.4     10.8   15.4   %
    Wrap Account Assets—Other company products     45.8     32.1   42.6   %
   
 
     
      Total managed assets—retail     118.1     108.4   8.9   %
 
Managed Assets—Institutional

 

 

 

 

 

 

 

 

 
    Separately Managed Accounts/Sub-Advisory     14.7     17.9   (25.0 )%
    Other Institutional     8.2     9.2   (11.2 )%
    Threadneedle Separately Managed Accounts/Sub-Advisory     101.8     90.5   12.5   %
   
 
     
      Total managed assets—institutional     124.7     117.6   6.1   %
 
Managed Assets—Retirement Services

 

 

 

 

 

 

 

 

 
    Collective Funds     11.3     12.3   (8.9 )%
 
Managed Assets—Eliminations(c)

 

 

(5.9

)

 

(10.3

)

42.7  

%
   
 
     
      Total managed assets     248.2     228.0   8.8   %

Administered Assets

 

 

72.1

 

 

66.0

 

9.2  

%
   
 
     
    Total Owned, Managed and Administered Assets   $ 410.2   $ 375.6   9.3   %
   
 
     

(a)
Percentage change calculated using thousands.

(b)
Includes cash and cash equivalents, restricted and segregated cash and receivables.

(c)
Includes eliminations from managed assets for owned assets invested in our managed products and separately managed accounts and among managed assets for AXP Fund assets sub-advised by Threadneedle.

        We recorded total revenues of $3,880 million for the six months ended June 30, 2005, a $305 million, or 8.5%, increase compared to $3,575 million for the six months ended June 30, 2004. This increase was primarily due to increased management, financial advice and services fees, higher net investment income and increased premiums.

        Our management, financial advice and service fees increased by $147 million, or 13.5%, to $1,237 million in the first six months of 2005 compared to $1,090 million in the first six months of 2004, primarily as a result of increased revenues from our wrap accounts of approximately $57 million, increased management fees from Threadneedle of approximately $42 million and increased fee revenues from our separate account assets of approximately $30 million, each of which reflect an increase in average levels of managed assets. The higher average managed assets in our wrap accounts

64



and in our separate accounts primarily resulted from net inflows and to a lesser extent higher average equity values. The increase in higher average managed assets at Threadneedle is primarily due to higher average equity values and net inflows, and to a lesser extent, hedge fund performance and favorable currency translation effects due to the appreciation of the pound sterling against the U.S. dollar. The remaining increase was primarily due to increased financial planning fees.

        We recorded $577 million in distribution fees in the first half of 2005, a $9 million, or 1.5%, decrease compared to $586 million in the first half of 2004. The decrease was primarily due to a $16 million decrease in fees from sales of other companies' real estate investment trust, or REIT, products, as well as a decrease in mutual fund distribution fees reflecting changes in the mix of product sales, which were offset by an increase in fees from retail brokerage activity.

        Our net investment income increased $96 million, or 8.5%, to $1,247 million in the first half of 2005 compared to $1,151 million in the first half of 2004, primarily due to increased interest and dividend income as a result of higher average levels of owned assets. Levels of owned assets increased principally as a result of increased sales of our certificate products due to a sales promotion in the second half of 2004 that ended in the first quarter of 2005. A portion of the increase was also due to a $36 million gain related to the sale of all of our interest in a CDO securitization trust, and to a lesser extent, $13 million of pretax income related to the liquidation of two SLTs consolidated in connection with our adoption of FIN 46, compared to a $31 million charge in 2004 related to the liquidation of another SLT. These increases were partially offset by lower investment yields and reduced mark-to-market gains on trading securities and equity method investments in hedge funds. During the first half of 2005, gross gains and losses on the sale of available-for-sale securities were $95 million and $38 million, respectively, and other-than-temporary impairments were $1 million. This compares to first half of 2004 gross gains and losses on the sale of available-for-sale securities of $35 million and $10 million, respectively, and other-than-temporary impairments of $1 million.

        We recorded $549 million in premiums in the first half of 2005, a $52 million, or 10.4%, increase compared to $497 million in the first half of 2004. This increase was primarily due to a $37 million, or 18.9%, increase in premiums from our personal auto and home protection products, reflecting a 17% increase in the average number of policies inforce, most notably from our Costco alliance. See "Our Business—Protection—Distribution and Marketing Channels" for more information relating to this alliance.

        Our other revenues increased by $19 million, or 7.1%, to $270 million in the first half of 2005 compared to $251 million in the first half of 2004, primarily as a result of a $7 million increase in cost of insurance charges received due to higher levels of fixed and variable universal life insurance policies inforce.

        We recorded total expenses of $3,421 million for the six months ended June 30, 2005, a $469 million, or 15.8%, increase compared to $2,952 million for the six months ended June 30, 2004. This increase was primarily due to increased compensation and benefits expenses due to performance incentives and costs related to the separation and distribution from American Express Company, as well as increased interest credited to account values.

        Our field compensation and benefits increased by $51 million, or 7.4%, to $733 million in the first half of 2005 compared to $682 million in the first half of 2004. The increase was a result of higher commissions paid to financial advisors and registered representatives due to increased sales, as well as increased compensation and benefits costs for other field employees. Cash sales by our branded financial advisors increased by 15.4% from $17 million in the first half of 2004 to $20 million in the first half of 2005.

65


        Our non-field compensation and benefits increased by $111 million, or 24.7%, to $559 million in the first half of 2005 compared to $448 million in the first half of 2004. Approximately $36 million of this increase was due to deferred compensation arrangements largely due to higher performance-related incentives under Threadneedle's equity participation plan resulting from a significant increase in the annual valuation of Threadneedle's business. The remaining increase was due to higher compensation paid to our employees for management incentives, higher benefit costs and merit adjustments.

        Our interest credited to account values increased by $69 million, or 10.6%, from $656 million in the first half of 2004 to $725 million in the first half of 2005. This increase reflected a $79 million net increase in interest credited on our investment certificate products as a result of higher crediting rates and volume growth in these products resulting from the promotion described above. The increases in interest credited on investment certificates and related reserves were partially offset by a $16 million decrease in interest credited on our fixed annuity products as a result of lower crediting rates. The crediting rates on the certificate products are generally tied to shorter-term rates. The crediting rates on the fixed annuity products are generally tied to longer-term rates. In the first half of 2005 compared to the first half of 2004, short-term rates were higher and long-term rates were generally moderating.

        Our provision for benefits, claims, losses and settlement expenses increased by $56 million, or 14.0%, to $456 million in the first half of 2005 from $400 million in the first half of 2004. Of the $56 million increase, $27 million was a result of higher average personal auto and home policies inforce, principally due to our Costco alliance, and $19 million of the increase was due to higher benefit expenses and reserves on life and long-term care insurance contracts.

        DAC amortization expense was $270 million in the first half of 2005, a 32.2% increase over the $204 million DAC amortization expense in the first half of 2004. This increase was primarily due to our $66 million downward adjustment in the first half of 2004 related to the lengthening of the amortization period for certain protection and annuity products in conjunction with the adoption of SOP 03-1. For additional information relating to DAC amortization, see "—Critical Accounting Policies" above, and for additional information relating to SOP 03-1, see "—Recent Accounting Pronouncements" above.

        Our interest and debt expense increased by $12 million, or 48.6%, to $36 million in the first half of 2005 from $24 million in the first half of 2004, primarily as a result of increased borrowing under our debt arrangements with American Express Company.

        Separation costs primarily consisted of financial advisor retention program costs, professional fees associated with our re-branding and brand strategy and other expenses related to the separation and distribution.

        Other expenses increased by $28 million, or 5.1%, to $566 million in the first half of 2005 compared to $538 million in the first half of 2004, primarily reflecting increased costs related to accruals for various legal and securities industry regulatory matters, which amounted to $90 million in the first half of 2005, up from $77 million in the first half of 2004, as well as increased advertising and promotion expenses. For additional information relating to legal and securities industry regulatory matters, see "Our Business—Legal Proceedings."

        Income taxes decreased to $121 million in the first half of 2005, down from $192 million in the first half of 2004. Our effective tax rate decreased to 26.3% in the first half of 2005 compared to 30.8% in the first half of 2004. The decreased effective tax rate resulted from lower levels of pretax income compared to tax-advantaged items in the first half of 2005 compared to the first half of 2004 reflecting 2005 separation costs and a $3 million tax benefit resulting from an IRS audit of previous years' tax returns, partially offset by non-tax deductible charges in the first half of 2005 that are not expected to occur in future periods. Our effective tax rate in the first half of 2004 was negatively affected by a $16 million tax expense due to required amendments to prior year tax returns.

        As a result of the foregoing, net income decreased to $338 million in the first half of 2005 from $360 million in the first half of 2004.

66


        The following tables present our consolidated results of operations, information regarding our cash sales and aggregate owned, managed and administered assets for the periods indicated.

 
  Year ended December 31
 
 
  2004
  2003
  2002
 
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
 
  (in millions except percentages)

 
Revenues                            
Management, financial advice and service fees   $ 2,244   32.1   % $ 1,699   4.0   % $ 1,635  
Distribution fees     1,101   8.5   %   1,015   14.0   %   890  
Net investment income     2,359   3.5   %   2,279   11.8   %   2,039  
Premiums     1,023   14.3   %   895   18.2   %   757  
Other revenues     518   9.3   %   473       472  
   
     
     
 
  Total revenues     7,245   13.9   %   6,361   9.8   %   5,793  
   
     
     
 
Expenses                            
Compensation and benefits                            
  Field     1,332   24.8   %   1,067   9.1   %   978  
  Non-field     956   24.8   %   766   25.4   %   631  
   
     
     
 
  Total compensation and benefits     2,288   24.9   %   1,833   13.9   %   1,609  
Interest credited to account values     1,352   (6.3 )%   1,444   7.2   %   1,345  
Benefits, claims, losses and settlement expenses     828   12.0   %   740   11.3   %   665  
Amortization of deferred acquisition costs     437   (9.0 )%   480   (15.0 )%   564  
Interest and debt expense     52   15.5   %   45   41.3   %   32  
Other expenses     1,115   26.8   %   878   34.8   %   653  
   
     
     
 
  Total expenses     6,072   12.0   %   5,420   11.3   %   4,868  
   
     
     
 
Income before income tax provision and accounting change     1,173   24.5   %   941   1.7   %   925  
Income tax provision     308   51.5   %   203   (19.2 )%   251  
   
     
     
 
Income before accounting change     865   17.1   %   738   9.5   %   674  
Cumulative effect of accounting change, net of tax     (71 ) #     (13 ) #      
   
     
     
 
  Net income   $ 794   9.5   % $ 725   7.6   % $ 674  
   
     
     
 

Cash sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Mutual funds   $ 35,025   13.2   % $ 30,407   (5.1 )% $ 31,945  
Annuities     7,820   (6.6 )%   8,335   (2.5 )%   8,541  
Investment certificates     7,141   19.7   %   5,736   28.7   %   4,088  
Life insurance and other protection products     1,162   14.9   %   988   7.1   %   919  
Institutional products and services     7,683   60.5   %   3,033   (9.8 )%   3,331  
Other     4,477   (29.3 )%   5,787   10.1   %   5,201  
   
     
     
 
  Total cash sales   $ 63,308   16.6   % $ 54,286     $ 54,025  
   
     
     
 

Percentage of cash sales generated by branded financial advisors

 

 

53.8

%


 

 

56.3

%


 

 

58.8

%

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

67


 
  As of December 31
 
 
  2004
  2003
  2002
 
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
 
  (in billions except percentages)

 
Owned, Managed and Administered Assets                            

Owned Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Managed owned assets                            
    Separate accounts   $ 35.9   16.5   % $ 30.8   40.2   % $ 22.0  
    Investments     46.0   6.3   %   43.3   9.6   %   39.5  
   
     
     
 
      Total managed owned assets     81.9   10.5   %   74.1   20.5   %   61.5  
 
Other(b)

 

 

5.2

 

(7.1

)%

 

5.6

 

(30.8

)%

 

8.1

 
   
     
     
 
      Total owned assets     87.1   9.3   %   79.7   14.6   %   69.6  

Managed Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Managed Assets—Retail                            
    AXP Mutual Funds     65.3   (5.0 )%   68.8   8.0   %   63.7  
    Threadneedle Mutual Funds     12.2   13.7   %   10.7   #      
    Wrap Account Assets—Other company products     39.5   48.4   %   26.6   48.9   %   17.9  
   
     
     
 
      Total managed assets—retail     117.0   10.3   %   106.1   30.1   %   81.6  
 
Managed Assets—Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Separately Managed Accounts/Sub-Advisory     15.8   (16.4 )%   18.9   (6.4 )%   20.1  
    Other Institutional     9.2   6.6   %   8.6   5.4   %   8.2  
    Threadneedle Separately Managed Accounts/Sub- Advisory     103.5   23.0   %   84.2   #      
   
     
     
 
      Total managed assets—institutional     128.5   15.1   %   111.7   #     28.3  
 
Managed Assets—Retirement Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Collective Funds     12.1   (3.9 )%   12.5   8.7   %   11.5  
 
Managed Assets—Eliminations(c)

 

 

(7.9

)

17.2  

%

 

(9.6

)

#

 

 

(1.8

)
   
     
     
 
      Total managed assets     249.7   13.1   %   220.7   84.6   %   119.6  

Administered Assets

 

 

71.0

 

12.2  

%

 

63.3

 

58.0  

%

 

40.0

 
   
     
     
 
 
Total Owned, Managed and Administered Assets

 

$

407.8

 

12.1  

%

$

363.7

 

58.7  

%

$

229.2

 
   
     
     
 

(a)
Percentage change calculated using thousands.

(b)
Includes cash and cash equivalents, restricted and segregated cash and receivables.

(c)
Includes eliminations from managed assets for owned assets invested in our managed products and separately managed accounts and among managed assets for AXP Fund assets sub-advised by Threadneedle.

#
Variance 100% or greater.

        We recorded total revenues of $7,245 million for the year ended December 31, 2004, an $884 million, or 13.9%, increase compared to $6,361 million for the year ended December 31, 2003. This increase was primarily due to substantially higher management, financial advice and service fees, a significant portion of which was due to our September 2003 acquisition of Threadneedle, and to a lesser but important extent, an increase in our personal auto and home insurance premiums.

68


        Our management, financial advice and service fees increased by $545 million, or 32.1%, to $2,244 million in 2004 compared to $1,699 million in 2003, primarily as a result of higher average managed assets due to our acquisition of Threadneedle and general improvement in equity markets. Management fees from Threadneedle increased by $295 million primarily due to the inclusion of Threadneedle for a full-year in 2004 as compared to only a quarter in 2003 and, to a lesser extent, favorable currency translation effects due to the appreciation of the pound sterling against the U.S. dollar in 2004. Excluding the effects of Threadneedle, our management, financial advice and service fees increased due to higher wrap and separate account fees. Wrap account fees increased by approximately $125 million and annuity and separate account fees increased by $67 million, both due to equity market improvements and net inflows, which were only partially offset by decreases in mutual fund performance-based fees.

        We recorded $1,101 million in distribution fees in 2004, an $86 million, or 8.5%, increase compared to $1,015 million in 2003. The increase was primarily due to a $91 million increase in mutual fund distribution and servicing-related fees, as well as $9 million in increased retail and institutional brokerage fees, only partially offset by a $14 million decrease in fees from sales of other companies' REIT products. Sales of other companies' mutual funds held in wrap accounts increased by 52% in 2004 compared to 2003.

        Our net investment income increased by $80 million, or 3.5%, to $2,359 million in 2004 compared to $2,279 million in 2003, primarily due to increased net realized gains on available-for-sale securities, net of other-than-temporary impairments, and reduced negative yield adjustments resulting from changes in cash flow estimates on certain structured investments. During 2004, gross gains and losses on the sale of available-for-sale securities were $68 million and $22 million, respectively, and other-than-temporary impairments were $2 million. This compares to 2003 gross gains and losses on the sale of available-for-sale securities of $323 million and $146 million, respectively, and other-than-temporary impairments of $163 million. Negative yield adjustments on structured loan trusts were $2 million in 2004 compared to $34 million in 2003. The favorable impact of these comparative amounts was offset by $28 million of net charges related to the complete liquidation of one SLT and partial liquidation of two SLTs recorded in 2004.

        We recorded $1,023 million in premiums in 2004, a $128 million, or 14.3%, increase compared to $895 million in 2003. This was primarily due to an increase of $96 million, or 29.4%, in sales from our personal auto and home protection products, principally due to automobile insurance sold through our Costco alliance. The overall increase in premium revenues was partially offset by a $6 million decrease in long-term care insurance premiums, which continue to decline, reflecting our decision to no longer underwrite long-term care products as of December 31, 2002.

        Our other revenues increased by $45 million, or 9.3%, to $518 million in 2004 compared to $473 million in 2003, primarily as a result of the number of fixed and variable universal life insurance contracts inforce in 2004, which increased by approximately 7% compared to 2003.

        We recorded total expenses of $6,072 million for the year ended December 31, 2004, a $652 million, or 12.0%, increase compared to $5,420 million for the year ended December 31, 2003. This increase was primarily due to a significant increase in compensation and benefits, a significant portion of which was due to our September 2003 acquisition of Threadneedle, which more than offset declines in DAC amortization expense and interest credited to account values.

        Our field compensation and benefits increased by $265 million, or 24.8%, to $1,332 million in 2004 compared to $1,067 million in 2003. This increase was primarily due to a higher average number of branded financial advisors, increased advisor production levels resulting in higher commissions, as well as the effect of reduced levels of DAC capitalization resulting from the mix of product sales.

69


        Our non-field compensation and benefits expense also increased by $190 million, or 24.8%, to $956 million in 2004 from $766 million in 2003. Of this increase, $173 million was due to the full-year effect of our September 2003 acquisition of Threadneedle. Excluding the effects of our Threadneedle acquisition, the average number of employees dropped slightly compared to 2003.

        Our interest credited to account values decreased by $92 million, or 6.3%, to $1,352 million in 2004, down from $1,444 million in 2003. This was primarily due to a $96 million decrease in crediting rates on fixed annuities and universal life insurance contracts. The crediting rates on these products decreased primarily due to decreases in long-term interest rates and to a lesser extent due to the impact of lower appreciation in the S&P 500 on equity-indexed annuities in 2004 compared to 2003. Despite the decrease in crediting rates on fixed annuity and universal life products, persistency remained high and inforce levels for annuity and life products were up in 2004.

        Our provision for benefits, claims, losses and settlement expenses increased by $88 million, or 12.0%, to $828 million in 2004 from $740 million in 2003, primarily as a result of the increase in the average number of policies inforce, partially offset by a reduction in long-term care benefit expenses as a result of our decision to cease underwriting long-term care insurance effective December 31, 2002.

        DAC amortization expense of $437 million decreased by $43 million, or 9.0%, in 2004 compared to $480 million in 2003, primarily due to a $66 million adjustment associated with the lengthening of amortization periods for certain insurance and annuity products in conjunction with our adoption of SOP 03-1, and approximately $24 million in net favorable DAC adjustments in the third quarter of 2004 as a result of changes to our DAC assumptions as compared to a $2 million net favorable DAC adjustment in the third quarter of 2003.

        In the third quarter of 2004, our annual evaluation of DAC resulted in a net $24 million DAC amortization expense reduction reflecting: (i) a $27 million DAC amortization expense reduction reflecting lower than previously assumed surrender and mortality rates on variable annuity products, higher surrender charges collected on universal and variable universal life products and higher than previously assumed interest rate spreads on annuity and universal life products; (ii) a $3 million DAC amortization expense reduction reflecting an extension of the mean reversion period by one year on variable annuity and variable universal life products; and (iii) a $6 million DAC amortization expense increase primarily reflecting a reduction in estimated future premiums on variable annuity products.

        For additional information relating to DAC amortization, see "—Critical Accounting Policies" above and Notes 1 and 4 to our consolidated financial statements, and for additional information related to SOP 03-1, see "—Recent Accounting Pronouncements" above and Note 1 to our consolidated financial statements.

        Our interest and debt expense increased by $7 million, or 15.5%, to $52 million in 2004 from $45 million in 2003, primarily as a result of increased borrowings under our debt arrangements with American Express Company. This increase was only partially offset by a reduction in the amount of our other debt.

        Other expenses increased by $237 million, or 26.8%, to $1,115 million in 2004 compared to $878 million in 2003, reflecting the full-year effect of our acquisition of Threadneedle, which increased other expenses by $114 million. Higher costs related to various mutual fund regulatory and legal matters increased other expenses by $80 million, and greater advertising and promotion expense increased other expenses by $39 million.

        Income taxes increased to $308 million in 2004 from $203 million in 2003. Our effective tax rate increased to 26.3% in 2004 from 21.6% in 2003, primarily due to the impact of lower levels of tax-advantaged items in pretax income and reduced low income housing credits during 2004, and the one-

70


time effect, recognized in 2003, of favorable technical guidance issued by the Internal Revenue Service relating to the taxation of dividend income.

        As a result of the foregoing, net income increased to $794 million in 2004 from $725 million in 2003.

        We recorded total revenues of $6,361 million for the year ended December 31, 2003, a $568 million, or 9.8%, increase compared to $5,793 million for the year ended December 31, 2002. This increase was primarily due to higher net investment income, increased distribution fees and increased personal auto and home insurance premiums.

        Our management, financial advice and service fees increased by $64 million, or 4.0%, to $1,699 million in 2003 compared to $1,635 million in 2002, primarily due to higher average managed assets reflecting the Threadneedle acquisition in September 2003. Threadneedle added approximately $81.1 billion in managed assets effective September 30, 2003. Excluding the effects of the Threadneedle acquisition and the resulting increase in our managed assets, our management, financial advice and service fees decreased, primarily due to overall decreases in fees from separate account asset management fees and mutual fund management performance-based fees.

        We recorded $1,015 million in distribution fees in 2003, a $125 million, or 14.0%, increase compared to $890 million in 2002. The increase was primarily due to a $39 million increase in the sales of other companies' REIT products and a $32 million increase in brokerage-related activities due to increased sales of other companies' products, as well as other fees from sales of other companies' products.

        Our net investment income increased by $240 million, or 11.8%, to $2,279 million in 2003 compared to $2,039 million in 2002, primarily due to higher levels of invested assets and the effect of appreciation in the S&P 500 on the value of options hedging outstanding equity-indexed annuities and investment certificates compared to market depreciation in 2002. These benefits were partially offset by lower average yields on fixed income investments. For 2003, gross gains and losses on the sale of available-for-sale securities were $323 million and $146 million, respectively, and other-than-temporary impairments were $163 million. This compares to 2002 gross gains and losses on the sale of available-for-sale securities of $342 million and $168 million, respectively, and other-than-temporary impairments of $204 million.

        We recorded $895 million in premiums in 2003, a $138 million, or 18.2%, increase compared to $757 million in 2002. This increase is primarily due to a $97 million, or 42.4%, increase in sales from our personal auto and home protection products, partially offset by the effects of our decision to stop underwriting long-term care insurance effective December 31, 2002. Personal auto and home policies inforce increased approximately 28% from 2002 to 2003 primarily due to our strategic alliance with Costco.

        We recorded total expenses of $5,420 million for the year ended December 31, 2003, a $552 million, or 11.3%, increase compared to $4,868 million for the year ended December 31, 2002. This increase was primarily due to a significant increase in other expenses and compensation and benefits, mainly related to the September 2003 acquisition of Threadneedle, and increases in interest

71


credited to account values and benefits, claims, losses and settlement expenses, which were only partially offset by a decrease in DAC amortization expense.

        Our field compensation and benefits expense increased by $89 million, or 9.1%, to $1,067 million in 2004 compared to $978 million in 2003. This increase is primarily due to increased advisor production levels resulting in higher commissions and an increase in the average number of branded financial advisors.

        Our non-field compensation and benefits increased by $135 million, or 25.4%, to $766 million in 2003 compared to $631 million in 2002. This increase was primarily due to the Threadneedle acquisition, increased management incentive costs and other increases in compensation and benefits due to merit increases and related payroll taxes and benefits. Increases in 2003 management incentive costs included higher stock-based compensation costs from both stock options and increased levels of restricted stock awards. The higher stock-based compensation expense from stock options reflects our decision to modify compensation practices and use restricted stock awards in place of stock options for middle management. Our average number of employees (excluding branded financial advisors and registered representatives) was virtually unchanged notwithstanding the acquisition of Threadneedle. Excluding the effects of Threadneedle, the average number of employees decreased by 4.3%.

        Our interest credited to account values increased by $99 million, or 7.2%, to $1,444 million in 2003, compared to $1,345 million in 2002. This increase was primarily due to higher average inforce levels of annuity products and the effect of appreciation in the S&P 500 on equity-indexed annuities and investment certificates in 2003 compared to depreciation in 2002, partially offset by the benefit of lower interest crediting rates on both fixed annuity and fixed universal life insurance contract values reflecting the relatively lower interest rate environment in 2003.

        Our provision for benefits, claims, losses and settlement expenses increased by $75 million, or 11.3%, to $740 million in 2003 from $665 million in 2002, primarily as a result of the increase in the average number of policies inforce noted earlier.

        DAC amortization expense of $480 million decreased by $84 million, or 15.0%, in 2003 compared to $564 million in 2002, primarily due to the positive effects of favorable equity market performance on variable insurance and annuity product DAC. Faster than assumed growth in client asset values associated with our variable annuity and variable universal life insurance products (separate account assets) resulted in a deceleration of DAC amortization in 2003, whereas declines in variable annuity and variable insurance product related client asset values, in light of unfavorable equity market performance in 2002, resulted in acceleration of DAC amortization in 2002.

        In the third quarter of 2003, our annual evaluation of DAC resulted in a net $2 million DAC amortization expense reduction reflecting: (i) a $106 million DAC amortization expense reduction resulting from extending 10-15 year amortization periods for certain flex annuity products to 20 years based on current measurements of meaningful life; (ii) a $92 million DAC amortization expense increase resulting from the recognition of premium deficiency on our long-term care insurance products; and (iii) a $12 million net DAC amortization expense increase across our universal life, variable universal life and annuity products, primarily reflecting lower than previously assumed interest rate spreads, separate account fee rates and account maintenance expenses. For additional information relating to DAC, see "—Critical Accounting Policies" above.

        Our interest and debt expense increased $13 million, or 41.3%, to $45 million in 2003 from $32 million in 2002, primarily as a result of increased borrowing under our debt arrangements with American Express Company.

        Other expenses increased by $225 million, or 34.8%, to $878 million in 2003 compared to $653 million in 2002 due to the effects of fewer capitalized DAC-related costs, our Threadneedle

72



acquisition in late 2003 (which accounted for approximately $31 million of other expenses) and increased costs related to various securities industry regulatory matters.

        Income taxes decreased to $203 million in 2003 from $251 million in 2002. Our income taxes would have been higher in 2003 had we not benefited from the one-time effect of favorable technical guidance issued by the Internal Revenue Service related to the taxation of dividend income. See Note 13 to our consolidated financial statements. Our effective tax rate decreased to 21.6% in 2003 from 27.2% in 2002.

        As a result of the foregoing, net income increased to $725 million in 2003 from $674 million in 2002.

        The following tables present financial information by operating segment for the periods indicated.

 
  Six Months Ended June 30
   
 
 
  2005
  2004
  % Change(a)
 
 
  Unaudited
(in millions)

   
 
Total revenues by segment                  
Asset Accumulation and Income   $ 2,619   $ 2,408   8.7 %
Protection     1,021     939   8.7 %
Corporate and Other     250     228   9.5 %
Eliminations     (10 )     #  
   
 
     
  Consolidated   $ 3,880   $ 3,575   8.5 %
   
 
     

Total expenses by segment

 

 

 

 

 

 

 

 

 
Asset Accumulation and Income   $ 2,279   $ 1,998   14.0 %
Protection     793     685   15.8 %
Corporate and Other     359     269   33.7 %
Eliminations     (10 )     #  
   
 
     
  Consolidated   $ 3,421   $ 2,952   15.8 %
   
 
     

Income before income tax provision and accounting change by segment

 

 

 

 

 

 

 

 

 
Asset Accumulation and Income   $ 340   $ 410   (17.2 )%
Protection     228     254   (10.3 )%
Corporate and Other     (109 )   (41 ) #  
   
 
     
  Consolidated   $ 459   $ 623   (26.2 )%
   
 
     

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

73


 
  As of
June 30, 2005

  As of
December 31, 2004

  % Change(a)
 
 
  Unaudited

  Audited

   
 
 
  (in millions)

   
 
Total assets by segment                  
Asset Accumulation and Income   $ 77,687   $ 75,389   3.0   %
Protection     14,145     13,465   5.1   %
Corporate and Other     4,120     4,259   (3.3 )%
   
 
     
  Consolidated   $ 95,952   $ 93,113   3.0   %
   
 
     

(a)
Percentage change calculated using thousands.

        The following table presents financial information for our asset accumulation and income operating segment for the periods indicated.

 
  Six months ended June 30,
   
 
 
  2005
  2004
   
 
 
  Amount
  Amount
  % Change(a)
 
 
  Unaudited
(in millions)

   
 
Revenues                  
Management, financial advice and service fees   $ 1,089   $ 966   12.7   %
Distribution fees     405     410   (1.3 )%
Net investment income     1,090     1,019   6.9   %
Other revenues     35     13   #  
   
 
     
  Total revenues     2,619     2,408   8.7   %
   
 
     
Expenses                  
Compensation and benefits—Field     481     437   10.1   %
Interest credited to account values     661     593   11.4   %
Benefits, claims, losses and settlement expenses     21     20   5.1   %
Amortization of deferred acquisition costs     189     144   31.2   %
Interest and debt expense     18     11   56.2   %
Other operating expenses     909     793   14.6   %
   
 
     
  Total expenses     2,279     1,998   14.0   %
   
 
     
  Income before income tax provision and accounting change   $ 340   $ 410   (17.2 )%
   
 
     

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

        Revenues

        We recorded total revenues of $2,619 million for the six months ended June 30, 2005 in our asset accumulation and income segment, a $211 million, or 8.7%, increase compared to $2,408 million for the six months ended June 30, 2004. Management, financial advice and service fees increased $123 million, or 12.7%, resulting from increased net inflows into our wrap accounts and separate account assets and from market appreciation. Net investment income increased $71 million, or 6.9%, resulting from higher average levels of owned investments.

        Expenses

        We recorded total expenses of $2,279 million for the six months ended June 30, 2005 in our asset accumulation and income segment, a $281 million, or 14.0%, increase compared to $1,998 million for the six months ended June 30, 2004. Interest credited to account values increased $68 million, or 11.4%, primarily due to higher interest crediting rates and volume growth on investment certificate

74



products as a result of the promotion described above in the discussion of our consolidated results of operations. DAC amortization expense increased by $45 million, or 31.2%, due to our adoption of SOP 03-1 in the first quarter of 2004, which resulted in a significantly reduced amortization expense for that period as the amortization periods for certain annuity products were lengthened. Field compensation and benefits expenses increased $44 million, or 10.1%, primarily due to higher commissions paid as well as increased compensation and benefits costs for other field employees.

        The remaining increase in expenses of our asset accumulation and income segment for the first half of 2005 was due to a $116 million, or 14.6%, increase in other operating expenses primarily due to higher performance-related incentives under Threadneedle's equity participation plan resulting from a significant increase in the annual valuation of Threadneedle's business, as well as increased costs related to accruals for various legal and securities industry regulatory matters. For additional information relating to legal and securities industry regulatory matters, see "Our Business—Legal Proceedings."

        Other operating expenses includes our non-field compensation and benefits expense and our other expenses.

        The following table presents financial information for our protection operating segment for the periods indicated.

 
  Six months ended June 30,
   
 
 
  2005
  2004
   
 
 
  Amount
  Amount
  % Change(a)
 
 
  Unaudited
(in millions)

   
 
Revenues                  
Management, financial advice and service fees   $ 29   $ 22   29.1   %
Distribution fees     53     53   (0.3 )%
Net investment income     166     152   9.5   %
Premiums     549     497   10.5   %
Other revenues     224     215   4.2   %
   
 
     
  Total revenues     1,021     939   8.7   %
   
 
     
Expenses                  
Compensation and benefits—Field     45     43   5.3   %
Interest credited to account values     64     62   1.7   %
Benefits, claims, losses and settlement expenses     435     380   14.6   %
Amortization of deferred acquisition costs     81     60   34.5   %
Interest and debt expense     10     7   51.7   %
Other operating expenses     158     133   18.8   %
   
 
     
  Total expenses     793     685   15.8   %
   
 
     
  Income before income tax provision and accounting change   $ 228   $ 254   (10.3 )%
   
 
     

(a)
Percentage change calculated using thousands.

        Revenues

        We recorded total revenues of $1,021 million for the six months ended June 30, 2005 in our protection segment, an $82 million, or 8.7%, increase compared to $939 million for the six months ended June 30, 2004. This increase was primarily due to increased premium revenues, which increased $52 million, or 10.5%, primarily related to an increase in premiums from our personal auto and home protection products, most notably from our Costco alliance. A portion of the increase was also due to a

75



$14 million, or 9.5%, increase in net investment income, primarily due to higher average levels of owned investments.

        Expenses

        We recorded total expenses of $793 million for the six months ended June 30, 2005 in our protection segment, a $108 million, or 15.8%, increase compared to $685 million for the six months ended June 30, 2004. This increase was primarily due to a $55 million, or 14.6%, increase in provisions for benefits, claims, losses and settlement expenses, which largely resulted from higher average personal auto and home insurance policies inforce, primarily as a result of our Costco alliance. The remaining increase in our protection segment expenses was primarily due to a $21 million, or 34.5%, increase in DAC amortization expense, reflecting our first quarter 2004 lengthening of amortization periods for certain life insurance products in connection with our adoption of SOP 03-1.

Corporate and Other

        We recorded total revenues of $250 million for the six months ended June 30, 2005 in our corporate and other segment, a $22 million, or 9.5%, increase compared to $228 million for the six months ended June 30, 2004. The increase in revenues primarily resulted from increased management, financial advice and service fees due to increased financial planning revenues, increased activity at our subsidiary, Securities America Financial Corporation, which operates its own separately branded distribution network and, to a lesser extent, the improvement in net investment income as a result of gains from the sale of corporate investments.

        We recorded total expenses of $359 million for the six months ended June 30, 2005 in our corporate and other segment, a $90 million, or 33.7%, increase compared to $269 million for the six months ended June 30, 2004. The principal reason for the increase was the incurrence of separation costs in the first half of 2005, which relate to financial advisor retention program costs, professional fees associated with our re-branding and brand strategy and other expenses related to the separation and distribution.

        The following tables present summary income statement and balance sheet financial data by segment for the periods indicated.

 
  Year ended December 31
 
 
  2004
  2003
  2002
 
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
 
  (in millions except percentages)

 
Total revenues by segment                            
Asset Accumulation and Income   $ 4,894   16.2 % $ 4,211   10.3 % $ 3,817  
Protection     1,923   10.9 %   1,733   10.7 %   1,566  
Corporate and Other     431   2.7 %   419   1.8 %   412  
Eliminations     (3 ) 50.0 %   (2 )     (2 )
   
     
     
 
  Consolidated   $ 7,245   13.9 % $ 6,361   9.8 % $ 5,793  
   
     
     
 

 
(a)    Percentage change calculated using thousands.  

76


Total expenses by segment                            
Asset Accumulation and Income   $ 4,142   17.9   % $ 3,514   6.5   % $ 3,300  
Protection     1,435   (1.9 )%   1,462   26.1   %   1,160  
Corporate and Other     498   11.7   %   446   8.7   %   410  
Eliminations     (3 ) 50.0   %   (2 ) 0.0   %   (2 )
   
     
     
 
  Consolidated   $ 6,072   12.0   % $ 5,420   11.3   % $ 4,868  
   
     
     
 
Income before income tax provision and accounting change by segment                            
Asset Accumulation and Income   $ 752   7.9   % $ 697   34.9   % $ 517  
Protection     488   80.3   %   271   (33.3 )%   406  
Corporate and Other     (67 ) #     (27 ) #     2  
   
     
     
 
  Consolidated   $ 1,173   24.5   % $ 941   1.7   % $ 925  
   
     
     
 
 
  At December 31,
 
  2004
  2003
 
  Amount
  % Change(a)
  Amount
 
  (in millions except percentages)


Total assets by segment

 

 

 

 

 

 

 

 
Asset Accumulation and Income   $ 75,389   10.1 % $ 68,487
Protection     13,465   6.4 %   12,655
Corporate and Other     4,259   0.4 %   4,242
   
     
  Consolidated   $ 93,113   9.1 % $ 85,384
   
 
 

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

        The following tables present financial information for our asset accumulation and income operating segment for the periods indicated.


(a)
Percentage change calculated using thousands.
#
Variance 100% or greater.

 
  Year ended December 31
 
  2004
  2003
  2002
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
  (in millions except percentages)

Revenues                          
Management, financial advice and service fees   $ 1,982   34.6 % $ 1,473   3.8 % $ 1,420
Distribution fees     784   6.4 %   736   13.9 %   646
Net investment income     2,082   5.0 %   1,984   14.0 %   1,740
Other revenues     46   #     18   63.9 %   11
   
     
     
  Total revenues   $ 4,894   16.2 % $ 4,211   10.3 % $ 3,817
   
     
     

77


Expenses                          
Compensation and benefits—Field     891   26.4   %   705   8.5   %   650
Interest credited to account values     1,209   (6.3 )%   1,291   9.4   %   1,180
Benefits, claims, losses and settlement expenses     52       #     22   (58.8 )%   54
Amortization of deferred acquisition costs     305   43.1   %   212   (50.5 )%   429
Interest and debt expense     33   9.3   %   31   42.4   %   22
Other operating expenses     1,652   31.9   %   1,253   29.9   %   965
   
     
     
  Total expenses     4,142   17.9   %   3,514   6.5   %   3,300
   
     
     
  Income before income tax provision and accounting change   $ 752   7.9   % $ 697   34.9   % $ 517
   
     
     

(a)
Percentage change calculated using thousands.

#
Variance 100% or greater.

        Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

        Revenues

        We recorded total revenues of $4,894 million for the year ended December 31, 2004 in our asset accumulation and income segment, a $683 million, or 16.2%, increase compared to $4,211 million for the year ended December 31, 2003. This increase was primarily due to a $509 million, or 34.6%, increase in management, financial advice and service fees, resulting from higher average managed assets. A significant portion of the increase in our managed assets was due to the full-year impact of our September 2003 acquisition of Threadneedle, as well as general improvement in the equity markets. Net investment income increased $98 million, or 5.0%, reflecting lower losses on available-for-sale securities and significant improvements in other net gains and losses as noted in the discussion of our consolidated results of operations. The $48 million, or 6.4%, increase in distribution fees is primarily a result of greater mutual fund fees driven principally by fees earned on wrap account assets as well as increased retail and institutional brokerage fees, partially offset by decreases in fees from sales of other companies' REIT products.

        Expenses

        We recorded total expenses of $4,142 million for the year ended December 31, 2004 in our asset accumulation and income segment, a $628 million, or 17.9%, increase compared to $3,514 million for the year ended December 31, 2003. This increase was primarily due to a $399 million, or 31.9%, increase in our other operating expenses, primarily due to the full-year effect of our September 2003 acquisition of Threadneedle, higher salaries and benefits, and increased management incentive costs for employees.

        Expenses in our asset accumulation and income segment also increased as a result of a $186 million, or 26.4%, increase in field compensation and benefits expense reflecting higher commissions resulting from increased financial advisor production levels, as well as reduced levels of DAC capitalization reflecting changes in our product sales mix. DAC amortization expense increased $93 million, or 43.1%, primarily due to our third quarter 2003 review of amortization assumptions, which had a more significant amortization reduction impact on annuity products in 2003 as compared to 2004. DAC amortization changes are discussed in more detail in our consolidated results of operations discussion above. DAC amortization expense related to our annuities was lower than it would have otherwise been in the first quarter of 2004 due to an adjustment made in conjunction with our adoption of SOP 03-1 in the first quarter of 2004, which significantly reduced DAC amortization

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expense for the reasons noted above in the discussion of our consolidated results of operations for the year ended December 31, 2004.

        These increases in expenses of our asset accumulation and income segment were only partially offset by the decrease in interest credited to account values, which decreased by $82 million, or 6.3%, primarily due to lower interest crediting rates and the effect of lower appreciation in the S&P 500 on our equity-indexed annuities and investment certificate products.

        Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        Revenues

        We recorded total revenues of $4,211 million for the year ended December 31, 2003 in our asset accumulation and income segment, a $394 million, or 10.3%, increase compared to $3,817 million for the year ended December 31, 2002. Net investment income increased $244 million, or 14.0%, resulting from increased levels of our owned assets and the effects of appreciation in the S&P 500 on the value of options hedging outstanding indexed annuity and face-amount certificate products, compared to depreciation in the index in 2002. Distribution fees increased $90 million, or 13.9%, due to sales of other companies' REIT products and brokerage-related activities. Management, financial advice and service fees increased $53 million, or 3.8%, primarily due to higher levels of managed assets due to our September 2003 acquisition of Threadneedle.

        Expenses

        We recorded total expenses of $3,514 million for the year ended December 31, 2003 in our asset accumulation and income segment, a $214 million, or 6.5%, increase compared to $3,300 million for the year ended December 31, 2002. Other operating expenses increased $288 million, or 29.9%, reflecting increased non-field compensation and benefits expense due to the effects of the Threadneedle acquisition and an increase in the average number of employees over the period. Interest credited to account values increased $111 million, or 9.4%, resulting from higher average inforce levels of our annuity products and the effects of appreciation in the S&P 500 on equity-indexed annuities in 2003 compared to depreciation in 2002. Field compensation and benefits expenses increased by $55 million, or 8.5%, reflecting increased commissions resulting from increased financial advisor production levels and an increase in the average number of branded financial advisors over the period.

        These increases in expenses of our asset accumulation and income segment more than offset the significant decrease in DAC amortization expense, which was down $217 million, or 50.5%, due to the positive effects of favorable equity market performance on variable annuity product DAC and faster than assumed growth in client asset values associated with our variable annuity products, which results in a deceleration of DAC amortization.

        The following tables present financial information for our protection operating segment for the periods indicated.

 
  Year ended December 31
 
  2004
  2003
  2002
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
  (in millions except percentages)

Revenues                          
Management, financial advice and service fees   $ 58   29.9 % $ 44   5.3   % $ 42
Distribution fees     105   2.9 %   102   24.3   %   82
Net investment income     316   9.7 %   288   (1.0 )%   291
Premiums     1,023   14.3 %   895   18.2   %   757
Other revenues     421   4.3 %   404   2.6   %   394
   
     
     
  Total revenues   $ 1,923   10.9 % $ 1,733   10.7   % $ 1,566
   
     
     

(a)
Percentage change calculated using thousands.

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  Year ended December 31
 
  2004
  2003
  2002
 
  Amount
  % Change(a)
  Amount
  % Change(a)
  Amount
 
  (in millions except percentages)

Expenses                          
Compensation and benefits—Field   $ 90   13.8   % $ 79   17.3   % $ 67
Interest credited to account values     143   (6.5 )%   152   (8.0 )%   166
Benefits, claims, losses and settlement expenses     777   8.3   %   717   16.7   %   615
Amortization of deferred acquisition costs     132   (50.8 )%   268   98.5   %   135
Interest and debt expense     19   28.2   %   15   39.1   %   11
Other operating expenses     274   18.8   %   231   38.9   %   166
   
     
     
  Total expenses     1,435   (1.9 )%   1,462   26.1   %   1,160
   
     
     
  Income before income tax provision and accounting change   $ 488   80.3   % $ 271   (33.3 )% $ 406
   
     
     

(a)
Percentage change calculated using thousands.

        Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

        Revenues

        We recorded total revenues of $1,923 million for the year ended December 31, 2004 in our protection segment, a $190 million, or 10.9%, increase compared to $1,733 million for the year ended December 31, 2003. Premium revenues increased $128 million, or 14.3%, reflecting increased sales of our personal auto and home protection products, primarily auto insurance sold through our Costco alliance. Net investment income increased $28 million, or 9.7%, reflecting reduced losses on available-for-sale securities and significant improvements in other net gains and losses.

        Expenses

        We recorded total expenses of $1,435 million for the year ended December 31, 2004 in our protection segment, a $27 million, or 1.9%, decrease compared to $1,462 million for the year ended December 31, 2003. This decrease resulted from a $136 million, or 50.8%, decrease in DAC amortization expense. DAC amortization expense decreased primarily as a result of the first quarter 2004 lengthening of amortization periods for certain life insurance products in connection with our adoption of SOP 03-1. Partially offsetting this significant decrease in DAC amortization expense were increases in provisions for benefits, claims, losses and settlement expenses of $60 million due to an increase in the average number of policies inforce and a $43 million increase in other operating expenses, primarily due to higher advertising and promotional expenses.

        Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        Revenues

        We recorded total revenues of $1,733 million for the year ended December 31, 2003 in our protection segment, a $167 million, or 10.7%, increase compared to $1,566 million for the year ended December 31, 2002. This increase was primarily due to increased premium revenues, which increased $138 million, or 18.2%, resulting from increases in sales of our personal home and auto protection products, primarily through our strategic alliance with Costco.

        Expenses

        We recorded total expenses of $1,462 million for the year ended December 31, 2003 in our protection segment, a $302 million, or 26.1%, increase compared to $1,160 million for the year ended December 31, 2002. DAC amortization expense increased by $133 million, or 98.5%, due to the recognition of premium deficiencies on our long-term care insurance products during our annual third quarter evaluation of DAC. DAC amortization expense would have been even higher had it not been

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partially offset by the positive effects of favorable equity market performance on our variable life insurance products and faster than assumed growth in client asset values associated with variable universal life insurance products.

        A portion of the increase in our protection segment expenses was also due to increased provisions for benefits, claims, losses and settlements, which increased $102 million, or 16.7%, due to the increase in the average number of policies inforce, in particular personal auto and home insurance, as well as increased other operating expenses, which increased $65 million or 38.9% primarily due to the effects of fewer capitalized DAC-related costs.

        Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

        We recorded total revenues of $431 million for the year ended December 31, 2004 in our corporate and other segment, a $12 million, or 2.7%, increase compared to $419 million for the year ended December 31, 2003. The increase in revenues primarily resulted from increased distribution fees and management, financial advice and service fees due to increased activity at our subsidiary Securities America Financial Corporation, which operates its own separately-branded distribution network. These increases were partially offset by recognition of losses from low-income housing investments, which were transferred to our corporate and other segment from our operating segments for regulatory capital reasons at year-end 2003.

        We recorded total expenses of $498 million for the year ended December 31, 2004 in our corporate and other segment, a $52 million, or 11.7%, increase compared to $446 million for the year ended December 31, 2003. This increase in total expenses was primarily due to an increase in field compensation and benefits, which resulted principally from increased commissions paid as a result of increased activity at our subsidiary, Securities America Financial Corporation.

        Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        We recorded total revenues of $419 million for the year ended December 31, 2003 in our corporate and other segment, a $7 million, or 1.8%, increase compared to $412 million for the year ended December 31, 2002. The increase in revenues primarily resulted from increased distribution fees and management, financial advice and service fees due to increased activity at our subsidiary Securities America Financial Corporation, which were partially offset by a decrease in other revenues.

        We recorded total expenses of $446 million for the year ended December 31, 2003 in our corporate and other segment, a $36 million, or 8.7%, increase compared to $410 million for the year ended December 31, 2002. The increase in total expenses was primarily due to an increase in field compensation and benefits expenses, which resulted principally from increased commissions paid as a result of increased activity at our subsidiary, Securities America Financial Corporation.

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Financial Condition

        The following table presents selected information from our consolidated balance sheet as of the dates indicated.

 
  As of June 30,
  As of December 31,
 
  2005
Amount

  % Change
  2004
Amount

  2004
Amount

  % Change
  2003
Amount

 
   
  unaudited

   
   
  audited

   
 
  (in millions of $ except percentages)

Investments(1)   $ 45,883   6.7%   $ 43,006   $ 45,984   6.3%   $ 43,264
Separate account assets(2)     37,433   13.8%     32,908     35,901   16.5%     30,809
  Total assets     95,952   9.5%     87,591     93,113   9.1%     85,384
Future policy benefits and claims(2)     33,169   1.4%     32,699     33,253   3.2%     32,235
Investment certificate reserves     12,174   27.9%     9,517     11,332   23.1%     9,207
Payable to American Express     1,838   4.7%     1,755     1,869   19.7%     1,562
Long-term debt     378   0.6%     375     385   (13.6)%     445
Separate account liabilities(2)     37,433   13.8%     32,908     35,901   16.5%     30,809
  Total liabilities     88,959   9.8%     81,021     86,411   10.6%     78,096
  Total shareholder's equity     6,993   6.4%     6,570     6,702   (8.1)%     7,288

(1)
Includes $32,696 million, $33,153 million, $32,021 million and $32,468 million as of June 30, 2005, December 31, 2004, June 30, 2004 and December 31, 2003, respectively, of investments held by our insurance subsidiaries.

(2)
All amounts are held by our insurance subsidiaries.

        Our total assets and liabilities increased as of June 30, 2005 from June 30, 2004 levels and as of December 31, 2004 from December 31, 2003 levels primarily due to higher investments, investment certificate reserves and separate account assets and liabilities, which increased primarily as a result of net client inflows and market appreciation.

        Investments primarily include corporate debt and mortgage-backed securities. At June 30, 2005, our corporate debt securities comprise a diverse portfolio with the largest concentrations, accounting for approximately 68% of the portfolio, in the following industries: banking and finance, utilities, and communications and media. Investments also include $3,161 million and $3,406 million of mortgage loans on real estate as of June 30, 2005 and June 30, 2004, respectively, and $3,249 million and $3,511 million of mortgage loans on real estate at December 31, 2004 and 2003, respectively. Investments are principally funded by sales of insurance, annuities and investment certificates and by reinvested income. Maturities of these investments are largely matched with the expected future payments of insurance and annuity obligations. For additional information on our investment portfolio, see Note 2 to our consolidated financial statements included elsewhere in this information statement.

        Investments include $2.9 billion of below investment grade securities (excluding net unrealized appreciation and depreciation) at June 30, 2005, $3.1 billion at December 31, 2004 and $3.2 billion at both June 30, 2004 and December 31, 2003. These investments represent 6.5%, 7.1%, 7.6% and 7.6% of our investment portfolio at June 30, 2005, December 31, 2004, June 30, 2004 and December 31, 2003, respectively. Non-performing assets relative to invested assets (excluding short-term cash positions) were 0.02% at both June 30, 2005 and December 31, 2004, 0.04% at June 30, 2004 and 0.07% at December 31, 2003. Our management believes a more relevant measure of exposure of our below investment grade securities and non-performing assets should exclude $231 million, $230 million, $240 million and $236 million, at June 30, 2005, December 31, 2004, June 30, 2004 and December 31, 2003, respectively, of below investment grade securities (excluding net unrealized appreciation and depreciation), which were recorded as a result of the adoption of FIN 46. These assets are not available for our general use as they are for the benefit of the CDO-debt holders, and reductions in value of such investments will be fully absorbed by the third party investors. Excluding the impacts of FIN 46, investments include $2.7 billion at June 30, 2005, $2.9 billion at December 31, 2004, $3.0 billion at June 30, 2004 and $2.9 billion at December 31, 2003 of below investment grade securities

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(excluding net unrealized appreciation and depreciation). They represent 6.1% of our investment portfolio at June 30, 2005, down from 6.5% at December 31, 2004, and 7.0% at both June 30, 2004 and December 31, 2003. Non-performing assets relative to invested assets (excluding short-term cash positions) were nil at June 30, 2005, 0.01% at December 31, 2004, nil at June 30, 2004 and 0.01% at December 31, 2003.

        During the six months ended June 30, 2005, we sold all of our retained interest in a CDO-related securitization trust and realized a pretax gain of $36 million. The carrying value of this retained interest was $705 million at December 31, 2004, of which $523 million was considered investment grade.

        As of June 30, 2005, we continued to hold investments in CDOs that we manage that were not consolidated pursuant to the adoption of FIN 46 as we were not considered the primary beneficiary. As a condition to managing certain CDOs, we are generally required to invest in the residual or "equity" tranche of the CDO, which is typically the most subordinated tranche of securities issued by the CDO entity. Our exposure as an investor is limited solely to our aggregate investment in the CDOs, and we have no obligations or commitments, contingent or otherwise, that could require any further funding of such investments. As of June 30, 2005, the carrying values of the CDO residual tranches we manage were $37 million, a net increase of $10 million from December 31, 2004, which primarily relates to the placement of new CDO products with clients. CDOs are illiquid investments. As an investor in the residual tranche of CDOs, our return correlates to the performance of portfolios of high-yield bonds and/or bank loans comprising the CDOs.

        The carrying value of the CDOs, as well as derivatives recorded on the balance sheet as a result of consolidating certain SLTs, which were liquidated by the end of July 2005, and our projected return are based on discounted cash flow projections that require a significant degree of management judgment as to assumptions primarily related to default and recovery rates of the high-yield bonds and/or bank loans either held directly by the CDOs or in the reference portfolio of the SLTs and, as such, are subject to change. Although the exposure associated with our investment in CDOs is limited to the carrying value of such investments, they have significant volatility associated with them because the amount of the initial value of the loans and/or other debt obligations in the related portfolios is significantly greater than our exposure. In the event of significant deterioration of a portfolio, the relevant CDO may be subject to early liquidation, which could result in further deterioration of the investment return or, in severe cases, loss of the CDO carrying amount. The derivatives recorded as a result of consolidating certain SLTs under FIN 46 are primarily valued based on the expected gains and losses from liquidating a reference portfolio of high-yield loans. The overall exposure to loss related to these derivatives is represented by the pretax net assets of the SLTs, which were $165 million at June 30, 2005 and $462 million at December 31, 2004. The two remaining SLT structures were liquidated by the end of July 2005, and no further exposure remains.

        Assets consolidated as a result of our December 31, 2003 adoption of FIN 46 were $1.2 billion. The newly consolidated assets consisted of $844 million of cash, $244 million of below investment grade securities classified as available-for-sale (including net unrealized appreciation and depreciation), $64 million of derivatives and $15 million of loans and other assets, essentially all of which are restricted. The effect of consolidating these assets on our balance sheet was offset by our previously recorded carrying values of our investment in such structures, which totaled $673 million. We also recorded $500 million of newly consolidated liabilities, which consisted of $325 million of non-recourse debt, $175 million of other liabilities and $9 million of net unrealized after-tax appreciation on securities classified as available-for-sale. For additional information relating to our adoption of FIN 46, see Note 3 to our consolidated financial statements included elsewhere in this information statement.

        Ongoing results of operations specifically related to the consolidated CDO are non-cash items and primarily relate to interest earned on the portfolio of high-yield bonds, gains and losses on the sale of bonds and loans and interest paid on the CDO debt. Changes in value of the portfolio of high-yield

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bonds will be reflected within other comprehensive income unless a decline in value is determined to be other-than-temporary, in which case a charge will be recorded within the results of operations. These impacts will be dependent upon market factors during such time and will result in periodic net operational income or expense. We expect, in the aggregate, such operational income or expense related to the CDO, including the December 31, 2003 FIN 46 implementation non-cash charge of $88 million pretax ($57 million after-tax), to reverse itself over time as the structure matures, because the debt issued to the investors in the consolidated CDO is non-recourse to us, and further reductions in the value of the related assets will be absorbed by the third party investors. Therefore, our maximum cumulative exposure to pretax loss as a result of our investment in the CDO is represented by the carrying value prior to the adoption of FIN 46, which was nil. During 2004, we recorded a $4 million pretax charge and during the first half of 2005, we recorded a $13 million pretax income amount related to the liquidation of the two remaining SLTs. These SLT structures were liquidated by the end of July 2005, and no further exposure remains. In connection with the SLT liquidated in 2004, we recorded a cumulative net pretax charge of $24 million during the year ended December 31, 2004.

        Separate account assets represent funds held for the exclusive benefit of variable annuity and variable life insurance contract holders. These assets are generally carried at market value, and separate account liabilities are equal to separate account assets. We earn investment management, administration and other fees from the related accounts. The increase in separate account assets to $37,433 million as of June 30, 2005 compared to $32,908 million as of June 30, 2004 resulted from market appreciation and foreign currency translation of $2,583 million and net inflows of $1,942 million. The increase in separate account assets to $35,901 million as of December 31, 2004 compared to $30,809 million as of December 31, 2003 resulted from market appreciation and foreign currency translation of $3,198 million and net inflows of $1,894 million.

        We hold reserves for current and future obligations that are primarily related to fixed annuities, certain guaranteed payments under variable annuities, face-amount certificates and life, disability and long-term care insurance. Reserves related to fixed annuities, guarantees under variable annuities and life, disability and long-term care insurance are reflected in future policy benefits and claims in our consolidated balance sheet. We record reserves associated with our obligations related to face-amount certificates under investment certificate reserves in our balance sheet. Reserves for fixed annuities, universal life contracts and face-amount certificates are equal to the underlying contract accumulation values. Reserves for other life, disability and long-term care insurance products are based on various assumptions, including mortality rates, morbidity rates and policy persistency.

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Liquidity and Capital Resources

        Our legal entity organizational structure has an impact on our ability to meet cash flow needs as an organization. Following is a simplified organizational structure. Names reflect current legal entity names of subsidiaries. We have changed some of these names in connection with the separation and distribution. See "Our Business—Our New Brand."

GRAPHIC

        We are primarily a parent holding company for the operations carried out by our subsidiaries. Because of our holding company structure, our ability to meet our cash requirements, including the payment of dividends on our common stock, substantially depends upon the receipt of dividends from our subsidiaries, particularly our life insurance subsidiary, IDS Life, our face-amount certificate subsidiary, Ameriprise Certificate Company (formerly American Express Certificate Company), or ACC, our retail broker-dealer subsidiary, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.), or AFSI, and our broker-dealer subsidiary, American Enterprise Investment Services, or AEIS. As described under "Our Business—Regulation," the payment of dividends by many of our subsidiaries, including IDS Life, IDS Property Casualty, ACC, AFSI and AEIS, is restricted. Regardless of the particular regulations restricting dividend payments, we also take into account the overall health of the business, capital quality and risk management in determining a dividend strategy for payments to our company from our subsidiaries, and in deciding to use cash to make capital contributions to our subsidiaries.

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        The following table sets out the dividends paid to our company (including extraordinary dividends paid with necessary advance notifications to regulatory authorities), net of capital contributions made by our company, and the dividend capacity (amount within the limitations of the applicable regulatory authorities as further described below) for each of IDS Life, ACC, AFSI, IDS Property Casualty and AEIS subsidiaries for the periods indicated:

 
  Year Ended December 31,
 
 
  2004
  2003
  2002
 
 
  (in millions)

 
Dividends paid/(contributions made), net                    
IDS Life   $ 930   $   $ (330 )
ACC         50     10  
AFSI     20     20      
AEIS     61          
IDS Property Casualty     87     58     54  
   
 
 
 
  Total   $ 1,098   $ 128   $ (266 )
   
 
 
 
Dividend capacity                    
IDS Life   $ 449   $ 241   $ 195  
ACC     13     69     32  
AFSI     103     74     28  
AEIS     124     105     93  
IDS Property Casualty     31     6     2  
   
 
 
 
  Total   $ 720   $ 495   $ 350  
   
 
 
 

        For IDS Life, the dividend capacity is based on the greater of (1) the previous year's statutory net gain from operations and (2) 10% of the previous year-end statutory capital and surplus. Dividends that, together with the amount of other distributions made within the preceding 12 months, exceed this statutory limitation are referred to as "extraordinary dividends" and require advance notice to the Minnesota Department of Commerce, IDS Life's primary state regulator, and are subject to potential disapproval. IDS Life exceeded the statutory limitation during 2004, as reflected above by paying $930 million to our company, a portion of which was an extraordinary dividend (which we then paid to American Express, see "—Cash Flows—Financing Cash Flows" below). Notice of non-disapproval was received from the Minnesota Department of Commerce prior to paying these extraordinary dividends. In 2002, we used cash from operations and cash from dividend payments from our other subsidiaries to make capital contributions to IDS Life because statutory earnings were insufficient to fund IDS Life's capital requirements.

        For ACC, the dividend capacity is based on capital held in excess of regulatory requirements. In 2004, ACC's dividend capacity was significantly reduced because of capital required due to growth in the balance sheet resulting from increased product sales. For AFSI and AEIS, the dividend capacity is based on an internal model used to determine the availability of dividends, while maintaining net capital at a level sufficiently in excess of minimum levels defined by SEC regulations.

        For IDS Property Casualty, the dividend capacity is based on the lesser of (1) 10% of the previous year-end capital and surplus and (2) the greater of (a) net income (excluding realized gains) of the previous year and (b) the aggregate net income of the previous three years excluding realized gains less any dividends paid within the first two years of the three-year period. Dividends that, together with the amount of other distributions made within the preceding 12 months, exceed this statutory limitation are referred to as "extraordinary dividends" and require advance notice to the Office of the Commissioner of Insurance of the State of Wisconsin, IDS Property Casualty's primary state regulator, and are subject to potential disapproval. For IDS Property Casualty, dividends paid in 2003 and 2004 and the dividend capacity in 2004 increased significantly due to the inclusion of AMEX Assurance as a subsidiary of IDS Property Casualty. The portion of dividends paid by IDS Property Casualty in 2004, 2003 and 2002 in excess of the dividend capacity set forth in the table above were extraordinary dividends and received approval from the Office of the Commissioner of Insurance of the State of Wisconsin.

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        We had $2,510 million in cash and cash equivalents at June 30, 2005, up from $1,078 million at December 31, 2004. We believe cash flows from operations, available cash balances and short-term borrowings will be sufficient to fund our operating liquidity needs.

        For the six months ended June 30, 2005, net cash provided by operating activities was $395 million compared to $582 million for the same period in 2004. This decrease reflects lower net income coupled with changes in various operating assets and liabilities, partially offset by net cash provided by the return of seed money from our mutual funds and equity method investments in hedge funds.

        For the year ended December 31, 2004, net cash provided by operating activities was $911 million, significantly higher than for the year ended December 31, 2003. We generated net cash from operating activities in amounts greater than net income during 2004 primarily due to adjustments for depreciation and amortization, which represent expenses in our consolidated statements of income but do not require cash at the time of provision. Net cash used to fund seed money in our mutual funds and hedge funds, which are classified as trading securities and used to fund equity method investments in hedge funds, substantially decreased in 2004 compared to 2003. Operating cash flows also increased in 2004 due to net cash provided by changes in derivatives and other assets, which can vary significantly due to the amount and timing of payments. Net cash provided by operating activities was significantly lower in 2003 than 2002, as higher net income in 2003 was more than offset by fluctuations in our operating assets and liabilities primarily reflecting cash used to seed new mutual funds, hedge funds and collateralized loan portfolios. In addition, cash was used to purchase derivatives to mitigate interest rate risk.

        Our investing activities primarily relate to our available-for-sale investment portfolio. Further, this activity is significantly affected by the net flows of our investment certificate, fixed annuity and universal life products reflected in financing activities. For the six months ended June 30, 2005, net cash provided by investing activities was $290 million compared to net cash used in investing activities of $575 million from the same period in 2004. This change resulted primarily from $285 million in net purchases of available-for-sale securities during the six months ended June 30, 2005 compared to $785 million in net purchases for the same period in 2004. In addition, the continued liquidation of the SLTs, which were originally consolidated under FIN 46, provided $337 million of net cash period over period.

        For the year ended December 31, 2004, we used $2,642 million net cash in investing activities, a significant change from the $8,416 million used in 2003. The change primarily reflects a $3,610 million increase in cash flows from unsettled securities transactions payable and receivable, related to investment transactions near the end of 2002 that settled in 2003. Positive net flows on investment certificate, fixed annuity and universal life products were $2,831 million for the year ended December 31, 2004 and $3,721 million for the same period in 2003. For the year ended December 31, 2003, net cash used in investing activities increased over the $1,516 million used in 2002 primarily due to cash flows from unsettled securities transactions payable and receivable related to investment transactions near the end of 2002 that settled in 2003 and $482 million in cash used for the Threadneedle acquisition in 2003. Positive net flows on investment certificate, fixed annuity and universal life products were $3,721 million for the year ended December 31, 2003 and $4,600 million for the same period in 2002.

        Our financing activities primarily include the issuance of debt and our sale of annuities and face-amount certificates. Our borrowing needs are less significant as we generate funds through our operations, primarily through sales of our own asset accumulation, income management and protection

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products. We generated $755 million net cash from financing activities as of June 30, 2005, compared to using $65 million for the same period in 2004. This change reflects $656 million of dividends paid to American Express Company affiliated entities during the six months ended June 30, 2004 compared to no such dividends paid during the same period in 2005. In addition, we had $782 million of positive net flows from our face-amount certificates, fixed annuity and universal life products compared to $628 million for the same period in 2004. Finally, we used $70 million of cash to redeem our outstanding 6.5% medium-term notes at maturity in the first quarter of 2004.

        We generated $1,718 million from financing activities in 2004, down significantly from $4,274 million in 2003 and $4,717 million in 2002. These declines are principally the result of increased dividend payments to American Express Company in 2004 as well as a decrease in consideration received from sales of our annuity products. We paid an aggregate of $1,325 million in dividends, including extraordinary dividends received from IDS Life of $930 million, to American Express Company during 2004, compared to $334 million in dividends in 2003 and $377 million in dividends in 2002.

        The following table sets forth, for the periods indicated, our ratio of earnings to fixed charges.

 
  Six Months
Ended
June 30,

  Year Ended December 31,
 
  2005
  2004
  2003
  2002
  2001
  2000
 
  (in millions except for ratios)

Income before income tax provision and accounting change (PTI)   $ 459   $ 1,173   $ 941   $ 925   $ 63   $ 1,465
Interest expense (I)     36     52     45     32     26     21
Ratio of earnings to fixed charges     13.8     23.6     21.9     29.9     3.4     70.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Our fixed charges consisted solely of interest expense for the periods indicated. We calculate the ratio of "earnings to fixed charges" by dividing the sum of income before income tax provision and accounting change (PTI) plus interest expense (I) by interest expense. The formula for this calculation is: (PTI+I)/(I).

        At June 30, 2005, we had approximately $1.8 billion payable to American Express Company. In August 2005, we repaid $260 million of intercompany debt related to construction financing using cash received from the transfer of our ownership interest in AEIDC to American Express Company, and proceeds from the sale of our interest in a CDO securitization trust. In addition, in connection with the transfer of our 50% ownership interest in AEIDC to American Express Company, we further reduced our intercompany indebtedness payable by $141 million. Our current intercompany indebtedness includes a $1.3 billion line of credit from American Express Company. This credit facility contains a change in control provision such that if at any time during the term of the arrangement American Express Company owns less than 79.5% of our outstanding common stock, any amounts outstanding shall become due and payable no later than 90 days after the date on which American Express Company's share ownership is reduced below the threshold. For more information relating to our intercompany financing arrangements with American Express Company, see Notes 6 and 15 to our consolidated financial statements.

        As part of the separation and distribution, we expect to replace our current intercompany indebtedness payable to American Express Company initially with a bridge facility from selected financial institutions (or American Express Company on arm's length terms, if not available from third parties), on or prior to the distribution date. In October 2005, we intend to replace the bridge facility through the issuance of $1.5 billion of unsecured senior debt securities ranging in maturities from 5 to

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30 years from issuance. We also intend to obtain an unsecured revolving credit facility at or shortly prior to the separation and distribution.

        In December 2004, our subsidiary, IDS Property Casualty, engaged in a sale-and-leaseback of one of its facilities for an initial term of ten years, with up to six renewal terms of five years each. We guaranteed IDS Property Casualty's obligations under the agreement and have accounted for this transaction as a financing. We included the $18 million in proceeds from this transaction in long-term debt at an implicit rate of 4.976%. Aggregate minimum rentals due over the initial base term are $1 million per year through 2009, and an aggregate of $7 million thereafter. For additional information relating to this sale-and-leaseback transaction, see "Our Business—Properties" and Note 6 to our consolidated financial statements.

        As of June 30, 2005 we had $310 million of non-recourse long-term debt relating to a CDO securitization trust that was consolidated beginning December 31, 2003, compared to $317 million at December 31, 2004 and $325 million at December 31, 2003. We consolidated this CDO securitization trust effective with our adoption of FIN 46. This debt will be repaid from the cash flows of the investments held within the portfolio of the CDO, which assets are held for the benefit of the CDO debt holders. For additional information relating to this debt, see Notes 3 and 6 to our consolidated financial statements.

        On February 8, 1994, we issued $70 million aggregate principal amount of 6.5% fixed-rate unsecured medium-term notes due February 5, 2004 and $50 million aggregate principal amount of 6.625% fixed-rate unsecured medium-term notes due February 15, 2006 in a private placement to institutional investors. The medium-term notes do not impose financial covenants on our company other than an agreement to maintain at all times a consolidated net worth of at least $400 million. Under the medium-term notes, we have agreed not to pledge the shares of our principal subsidiaries. Events of default under the medium-term notes include a default in payment and certain defaults or acceleration of certain other financial indebtedness. We redeemed $70 million in aggregate principal amount of outstanding 6.5% medium-term notes at maturity in February 2004.

        The contractual obligations identified in the table below include both our on- and off-balance transactions that represent material expected or contractually committed future obligations. The following table presents payments due by period as of December 31, 2004.

 
   
  Payments due in year ending
 
  Outstanding
at
December 31,
2004

Contractual Obligations

  2005
  2006-
2007

  2008-
2009

  2010 and
Thereafter

 
  (in millions)

Balance Sheet:                              
  Long-term debt(a)   $ 1,963   $ 1,068   $ 560   $   $ 335
  Insurance and annuities(b)     54,755     3,366     7,036     6,937     37,416
  Investment certificates(c)     11,332     10,867     465        
Off-Balance Sheet:                              
  Lease obligations     645     77     123     83     362
  Purchase obligations(d)     133     80     46     7    
   
 
 
 
 
    Total:   $ 68,828   $ 15,458   $ 8,230   $ 7,027   $ 38,113
   
 
 
 
 

(a)
See Note 6 to our consolidated financial statements for more information regarding our long-term debt.

(b)
These scheduled payments are represented by reserves of $33 billion at December 31, 2004 and are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions. Actual payment obligations may differ if

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(c)
The payments due by year are based on contractual term maturities. However, contractholders have the right to redeem the investment certificates earlier and at their discretion subject to surrender charges, if any. Redemptions are most likely to occur in periods of substantial increases in interest rates.

(d)
These payments due by year are based on allocations of American Express Company's consolidated amounts.

        For additional information relating to these contractual commitments, see Note 16 to our consolidated financial statements.

        In 2001, we placed a majority of our rated CDO securities and related accrued interest, as well as a relatively minor amount of other liquid securities, having an aggregate book value of $905 million into a securitization trust. We sold interests in the trust to institutional investors for $120 million in cash (excluding transaction expenses), and retained an aggregate allocated book amount of $785 million. We sold our interest in the securitization trust in the second quarter of 2005 for a net gain of $36 million.

        Our investment portfolio is a high-quality and diversified portfolio, both by sector and issuer, with 6.5% rated below investment grade as of June 30, 2005. See Note 2 to our consolidated financial statements for details regarding our investment portfolio holdings. We manage our investment portfolio with an emphasis on investment income and capital preservation. Our current strategy focuses on cash-flow certainty and credit quality as interest rates have declined and risk premiums have narrowed.

Qualitative and Quantitative Disclosures about Market Risks

        We have two principal components of market risk: interest rate risk and equity market risk within both of our asset accumulation and income and protection segments. Interest rate risk results from investing in assets that are somewhat longer and reset less frequently than the liabilities they support. We manage interest rate risk through the use of a variety of tools that include modifying the maturities of investments supporting our fixed annuities, insurance and certificate products. Additionally, we enter into derivative financial instruments, such as interest rate swaps, caps, floors and swaptions, which change the interest rate characteristics of client liabilities or investment assets. Because certain of our investments and asset management activities are impacted by the value of our managed equity-based portfolios, from time to time we enter into risk management strategies that may include the use of equity derivative financial instruments, such as equity options, to mitigate our exposure to volatility in the equity markets.

        Our interest rate exposures arise primarily with respect to our protection, annuity and face-amount certificate products and our investment portfolio. Such client liabilities and investment assets generally do not create naturally offsetting positions as it relates to basis, repricing or maturity characteristics. Rates credited to clients' accounts generally reset at shorter intervals than the yield on underlying investments. Further, the expected maturities on the investment assets may not align with the certificate maturities and surrender or other benefit payments from fixed annuity and insurance products. Therefore, our interest spread margins are affected by changes in the general level of interest rates. The extent to which the level of rates affects spread margins is managed primarily by a combination of modifying the maturity structure of the investment portfolio to more closely align with the client liability maturities, and the use of derivative financial instruments to modify the interest rate risk characteristics associated with certain client liabilities and investment assets.

        From time to time, we enter into interest rate swaps or other interest rate related derivative instruments that effectively decrease the mismatch between the repricing of client liabilities and the

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investments supporting the liabilities. This helps align the interest rate characteristics of the client liabilities with the interest rate characteristics of the investment assets. These derivative financial instruments are generally economic hedges that do not qualify for hedge accounting. As of June 30, 2005 and as of December 31, 2004 and 2003, we had no derivatives outstanding utilizing this specific risk management strategy.

        Additionally, from time to time, we enter into interest rate swaps to "lock in" interest rates at a specified market rate related to the forecasted interest credited on client liabilities, such as client investor certificates or other funding instruments. These liabilities generally contain a fixed interest rate provision, which is set at the time of the future issuance. These hedging activities are generally eligible for hedge accounting. The total notional of derivatives outstanding under this risk management strategy was $1.5 billion as of June 30, 2005 and $1.2 billion and $3.7 billion as of December 31, 2004 and 2003, respectively. The total fair value of these derivative financial instruments, excluding accruals, was $(19) million as of June 30, 2005 and $1 million and $(24) million as of December 31, 2004 and 2003, respectively. The total amounts recognized in the statement of income for these contracts were losses of $14 million for the six months ended June 30, 2005 and $22 million, $24 million and $27 million for the years ended December 31, 2004, 2003 and 2002, respectively. Net cash paid related to these derivative financial instruments totaled $4 million for the six months ended June 30, 2005 and $22 million, $22 million and $31 million for the years ended December 31, 2004, 2003 and 2002, respectively.

        Further, from time to time, we also enter into swaptions or other interest rate floors and caps to mitigate the impact of increasing interest rates related to the forecasted interest payments of future annuity sales to clients. Such annuities generally contain fixed interest rate provisions, which are set at the time of the future issuance, and impact the total interest payment cash flows related to the annuities. Therefore, this strategy allows us to "lock in" interest rate risk associated with the forecasted annuity sale cash flows at a specified market rate in the event that interest rates rise but not "lock in" the interest rate risk on the event that interest rates decline. The total notional of derivatives outstanding under this risk management strategy was $1.2 billion as of June 30, 2005, December 31, 2004 and 2003. The total fair value of these derivative financial instruments was $7 million as of June 30, 2005 and $27 million and $61 million as of December 31, 2004 and 2003, respectively. We recognized $(8) million in the statement of income for the six months ended June 30, 2005 and no significant amounts for the years ended December 31, 2004 and 2003. No cash was paid for the six months ended June 30, 2005 and year ended December 31, 2004. Total cash paid was $72 million for the year ended December 31, 2003.

        Finally, from time to time, we enter into interest rate swaps to hedge the change in fair value of specific investment assets, generally corporate bonds, due to changes in interest rates. These investment assets contain a fixed interest rate provision, which the interest rate swaps allow us to effectively convert to a floating rate. These hedging activities are generally eligible for hedge accounting. The total notional of derivatives outstanding under this risk management strategy was $131 million as of June 30, 2005 and $155 million as of December 31, 2004 and 2003. The total fair value of these derivative financial instruments was $(2) million as of June 30, 2005 and $(5) million and $(8) million as of December 31, 2004 and 2003, respectively. The total amounts recognized in the statement of income for these contracts were $1 million for the six months ended June 30, 2005 and $(1) million, $(3) million and $(21) million for the years ended December 31, 2004, 2003 and 2002, respectively. Net cash paid related to these derivative financial instruments totaled $2 million for the six months ended June 30, 2005 and $5 million, $8 million and $5 million for the years ended December 31, 2004, 2003 and 2002, respectively.

        The negative effect on our pretax earnings of a 100 basis point increase in interest rates, which assumes repricings and client behavior based on the application of proprietary models, to the book of business at December 31, 2004 and 2003 would be approximately $58 million and $53 million, respectively.

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        We have three primary exposures to the general level of equity markets. One exposure is that we earn fees from the management of equity securities in variable annuities, variable insurance, our 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 our fee revenues to the general performance of equity markets, we may from time to time enter 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. For example, in 2005, we purchased put options to mitigate reductions in our management fees in the event of a downturn in the equity markets.

        The second exposure is the equity risk related to certain face-amount certificate and annuity products that pay interest based upon the relative change in the S&P 500 index. We enter into options and futures contracts to economically hedge this risk. These products generally have rates that are paid to clients based on equity market performance, with minimum guarantees. The minimum guarantees are provided by a portfolio of fixed income securities, while the equity based return is provided by a portfolio of equity options and futures constructed to replicate the return to the policyholder.

        Finally, although we currently bear all risk related to guaranteed minimum death and income benefits associated with certain of our variable annuity products, we hedge our guaranteed minimum withdrawal benefit risk using futures contracts, but are still exposed to income statement volatility from change in equity market volatility. Such annuities, which were first introduced in 2004, typically have account values that are based on an underlying portfolio of mutual funds which fluctuate based on equity market performance. The guaranteed minimum withdrawal benefit guarantees that over a period of approximately 14 years the client can withdraw an amount equal to what has been paid into the contract, regardless of the performance of the underlying funds. This option is an embedded derivative that is accounted for at fair value, with changes in fair value recorded through earnings. To economically hedge these changes in market value, we have a portfolio of equity futures contracts constructed to offset a portion of the changes in the option mark-to-market.

        For all of our economic equity risk hedges, the total notional of derivatives outstanding under this risk management strategy was $849 million as of June 30, 2005 and $283 million and $264 million as of December 31, 2004 and 2003, respectively. The total net fair value of these derivative financial instruments was $64 million as of June 30, 2005 and $70 million and $66 million as of December 31, 2004 and 2003, respectively. The total amounts recognized in the statement of income for these contracts were $(3) million for the six months ended June 30, 2005 and $16 million, $7 million and $(43) million for the years ended December 31, 2004, 2003 and 2002, respectively. Cash (paid)/received related to these derivative financial instruments totaled $(4) million for the six months ended June 30, 2005 and $19 million, $(30) million and $(20) million for the years ended December 31, 2004, 2003 and 2002, respectively.

        The negative effect on our pretax earnings of a 10% decline in equity markets would be approximately $85 million and $89 million based on managed assets, certificate and annuity business inforce and index options as of December 31, 2004 and 2003, respectively.

        Our September 2003 acquisition of U.K.-based Threadneedle resulted in foreign currency exposures. We manage these foreign currency exposures primarily by entering into agreements to buy and sell currencies on a spot basis or through foreign currency forward contracts, which are derivative financial instruments. We use foreign currency forward contracts to hedge our foreign currency exposure related to the net investment in the foreign operations of Threadneedle. These foreign currency forwards are designated and accounted for as hedges. For other foreign currency transaction exposures, such as the issuance of foreign currency denominated deposits, we generally use foreign currency forward contracts to economically hedge such exposures and "lock in" a component of that exposure to the specific currencies at a specified rate. The total principal of foreign currency derivative

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products outstanding was $1.0 billion as of June 30, 2005 and $1.6 billion and $1.4 billion as of December 31, 2004 and 2003, respectively. The total net fair value of these derivative financial instruments was $8 million as of June 30, 2005 and $(27) million and $(4) million as of December 31, 2004 and 2003, respectively. The total amounts recognized in the statement of income for these contracts were $(38) million for the six months ended June 30, 2005 and $2 million, $6 million and $17 million for the years ended December 31, 2004, 2003 and 2002, respectively.

        Based on the year-end 2004 foreign exchange positions, the effect on our earnings and equity of a hypothetical 10% change in the value of the U.S. dollar would be immaterial.

        Our owned investment securities are, for the most part, held to support our life insurance, annuity and face-amount certificate products. We primarily invest in long-term and intermediate-term fixed income securities to provide our contractholders with a competitive rate of return on their investments while controlling risk. In addition to our general investment strategy described above under "—Liquidity and Capital Resources—Investment Portfolio," our investment in fixed income securities is designed to provide us with a targeted margin between the interest rate earned on investments and the interest rate credited to clients' accounts. We do not trade in securities to generate short-term profits for our own account.

        We regularly review models projecting various interest rate scenarios and risk/return measures and their effect on profitability. We structure our investment security portfolios based upon the type and behavior of the products in the liability portfolios to achieve targeted levels of profitability within defined risk parameters and to meet contractual obligations. Part of our strategy includes the use of derivatives, such as interest rate caps, swaps and floors, for risk management purposes.

        Our potential credit exposure to a counterparty from derivatives is aggregated with all of our other exposures to the counterparty to determine compliance with established credit and market risk limits at the time we enter into a derivatives transaction. Credit exposures may take into account enforceable netting arrangements. Prior to execution of a new type or structure of derivative contract, we determine the variability of the contract's potential market and credit exposures and whether such variability might reasonably be expected to create exposure to a counterparty in excess of established limits.

        We have developed a contingent funding plan that enables us to meet client obligations during periods in which our clients do not roll over maturing certificate contracts and elect to withdraw funds from their annuity and insurance contracts. We designed this plan to allow us to meet these client withdrawals by selling or obtaining financing, through repurchase agreements of portions of our investment securities portfolio.

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OUR BUSINESS

Overview

        We are a financial planning and financial services company that offers solutions for our clients' asset accumulation, income management and protection needs. As of June 30, 2005, we had over 2.7 million individual, business and institutional clients and a network of over 12,000 financial advisors and registered representatives, including registered representatives of our Securities America Financial Corporation subsidiary, who provide personalized financial planning, advisory and brokerage services.

        We strive to deliver financial solutions to our clients through a tailored approach focused on building a long-term personal relationship through financial planning that is responsive to our clients' evolving needs. The financial solutions we offer include both our own products and services and products of other companies. Our financial planning and advisory process provides comprehensive solutions for our clients' lifetime asset accumulation, income management and protection needs. We believe that our focus on personal relationships, together with our strengths in financial planning and product development, allows us to better address the financial needs of our core mass affluent clients. This focus also puts us in a strong position to capitalize on significant demographic and market trends, which we believe will continue to drive increased demand for financial planning and the other financial services we provide, particularly among our target client population.

        Our nationwide network of financial advisors and registered representatives is the means by which we develop personal relationships with our clients. We refer to the advisors who use our brand name (who numbered over 10,500 at June 30, 2005) as our branded advisors. Our branded advisor network is also the primary distribution channel through which we offer our asset accumulation and income management products and services, as well as a range of protection products. We provide our branded advisors training, tools and centralized support to assist them in delivering tailored solutions to our clients, including products and services responsive to their needs. We believe that the integration of our advisors and the financial solutions we offer through our financial planning model not only improves the products and services we provide to our clients, but also allows us to reinvest in enhanced services for our clients and support for our advisors. This integrated model also affords us a better understanding of our client base, which allows us to better manage the risk profile of our businesses. In our experience, our business model results in more satisfied clients with deeper, longer lasting relationships with our company and increased retention of experienced advisors.

        We have two main operating segments aligned with the financial solutions we offer to address our clients' needs:

Our asset accumulation and income business offers our own and other companies' mutual funds, as well as our own annuities and other asset accumulation and income management products and services to retail clients through our ad