============================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
-----------------------FORM 10-K
----------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO ________ COMMISSION FILE NUMBER 33-28976 IDS
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
Commission file number 033-28976
RIVERSOURCE LIFE INSURANCE COMPANY
-------------------------- (Exact(Exact name of registrant as specified in its charter)
MINNESOTAMinnesota
41-0823832
-------------------------------------------------------------- ------------------------------------------- (State(State or other jurisdiction of incorporation or
(I.R.S.organization)(I.R.S. Employer Identification No.)
organization) 829 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA1099 Ameriprise Financial Center, Minneapolis, Minnesota
55474
-------------------------------------------------------------- ------------------------------------------- (Address(Address of principal executive offices)
(Zip(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:Registrant’s telephone number, including area code (612) 671-3131
-------------- SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(b)
OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTIONof the Act: NoneSecurities registered pursuant to Section 12(g)
OF THE ACT: NONEof the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ]o No[X]xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
[ ]o No[X]xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
[X]x No[ ]oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [Not Applicable]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
non-accelerated filer.smaller reporting company. Seedefinitiondefinitions of"accelerated“large accelerated filer,” “accelerated filer” andlarge accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[ ]o No[X]xIndicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date.Class Outstanding at March 9, 2006 ----- ---------------------------- Common Stock (par value $30 per share) 100,000 shares
Class
Outstanding at March 2, 2009
Common Stock (par value $30 per share)
100,000 shares
All outstanding shares of the registrant are directly owned by Ameriprise Financial, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
============================================================================
TABLE OF CONTENTSFORM 10-K ITEM NUMBER PART I PAGE1. Business................................................................................. 1 1A. Risk Factors............................................................................. 10 1B. Unresolved Staff Comments................................................................ 19 2. Properties............................................................................... 19 3. Legal Proceedings........................................................................ 19 4. Submission of Matters to a Vote of Security Holders...................................... 19 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................................................ 20 6. Selected Financial Data.................................................................. 20 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............................................................................ 21 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 37 8. Financial Statements and Supplementary Data.............................................. 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 38 9A. Controls and Procedures.................................................................. 38 9B. Other Information........................................................................ 39 10. Directors and Executive Officers of the Registrant....................................... 39 11. Executive Compensation................................................................... 39 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...................................................................... 39 13. Certain Relationships and Related Transactions........................................... 39 PART III 14. Principal Accounting Fees and Services................................................... 40 PART IV 15. Exhibits, Financial Statement Schedules.................................................. 41 Signatures............................................................................... 42 Index to Financial Statements............................................................ F-1 Exhibit Index............................................................................ E-1TABLE OF CONTENTS
Form 10-K
Item Number
Page
PART I
1.
Business
1
1A.
Risk Factors
8
1B.
Unresolved Staff Comments
18
2.
Properties
18
3.
Legal Proceedings
19
4.
Submission of Matters to a Vote of Security Holders
19
PART II
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19
6.
Selected Financial Data
19
7.
Management’s Narrative Analysis
20
7A.
Quantitative and Qualitative Disclosures About Market Risk
37
8.
Financial Statements and Supplementary Data
37
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
78
9A(T).
Controls and Procedures
78
9B.
Other Information
79
PART III
10.
Directors and Executive Officers of the Registrant
79
11.
Executive Compensation
79
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
79
13.
Certain Relationships and Related Transactions, and Director Independence
79
14.
Principal Accountant Fees and Services
79
PART IV
15.
Exhibits and Financial Statement Schedules
80
Signatures
81
Exhibit Index
E-1
PART I
------ ITEM 1. BUSINESS INTRODUCTION ------------ IDS
ITEM 1.
BUSINESS
Introduction
RiverSource Life Insurance Company is a stock life insurance company with
four wholly-ownedone wholly owned operatingsubsidiaries: IDSsubsidiary, RiverSource Life InsuranceCompanyCo. of New YorkAmerican Partners(“RiverSource LifeInsurance Company, American Enterprise Life Insurance Company and American Centurion Life Assurance Company. IDSof NY”). RiverSource Life Insurance Company is awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.(Ameriprise Financial)(“Ameriprise Financial”).o IDS· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York.
IDSRiverSource Life Insurance Company issues insurance and annuity products.o American Enterprise Life Insurance Company (American Enterprise Life) is a stock life insurance company domiciled in Indiana, which holds Certificates of Authority in the District of Columbia and all states except New York. American Enterprise Life issues fixed and variable annuity contracts primarily through regional and national financial institutions and regional and/or independent broker-dealers. (In past years, American Enterprise Life issued a nominal number of variable universal life contracts.) o American Partners Life Insurance Company (American Partners Life) is a stock life insurance company domiciled in Arizona, which holds Certificates of Authority in the District of Columbia and all states except New York and New Hampshire. American Partners Life markets annuity products directly to customers, generally persons holding an American Express(R) Card. o IDS Life Insurance Company of New York (IDS· RiverSource Life of
New York)NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota andNorth Dakota. IDSDelaware. RiverSource Life ofNew YorkNY issues insurance and annuity products.o American CenturionOn December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RiverSource Tax Adv. Inv.”) to RiverSource Life
Assurance Company (American Centurion Life)Insurance Company. RiverSource Tax Adv. Inv. is a stocklife insurancecompany domiciled inNew York, which holds Certificates of AuthorityDelaware and is a limited partner inNew York, Alabama and Delaware. American Centurion Life issues fixed and variable annuity contracts primarily through financial institutions and independent broker-dealers. American Centurion Life also markets annuity products directly, generally to persons holding an American Express(R) Card. IDS Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estateaffordable housing partnership investments.IDSRiverSource Life Insurance Company and its
seventwo subsidiaries are referred to collectively in this Form 10-K as"IDS Life"“RiverSource Life”.BusinessA majority of RiverSource Life’s business is sold through the retail distribution channel of Ameriprise Financial Services, Inc., a subsidiary of Ameriprise
Financial, for IDS Life Insurance Company and IDS LifeFinancial. RiverSource Distributors, Inc., a subsidiary ofNew York represents the majority of IDS Life's business, whereas business sold through third party distribution by American Enterprise Life and American Centurion Life and business sold directly to consumers by American Partners Life and American Centurion Life represent a smaller portion of IDS Life's business.Ameriprise Financial,Services, Inc.serves as the principal underwriter and distributor of variable annuity and life insurance products issued bythe four operating subsidiaries of IDSRiverSource Life.IDS Life Insurance Company serves as distributor for the variable products it issues. 1Prior to August 1, 2005,Ameriprise Financial was
referred to asformerly a wholly owned subsidiary of American ExpressFinancial Corporation.Company (“American Express”). On February 1, 2005, the American ExpressCompany (American Express)Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings inwhat is nowAmeriprise Financial (theSeparation)“Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (theDistribution)“Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the separationof its businessand to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees.IDSThrough 2007, RiverSource Life was allocated certainseparation and Distribution-relatedexpenses incurred as a result of Ameriprise Financial becoming an independent company.Cumulatively, the expenses allocated to IDS Life are significant to IDS Life. IDS Life received a capital contribution of $650 millionThe separation fromAmeriprise Financial during the third quarter of 2005 to support its current financial strength ratingsAmerican Express was completed in 2007.Annuities: Product Features and
to cover the allocated separation costs. AMERIPRISE FINANCIAL'S NEW BRAND -------------------------------- In connection with the separation, Ameriprise Financial launched a new brand name strategy for its businesses. In October 2005, it began marketing products, including insurance and annuities, under theRisksRiverSource
brand. The transition of the insurance and annuity products to the RiverSource brand is expected to be completed by the end of 2006. Ameriprise Financial will streamline the organizational structure of its insurance business by consolidating certain of its insurance subsidiaries at year-end 2006. This organization will incorporate the new RiverSource branding strategy into the names of Ameriprise Financial's insurance company subsidiaries and is expected to result in certain expense and capital-deployment efficiencies. It is expected that the formal legal entity consolidation and legal entity name changes with respect to the insurance company subsidiaries will not be complete until year-end 2006 due to the time required to obtain all necessary state regulatory approvals. ANNUITIES: PRODUCT FEATURES AND RISKS ------------------------------------- IDSLife offers both deferred variable and fixedand variable annuity productsannuities to a broad range of consumers through multiple distribution channels.VariableDeferred variable and fixed annuitiesissued by IDS Life may be deferred,are products where assets accumulate until the contract is surrendered, thecontract ownercontractholder (or in some contracts, the annuitant) dies, or thecontract ownercontractholder or annuitant begins receiving benefits under an annuity payoutoption; oroption. RiverSource Life also offers immediatewhereannuities in which payments begin within one year of issue and continue for life or for a fixed period of time.IDSRiverSource Life is one of the largest issuers of annuities in the United States. For the
yearnine months endedDecember 31, 2005, on a consolidated basis, ourSeptember 30, 2008, its variable annuity products ranked11theleventh in new salesof variable annuitiesaccording toVARDS. IDSMorningstar Annuity Research Center. RiverSource Life hadfixed and variableannuity cash sales in20052008 of$7.6$9.2 billion,upa decrease of 17% from20042007 as a result of a41% increasedecrease in variable annuities sales, partially offset bya decreasean increase in fixedannuities.annuity sales. The relative proportion between fixed and variable annuity sales is generally driven by the relative performance of the equity and fixed income markets. In times oflacklusterweak performance in equity markets, fixed sales are generally stronger. In times of superior performance in equity markets, variable sales are generally stronger. The relative proportion between fixed and variable annuity sales is also influenced by product design and other factors.IDSRevenues for RiverSource Life’s variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. RiverSource Life
receives fees chargedalso earns net investment income on owned assetsallocated to its separate accounts. Investment management performance is critical to the profitability of the annuity business. 2VARIABLE ANNUITIESsupporting reserves for fixed and immediate annuities and for certain guaranteed benefits offered with variable annuities.1
Variable Annuities
A variable annuity provides a
contract ownercontractholder with investment returns linked totheunderlying investmentoptionsaccounts of thecontract owner'scontractholder’s choice. Most variable annuity products in force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging up to 4.0% as of December 31,2005.2008.Contract purchasers can choose
to add variousoptional benefit provisions to their contracts to meet theirneeds. These includeneeds, including enhanced guaranteed minimum death benefit(GMDB)(“GMDB”), guaranteed minimum withdrawal benefit(GMWB), guaranteed minimum income benefit (GMIB)(“GMWB”) and guaranteed minimum accumulation benefit(GMAB)(“GMAB”) provisions. Approximately 68% of variable annuity sales in 2008 included either a GMWB or GMAB provision, while approximately one-third of RiverSource Life’s overall variable annuity assets include a GMWB or GMAB feature. In general, theseprovisionsfeatures can help protectcontract ownerscontractholders and beneficiaries from a shortfall in death or living benefits due to a decline in the value of their underlying investment accounts.Innovative features forThe majority of the variable annuity
products have continued to evolve. These featurescontracts RiverSource Life offers contain GMDB provisions. RiverSource Life’s largest-selling variable annuities are the RiverSource® Retirement Advisor Plus 4 series of variable annuities, which includeGMDBs. Underthe RiverSource Retirement Advisor 4 AdvantagePlus(SM)® variable annuity and the RiverSource Retirement Advisor 4 Select® variable annuity (the “Retirement Advisor 4 Variable Annuities”). Under the Retirement Advisor 4 Variable Annuities, the standard GMDB provides that if thecontract ownercontractholder is age 75 or younger on the date the contract is issued, the beneficiary will receive the greater of (i) contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) purchase payments minus adjusted partial surrenders. If thecontract ownercontractholder is age 76 or older at contract issue, the beneficiary will receive the contract value, less any purchase payment credits subject to recapture and less a pro-rata portion of any rider fees.Additional optional GMDBs are also available. For example, RiverSource Retirement Advisor 4 Advantage
Plus(SM) Variable Annuity contract ownersvariable annuity contractholders age 76 or older at contract issue may purchase the optional Return of Purchase Payment Death Benefit for an additional charge which adds the return of purchase payments less adjusted partial surrenders to the standard death benefit.Contract ownersContractholders may also purchase a maximum anniversary value death benefit or a five-year maximum anniversary value death benefit for an additional charge. These death benefit riders guarantee to pay the beneficiary the maximum account value on any contract anniversary or any fifth contract anniversary, plus subsequent purchase payments less adjusted partial surrenders.
IDS Life's contract ownersRiverSource Life’s contractholders also may purchase an enhanced earnings death benefit or an enhanced earnings plus death benefit for an additional charge. These death benefit riders are intended to provide additional benefits to offset expenses after the
contract owner'scontractholder’s death.InnovativeAvailable features for annuity products also include the GMWB and GMWB for life. The GMWB is designed to protect the
contract owner'scontractholder’s principal by allowing the client to withdraw the principal over a period of time, regardless of the investment performance of the contract. The GMWB for life is an enhanced benefit that also allows periodic withdrawals for the life of the contractholder, regardless of the investment performance of the contract.Variable annuity contract
owners age 79 or younger at contract issueholders can also obtainthea lump sum principal-back guarantee by purchasing the optional GMAB rider for an additionalcharge, whichcharge. The GMAB provides a guaranteed contract value at the end of a ten-year waitingperiod. The guaranteed value is the total amount of purchase payments made minus any withdrawals,period regardless of the investment performance of the contract.American Enterprise Life and other subsidiariesThe guarantee is equal to the greater ofIDS Life also offer variable annuities with a varietythe total amount ofGMDB features and certain optional "living" benefits, i.e. GMWB, GMIB and GMAB. For example, American Enterprise Life issues certainpurchase payments made or 80% of the highest anniversary value, adjusted for any withdrawals.Certain variable annuity contracts
thatcontain aGMIBguaranteed minimum income benefit (“GMIB”) feature which,if elected by the contract owner andafter a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates.American EnterpriseRiverSource Life bears the risk that protracted under-performance of the financial markets could result in GMIB being higher than what accumulatedcontract ownercontractholder account balances would support.3In May 2007, RiverSource Life ceased offering contracts with GMIB provisions. RiverSource Life earns fee-based revenue in the form of mortality and expense risk fees, marketing support and administrative fees, fees charged for optional features elected by the contractholder and any surrender or withdrawal charges.
2
The general account assets of
IDSRiverSource Life support the contractual obligations under the guaranteed benefitriders IDS Life issuesprovisions (see"General“General andVariableSeparate AccountAssets--TheAssets — GeneralAccount"Account” below). As a result,IDSRiverSource Life bears the risk that protracted under-performance of the financial markets could result in guaranteed benefit payments being higher than what current account values would support.IDS Life'sRiverSource Life’s exposure to risk from guaranteed benefits generally will increase when equity marketsdecline. IDS Life's largest-selling variable annuities aredecline, as evidenced by the significant decline experienced in 2008. For a discussion of liabilities related to RiverSourceRetirement Advisor Plus(SM) seriesLife’s annuity products, see Note 2 ofvariable annuities, which includethe Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.Fixed Annuities
RiverSource
Retirement Advisor Advantage Plus(SM) Variable Annuity and the RiverSource Retirement Advisor Select Plus(SM) Variable Annuity (the Retirement Advisor Plus(SM) Variable Annuities). FIXED ANNUITIES IDS Life'sLife’s fixed annuity products provide acontract ownercontractholder withacash value that increases by a fixed or indexed interest rate.FixedRiverSource Life periodically resets ratesare periodically resetattheits discretionof IDS Lifesubject to certain policy terms establishing minimum guaranteed interest crediting rates.IDS Life'sRiverSource Life’s earnings from fixed annuities are based upon the spread between rates earned on assets purchased with fixed annuity deposits and the rates at which interest is credited to its fixed annuity contracts.IDSRiverSource Life
resetspreviously offered equity indexed annuities. In 2007, new sales were discontinued.Revenues for RiverSource Life’s fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances with profitability significantly impacted by the spread between net investment income earned and interest
rates basedcredited ona number of factors, including interest rate scenario models and risk/return measures.the fixed account balances.The fixed annuity contracts in force provide guaranteed minimum interest crediting rates ranging from 1.5% to 5.0% as of December 31,
2005. In 2003, and in response to a declining interest rate environment, several states adopted an interim regulation allowing for a2008. New contracts issued provide guaranteed minimum interestcrediting rate of 1.5% and/or a model regulationrates in compliance with state laws providing for indexed guaranteed rates.Insurance: Product Features and Risks
RiverSource Life issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance. Universal life insurance is a
guaranteed indexed rateform of permanent life insurance characterized by flexible premiums, flexible death benefits andhave now adopted regulationsunbundled pricing factors (i.e., mortality, interest and expenses). Traditional life insurance refers to whole and term life insurance policies thatmirrorpay a specified sum to a beneficiary upon death of theNational Association of Insurance Commissioners (NAIC) model regulationinsured for aguaranteed index rate. In response, IDS Life filed a numberfixed premium. Variable universal life insurance combines the premium and death benefit flexibility ofcontract changes in recent years to implement lower minimum guarantees. IDS Life will continue to implement contract changes as states continue to adoptuniversal life with underlying fund investment flexibility and thenew model regulation or as the interim regulation expires according to its terms. INSURANCE: PRODUCT FEATURES AND RISKS ------------------------------------- IDS Life issues a wide range of insurance products, each described below. IDS Life'srisks associated therewith.RiverSource Life’s sales of individual life insurance in
2005,2008, as measured by scheduled annual premiums,excludinglump sum and excess premiums, consisted of89%71% variable universal life,2%22% fixed universal life and9%7% traditional life.IDSRiverSource Life issues only non-participating life insurance policies, which do not pay dividends to policyholders from theinsurers'insurers’ earnings. One of the major risks inherent in life insurance is the risk that mortality will be greater than anticipated. As discussed below, reinsurance is critical forIDSRiverSource Life to mitigate this risk.VARIABLE UNIVERSAL LIFE INSURANCE IDS Life's best-selling life insurance products areVariable Universal Life Insurance
RiverSource Life is a leader in variable universal life
insurance policies.insurance. Variable universal life insurance provides life insurance coverage along with investment returns linked to underlying investment accounts of thepolicyholder'spolicyholder’s choice. Options may includeAmeriprise Financial'sRiverSource Variable Portfolio Funds as well as variable portfolio funds of other companies.VariableMost variable universal life insurance products in force offered a fixed account investment option with guaranteed minimum interest crediting rates ranging from 3.0% to 4.5% as of December 31,2005. For the year ended December 31, 2005, IDS2008. RiverSource Life Insurance Company rankedfirstfifth in sales of variable universal life based on total premiums (according to the Tillinghast Towers-PerrinValue(TM) Survey)ValueTM Survey, dated September 30, 2008, the most recent report available).IDS Life'sRiverSource Life’s major source of revenue from variable universal life insurance is cost of insurance and other charges.4IDS Life's variable life insurance products include RiverSource(SM) VariableFixed Universal Life
IVInsurance andRiverSource(SM) Variable UniversalTraditional Whole LifeIV - Estate Series, which are individual flexible premium life insurance policies. The Estate Series policy is available to policyholders with initial specified insurance coverage of $1 million or more. IDS Life also issues RiverSource(SM) Succession Select Variable LifeInsurance(Succession Select), a flexible premium survivorship variable life insurance policy that insures two lives. Succession Select is often used for estate planning purposes. Finally, IDS Life issues RiverSource(SM) Single Premium Variable Life, an individual single premium variable life insurance policy. FIXED UNIVERSAL LIFE INSURANCE AND TRADITIONAL WHOLE LIFE INSURANCEFixed universal life and traditional whole life insurance policies do not subject the policyholder to the investment risks associated with variable universal life insurance.
IDS Life'sRiverSource Life’s fixed universal life insurance products provide life insurance coverage and cash value that increases by a fixed interest rate. The rate is periodically reset at the discretion of
the issuing companyRiverSource Life subject to certain policy terms relative to minimum interest crediting rates.UniversalFixed universal life insurance products in force provided guaranteed minimum interest crediting rates ranging from4.0%3.0% to 5.0% as of December 31,2005. IDS Life's universal life insurance products as of December 31, 2005 included Life Protection Plus, Life Protection Select and Life Protection Select-Estate Series. The Estate Series policy is available to policyholders with initial specified insurance coverage of $1 million or more. In January 2006, IDS Life introduced two new universal life products,2008.3
RiverSource
Foundations(SM) Universal Life and RiverSource Foundations Protector(SM) Universal Life. Both products are also available to policyholders as an estate series when the initial specified insurance coverage is $1 million or more. The guaranteed minimum interest crediting rate is 3.0%. IDSLife also offersnon-participatingtraditional whole life insurance, which combines a death benefit with a cash value that generally increases graduallyin amountover a period ofyears and does not pay a dividend. IDSyears. RiverSource Life has sold very little traditional whole life insurance in recent years.TERM LIFE INSURANCE IDSTerm Life
offers term life insurance.InsuranceTerm life insurance
onlyprovides a death benefit but it does not build up cashvalue and does not pay a dividend.value. The policyholder chooses the term of coverage with guaranteed premiums at the time of issue. During the chosen term,IDSRiverSource Life cannot raise premium rates even if claims experiencewere to deteriorate.deteriorates. At the end of the chosen term, coverage may continue with higher premiums until the maximum age is attained,at which pointor the policy expires with no value.DISABILITY INCOME INSURANCE IDS Life also issues disability income (DI) insurance. For the nine months ended September 30, 2005, IDS Life was ranked as the eighth largest provider of individual DI insurance based on premiums (according to LIMRA International).Disability Income Insurance
DI insurance provides monthly benefits to individuals who are unable to earn income either at
eithertheir occupation at time of disability("(“ownoccupation"occupation”) or at any suitable occupation("(“anyoccupation"occupation”).for premium payments that are guaranteed not to change. Depending upon occupational and medical underwriting criteria, applicants for DI insurance can choose"own occupation"“own occupation” and"any occupation"“any occupation” coverage for varying benefitperiods up to age 65.periods. In some states, applicants may also choose various benefitridersprovisions to help them integrate individual DI insurance benefits with social security or similar benefit plans and to help them protect their DI insurance benefits from the risk of inflation.LONG-TERM CARE INSURANCEFor the nine months ended September 30, 2008, RiverSource Life was ranked as the eighth largest provider of individual (non-cancelable) DI insurance based on premiums (according to LIMRA International®).Long Term Care Insurance
As of December 31, 2002,
IDSRiverSource Lifegenerallydiscontinued underwritinglong-termlong term care(LTC)(“LTC”) insurance. Although new product sales were discontinued in the fourth quarter of 2002,IDSRiverSource Life generally retained 50% of the risk on existing contracts and ceded the remaining 50% of the risk on a coinsurance basis toGeneral Electric Capital Assurance Company (GECA), onea subsidiary oftheGenworth Financial,insurance companies. In addition, in May 2003, IDSInc. (“Genworth”).RiverSource Life
began outsourcing claims administration on its existing blockInsurance Company and RiverSource Life ofLTC policies to GECA. 5BeginningNY began in 2004IDS Life filedto file for approval to implement rate increases onitsmost of their existingblockblocks of nursing home-only indemnity LTC insurance policies. Implementation of these rate increases began in early 2005 and continues. So far, approvals have been received for some or all requested increases inover 4550 states,covering over 83% of the eligible premiums,with an average approved cumulative rate increase of32.1%.44.7% of premium on all such policies where an increase was requested.RiverSource Life Insurance Company and RiverSource Life of NY began in 2007 to file for approval to implement rate increases on most of their existing blocks of comprehensive reimbursement LTC insurance policies. Implementation
is expectedof these rate increases began in late 2007 and continues. So far, approvals have been received for some or all requested increases in 46 states, with an average approved cumulative rate increase of 15.8% of premium on all such policies where an increase was requested.Additional rate increases may be sought with respect to
continue through 2006. GENERAL AND VARIABLE ACCOUNT ASSETS -----------------------------------these and other existing blocks of LTC insurance policies, in each case subject to regulatory approval.General and Separate Account Assets
Depending on the life insurance and annuity product purchased, the assets of
IDS Life'sRiverSource Life’s policyholders and contractholders may be placed in the general account ofIDSRiverSource Life (thegeneral account)“general account”) for fixed products and for the fixed account options under certain variable products or, in the case of variable life insurance and variable annuity products, in separate accounts that invest in underlying investment options (thevariable account)“separate accounts”).THE GENERAL ACCOUNTGeneral Account
Assets in the general account support all obligations of
IDSRiverSource Life other than those supported by the separate accounts.IDSRiverSource Life bears the investment risk of the general account assets.In the general account,
IDSRiverSource Life, through its investment manager, RiverSource Investments, LLC, primarily invests in fixed maturity securities over a broad range of maturities for the purpose of providing a targeted rate of return on its investments while controlling risk. The majority of these fixed maturity securities are interest-bearing investments such as government obligations,mortgage-backedmortgage backed obligations and various corporate debt instruments.IDSRiverSource Life does not invest in securities to generate trading profits.4
In accordance with regulatory investment guidelines,
IDSRiverSource Life Insurance Company andits subsidiaries,RiverSource Life of NY, through their respective boards of directors or board ofdirectors'directors’ investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures and their effect onprofitability.profitability in order to guide the management of the general account assets. They also review the distribution of assets in the portfolio by type and credit risk sector. The objective is to structure the investment securities portfolio in the general account to meet contractual obligations under the insurance and annuity products and achieve targeted levels of profitability within defined risk parameters.IDSRiverSource Life has the discretion to set the rate of interest credited to
contract owners'contractholders’ accounts subject to eachcontract'scontract’s guaranteed minimum interest crediting rate. As of December 31,2005,2008, this rate varied among fixed accounts and was as low as1.5%1.7% and as high as6.9%8.4%. To the extent the yield onIDS Life'sRiverSource Life’s invested general account asset portfolio declines below its target spread plus the minimum guarantee,IDS Life'sRiverSource Life’s profitability would be negatively affected.The interest rates credited to
contract owners'contractholders’ fixed accounts generally reset towards new business rates; therefore, margins may be negatively impacted by increases in the general level of interest rates. Part ofIDS Life'sRiverSource Life’s strategy includes the use of derivatives, such as interest rate swaptions, for risk management purposes. These derivatives help protect margins by increasing investment returns if there is a sudden and severe rise in interest rates, thereby lessening the impact of an increase in rates credited tocontract owners'contractholders’ fixed accounts. Conversely, in a low interest rate environment,such as that experienced recently,margins may be negatively impacted as the interest rates available onIDS Life'sRiverSource Life’s invested assets approach guaranteed minimum interest rates on the insurance or annuity contracts in force. This negative impact may be compounded by the fact that many of these interest-bearing investments are callable or pre-payable by the issuer and calls and prepayments are more likely to occur in a low interest rate environment.In light of the interest rate environment in 2003, when interest rates were at relative lows, IDS Life imposed a fixed account allocationSeparateAccounts
Variable annuity and
transfer requirement for new variable annuity sales in 2003. These requirements were relaxed slightly beginning in 2004 with the introduction of lower guaranteed minimum interest rates. 6THE VARIABLE ACCOUNTS Variableinsuranceand annuityproducts offervariableseparate account investment options. In addition, many of these products offer fixed account options. Under thevariableseparate account option,contract ownerscontractholders and policyholders bear the investment risk. Thevariableseparate accounts are registered as unit investment trusts under the Investment Company Act of 1940. State insurance law prescribes thatvariableseparate accounts constitute aseparatedistinct operation from the general account and as such assets in the separate accounts are only available to fund the liabilities of the separate accounts. Under the subaccounts of eachvariableseparate account,IDSRiverSource Life credits or charges income, capital gains and losses only to that subaccount.Generally, the
variableseparate accounts consist of a number of subaccounts, each of which invests in shares of a particular fund.Contract ownersContractholders and policyholders can allocate their payments among thesevariableseparate subaccounts. The underlying funds are managed both by affiliated and unaffiliated third-party money managers. These funds invest in portfolios containing a variety of securities including common stocks, bonds, managed assets and/or short-term securities. The value of the subaccounts fluctuates with the investment return of the underlying funds in which the subaccounts invest.IDS Life's major source of revenue from the variable annuities it issues is the fees itRiverSource Life receives
including mortality and expense risk and other fees, includingpayments from its affiliate, RiverSource Investments, LLC, for providing certain sponsor and related servicingactivity.activity for the RiverSource Variable Portfolio funds which are available as investment options under the variable annuity and life insurance products. RiverSource Life also receives revenues from assets allocated to subaccounts investing in RiverSource Variable Portfolio funds. These revenues include shareholder services payments as well as payments for marketing, administrative services, training and other services provided by RiverSource Life.In addition
IDSto the revenues described above, RiverSource Life receives shareholder servicing payments from other companies’ funds included as investment options under its variable annuity and life insurance products. It also receives marketing and administrative support payments from the affiliates of othercompanies'companies’ funds which are included as investment options in its variable annuity andvariablelife insurance products. These feesvaryare generally based on the level ofvariableseparate accountassets. Prior to the fourth quarter of 2003, these fees included investment advisory fees as IDS Life served as the investment manager for affiliated variable portfolio mutual funds. In the fourth quarter of 2003, Ameriprise Financial replaced IDS Life as the investment managerassets held in a particular fund andassumed these duties for the mutual funds and retained IDS Life to provide certain underlying sponsor and related services. At that time, IDS Life began receiving internal allocation payments from Ameriprise Financial as compensation for providing these non-investment advisory services. In the fourth quarter of 2005,accordingly will vary based on market conditions.Competition
RiverSource
Investments, LLC replaced Ameriprise Financial as the investment manager. As a result, IDS Life now receives internal allocation payments as compensation from RiverSource Investments, LLC for providing these non-investment advisory services. COMPETITION ----------- IDSLife competes with other insurers and product manufacturers including insurance companies, such as HartfordMetlife,Life, MetLife, Lincoln National Life and Nationwide Life, as well as certain banks, securities brokerage firms, independent financial advisors and other financial intermediaries that market insurance, annuities, mutual funds, retirement accounts and other financial products.5
Competitive factors affecting the sale of
IDS Life'sRiverSource Life’s annuity and/or insuranceand/or annuityproducts include:o· financial strength ratings from agencies such as A.M. Best;
o· the breadth, quality, design and pricing of products and services offered;
o· guaranteed benefit features;
o· the quality of underwriting;
o· the effectiveness of advertising and promotion campaigns;
o· reputation and recognition in the marketplace;
o· distribution capabilities and compensation; and
o· the quality of customer service.
7REGULATION ----------Regulation
The Minnesota Department of Commerce
(Insurance Division), the Indiana Department ofregulates RiverSource Life Insurance Company, andthe Arizona Department of Insurance (collectively, and withthe New York State Insurance Department (together with the"Domiciliary Regulators"Minnesota Department of Commerce, the “Domiciliary Regulators”)regulate IDS Life Insurance Company, American Enterprise Life and American Partners Life, respectively. The New York State Insurance DepartmentregulatesAmerican Centurion Life and IDSRiverSource Life ofNew York.NY.In addition to being regulated by their Domiciliary Regulators,
IDSRiverSource Life Insurance Company andits four life insurance subsidiariesRiverSource Life of NY are regulated by each of the insurance regulators in the states where each is authorized to transact the business of insurance.TheThese other states also regulate such matters as the licensing of sales personnel and, in some cases, the underwriting, marketing and contents of insurance policies and annuity contracts. The primary purpose of such regulation and supervision is to protect the interests of contractholders and policyholders. Financial regulation ofIDSRiverSource Life is extensive and its financial and intercompany transactions (such as intercompany dividends, capital contributions and investmentactivity)activities) are often subject to pre-notification and continuing evaluation by the Domiciliary Regulators. Virtually all states require participation in insurance guaranty associations which assess fees to insurance companies in order to fund claims of policyholders and contractholders of insolvent insurance companies.Because RiverSource Life issues variable annuity and life insurance products required to be registered under federal and state securities laws, many aspects of its business are subject to extensive regulation and examination by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority, commonly referred to as FINRA, and other federal and state regulatory bodies.
Insurance companies have recently been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced investigations regarding sales and marketing practices (including sales to older consumers), compensation arrangements and anticompetitive activities, and market timing and late trading in connection with insurance, annuity and mutual fund products.
IDSRiverSource Life has been contacted by regulatory agencies for information relating to some of these investigations and is cooperating with those inquiries.IDS Life has reviewed its compensation arrangements and other operations that may be affected by these regulatory investigations. In addition, IDS Life is reviewing the legal precedents and new industry-wide legislation, rules and regulations that may arise from ongoing investigations.At the federal level, there is periodic interest in enacting new regulations relating to various aspects of the insurance industry, including taxation of annuities and life insurance policies, accounting procedures, the use of travel in underwriting, and the treatment of persons differently because of gender with respect to terms, conditions, rates or benefits of an insurance policy. Adoption of any new federal regulation in any of these or other areas could
potentiallymaterially affect RiverSource Life’s financial condition and results of operations.The instability and decline in global financial markets experienced during 2008 and through the present time have resulted in an
adverse effect upon IDS Life. Also, recent federal legislative proposals aimed atunprecedented amount of government intervention in financial markets, including direct investment in financial institutions. Governments and regulators in thepromotionU.S. and abroad are considering or have implemented new and more expansive laws and regulations which may directly impact RiverSource Life’s businesses. Additional discussion oftax-advantaged savings may adversely impact IDS Life's salespotential risks arising from enactment ofannuity and life insurance products if enacted. FINANCIAL STRENGTH RATINGS -------------------------- IDSnew regulations can be found in Item 1A of this Annual Report on Form 10-K— “Risk Factors.”Financial Strength Ratings
RiverSource Life Insurance Company receives ratings from independent rating
agencies.organizations. Ratings are important to maintaining public confidence inIDSRiverSource Life. Lowering ofIDS Life'sRiverSource Life’s ratings could have a material adverseeffectaffect on its ability to market its products and could lead to increasedsurrenders.surrenders of its products. Ratingagencies continuallyorganizations6
evaluate the financial soundness and claims-paying ability of insurance companies
basedcontinually, and base their ratings on a number of differentfactors.factors, including market position in core products and market segments, risk-adjusted capitalization and the quality of investment portfolios.More specifically, the ratings assigned are developed from an evaluation of a
company'scompany’s balance sheet strength, operating performance and business profile. Balance sheet strength reflects acompany'scompany’s ability to meet its current and ongoing obligations to its contractholders and policyholders and includes analysis of acompany'scompany’s capital adequacy. The evaluation of operating performance centers on the stability and sustainability of acompany'scompany’s source of earnings. Theanalysis ofbusiness profilereviewscomponent of the rating considers acompany'scompany’s mix of business, market position and depth and experience of management.The ratings relate to an insurer's general account and not to the management or performance of the variable accounts. 8Generally, IDSRiverSource Life Insurance
Company's four insurance subsidiaries do not receive an individual rating, but receive the same rating as IDS Life Insurance Company. IDS Life Insurance CompanyCompany’s claims-paying ability is currently rated"A+"“A+” (Superior) by A.M. Best Company, Inc. and its claims-paying ability/financial strength was rated"Aa3"“Aa3” (Excellent) byMoody'sMoody’s Investors ServiceInc. (Moody's)(Moody’s),"AA-"“AA-” (Very Strong) by Fitch, and"AA-"“AA-” (Very Strong) by Standard &Poor's. REINSURANCE ----------- IDSPoor’s (“S&P”).Generally, RiverSource Life of NY does not receive an individual rating, but receives the same rating as RiverSource Life Insurance Company.
On January 29, 2009, S&P and Moody’s each affirmed their above ratings of RiverSource Life Insurance Company, citing excellent capitalization and solid financial flexibility. At the same time both S&P and Moody’s revised their outlook on RiverSource Life from stable to negative citing diminished earnings power resulting from the challenging equity and credit markets.
Reinsurance
RiverSource Life reinsures a portion of the
insurancerisks associated with its life, DI and LTC insurance products through reinsurance agreements with unaffiliatedinsurancereinsurance companies. Reinsurance is used in order to limit losses,minimizereduce exposure to large risks and provide additional capacity for futuregrowth andgrowth. To manage exposure toeffect business-sharing arrangements. IDSlosses from reinsurer insolvencies, RiverSource Life evaluates the financial condition of its reinsurers prior tomanage exposure to significant losses from reinsurer insolvencies. IDSentering into new reinsurance treaties and on a periodic basis during the terms of the treaties. RiverSource Life remains primarily liable as the direct insurer on all risks reinsured.Generally,
IDSRiverSource Life reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products.IDSAs a result, RiverSource Life typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level beginning in 2001 for term life insurance and 2002 for individual fixed and variableanduniversal life insurance. Policies issued prior to these dates are not subject to these same reinsurance levels.TheGenerally, the maximum amount of life insurance risk retained byIDSRiverSource Life is $1.5 million (increased from $750,000 during 2008) on any policy insuring a single life and $1.5 million on any flexible premium survivorshipvariablelife policy.For existing LTC policies, IDS Life retained 50%As a result of therisk andincrease in single life retention during 2008, RiverSource Life is in theremaining 50%process ofthe risk was ceded to GECA.recapturing some older blocks of business representing less than 1% of current reinsured life insurance risk. Risk on fixed and variablelife anduniversal life policies is reinsured on a yearly renewable term basis. Risk onrecentmost term lifeand LTCpolicies starting in 2001 is reinsured on a coinsurancebasis. IDSbasis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.For existing LTC policies, RiverSource Life (and RiverSource Life of NY for 1996 and later issues) retained 50% of the risk and ceded on a coinsurance basis the remaining 50% of the risk to Genworth. As of December 31, 2008, RiverSource Life’s credit exposure to Genworth under this reinsurance arrangement was approximately $1.2 billion under U.S. generally accepted accounting principles (“GAAP”) and $1.6 billion under statutory accounting principles. Genworth also serves as claims administrator for RiverSource Life’s LTC policies.
Generally, RiverSource Life retains at most $5,000 per month of risk per life on DI policies sold on policy forms introduced in most states in October 2007 and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. RiverSource Life retains all risk for new claims on DI
contracts. Risk is currently managed by limiting the amount of disability insurance writtencontracts sold onany one individual. IDSother policy forms. RiverSource Life also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premiumrisk. RISK-BASED CAPITAL ------------------ The NAIC definesprovisions.In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies. As of December 31, 2008, the amount related to assumed reinsurance arrangements was $689 million under GAAP and $695 million under statutory accounting principles.
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See Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on reinsurance.
Risk-Based Capital
(RBC)The National Association of Insurance Commissioners (“NAIC”) defines risk-based capital (“RBC”) requirements for life insurance companies. The RBC requirements are used by the NAIC and state insurance regulators to identify companies that merit regulatory action designed to protect policyholders. The NAIC RBC report is completed as of December 31 and filed annually, along with the statutory financial statements.
IDSRiverSource Life Insurance Company would be subject to various levels of regulatory intervention if its total adjusted statutory capital
were to fallfell below the RBC requirement. At the"company“company action level,"” defined as total adjusted capital level between 100% and 75% of the RBC requirement, an insurer must submit a plan for corrective action with its primary state regulator. The"regulatory“regulatory action level,"” which is between 75% and 50% of the RBC requirement, subjects an insurer to examination, analysis and specific corrective action prescribed by the primary state regulator. If acompany'scompany’s total adjusted capital falls between 50% and 35% of its RBC requirement, referred to as"authorized“authorized control level,"” theinsurer'sinsurer’s primary state regulator may place the insurer under regulatory control. Insurers with total adjusted capital below 35% of the requirement will be placed under regulatory control.At December 31,
2005, IDS2008, RiverSource Life InsuranceCompany'sCompany’s company action level RBC was$751.0$551 million, and the corresponding total adjusted capital wasapproximately $3.3$2.7 billion, which represents435%494% ofthecompany action level RBC.As described above,
IDSRiverSource Life Insurance Company maintains capital well in excess of the company action level required by the Minnesota Department of Commerce, its primary regulator.9ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
If any of the following risks and uncertainties
developsdevelop into actual events, these events could have a material adverse effect onIDS Life'sRiverSource Life’s business, financial condition or results of operations. Based on current information, RiverSource Life believes that the following information identifies the most significant risk factors affectingIDSRiverSource Life in each of these categories of risk. However, the risks and uncertaintiesIDSRiverSource Life faces are not limited to those described below. Additional risks and uncertainties which are not presently known or which are currently believed to be immaterial may also adversely affectIDS Life'sRiverSource Life’s business.RISKS RELATING TO IDS LIFE'S BUSINESS ------------------------------------- INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT IDS LIFE'S BUSINESS AND PROFITABILITY. IDS Life'sRisks Relating to RiverSource Life’s Business
RiverSource Life’s financial condition and results of operations may be adversely affected by market fluctuations, interest rate fluctuations and by economic and other factors.
RiverSource Life’s financial condition and results of operations may be materially affected by market fluctuations, interest rate fluctuations and economic and other factors. Many factors of a global or localized nature include: political, economic and market conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates and other market indices; technological changes and events; the availability and cost of credit; inflation; investor sentiment and confidence in the financial markets; terrorism events and armed conflicts; and natural disasters such as weather catastrophes and widespread health emergencies. In addition, during periods of unfavorable market or economic conditions, the level of consumer investing and insuring activity may also decrease, which may negatively impact the results of RiverSource Life’s businesses. Moreover, fluctuations in economic and market activity could impact the way then-existing customers allocate their available resources, which could affect RiverSource Life’s persistency, surrender and product cash value loan experience and could negatively impact its business. RiverSource Life’s insurance and annuity products are sensitive to interest rate fluctuations, and its future costs associated with such variations may differ from its historical costs. In addition, interest rate fluctuations could result in fluctuations in the valuation of certain minimum guaranteed benefits contained in some of its variable annuity products. Although RiverSource Life typically hedges against such fluctuations, a significant change in interest rates could have a material adverse impact on RiverSource Life’s results of operations.
RiverSource Life’s business has been and may continue to be adversely affected by the current U.S. and global capital market and credit crises, the repricing of credit risk, equity market volatility and decline, and stress or recession in the U.S. and global economies generally. Over approximately the past eighteen months, difficulties in the mortgage and broader capital markets in the U.S. and elsewhere, coupled with the repricing of credit risk, have created extremely difficult market conditions. These conditions, as well as instability in global equity markets with a significant decline in stock prices, have produced greater volatility, less liquidity, variability of credit spreads and a lack of price transparency.
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During periods of increasing market interest rates,
IDSRiverSource Life must offer higher crediting rates on interest-sensitive products, such as fixed universal life insurance and fixed annuitiesand it must increase crediting rates on insurance and annuity productsto keep these products competitive. Because returns on invested assets may not increase as quickly as current interest ratesIDSand RiverSource Life must increase crediting rates on in-force products, RiverSource Life may have to accept a lower"spread,"“spread,” or the difference between the returns it earns on the investments that support its obligations under these products and the amounts that it must pay policyholders and contractholders, 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 expectedflowoutflow of cashout offrom the business. Also, increases in market interest rates may result in extension of the maturity of some ofIDS Life'sRiverSource Life’s 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 onIDS Life'sRiverSource Life’s financial condition and results of operations. An increase in policy surrenders and withdrawals also may requireIDSRiverSource Life to accelerate amortization of deferredpolicyacquisition costs(DAC)(“DAC”), which would increase its expenses and reduce its netearnings.income.During periods of falling interest rates,
IDS Life'sRiverSource Life’s spread may bereduced. Because IDS Life may adjust the interest rates it credits on mostreduced or could become negative, primarily because some of these productsdownward only at limited, pre-established intervals, and because some of themhave guaranteed minimum crediting rates. Due to the long-term nature of the liabilities associated with RiverSource Life’s fixed annuities and guaranteed benefits on variable annuities, sustained declines in long-term interest ratesits spreads could decreasemay subject RiverSource Life to reinvestment risks andpotentially become negative.increased hedging costs.Interest rate fluctuations also could have an adverse effect on the results of
IDS Life'sRiverSource Life’s investment portfolio. During periods of declining market interest rates, the interestIDSRiverSource Life receives on variable interest rate investments decreases. In addition, during those periods,IDSRiverSource Life is forced to reinvest the cash it receives as interest or return of principal on its investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of certain callable fixed income securities also may decide to prepay their obligations in order to borrow at lower market rates, whichexacerbatesincreases the risk thatIDSRiverSource Life may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments.For additional information regarding the sensitivity of the fixed income securities in IDS Life's investment portfolio to interest rate fluctuations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Risk Management." 10POOR INVESTMENT PERFORMANCE IN IDS LIFE'S PRODUCTS COULD ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IDS Life believes that investment performance is an important factor in the growth of its variable annuity and variable life insurance business. Poor investment performance could impair revenues and earnings, as well as IDS Life's prospects for growth, because: o sales of variable products might decrease; o existing clients might withdraw assets from IDS Life's variable products in favor of better performing products of other companies, which would result in lower revenues; and o IDS Life's ability to attract funds from existing and new clients might diminish. A DOWNGRADE OR A POTENTIAL DOWNGRADE IN IDS LIFE'S FINANCIAL STRENGTH RATINGS COULD RESULT IN A LOSS OF BUSINESS AND ADVERSELY AFFECT ITS 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 IDS Life's products, the ability to market its products and its competitive position. Any downgrade in IDS Life's financial strength ratings, or the announced potential for a downgrade, could have a significant adverse effect on its financial condition and results of operations in many ways, including: o reducing new sales of insurance and annuity products; o adversely affecting IDS Life's relationships with distributors of its products; o materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders; o requiring IDS Life to reduce prices for many of its products to remain competitive; and o adversely affecting IDS Life's ability to obtain reinsurance or obtain reasonable pricing on reinsurance. IF IDS LIFE IS UNABLE TO EFFECTIVELY MANAGE THE ECONOMICS OF CHANGES IN ITS PRODUCT DISTRIBUTION MIX AND DISTRIBUTION CHANNELS, AND OTHER TRENDS ADVERSELY AFFECTING SALES OF ITS PRODUCTS, ITS RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. Currently, Ameriprise Financial's branded advisor network distributes annuity and insurance products issued almost exclusively by IDS Life. If Ameriprise Financial's branded advisor distribution network is opened to annuity and insurance products of other companies, IDS Life cannot assure that there would not be a material adverse effect on its financial condition and results of operations. DOWNTURNS AND VOLATILITY IN EQUITY MARKETS COULD ADVERSELY AFFECT IDS LIFE'S BUSINESS AND PROFITABILITY.Significant downturns and volatility in equity markets, such as RiverSource Life is currently experiencing, have had and could continue to have an adverse effect on
IDS Life'sRiverSource Life’s financial condition and results of operations. Market downturns and volatility may cause, and have caused, potential new purchasers to refrain from purchasingIDS Life'sRiverSource Life’s variable annuities and variable universal life insurance products that have returns linked to the performance of the equity markets. Downturns may also cause contractholders in annuity products and policyholders in insurance products to withdraw cash values from those products.11Additionally, downturns and volatility in equity markets can have, and have had, an adverse effect on
IDS Life'sRiverSource Life’s asset-based revenues because the value ofinvestments under managementequity-based separate account assets will be reduced.Some of itsThe GMAB and the non-life contingent benefits associated with GMWB provisions offered with certain RiverSource Life variable annuities create obligations which are carried at fair value separately from the underlying host variable annuity
products contain GMDB,contract. Changes in the fair value of these GMAB and GMWBGMIBobligations are recorded through earnings with fair value calculated by estimating the present value of future benefits less applicable fees using actuarial models, which simulate various economic scenarios. Changes in interest rates, equity prices and/or equity market volatility may impact the fair value of the GMAB andGMAB riders.GMWB liabilities. Although RiverSource Life typically hedges against such changes, a significant change in either equity price levels or equity market volatility may result in a net adverse impact to current period financial statements. Further, RiverSource Life’s cost of hedging these guarantees has increased significantly in recent periods as a result of low interest rates and continuing volatility in the equity markets. In addition, continued heightened volatility creates greater uncertainty for the accuracy of RiverSource Life’s future hedging effectiveness.A significant market decline in equity price levels could also result in guaranteed minimum benefits under GMDB and GMIB provisions being higher than
whatcurrent account values,would support,which could have an adverse effect onIDS Life'sRiverSource Life’s financial condition and results of operations. RiverSource Life does not currently hedge or reinsure GMDB or GMIB provisions.9
For additional information regarding the sensitivity of
IDS Life'sRiverSource Life’s business results to equity market and interest rate fluctuations, see"Management's DiscussionItem 7 of this Annual Report on Form 10-K — “Management’s Narrative Analysis — Quantitative andAnalysisQualitative Disclosures about Market Risk.”Adverse capital and credit market conditions may significantly affect RiverSource Life’s ability to meet liquidity needs, access to capital and cost of
Financial Conditioncapital.The capital and
Resultscredit markets have been experiencing extreme volatility and disruption. In some cases, the markets have exerted downward pressure on availability ofOperations--Risk Management." DEFAULTS IN IDS LIFE'S FIXED INCOME SECURITIES PORTFOLIO WOULD ADVERSELY AFFECT ITS EARNINGS.liquidity and credit capacity for certain issuers. RiverSource Life needs liquidity to pay contractholder and policyholder claims and benefits as well as operating expenses. Without sufficient liquidity, RiverSource Life could be required to curtail its operations, and its business would suffer.RiverSource Life maintains a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed adequate to meet anticipated short-term and long-term benefit and claims payment obligations. In the event current resources are insufficient to satisfy RiverSource Life’s needs, it may need to rely on financing sources from its parent holding company, its other affiliates or third parties. The availability of additional financing will depend on a variety of factors such as market conditions, the availability of liquidity from RiverSource Life’s parent or other affiliates, the general availability of credit, the overall availability of credit to the financial services industry, RiverSource Life’s credit ratings and credit capacity, as well as the possibility that customers or potential third party lenders could develop a negative perception of RiverSource Life’s long- or short-term financial prospects if it incurs large investment losses or if the level of its business activity decreases due to a market downturn. Similarly, RiverSource Life’s access to funds may be impaired if regulatory authorities or rating organizations take negative actions against it. Also, transfers of cash or other assets from RiverSource Life’s parent or other affiliates must comply with applicable regulations and may be subject to the prior approval of state insurance regulators.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit RiverSource Life’s or its parent’s access to capital required to operate its business. Such market conditions may limit RiverSource Life’s ability to satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow its business. As such, RiverSource Life may be forced to use different types of capital than it would otherwise use, less effectively deploy such capital, or bear an unattractive cost of capital which could decrease RiverSource Life’s profitability and significantly reduce its financial flexibility.
The impairment of other financial institutions could adversely affect RiverSource Life.
RiverSource Life has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds, insurers, reinsurers and other investment funds and other institutions. Many of these transactions expose RiverSource Life to credit risk in the event of default of its counterparty. In addition, with respect to secured transactions, RiverSource Life’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to it. RiverSource Life also has exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions, (including with respect to derivatives hedging its exposure on variable annuity contracts with guaranteed benefits), reinsurance and underwriting arrangements and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely impact RiverSource Life’s business and results of operations. Downgrades in the credit or financial strength ratings assigned to the counterparties with whom RiverSource Life transacts could create the perception that its financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally, RiverSource Life could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions.
The failure of other insurers could require RiverSource Life to pay higher assessments to state insurance guaranty funds
RiverSource Life Insurance Company and RiverSource Life of NY are required by law to be a member of the guaranty fund association in every state where it is licensed to do business. In the event of insolvency of one or more unaffiliated insurance companies, RiverSource Life could be adversely affected by the requirement to pay assessments to the guaranty fund associations.
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Third-party defaults, bankruptcy filings, legal actions and other events may limit the value of or restrict RiverSource Life’s access to cash and investments.
The extreme capital and credit market volatility that RiverSource Life continues to experience has exacerbated the risk of third-party defaults, bankruptcy filings, legal actions and other events that may limit the value of or restrict RiverSource Life’s access to cash and investments.
Governmental initiatives intended to address capital market and general economic conditions may not be effective and may give rise to additional requirements for RiverSource Life’s business, including new capital requirements or other regulations, that could materially impact its financial condition, results of operations and liquidity in ways that it cannot predict.
Legislation has been passed in the United States and abroad in an attempt to address the instability in global financial markets. The U.S federal government, Federal Reserve and other U.S. governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis, including future investments in financial institutions and creation of a federal systemic risk regulator. This legislation or similar proposals may fail to stabilize the financial markets or the economy generally. This legislation and other proposals or actions may also have other consequences, including substantially higher compliance costs as well as material effects on interest rates, which could materially impact RiverSource Life’s investments, results of operations and liquidity in ways that it cannot predict. In addition, prolonged government support for, and intervention in the management of, private institutions could distort customary and expected commercial behavior on the part of those institutions, adversely impacting RiverSource Life.
In addition, RiverSource Life is subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory organizations, including state securities and insurance regulators, the SEC, FINRA, the U.S. Department of Justice and state attorneys general. Current financial conditions have prompted or may prompt some of these authorities to consider additional regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their authority in new or more expansive ways and the U.S. government may create additional regulators or materially change the authorities of existing regulators. All of these possibilities, if they occurred, could impact the way RiverSource Life conducts its business and manages its capital, and may require RiverSource Life to satisfy increased capital requirements, which in turn could materially impact its financial condition, results of operations and liquidity.
Defaults in RiverSource Life’s fixed maturity securities portfolio would adversely affect its earnings.
Issuers of the fixed
incomematurity securities thatIDSRiverSource Life owns may default on principal and interest payments.AtAs of December 31,2005 and 2004, 7% and 8%, respectively,2008, 5% ofIDS Life's investment portfolioRiverSource Life’s invested assets had ratings belowinvestment grade.investment-grade. Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those withinvestment gradeinvestment-grade ratings, that default on their debtobligations, as occurred in 2001 and 2002. As of December 31, 2005, IDS Life 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 $52.8 million.obligations. Default-related declines in the value ofIDS Life'sRiverSource Life’s fixedincomematurity securities portfolio could cause its net earnings to decline and could weaken its capital position.SOME OF IDS LIFE'S INVESTMENTS ARE RELATIVELY ILLIQUID. IDSIf the counterparties to RiverSource Life’s reinsurance arrangements or to the derivative instruments it uses to hedge its business risks default, RiverSource Life may be exposed to risks it had sought to mitigate, which could adversely affect its financial condition and results of operations.
RiverSource Life uses reinsurance to mitigate its risks in various circumstances as described in Item 1 of this Annual Report on Form 10-K — “Business — Reinsurance.” Reinsurance does not relieve RiverSource Life of its direct liability to its policyholders, even when the reinsurer is liable to RiverSource Life. Accordingly, RiverSource Life bears credit and performance risk with respect to its reinsurers. A reinsurer’s insolvency or its inability or unwillingness to make payments under the terms of its reinsurance agreement could have a material adverse effect on RiverSource Life’s financial condition and results of operations. See Note 2 and Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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In addition, RiverSource Life uses a variety of derivative instruments (including options, forwards and interest rate swaps) with a number of counterparties to hedge business risks. The amount and breadth of exposure to derivative counterparties, as well as the cost of derivatives, have increased significantly in connection with RiverSource Life’s strategies to hedge guaranteed benefit obligations under its variable annuity products. If RiverSource Life’s counterparties fail to honor their obligations under the derivative instruments in a timely manner, RiverSource Life’s hedges of the related risk will be ineffective. That failure could have a material adverse effect on RiverSource Life’s financial condition and results of operations. This risk of failure of RiverSource Life’s hedge transactions may be increased by capital market volatility, such as the volatility that has been experienced over the past eighteen months.
The determination of the amount of allowances and impairments taken on certain investments is subject to management’s evaluation and judgment and could materially impact RiverSource Life’s financial position or results of operations.
The determination of the amount of allowances and impairments vary by investment type and is based upon RiverSource Life’s periodic evaluation and assessment of inherent and known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer and management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential, which assumptions and estimates are more difficult to make with certainty under current market conditions.
RiverSource Life’s valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely impact its financial condition or results of operations.
Fixed maturity, equity, trading securities and short-term investments which are reported at fair value on the consolidated balance sheets, represent the majority of RiverSource Life’s total cash and invested assets. The determination of fair values by management in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities RiverSource Life deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of RiverSource Life’s securities. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, more securities may require additional subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation thereby resulting in values which may be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within RiverSource Life’s consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on RiverSource Life’s financial condition or results of operations.
Some of RiverSource Life’s investments are relatively illiquid.
RiverSource Life invests a portion of its
ownedgeneral account assets in certain privately placed fixed income securities, mortgage loans, policy loans, limited partnership interests, andreal estate,collateralized debt obligations, among others, all of which are relatively illiquid. These asset classes representedapproximately 16.8%17.9% of the carrying value ofIDS Life'sRiverSource Life’s investment portfolio as of December 31,2005.2008. IfIDSRiverSource Life requires significant amounts of cash on short notice in excess of its normal cash requirements, it may have difficulty selling these investments in a timely manner, or be forced to sell them for an amount less than it would otherwise have been able to realize, orboth. For example, if an unexpected number of contractholders of its annuity products exercise their surrender right and IDS Life is unable to access other liquidity sources, it may have to quickly liquidate assets. Any inability to quickly dispose of illiquid investmentsboth, which could have an adverse effect onIDS Life'sRiverSource Life’s financial condition and results of operations.INTENSE COMPETITION COULD NEGATIVELY AFFECT IDS LIFE'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE AND PROFITABILITY. IDS12
Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively impact RiverSource Life’s ability to maintain or increase its market share and profitability.
RiverSource Life operates in an intensely competitive industry.
IDSRiverSource Life competes based on a number of factors including name recognition, service,productinvestment performance,andproduct features, price, perceived financial strength, and claims-paying ratings.IDS Life'sRiverSource Life’s competitors include insurers and other financial institutions.IDSRiverSource Life may face competitors that have greater market share, offer a broader range of products, have greater financial resources orofferhave higher claims-paying ratings thanIDSRiverSource Life does.IDS LIFE'S AFFILIATED DISTRIBUTOR MAY BE UNABLE TO ATTRACT AND RETAIN FINANCIAL ADVISORS. IDSSome of RiverSource Life’s competitors may possess or acquire intellectual property rights that could provide a competitive advantage to them in certain markets or for certain products, which could make it more difficult for RiverSource Life to introduce new products and services. Some of RiverSource Life’s competitors’ proprietary products or technology could be similar to its own, and this could result in disputes that could impact RiverSource Life’s financial condition or results of operations. In addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This convergence could result in RiverSource Life’s competitors gaining greater resources and RiverSource Life may experience pressures on its pricing as a result of these factors.Currently, Ameriprise Financial’s branded advisor network distributes annuity and insurance products issued almost exclusively (in the case of annuities) or predominantly (in the case of insurance products) by RiverSource Life. In 2009 or 2010, Ameriprise Financial expects to expand the offerings available to its branded advisors to include variable annuities issued by a limited number of unaffiliated insurance companies. As a result of further opening of Ameriprise Financial’s branded advisor network to annuity and insurance products of other companies, RiverSource Life could experience lower sales of its products, higher surrenders or other developments, which could adversely affect its financial condition and results of operations.
Poor investment performance in RiverSource Life’s variable products could adversely affect its financial condition and results of operations.
RiverSource Life believes that investment performance is an important factor in the growth of its variable annuity and variable life insurance business. Poor investment performance could impair revenues and earnings, as well as RiverSource Life’s prospects for growth, because:
· RiverSource Life’s ability to attract funds from existing and new clients might diminish; and
· existing clients might withdraw assets from RiverSource Life’s variable products in favor of better performing products of other companies, which would result in lower revenues.
RiverSource Life’s affiliated distributor may be unable to attract and retain financial advisors.
RiverSource Life is dependent on the branded financial advisors of its affiliated
distributorbroker-dealer selling firm for a significant portion of the sales of its annuity and insurance products. A significant number of its branded financial advisors operate as independent contractors under a franchise agreement with its affiliateddistributor.selling firm. There can be no assurance thatIDS Life'sRiverSource Life’s affiliateddistributorselling firm will be successful in its efforts to recruit and retain new advisors to its network. IfIDS Life'sRiverSource Life’s affiliateddistributorselling firm is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSource Life’s annuity and insurance products and RiverSource Life’s financial condition and results of operations could be materially adversely affected.RiverSource Life and its affiliates face intense competition in attracting and retaining key talent.
RiverSource Life is dependent on Ameriprise Financial’s network of branded advisors for a significant portion of the sales of its annuity products and substantially all of the sales of its insurance products. In addition, RiverSource Life’s continued success depends to a substantial degree on its, and its affiliates’, ability to attract and retain qualified personnel. The market for qualified talent is extremely competitive. If RiverSource Life is unable to attract and retain qualified individuals or its recruiting and retention costs increase significantly, its financial condition and results of operations could be materially adversely
affected. 12IDS LIFE AND ITS AFFILIATES MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL. IDS Life's continued success depends to a substantial degree onimpacted.13
RiverSource Life’s business is heavily regulated, and changes in regulation may reduce its profitability and limit its
affiliates' ability to attract and retain qualified personnel to conduct its business. The market for qualified talent is extremely competitive and has grown more so in recent periods due to industrygrowth.There can be no assurance that IDS Life will be successful in its efforts to recruit and retain the required personnel. If IDS Life is unable to attract and retain qualified individuals or its recruiting and retention costs increase significantly, its operations and financial results could be materially adversely affected. IF THE COUNTERPARTIES TO IDS LIFE'S REINSURANCE ARRANGEMENTS OR TO THE DERIVATIVE INSTRUMENTS IT USES TO HEDGE ITS BUSINESS RISKS DEFAULT, IDS LIFE MAY BE EXPOSED TO RISKS IT HAD SOUGHT TO MITIGATE, WHICH COULD ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IDS Life uses reinsurance to mitigate its risks in various circumstances. See "Business--Reinsurance." Reinsurance does not relieve IDS Life of its direct liability to its policyholders, even when the reinsurer is liable to IDS Life. Accordingly, IDS Life bears credit risk with respect to its reinsurers. IDS Life cannot provide assurance that its reinsurers will pay the reinsurance recoverable owed to it 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 its reinsurance agreement could have an adverse effect on IDS Life's financial condition and results of operations that could be material. In addition, IDS Life uses derivative instruments to hedge various business risks. IDS Life enters into a variety of derivative instruments with a number of counterparties. If IDS Life's counterparties fail to honor their obligations under the derivative instruments, its hedges of the related risk will be ineffective. That failure could have an adverse effect on its financial condition and results of operations that could be material. IDS LIFE'S BUSINESS IS HEAVILY REGULATED, AND CHANGES IN REGULATION MAY REDUCE ITS PROFITABILITY AND LIMIT ITS GROWTH. IDSRiverSource Life operates in a highly regulated industry, and is required to obtain and maintain licenses for its business in addition to being subject to regulatory oversight.
RegulatorsFinancial regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation.VariousCurrent market conditions and recent events could result in increases or changes in current regulations and regulatory structures including higher licensing fees andgovernmental bodies haveassessments. Significant discussion and activity by regulators concerns theauthoritysale and suitability of financial products and services toreviewpersons planning for retirement, as well as to older investors. In addition, RiverSource Life is subject to heightened requirements and associated costs and risks relating to privacy and the protection of customer data. RiverSource Life’s information systems, moreover, may be subject to increased efforts of “hackers” by reason of the customer data it possesses. These requirements, costs and risks, as well as possible legislative or regulatory changes, may constrain RiverSource Life’s ability to market its products and services to its target demographic and potential customers, and could negatively impact RiverSource Life’s profitability and make it more difficult for RiverSource Life to pursue its growth strategy.RiverSource Life is subject to state regulation and must comply with statutory reserve and capital requirements. State regulators are continually reviewing and updating these requirements and other requirements relating to the business
practicesoperations of insurance companies, including their underwriting andthosesales practices. Moreover, RiverSource Life is subject to capital requirements for variable annuity contracts with guaranteed death or living benefits. These requirements may have an impact on statutory reserves and regulatory capital in the event equity market values fall in the future. The NAIC has adopted a change to require principles-based reserves for variable annuities at the end of 2009, and continues to discuss moving to a principles-based reserving system for other insurance and annuity products. This could change statutory reserve requirements significantly and it is not possible to estimate the potential impact at this time. Further, RiverSource Life cannot predict the effect that proposed federal legislation, such as the option of federally chartered insurers or a mandated federal systemic risk regulator, may have on RiverSource Life or itsemployees and to bring regulatory or other legal actions against IDS Life if, in their view, its practices, or those of its employees are improper.competitors.Compliance with applicable laws and regulations is time consuming and personnel-intensive. Moreover, the evaluation of RiverSource Life’s compliance with these laws and regulations by state insurance regulators, the SEC, and other regulatory organizations is an ongoing feature of RiverSource Life’s business, the outcomes of which may not be foreseeable. Changes in these laws and regulations may materially increase
materially IDS Life'sRiverSource Life’s direct and indirect compliance and other expenses of doing business. The costs of the compliance requirementsIDSRiverSource Life faces, and the constraints they impose on its operations, could have a material adverse effect onIDS Life'sRiverSource Life’s financial condition and results of operations. For a further discussion of the regulatory framework in whichIDSRiverSource Life operates, see"Business--Regulation."Item 1 in this Annual Report on Form 10-K — “Business — Regulation.” For more information regarding ongoing investigations, see"Item 3--LegalItem 3 in this Annual Report on Form 10-K — “Legal Proceedings." LEGAL AND REGULATORY ACTIONS ARE INHERENT IN IDS LIFE'S BUSINESS AND COULD RESULT IN FINANCIAL LOSSES OR HARM ITS BUSINESS. IDS Life is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its operations. Substantial legal liability in legal or regulatory actions could have a material financial effect or cause significant reputational harm, which in turn could seriously harm its business prospects. 13COMPETITIVE AND REGULATORY PRESSURES MAY REQUIRE IDS LIFE TO REDUCE THE LEVELS OF ITS FEES. IDS Life's”RiverSource Life’s profit margins and earnings are dependent in part on its ability to maintain current fee levels for the products and services that it offers. Competition within the financial services industry could lead
IDSRiverSource Life to reduce the fees that it charges its clients for products and services. See the risk factor entitled"Intense“Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negativelyaffect IDS Life'simpact RiverSource Life’s ability to maintain or increase its market share and profitability."” In addition,IDSRiverSource Life may be required to reduce its fee levels, or restructure the fees it charges, as a result of regulatory initiatives or proceedings that are either industry-wide or specifically targeted atIDSRiverSource Life. Seethe risk factor entitled "IDS Life's business is heavily regulated, and changesItem 3 inregulation may reduce its profitability and limit its growth" and "Item 3--Legal Proceedings"this Annual Report on Form 10-K — “Legal Proceedings” for more information regarding this and other regulatory matters. Reductions or other changes in the fees thatIDSRiverSource Life charges for its products and services could reduce its revenues and earnings.MISCONDUCT BY IDS LIFE'S EMPLOYEES AND ITS AFFILIATES' EMPLOYEES IS DIFFICULT TO DETECT AND DETER AND COULD HARM IDS LIFE'S BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION.Misconduct by
IDS Life'sRiverSource Life’s employees and agents and itsaffiliates'affiliates’ employees and agents is difficult to detect and deter and could harm RiverSource Life’s business, results of operations or financial condition.Misconduct by RiverSource Life’s employees and agents and its affiliates’ employees and agents could result in violations of law, regulatory sanctions and/or serious reputational or financial harm. Misconduct can occur in each of
IDS Life'sRiverSource Life’s businesses and could include:o· attempting to bind
IDSRiverSource Life to transactions that exceed authorized limits;o· hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;
o14
· improperly using, disclosing, or otherwise compromising confidential information;
o· recommending transactions that are not suitable;
· engaging in fraudulent or otherwise improper activity;
o· engaging in unauthorized or excessive trading to the detriment of customers; or
o· otherwise not complying with laws, regulations or
IDS Life'sRiverSource Life’s control procedures.IDSRiverSource Life cannot always deter misconduct by employees and agents and its affiliate’s employees and agents and the precautions
IDSRiverSource Life takes to prevent and detect this activity may not be effective in all cases.IDSRiverSource Life also cannotprovide assuranceassure that misconduct by employees and agents and its affiliate’s employees and agents will not lead to a material adverse effect on its business, financial condition or results of operations.Legal and regulatory actions are inherent in RiverSource Life’s business and could result in financial losses or harm its business.
RiverSource Life is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its operations. Various regulatory and governmental bodies have the authority to review RiverSource Life’s products and business practices and those of its employees and agents and its affiliates’ employees and agents and to bring regulatory or other legal actions against RiverSource Life if, in their view, RiverSource Life’s practices, or those of its employees and agents and its affiliates’ employees and agents, are improper. Pending legal and regulatory actions include proceedings relating to aspects of RiverSource Life’s business and operations that are specific to it and proceedings that are typical of the industries which it operates. In turbulent times such as these, the volume of claims and amount of damages sought in litigation and regulatory proceedings generally increase. Substantial legal liability in legal or regulatory actions could have a material financial effect or cause significant reputational harm, which in turn could seriously harm its business prospects.
A downgrade or a potential downgrade in RiverSource Life’s financial strength ratings could result in a loss of business and adversely affect its 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 RiverSource Life’s products, the ability to market its products and its competitive position. A downgrade in RiverSource Life’s financial strength ratings, or the announced potential for a downgrade, could have a significant adverse effect on its financial condition and results of operations in many ways, including:
· reducing new sales of insurance and annuity products;
· adversely affecting RiverSource Life’s relationships with distributors of its products;
· materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders;
· requiring RiverSource Life to reduce prices for many of its products to remain competitive; and
· adversely affecting RiverSource Life’s ability to obtain reinsurance or obtain reasonable pricing on reinsurance.
In view of the difficulties experienced recently by RiverSource Life’s competitors, RiverSource Life believes it is possible that the ratings organizations will heighten the level of scrutiny that they apply, will increase the frequency and scope of their reviews, will request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the ratings organization’s models for maintenance of ratings levels. Rating organizations may also become subject to tighter laws and regulations governing the rating, which may in turn impact the ratings assigned to insurance companies.
RiverSource Life cannot predict what actions rating organizations may take, or what actions RiverSource Life may take in response to the actions of rating organizations, which could adversely affect its business. As with other companies in the insurance industry, RiverSource Life’s ratings could be changed at any time and without any notice by the ratings organizations.
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If RiverSource Life’s reserves for future policy benefits and claims are inadequate, it may be required to increase its reserve liabilities, which could adversely affect its financial
condition. IF IDS LIFE'S RESERVES FOR FUTURE POLICY BENEFITS AND CLAIMS ARE INADEQUATE, IT MAY BE REQUIRED TO INCREASE ITS RESERVE LIABILITIES, WHICH COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS AND FINANCIAL CONDITION. IDScondition and results of operations.RiverSource Life establishes reserves as estimates of its liabilities to provide for future obligations under its
products.insurance policies and annuities contracts. Reserves do not represent an exact calculation of liability, but rather are estimates of contract benefits and related expensesIDSRiverSource Life expects to incur over time. The assumptions and estimatesIDSRiverSource Life makes in establishing reserves require certain judgments about future experience and, therefore, are inherently uncertain.IDSRiverSource Life cannot determine with precision the actual amounts that it will pay for contract benefits, the timing of payments, or whether the assets supporting its stated reserves will increase to the levels it estimates before payment of benefits or claims.IDSRiverSource Life monitors its reserve levels continually. IfIDSRiverSource Life were to conclude that its reserves are insufficient to cover actual or expected contract benefits, it would be required to increase its reserves andpotentiallyincur income statement charges for the period in which it makes the determination, which could adversely affect its financial condition and results ofoperations and financial condition.operations. For more information on howIDSRiverSource Life sets its reserves, see Note12 to the Consolidated FinancialStatements. 14IDS LIFE MAY FACE LOSSES IF MORBIDITY RATES OR MORTALITY RATES DIFFER SIGNIFICANTLY FROM ITS PRICING EXPECTATIONS. IDSStatements included in Part II, Item 8 of this Annual Report on Form 10-K.Morbidity rates or mortality rates that differ significantly from RiverSource Life’s pricing expectations would negatively affect profitability.
RiverSource Life sets prices for its life, DI and LTC insurance and some annuity products based upon expected claim payment patterns, derived from assumptions
IDSRiverSource Life makes about its policyholders and contractholders, the morbidity rates, or likelihood of sickness, and the mortality rates, or likelihood ofdeath, of its policyholders and contractholders.death. The long-term profitability of these products depends upon howIDS Life'sRiverSource Life’s actual experience compares with its pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than its pricing assumptions,IDSRiverSource Life could be required to make greater payments under DIand LTCinsurance policies and immediate annuity contracts than it had projected. In 2009, upon regulatory approval, RiverSource Life intends to offer certain optional riders with its new permanent life insurance policies that will enable consumers to access a portion of their death benefit to fund qualified chronic care needs. These policies, if approved and issued, will also subject RiverSource Life to morbidity risk. The same holds true for LTC policiesIDSRiverSource Life previously underwrote to the extentthey are not fully reinsured.of the risks that RiverSource Life has retained. If mortality rates are higher than its pricing assumptions,IDSRiverSource Life could be required to make greater payments under its life insurance policies and annuity contracts with GMDBs than ithadhas projected.The risk that
IDS Life'sRiverSource Life’s claims experience may differ significantly from its pricing assumptions is particularly significant for its LTC insurance products, notwithstandingitsRiverSource Life’s ability to implement future priceincreases.increases subject to regulatory approvals. As with life insurance, LTC insurance policies provide for long-duration coverage and, therefore, its actual claims experience will emerge over many years. However, as a relatively new product in the market, LTC insurance does not have the extensive claims experience history of life insurance, and, as a result,IDS Life'sRiverSource Life’s ability to forecast future claim rates for LTC insurance is more limited than for life insurance.IDSRiverSource Life has sought to moderate these uncertainties to some extent by partially reinsuring LTC policies that it had previously underwritten and bydiscontinuing underwritinglimiting its present LTCinsurance. IDS LIFE MAY FACE LOSSES IF THERE ARE SIGNIFICANT DEVIATIONS FROM ITS ASSUMPTIONS REGARDING THE FUTURE PERSISTENCY OF ITS INSURANCE POLICIES AND ANNUITY CONTRACTS.insurance offerings to policies underwritten fully by unaffiliated third party insurers, and RiverSource Life has also implemented rate increases on certain in-force policies as described in Item 1 of this Annual Report on Form 10-K — “Business — Insurance: Product Features and Risks — Long Term Care Insurance.” RiverSource Life may be required to implement additional rate increases in the future and may or may not receive regulatory approval for the full extent and timing of any rate increases that RiverSource Life may seek.RiverSource Life may face losses if there are significant deviations from its assumptions regarding the future persistency of its insurance policies and annuity contracts.
The prices and expected future profitability of
IDS Life'sRiverSource Life’s insurance and deferred annuity products are based in part uponexpected patterns of premiums, expenses and benefits, using a number ofassumptionsincluding thoserelated to persistency, which is the probability that a policy or contract will remain in force from one period to the next. Given the ongoing economic and market dislocations, future consumer persistency behaviors could vary materially from the past. The effect of persistency on profitability varies for different products. For most of its life insurance and deferred annuity products, actual persistency that is lower than its persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily becauseIDSRiverSource Life would be required to accelerate the amortization of expenses it deferred in connection with the acquisition of the policy or contract.16
For
IDS Life'sRiverSource Life’s LTC insurance, actual persistency that is higher than its persistency assumptions could have a negative impact on profitability. If these policies remain in force longer thanIDSRiverSource Life assumed, thenIDSRiverSource Life could be required to make greater benefit payments than it had anticipated when it priced or partially reinsured these products. Some of its LTC insurance policies have experienced higher persistency andhigher morbidity ratespoorer loss experience thanIDSRiverSource Life had assumed, which led it to increase premium rates on certain of these policies.Because
IDS Life'sRiverSource Life’s assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and policy claims and other policyholders’ funds may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of its products permitIDSRiverSource Life to increase premiums during the life of the policy or contract,IDSRiverSource Life 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 ofIDS Life'sRiverSource Life’s products do not permitpremium increasesRiverSource Life to increase premiums or limit those increases during the life of the policy orcontract.contract while premiums on certain other products (primarily LTC insurance) may not be increased without prior regulatory approval. Significant deviations in experience from pricing expectations regarding persistency could have an adverse effect on the profitability ofIDS Life'sRiverSource Life’s products.15IDS LIFE MAY BE REQUIRED TO ACCELERATE THE AMORTIZATION OFRiverSource Life may be required to accelerate the amortization of DAC,
WHICH WOULD INCREASE ITS EXPENSES AND REDUCE PROFITABILITY.which would increase its expenses and reduce profitability.DAC
representsrepresent the costs of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale ofannuities andannuity, life, DI and LTC insurance. For annuity and universal life products, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products,IDS Life amortizesDACover periods approximating the lives of the related policy or contract,are generally amortized as a percentage of premiumsor estimated gross profits associated with that policy or contract. IDS Life'sover amortization periods equal to the premium-paying period.RiverSource Life’s projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and
clientcustomer asset value growth rates for variable products.IDSRiverSource Life periodically reviews and, where appropriate, adjusts its assumptions. WhenIDSRiverSource Life changes its assumptions, it may be required to accelerate the amortization of DAC or to record a charge to increase benefit reserves.As of December 31, 2005 and 2004, IDS Life had $4.0 billion and $3.6 billion of DAC, respectively, and it amortized $315.9 million and $260.8 million, respectively, of DAC as a current period expense for the years ended December 31, 2005 and 2004, respectively.For more information regarding DAC, see
"Management's DiscussionItem 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis — Critical Accounting Policies — Deferred Acquisition Costs andAnalysisDeferred Sales Inducement Costs” and “— Recent Accounting Pronouncements.”Breaches of
Financial Condition and Results of Operations-Critical Accounting Policies." STATE INSURANCE REGULATORS MAY ADOPT NEW RESERVE OR CAPITAL REQUIREMENTS, POTENTIALLY IMPACTING IDS LIFE'S FINANCIAL STRENGTH RATINGS. IDS Life must comply with statutory reserve and capital requirements. State regulators are continually reviewing and updating these requirements. As of December 31, 2005, IDS Life was subject to new capital requirements for variable annuity contracts with guaranteed deathsecurity, orliving benefits. These new requirements had minimal impact on IDS Life's Consolidated Balance Sheet in 2005, butthe perception thatmay not continue to be true in the event equity market values fall in the future. There is active discussion at the NAIC of moving to a principles-based reserving system. This could change statutory reserve requirements significantly, and itRiverSource Life’s technology infrastructure is notpossible to estimatesecure, could harm its business.RiverSource Life’s business requires the
impact at this time. CHANGES IN U.S. FEDERAL INCOME TAX LAW COULD MAKE SOME OF IDS LIFE'S PRODUCTS LESS ATTRACTIVE TO CLIENTS. Manyappropriate and secure utilization of client and other sensitive information. RiverSource Life’s operations require theproducts IDS Life issues or on which its business is based (including both insurance products and non-insurance products) enjoy favorable treatment under current U.S. federal income tax law. Changessecure transmission of confidential information over public networks. Security breaches inU.S. federal income tax law could make someconnection with the delivery of its productsless attractiveand services, including products and services utilizing the Internet, and the trend toward broad consumer and general public notification of such incidents, could significantly harm RiverSource Life’s business, financial condition or results of operations. Even if RiverSource Life successfully protected its technology infrastructure and the confidentiality of sensitive data, RiverSource Life could suffer harm toclients. IDS LIFE'S RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT BE FULLY EFFECTIVE IN MITIGATING ITS RISK EXPOSURE IN ALL MARKET ENVIRONMENTS OR AGAINST ALL TYPES OF RISK. IDSits business and reputation if attempted security breaches are publicized. RiverSource Life cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in its systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks used in connection with its products and services.Protection from system interruptions is important to RiverSource Life’s business. If RiverSource Life experienced a sustained interruption to its telecommunications or data processing systems, it could harm its business.
System or network interruptions could delay and disrupt RiverSource Life’s ability to develop, deliver or maintain its products and services, causing harm to its business and reputation and resulting in loss of customers or revenue. Interruptions could be caused by operational failures arising from RiverSource Life’s implementation of new technology, as well as from maintenance of existing technology. RiverSource Life’s financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond its control, adversely affecting its ability to process transactions or provide products and services to customers. These interruptions can include fires, floods, earthquakes, power losses, equipment failures, failures of internal
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or vendor software or systems and other events beyond its control. Further, RiverSource Life faces the risk of operational failure, termination or capacity constraints of any of the clearing agents, clearing houses or other financial intermediaries that RiverSource Life uses to facilitate its securities transactions. Any such failure, termination or constraint could adversely impact its ability to effect transactions, service its clients and manage its exposure to risk.
RiverSource Life’s risk management policies and procedures may not be fully effective in mitigating its risk exposure in all market environments or against all types of risk, including employee and financial advisor misconduct.
RiverSource Life has devoted significant resources toward developing its risk management policies and procedures and
expects towill continue to doso in the future.so. Nonetheless,IDS Life'sRiverSource Life’s policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating its risk exposure in all market environments or against all types of risk. Many of its methods of managing risk and exposures are based upon its use of observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what its models indicate. This could cause RiverSource Life to incur investment losses or cause its hedging and other risk management strategies to be ineffective. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters thatisare publicly available or otherwise accessible toIDSRiverSource Life, which may not always be accurate, complete, up-to-date or properly evaluated.Moreover, RiverSource Life is subject to the risks of errors and misconduct by its employees and affiliated financial advisors — such as fraud, non-compliance with policies, recommending transactions that are not suitable, and improperly using or disclosing confidential information. These risks are difficult to detect in advance and deter, and could harm RiverSource Life’s business, financial condition or results of operations. RiverSource Life is further subject to the risk of nonperformance or inadequate performance of contractual obligations by third-party vendors of products and services that are used in its businesses. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly
recordand verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigatingIDS Life'sRiverSource Life’s risk exposure in all market environments or against all types of risk.16IDS LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY ECONOMIC AND OTHER FACTORS. IDS Life's financial conditionInsurance andresults of operationsother traditional risk-shifting tools may bematerially affectedheld byeconomic and other factors. Many such factors of a globalorlocalized nature include: political, economic and market conditions; technological changes and events; inflation; investor sentiment and confidenceavailable to RiverSource Life inthe financial markets; terrorism events and armed conflicts; and natural disastersorder to manage certain exposures, but they are subject to terms such asweather catastrophesdeductibles, coinsurance, limits andwidespread health emergencies. In addition, during periodspolicy exclusions, as well as risk ofunfavorable marketcounterparty denial of coverage, default oreconomic conditions,insolvency.Changes in U.S. federal income or estate tax law could make some of RiverSource Life’s products less attractive to clients.
Many of the
levelproducts RiverSource Life issues or on which its business is based (including both insurance products and non-insurance products) enjoy favorable treatment under current U.S. federal income or estate tax law. Changes in U.S. federal income or estate tax law could make some ofconsumer investing and insuring activity may also decrease, which may negatively impactits products less attractive to clients.RiverSource Life is subject to tax contingencies that could adversely affect the
results of IDS Life's businesses. Moreover, fluctuations in economic and market activity could impact the way then-existing customers allocate their available resources, which could affect IDS Life's persistency, surrender and product cash value loan experience and could negatively impact its business. IDS LIFE IS SUBJECT TO TAX CONTINGENCIES THAT COULD ADVERSELY AFFECT RESERVES. IDSprovision for income taxes.RiverSource Life is subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which it has significant business operations.municipalities. These tax laws are complex and may be subject to differentinterpretations by the taxpayer and the relevant governmental taxing authorities. IDSinterpretations. RiverSource Life must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit.RISKS RELATING TO AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS ------------------------------------------------------------------------- CLIENT ACQUISITION AND RETENTION MAY BE ADVERSELY AFFECTED BY IDS LIFE'S SEPARATION FROM AMERICAN EXPRESS. Although IDS Life generally operated independently of American Express' other operations with respect to client services priorIn addition, changes to theseparation and Distribution, IDS Life has relied on the American Express brand and cardmember relationships in acquiring clients as part of its growth strategy. As part of a marketing and branding arrangement between Ameriprise Financial and American Express, IDS Life has a limited right to continue until September 30, 2007 to market its products in a manner similar to the methods it used prior to the separation. However, overall response rates, marginal costs and profitability from these efforts may be negatively affected as a result of the loss of this affiliation. IDS Life cannot provide assurance that the clients it gained as a result of being affiliated with American Express will not move someInternal Revenue Code, administrative rulings orall of their existing business from IDS Life to another company. Loss of a significant portion of these clientscourt decisions couldnegatively impact IDS Life's business. AMERIPRISE FINANCIAL AND IDS LIFE HAVE EXPERIENCED INCREASED COSTS IN CONNECTION WITH THE SEPARATION. Ameriprise Financial is in the process of developing certain independent facilities, systems, infrastructure and personnel to replace services it had access to from American Express. Ameriprise Financial has also made significant investments to develop its new brands and establish its ability, and the ability of its subsidiaries, to operate without access to American Express's operational and administrative infrastructure. These initiatives have been costly to implement. In 2005 Ameriprise Financial developed an allocation policyincrease RiverSource Life’s provision forseparation costs resulting in the allocation of certain costs to IDS Life that it considered to be a reasonable reflection of separation costs benefiting IDS Life. These costs generally consist of allocated financial advisor and employee retention program costs, re-branding and marketing costs and costs to separate and reestablish technology platforms related to the separation and Distribution of Ameriprise Financial. IDS Life has incurred and been allocated approximately $121.3 million in total pretax non-recurring separation costs through December 31, 2005 and IDS Life expects to incur significant additional separation costs. This risk has been greatly offset by the contribution of capital from American Express to Ameriprise Financial, and in turn, from Ameriprise Financial to IDS Life. 17As a stand-alone company, Ameriprise Financial, and hence, IDS Life do not have the same purchasing power they had through American Express and, in some cases, may not have as favorable terms or prices as those obtained prior to the separation and Distribution, which could decrease its overall profitability. IDS LIFE MAY NOT HAVE SUFFICIENT CAPITAL GENERATION ABILITY TO MEET ITS OPERATING AND REGULATORY CAPITAL REQUIREMENTS. As a stand-alone company, Ameriprise Financial, and hence, IDS Life is required to maintain higher capital ratios to retain its credit ratings. In addition, IDS Life needs to cover volatility associated with variations in its operating, risk-based and regulatory capital requirements, including separation costs and contingent exposures, for example, in connection with its ongoing legal and regulatory matters. See "Business--Risk-Based Capital" for more information regarding capital requirements and see "Item 3--Legal Proceedings" for more information regarding pending regulatory and legal proceedings. Although Ameriprise Financial made a $650 million capital contribution to IDS Life to cover, among other things, allocated separation costs, IDS Life cannot be certain that this capital contribution will be sufficient to cover all of the additional costs. If it is not sufficient, IDS Life's financial condition could be adversely affected and its financial strength ratings may be downgraded. AS AMERIPRISE FINANCIAL BUILDS ITS INFORMATION TECHNOLOGY INFRASTRUCTURE AND TRANSITIONS ITS DATA AND THAT OF ITS AFFILIATES, SUCH AS IDS LIFE, TO ITS OWN SYSTEMS, IT COULD EXPERIENCE TEMPORARY BUSINESS INTERRUPTIONS AND INCUR SUBSTANTIAL ADDITIONAL COSTS. Ameriprise Financial, and hence, IDS Life is in the process of installing and implementing information technology infrastructure to support its business functions, including accounting and reporting, customer service and distribution. IDS Life anticipates this will involve significant costs. IDS Life may incur temporary interruptions in business operations if it cannot transition effectively from American Express' existing technology infrastructure (which covers hardware, applications, network, telephony, databases, backup and recovery solutions), as well as the people and processes that support them. IDS Life may not be successful in implementing its new technology infrastructure and transitioning its data, and IDS Life may incur substantially higher costs for implementation than currently anticipated. IDS Life's failure to avoid operational interruptions as it implements the new infrastructure and transitions its data, or its failure to implement the new infrastructure and transition its data successfully, could disrupt its business and have a material adverse effect on its profitability. In addition, technology service failures could have adverse regulatory consequences for IDS Life's business and make it vulnerable to its competitors. Ameriprise Financial, and hence, IDS Life continues to rely on American Express' disaster recovery capabilities as part of its business continuity processes. IDS Life will only have the right to use American Express' disaster recovery resources for up to two years after the Distribution. IDS Life will be required to develop and implement its own disaster recovery infrastructure and develop business continuity for its operations, which it anticipates will involve significant costs. IDS Life 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. IDS Life's failure to avoid operational interruptions as it implements new business continuity processes, or its failure to implement the new processes successfully, could disrupt its business and have a material adverse effect on its profitability in the event of a significant business disruption. 18AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS COULD INCREASE IDS LIFE'S U.S. FEDERAL INCOME TAX COSTS. Due to the separation, IDS Life will not be able to file a consolidated U.S. federalincometax return with the other members of the Ameriprise Financial affiliated group for five tax years following the Distribution. 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 group may also not be available. As a result of these and other inefficiencies, the aggregate amount of U.S. federal income tax that IDS Life pays may increase and IDS Life may, in addition, not be able to fully realize certain of its deferred tax assets. ITEM 1B. UNRESOLVED STAFF COMMENTStaxes.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES IDS
ITEM 2.
PROPERTIES
RiverSource Life Insurance Company occupies office space in Minneapolis, Minnesota, which is leased or owned by Ameriprise Financial.
IDSRiverSource Life Insurance Company reimburses Ameriprise Financial for rent based on direct and indirect allocation methods.IDSRiverSource Life ofNew York and American Centurion Life rentNY rents office space in Albany, New York.FacilitiesRiverSource Life believes that the facilities occupiedby IDS Life are believed to be adequate for the purposes for which they are used and are well maintained. ITEM 3. LEGAL PROCEEDINGSsuit its needs.18
ITEM 3.
LEGAL PROCEEDINGS
The
Securities and Exchange Commission, the National Association of Securities DealersSEC, FINRA, and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements.IDSRiverSource Life has received requests for information and has been contacted by regulatory authorities concerningsome of theseits practices and is cooperating fully with these inquiries.IDSRiverSource Life is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities.
IDSRiverSource Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
19PART II
------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable. ITEM 6. SELECTED FINANCIAL DATA
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of RiverSource Life Insurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc. There is no established public trading market for RiverSource Life Insurance Company’s common stock.
For discussion regarding RiverSource Life Insurance Company’s payment of dividends and restrictions on dividends, see Item 7 of this Annual Report on Form 10-K — “Management’s Narrative Analysis — Liquidity and Capital Resources — Capital Activity” and Note 13 to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 6.
SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2)(a) of Form 10-K.
20ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IDS Life follows United States generally accepted accounting principles (GAAP), and the following discussion is presented on a consolidated basis consistent with GAAP. The following discussion may contain forward-looking statements that reflect IDS Life's plans, estimates and beliefs. Actual results could differ materially from those discussed in forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under "Forward-Looking Statements" and "Item 1A-Risk Factors" of this Form 10-K. The following management's narrative analysis of the results of operations is presented pursuant to General Instructions I(2)(a) of Form 10-K in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations. The following information should be read in conjunction with IDS Life's accompanying consolidated financial statements and related notes included elsewhere in this Form 10-K.19
ITEM 7.
MANAGEMENT’S NARRATIVE ANALYSIS
Overview
IDSRiverSource Life Insurance Company is a stock life insurance company with
four wholly-ownedone wholly owned operatingsubsidiaries: IDSsubsidiary, RiverSource Life InsuranceCompanyCo. of New YorkAmerican Partners(“RiverSource LifeInsurance Company, American Enterprise Life Insurance Company and American Centurion Life Assurance Company. IDSof NY”). RiverSource Life Insurance Company is awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.(Ameriprise Financial)(“Ameriprise Financial”).o IDS· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York.
IDSRiverSource Life Insurance Company issues insurance and annuity products.o American Enterprise Life Insurance Company (American Enterprise Life) is a stock life insurance company domiciled in Indiana, which holds Certificates of Authority in the District of Columbia and all states except New York. American Enterprise Life issues fixed and variable annuity contracts primarily through regional and national financial institutions and regional and/or independent broker-dealers. (In past years, American Enterprise Life issued a nominal number of variable universal life contracts.) o American Partners Life Insurance Company (American Partners Life) is a stock life insurance company domiciled in Arizona, which holds Certificates of Authority in the District of Columbia and all states except New York and New Hampshire. American Partners Life markets annuity products directly to customers, generally persons holding an American Express(R) Card. 21o IDS Life Insurance Company of New York (IDS· RiverSource Life of
New York)NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota andNorth Dakota. IDSDelaware. RiverSource Life ofNew YorkNY issues insurance and annuity products.o American CenturionOn December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RiverSource Tax Adv. Inv.”) to RiverSource Life
Assurance Company (American Centurion Life)Insurance Company. RiverSource Tax Adv. Inv. is a stocklife insurancecompany domiciled inNew York, which holds Certificates of AuthorityDelaware and is a limited partner inNew York, Alabama and Delaware. American Centurion Life issues fixed and variable annuity contracts primarily through financial institutions and independent broker- dealers. American Centurion Life also markets annuity products directly, generally to persons holding an American Express(R) Card. IDS Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estateaffordable housing partnership investments.IDSRiverSource Life Insurance Company and its
seventwo subsidiaries are referred to collectively in this Form 10-K as"IDS Life"“RiverSource Life”.PriorThe accompanying financial information has been presented as if RiverSource Tax Adv. Inv. had been a wholly owned subsidiary prior to
AugustJanuary 1,2005,2006 and is accounted for as a pooling of interests for entities under common control as RiverSource Life Insurance Company and RiverSource Tax Adv. Inv. are wholly owned subsidiaries of Ameriprise Financial.The following discussion and management’s narrative analysis of the financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements,” “Item 1A - Risk Factors” and the Consolidated Financial Statements and Notes. Management’s narrative analysis is presented pursuant to General Instructions I(2) (a) of Form 10-K in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Ameriprise Financial was
referred to asformerly a wholly owned subsidiary of American ExpressFinancial Corporation.Company (“American Express”). On February 1, 2005, the American ExpressCompany (American Express)Board of Directors announced its intention to pursue the disposition of 100% of itsshareholdingshareholdings inwhat is nowAmeriprise Financial (theSeparation)“Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (theDistribution)“Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect theseparation of its businessSeparation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees.IDSThrough 2007, RiverSource Life was allocated certainseparation and Distribution-relatedexpenses incurred as a result of Ameriprise Financial becoming an independent company.Cumulatively,The separation from American Express was completed in 2007.Results of Operations for the
expenses incurred and allocatedYear Ended December 31, 2008 compared toIDS Life are significant to IDS Life. IDS Life received a capital contribution of $650 million from Ameriprise Financial duringthethird quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBERYear Ended December 31,2005 AND 2004 Income before taxes and accounting change declined 19% to $640.42007Overview
Consolidated net income was $71 million for the year ended December 31,
2005. The decrease primarily reflects separation costs, higher other insurance and operating expenses and amortization of deferred policy acquisition costs (DAC), partially offset by increased mortality and expense risk and other fees, contractholder and policyholder charges and net realized gain on investments. Net income2008 compared to $434 million for the year ended December 31,2004 reflects2007, a decrease of $363 million. The pretax loss for the$70.6year ended December 31, 2008 was $118 million($108.6compared to pretax income of $487 millionpretax) cumulative effectfor the year ended December 31, 2007. The decrease was driven by pretax net realized investment losses ofaccounting change as a result of IDS Life's January 1, 2004 adoption of$442 million primarily related to non-agency residential mortgage backed securities, corporate debt securities primarily in theAmerican Institute of Certified Public Accountants Statement of Position 03-1, "Accountingfinancial services industry andReporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contractsasset backed andfor Separate Accounts" (SOP 03-1). SOP 03-1 requires insurance enterprises to establish liabilities for benefits that may become payable under variable annuity death benefit guarantees orotherinsurance or annuity contract provisions. See the "Recently Issued Accounting Standards" section in Note 1securities. Also contributing to theConsolidated Financial Statements regarding the impact of adoption of SOP 03-1. REVENUES Total revenues increased $133.9 million or 4% primarily due to higherdecrease in netrealized gain on investments, mortality and expense risk and other fees and contractholder and policyholder charges compared to 2004. Disabilityincome(DI) and long-term care insurance (LTC) premiums increased $11.5 million or 4% reflecting higher DI insurance in force levels. 22Net investment income increased $13.9 million or 1%. The increase reflects a $13.9 million pretax gain for 2005 compared to a $27.9 million charge in 2004 all related to the liquidation of secured loan trusts (SLTs) offset by lower interest on mortgage investments and lower mark-to-market gains on trading securities and equity method investments in hedge funds. Additionally, the average yield decreased compared to 2004, partially offset bywas an increase in amortization of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) due to theaverage level of invested assets. Contractholder and policyholder charges increased $22.8 million or 4% as a result of a $13.2 million increasemarket dislocation inthe cost of insurance on higher average variable and fixed universal life policies in force,2008 as well as an increase insurrender charges on annuities. Mortalityguaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) benefits due to lower equity markets. These negative impacts were partially offset by a benefit resulting from RiverSource Life’s annual review of valuation assumptions and conversion to a new industry standard valuation system, both of which occurred during the third20
quarter of 2008. The annual review of valuation assumptions resulted in a decrease in expenses resulting primarily from updating mortality and expense
riskassumptions for certain life insurance products and from updating fund mix and contractholder behavior assumptions for variable annuities with guaranteed benefits.In the third quarter of 2008, the valuation assumptions review and the valuation system conversion resulted in a net $106 million benefit. The review of the valuation assumptions resulted in a decrease in expenses primarily from updating product mortality and expense assumptions for certain life insurance products and from updating fund mix and contractholder behavior assumptions for variable annuities with guaranteed benefits. The valuation system conversion also resulted in an increase in revenue primarily from improved modeling of the expected value of existing reinsurance agreements and a decrease in expense from modeling annuity amortization periods at the individual policy level. The review of the valuation assumptions in the third quarter of 2007 resulted in a net $30 million increase in expense from updating product persistency assumptions partially offset by decreases in expense from updating other assumptions.
The total pretax impacts on RiverSource Life’s revenues and expenses for the years ended December 31, 2008 and 2007 attributable to the annual third quarter review of the valuation assumptions, the valuation system conversion and the impact of markets on DAC and DSIC amortization, variable annuity living benefit riders, net of hedges and GMDB and GMIB benefits were as follows:
Pretax
Benefit (Charge)
Premiums
Policy and
Contract
Charges
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization
of DAC
Other
Insurance
and
Operating
Expenses
Total
(in millions)
2008 period
$
2
$
95
$
70
$
(475
)
$
1
$
(307
)
2007 period
—
(2
)
(47
)
7
—
(42
)
Revenues
Total revenues for the year ended December 31, 2008 were $2.9 billion, a decrease of $544 million from $3.4 billion in 2007.
Net investment income decreased $172 million or 12.1% to $1.3 billion for the year ended December 31, 2008 primarily due to declining average balances in fixed annuity balances as well as a decline in the overall yield in the investment portfolio.
Policy and contract charges increased $135 million or 11.1% to $1.4 billion for the year ended December 31, 2008. The increase is primarily the result of a $95 million benefit from updating valuation assumptions and converting to a new valuation system as well as growth in guaranteed benefit rider fees on variable annuities and cost-of-insurance fees for fixed and variable universal life insurance. The impact to policy and contract charges from updating valuation assumptions for the prior year period was immaterial.
Net realized investment losses were $442 million for the year ended December 31, 2008 compared to net realized investment gains of $61 million for the year ended December 31, 2007. Included in net realized investment losses for the year ended December 31, 2008 is $440 million of other-than-temporary impairments on Available-for-Sale securities primarily related to non-agency residential mortgage backed securities, corporate debt securities primarily in the financial services industry and asset backed and other
fees increased $58.3securities, an increase of $1 millionor 14% reflecting higher average market valuesto the allowance for loan losses on commercial mortgage loans and an increase ofseparate account assets due$8 million toincreased inflows and market appreciation. Net realized gainthe allowance for loan losses oninvestments was $48.3 million in 2005 compared to $27.3 million in 2004.below investment grade syndicated bank loans. For the year ended December 31,2005, $107.92008, $13 million oftotalgross realized investment gains were offset by $6 million of gross realized losses on Available-for-Sale securities. For the year ended December 31, 2007, $64 million of gross realized investment gains were partially offset by$59.6 million of impairments and losses. Included in these total net investment gains and losses were $107.8 million of gross realized gains and $38.6$20 million of gross realized lossesfrom sales of securities,as well as$19.4$4 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. Included inthenet realizedgain on investments classified as Available-for-Saleinvestment gains for2005 were gross realized gains and losses of $39.2 million and $14.3 million, respectively, related to the sale of all of IDS Life's retained interest in a collateralized debt obligations (CDO) securitization trust. Forthe year ended December 31,2004, $49.52007 was a decrease of $21 millionof total investment gains were partially offset by $22.2 million of impairments and losses. Included in these total net investment gains and losses were $48.4 million of gross realized gains and $17.5 million of gross realized losses from sales of securities, as well as $0.1 million of other-than-temporary impairmentto the allowance for loan losses oninvestments, classified as Available-for-Sale. BENEFITS AND EXPENSEScommercial mortgage loans.21
Benefits and Expenses
Total benefits and expenses
increased $285.9for both years ended December 31, 2008 and 2007 were $3.0 billion. Total benefits and expenses reflect the impact of the valuation assumptions review and the valuation system conversion as previously described.Benefits, claims, losses and settlement expenses decreased $87 million or
12%, reflecting separation costs, an increase in DAC amortization expense and higher other insurance and operating expenses, partially offset by lower interest crediting rates. Death and other benefits for traditional life insurance increased $4.7 million or 13% primarily due11.4% toincreased in force levels. Death and other benefits for DI and LTC insurance increased $8.6 million or 13% primarily due to increased DI in force levels. Increase in liabilities for future policy benefits for DI and LTC insurance increased $18.0 million or 15% primarily reflecting inclusion of a $13.3 million maintenance reserve adjustment for LTC insurance. Interest credited to account values decreased $17.5 million or 2%, primarily due to lower interest crediting rates and average accumulation values of annuities, as well as the effect on equity indexed annuities of lower appreciation in the Standard & Poor's (S&P) 500 during 2005 versus 2004. 23DAC amortization expense increased to $315.9 million in 2005 from $260.8 million in 2004. DAC amortization expense in 2005 was reduced by $67.0 million as a result of the annual DAC assessment performed in the third quarter, while DAC amortization expense in 2004 was reduced by $65.7 million in the first quarter as a result of lengthening amortization periods for certain insurance and annuity products in conjunction with the adoption of SOP 03-1 and by $23.7 million as a result of the annual DAC assessment in the third quarter. Equity market conditions and other factors also resulted in increased amortization of DAC in 2005 compared to 2004, particularly for IDS Life's growing variable annuity business. See the "Deferred Policy Acquisition Costs" section for further discussion of DAC and related third quarter 2005 and 2004 adjustments. Separation costs generally consist of allocated financial advisor and employee retention program costs, re-branding and marketing costs and costs to separate and reestablish technology platforms related to the separation and Distribution of Ameriprise Financial. During 2005, IDS Life was allocated and incurred $121.3 million in separation costs. See Note 1 to the Consolidated Financial Statements for further discussion regarding the separation and the allocation of costs to IDS Life. Other insurance and operating expenses increased $87.3 million or 17% reflecting increases in distribution costs and non-deferrable expenses related to product management and higher business investment initiatives. INCOME TAXES IDS Life's effective tax rate declined to 28% in 2005 from 29% in 2004 which resulted from relatively lower levels of pretax income compared to tax-advantaged items in 2005. Additionally, the 2005 effective tax rate reflects a $20 million tax expense and the 2004 effective tax rate reflects a $20 million tax benefit applicable to prior years amendments. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 Pretax income rose 38% to $792.4$673 million for the year ended December 31,2004. The increase primarily reflects increased2008. Benefits, claims, losses and settlement expenses for 2008 included a $90 million benefit from updating valuation assumptions and converting to a new valuation system in the third quarter of 2008 and a $92 million benefit related to the market impact on variable annuity guaranteed living benefits, netinvestmentof hedges. Partially offsetting these benefits was a $42 million expense related to the market’s impact on DSIC, a $70 million expense related to the equity market’s impact on variable annuity minimum death and incomemortalitybenefits and increases in life and long term care (“LTC”) insurance benefits. In the prior year, updating valuation assumptions resulted in $12 million additional expenses, $39 million of expenseriskdue to the unfavorable market impact on variable annuity guaranteed living benefits, net of hedges, andother fees, net realized gainan immaterial market impact oninvestments, lower interestDSIC.Interest credited to
account values and lower amortization of DAC, partially offsetfixed accounts decreased byhigher other insurance and operating expenses. Net income$57 million or 6.7% to $790 million for the year ended December 31,2004 reflects the $70.6 million ($108.6 million pretax) impact of IDS Life's January 1, 2004 adoption of SOP 03-1. SOP 03-1 requires insurance enterprises to establish liabilities for benefits that may become payable under variable annuity death benefit guarantees or other insurance or annuity contract provisions. See the "Recently Issued Accounting Standards" section in Note 1 to the Consolidated Financial Statements regarding the impact of adoption of SOP 03-1. REVENUES Total revenues increased $162.0 million or 5%2008 primarily due tohigher net investment income, mortality and expense risk and other fees and net realized gain on investments compareddeclining fixed annuity accumulation balances. The balances had been decreasing steadily throughout 2008 until the fourth quarter when market events caused positive flows into fixed annuities.Amortization of DAC increased $391 million to
2003. Net investment income increased $72.3$861 millionor 4%. Net investment incomefor the year ended December 31,2003 includes $77.32008 from $470 millionof amortization expense of certain low income housing investments. See effective tax rate discussion below. Contractholder and policyholder charges increased $24.2 million or 5% reflecting increased cost of insurance charges on variable universal life products as well as an increase in the amount of surrender charges on variable annuity products. 24Mortality and expense risk and other fees increased $39.8 million or 10% reflecting higher average market values of separate account assets, and the impact of the change from IDS Life to Ameriprise Financial as investment manager of the internally managed proprietary funds during the fourth quarter of 2003. Concurrent with the investment manager change, IDS Life entered into an agreement with Ameriprise Financial to receive feesforthe services, other than investment management, that IDS Life continues to provide the underlying proprietary mutual funds. IDS Life's administrative service fees will vary with the market values of these proprietary mutual funds. Prior to this change, IDS Life received management fees directly from the proprietary funds and was party to an agreement with Ameriprise Financial to compensate Ameriprise Financial for the investment sub-advisory services Ameriprise Financial provided these proprietary funds. In addition to IDS Life's administrative service fees, IDS Life receives mortality and expense risk fees from the separate accounts based on the level of assets. Net realized gain on investments was $27.3 million in 2004 compared to $4.4 million in 2003. Forthe year ended December 31,2004, $49.52007. Amortization of DAC in 2008 included a $292 million expense from the market’s impact on DAC, an $82 million expense from updating valuation assumptions and conversion to a new valuation system in the third quarter oftotal investment gains2008 and a $101 million increase related to higher estimated gross profits to amortize as a result of the reserve decrease, net of hedges, for variable annuity guaranteed living benefits. The market impact on DAC included $220 million resulting from management’s action in the fourth quarter of 2008 to lower future profit expectations based on continued depreciation in contract values and historical equity market return patterns. In the prior year, DAC amortization included an expense of $16 million related to updating valuation assumptions and benefits of $6 million from the market’s impact on DAC and $17 million related to the DAC effect of variable annuity guaranteed living benefits, net of hedges.Separation costs incurred in 2007 were
partially offsetprimarily associated with separating and reestablishing technology platforms. All separation costs were incurred by$22.2December 31, 2007.Other insurance and operating expenses decreased $89 million
of impairments and losses. Included in these total net investment gains and losses were $48.4or 11.4% to $692 millionof gross realized gains and $17.5 million of gross realized losses from sales of securities, as well as $0.1 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. Forfor the year ended December 31,2003, $257.0 million of total investment gains were partially offset by $252.6 million of impairments and losses. Included in these total net investment gains and losses were $255.3 million of gross realized gains and $135.5 million of gross realized losses from sales of securities, as well as $102.6 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. BENEFITS AND EXPENSES Total benefits and expenses decreased $55.8 million or 2%, reflecting lower interest crediting rates and the effect on equity indexed annuities of lower appreciation in the S&P 500 during 2004 versus 2003, a reduction in DAC amortization expense in conjunction with the adoption of SOP 03-1 and third quarter DAC adjustments, partially offset by higher other insurance and operating expenses. Interest credited to account values decreased $114.1 million or 9%,2008 primarily due to decreased sales and marketing expenses and lowerinterest crediting ratescorporate overhead expenses.Income Taxes
RiverSource Life’s effective tax rate was 160.1% and 10.8% for the
effect on equity indexed annuities of lower appreciationyears ended December 31, 2008 and 2007, respectively. The increase in theS&P 500 during 2004 versus 2003, partially offset by higher average accumulation values of annuities and in force levels of life insurance products. DAC amortization expense decreased to $260.8 million in 2004 from $264.3 million in 2003. The decrease waseffective tax rate is primarily due to a$65.7pretax loss in relation to a net tax benefit for 2008 compared to pretax income for 2007. RiverSource Life’s effective tax rate for 2008 included a $39 millionadjustment associated with the lengthening of amortization periods for certain insurance and annuity products in conjunction with the adoption of SOP 03-1, and approximately $23.7 million in net favorable DAC adjustmentstax benefit related to changes in thethird quarterstatus of2004 ascurrent audits. RiverSource Life’s effective tax rate for 2007 included aresult of changes to DAC assumptions as compared to a $1.8$7 millionnet favorable DAC adjustment in the third quarter of 2003. See the "Deferred Policy Acquisition Costs" section for further discussion of DAC and related third quarter 2004 and 2003 adjustments. Other insurance and operating expenses increased $50.8 million or 11% reflecting increases in distribution costs and non-deferrable expenses related to product management and business reinvestment initiatives. These increases were partially offset by a reductiontax benefit related to thechange in investment managerfinalization of theproprietary mutual funds from IDS Lifeprior year tax return.On September 25, 2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 in which it announced that it intends to
Ameriprise Financial. Effective with this change, the previously existing arrangement under which IDS Life compensated Ameriprise Financial for investment sub-advisory services was terminated. INCOME TAXES IDS Life's effective tax rate rose to 29% in 2004 from 12% in 2003 primarily due to the impact of lower levels of tax-advantaged items in pretax income during 2004, reduced low income housing credits as a result of the December 2003 distribution of substantially all of IDS Life's interests in low income housing investments to Ameriprise Financial and the one-time effect of favorable technical guidance related to the taxation of dividend income recognized in 2003. For 2003 and prior years, IDS Life's federal income taxes were reduced by credits arising from low income housing investments. 25DEFERRED POLICY ACQUISITION COSTS DAC represents 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 and life, DI and LTC insurance products. These costs are deferred to the extent they are recoverable from future profits. For annuity and insurance products, DAC is amortized over periods approximating the lives of the business, generally as a percentage of premiums or estimated gross profits or as a portion of product interest margins depending on the product's characteristics. For IDS Life's annuity and insurance products, the projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, mortality and morbidity rates, persistency, maintenance expense levels and client asset value growth rates for variable products. Management routinely monitors a wide variety of trends in the business, including comparisons of actual and assumed experience. 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. Management reviews and, where appropriate, adjusts its assumptionsissue regulations with respect toclient asset value growth rates on a quarterly basis. Management monitors other principal DAC amortization assumptions, such as interest margin, mortality and morbidity rates, persistency, and maintenance expense level assumptions, each quarter. Unless management identifies a significant deviation over the coursecertain computational aspects of thequarterly monitoring, management reviewsDividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry andupdatesIRS interpretations of the statutes governing theseDAC amortization assumptions annuallycomputational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of thethird quarterpublic will have the opportunity to raise legal and practical questions about the content, scope and application ofeach year. 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 an increase in DAC amortization expense while a decrease in amortization percentage will result in 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 whichsuchchanges are made.regulations. As a result, the ultimate timing and substance ofthese reviews, IDS Life took actionsany such regulations are unknown at this time, but they may result inboth 2005 and 2004 that impactedtheDAC balance and amortization expense. In the third quarter 2005, these actions resulted in a net $67.0 million DAC amortization expense reduction consistingelimination of some or all of thefollowing: o A $31.7 million reduction reflecting changes in previously assumed mortality rates; o A $32.8 million reduction reflecting lower than previously assumed surrender rates and higher associated surrender charges; o A $6.0 million reduction from improved average fee revenues; o A $5.6 million reduction from the extension of the mean reversion period by one year; and o A $9.1 million increase reflecting changes from previously assumed interest rate spreads, modeling changes, account maintenance expenses, and other miscellaneous items. In the third quarter 2004, these actions resulted in a net $23.7 million DAC amortization expense reduction consisting of the following: o A $4.2 million reduction reflecting changes in previously assumed mortality rates; o A $12.7 million reduction reflecting changes from previously assumed surrender and lapse rates; o A $3.3 million reduction from the extension of the mean reversion period by one year; and 26o A $3.5 million reduction reflecting higher than previously assumed interest rate spreads and other miscellaneous items. In the third quarter 2003, these actions resulted in a net $1.8 million DAC amortization expense reduction reflecting: o A $105.4 million reduction resulting from extending 10-15 year amortization periods for certain flex annuity contracts to 20 years based on current measurements of meaningful life; o A $92.0 million increase resulting from the recognition of a premium deficiency on IDS Life's LTC products; and o A $11.6 million net increase across IDS Life's universal life, variable universal life and annuity products, reflecting lower than previously assumed interest rate spreads,separate accountfee rates and account maintenance expense. During the first quarter of 2004 and in conjunction with the adoption of SOP 03-1, IDSDRD tax benefit that RiverSource Life(1) established additional liabilities for insurance benefitsreceives. Management believes thatmay become payable under variable annuity death benefit guarantees or on certain variable universal life and single pay universal life insurance contracts, which prior to January 1, 2004, were expensed when payable; and (2) extended the time periods over which DAC associated with certain insurance and annuity products are amortized to coincide with the liability funding periods in order to establish the proper relationships between these liabilities and DAC associated with the same contracts. As a result, IDS Life recognized a $108.6 million pretax charge due to an accounting change on establishing the future liability under death benefit guarantees and recognized a $65.7 million pretax reduction in DAC amortization expense to reflect the lengthening of the amortization periods for certain products impacted by SOP 03-1. DAC balances for various insurance and annuity products sold by IDS Life at December 31 are set forth below:
(Millions) 2005 2004 ---------------------------------------------------------------------------------------------------Life, disability income and long-term care insurance $ 1,920 $ 1,766 Annuities 2,116 1,872 --------------------------------------------------------------------------------------------------- Total $ 4,036 $ 3,638 ---------------------------------------------------------------------------------------------------In addition to the DAC balances shown above and in conjunction with IDS Life's adoption of SOP 03-1, sales inducement costs previously included in DAC were reclassified from DAC and presented as a separate line item in the consolidated balance sheets. Deferred sales inducement costs were $370 million and $303 million at December 31, 2005 and 2004, respectively. Sales inducement costs consist of bonus interest credits and deposit credits added to certain annuity contract values. These benefits are capitalized to the extent they are incremental to amountsit is likely that any such regulations wouldbe credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. CRITICAL ACCOUNTING POLICIESapply prospectively only.22
Critical Accounting Policies
The accounting and reporting policies that
IDSRiverSource Life uses affect its Consolidated Financial Statements. Certain of RiverSource Life’s accounting and reporting policies are critical to an understanding ofIDS Life'sRiverSource Life’s financial condition and results of operationsand 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 theconsolidated financial statements.Consolidated Financial Statements. The accounting and reporting policiesIDSRiverSource Life has identified as fundamental to a full understanding of its financial condition and results of operationsand financial conditionare described below. See Note12 to the Consolidated Financial Statements for further information aboutIDS Life'sRiverSource Life’s accounting policies.27VALUATION OF INVESTMENTSValuation of Investments
The most significant component of RiverSource Life’s investments is
Available-for-Sale securities. Generally, IDS Life carriesits Available-for-Sale securities, which RiverSource Life generally carries at fair valueon thewithin its Consolidated BalanceSheets andSheets. The fair value ofRiverSource Life’s Available-for-Sale securities at December 31, 2008 was primarily obtained from third-party pricing sources. RiverSource Life records unrealized securities gains (losses) in accumulated other comprehensive income (loss)within equity,, net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expectedimpactsimpact on their carryingvaluevalues had the unrealized securities gains (losses) been realized as of the respective balance sheetdate.dates. At December 31,2005, IDS2008, RiverSource Life had net unrealized pretax losses on Available-for-Sale securities of$63.8 million. IDS$1.4 billion. RiverSource Life recognizes gains and losses in results of operations upon disposition of the securities.IDSRiverSource Life also recognizes losses in results of operations when management determines that a decline in value is other-than-temporary.ThisA write-down for impairment can be recognized for both credit-related events and for change in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery in value cannot be recognized in net income until the principal is returned. The determination of other-than-temporary impairment requires the exercise of judgment regarding the amount and timing of recovery.IndicatorsFactors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporaryimpairment for debt securities include issuer downgrade, default or bankruptcy. IDS Life also considersinclude: 1) the extent to which the market value is below amortizedcost exceeds fair value and the duration of that difference, and management's judgment about the issuer's current and prospective financial condition, as well as itscost; 2) RiverSource Life’s ability and intent to holduntil recovery. The fair valuethe investment for a sufficient period ofapproximately 96%time for it to recover to an amount at least equal to its carrying value; 3) the duration of time in which there has been a significant decline in value; 4) fundamental analysis of theinvestment portfolio classifiedliquidity, business prospects and overall financial condition of the issuer; and 5) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. For structured investments (e.g., mortgage backed securities), RiverSource Life also considers factors such asAvailable-for-Sale asoverall deal structure and its position within the structure, quality ofDecember 31, 2005 is determinedunderlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments, cumulative loss projections and discounted cash flows in assessing potential other-than-temporary impairment of these investments. Based upon these factors, securities that have indicators of potential other-than-temporary impairment are subject to detailed review byquotedmanagement. In response to the marketprices.dislocation in the fourth quarter of 2008 and expectations of continued dislocation in 2009, management increased the discount rate, expected loss and severity rates used to value non-agency residential mortgage backed securities and increased the expected default rates for high yield corporate credits. Securities for which declines are considered temporary continue to be carefully monitored by management. As of December 31,2005, there were $420.9 million2008, RiverSource Life had $1.6 billion in gross unrealized losses that related to$17.9$10.9 billion of Available-for-Sale securities, of which$4.3$4.9 billion has been in a continuous unrealized loss position for 12 months or more. These investment securities had an overall ratio of 87% of fair value to amortized cost at December 31, 2008. As part ofIDS Life'sRiverSource Life’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on these securitiesiswere attributable to changes in interestrates.rates and credit spreads across asset classes. Additionally, becauseIDSRiverSource Life has the ability as well as the intent to hold these securities for a time sufficient to recover itsamortizedcost,IDSRiverSource Life concluded that none of these securitieswaswere other-than-temporarily impaired at December 31,2005. DEFERRED POLICY ACQUISITION COSTS DAC represents the costs of acquiring new business, principally direct sales commissions2008.Deferred Acquisition Costs and
other distribution and underwriting costs that have been deferred on the sale ofDeferred Sales Inducement CostsFor RiverSource Life’s annuity and life,
DI and LTC insurance products. These costs are deferred to the extent they are recoverable from future profits. For annuity and insurance products, DAC is amortized over periods approximating the lives of the business, principally as a percentage of premiums or estimated gross profits or as a portion of product interest margins depending on the product's characteristics. For IDS Life's annuity and life, DIdisability income (“DI”) and LTC insurance products, the DAC and DSIC balances at any reporting date are supported by projections that show that management expects there to be adequate premiums or estimated gross profits after that date to amortize the remaining DAC and DSIC balances. These projections are inherently uncertain because they require 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 forIDS Life'sRiverSource Life’s annuity products are typically 10 to 25 years, while projection periods forIDS Life'sRiverSource Life’s life, DI and LTC insurance products are often 50 years or longer. Management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.23
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are
management'smanagement’s best estimates. 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 the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the 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.28For products with associated DSIC, the same policy applies in calculating the DSIC balance and periodic DSIC amortization. For other life, DI and LTC insurance products, the assumptions made in calculating the 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 management concludes experience will be so adverse that DAC
isare not recoverable. If management concludes that DACisare not recoverable, DACisare reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded inthe Consolidated Statementsconsolidated results ofIncome.operations.For annuity and life, DI and LTC insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and 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 earned and credited interest rates are the primary
factorfactors used to project interest margins, while assumptions aboutrates credited to policyholder accountsequity andequitybond 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. Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance business during the DAC amortization period.The client asset value growth
rate isrates are theraterates at which variable annuity and variable universal life insurance contract values invested in separate accounts are assumed to appreciate in the future. Therate is net of asset fees and anticipates a blend ofrates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on aquarterlyregular basis.IDSRiverSource Life typically uses a mean reversionmethodprocess as amonthlyguideline in setting near-termclientequity assetvaluegrowth rates based on a long-term view of financial market performance as well as recent actualhistoricalperformance.In periods when market performance results in actual contract value growth at a rate that is different than that assumed, IDS Life will reassess the near-term rate in order to continue to project its best estimate of long-term growth.The suggested near-term growth rate is reviewed to ensure consistency withmanagement'smanagement’s assessment of anticipated equity market performance.ManagementIn the fourth quarter of 2008, RiverSource Life decided to constrain near-term equity growth rates below the level suggested by mean reversion. This constraint iscurrently assuming a 7%based on RiverSource Life’s analysis of historical equity returns following downturns in the market. The long-term client asset value growthrate.rates are based on assumed gross annual returns of 9% for equities and 6.5% for fixed income securities. IfIDSRiverSource Life increased or decreased itsassumptionassumptions related tothisthese growthraterates by 100 basis points, the impact onannualthe DACamortization expenseand DSIC balances would beaan increase or decreaseor increaseof approximately$65$30 million.Management monitors other principal DAC and DSIC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, each could impact
IDS Life'sRiverSource Life’s DACbalances. For example, if IDS Life increased or decreased its interest margin on its universal life insuranceandon the fixed portion of its variable universal life insurance products by 10 basis points, the impact on annual DAC amortization expense would be a decrease or increase of approximately $5 million. Additionally, if IDS Life extended or reduced the amortization periods one year for variable annuities to reflect changes in premium paying persistency and/or surrender assumptions, the impact on annual DAC amortization expense would be a decrease or increase of approximately $30 million. The amortization impact of extending or reducing the amortization period any additional years is not linear.DSIC balances.The analysis of DAC and DSIC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless management identifies a significant deviation over the course of the quarterly monitoring, management reviews and updates these DAC and DSIC 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.
RiverSource Life adopted American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts,” (“SOP 05-1”) on January 1, 2007. See Note 2 and Note 3 to the Consolidated Financial Statements for additional information about the effect of RiverSource Life’s adoption of SOP 05-1 and the accounting policies for the amortization and capitalization of DAC. In periods prior to 2007, RiverSource Life’s policy had
24
been to treat certain internal replacement transactions as continuations and to continue amortization of DAC associated with the existing contract against revenues from the new contract. For details regarding the balances of and changes in DAC for the years ended December 31,
2005, 20042008 and2003,2007, see Note46 to the Consolidated Financial Statements.29LIABILITIES FOR FUTURE POLICY BENEFITSLiabilities for Future Policy Benefits and Policy Claims and Other Policyholders’ Funds
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest
and fund performanceless withdrawals andmortality and expense riskvarious charges.The majority of the variable annuity contracts offered by
IDSRiverSource Life containguaranteed minimum death benefit (GMDB)GMDB provisions. When market values of theclient'scustomer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value.IDSRiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contractearnings; theseearnings which are referred to as gain gross-up(GGU)(“GGU”) benefits. In addition,IDSRiverSource Life offers contractscontainingwith guaranteed minimum withdrawal benefit(GMWB), guaranteed minimum income benefit (GMIB),(“GMWB”) and guaranteed minimum accumulation benefit(GMAB)(“GMAB”) provisions and, until May 2007, RiverSource Life offered contracts containing GMIB provisions.Effective January 1, 2004, liabilities for GMDB, GGU and GMIB benefits have been established under SOP 03-1. Actuarial models to simulate various equity market scenarios are used to project these benefits and contract assessments and include making significant assumptions related to client asset value growth rates, mortality, persistency and investment margins. These assumptions, as well as their periodic review by management, are consistent with those used for DAC purposes. Prior to the adoption of SOP 03-1, amounts paid in excess of contract value were expensed. See the "Recently Issued Accounting Standards" section in Note 1 to the Consolidated Financial Statements for more information about these guaranteed benefits. GMWB and GMAB provisions are considered embedded derivatives under Statement of Financial Accounting Standards Board No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and, accordingly, are carried at fair value within future policy benefits for variable annuity guarantees on the Consolidated Balance Sheets. The fair value of these embedded derivatives is based on the present value of future benefits less applicable fees charged for the provision. Changes in fair value are reflected in death and other benefits for investment contracts and universal life-type insurance within the Consolidated Statements of Income. Liabilities for equity indexed deferred annuities issued in 1999 or later are equal to the accumulation of host contract values covering guaranteed benefits and the market value of embedded equity options. Liabilities for equity indexed deferred annuities issued before 1999 are equal to the present value of guaranteed benefits and the intrinsic value of index-based benefits. Accounting for equity indexed deferred annuities issued before 1999 differs from those issued in 1999 and later due to the treatment of embedded equity options within the contracts. Embedded equity options are considered embedded derivatives under SFAS 133. However, SFAS 133 allowed companies to elect whether to separately account for embedded derivatives related to contracts issued prior to January 1, 1999. IDS Life elected not to separately account for embedded derivatives related to contacts issued prior to January 1, 1999. Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2005, depending on year of issue, with an average rate of approximately 6.0%. Life, Disability Income and Long-Term Care Policies Liabilities for life insurance claims that have been reported but have not yet been paid (unpaid claim liabilities) are equal to the death benefits payable under the policies. For DI and LTC claims, unpaid claim liabilities are equal to benefit amounts due and accrued including the expense of reviewing claims and making benefit payment determinations. Liabilities for claims that have occurred but have not yet been reported are estimated based on periodic analysis of the actual lag between when a claim occurs and when it is reported. Where applicable, amounts recoverable from other insurers who share in the risk of the products offered (reinsurers) are separately recorded as receivables. 30Liabilities for fixed and variable universal life insurance are equal to accumulation values which are the cumulative deposits, credited interest, and fund performance less withdrawals and mortality and expense risk charges. Liabilities for future benefits on term and whole life insurance are based on the net level premium method, using anticipated premium payments, mortality rates, policy persistency and interest rates earned on the assets supporting the liability. Anticipated mortality rates are based on established industry mortality tables, with modifications based on IDS Life's experience. Anticipated policy premium payments and persistency rates vary by policy form, issue age and policy duration. Anticipated interest rates range from 4.0% to 10.0% at December 31, 2005, depending on policy form, issue year and policy duration. IDS Life issues only non-participating life insurance policies, which do not pay dividends to policyholders from the insurers' earnings. Liabilities for future policy benefits include both policy reserves and claim reserves on DI and LTC products. Policy reserves are the amounts needed to meet obligations for future claims and are based on the net level premium method, using anticipated premium payments and morbidity, mortality, policy persistency and discount rates. Anticipated morbidity and mortality rates are based on established industry morbidity and mortality tables. Anticipated policy persistency rates vary by policy form, issue age, policy duration and, for DI policies, occupation class. Anticipated interest rates for DI policy reserves are 7.5% at policy issue and grade to 5.0% over 5 years. Anticipated interest rates for LTC care policy reserves were 5.3% at December 31, 2005 grading up to 9.4% over 40 years. Claim reserves on DI and LTC products are the amounts needed to meet obligations for continuing claim payments on already incurred claims. Claim reserves are calculated based on claim continuance tables which estimate the likelihood that an individual will continue to be eligible for benefits and anticipated interest rates earned on assets supporting the reserves. Anticipated claim continuance rates are based on established industry tables. Anticipated interest rates for claim reserves for both DI and LTC range from 3.0% to 8.0% at December 31, 2005, with an average rate of approximately 4.9% at December 31, 2005. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The fair value of IDS Life's derivative financial instruments are determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. IDS Life currently designates derivatives as cash flow hedges or, in certain circumstances, does not designate derivatives as accounting hedges. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transactions impact earnings. Any ineffective portion of the gain or loss is also reported currently in earnings as a component of net investment income. For derivative financial instruments that do not qualify for hedge accounting, or are not designated as hedges, changes in fair value are reported in current period earnings, generally as a component of net investment income. These derivatives primarily provide economic hedges to equity market exposures. An example includes options and futures that economically hedge the equity components of certain annuities. For further details on the types of derivatives IDS Life uses and how it accounted for them, see Note 10 to the Consolidated Financial Statements. 31INCOME TAX ACCOUNTING Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of income taxes that IDS Life expects to pay to or receive from various taxing jurisdictions in connection with its operations. IDS Life provides for income taxes based on amounts that it believes it 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 differs from IDS Life's estimates, it may be required to significantly change the provision for income taxes recorded in its Consolidated Financial Statements. In connection with the provision for income taxes, the 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 IDS Life's deferred tax assets is a significant deferred tax asset relating to capital losses realized for tax return purposes and 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. IDS Life will not be able to file a consolidated U.S. federal income tax return with the other members of the Ameriprise Financial affiliated group for five tax years following the Distribution, 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. This lack of consolidation could affect IDS Life's ability to fully realize certain deferred tax assets, including the capital losses referred to above. IDS Life is required to establish a valuation allowance for any portion of deferred tax assets that management believes will not be realized. It is likely that management will need to identify and implement appropriate planning strategies to ensure its ability to realize deferred tax assets relating to capital losses and avoid the establishment of a valuation allowance with respect to it. In the opinion of management, it is currently more likely than not that IDS Life will realize the benefit of deferred tax assets, including capital loss deferred tax assets, and, therefore, no such valuation allowance has been established. RECENT ACCOUNTING PRONOUNCEMENTS For information regarding recent accounting pronouncements and their expected impact on future consolidated results of operations or financial condition, see Note 1 to the Consolidated Financial Statements. FINANCIAL CONDITION IDS Life's total assets and liabilities increased in 2005 primarily due to higher separate account assets and liabilities, which increased as a result of net client inflows and market appreciation. Investments primarily include corporate debt securities and mortgage and other asset-backed securities. At December 31, 2005, IDS Life's 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 $4.0 billion and $4.3 billion of mortgage loans on real estate, policy loans and other investments at December 31, 2005 and 2004, respectively. Investments are principally funded by sales of insurance and annuities and by reinvested income. Maturities of these investment securities are largely matched with the expected future payments of insurance and annuity obligations. Investments include $2.1 billion and $2.2 billion of below investment grade securities (excluding net unrealized appreciation and depreciation) at December 31, 2005 and 2004, respectively. These investments represent 7% and 8% of IDS Life's investment portfolio at December 31, 2005 and 2004, respectively. 32Separate account assets represent funds held for the exclusive benefit of variable annuity contractholders and variable life insurance policyholders. These assets are generally carried at market value, and separate account liabilities are equal to separate account assets. IDS Life earns administration and other fees from the related accounts. The increase in separate account assets and liabilities to $37.9 billion as of December 31, 2005 compared to $32.5 billion as of December 31, 2004, resulted from net inflows of $3.1 billion and market appreciation. IDS Life holds reserves for current and future obligations that are related to fixed annuities, certain guaranteed payments under variable annuities and life, DI and LTC insurance. Reserves related to fixed annuities, guarantees under variable annuities and life, DI and LTC insurance are reflected in future policy benefits in the Consolidated Balance Sheets. Reserves for fixed annuities and universal life contracts are equal to the underlying contract accumulation values. Reserves for other life, DI and LTC insurance products are based on various assumptions, including mortality rates, morbidity rates and policy persistency. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRATEGY The liquidity requirements of IDS Life are generally met by funds provided by investment income, maturities and periodic repayments of investments, deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial. The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. IDS Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations. In connection with the separation, IDS Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs. During the fourth quarter of 2005, IDS Life approved and paid dividends to Ameriprise Financial of $380 million. During the second and fourth quarter of 2004, IDS Life approved and paid dividends to Ameriprise Financial of $430 million and $500 million, respectively. IDS Life expects to continue to maintain adequate capital to meet internal and external RBC requirements. FUNDING STRATEGY At December 31, 2005 and 2004, IDS Life had outstanding reverse repurchase agreements totaling $25.0 million and $47.0 million, respectively. The reverse repurchase agreements are used strictly as short-term sources of funds. CONTRACTUAL COMMITMENTS The contractual obligations identified in the table below include balance sheet transactions that represent material expected or contractually committed future obligations of IDS Life. Payments due by period as of December 31, 2005 are as follows:
Payments due in year ending - ---------------------------------------------------------------------------------------------------------------------------------- (Millions) Total 2006 2007- 2009- 2011 and 2008 2010 thereafter - ----------------------------------------------------------------------------------------------------------------------------------Insurance and annuities (1) $ 53,467 $ 3,715 $ 7,264 $ 6,859 $ 35,629 - ----------------------------------------------------------------------------------------------------------------------------------(1) These scheduled payments are represented by reserves of approximately $32 billion at December 31, 2005 and are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions. Actual payment obligations may differ if experience varies from these assumptions. Separate account liabilities have been excluded as associated contractual obligations would be met by separate account assets.33OFF-BALANCE SHEET ARRANGEMENTS Consolidated Variable Interest Entities Assets consolidated as a result of the December 31, 2003 adoption of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities," as revised (FIN 46) were $907 million. The consolidated assets consisted of $834 million of cash and $73 million of derivatives, essentially all of which were restricted. The effect of consolidating these assets on IDS Life's balance sheet was offset by IDS Life's previously recorded carrying values of its investment in such structures, which totaled $673 million, and $166 million of newly consolidated liabilities. The consolidation of FIN 46-related entities resulted in a cumulative effect of accounting change that increased 2003 net income through a non-cash gain of $44.5 million ($68.4 million pretax) related to the consolidation of three SLTs. The initial gain related to the application of FIN 46 for the SLTs had no cash flow effect on IDS Life. One SLT was liquidated in 2004, resulting in a cumulative net pretax charge of $24.2 million during the year ended December 31, 2004 and the other two SLTs were liquidated in 2004 and 2005 resulting in a $3.7 million pretax charge in 2004 and a $13.9 million pretax gain in 2005. There is no remaining exposure related to these SLTs as of December 31, 2005. Retained Interest in Assets Transferred to Unconsolidated Entities In 2001, IDS Life placed a majority of its rated CDO securities and related accrued interest, as well as a relatively minor amount of other liquid securities, having an aggregate book value of $675.3 million, into a securitization trust. In return, IDS Life received $89.5 million in cash (excluding transaction expenses) relating to sales to unaffiliated investors and retained interests with allocated book amounts aggregating $585.8 million. During the second quarter of 2005, IDS Life sold all of its retained interest in the CDO-related securitization trust and realized a net pretax gain of $24.9 million. The carrying value of this retained interest was $526.2 million at December 31, 2004, of which $389.9 million was considered investment grade. CONTINGENT LIQUIDITY PLANNING Ameriprise Financial has developed a contingent funding plan that enables IDS Life to meet client obligations during periods in which its clients elect to withdraw funds from their annuity and insurance contracts. Ameriprise Financial designed this plan to allow IDS Life to meet these client withdrawals by selling or obtaining financing, through repurchase agreements, of portions of its investment securities portfolio. RISK MANAGEMENT In accordance with regulatory investment guidelines, IDS Life Insurance Company and its subsidiaries, through their respective boards of directors or board of directors' investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures, and their effect on profitability. They also review the distribution of assets in the portfolio by type and credit risk sector. The objective is to structure the investment securities portfolio in the general account to meet contractual obligations under the insurance and annuity products and achieve targeted levels of profitability within defined risk parameters. IDS Life has developed an asset/liability management approach with separate investment objectives to support specific product liabilities, such as insurance and annuities. As part of this approach, IDS Life develops specific investment guidelines that are designed to optimize trade offs between risk and return and help ensure IDS Life is able to support future benefit payments under its insurance and annuity obligations. These same objectives must be consistent with management's overall investment objectives for the general account investment portfolio. 34IDS Life's owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to provide clients with a competitive rate of return on their investments while controlling risk. Investment in fixed maturity securities is designed to provide IDS Life with a targeted margin between the yield earned on investments and the interest rate credited to clients' accounts. IDS Life does not trade in securities to generate short-term profits for its own account. As part of IDS Life's investment process, management, with the assistance of its investment advisors, conducts a quarterly review of investment performance. The review process conducted by IDS Life's Investment Committee involves the review of certain invested assets which the committee evaluates to determine whether or not any investments are other-than-temporarily impaired and/or which specific interest earning investments should be put on an interest non-accrual basis. IDS Life has two principal components of market risk: interest rate risk and equity market risk. Interest rate risk results from investing in assets that are somewhat longer and reset less frequently than the liabilities they support. IDS Life manages interest rate risk through the use of a variety of tools that include modifying the maturities of investments supporting its fixed annuities and insurance products. Additionally, IDS Life enters 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 its investment activities are impacted by the value of its managed equity-based portfolios, from time to time IDS Life enters into risk management strategies that may include the use of equity derivative financial instruments, such as equity options, to mitigate its exposure to volatility in the equity markets. INTEREST RATE RISK Interest rate exposures arise primarily with respect to the fixed account portion of IDS Life's annuity and insurance products and its 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 surrender or other benefit payments from fixed annuity and insurance products. Therefore, IDS Life's interest spread margins are affected by changes in the general level of interest rates. The extent to which the level of interest 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. IDS Life has entered into swaptions or other interest 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 IDS Life 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 in the event that interest rates decline. The total notional of derivatives outstanding under this risk management strategy was $1.2 billion as of December 31, 2005 and 2004. The total fair value of these derivative financial instruments was $8.4 million and $27.3 million as of December 31, 2005 and 2004, respectively. IDS Life recognized $1.8 million of losses in the Consolidated Statements of Income for the year ended December 31, 2005. No losses were recognized for the years ended December 31, 2004 and 2003, respectively. No cash was paid for the years ended December 31, 2005 and 2004. Total cash paid was $71.8 million for the year ended December 31, 2003. The negative effect on IDS Life's 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 for years ended December 31, 2005 and 2004 would be approximately $27.4 million and $15.5 million, respectively. 35EQUITY MARKET RISK IDS Life has three primary exposures to the general level of equity markets. One exposure is that IDS Life earns fees from variable annuity and variable life insurance products. 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 IDS Life's fee revenues to the general performance of equity markets, IDS Life 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. The second exposure is the equity risk related to certain annuity products that pay interest based upon the relative change in the S&P 500 index. IDS Life enters 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 contractholder. Finally, although IDS Life currently bears all risk related to GMDB, GMIB and GMAB, IDS Life hedges its GMWB risk using structured option contracts which are designed to mitigate economic risk and its exposure to income statement 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 GMWB guarantees that over a period no shorter than 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, IDS Life may pursue a portfolio of equity future contracts constructed to offset a portion of the changes in the option mark-to-market. For all of IDS Life's economic equity risk hedges, the total notional of derivatives outstanding under this risk management strategy was $854.1 million and $261.0 million as of December 31, 2005 and 2004, respectively. The total net fair value of these derivative financial instruments was $123.8 million and $26.9 million as of December 31, 2005 and 2004, respectively. The total amounts recognized in the Consolidated Statements of Income for these contracts were $9.1 million, $4.0 million and $7.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Cash (paid)/received related to these derivative financial instruments totaled $(87.8) million, $4.4 million and $(3.1) million for the years ended December 31, 2005, 2004 and 2003, respectively. The negative effect on IDS Life's pretax earnings of a 10% decline in equity markets would be approximately $51.3 million and $38.8 million based on annuity and insurance business in force and index options as of December 31, 2005 and 2004, respectively. IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS As described previously, various aspects of IDS Life's business are impacted by equity market levels and other market-based events. Several areas in particular involve DAC and deferred sales inducements, recognition of GMDB, GMWB, GMIB and GMAB, asset management fees, and mortality and expense risk and other fees. The direction and magnitude of the changes in equity markets can increase or decrease amortization of DAC and deferred sales inducement costs, incurred amounts under GMDB, GMWB, GMIB and GMAB and asset management fees and mortality and expense risk and other fees and correspondingly affect results of operations in any particular period. 36FORWARD-LOOKING STATEMENTS This report includes forward-looking statements, which are subject to risks and uncertainties. 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. 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. IDS Life undertakes no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: the success, timeliness and financial impact (including the amount of intercompany costs allocated to IDS Life, cost savings and other benefits including increased revenues), both in the short-term and over time, of reengineering initiatives being implemented or considered by Ameriprise Financial that could impact IDS Life, including cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation and outsourcing (including, among others, technologies operations); the ability to control and manage operating infrastructure, advertising and promotion expenses as business expands or changes; a downturn in IDS Life's businesses and/or negative changes in IDS Life's credit or financial strength ratings, which could result in decreased liquidity, negative impact on marketing and sale of products, and higher borrowing costs; IDS Life's ability to improve investment performance, including attracting and retaining high-quality personnel, and reduce outflows of invested funds; IDS Life's ability to develop and introduce new and attractive products to clients in a timely manner and effectively manage the economics in selling a growing volume of non-proprietary mutual funds and other retail financial products to clients; fluctuation in the equity and fixed income markets, which can affect the amount and types of investment products sold by IDS Life, and other fees received based on the value of those assets; IDS Life's ability to recover DAC, as well as the timing of such DAC amortization, in connection with the sale of annuity and insurance products; the level of GMDB or living benefits paid to clients; changes in assumptions relating to DAC, which could impact the amount of DAC amortization; IDS Life's ability to avoid deterioration in its high-yield portfolio in order to mitigate losses in its investment portfolio; fluctuations in interest rates, which impact IDS Life's borrowing costs, return on lending products and spreads in the insurance and annuity products; accuracy of estimates for the fair value of the assets in IDS Life's investment portfolio and, in particular, those investments that are not readily marketable; the potential negative effect on IDS Life's businesses and infrastructure, including information technology, of terrorist attacks, disasters or other catastrophic events in the future; changes in laws or government regulations, including changes in tax laws or regulations that could result in the elimination of certain tax benefits; outcomes and costs associated with litigation and compliance and regulatory matters; successfully cross-selling insurance and annuity products and services to Ameriprise Financial's customer base; lower than anticipated spreads in the insurance and annuity business; the type and the value of certain benefit features on variable annuity contracts; the affect of assessments and other surcharges for guaranty funds; the response of reinsurance companies under reinsurance contracts; the impact of the separation of Ameriprise Financial from American Express; the impact of reinsurance rates and the availability and adequacy of reinsurance; and competitive pressures in IDS Life's business. See "Item 1A-Risk Factors" for further discussion of risks. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Items required under this section are included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1. Financial Statements. See Index to Financial Statements at page F-1 hereof. 37ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE IDS Life's Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003 have been audited by Ernst & Young LLP, IDS Life's independent registered public accounting firm. Through 2004, Ernst & Young LLP provided audit services to IDS Life as part of the audit services it provided to American Express. In 2004, the Audit Committee of American Express' Board of Directors determined to request proposals from auditing firms for their 2005 audit. This request was made pursuant to the American Express Audit Committee charter, which requires a detailed review of the outside audit firm at least every ten years. At a meeting held on November 22, 2004, the American Express Audit Committee approved the future engagement of PricewaterhouseCoopers LLP as independent registered public accountants for the fiscal year ending December 31, 2005 and dismissed Ernst & Young LLP for the 2005 fiscal year. This decision also applied to IDS Life. Ernst & Young LLP continued as auditors of American Express and IDS Life for the year ended December 31, 2004. Ernst & Young LLP's reports on IDS Life's Consolidated Financial Statements for the fiscal years ended December 31, 2004 and 2003, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of IDS Life's Consolidated Financial Statements for each of the two fiscal years ended December 31, 2004 and 2003, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. During the two most recent fiscal years and subsequent interim period proceeding the dismissal of Ernst & Young LLP, there were no "reportable events" (as defined in Regulation S-K, Item 304(a)(1)(v)). In connection with the Separation and Distribution from American Express, on February 18, 2005, the Audit Committee of the Board of Directors of American Express dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP to be the independent registered public accountants of IDS Life for the year ended December 31, 2005. PricewaterhouseCoopers LLP continues as the independent registered public accountants for the Consolidated Financial Statements of American Express for the 2005 fiscal year. PricewaterhouseCoopers LLP did not issue any report on IDS Life's Consolidated Financial Statements for either of the past two years. During the period from November 22, 2004 and through February 18, 2005, there were no disagreements between IDS Life and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference to the matter in their report. There have been no "reportable events," as defined in Item 304(a)(1)(v) of Regulation S-K, during the period between November 22, 2004 to February 18, 2005. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES IDS Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission, including controls and procedures designed to ensure that this information is accumulated and communicated to IDS Life's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, IDS Life's disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. 38IDS Life's management, with the participation of IDS Life's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of IDS Life's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, IDS Life's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, IDS Life's disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2005. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING American Express has historically provided a variety of corporate and other support services for IDS Life, including information technology, treasury, accounting, financial reporting, tax administration, human resources, marketing, legal, procurement and other services. American Express will continue to provide IDS Life with many of these services pursuant to a transition services agreement for a transition period of up to two years following the Distribution. IDS Life is now relying upon American Express as a third party to perform these services, many of which may impact its financial reporting processes. During this transition there have been some changes in personnel and in relative responsibility for oversight of the processes. IDS Life considers this a material change in internal control over financial reporting. Other than the changes mentioned above, no other changes in IDS Life's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates have materially affected, or are reasonably likely to materially affect, IDS Life's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item omitted pursuant to General Instructions I(2)(c) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Item omitted pursuant to General Instructions I(2)(c) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Item omitted pursuant to General Instructions I(2)(c) of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item omitted pursuant to General Instructions I(2)(c) of Form 10-K. 39PART III -------- ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The Audit Committee of the Board of Directors of American Express has appointed Ernst & Young LLP (Ernst & Young) as independent auditors to audit the Consolidated Financial Statements of IDS Life for the years ended December 31, 2005 and 2004. FEES PAID TO THE REGISTRANT'S INDEPENDENT AUDITOR The following table presents fees for professional services rendered by Ernst & Young for the audit of IDS Life's financial statements for the years ended December 31, 2005 and 2004 and other fees billed for other services rendered by Ernst & Young during those periods.
Thousands 2005 2004 - ---------------------------------------------------------------------------------------------------------------Audit Fees (1) $ 1,423 $ 1,434 Tax Fees (2) - - All Other Fees (3) - - - --------------------------------------------------------------------------------------------------------------- Total $ 1,423 $ 1,434 ===============================================================================================================(1) Audit fees included audit work performed in the review and preparation of the financial statements, as well as, services that generally only the independent auditor can be expected to provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Securities and Exchange Commission. (2) Tax fees included all services performed by the independent auditor's tax personnel. (3) All other fees included miscellaneous out-of-pocket expenses.POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY INDEPENDENT AUDITOR Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of Ernst & Young are subject to the specific pre-approval of the Audit Committee of Ameriprise Financial. All audit and permitted non-audit services to be performed by Ernst & Young for IDS Life require pre-approval by the Audit Committee of Ameriprise Financial in accordance with pre-approval procedures established by the Audit Committee of Ameriprise Financial. The procedures require all proposed engagements of Ernst & Young for services to IDS Life of any kind to be directed to the General Auditor of Ameriprise Financial, and then submitted for approval to the Audit Committee of Ameriprise Financial prior to the beginning of any services. In 2005, 100% of the services provided by Ernst & Young for IDS Life were pre-approved by the Audit Committee of American Express prior to the Distribution and, thereafter, by the Audit Committee of Ameriprise Financial. 40PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements See Index to Financial Statements on page F-1 hereof. (2) Financial Statement Schedules See Index to Financial Statements on page F-1 hereof. All information on schedules to the Consolidated Financial Statements required by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated Financial Statements or is not required. Therefore, all schedules have been omitted. (3) Exhibits See Exhibit Index on pages E-1 through E-3 hereof. 41SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDS LIFE INSURANCE COMPANY Registrant March 9, 2006 By /s/ Mark E. Schwarzmann - ------------- ------------------------------------------ Date Mark E. Schwarzmann, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 9, 2006 /s/ Gumer C. Alvero - ------------- --------------------------------------------- Date Gumer C. Alvero, Director and Executive Vice President - Annuities March 9, 2006 /s/ Timothy V. Bechtold - ------------- --------------------------------------------- Date Timothy V. Bechtold, Director and President March 9, 2006 /s/ Arthur H. Berman - ------------- --------------------------------------------- Date Arthur H. Berman, Director March 9, 2006 /s/ Brian J. McGrane - ------------- --------------------------------------------- Date Brian J. McGrane, Director, Executive Vice President and Chief Financial Officer March 9, 2006 /s/ David K. Stewart - ------------- --------------------------------------------- Date David K. Stewart, Vice President and Controller March 9, 2006 /s/ Kevin E. Palmer - ------------- --------------------------------------------- Date Kevin E. Palmer, Director, Vice President and Chief Actuary March 9, 2006 /s/ Mark E. Schwarzmann - ------------- --------------------------------------------- Date Mark E. Schwarzmann, Director, Chairman of the Board and Chief Executive Officer 42
IDS LIFE INSURANCE COMPANY INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 14 (a))Page NumberCONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at December 31, 2005 and 2004 F-3 Consolidated Statements of Income for each of the three years ended December 31, 2005, 2004 and 2003 F-4 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005, 2004 and 2003 F-5 to F-6 Consolidated Statements of Stockholder's Equity for each of the three years ended December 31, 2005, 2004 and 2003 F-7 Notes to Consolidated Financial Statements F-8 to F-38SCHEDULES: All information on schedules to the Consolidated Financial Statements required by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated Financial Statements and notes thereto or is not required. Therefore, all schedules have been omitted. F-1Report of Independent Registered Public Accounting Firm The Board of Directors IDS Life Insurance Company We have audited the accompanying Consolidated Balance Sheets of IDS Life Insurance Company (a wholly-owned subsidiary of Ameriprise Financial, Inc.) as of December 31, 2005 and 2004, and the related Consolidated Statements of Income, Stockholder's Equity, and Cash Flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of IDS Life Insurance Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IDS Life Insurance Company at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, in 2004 IDS Life Insurance Company adopted the provisions of the American Institute of Certified Public Accountants' Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" and in 2003 adopted the provisions of Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities." /s/ Ernst & Young LLP Minneapolis, Minnesota February 27, 2006 F-2
IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS December 31, (Thousands, except share data)2005 2004 ------------------ -----------------ASSETS Investments: Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2005, $27,817,021; 2004, $27,400,640) $ 27,753,174 $ 28,131,195 Preferred and common stocks, at fair value (cost: 2005, $13; 2004, $30,019) 21 31,256 Mortgage loans on real estate, at cost (less allowance for loan losses: 2005, $41,347; 2004, $45,347) 2,842,362 2,923,542 Policy loans 605,212 588,574 Trading securities and other investments 547,668 802,096 ------------------ ----------------- Total investments 31,748,437 32,476,663 Cash and cash equivalents 233,589 131,427 Restricted cash - 535,821 Reinsurance recoverables 982,521 876,408 Amounts due from brokers 4,166 7,109 Other accounts receivable 62,930 52,527 Accrued investment income 328,567 351,522 Deferred policy acquisition costs 4,035,879 3,637,956 Deferred sales inducement costs 370,166 302,997 Other assets 220,371 186,003 Separate account assets 37,929,960 32,454,032 ------------------ ----------------- Total assets $ 75,916,586 $ 71,012,465 ================== ================= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits: Fixed annuities $ 26,126,068 $ 26,978,596 Variable annuity guarantees 29,550 32,955 Universal life insurance 3,711,628 3,689,639 Traditional life insurance 298,479 271,516 Disability income and long-term care insurance 2,145,969 1,942,656 Policy claims and other policyholders' funds 90,233 69,884 Amounts due to brokers 31,772 162,609 Deferred income taxes, net 9,099 141,202 Other liabilities 381,938 363,821 Separate account liabilities 37,929,960 32,454,032 ------------------ ----------------- Total liabilities 70,754,696 66,106,910 ------------------ ----------------- Stockholder's equity: Capital stock, $30 par value; 100,000 shares authorized, issued and outstanding 3,000 3,000 Additional paid-in capital 2,020,388 1,370,388 Retained earnings 3,269,206 3,190,474 Accumulated other comprehensive (loss) income, net of tax: Net unrealized securities (losses) gains (90,632) 370,615 Net unrealized derivative losses (40,072) (28,922) ------------------ ----------------- Total accumulated other comprehensive (loss) income (130,704) 341,693 ------------------ ------------------ Total stockholder's equity 5,161,890 4,905,555 ------------------ ----------------- Total liabilities and stockholder's equity $ 75,916,586 $ 71,012,465 ================== ================= See Notes to Consolidated Financial Statements.F-3
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, (Thousands)2005 2004 2003 ------------------- -------------------- -------------------REVENUES Premiums: Traditional life insurance $ 74,751 $ 68,335 $ 64,890 Disability income and long-term care insurance 295,084 283,608 284,111 ------------------- -------------------- ------------------- Total premiums 369,835 351,943 349,001 Net investment income 1,791,324 1,777,446 1,705,185 Contractholder and policyholder charges 577,159 554,344 530,190 Mortality and expense risk and other fees 488,633 430,320 390,516 Net realized gain on investments 48,296 27,292 4,445 ------------------- -------------------- ------------------- Total revenues 3,275,247 3,141,345 2,979,337 ------------------- -------------------- ------------------- BENEFITS AND EXPENSES Death and other benefits: Traditional life insurance 41,550 36,843 38,870 Investment contracts and universal life-type insurance 232,816 227,664 209,065 Disability income and long-term care insurance 75,864 67,261 57,339 Increase (decrease) in liabilities for future policy benefits: Traditional life insurance 4,638 1,381 (2,401) Disability income and long-term care insurance 141,286 123,289 142,532 Interest credited to account values 1,110,425 1,127,875 1,242,020 Amortization of deferred policy acquisition costs 315,882 260,778 264,308 Separation costs 121,264 - - Other insurance and operating expenses 591,133 503,872 453,065 ------------------- -------------------- ------------------- Total benefits and expenses 2,634,858 2,348,963 2,404,798 ------------------- -------------------- ------------------- Income before income tax provision and accounting change 640,389 792,382 574,539 Income tax provision 181,657 226,177 66,945 ------------------- -------------------- ------------------- Income before accounting change 458,732 566,205 507,594 Cumulative effect of accounting change, net of tax - (70,568) 44,463 ------------------- -------------------- ------------------- Net income $ 458,732 $ 495,637 $ 552,057 =================== ==================== =================== See Notes to Consolidated Financial Statements.F-4
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, (Thousands)2005 2004 2003 --------------- ---------------- ---------------CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 458,732 $ 495,637 $ 552,057 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of accounting change, net of tax - 70,568 (44,463) Amortization of deferred policy acquisition costs 315,882 260,778 264,308 Amortization of deferred sales inducement costs 40,332 33,825 23,968 Capitalization of deferred policy acquisition costs (632,743) (533,842) (516,928) Capitalization of deferred sales inducement costs (94,319) (70,860) (71,839) Amortization of premium, net 83,152 92,617 160,862 Deferred income taxes 122,264 70,574 (30,714) Policyholder and contractholder charges, non-cash (231,503) (231,611) (234,098) Net realized gain on investments (48,296) (27,292) (4,445) Net realized gain on trading securities and equity method investments in hedge funds (24,037) (37,460) (30,400) Change in operating assets and liabilities: Trading securities and equity method investments in hedge funds, net 246,828 6,788 (358,200) Future policy benefits for traditional life, disability income and long-term care insurance 230,276 235,327 265,233 Policy claims and other policyholders' funds 20,349 1,973 (17,489) Policy loans, excluding universal life-type insurance: Repayment 35,996 37,592 43,596 Issuance (38,688) (39,230) (34,490) Reinsurance recoverables (106,113) (121,894) (121,004) Other accounts receivable (10,403) 15,895 (12,177) Accrued investment income 22,955 3,852 (64,359) Other assets and liabilities, net 38,782 (12,765) (130,066) --------------- ---------------- --------------- Net cash provided by (used in) operating activities $ 429,446 $ 250,472 $ (360,648) --------------- ---------------- ---------------See Notes to Consolidated Financial Statements. F-5IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years ended December 31, (Thousands) 2005 2004 2003 --------------- ----------------- -----------------CASH FLOWS FROM INVESTING ACTIVITIES Available-for-Sale securities: Sales $ 3,124,154 $ 1,603,285 $ 12,232,235 Maturities, sinking fund payments and calls 2,241,829 1,931,070 4,152,088 Purchases (5,780,183) (4,392,522) (20,527,995) Other investments, excluding policy loans: Sales, maturities, sinking fund payments and calls 652,831 690,333 621,163 Purchases (542,610) (402,235) (438,336) Change in amounts due to and from brokers, net (127,894) (71,415) (3,261,601) Change in restricted cash 535,821 298,627 - --------------- ----------------- ----------------- Net cash provided by (used in) investing activities 103,948 (342,857) (7,222,446) --------------- ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Activity related to investment contracts and universal life-type insurance: Considerations received 1,532,282 2,350,426 4,267,115 Interest credited to account values 1,110,425 1,127,875 1,242,020 Surrenders and other benefits (3,329,993) (2,715,847) (2,235,889) Universal life-type insurance policy loans: Repayment 89,322 84,281 85,760 Issuance (103,268) (93,217) (81,740) Capital contribution from Ameriprise Financial, Inc. 650,000 - 282,061 Cash dividend to Ameriprise Financial, Inc. (380,000) (930,000) - --------------- ----------------- ----------------- Net cash (used in) provided by financing activities (431,232) (176,482) 3,559,327 --------------- ----------------- ----------------- Net increase (decrease) in cash and cash equivalents 102,162 (268,867) (4,023,767) Cash and cash equivalents at beginning of year 131,427 400,294 4,424,061 --------------- ----------------- ----------------- Cash and cash equivalents at end of year $ 233,589 $ 131,427 $ 400,294 =============== ================= ================= Supplemental disclosures: Income taxes paid $ 95,794 $ 196,397 $ 103,034 Interest paid on borrowings $ 364 $ 411 $ 2,926 Non-cash ownership transfer of net assets of American Express Corporation to Ameriprise Financial, Inc. in 2003 $ - $ - $ 282,061 See Notes to Consolidated Financial Statements.F-6
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the three years ended December 31, 2005 (Thousands)Accumulated Additional Other Capital Paid-in Retained Comprehensive Total Stock Capital Earnings Income (Loss) - ------------------------------------------------------------------------------------------------------------------------------------Balances at December 31, 2002 $ 4,944,251 $ 3,000 $ 1,088,327 $ 3,354,841 $ 498,083 Comprehensive income: Net income 552,057 552,057 Change in unrealized holding losses on securities, net (90,695) (90,695) Change in unrealized derivative losses, net (7,777) (7,777) ---------------- Total comprehensive income 453,585 Capital contribution 282,061 282,061 Non-cash dividend of American Express Corporation to Ameriprise Financial, Inc. (282,061) (282,061) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2003 $ 5,397,836 $ 3,000 $ 1,370,388 $ 3,624,837 $ 399,611 Comprehensive income: Net income 495,637 495,637 Change in unrealized holding losses on securities, net (34,841) (34,841) Change in unrealized derivative losses, net (23,077) (23,077) ---------------- Total comprehensive income 437,719 Cash dividends to Ameriprise Financial, Inc. (930,000) (930,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2004 $ 4,905,555 $ 3,000 $ 1,370,388 $ 3,190,474 $ 341,693 Comprehensive loss: Net income 458,732 458,732 Change in unrealized holding losses on securities, net (461,247) (461,247) Change in unrealized derivative losses, net (11,150) (11,150) ---------------- Total comprehensive loss (13,665) Capital contribution from Ameriprise Financial, Inc. 650,000 650,000 Cash dividend to Ameriprise Financial, Inc. (380,000) (380,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2005 $ 5,161,890 $ 3,000 $ 2,020,388 $ 3,269,206 $ (130,704) ==================================================================================================================================== See Notes to Consolidated Financial Statements.F-7IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business, Basis of Presentation and Summary of Significant -------------------------------------------------------------------- Accounting Policies ------------------- Nature of Business IDS Life Insurance Company is a stock life insurance company with four wholly-owned operating subsidiaries: IDS Life Insurance Company of New York, American Partners Life Insurance Company, American Enterprise Life Insurance Company and American Centurion Life Assurance Company. IDS Life Insurance Company is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). o IDS Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. IDS Life Insurance Company issues insurance and annuity products. o American Enterprise Life Insurance Company (American Enterprise Life) is a stock life insurance company domiciled in Indiana, which holds Certificates of Authority in the District of Columbia and all states except New York. American Enterprise Life issues fixed and variable annuity contracts primarily through regional and national financial institutions and regional and/or independent broker-dealers. (In past years, American Enterprise Life issued a nominal number of variable universal life contracts.) o American Partners Life Insurance Company (American Partners Life) is a stock life insurance company domiciled in Arizona, which holds Certificates of Authority in the District of Columbia and all states except New York and New Hampshire. American Partners Life markets annuity products directly to customers, generally persons holding an American Express(R) Card. o IDS Life Insurance Company of New York (IDS Life of New York) is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York and North Dakota. IDS Life of New York issues insurance and annuity products. o American Centurion Life Assurance Company (American Centurion Life) is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, Alabama and Delaware. American Centurion Life issues fixed and variable annuity contracts primarily through financial institutions and independent broker-dealers. American Centurion Life also markets annuity products directly, generally to persons holding an American Express(R) Card. IDS Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estate investments. IDS Life Insurance Company and its seven subsidiaries are referred to collectively in this Form 10-K as "IDS Life". F-8IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to August 1, 2005, Ameriprise Financial was referred to as American Express Financial Corporation. On February 1, 2005 American Express Company (American Express) announced its intention to pursue the disposition of 100% of its shareholding in what is now Ameriprise Financial (the Separation) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and distribution of common shares to American Express shareholders (the Distribution). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the separation of its business and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. IDS Life was allocated certain separation and Distribution-related expenses incurred as a result of Ameriprise Financial becoming an independent company. Cumulatively, the expenses incurred and allocated to IDS Life are significant to IDS Life. IDS Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs. IDS Life's principal products are deferred annuities and universal life insurance which are issued primarily to individuals. It offers single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. IDS Life's fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, IDS Life has the option of paying a higher rate set at its discretion. In addition, persons owning one type of annuity may have their interest calculated based on an increase in a broad-based stock market index. IDS Life also offers variable annuities, including the RiverSource Retirement Advisor Advantage Plus(SM) Variable Annuity and the RiverSource Retirement Advisor Select Plus(SM) Variable Annuity. Life insurance products currently offered by IDS Life include universal life (fixed and variable, single life and joint life), single premium life, whole life and term products. Waiver of premium and accidental death benefit riders are generally available with these life insurance products. IDS Life also markets disability income (DI) insurance. Although IDS Life discontinued issuance of long-term care (LTC) insurance at the end of 2002, IDS Life retains risk on a large block of existing contracts, 50% of which are reinsured. In May 2003, IDS Life began outsourcing claims administration. Under IDS Life's variable life insurance and variable annuity products described above, the purchaser may choose among investment options that include IDS Life's "general account" as well as from a variety of portfolios including common stocks, bonds, managed assets and/or short-term securities. Basis of Presentation The accompanying Consolidated Financial Statements include the accounts of IDS Life Insurance Company, its wholly-owned subsidiaries and certain variable interest entities (VIEs). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Consolidated Financial Statements have been prepared in conformity with United States generally accepted accounting principles (GAAP) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 7. Certain prior year amounts have been reclassified to conform to the current year's presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principles of Consolidation IDS Life consolidates all non-variable interest entities in which it holds a greater than 50% voting interest, except for immaterial seed money investments in separate accounts, which are accounted for as trading securities. Entities in which IDS Life holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. Additionally, other investments in hedge funds in which IDS Life holds an interest that is less than 50% are accounted for under the equity method. All other investments are accounted for under the cost method where IDS Life owns less than a 20% voting interest and does not exercise significant influence, or as Available-for-Sale securities, as applicable. IDS Life also consolidates all VIEs for which it is considered to be the primary beneficiary pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities," as revised (FIN 46). The determination as to whether an entity is a VIE is based on the amount and characteristics of the entity's equity. In general, FIN 46 requires a VIE to be consolidated when an enterprise has a variable interest for which it is deemed to be the primary beneficiary, which means that it will absorb a majority of the VIEs expected losses, receive a majority of the VIEs expected residual return, or both. IDS Life liquidated its interest in all consolidated VIEs during 2004 and 2005 resulting in no consolidated VIEs as of December 31, 2005. Qualifying Special Purpose Entities (QSPEs) under Statement of Financial Accounting Standard (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," are not consolidated. Such QSPEs include a securitization trust containing a majority of its rated collateralized debt obligations (CDOs), as described in Note 2. IDS Life sold all of its retained interest in this securitization trust in 2005. BALANCE SHEET INVESTMENTS Investments consist of the following: Available-for-Sale Securities Available-for-Sale securities are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive income (loss) within equity, net of income tax provision (benefit) and net of adjustments in asset and liability balances, such as deferred policy acquisition costs (DAC), to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet date. Gains and losses are recognized in results of operations upon disposition of the securities. In addition, losses are also recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default or bankruptcy. IDS Life also considers the extent to which amortized cost exceeds fair value, the duration of that difference, and management's judgment about the issuer's current and prospective financial condition, as well as its ability and intent to hold until recovery. Other-than-temporary impairment charges are recorded in net realized gains (losses) on investments within the Consolidated Statements of Income. Fair value is generally based on quoted market prices. F-10IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Mortgage Loans on Real Estate, Net Mortgage loans on real estate reflect principal amounts outstanding less allowance for mortgage loan losses. The allowance for mortgage loan losses is measured as the excess of the loan's recorded investment over the present value of its expected principal and interest payments discounted at the loan's effective interest rate, or the fair value of collateral. Additionally, the level of the allowance for mortgage loan losses considers other factors, including historical experience and current economic and political conditions. Management regularly evaluates the adequacy of the allowance for mortgage loan losses and believes it is adequate to absorb estimated losses in the portfolio. IDS Life generally stops accruing interest on mortgage loans for which interest payments are delinquent more than three months. Based on management's judgment as to the ultimate collectibility of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan. Policy Loans Policy loans are carried at the aggregate of the unpaid loan balances, which do not exceed the cash surrender values of the related policies. Trading Securities and Other Investments Included in trading securities and other investments are hedge fund investments, separate account seed money, syndicated loans and real estate. Separate account seed money is carried at fair market value with changes in value recognized in the Consolidated Statements of Income within net investment income. The carrying value of equity method investments in hedge funds reflects IDS Life's original investment and its share of earnings or losses of the hedge funds subsequent to the date of investment, and approximate fair value. Syndicated loans reflect amortized cost less allowance for losses. Real estate investments reflect properties acquired in satisfaction of debt and are carried at the lower of cost or the property's net realizable value. CASH AND CASH EQUIVALENTS IDS Life has defined cash equivalents to include highly liquid investments with original maturities of 90 days or less. RESTRICTED CASHAs a result of theadoption of FIN 46 in 2003, IDS Life consolidated restricted cash held by secured loan trusts (SLTs) where such cash cannot be utilized for operations. The SLTs were liquidated in 2004 and 2005. REINSURANCE IDS Life reinsures a portion of the insurance risks associated with its life and LTC insurance products through reinsurance agreements with unaffiliated insurance companies. Reinsurance is used in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and to effect business-sharing arrangements. IDS Life evaluates the financial condition of reinsurers to manage its exposure to significant losses from reinsurer insolvencies. IDS Life remains primarily liable as the direct insurer on all risks reinsured. F-11IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Generally, IDS Life reinsures 90% of the death benefit liability related to fixed and variable universal life and term life insurance products. IDS Life began reinsuring risks at this level beginning in 2001 for term life insurance and 2002 for variable and universal life insurance. Policies issued prior to these dates are not subject to these same reinsurance levels. The maximum amount of life insurance risk retained by IDS Life is $750,000 on any policy insuring a single life and $1.5 million on any flexible premium survivorship variable life policy. For existing LTC policies, IDS Life retained 50% of the risk and the remaining 50% of the risk was ceded to General Electric Capital Assurance Company. Risk on variable life and universal life policies is reinsured on a yearly renewable term basis. Risk onrecentterm life and LTC policies is reinsured on a coinsurance basis. IDS Life retains all risk for new claims on DI contracts. Risk is currently managed by limitingmarket decline, the amountof disability insurance written on any one individual. IDS Life also retains all accidental death benefit and waiver of premium risk. DEFERRED POLICY ACQUISITION COSTS DAC represents 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 and life, DI and LTC insurance products. These costs are deferred to the extent they are recoverable from future profits. For annuity and insurance products, DAC is amortized over periods approximating the lives of the business, generally as a percentage of premiums or estimated gross profits or as a portion of product interest margins depending on the product's characteristics. For IDS Life's annuity and insurance products, the projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, mortality and morbidity rates, persistency, maintenance expense levels and customer asset value growth rates for variable products. Management routinely monitors a wide variety of trends in the business, including comparisons of actual and assumed experience. The customer asset value growth rate is the rate atby whichcontract 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. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a quarterly basis. Management monitors other principal DAC assumptions, such as interest margin, mortality and morbidity rates, persistency and maintenance expense level assumptions, each quarter. Unless management identifies a material deviation over the course of the quarterly monitoring, management reviews and updates these DAC assumptions annually in the third quarter of each year. When assumptions are changed, the percentage of estimated gross profits or portion of interest margins used to amortize DAC may also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in an increase in DAC amortization expense while a decrease in amortization percentage will result in a decrease in DAC amortization expense. The impact on results of operations of changing assumptions with respect to the amortization of DAC can be either positive or negative in any particular period and is reflected in the period in which such changes are made. F-12IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEFERRED SALES INDUCEMENT COSTS Deferred sales inducement costs (DSIC) consist of bonus interest credits and deposit credits added to certain annuity contract values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. These costs were previously included in DAC and were reclassified as part of the adoption of the American Institute of Certified Public Accountants (AICPA) Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1). The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Derivative instruments are classified on the Consolidated Balance Sheets at fair value within other assets or liabilities. The fair value of IDS Life's derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction. The accounting for the change in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are recorded in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transactions impact earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income. If a hedge is no longer designated or is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is recognized into earnings over the period that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized into earnings immediately. Derivative financial instruments that are entered into for hedging purposes are designated as such at the time that IDS Life enters into the contract. For all derivative financial instruments that are designated for hedging activities, IDS Life formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. IDS Life formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the cash flows of hedged items. If it is determined that a derivative is not highly effective as a hedge, IDS Life will discontinue the application of hedge accounting. See Note 10 for information regarding the cash flow hedges used by IDS Life. IDS Life currently has economic hedges that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). For derivative financial instruments that do not qualify for hedge accounting, or are not designated under SFAS 133 as hedges, changes in fair value are reported in current period earnings generally as a component of net investment income. See the "Derivatives Not Designated as Hedges" section of Note 10 which describes the types of economic hedges used by IDS Life. F-13IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate account assets and liabilities are funds held for exclusive benefit of variable annuity contractholders and variable life insurance policyholders. IDS Life receives mortality and expense risk and other fees, including payments from its affiliate, RiverSource Investments, LLC for providing certain sponsor and related servicing activity, which are based on asset levels, guaranteed minimum death benefit (GMDB) fees and cost of insurance charges from the related accounts. In addition, IDS Life also receives marketing and administrative support payments from the affiliates of other companies' funds included as investment options in its variable annuity and variable life insurance products, which vary based on the level of variable assets. Prior to the fourth quarter of 2003, these fees included investment advisory fees as IDS Life served as the investment manager for affiliate variable portfolio mutual funds. In the fourth quarter of 2003, Ameriprise Financial replaced IDS Life as the investment manager and assumed these duties for the mutual funds and retained IDS Life to provide underlying sponsor and related services. At that time, IDS Life began receiving internal allocation fees from Ameriprise Financial as compensation for providing these non-investment advisory services. In the fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise Financial as the investment manager. As a result, IDS Life now receives internal allocation payments as compensation from RiverSource Investments, LLC for providing these non-investment advisory services. IDS Life provides contractual mortality assurances to variable annuity contractholders that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and beneficiaries from the mortality assumptions implicit in the annuity contracts. IDS Life makes periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for variable annuities that are in the benefit payment period. IDS Life alsoguaranteesthat the rates at which administrative charges are deducted from contract funds will not exceed contractual maximums. For variable life insurance, IDS Life guarantees that the rates at which insurance charges and administrative charges are deducted from contract funds will not exceed contractual maximums. LIABILITIES FOR FUTURE POLICY BENEFITS AND CLAIMS Fixed Annuities and Variable Annuity Guarantees Liabilities for fixed and variable deferred annuities are equal to accumulation values which are the cumulative gross deposits, credited interest and fund performance less withdrawals and mortality and expense risk charges. The majority of the variable annuity contracts offered by IDS Life contain GMDB provisions. When market values of the customer's accounts decline, the death benefit payable on a contract with a GMDB mayexceed thecontract accumulation value. IDS Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings. These are referred to as gain gross-up (GGU) benefits. In addition, IDS Life offers contracts containing guaranteed minimum withdrawal benefit (GMWB), guaranteed minimum income benefit (GMIB) and guaranteed minimum accumulation benefit (GMAB) provisions. F-14IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective January 1, 2004, liabilities for GMDB, GGU and GMIB benefits have been established under SOP 03-1. Actuarial models to simulate various equity market scenarios are used to project these benefits and contract assessments and include making significant assumptions related to customer asset value growth rates, mortality, persistency and investment margins. These assumptions, as well as their periodic review by management, are consistent with those used for DAC purposes. Prior to the adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. See the "Recently Issued Accounting Standards" section below and Note 5 for more information about these guaranteed benefits. GMWB and GMAB provisions are considered embedded derivatives under SFAS 133 and, accordingly, are carried at fair value within future policy benefits for variable annuity guarantees on the Consolidated Balance Sheets. The fair value of these embedded derivatives is based on the present value of future benefits less applicable fees charged for the provision. Changes in fair value are reflected in death and other benefits for investment contracts and universal life-type insurance within the Consolidated Statements of Income. Liabilities for equity indexed deferred annuities issued in 1999 or later are equal to the accumulation of host contract values covering guaranteed benefits and the market value of embedded equity options. Liabilities for equity indexed deferred annuities issued before 1999 are equal to the present value of guaranteed benefits and the intrinsic value of index-based benefits. Accounting for equity indexed deferred annuities issued before 1999 differs from those issued in 1999 and later due to the treatment of embedded equity options within the contracts. Embedded equity options are considered embedded derivatives under SFAS 133. However, SFAS 133 allowed companies to elect whether to separately account for embedded derivatives which are part of contracts issued prior to January 1, 1999. IDS Life elected not to separately account for embedded derivatives related to contacts issued prior to January 1, 1999. Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2005, depending on year of issue, with an average rate of approximately 6.0%. Life, Disability Income and Long-Term Care Policies Liabilities for insurance claims that have been reported but have not yet been paid (unpaid claim liabilities) are equal to the death benefits payable under the policies. For DI and LTC claims, unpaid claim liabilities are equal to benefit amounts due and accrued including the expense of reviewing claims and making benefit payment determinations. Liabilities for claims that have been incurred but not reported are estimated based on periodic analysis of the actual lag between when a claim occurs and when it is reported. Where applicable, amounts recoverable from other insurers who share in the risk of the products offered (reinsurers) are separately recorded as receivables. Liabilities for fixed and variable universal life insurance are equal to accumulation values which are the cumulative gross deposits, credited interest, and fund performance less withdrawals and mortality and expense risk charges. Liabilities for future benefits on term and whole life insurance are based on the net level premium method, using anticipated premium payments, mortality rates, policy persistency and interest rates earned on the assets supporting the liability. Anticipated mortality rates are based on established industry mortality tables, with modifications based on IDS Life's experience. Anticipated policy premium payments and persistency rates vary by policy form, issue age and policy duration. Anticipated interest rates range from 4% to 10% at December 31, 2005, depending on policy form, issue year and policy duration. IDS Life issues only non-participating life insurance policies, which do not pay dividends to policyholders from the insurers' earnings. F-15IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Liabilities for future policy benefits include both policy reserves and claim reserves on DI and LTC products. Policy reserves are the amounts needed to meet obligations for future claims and are based on the net level premium method, using anticipated premium payments and morbidity, mortality, policy persistency and discount rates. Anticipated morbidity and mortality rates are based on established industry morbidity and mortality tables. Anticipated policy persistency rates vary by policy form, issue age, policy duration and, for DI policies, occupation class. Anticipated discount rates for DI policy reserves are 7.5% at policy issue and grade to 5% over 5 years. Anticipated discount rates for LTC policy reserves are currently 5.3% at December 31, 2005 grading up to 9.4% over 40 years. Claim reserves on DI and LTC products are the amounts needed to meet obligations for continuing claim payments on already incurred claims. Claim reserves are calculated based on claim continuance tables which estimate the likelihood that an individual will continue to be eligible for benefits and anticipated interest rates earned on assets supporting the reserves. Anticipated claim continuance rates are based on established industry tables. Anticipated interest rates for claim reserves for both DI and LTC range from 3.0% to 8.0% at December 31, 2005, with an average rate of approximately 4.9%. REVENUES AND EXPENSES IDS Life's principal sources of revenue include premium revenues, net investment income, contractholder and policyholder charges and mortality and expense risk and other fees. Premium Revenues Premium revenues include premiums on traditional life, DI and LTC insurance products. Such premiums are recognized as revenue when due. Net Investment Income Net investment income predominantly consists of interest income earned on fixed maturity securities classified as Available-for-Sale, mortgage loans on real estate and policy loans, mark-to-market of trading securities and hedges on equity indexed annuities and GMWB, and allocated income from equity method investments in hedge funds. Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale, excluding structured securities, and mortgage loans on real estate so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term. Contractholder and Policyholder Charges Contractholder and policyholder charges include certain charges assessed on annuities and fixed and variable universal life insurance, such as cost of insurance and administrative and surrender charges. Cost of insurance charges on fixed and variable universal life insurance are recognized as revenue when earned, whereas contract charges and surrender charges on annuities and universal and variable universal life insurance are recognized as revenue when collected. Mortality and Expense Risk and Other Fees Mortality and expense risk and other fees include risk, management and administration fees, which are generated directly and indirectly from IDS Life's separate account assets. IDS Life's management and other fees are generally computed as a contractual rate based on the underlying asset values and are generally received monthly. F-16IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Realized Gain (Loss) on Investments Realized gains and losses are recognized using the specific identification method, on a trade date basis, and charges are recorded when securities are determined to be other-than-temporarily impaired. Separation Costs During 2005, Ameriprise Financial developed an allocation policy for separation costs resulting in the allocation of certain costs to IDS Life that it considered to be a reasonable reflection of separation costs benefiting IDS Life. Separation costs generally consist of allocated financial advisor and employee retention program costs, re-branding and marketing costs and costs to separate and reestablish technology platforms related to the separation and Distribution of Ameriprise Financial. Income Taxes IDS Life's taxable income is included in the consolidated federal income tax return of American Express through September 30, 2005. IDS Life will file a separate consolidated life insurance company federal income tax return for five tax years following the Distribution including the period October 1, 2005 through December 31, 2005. IDS Life provides for income taxes based on the net amount of income taxes that it expects to pay or receive from various taxing jurisdictions in connection with its operations. RECENTLY ISSUED ACCOUNTING STANDARDS On November 3, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." FSP FAS 115-1 and FAS 124-1 address the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. IDS Life anticipates the impact of FSP FAS 115-1 and FAS 124-1 on IDS Life's consolidated results of operations and financial condition will not be material. In September 2005, the AICPA issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts" (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. IDS Life is currently evaluating the impact of SOP 05-1 on IDS Life's consolidated results of operations and financial condition. In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" (SFAS 154). This statement replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. IDS Life does not anticipate SFAS 154 will materially impact its Consolidated Financial Statements upon its adoption on January 1, 2006. F-17IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 2004, the FASB issued FSP No. 97-1, "Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (SFAS No. 97), Permit or Require Accrual of an Unearned Revenue Liability" (FSP 97-1). The implementation of SOP 03-1 raised a question regarding the interpretation of the requirements of SFAS No. 97 concerning when it is appropriate to record an unearned revenue liability. FSP 97-1 clarifies that SFAS No. 97 is clear in its intent and language, and requires the recognition of an unearned revenue liability for amounts that have been assessed to compensate insurers for services to be performed over future periods. SOP 03-1 describes one situation, when assessments result in profits followed by losses, where an unearned revenue liability is required. SOP 03-1 does not amend SFAS No. 97 or limit the recognition of an unearned revenue liability to the situation described in SOP 03-1. The guidance in FSP 97-1 is effective for financial statements for fiscal periods beginning after June 18, 2004. The adoption of FSP 97-1 did not have a material impact on IDS Life's consolidated results of operations or financial condition. In July 2003, the AICPA issued SOP 03-1 effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance on separate account presentation and accounting for interests in separate accounts. Additionally, SOP 03-1 provides clarifying guidance as to the recognition of bonus interest and other sales inducement benefits and the presentation of any deferred amounts in the financial statements. Lastly, SOP 03-1 requires insurance enterprises to establish additional liabilities for benefits that may become payable under variable annuity death benefit guarantees or other insurance or annuity contract provisions. Where an additional liability is established, the recognition of this liability will then be considered in amortizing DAC and any DSIC associated with those insurance or annuity contracts. The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative effect of accounting change that reduced 2004 results by $70.6 million ($108.6 million pretax). The cumulative effect of accounting change consisted of: (i) $42.9 million pretax from establishing additional liabilities for certain variable annuity guaranteed benefits ($32.8 million) and from considering these liabilities in valuing DAC and DSIC associated with those contracts ($10.1 million) and (ii) $65.7 million pretax from establishing additional liabilities for certain variable universal life and single pay universal life insurance contracts under which contractual cost of insurance charges are expected to be less than future death benefits ($92 million) and from considering these liabilities in valuing DAC associated with those contracts ($26.3 million offset). Prior to the adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. IDS Life's accounting for separate accounts was already consistent with the provisions of SOP 03-1 and, therefore, there was no impact related to this requirement. The AICPA released a series of technical practice aids (TPAs) in September 2004, which provide additional guidance related to, among other things, the definition of an insurance benefit feature and the definition of policy assessments in determining benefit liabilities, as described within SOP 03-1. The TPAs did not have a material effect on IDS Life's calculation of liabilities that were recorded in the first quarter of 2004 upon adoption of SOP 03-1. F-18IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2003, the FASB issued FIN 46, which addresses consolidation by business enterprises of VIEs and was subsequently revised in December 2003. The VIEs primarily impacted by FIN 46, which IDS Life consolidated as of December 31, 2003, relate to three SLTs, which were managed by an affiliate and partially owned by IDS Life. The consolidation of the three SLTs partially owned by IDS Life and managed by an affiliate, resulted in a cumulative effect of accounting change that increased 2003 net income through a non-cash gain of $44.5 million ($68.4 million pretax). The Company liquidated its interest in all consolidated VIEs during 2004 and 2005. See Note 3 for further discussion of consolidated VIEs. 2. Investments ----------- AVAILABLE-FOR-SALE SECURITIES Available-for-Sale securities at December 31, 2005 are distributed by type as presented below:
--------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (Thousands) Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------------------Fixed maturities: Corporate debt securities $ 13,318,636 $ 208,577 $ (198,774) $ 13,328,439 Mortgage and other asset-backed securities 10,804,984 45,531 (158,784) 10,691,731 Foreign corporate bonds and obligations 3,148,534 67,097 (54,721) 3,160,910 U.S. Government and agencies obligations 300,337 16,207 (5,282) 311,262 State and municipal obligations 114,165 2,756 (3,262) 113,659 Foreign government bonds and obligations 127,912 16,922 (114) 144,720 Structured investments(a) 2,453 - - 2,453 --------------------------------------------------------------------------------------------------------------------- Total fixed maturities 27,817,021 357,090 (420,937) 27,753,174 Preferred and common stocks 13 8 - 21 --------------------------------------------------------------------------------------------------------------------- Total $ 27,817,034 $ 357,098 $ (420,937) $ 27,753,195 ---------------------------------------------------------------------------------------------------------------------(a) Includes unconsolidated CDOs.F-19IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Available-for-Sale securities at December 31, 2004 are distributed by type as presented below:
--------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (Thousands) Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------------------Fixed maturities: Corporate debt securities $ 13,718,138 $ 531,970 $ (36,990) $ 14,213,118 Mortgage and other asset-backed securities 9,383,868 143,102 (30,487) 9,496,483 Foreign corporate bonds and obligations 3,185,592 139,821 (14,178) 3,311,235 U.S. Government and agencies obligations 330,540 15,181 (513) 345,208 State and municipal obligations 114,161 3,493 (2,569) 115,085 Foreign government bonds and obligations 104,442 15,507 (552) 119,397 Structured investments(a) 563,899 - (33,230) 530,669 --------------------------------------------------------------------------------------------------------------------- Total fixed maturities 27,400,640 849,074 (118,519) 28,131,195 Preferred and common stocks 30,019 1,237 - 31,256 --------------------------------------------------------------------------------------------------------------------- Total $ 27,430,659 $ 850,311 $ (118,519) $ 28,162,451 ---------------------------------------------------------------------------------------------------------------------(a) Includes unconsolidated CDOs.At December 31, 2005 and 2004, fixed maturity securities, excluding net unrealized appreciation and depreciation, comprised approximately 87% of IDS Life's total investments. These securities are rated by Moody's Investors Service, Inc. (Moody's) and Standard & Poor's (S&P), except for approximately $1.0 billion of securities at both December 31, 2005 and 2004 which are rated by RiverSource Investments, LLC's internal analysts using criteria similar to Moody's and S&P. Ratings on investment grade securities are presented using S&P's convention and, if the two agencies' ratings differ, the lower rating is used. A summary by rating (excluding net unrealized appreciation and depreciation) on December 31 is as follows:
Rating 2005 2004 ---------------------------------------------------------------------------------------------------------AAA 40% 37% AA 6 3 A 20 22 BBB 26 30 Below investment grade 8 8 --------------------------------------------------------------------------------------------------------- Total 100% 100% ---------------------------------------------------------------------------------------------------------At December 31, 2005 and 2004, approximately 47% and 61%, respectively, of the securities rated AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer were greater than 10% of stockholder's equity. F-20IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2005:
--------------------------------------------------------------------------------------------------------------------------- (Thousands) Less than 12 months 12 months or more Total --------------------------------------------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of securities: Value Losses Value Losses Value Losses ---------------------------------------------------------------------------------------------------------------------------Corporate debt securities $ 6,184,289 $ (132,802) $ 1,618,552 $ (65,972) $ 7,802,841 $ (198,774) Mortgage and other asset-backed securities 6,001,482 (87,558) 2,059,075 (71,226) 8,060,557 (158,784) Foreign corporate bonds and obligations 1,203,652 (31,308) 535,393 (23,413) 1,739,045 (54,721) U.S. Government and agencies obligations 148,584 (3,062) 72,844 (2,220) 221,428 (5,282) State and municipal obligations 67,353 (2,589) 14,348 (673) 81,701 (3,262) Foreign government bonds and obligations 13,344 (114) - - 13,344 (114) Structured investments 2,189 - - - 2,189 - --------------------------------------------------------------------------------------------------------------------------- Total $ 13,620,893 $ (257,433) $ 4,300,212 $ (163,504) $ 17,921,105 $ (420,937) ---------------------------------------------------------------------------------------------------------------------------The following table provides information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2004:
------------------------------------------------------------------------------------------------------------------------------ (Thousands) Less than 12 months 12 months or more Total ------------------------------------------------------------------------------------------------------------------------------ Fair Unrealized Fair Unrealized Fair Unrealized Description of securities: Value Losses Value Losses Value Losses ------------------------------------------------------------------------------------------------------------------------------Corporate debt securities $ 2,410,156 $ (20,461) $ 645,898 $ (16,529) $ 3,056,054 $ (36,990) Mortgage and other asset-backed securities 2,560,175 (17,686) 550,728 (12,801) 3,110,903 (30,487) Foreign corporate bonds 641,928 (6,571) 373,312 (7,607) 1,015,240 (14,178) U.S. Government and agencies obligations 159,904 (498) 533 (15) 160,437 (513) State and municipal obligations - - 62,454 (2,569) 62,454 (2,569) Foreign government bonds and obligations 1,002 (33) 9,008 (519) 10,010 (552) Structured investments - - 526,190 (33,230) 526,190 (33,230) ------------------------------------------------------------------------------------------------------------------------------ Total $ 5,773,165 $ (45,249) $ 2,168,123 $ (73,270) $ 7,941,288 $ (118,519) ------------------------------------------------------------------------------------------------------------------------------In evaluating potential other-than-temporary impairments, IDS Life considers the extent to which amortized costs exceeds fair value and the duration of that difference. A key metric in performing this evaluation is the ratio of fair value to amortized cost. The following table summarizes the unrealized losses by ratio of fair value to amortized cost as of December 31, 2005:
(Millions, except number of securities) Less than 12 months 12 months or more Total ------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Ratio of Fair Value Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized to Amortized Cost Securities Value Losses Securities Value Losses Securities Value Losses -------------------------------------------------------------------------------------------------------------------------------95% - 100% 645 $ 13,200 $ (223) 213 $ 3,971 $ (141) 858 $ 17,171 $ (364) 90% - 95% 36 340 (22) 24 321 (22) 60 661 (44) 80% - 90% 9 81 (12) 3 8 (1) 12 89 (13) ------------------------------------------------------------------------------------------------------------------------------- Total 690 $ 13,621 $ (257) 240 $ 4,300 $ (164) 930 $ 17,921 $ (421) -------------------------------------------------------------------------------------------------------------------------------F-21IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A majority of the gross unrealized losses related to corporate debt securities and substantially all of the gross unrealized losses related to mortgage and other asset-backed securities are attributable to changes in interest rates. A portion of the gross unrealized losses particularly related to corporate debt securities is also attributed to credit spreads and specific issuer credit events. As noted in the table above, a significant portion of the unrealized loss relates to securities that have a fair value to amortized cost ratio of 95% or above resulting in an overall 98% ratio of fair value to amortized cost for all securities with an unrealized loss. From an overall perspective, the gross unrealized losses are not concentrated in any individual industries or with any individual securities. However, the securities with a fair value to amortized cost ratio of 80%-90% primarily relate to the auto and paper industries. The largest unrealized loss associated with an individual issuer, excluding GNMA, FNMA and FHLMC mortgage-backed securities, is $6 million. The securities related to this issuer have a fair value to amortized cost ratio of 80%-90% and have been in an unrealized loss position for less than 12 months. IDS Life monitors the investments and metrics discussed previously on a quarterly basis to identify and evaluate investments that have indications of possible other-than-temporary impairment. See the Investments section of Note 1 for information regarding IDS Life's policy for determining when an investment's decline in value is other-than-temporary. As stated earlier, IDS Life's ongoing monitoring process has revealed that a significant portion of the gross unrealized losses on its Available-for-Sale securities are attributable to changes in interest rates. Additionally, IDS Life has the ability and intent to hold these securities for a time sufficient to recover its amortized cost and has, therefore, concluded that none are other-than-temporarily impaired at December 31, 2005. The change in net unrealized securities gains (losses) recognized in accumulated other comprehensive income includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in market value of securities that were held during the period (holding gains (losses)), (ii) gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales and other-than-temporary impairments of Available-for-Sale securities (reclassification of realized (gains) losses) and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC and annuity liabilities to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective consolidated balance sheet dates. The following table presents these components of other comprehensive income (loss), net of tax:
(Thousands) 2005 2004 2003 -------------------------------------------------------------------------------------------------------------------Holding (losses) gains, net of tax of $260,090, $22,633, and $44,705, respectively $ (483,023) $ 42,034 $ (83,106) Reclassification of realized gains, net of tax of $18,381, $10,765, and $6,044, respectively (34,137) (19,993) (11,225) DAC, net of tax of $28,372, $3,179 and $1,958, respectively 52,690 5,905 3,636 DSIC, net of tax of $4,614, $3,538, and $0, respectively 8,568 (6,571) - Fixed annuity liabilities, net of tax of $2,878, $30,270, and $0, respectively (5,345) (56,216) - ------------------------------------------------------------------------------------------------------------------- Net unrealized securities losses $ (461,247) $ (34,841) $ (90,695) -------------------------------------------------------------------------------------------------------------------F-22IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a distribution of Available-for-Sale securities by maturity as of December 31, 2005:
Amortized Fair (Thousands) Cost Value -------------------------------------------------------------------------------------------------Due within 1 year $ 525,818 $ 529,579 Due after 1 through 5 years 4,288,859 4,301,151 Due after 5 through 10 years 11,063,792 11,020,647 Due after 10 years 1,131,115 1,207,613 ------------------------------------------------------------------------------------------------- 17,009,584 17,058,990 Mortgage and other asset-backed securities 10,804,984 10,691,731 Structured investments 2,453 2,453 Preferred and common stocks 13 21 ------------------------------------------------------------------------------------------------- Total $ 27,817,034 $ 27,753,195 -------------------------------------------------------------------------------------------------The expected payments on mortgage and other asset-backed securities and structured investments may not coincide with their contractual maturities. As such, these securities, as well as preferred and common stocks, were not included in the maturities distribution. The table below includes sales, maturities, and purchases of investments classified as Available-for-Sale for the years ended December 31:
(Thousands) 2005 2004 2003 --------------------------------------------------------------------------------------------------------Sales $ 3,124,154 $ 1,603,285 $ 12,232,235 Maturities, sinking fund payments and calls $ 2,241,829 $ 1,931,070 $ 4,152,088 Purchases $ 5,780,183 $ 4,392,522 $ 20,527,995 --------------------------------------------------------------------------------------------------------Included in net realized gains and losses were gross realized gains and losses on sales of securities, as well as other-than-temporary losses on investments, classified as Available-for-Sale, using the specific identification method, as noted in the following table for the years ended December 31:
(Thousands) 2005 2004 2003 ------------------------------------------------------------------------------------------------------Gross realized gains from sales $ 107,800 $ 48,412 $ 255,348 Gross realized losses from sales $ (38,602) $ (17,524) $ (135,465) Other-than-temporary impairments $ (19,380) $ (131) $ (102,614) ------------------------------------------------------------------------------------------------------The $19.4 million of other-than-temporary impairments in 2005 primarily related to corporate debt securities within the auto industry which were downgraded in 2005 and subsequently deteriorated throughout the year in terms of their fair value to amortized cost ratio. The $102.6 million of other-than-temporary impairments in 2003 consisted of $54.4 million related to corporate debt securities, $40.9 million related to IDS Life's interests in a CDO securitization trust which was sold in 2005 as discussed below, and $7.3 million related to other securities. The other-than-temporary impairments related to corporate debt securities primarily resulted from continued operating difficulties and bankruptcies of certain large airline carriers and the related overall impact on the airline industry. The other-than-temporary impairments related to IDS Life's interests in the CDO securitization trust primarily resulted from defaults associated with a specific CDO within the securitization trust. F-23IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the second quarter of 2005, IDS Life sold all of its retained interest in the CDO-related securitization trust and realized a net pretax gain of $24.9 million. The carrying value of this retained interest was $526.2 million at December 31, 2004, of which $389.9 million was considered investment grade. At December 31, 2005 and 2004, bonds carried at $15.8 million were on deposit with various states as required by law. MORTGAGE LOANS ON REAL ESTATE AND SYNDICATED LOANS, NET The following is a summary of mortgage loans on real estate and syndicated loans at December 31:
(Thousands) 2005 2004 ------------------------------------------------------------------------------------------------------------Mortgage loans on real estate $ 2,883,709 $ 2,968,889 Less: allowance for loan losses (41,347) (45,347) ------------------------------------------------------------------------------------------------------------ Net mortgage loans $ 2,842,362 $ 2,923,542 ------------------------------------------------------------------------------------------------------------ Syndicated loans $ 130,869 $ 139,295 Less: allowance for loan losses (3,500) (3,500) ------------------------------------------------------------------------------------------------------------ Net syndicated loans $ 127,369 $ 135,795 ------------------------------------------------------------------------------------------------------------Mortgage loans are first mortgages on real estate. IDS Life holds the mortgage documents, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements. Mortgage loan fundings are restricted by state insurance regulatory authorities to 80% or less of the market value of the real estate at the time of origination of the loan. Commitments to fund mortgages are made in the ordinary course of business. The estimated fair value of the mortgage commitments as of December 31, 2005 and 2004 was not material. Syndicated loans, which are included as a component of other investments, represent loans in which a group of lenders provide funds to borrowers. There is usually one originating lender which retains a small percentage and syndicates the remainder. At December 31, 2005 and 2004, IDS Life's recorded investment in impaired mortgage loans on real estate was $14.0 million and $11.3 million, respectively, with related allowances for mortgage loan losses of $4.0 million for both periods. During 2005 and 2004, the average recorded investment in impaired mortgage loans on real estate was $6.3 million and $8.3 million, respectively. IDS Life recognized nil, $0.6 million and $0.8 million of interest income related to impaired mortgage loans on real estate for the years ended December 31, 2005, 2004 and 2003, respectively. The balances of and changes in the total allowance for mortgage loan losses as of and for the years ended December 31, are as follows:
(Thousands) 2005 2004 2003 -----------------------------------------------------------------------------------------------------------------Balance, beginning of year $ 45,347 $ 47,197 $ 44,312 Provision for mortgage loan losses - 9,500 11,687 Foreclosures, write-offs and loan sales (4,000) (11,350) (8,802) ----------------------------------------------------------------------------------------------------------------- Balance, end of year $ 41,347 $ 45,347 $ 47,197 -----------------------------------------------------------------------------------------------------------------F-24IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration of credit risk of mortgage loans on real estate by region at December 31 were:
(Thousands) 2005 2004 -------------------------------------------------------------------------------------------------------------------------- On Balance Funding On Balance Funding Region Sheet Commitments Sheet Commitments --------------------------------------------------------------------------------------------------------------------------South Atlantic $ 594,022 $ 10,900 $ 588,764 $ 24,115 West North Central 436,367 6,200 433,298 14,550 East North Central 406,714 - 509,752 1,400 Pacific 364,448 26,750 332,764 13,700 Mountain 352,178 8,725 371,801 20,025 Middle Atlantic 257,625 11,500 270,509 2,600 West South Central 215,467 17,350 191,410 - New England 164,047 20,550 198,297 6,515 East South Central 92,841 4,850 72,294 9,625 -------------------------------------------------------------------------------------------------------------------------- 2,883,709 106,825 2,968,889 92,530 Less: allowance for loan losses (41,347) - (45,347) - -------------------------------------------------------------------------------------------------------------------------- Total $ 2,842,362 $ 106,825 $ 2,923,542 $ 92,530 --------------------------------------------------------------------------------------------------------------------------Concentration of credit risk of mortgage loans on real estate by property type at December 31 were:
(Thousands) 2005 2004 ----------------------------------------------------------------------------------------------------------------------------- On Balance Funding On Balance Funding Property type Sheet Commitments Sheet Commitments -----------------------------------------------------------------------------------------------------------------------------Office buildings $ 1,048,566 $ 36,000 $ 1,087,700 $ 5,840 Department/retail stores 703,811 37,800 734,590 40,075 Apartments 454,024 10,500 505,632 24,875 Industrial buildings 453,503 12,000 373,767 15,615 Hotels/motels 92,335 5,900 109,408 - Medical buildings 46,851 2,700 46,960 - Mixed use 39,318 - 62,424 4,200 Nursing/retirement homes 4,898 - 9,875 - Other 40,403 1,925 38,533 1,925 ----------------------------------------------------------------------------------------------------------------------------- 2,883,709 106,825 2,968,889 92,530 Less: allowance for loan losses (41,347) - (45,347) - ----------------------------------------------------------------------------------------------------------------------------- Total $ 2,842,362 $ 106,825 $ 2,923,542 $ 92,530 -----------------------------------------------------------------------------------------------------------------------------SOURCES OF INVESTMENT INCOME AND REALIZED GAINS (LOSSES) ON INVESTMENTS Net investment income for the years ended December 31 is summarized as follows:
(Thousands) 2005 2004 2003 -----------------------------------------------------------------------------------------------------------------Income on fixed maturities $ 1,448,882 $ 1,450,919 $ 1,423,560 Income on mortgage loans on real estate 196,840 221,022 247,001 Trading securities and other investments 163,814 138,468 63,983 ----------------------------------------------------------------------------------------------------------------- 1,809,536 1,810,409 1,734,544 Less: investment expenses 18,212 32,963 29,359 ----------------------------------------------------------------------------------------------------------------- Total $ 1,791,324 $ 1,777,446 $ 1,705,185 -----------------------------------------------------------------------------------------------------------------F-25IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net realized gains (losses) on investments for the years ended December 31 is summarized as follows:
(Thousands) 2005 2004 2003 -----------------------------------------------------------------------------------------------------------------Fixed maturities $ 49,818 $ 30,757 $ 17,269 Mortgage loans on real estate (1,627) (3,048) (10,865) Trading securities and other investments 105 (417) (1,959) -----------------------------------------------------------------------------------------------------------------. Total $ 48,296 $ 27,292 $ 4,445 -----------------------------------------------------------------------------------------------------------------3. Variable Interest Entities -------------------------- The VIEs for which IDS Life was considered the primary beneficiary and which were consolidated beginning December 31, 2003, relate to SLTs which were partially owned by IDS Life and managed by an affiliate. The consolidated SLTs provided returns to investors primarily based on the performance of an underlying portfolio of high-yield loans which were managed by an affiliate. IDS Life liquidated its interest in all three SLTs. One SLT was liquidated in 2004, and the other two SLTs were liquidated in 2005, resulting in a non-cash $27.9 million cumulative net pretax charge and a $13.9 million pretax gain during the years ended December 31, 2004 and 2005, respectively. There is no remaining exposure related to these SLTs as of December 31, 2005. The following table presents the consolidated assets, essentially all of which were restricted, and other balances related to these entities at December 31:
(Millions) 2004 -----------------------------------------------------------------------------------------------------------Restricted cash $ 536 Derivative financial instruments (a) 43 ----------------------------------------------------------------------------------------------------------- Total assets $ 579 Total liabilities 117 ----------------------------------------------------------------------------------------------------------- Net assets $ 462 -----------------------------------------------------------------------------------------------------------(a) Represents the estimated fair market value of the total return swap derivatives related to the consolidated SLTs which had a notional amount of $1.8 billion as of December 31, 2004.IDS Life has other significant variable interests for which it is not considered the primary beneficiary and, therefore, does not consolidate. These interests are represented by carrying values of $2.5 million of CDO residual tranches managed by an affiliate where IDS Life is not the primary beneficiary. IDS Life's maximum exposure to loss as a result of its investment in CDO residual tranches is represented by the carrying value. F-26IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Deferred Policy Acquisition Costs and Deferred Sales Inducement Costs --------------------------------------------------------------------- The balances of and changes in DAC as of and for the years ended December 31, were:
(Thousands) 2005 2004 2003 ----------------------------------------------------------------------------------------------------------------Balance, beginning of year $ 3,637,956 $ 3,336,208 $ 3,077,994 Impact of SOP 03-1 - 19,600 - Capitalization of acquisition costs 632,743 533,842 516,928 Amortization, excluding impact of changes in assumptions (382,882) (340,578) (266,108) Amortization, impact of annual third quarter changes in DAC-related assumptions 67,000 23,700 1,800 Amortization, impact of other quarter changes in DAC-related assumptions(a) - 56,100 - Impact of changes in net unrealized securities losses 81,062 9,084 5,594 ---------------------------------------------------------------------------------------------------------------- Balance, end of year $ 4,035,879 $ 3,637,956 $ 3,336,208 ----------------------------------------------------------------------------------------------------------------(a) Primarily relates to a $65.7 million reduction in DAC amortization expense to reflect the lengthening of the amortization periods for certain annuity and life insurance products impacted by IDS Life's adoption of SOP 03-1 on January 1, 2004, partially offset by a $9.6 million increase in amortization expense due to a LTC DAC valuation system conversion.The balances of and changes in DSIC as of and for the years ended December 31, were:
(Thousands) 2005 2004 2003 ----------------------------------------------------------------------------------------------------------------Balance, beginning of year $ 302,997 $ 278,971 $ 231,100 Impact of SOP 03-1 - (2,900) - Capitalization of sales inducements 94,319 70,860 71,839 Amortization (40,332) (33,825) (23,968) Impact of changes in net unrealized securities losses (gains) 13,182 (10,109) - ---------------------------------------------------------------------------------------------------------------- Balance, end of year $ 370,166 $ 302,997 $ 278,971 ----------------------------------------------------------------------------------------------------------------5. Variable Annuity Guarantees --------------------------- This note discusses variable annuity guarantees for which liabilities are established under SOP 03-1, specifically GMDB, GGU and GMIB. See Note 10 for more information about guarantees for which liabilities are established under SFAS 133, specifically GMWB and GMAB. The majority of the variable annuity contracts offered by IDS Life contain GMDB provisions. When market values of the customer's accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. IDS Life also offers GGU provisions on variable annuities with death benefit provisions and contracts containing GMIB provisions. If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contractaccumulation valuegrowth and predetermined annuity purchase rates. IDS Lifehasestablished additional liabilities for these variable annuity death benefits and GMIB provisions. F-27IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The variable annuity death benefit liability is determined each period by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees). Similarly, the GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments. The majority of the GMDB contracts provide for six year reset contract values.increased significantly.In determining the
additionalliabilities for variable annuity death benefits, GMIB andGMIB, IDSthe life contingent benefits associated with GMWB, RiverSource Life projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management will review, and where appropriate, adjust its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will review and update these assumptions annually in the third quarter of each year.F-28IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn response to the market dislocation in the fourth quarter of 2008 and expectations of continued dislocation in 2009, management lowered future variable annuity and variable universal life profit expectations based on continued depreciation in contract values and historical equity market return patterns.The
following provides summary informationvariable annuity death benefit liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.
The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value. See Note 11 to the Consolidated Financial Statements for information regarding the fair value measurement of embedded derivatives. The liability for the life contingent benefits associated with GMWB provisions is determined in the same way as the liability for variable annuity
contractsdeath benefits. The changes in both the fair values of the GMWB and GMAB embedded derivatives and the liability forwhich IDSlife contingent benefits are reflected in benefits, claims, losses and settlement expenses.Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the market value of embedded equity options. See Note 11 to the Consolidated Financial Statements for information regarding the fair value measurement of embedded derivatives.
Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2008, depending on year of issue, with an average rate of approximately 5.8%.
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Life,
has established additionalDisability Income and Long Term Care InsuranceFuture policy benefits and policy claims and other policyholders’ funds related to life, DI and LTC insurance include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI and LTC policies as claims are incurred in the future.
Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values. Accumulation values are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts withdrawn by policyholders.
Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported DI and
GMIBLTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for RiverSource Life’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2008, with an average rate of 4.8%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2008, with an average rate of 4.1%.Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, DI and LTC policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Anticipated mortality and morbidity rates are based on established industry mortality and morbidity tables, with modifications based on RiverSource Life’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life ranged from 4.0% to 10.0% at December 31, 2008, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively. Anticipated discount rates for LTC vary by plan and were 5.8% at December 31, 2008 and range from 5.9% to 6.3% over 40 years.
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.
Derivative Instruments and Hedging Activities
RiverSource Life uses derivative instruments to manage its exposure to various market risks. All derivatives are recorded at fair value. The fair value of RiverSource Life’s derivative instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any. RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (2) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”).
For derivative instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings. The mark-to-market adjustment on derivatives hedging variable annuity living benefits and equity indexed annuities are included within benefits, claims, losses and settlement expenses and interest credited to fixed accounts, respectively. The mark-to-market adjustment on all other derivatives is a component of net investment income. These derivatives primarily provide economic hedges to equity market and interest rate exposures. Examples include structured derivatives, options, futures, equity and interest rate swaps and swaptions that economically hedge the equity and interest rate exposure of derivatives embedded in certain annuity liabilities.
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For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of
December 31:
------------------------------------------------------------------------------------------------------------ VARIABLE ANNUITY GMDB, GMIB AND GGU BY BENEFIT TYPE 2005 2004 ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) ------------------------------------------------------------------------------------------------------------Contracts with GMDB Total Contract Value $ 9,106,907 $ 3,241,618 Providing for Return of Contract Value in Separate Accounts $ 7,409,865 $ 1,727,415 Premium Net Amount at Risk* $ 16,727 $ 110,922 Weighted Average Attained Age 60 62 ------------------------------------------------------------------------------------------------------------ Contracts with GMDB Total Contract Value $ 24,608,183 $ 27,453,193 Providing for Six Year Contract Value in Separate Accounts $ 20,362,261 $ 22,787,083 Reset Net Amount at Risk* $ 762,724 $ 1,267,225 Weighted Average Attained Age 61 60 ------------------------------------------------------------------------------------------------------------ Contracts with GMDB Total Contract Value $ 5,129,201 $ 4,039,358 Providing for One Year Contract Value in Separate Accounts $ 4,210,758 $ 3,078,491 Ratchet Net Amount at Risk* $ 45,363 $ 55,622 Weighted Average Attained Age 61 61 ------------------------------------------------------------------------------------------------------------ Contracts with Other Total Contract Value $ 993,152 $ 494,668 GMDB Contract Value in Separate Accounts $ 891,930 $ 397,696 Net Amount at Risk* $ 16,415 $ 11,689 Weighted Average Attained Age 59 66 ------------------------------------------------------------------------------------------------------------ Contracts with GGU Total Contract Value $ 619,846 $ 450,067 Death Benefit Contract Value in Separate Accounts $ 535,821 $ 363,753 Net Amount at Risk* $ 34,844 $ 18,192 Weighted Average Attained Age 61 64 ------------------------------------------------------------------------------------------------------------ Contracts with GMIB Total Contract Value $ 792,578 $ 603,251 Contract Value in Separate Accounts $ 711,759 $ 517,596 Net Amount at Risk* $ 15,970 $ 11,886 Weighted Average Attained Age 60 59 ------------------------------------------------------------------------------------------------------------* Represents current death benefit less total contract value for GMDB, amount of gross up for GGU and accumulated guaranteed minimum benefit base less total contract value for GMIB and assumes the actuarially remote scenario that all claims become payable on the same day.------------------------------------------------------------------------------------------------------------ ADDITIONAL LIABILITIES AND INCURRED BENEFITS GMDB & GGU GMIB ------------------------------------------------------------------------------------------------------------For the year ended Liability balance at January 1 $ 29,966 $ 2,989 December 31, 2005 Reported claims $ 12,203 $ - Liability balance at December 31 $ 16,451 $ 3,528 Incurred claims (reported + change in liability) $ (1,312) $ 539 ------------------------------------------------------------------------------------------------------------The additionalthe corresponding hedged assets, liabilities or firm commitments, are recognized in current earnings. If a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings over the remaining life of the hedged item.For derivative instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings. Any ineffective portion of the gain or loss is reported currently in earnings. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) may be recognized into earnings over the period that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.
For further details on the types of derivatives RiverSource Life uses and how it accounts for
guaranteed benefits established under SOP 03-1 are supported by general account assets. Changes in these liabilities are included in deaththem, see Note 2 andother benefitsNote 15 to the Consolidated Financial Statements.Income Tax Accounting
Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of
Income. Contract valuesincome taxes that RiverSource Life expects to pay to or receive from various taxing jurisdictions inseparate accounts were invested in various equity, bond and other funds as directed by the contractholder. No gains or losses were recognized on assets transferred to separate accounts for the periods presented. F-29IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Income Taxes ------------ IDSconnection with its operations. RiverSource Lifequalifies as a life insurance company for federal income tax purposes. As such, IDS Life is subject to the Internal Revenue Code provisions applicable to life insurance companies. Provisions (benefits)provides for income taxeswere:
(Thousands) 2005 2004 2003 ---------------------------------------------------------------------------------------------------------------Federal income tax: Current $ 55,766 $ 159,783 $ 91,862 Deferred 122,264 70,574 (30,714) --------------------------------------------------------------------------------------------------------------- Total federal income taxes 178,030 230,357 61,148 State income taxes-current 3,627 (4,180) 5,797 --------------------------------------------------------------------------------------------------------------- Income tax provision before accounting change $ 181,657 $ 226,177 $ 66,945 ===============================================================================================================The principal reasonsbased on amounts that it believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items. In the event that theaggregateultimate tax treatment of items differs from RiverSource Life’s estimates, it may be required to significantly change the provision for incometaxtaxes recorded in its Consolidated Financial Statements.In connection with the provision
is different from that computed by usingfor income taxes, theU.S. statutory rate of 35% are as follows:
2005 2004 2003 ---------------------------------------------------------------------------------------------------------------Tax at U.S. statutory rate 35.0% 35.0% 35.0% Changes in taxes resulting from: Tax-exempt interest and dividend income (9.7) (3.1) (10.6) State income taxes, net of federal benefit 0.4 (0.4) 0.7 Affordable housing credits - - (12.8) Taxes applicable to prior years 3.2 (2.6) - Other, net (0.5) (0.4) (0.6) --------------------------------------------------------------------------------------------------------------- Income tax provision before accounting change 28.4% 28.5% 11.7% ===============================================================================================================Deferred incomeConsolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured forU.S. GAAP reportingfinancial statement purposes versusincomethe assets and liabilities measured for tax return purposes.The significant components of IDS Life's deferred income tax assets and liabilities as of December 31, 2005 and 2004 are reflected in the following table:
(Thousands) 2005 2004 ---------------------------------------------------------------------------------------------------------------Deferred income tax assets: Policy reserves $ 1,101,836 $ 1,035,300 Other investments 69,864 139,066 Deferred taxes related to net securities and derivative unrealized losses 70,379 - Other 61,896 55,556 --------------------------------------------------------------------------------------------------------------- Total deferred income tax assets 1,303,975 1,229,922 --------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Deferred policy acquisition costs 1,154,402 1,116,235 Deferred taxes related to net securities and derivative unrealized gains - 183,988 Other 158,672 70,901 --------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 1,313,074 1,371,124 --------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities, net $ 9,099 $ 141,202 ---------------------------------------------------------------------------------------------------------------F-30IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A portion of IDS Life's income earned prior to 1984 was not subject to current taxation but was accumulated, for tax purposes, in a "policyholders' surplus account." At December 31, 2005, IDS Life had a policyholders' surplus account balance of $1.1 million. The American Jobs Creation Act of 2004 which was enacted on October 22, 2004 provides a two-year suspension of the tax on policyholders' surplus account distributions. IDS Life has made distributions of $19 million, which will not be subject to tax under the two-year suspension. Previously the policyholders' surplus account was only taxable if dividends to shareholders exceeded the shareholders' surplus account and/or IDS Life is liquidated. Deferred income taxes of $0.4 million have not been established as distributions of the remaining policyholders' surplus account are contemplated in 2006. IDS Life is required to establish a valuation allowance for any portion of the deferred income tax assets that management believes will not be realized. Included in IDS Life'sAmong RiverSource Life’s deferred tax assets is a significant deferred tax asset relating tocapital losses realized for tax return purposes andcapital 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.IDSRiverSource Life
has $231 million in capital loss carryforwards that expire December 31, 2009. The deferred tax benefit of these capital loss carryforwards is reflected in the other investments deferred tax assets, net of other related items. Based on analysis of IDS Life's tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable IDS Life to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of December 31, 2005 and 2004. As a result of the separation of Ameriprise Financial from American Express, IDS Life will be required to file a short period income tax return through September 30, 2005 which will be included as part of the American Express consolidated income tax return for the year ended December 31, 2005. Additionally, IDS Life and subsidiarieswill not be able to file a consolidated U.S. federal income tax return with the other members of the Ameriprise Financial affiliated group until 2010 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. This lack of consolidation could affect RiverSource Life’s ability to fully realize certain deferred tax assets, including the capital losses.RiverSource Life is required to establish a valuation allowance for
fiveany portion of deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, a) future taxable income exclusive of reversing temporary differences and carryforwards, b) future reversals of existing taxable temporary differences, c) taxable income in prior carryback years,followingand d) tax planning strategies. It is likely that management will need to identify and implement appropriate planning strategies to ensure its ability to realize deferred tax assets and avoid theDistribution. Therefore IDSestablishment of a valuation allowance with respect to such assets. In the opinion of management, it is currently more likely than not that RiverSource Life will realize the benefit of its deferred tax assets, including its capital loss deferred tax assets; therefore, no such valuation allowance has been established.Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on RiverSource Life’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.
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Financial Condition
RiverSource Life’s total assets and liabilities decreased in 2008 primarily due to lower separate account assets and liabilities, which decreased as a result of market conditions in the second half of 2008.
Investments primarily include corporate debt securities and mortgage and other asset backed securities. At December 31, 2008, RiverSource Life’s corporate debt securities comprised a diverse portfolio with the largest concentrations accounting for approximately 70% of the portfolio in the following industries: banking and finance, utilities, energy and food processing. Investments also
be required to file a separate short period consolidatedincluded $3.9 billion and $3.7 billion of commercial mortgage loans, policy loans and trading securities and other investments at December 31, 2008 and 2007, respectively. Investments are principally funded by sales of insurance and annuities and by reinvested income.Investments include $1.0 billion and $1.5 billion of below investment grade securities at December 31, 2008 and 2007, respectively. These investments represent 5% and 7% of RiverSource Life’s investment portfolio at December 31, 2008 and 2007, respectively.
Separate account assets primarily represent funds held for the exclusive benefit of variable annuity contractholders and variable life insurance
company income tax return forpolicyholders. These assets are generally carried at market value and separate account liabilities are equal to separate account assets. RiverSource Life earns administration and other fees from theperiod October 1, 2005 throughrelated accounts. The decrease in separate account assets and liabilities to $41.8 billion as of December 31,2005. The items comprising other comprehensive income2008 compared to $58.1 billion as of December 31, 2007, primarily resulted from market impacts of $19.1 billion partially offset by net inflows of $3.0 billion.RiverSource Life holds reserves for current and future obligations that are related to fixed annuities, certain guaranteed payments under variable annuities and life, DI and LTC insurance. These reserves are reflected in future policy benefits in the Consolidated
StatementsBalance Sheets. Reserves for fixed annuities and universal life contracts are equal to the underlying contract accumulation values. Reserves for other life, DI and LTC insurance products are based on various assumptions, including mortality rates, morbidity rates and policy persistency.Fair Value Measurements
RiverSource Life reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents. Statement of
Stockholder's EquityFinancial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”) defines fair value, provides a framework for measuring fair value and expands disclosures about fair value measurements. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions. RiverSource Life includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes arepresentedobtained when quotes from pricing services are not available.RiverSource Life validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. SFAS 157 does not require the use of market prices that are the result of a forced liquidation or distressed sale.
Inactive Markets
Through RiverSource Life’s own experience transacting in the marketplace and through discussions with its pricing vendors, RiverSource Life believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services). RiverSource Life considers market observable yields for other asset classes it considers to be of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities. The discount rates used for these securities at December 31, 2008 ranged from 13% to 22%.
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At the beginning of the fourth quarter of 2008, $219 million of prime non-agency residential mortgage backed securities were transferred from Level 2 to Level 3 of the fair value hierarchy because management believes the market for these prime quality assets is now inactive. The loss recognized on these assets during the fourth quarter of 2008 was $47 million of which $13 million was included in net investment income and $34 million was included in other comprehensive loss.
Residential Mortgage backed Securities Backed by Subprime, Alt-A or Prime Collateral
Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. Alt-A mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime but may not conform to government-sponsored standards. Prime mortgage lending is the origination of residential mortgage loans to customers with good credit profiles. RiverSource Life has exposure to these types of loans only through mortgage backed and asset backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting standards by some originators, has recently led to higher delinquency and loss rates for some of these investments. Recent market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of RiverSource Life’s risk management process, an internal rating system is used in conjunction with market data as the basis of analysis to assess the likelihood that RiverSource Life will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment, RiverSource Life performs its own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds, loss severity, and geographic concentrations to determine if an other-than-temporary impairment should be recognized. Based on this analysis, other than non-agency mortgage backed securities that had credit-related impairments recorded in 2008, all contractual payments are expected to be received.
The following table presents, as of December 31, 2008, RiverSource Life’s residential mortgage backed and asset backed securities backed by sub-prime, Alt-A or prime mortgage loans by credit rating and vintage year (in millions):
AAA
AA
A
BBB
BB & Below
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Sub-prime
2004 & prior
$
5
$
4
$
7
$
3
$
—
$
—
$
—
$
—
$
—
$
—
$
12
$
7
2005
61
51
13
8
—
—
5
2
—
—
79
61
2006
23
19
—
—
—
—
—
—
—
—
23
19
2007
—
—
—
—
—
—
—
—
—
—
—
—
2008
10
8
—
—
—
—
—
—
—
—
10
8
Total Sub-prime
$
99
$
82
$
20
$
11
$
—
$
—
$
5
$
2
$
—
$
—
$
124
$
95
Alt-A
2004 & prior
$
54
$
46
$
6
$
6
$
—
$
—
$
—
$
—
$
—
$
—
$
60
$
52
2005
241
148
12
12
7
7
13
13
2
2
275
182
2006
3
3
—
—
—
—
17
16
—
—
20
19
2007
32
15
—
—
—
—
—
—
—
—
32
15
2008
—
—
—
—
—
—
—
—
—
—
—
—
Total Alt-A
$
330
$
212
$
18
$
18
$
7
$
7
$
30
$
29
$
2
$
2
$
387
$
268
Prime
2004 & prior
$
109
$
88
$
18
$
11
$
—
$
—
$
—
$
—
$
—
$
—
$
127
$
99
2005
103
75
52
28
14
6
—
—
—
—
169
109
2006
—
—
6
2
—
—
—
—
—
—
6
2
2007
—
—
—
—
17
11
—
—
—
—
17
11
2008
19
31
—
—
—
—
—
—
—
—
19
31
Total Prime
$
231
$
194
$
76
$
41
$
31
$
17
$
—
$
—
$
—
$
—
$
338
$
252
Grand Total
$
660
$
488
$
114
$
70
$
38
$
24
$
35
$
31
$
2
$
2
$
849
$
615
29
Fair Value of Liabilities and Nonperformance Risk
SFAS 157 also requires companies to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for RiverSource Life’s obligations of its variable annuity riders, RiverSource Life considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, RiverSource Life adjusts the valuation of variable annuity riders by updating certain policyholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are adjusted to estimate the risk of RiverSource Life not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of December 31, 2008. As RiverSource Life’s estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $235 million, net of DAC and DSIC amortization and income taxes, based on December 31, 2008 credit spreads.
The nonperformance risk for RiverSource Life’s derivatives is managed and mitigated primarily through the
followinguse of master netting arrangements and collateral arrangements. As of December 31, 2008, any deterioration in RiverSource Life’s derivative counterparties’ credit would not materially impact RiverSource Life’s financial statements.Liquidity and Capital Resources
Liquidity Strategy
The liquidity requirements of RiverSource Life are generally met by funds provided by investment income,
tax benefit amounts:
(Thousands) 2005 2004 2003 -------------------------------------------------------------------------------------------------------Net unrealized securities losses $ 248,363 $ 18,761 $ 48,791 Net unrealized derivative losses 6,004 12,426 4,188 ------------------------------------------------------------------------------------------------------- Net income tax benefit $ 254,367 $ 31,187 $ 52,979 -------------------------------------------------------------------------------------------------------F-31IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Statutory Capitalmaturities andSurplus ----------------------------- Statutoryperiodic repayments of investments, deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial. Other liquidity sources RiverSource Life has established are repurchase agreements andsurplusan availablefor distribution orline of credit with Ameriprise Financial aggregating $200 million. The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financialare limitedand investment purchases. RiverSource Life routinely reviews its sources and uses of funds in order toIDSmeet its ongoing obligations.At December 31, 2008 and 2007, RiverSource Life
Insurance Company's surplushad no securities sold under repurchase agreements and no amounts were outstanding on the line of credit with Ameriprise Financial.In September 2008, RiverSource Life, as
determined in accordancethe lender, entered into a revolving credit agreement withaccounting practices prescribed by state insurance regulatory authorities. IDS Life Insurance Company's statutory unassigned surplus aggregated $925.1 million and $909.7 millionAmeriprise Financial as the borrower. There were no amounts outstanding as of December 31,2005 and 2004, respectively. In addition, any dividend or distribution paid prior to December 24, 2006 (one year after IDS Life Insurance Company's most recent dividend payment) would require pre-notification2008. See Note 10 to theCommissionerConsolidated Financial Statements for additional information.Capital Activity
Dividends paid and received were as follows:
2008
2007
2006
(in millions)
Cash dividends paid to Ameriprise Financial
$
775
$
900
$
300
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY
77
83
25
Non-cash dividend paid to Ameriprise Financial from RiverSource Tax Adv. Inv.
118
—
—
Notifications to state insurance regulators were made in advance of
Commercepayments ofthe State of Minnesota, who has the authority to disapprove and prevent payment thereof. From December 24, 2006 to December 31, 2006,dividendsor distributionsfor amounts in excess of$327.5statutorily defined thresholds. See Note 13 to the Consolidated Financial Statements for additional information.During 2008, RiverSource Life Insurance Company received a non-cash capital contribution of $83 million
would be subject to this same pre-notificationcomprised of below investment grade syndicated bank loans from Ameriprise Financial.In addition, RiverSource Life Insurance Company received a $239 million contribution from Ameriprise Financial, consisting of all the issued and
potential disapproval. Statutory net income for the years ended December 31 and capital and surplus asoutstanding shares ofDecember 31 are summarized as follows:
(Thousands) 2005 2004 2003 ------------------------------------------------------------------------------------------------------------Statutory net income $ 341,235 $ 379,950 $ 432,063 Statutory capital and surplus 2,942,153 2,276,724 2,804,593IDSRiverSource Tax Adv. Inv.30
Regulatory Capital
RiverSource Life Insurance Company and
its wholly-owned life insurance subsidiariesRiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities are as follows:
December 31,
Actual Capital(a)
Regulatory
Capital
Requirement(b)
2008
2007
2008
2007
(in millions)
RiverSource Life Insurance Company
$
2,722
$
3,017
$
551
$
442
RiverSource Life Insurance Co. of New York
229
288
58
34
(a) Actual capital, as defined by the National Association of Insurance Commissioners (“NAIC”) for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the statutory risk-based capital filing.
Contractual Commitments
The contractual obligations identified in the table below include balance sheet transactions that represent material expected or contractually committed future obligations of RiverSource Life. Payments due by period as of December 31,
20052008 are as follows:
Regulatory Capital (Thousands) Actual Capital(a) Requirement -------------------------------------------------------------------------------------------------IDS Life Insurance Company $ 3,270,285 $ 750,975 American Enterprise Life Insurance Company 583,303 125,285 IDS Life Insurance Company of New York 246,001 39,880 American Partners Life Insurance Company 67,382 10,906 American Centurion Life Assurance Company 61,748 12,654 -------------------------------------------------------------------------------------------------(a) Actual Capital, as defined by the NAIC for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.8. Related Party Transactions -------------------------- IDS Life loans funds to Ameriprise Financial under a collateral loan agreement. There was no balance on the loan
Payments due in year ending
Total
2009
2010-
2011
2012-
2013
2014 and
thereafter
(in millions)
Insurance and annuities(1)
$
47,241
$
2,994
$
4,858
$
4,610
$
34,779
Deferred premium options obligations(2)
876
134
247
198
297
Total
$
48,117
$
3,128
$
5,105
$
4,808
$
35,076
(1) These scheduled payments are represented by reserves of approximately $28.8 billion at December 31,
20052008 and2004.are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions. Actual payment obligations may differ if experience varies from these assumptions. Separate account liabilities have been excluded as associated contractual obligations would be met by separate account assets.(2) The fair value of these deferred premium options recorded on the Consolidated Balance Sheets was $795 million as of December 31, 2008. See Note 15 to the Consolidated Financial Statements for more information about deferred premium options.
Risk Management
In accordance with regulatory investment guidelines, RiverSource Life Insurance Company and RiverSource Life of NY, through their respective boards of directors or board of directors’ investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures, and their effect on profitability in order to guide the management of the general account assets. They also review the distribution of assets in the portfolio by type and credit risk sector. The objective is to structure the investment securities portfolio in the general account to meet contractual obligations under the insurance and annuity products and achieve targeted levels of profitability within defined risk parameters.
RiverSource Life has developed an asset/liability management approach with separate investment objectives to support specific product liabilities, such as insurance and annuities. As part of this approach, RiverSource Life develops specific investment guidelines that are designed to optimize trade offs between risk and return and help ensure RiverSource Life is able to support future benefit payments under its insurance and annuity obligations. These same objectives must be consistent with management’s overall investment objectives for the general account investment portfolio.
RiverSource Life’s owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to provide clients with a competitive rate of return on their investments while managing risk. Investment in fixed maturity securities is designed to provide RiverSource Life with a targeted margin between the yield earned on investments and the interest rate credited to clients’ accounts. RiverSource Life does not trade in securities to generate short-term profits for its own account.
31
As part of RiverSource Life’s investment process, management, with the assistance of its investment advisors, conducts a quarterly review of investment performance. The review process involves the review of certain invested assets which the committee evaluates to determine whether or not any investments are other-than-temporarily impaired and/or which specific interest earning investments should be put on an interest non-accrual basis.
RiverSource Life has interest rate risk and equity market risk. Interest rate risk results from investing in assets that are somewhat longer and reset less frequently than the liabilities they support. RiverSource Life manages interest rate risk through the use of a variety of tools that include modifying the maturities of investments supporting its fixed annuities and insurance products. Additionally, RiverSource Life enters into derivative instruments, such as structured derivatives, options, futures, interest rate swaps and swaptions, which change the interest rate characteristics of client liabilities or investment assets. Because certain of its investment activities are impacted by the value of its managed equity-based portfolios, from time to time RiverSource Life enters into risk management strategies that may include the use of equity derivative instruments, such as equity options, to mitigate its exposure to volatility in the equity markets.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate, equity price and credit risk are the market risks to which RiverSource Life has material exposure. Equity market and interest rate fluctuations can have a significant impact on RiverSource Life’s results of operations, primarily due to the “spread” (the difference between the returns earned on investments that support obligations and the amounts that must be paid to policyholders and contractholders) income generated on its annuities and universal life (“UL”) insurance products, the value of DAC and DSIC assets associated with variable annuity and variable UL products, the values of liabilities for guaranteed benefits associated with its variable annuities and the values of derivatives held to hedge these benefits.
Changes in both the equity and fixed income markets during 2008 have affected RiverSource Life’s market risk position. These changes resulted in lower asset values against which RiverSource Life takes asset-based fees and expenses as well as increases in stated liabilities for variable annuity guaranteed benefits. The guaranteed benefits associated with RiverSource Life’s variable annuities are GMWB, GMAB, GMDB and GMIB options. Each of the guaranteed benefits mentioned above guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.
To evaluate interest rate and equity price risk, RiverSource Life performs sensitivity testing which measures the impact on pretax income from the sources listed below for a 12 month period following a hypothetical 100 basis point increase in interest rates and a hypothetical 10% decline in equity markets. Due to the market conditions in the second half of 2008, RiverSource Life also performed sensitivity testing using a hypothetical 20% decline in equity markets.
Equity price risk includes absolute market level and implied market volatility changes. The estimates of net equity price risk exposure presented below assume no changes in implied market volatility.
The numbers below show RiverSource Life’s estimate of the pretax impact of these hypothetical market moves, net of hedging as of December 31, 2008. DAC and DSIC changes are shown based on the impact of projecting lower profits as a result of the market declines as well as linked specifically to the changes in RiverSource Life’s variable annuity riders. Following the table is a discussion by source of risk and the portfolio management techniques and derivative instruments RiverSource Life uses to mitigate these risks.
Equity Price Exposure to Pretax Income
Equity Price Decline 10%
Before
Hedge Impact
Hedge
Impact
Net
Impact
(in millions)
Asset-based fees and expenses
$
(40
)
$
N/A
$
(40
)
DAC and DSIC amortization(1)
(160
)
N/A
(160
)
Variable annuity riders:
GMDB and GMIB
(67
)
N/A
(67
)
GMWB
(162
)
179
17
GMAB
(38
)
35
(3
)
DAC and DSIC amortization(2)
N/A
N/A
(5
)
Total variable annuity riders
(267
)
214
(58
)
Equity indexed annuities
2
(2
)
—
Total
$
(465
)
$
212
$
(258
)
32
Equity Price Exposure to Pretax Income
Equity Price Decline 20%
Before
Hedge Impact
Hedge
Impact
Net
Impact
(in millions)
Asset-based fees and expenses
$
(81
)
$
N/A
$
(81
)
DAC and DSIC amortization(1)
(238
)
N/A
(238
)
Variable annuity riders:
GMDB and GMIB
(116
)
N/A
(116
)
GMWB
(352
)
371
19
GMAB
(81
)
74
(7
)
DAC and DSIC amortization(2)
N/A
N/A
(2
)
Total variable annuity riders
(549
)
445
(106
)
Equity indexed annuities
3
(3
)
—
Total
$
(865
)
$
442
$
(425
)
Interest Rate Exposure to Pretax Income
Interest Rate Increase 100 Basis Points
Before
Hedge Impact
Hedge
Impact
Net
Impact
(in millions)
Asset-based fees and expenses
$
(9
)
$
N/A
$
(9
)
Variable annuity riders:
GMWB
342
(439
)
(97
)
GMAB
64
(51
)
13
DAC and DSIC amortization(2)
N/A
N/A
51
Total variable annuity riders
406
(490
)
(33
)
Fixed annuities, fixed portion of variable annuities and fixed insurance products
(3
)
N/A
(3
)
Total
$
394
$
(490
)
$
(45
)
N/A Not Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected profits.
(2) Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.
The above results compare to estimated negative impacts, net of hedging and DAC, of $3 million related to a 100 basis point increase in interest rates and $64 million related to a 10% equity market decline as of December 31, 2007. The larger impact in 2008 is a result of market dislocation in 2008 and changes to RiverSource Life’s valuation models. The discount rates and credit spreads RiverSource Life uses to value certain of its investments have been negatively impacted by the current market. This
loanhas led to greater pretax loss projections related to RiverSource Life’s variable annuity riders partially offset by a lower impact to fees and expenses primarily as a result of lower asset values. In addition, management’s action to constrain the near term growth rate for equities in the DAC models results in a greater pretax loss under the above equity scenarios.Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming the composition of invested assets and liabilities does not change in the 12 month period following the hypothetical market decline, that there are no changes in implied market volatility and the increase in interest rates produces a parallel shift in the yield curve. The selection of a 100 basis point interest rate increase as well as a 10% and 20% equity market decline should not be construed as a prediction of future market events.
Asset-Based Fees and Expenses
RiverSource Life earns asset-based management fees on its owned separate account assets partially offset by certain expenses. At December 31, 2008, the value of these assets was $41.8 billion. This source of revenue is subject to both interest rate and equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. RiverSource Life does not hedge the equity price risk or the interest rate risk of this exposure.
33
DAC and DSIC Amortization
For annuity and universal life products, DAC and DSIC are amortized on the basis of estimated gross profits. Estimated gross profits are a proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase current period estimated gross profits, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income.
Variable Annuity Riders
The guaranteed benefits associated with the variable annuities are GMWB, GMAB, GMDB and GMIB options. Each of the guaranteed benefits mentioned above guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying assets.
The total value of all variable annuity contracts has decreased from $57.2 billion at December 31, 2007 to $43.3 billion at December 31, 2008. These contract values include GMWB and GMAB contracts which have decreased from $13.1 billion and $2.3 billion at December 31, 2007 to $12.7 billion and $2.0 billion at December 31, 2008, respectively. At December 31, 2008, the reserves for the GMWB and GMAB were $1.5 billion and $367 million compared to reserves of $136 million and $33 million at December 31, 2007, respectively. The increase in the reserves for the GMWB and GMAB reflect the changes in economic factors impacting the mark-to-market value of the guarantees. At December 31, 2008, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $67 million compared to $27 million at December 31, 2007.
As a means of economically hedging its obligations under GMWB and GMAB provisions, RiverSource Life purchases equity put and call options, enters into interest rate swaps, swaptions and trades equity futures contracts. See Note 15 to the Consolidated Financial Statements for further information on derivative instruments.
Equity Price Risk — Variable Annuity Riders
The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions, regardless of the performance of the investment assets. For this reason, when equity markets decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to RiverSource Life’s earnings.
The core derivative instruments with which RiverSource Life hedges the equity price risk of its GMWB and GMAB are longer dated put and call derivatives; these core instruments are supplemented with equity futures and total return swaps.
Interest Rate Risk — Variable Annuity Riders
The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at fair value separately from the underlying host variable annuity contract. Changes in fair value of the GMWB and GMAB are recorded through earnings with fair value calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB and GMAB liabilities. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives, interest rate swaps and swaptions. These derivatives are an alternative to the more customized equity puts that were previously used. RiverSource Life entered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to increase, RiverSource Life would have to pay more to the swap counterparty and the fair value of its equity puts would decrease, resulting in a negative impact to RiverSource Life’s pretax income.
Fixed Annuities, Fixed Portion of Variable Annuities and Fixed Insurance Products
Interest rate exposures arise primarily with respect to the fixed account portion of RiverSource Life’s annuity and insurance products and its investment portfolio. RiverSource Life guarantees an interest rate to the holders of these products. Premiums and deposits collected from clients are primarily invested in fixed rate securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments.
34
Therefore, in an increasing rate environment, higher interest rates are reflected in crediting rates to clients sooner than in rates earned on invested assets resulting in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. RiverSource Life had $26.8 billion in reserves in future policy benefits on its Consolidated Balance Sheets at December 31, 2008 to recognize liabilities created by these products. As of December 31, 2008, RiverSource Life did not hedge this exposure. As of December 31, 2007, RiverSource Life hedged part of this exposure through the use of swaptions. As of December 31, 2007, the outstanding derivatives were not significant.
Equity Indexed Annuities
RiverSource Life’s equity indexed annuity product is a single premium annuity issued with an initial term of seven years. The annuity guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation value upon renewal plus a return that is linked to the performance of the S&P 500 Index. The equity-linked return is based on a participation rate initially set at between 50% and 90% of the S&P 500 Index which is guaranteed for the initial seven-year term when the contract is held to full term. Of the $28.8 billion in future policy benefits at December 31, 2008, $244 million relates to the liabilities created by this product. In 2007, RiverSource Life discontinued new sales of equity indexed annuities. See Note 15 to the Consolidated Financial Statements for further information on derivative instruments.
Equity Price Risk — Equity Indexed Annuities
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity markets. To hedge this exposure, a portion of the proceeds from the sale of equity indexed annuities is used to purchase futures, calls and puts which generate returns to replicate what RiverSource Life must credit to client accounts. In conjunction with purchasing puts, RiverSource Life also writes puts. Pairing purchased puts with written puts allows RiverSource Life to better match the characteristics of the liability.
Interest Rate Risk — Equity Indexed Annuities
Most of the proceeds from the sale of equity indexed annuities are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. RiverSource Life earns income from the difference between the return earned on invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount credited is affected by changes in interest rates.
Credit Risk
RiverSource Life is exposed to credit risk within its investment portfolio, which includes loans, and through derivative and reinsurance counterparties. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. RiverSource Life’s potential derivative credit exposure to each counterparty is aggregated with all of its other exposures to the counterparty to determine compliance with established credit guidelines at the time it enters into a derivative transaction. RiverSource Life manages credit risk through fundamental credit analysis, issuer and industry concentration guidelines, and diversification requirements. These guidelines and oversight of credit risk are managed through its comprehensive enterprise risk management program that includes members of senior management.
RiverSource Life manages the risk of adverse default experience on these investments by applying disciplined fundamental credit analysis and underwriting standards, prudently limiting exposures to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity and its affiliates, RiverSource Life’s exposures from all types of transactions are aggregated and managed in relation to guidelines set by risk tolerance thresholds and external and internal rating quality. RiverSource Life remains exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing.
Credit exposures on derivative contracts may take into account netting arrangements and collateral arrangements. Before executing a new type of structure of derivative contract, RiverSource Life determines 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.
35
Additionally, RiverSource Life reinsures a portion of the insurance risks associated with its life, DI and LTC insurance products through reinsurance agreements with unaffiliated reinsurance companies. Reinsurance is used in order to limit losses, reduce exposure to large risks and provide additional capacity for future growth. To manage exposure to losses from reinsurer insolvencies, the financial condition of reinsurers is evaluated prior to entering into new reinsurance treaties and on a periodic basis during the terms of the treaties. RiverSource Life remains primarily liable as the direct insurer on all risks reinsured. As of December 31, 2008, RiverSource Life’s largest reinsurance credit risk related to a long term care coinsurance arrangement between RiverSource Life and a life insurance subsidiary of Genworth Financial, Inc. See Note 2 and Note 7 to the Consolidated Financial Statements for further information on reinsurance.
Forward-Looking Statements
This report contains forward-looking statements that reflect RiverSource Life’s plans, estimates and beliefs. RiverSource Life’s actual results could differ materially from those described in these forward-looking statements. RiverSource Life has made various forward-looking statements in this report. Examples of such forward-looking statements include:
· statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and
· statements of assumptions underlying such statements.
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. RiverSource Life cautions the reader that the following list of factors is not exhaustive. There may also be other risks that RiverSource Life is 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. RiverSource Life undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
· changes in the valuations, liquidity and volatility in the interest rate, credit default equity market, and foreign exchange environments;
· changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation;
· RiverSource Life’s investment management performance and consumer acceptance of RiverSource Life’s products;
· effects of competition in the financial services industry and changes in RiverSource Life’s product distribution mix and distribution channels;
· RiverSource Life’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings; as well as the opinions of rating organizations and other analysts or RiverSource Life’s regulators, distributors or policyholders and contractholders in response to any change or prospect of change in such opinion;
· risks of default by issuers or guarantors of investments RiverSource Life owns or by counterparties to hedge derivative, insurance or reinsurance arrangements; experience deviations from RiverSource Life’s assumptions regarding such risks and the evaluations or the prospect of changes in evaluations of such third parties published by rating organizations or other analysts;
· experience deviations from RiverSource Life’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market volatility underlying RiverSource Life’s hedges on guaranteed benefit annuity riders;
· successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;
· RiverSource Life’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
· the impact of intercompany allocations to RiverSource Life from Ameriprise Financial and its affiliates;
· Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute RiverSource Life’s products through current and future distribution channels;
· the impact of Ameriprise Financial’s efforts to improve distribution economics and of RiverSource Life’s efforts to grow third party distribution and to realize benefits from reengineering and tax planning;
36
· changes in U.S. federal income or estate tax laws potentially making RiverSource Life’s products less attractive to clients;
· RiverSource Life’s ability to recover from catastrophes, both natural and man-made;
· changes in the capital markets and competitive environments induced or resulting from the partial or total ownership or other support by central governments or certain financial services firms of financial assets; and
· general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability to and inclination to invest in or purchase insurance and other products other than cash and equivalents ,the costs of products and services RiverSource Life consumes in the conduct of its business, and applicable legislation and regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and regulatory rulings and pronouncements.
A further description of these and other risks and uncertainties can be
increased to a maximum of $75 millionfound under “Item 1A - Risk Factors” in this Annual Report on Form 10-K.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in Item 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis - Quantitative and
pays interest at a rate equalQualitative Disclosures about Market Risk.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page Number
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
38
Consolidated Balance Sheets at December 31, 2008 and 2007
39
Consolidated Statements of Income for each of the three years ended December 31, 2008, 2007 and 2006
40
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2008, 2007 and 2006
41
Consolidated Statements of Shareholder’s Equity for each of the three years ended December 31, 2008, 2007 and 2006
42
Notes to Consolidated Financial Statements
43 to 77
Schedules:
All information on schedules to the
preceding month's effective new money rateConsolidated Financial Statements required by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated Financial Statements and Notes thereto or is not required. Therefore, all schedules have been omitted.37
Report of Independent Registered Public Accounting Firm
The Board of Directors
RiverSource Life Insurance CompanyWe have audited the accompanying consolidated balance sheets of RiverSource Life Insurance Company, (a wholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholder’s equity, and cash flows for
IDS Life's permanent investments. F-32IDSeach of the three years in the period ended December 31, 2008. These financial statements are the responsibility of RiverSource Life Insurance Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RiverSource Life Insurance Company at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 2008 the Company adopted Statement of Financial Accounting Standards (FAS) No. 157, Fair Value Measurements. Also discussed in Note 3, in 2007 the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, and American Institute of Certified Public Accountants Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 2, 2009
38
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
December 31,
2008
2007
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2008, $19,452; 2007, $21,020)
$
18,070
$
20,792
Common and preferred stocks, at fair value (cost: 2008 and 2007, $30)
16
29
Commercial mortgage loans, at cost (less allowance for loan losses: 2008, $17; 2007, $16)
2,737
2,892
Policy loans
722
697
Trading securities and other investments
452
155
Total investments
21,997
24,565
Cash and cash equivalents
3,307
980
Reinsurance recoverables
1,592
1,290
Amounts due from brokers
3
123
Deferred income taxes, net
599
9
Other accounts receivable
99
119
Accrued investment income
239
252
Deferred acquisition costs
4,424
4,429
Deferred sales inducement costs
518
511
Other assets
2,658
609
Separate account assets
41,787
58,070
Total assets
$
77,223
$
90,957
Liabilities and Shareholder’s Equity
Liabilities:
Future policy benefits
$
28,753
$
26,977
Policy claims and other policyholders’ funds
172
91
Amounts due to brokers
1,862
361
Other liabilities
910
392
Separate account liabilities
41,787
58,070
Total liabilities
73,484
85,891
Shareholder’s equity:
Common stock, $30 par value;
100,000 shares authorized, issued and outstanding
3
3
Additional paid-in capital
2,116
2,031
Retained earnings
2,336
3,188
Accumulated other comprehensive loss, net of tax:
Net unrealized securities losses
(678
)
(116
)
Net unrealized derivative losses
(38
)
(40
)
Total accumulated other comprehensive loss
(716
)
(156
)
Total shareholder’s equity
3,739
5,066
Total liabilities and shareholder’s equity
$
77,223
$
90,957
See Notes to Consolidated Financial Statements.
39
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
Years ended December 31,
2008
2007
2006
Revenues
Premiums
$
481
$
485
$
533
Net investment income
1,252
1,424
1,622
Policy and contract charges
1,352
1,217
1,045
Other revenue
255
255
189
Net realized investment gains (losses)
(442
)
61
51
Total revenues
2,898
3,442
3,440
Benefits and expenses
Benefits, claims, losses and settlement expenses
673
760
724
Interest credited to fixed accounts
790
847
955
Amortization of deferred acquisition costs
861
470
356
Separation costs
—
97
131
Other insurance and operating expenses
692
781
637
Total benefits and expenses
3,016
2,955
2,803
Pretax income (loss)
(118
)
487
637
Income tax provision (benefit)
(189
)
53
129
Net income
$
71
$
434
$
508
See Notes to Consolidated Financial Statements.
40
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years ended December 31,
2008
2007
2006
Cash Flows from Operating Activities
Net income
$
71
$
434
$
508
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred acquisition costs and deferred sales inducement costs
(679
)
(828
)
(813
)
Amortization of deferred acquisition costs and deferred sales inducement costs
982
523
404
Premium and discount amortization on Available-for-Sale
57
70
75
Deferred income taxes, net
(234
)
83
121
Contractholder and policyholder charges, non-cash
(248
)
(206
)
(220
)
Net realized investment losses (gains)
442
(61
)
(51
)
Change in operating assets and liabilities:
Trading securities and equity method investments, net
(110
)
166
320
Future policy benefits for traditional life, disability income and long term care insurance
308
275
274
Policy claims and other policyholders’ funds
81
2
3
Reinsurance recoverables
(302
)
(153
)
(154
)
Other accounts receivable
20
(28
)
(27
)
Accrued investment income
14
49
21
Other assets and liabilities, net
1,623
22
(76
)
Net cash provided by operating activities
2,025
348
385
Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales
246
3,020
1,895
Maturities, sinking fund payments and calls
2,510
1,908
2,014
Purchases
(1,684
)
(677
)
(1,416
)
Other investments, excluding policy loans:
Proceeds from sales, maturities, sinking fund payments and calls
282
473
513
Purchases
(250
)
(504
)
(441
)
Change in policy loans, net
(25
)
(47
)
(36
)
Net cash provided by investing activities
1,079
4,173
2,529
Cash Flows from Financing Activities
Activity related to investment contracts and universal life-type insurance:
Considerations received
2,913
1,093
1,267
Net transfers from (to) separate accounts
91
(50
)
(307
)
Surrenders and other benefits
(2,931
)
(3,838
)
(3,688
)
Other
(77
)
(8
)
—
Tax adjustment of share-based incentive compensation plan
2
2
1
Cash dividend to Ameriprise Financial, Inc.
(775
)
(900
)
(300
)
Net cash used in financing activities
(777
)
(3,701
)
(3,027
)
Net increase (decrease) in cash and cash equivalents
2,327
820
(113
)
Cash and cash equivalents at beginning of year
980
160
273
Cash and cash equivalents at end of year
$
3,307
$
980
$
160
Supplemental Disclosures:
Income taxes paid (received), net
$
168
$
(4
)
$
64
Interest paid on borrowings
—
—
1
See Notes to Consolidated Financial Statements.
41
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
THREE YEARS ENDED DECEMBER 31, 2008
(in millions)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Balances at December 31, 2005
$
3
$
2,020
$
3,580
$
(131
)
$
5,472
Comprehensive income:
Net income
—
—
508
—
508
Other comprehensive income (loss), net of tax:
Change in net unrealized securities losses
—
—
—
(77
)
(77
)
Change in net unrealized derivative losses
—
—
—
(1
)
(1
)
Total comprehensive income
430
Tax adjustment of share-based incentive compensation plan
—
1
—
—
1
Cash dividends to Ameriprise Financial, Inc.
—
—
(300
)
—
(300
)
Balances at December 31, 2006
$
3
$
2,021
$
3,788
$
(209
)
$
5,603
Change in accounting principles, net of tax
—
—
(134
)
—
(134
)
Comprehensive income:
Net income
—
—
434
—
434
Other comprehensive income (loss), net of tax:
Change in net unrealized securities losses
—
—
—
52
52
Change in net unrealized derivative losses
—
—
—
1
1
Total comprehensive income
487
Tax adjustment of share-based incentive compensation plan
—
2
—
—
2
Cash dividends to Ameriprise Financial, Inc.
—
—
(900
)
—
(900
)
Non-cash capital contribution from Ameriprise Financial, Inc.
—
8
—
—
8
Balances at December 31, 2007
$
3
$
2,031
$
3,188
$
(156
)
$
5,066
Change in accounting principles, net of tax
—
—
(30
)
—
(30
)
Comprehensive income:
Net income
—
—
71
—
71
Other comprehensive income (loss), net of tax:
Change in net unrealized securities losses
—
—
—
(562
)
(562
)
Change in net unrealized derivative losses
—
—
—
2
2
Total comprehensive loss
(489
)
Tax adjustment of share-based incentive compensation plan
—
2
—
—
2
Cash dividends to Ameriprise Financial, Inc.
—
—
(775
)
—
(775
)
Non-cash capital contribution from Ameriprise Financial, Inc.
—
83
—
—
83
Non-cash dividend to Ameriprise Financial, Inc.
—
—
(118
)
—
(118
)
Balances at December 31, 2008
$
3
$
2,116
$
2,336
$
(716
)
$
3,739
See Notes to Consolidated Financial Statements.
42
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Nature of Business
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RiverSource Tax Adv. Inv.”) to RiverSource Life Insurance Company. RiverSource Tax Adv. Inv. is domiciled in Delaware and is a limited partner in affordable housing partnership investments.
RiverSource Life Insurance Company and its two subsidiaries are referred to collectively in this Form 10-K as “RiverSource Life”.
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express was completed in 2007.
RiverSource Life’s principal products are variable deferred annuities and variable universal life insurance which are issued primarily to individuals. It also offers fixed annuities where assets accumulate until the contract is surrendered, the contractholder (or in some contracts, the annuitant) dies, or the contractholder or annuitant begins receiving benefits under an annuity payout option. It also offers immediate annuities in which payments begin within one year of issue and continue for life or for a fixed period of time. RiverSource Life’s fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, RiverSource Life has the option of paying a higher rate set at its discretion. In addition, persons owning one type of annuity may have their interest calculated based on an increase in a broad-based stock market index. RiverSource Life issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance. Universal life insurance is a form of permanent life insurance characterized by flexible premiums, flexible death benefit amounts and unbundled pricing factors (i.e., mortality, interest and expenses). Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium. Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith. Waiver of premium and accidental death benefit riders are generally available with these life insurance products. RiverSource Life issues only non-participating life insurance policies which do not pay dividends to policyholders from realized policy margins.
Under RiverSource Life’s variable life insurance and variable annuity products described above, the purchaser may choose among investment options that include RiverSource Life’s “general account” as well as from a variety of portfolios including common stocks, bonds, managed assets and/or short-term securities.
43
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its wholly owned subsidiaries, RiverSource Life of NY and RiverSource Tax Adv. Inv. All significant intercompany accounts and transactions have been eliminated in consolidation.
Restatement for consolidation of RiverSource Tax Adv. Inv.
The consolidated financial statements give effect to the RiverSource Tax Adv. Inv. transfer as a pooling of interests for entities under common control. Prior periods have been restated to include the accounts of RiverSource Tax Adv. Inv. using the pooling of interests method in order to be comparable to the current year. Following are the amounts related to RiverSource Tax Adv. Inv. which are included in RiverSource Life’s consolidated financial statements:
December 31,
2008
2007
2006
(in millions)
Total revenues
$
(31
)
$
(33
)
$
(41
)
Net income
11
13
22
Shareholder’s equity: Retained earnings
239
347
334
Reclassifications
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 13. Certain reclassifications of prior year amounts have been made to conform to the current presentation. In the second quarter of 2008, RiverSource Life reclassified the mark-to-market adjustment on certain derivatives from net investment income to various expense lines where the mark-to-market adjustment on the related embedded derivative resides. The mark-to-market adjustment on derivatives hedging variable annuity living benefits and equity indexed annuities were reclassified to benefits, claims, losses and settlement expenses and interest credited to fixed accounts, respectively.
The following table shows the impact of the reclassification of the mark-to-market adjustment and the effect of the pooling of interests of RiverSource Tax. Adv. Inv. made to RiverSource Life’s previously reported Consolidated Statements of Income.
Year Ended December 31, 2007
Year Ended December 31, 2006
Previously
Reported
Restated and
Reclassified
Previously
Reported
Restated and
Reclassified
(in millions)
(in millions)
Revenues
Premiums
$
485
$
485
$
533
$
533
Net investment income
1,555
1,424
1,657
1,622
Policy and contract charges
1,217
1,217
1,045
1,045
Other revenue
255
255
189
189
Net realized investment gain
61
61
51
51
Total revenues
3,573
3,442
3,475
3,440
Benefits and expenses
Benefits, claims, losses and settlement expenses
855
760
705
724
Interest credited to fixed accounts
850
847
968
955
Amortization of deferred acquisition costs
470
470
356
356
Separation costs
97
97
131
131
Other insurance and operating expenses
781
781
637
637
Total benefits and expenses
3,053
2,955
2,797
2,803
Pretax income
520
487
678
637
Income tax provision
99
53
192
129
Net income
$
421
$
434
$
486
$
508
44
2. Summary of Significant Accounting Policies
Principles of Consolidation
RiverSource Life consolidates all entities in which it holds a greater than 50% voting interest or when certain conditions are met for variable interest entities (“VIEs”) and limited partnerships, except for immaterial seed money investments in separate accounts, which are accounted for as trading securities. Entities in which RiverSource Life holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. Additionally, other investments in hedge funds in which RiverSource Life holds an interest that is less than 50% are accounted for under the equity method. All other investments that are not reported at fair value as Available-for-Sale or trading securities are accounted for under the cost method where RiverSource Life owns less than a 20% voting interest and does not exercise significant influence.
RiverSource Life consolidates all VIEs for which it is considered to be the primary beneficiary. The determination as to whether an entity is a VIE is based on the amount and nature of RiverSource Life’s equity investment in the entity. RiverSource Life also considers other characteristics such as the ability to influence the decision making about the entity’s activities and how the entity is financed. The determination as to whether RiverSource Life is considered to be the primary beneficiary is based on whether RiverSource Life will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual return, or both. There were no consolidated VIEs as of December 31, 2008, 2007 and 2006. See Note 5 for additional information about RiverSource Life’s VIEs.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other-than-temporary impairments, valuation of deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, derivative instruments and hedging activities, claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.
Investments
Investments consist of the following:
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet date. Gains and losses are recognized in consolidated results of operations upon disposition of the securities. In addition, losses are also recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. RiverSource Life regularly reviews Available-for-Sale securities for impairments in value considered to be other-than-temporary. The cost basis of securities that are determined to be other-than-temporarily impaired is written down to current fair value with a corresponding charge to net income. A write-down for impairment can be recognized for both credit-related events and for change in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery in value cannot be recognized in net income until the principal is returned.
Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: 1) the extent to which the market value is below amortized cost; 2) RiverSource Life’s ability and intent to hold the investment for a sufficient period of time for it to recover to an amount at least equal to its carrying value; 3) the duration of time in which there has been a significant decline in value; 4) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and 5) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. For structured investments (e.g., mortgage backed securities), RiverSource Life also considers factors such as overall deal structure and its position within the
45
structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments, cumulative loss projections and discounted cash flows in assessing potential other-than-temporary impairment of these investments. Based upon these factors, securities that have indicators of potential other-than-temporary impairment are subject to detailed review by management. Securities for which declines are considered temporary continue to be carefully monitored by management. Other-than-temporary impairment charges are recorded in net realized investment gains (losses) within the Consolidated Statements of Income.
See Note 11 for information regarding the fair values of assets and liabilities.
Commercial Mortgage Loans, Net
Commercial mortgage loans, net, reflect principal amounts outstanding less the allowance for loan losses. The allowance for loan losses is measured as the excess of the loan’s recorded investment over (i) present value of its expected principal and interest payments discounted at the loan’s effective interest rate, or (ii) the fair value of collateral. Additionally, the level of the allowance for loan losses considers other factors, including historical experience, economic conditions and geographic concentrations. Management regularly evaluates the adequacy of the allowance for loan losses and believes it is adequate to absorb estimated losses in the portfolio.
RiverSource Life generally stops accruing interest on commercial mortgage loans for which interest payments are delinquent more than three months. Based on management’s judgment as to the ultimate collectibility of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan.
Policy Loans
Policy loans include life insurance policy and annuity loans. These loans are carried at the aggregate of the unpaid loan balances, which do not exceed the cash surrender values of underlying products, plus accrued interest.
Trading Securities and Other Investments
Included in trading securities and other investments are separate account and mutual fund seed money, equity method investments in hedge funds, trading bonds, interests in affordable housing partnerships and below investment grade syndicated bank loans. Separate account and mutual fund seed money is carried at fair value with changes in value recognized within net investment income. Affordable housing partnerships and investments in hedge funds are accounted for under the equity method. Below investment grade syndicated bank loans reflect amortized cost less allowance for losses.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less.
Reinsurance
RiverSource Life cedes significant amounts of insurance risk to other insurers under reinsurance agreements. Reinsurance premium paid and benefits received are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Traditional life, long term care (“LTC”) and DI reinsurance premium, net of change in any prepaid reinsurance asset, is reported as a reduction of premiums. Fixed and variable universal life reinsurance premium is reported as a reduction of policy and contract charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.
Insurance liabilities are reported before the effects of reinsurance. Future policy benefits and policy claims and other policyholders’ funds recoverable under reinsurance contracts are recorded as reinsurance recoverables.
RiverSource Life also assumes life insurance and fixed annuity business from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Liabilities for assumed business are recorded within future policy benefits.
See Note 7 for additional information on reinsurance.
Derivative Instruments and Hedging Activities
Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities. See Note 11 for information regarding RiverSource Life’s fair value measurement of derivative instruments. The accounting for changes in the fair value of a derivative instrument depends on its intended use
46
and the resulting hedge designation, if any. RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (2) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”).
For derivative instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings. Changes in fair value of derivatives hedging variable annuity living benefits and equity indexed annuities are included within benefits, claims, losses and settlement expenses and interest credited to fixed accounts, respectively. Changes in fair value of all other derivatives is a component of net investment income.
For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of the corresponding hedged assets, liabilities or firm commitments, are recognized in current earnings. If a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings over the remaining life of the hedged item.
For derivative instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) may be recognized into earnings over the period that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.
Derivative instruments that are entered into for hedging purposes are designated as such at the time RiverSource Life enters into the contract. For all derivative instruments that are designated for hedging activities, RiverSource Life formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. RiverSource Life formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, RiverSource Life will discontinue the application of hedge accounting.
The equity component of the equity indexed annuity obligations are considered embedded derivatives. Additionally, certain annuities contain guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”) provisions. The GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives. The fair value of embedded derivatives associated with annuities is included in future policy benefits. The change in fair value of the equity indexed annuity embedded derivatives is reflected in the interest credited to fixed accounts. The changes in the fair value of the GMWB and GMAB embedded derivatives are reflected in benefits, claims, losses and settlement expenses.
Deferred Acquisition Costs
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 and insurance products. These costs are deferred to the extent they are recoverable from future profits or premiums. The DAC associated with insurance or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periods and other valuation assumptions.
47
Direct sales commissions and other costs deferred as DAC are amortized over time. For annuity and universal life contracts, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. 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 the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the 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, DI and LTC insurance products, the assumptions made in calculating the 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 management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSource Life’s consolidated results of operations.
For annuity, life, DI and LTC insurance products, key assumptions underlying those long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and 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 earned and credited interest rates are the primary factors used to project interest margins, while assumptions about equity and bond 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. Management must also make assumptions to project maintenance expenses associated with servicing annuity and insurance business during the DAC amortization period.
The client asset value growth rates are the rates at which variable annuity and variable universal life insurance contract values invested in separate accounts are assumed to appreciate in the future. The rates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life typically uses a mean reversion process as a guideline in setting near-term equity asset growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. In the fourth quarter of 2008, RiverSource Life decided to constrain near-term equity growth rates below the level suggested by mean reversion. This constraint is based on RiverSource Life’s analysis of historical equity returns following downturns in the market. DAC amortization expense recorded in a period when client asset value growth rates exceed near-term estimates will typically be less than in a period when growth rates fall short of near-term estimate.
The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless management identifies a significant deviation over the course of its quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.
Deferred Sales Inducement Costs
Deferred sales inducement costs (“DSIC”) consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. The amortization of DSIC is recorded in benefits, claims, losses and settlement expenses.
48
Separate Account Assets and Liabilities
Separate account assets and liabilities are primarily funds held for the exclusive benefit of variable annuity contractholder and variable life insurance policyholders. RiverSource Life receives mortality and expense risk and other fees, guarantee fees and cost of insurance charges from the related accounts.Future Policy Benefits and Policy Claims and Other Policyholders’ Funds
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.
The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits. In addition, RiverSource Life offers contracts containing GMWB and GMAB provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions. As a result of the recent market decline, the amount by which guarantees exceed the accumulation value has increased significantly.
In determining the liabilities for variable annuity death benefits, GMIB and the life contingent benefits associated with GMWB, RiverSource Life projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management will review, and where appropriate, adjust its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will review and update these assumptions annually in the third quarter of each year.
The variable annuity death benefit liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.
The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value. See Note 11 for information regarding the fair value measurement of embedded derivatives. The liability for the life contingent benefits associated with GMWB provisions are determined in the same way as the liability for variable annuity death benefits. The changes in both the fair values of the GMWB and GMAB embedded derivatives and the liability for life contingent benefits are reflected in benefits, claims, losses and settlement expenses.
Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2008, depending on year of issue, with an average rate of approximately 5.8%.
49
Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the market value of embedded equity options.
Life, Disability Income and Long Term Care Insurance
Future policy benefits and policy claims and other policyholders’ funds related to life, DI and LTC insurance include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI and LTC policies as claims are incurred in the future.Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values. Accumulation values are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts withdrawn by policyholders.
Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported DI and LTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for RiverSource Life’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2008, with an average rate of 4.8%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2008, with an average rate of 4.1%.
Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, DI and LTC policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Anticipated mortality and morbidity rates are based on established industry mortality and morbidity tables, with modifications based on RiverSource Life’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life ranged from 4.0% to 10.0% at December 31, 2008, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively. Anticipated discount rates for LTC vary by plan and were 5.8% at December 31, 2008 and range from 5.9% to 6.3% over 40 years.
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverable.
Sources of Revenue
RiverSource Life’s principal sources of revenue include premium revenues, net investment income and policy and contract charges.
Premium Revenues
Premium revenues include premiums on traditional life, DI and LTC insurance products and immediate annuities with a life contingent feature. Premiums on traditional life, DI and LTC insurance are net of reinsurance ceded and are recognized as revenue when due.Net Investment Income
Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial mortgage loans and policy loans, mark-to-market adjustment on trading securities and certain derivatives and pro-rata share of net income or loss of equity method investments. Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security50
premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale and commercial mortgage loans so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term.
Policy and Contract Charges
Policy and contract charges include mortality and expense risk fees and certain charges assessed on annuities and fixed and variable universal life insurance, such as cost of insurance, net of reinsurance premiums for universal life insurance products, and administrative and surrender charges. Mortality and expense risk fees include risk, management and administration fees, which are generated directly and indirectly from RiverSource Life’s separate account assets. Cost of insurance charges on fixed and variable universal life insurance and contract charges and surrender charges on annuities and universal and variable universal life insurance are recognized as revenue when collected.Net Realized Investment Gains (Losses)
Realized gains and losses are recognized using the specific identification method, on a trade date basis, and charges are recorded when securities are determined to be other-than-temporarily impaired.Other Insurance and Operating Expenses
Other insurance and operatingexpenses primarily include expenses allocated to RiverSource Life from its parent, Ameriprise Financial, for RiverSource Life’s share of compensation, professional and consultant fees, information technology and communications, facilities and equipment, advertising and promotion and legal and regulatory.Income Taxes
As a result of the Separation of Ameriprise Financial from American Express, RiverSource Life will not be able to file a consolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010. RiverSource Life’s provision for income taxes represents the net amount of income taxes that it expects to pay or to receive from various taxing jurisdictions in connection with its operations. RiverSource Life provides for income taxes based on amounts that it believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.In connection with the provision for income taxes, the 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 RiverSource Life’s 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.
RiverSource Life is required to establish a valuation allowance for any portion of deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, a) future taxable income exclusive of reversing temporary differences and carryforwards, b) future reversals of existing taxable temporary differences, c) taxable income in prior carryback years, and d) tax planning strategies.
3. Recent Accounting Pronouncements
In January 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 99-20-1 “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 amends the impairment guidance in EITF 99-20 to be more consistent with other impairment models used for debt securities. FSP EITF 99-20-1 is effective prospectively for reporting periods ending after December 15, 2008. The adoption of FSP EITF 99-20-1 did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
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In December 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation No. (“FIN”) 46(R)-8 “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP 140-4”), which is effective for the first reporting period ending after December 15, 2008. This FSP requires additional disclosure related to transfers of financial assets and variable interest entities. RiverSource Life applied the disclosure requirements of this FSP as of December 31, 2008.
In November 2008, the FASB issued EITF No. 08-6 “Equity Method Investments Accounting Considerations” (“EITF 08-6”), which is effective for the first annual reporting period beginning on or after December 15, 2008. EITF 08-6 clarifies the effects of the issuance of Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”) and SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). See further information on the issuance of SFAS 141(R) and SFAS 160 below. RiverSource Life will apply EITF 08-6 to any transactions within scope occurring after December 31, 2008.
In November 2008, the FASB issued EITF No. 08-7 “Accounting for Defensive Intangible Assets” (“EITF 08-7”), which is effective for the first annual reporting period beginning on or after December 15, 2008. EITF 08-7 provides guidance on intangible assets acquired after the effective date of SFAS 141(R) that an entity does not intend to actively use but intends to hold to prevent others from using. RiverSource Life will apply EITF 08-7 to any transactions within scope occurring after December 31, 2008.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”), which was effective upon issuance, including prior periods for which financial statements have not been issued. FSP 157-3 clarifies the application of SFAS No. 157 “Fair Value Measurements” (“SFAS 157”) in a market that is not active and provides an example of key considerations to determine the fair value of financial assets when the market for those assets is not active. The adoption of FSP 157-3 did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about their impact on an entity’s financial position, financial performance and cash flows. SFAS 161 requires disclosures regarding the objectives for using derivative instruments, the fair value of derivative instruments and their related gains and losses, and the accounting for derivatives and related hedged items. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. RiverSource Life is currently evaluating the impact of SFAS 161 on its disclosures. RiverSource Life’s adoption of SFAS 161 will not impact its consolidated financial condition and results of operations.
In December 2007, the FASB issued SFAS 141(R), which establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree, and goodwill acquired. SFAS 141(R) also requires an acquirer to disclose information about the financial effects of a business combination. SFAS 141(R) is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with early adoption prohibited. RiverSource Life will apply the standard to any business combinations within the scope of SFAS 141(R) occurring after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, which establishes the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent. SFAS 160 requires that noncontrolling (minority) interests be classified as equity (instead of as a liability) within the consolidated balance sheets, and net income attributable to both the parent and the noncontrolling interest be disclosed on the face of the consolidated statements of income. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions of SFAS 160 are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Life is currently evaluating the impact of SFAS 160 on its consolidated financial condition and results of operations.
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In September 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. The provisions of SFAS 157 are required to be applied prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except for certain financial instruments as defined in SFAS 157 that require retrospective application. Any retrospective application will be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year of adoption. RiverSource Life adopted SFAS 157 effective January 1, 2008 and recorded a cumulative effect reduction to the opening balance of retained earnings of $30 million, net of DAC and DSIC amortization and income taxes. This reduction to retained earnings was related to adjusting the fair value of certain derivatives RiverSource Life uses to hedge its exposure to market risk related to certain variable annuity riders. RiverSource Life initially recorded these derivatives in accordance with EITF Issue No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF 02-3”). SFAS 157 nullifies the guidance in EITF 02-3 and requires these derivatives to be marked to the price RiverSource Life would receive to sell the derivatives to a market participant (an exit price). The adoption of SFAS 157 also resulted in adjustments to the fair value of RiverSource Life’s embedded derivative liabilities associated with certain variable annuity riders. Since there is no market for these liabilities, RiverSource Life considered the assumptions participants in a hypothetical market would make to determine an exit price. As a result, RiverSource Life adjusted the valuation of these liabilities by updating certain policyholder assumptions, adding explicit margins to provide for profit, risk and expenses and adjusting the rate used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s risk of nonperformance specific to these liabilities. These adjustments resulted in an adoption impact of a $4 million increase in earnings, net of DAC and DSIC amortization and income taxes, at January 1, 2008. The nonperformance risk component of the adjustment is specific to the risk of RiverSource Life not fulfilling these liabilities. As RiverSource Life’s estimate of this credit spread widens or tightens, the liability will decrease or increase.
In accordance with FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), RiverSource Life deferred the adoption of SFAS 157 until January 1, 2009 for all nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. See Note 11 for additional information regarding the fair values of RiverSource Life’s assets and liabilities.
In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. RiverSource Life adopted FIN 48 as of January 1, 2007. The effect of adopting FIN 48 on RiverSource Life’s consolidated financial condition and results of operations was not material.
In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts,” (“SOP 05-1”). SOP 05-1 provides clarifying guidance on accounting for DAC associated with an insurance or annuity contract that is significantly modified or is internally replaced with another contract. Prior to adoption, RiverSource Life accounted for many of these transactions as contract continuations and continued amortizing existing DAC against revenue for the new or modified contract. Effective January 1, 2007, RiverSource Life adopted SOP 05-1 resulting in these transactions being
namedprospectively accounted for as contract terminations. Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periods and other valuation assumptions. As a result of adopting SOP 05-1, RiverSource Life recorded as a cumulative change in accounting principle $206 million, reducing DAC by $204 million, DSIC by $11 million and liabilities for future policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134 million.53
4. Investments
Available-for-Sale Securities
The following is a summary of Available-for-Sale securities by type:
December 31, 2008
Description of Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(in millions)
Fixed maturities:
Corporate debt securities
$
12,030
$
86
$
(1,123
)
$
10,993
Mortgage and other asset backed securities
6,961
98
(454
)
6,605
U.S. government and agencies obligations
200
11
—
211
State and municipal obligations
164
1
(20
)
145
Foreign government bonds and obligations
95
16
(4
)
107
Structured investments(a)
2
7
—
9
Total fixed maturities
19,452
219
(1,601
)
18,070
Common and preferred stocks
30
—
(14
)
16
Total
$
19,482
$
219
$
(1,615
)
$
18,086
(a) Includes unconsolidated collateralized debt obligations.
December 31, 2007
Description of Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(in millions)
Fixed maturities:
Corporate debt securities
$
12,870
$
112
$
(307
)
$
12,675
Mortgage and other asset backed securities
7,637
33
(84
)
7,586
U.S. government and agencies obligations
249
7
(1
)
255
State and municipal obligations
165
3
(6
)
162
Foreign government bonds and obligations
97
15
—
112
Structured investments(a)
2
—
—
2
Total fixed maturities
21,020
170
(398
)
20,792
Common and preferred stocks
30
—
(1
)
29
Total
$
21,050
$
170
$
(399
)
$
20,821
(a) Includes unconsolidated collateralized debt obligations.
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At December 31, 2008 and 2007, fixed maturity securities comprised approximately 82% and 85%, respectively, of RiverSource Life’s total investments. These securities were rated by Moody’s Investors Service (“Moody’s”) and Standard & Poor’s (“S&P”), except for approximately $1.1 billion and $1.3 billion of securities at December 31, 2008 and 2007, respectively, which were rated by RiverSource Investments, LLC’s internal analysts using criteria similar to Moody’s and S&P. Ratings on investment grade securities are presented using S&P’s convention and, if the two agencies’ ratings differ, the lower rating was used. A summary of fixed maturity securities by rating was as follows:
December 31, 2008
December 31, 2007
Ratings
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
(in millions, except percentages)
AAA
$
7,038
$
6,779
38
%
$
7,854
$
7,815
38
%
AA
1,071
1,017
6
2,046
2,029
10
A
4,132
3,883
21
3,973
3,938
19
BBB
5,901
5,388
30
5,586
5,514
26
Below investment grade
1,310
1,003
5
1,561
1,496
7
Total fixed maturities
$
19,452
$
18,070
100
%
$
21,020
$
20,792
100
%
At December 31, 2008 and 2007, approximately 44% and 45%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. No holdings of any other issuer were greater than 10% of shareholder’s equity.
The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2008
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in millions)
Corporate debt securities
$
5,086
$
(372
)
$
3,309
$
(751
)
$
8,395
$
(1,123
)
Mortgage and other asset backed securities
879
(139
)
1,457
(315
)
2,336
(454
)
U.S. government and agencies obligations
—
—
11
—
11
—
State and municipal obligations
17
(1
)
78
(19
)
95
(20
)
Foreign government bonds and obligations
20
(4
)
—
—
20
(4
)
Common and preferred stock
—
—
16
(14
)
16
(14
)
Total
$
6,002
$
(516
)
$
4,871
$
(1,099
)
$
10,873
$
(1,615
)
December 31, 2007
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in millions)
Corporate debt securities
$
1,477
$
(45
)
$
7,083
$
(262
)
$
8,560
$
(307
)
Mortgage and other asset backed securities
888
(15
)
4,219
(69
)
5,107
(84
)
U.S. government and agencies obligations
—
—
154
(1
)
154
(1
)
State and municipal obligations
47
(4
)
63
(2
)
110
(6
)
Foreign government bonds and obligations
—
—
2
—
2
—
Common and preferred stock
29
(1
)
—
—
29
(1
)
Total
$
2,441
$
(65
)
$
11,521
$
(334
)
$
13,962
$
(399
)
55
In evaluating potential other-than-temporary impairments, RiverSource Life considers the extent to which amortized costs exceeds fair value and the duration of that difference. The following table summarizes the unrealized losses by ratio of fair value to amortized cost:
December 31, 2008
Less than 12 months
12 months or more
Total
Ratio of Fair Value
to Amortized Cost
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(in millions, except number of securities)
95% - 100%
191
$
3,181
$
(75
)
69
$
1,068
$
(23
)
260
$
4,249
$
(98
)
90% - 95%
98
1,667
(129
)
48
1,001
(86
)
146
2,668
(215
)
80% - 90%
62
747
(119
)
82
1,465
(271
)
144
2,212
(390
)
Less than 80%
47
407
(193
)
150
1,337
(719
)
197
1,744
(912
)
Total
398
$
6,002
$
(516
)
349
$
4,871
$
(1,099
)
747
$
10,873
$
(1,615
)
December 31, 2007
Less than 12 months
12 months or more
Total
Ratio of Fair Value
to Amortized Cost
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(in millions, except number of securities)
95% - 100%
164
$
2,015
$
(25
)
486
$
10,169
$
(180
)
650
$
12,184
$
(205
)
90% - 95%
31
305
(22
)
48
811
(57
)
79
1,116
(79
)
80% - 90%
4
121
(18
)
32
461
(66
)
36
582
(84
)
Less than 80%
1
—
—
10
80
(31
)
11
80
(31
)
Total
200
$
2,441
$
(65
)
576
$
11,521
$
(334
)
776
$
13,962
$
(399
)
As part of RiverSource Life’s ongoing monitoring process, management determined that a majority of the increase in gross unrealized losses on its Available-for-Sale securities in 2008 was attributable primarily to widening of credit spreads across sectors. A majority of the unrealized losses for the year ended December 31, 2008 related to corporate debt securities and mortgage backed and asset backed securities. From an overall perspective, the gross unrealized losses were not concentrated in any individual industries or with any individual securities. The securities with a fair value to amortized cost ratio of 80%-90% primarily related to the banking, communications, energy, and utility industries. The total gross unrealized loss related to the banking industry was $91 million. The securities with a fair value to amortized cost ratio of less than 80% primarily relate to the consumer cyclical, communications, real estate investment trusts, and consumer non-cyclical industries. The largest unrealized loss associated with an individual issuer, excluding GNMA, FNMA and FHLMC mortgage backed securities, was $34 million. The securities related to this issuer have a fair value to amortized cost ratio of 65% and have been in an unrealized loss position for more than 12 months. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value. In addition, RiverSource Life has the ability and intent to hold these securities until anticipated recovery which may not be until maturity.
RiverSource Life regularly reviews Available-for-Sale securities for impairments in value considered to be other-than-temporary. See Note 2 for additional information regarding RiverSource Life’s evaluation of potential other-than-temporary impairments.
RiverSource Life’s total mortgage and asset backed exposure at December 31, 2008 was $6.6 billion which included $3.5 billion of residential mortgage backed securities and $2.4 billion of commercial mortgage backed securities. At December 31, 2008, residential mortgage backed securities included $3.0 billion of agency-backed securities, $0.3 billion of Alt-A securities, and $0.2 billion of prime, non-agency securities. With respect to the Alt-A securities, the vast majority are rated AAA. None of the structures are levered, and the majority of the AAA-rated holdings are “super senior” bonds, meaning they have more collateral support or credit enhancement than required to receive a AAA rating. The prime, non-agency securities are a seasoned portfolio,
56
almost entirely 2005 and earlier production, with the vast majority AAA-rated. With regard to asset backed securities, RiverSource Life’s exposure at December 31, 2008 was $0.7 billion, which included $0.1 billion of securities backed by subprime collateral. These securities are predominantly AAA-rated bonds backed by seasoned, traditional, first lien collateral. Holdings include both floating rate and short-duration, fixed securities. RiverSource Life has no other structured or hedge fund investments with exposure to subprime residential mortgages.
The change in net unrealized securities gains (losses) in other comprehensive income includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period (holding gains (losses)); (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales and other-than-temporary impairments of Available-for-Sale securities (reclassification of realized gains (losses)) and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC and annuity liabilities, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.
The following table presents the components of the net unrealized securities gains (losses), net of tax, included in accumulated other comprehensive loss:
2008
2007
2006
(in millions)
Net unrealized securities losses at January 1
$
(116
)
$
(168
)
$
(91
)
Holding (losses) gains, net of tax of $405, $38 and $63, respectively
(754
)
70
(116
)
Reclassification of realized gains, net of tax of $3, $16 and $17, respectively
(5
)
(28
)
(33
)
DAC, net of tax of $80, $5 and $15, respectively
148
(7
)
29
DSIC, net of tax of $11, nil and $2, respectively
21
(1
)
3
Fixed annuity liabilities, net of tax of $15, $11 and $22, respectively
28
18
40
Net unrealized securities losses at December 31
$
(678
)
$
(116
)
$
(168
)
Available-for-Sale securities by maturity at December 31, 2008 were as follows:
Amortized
Cost
Fair
Value
(in millions)
Due within one year
$
830
$
824
Due after one year through five years
7,229
6,718
Due after five years through 10 years
3,112
2,707
Due after 10 years
1,318
1,207
12,489
11,456
Mortgage and other asset backed securities
6,961
6,605
Structured investments
2
9
Common and preferred stocks
30
16
Total
$
19,482
$
18,086
The expected payments on mortgage and other asset backed securities and structured investments may not coincide with their contractual maturities. As such, these securities, as well as common and preferred stocks, were not included in the maturities distribution.
57
The table below includes sales, maturities, and purchases of investments classified as Available-for-Sale:
Years Ended December 31,
2008
2007
2006
(in millions)
Sales
$
246
$
3,020
$
1,895
Maturities, sinking fund payments and calls
2,510
1,908
2,014
Purchases
(1,684
)
(677
)
(1,416
)
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, were as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Gross realized investment gains
$
13
$
64
$
61
Gross realized investment losses
(6
)
(20
)
(10
)
Other-than-temporary impairments
(440
)
(4
)
—
The $440 million of other-than-temporary impairments in 2008 primarily related to credit-related losses on non-agency residential mortgage backed securities, corporate debt securities primarily in the financial services industry and asset backed and other securities. The $4 million of other-than-temporary impairments in 2007 related to corporate debt securities in the publishing and home building industries which were downgraded in 2007.
At December 31, 2008 and 2007, bonds carried at $6 million and $7 million, respectively, were on deposit with various states as required by law.
Commercial mortgage loans, net
The following is a summary of commercial mortgage loans:
December 31,
2008
2007
(in millions)
Commercial mortgage loans
$
2,754
$
2,908
Less: allowance for loan losses
(17
)
(16
)
Commercial mortgage loans, net
$
2,737
$
2,892
Commercial mortgage loans are first mortgages on real estate. RiverSource Life holds the mortgage documents, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements. Commercial mortgage loan fundings are restricted by state insurance regulatory authorities to 80% or less of the market value of the real estate at the time of origination of the loan.
The balances of and changes in the allowance for loan losses were as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Balance at January 1
$
16
$
37
$
41
Provision for loan losses
1
(21
)
—
Foreclosures, write-offs and loan sales
—
—
(4
)
Balance at December 31
$
17
$
16
$
37
58
Concentrations of credit risk of commercial mortgage loans by region were as follows:
December 31,
2008
2007
On-Balance
Sheet
Funding
Commitments
On-Balance
Sheet
Funding
Commitments
Commercial mortgage loans by U.S. region
(in millions)
Atlantic
$
880
$
3
$
922
$
22
North Central
629
10
687
33
Pacific
463
20
461
21
Mountain
319
10
343
9
South Central
287
—
298
8
New England
176
—
197
8
2,754
43
2,908
101
Less: allowance for loan losses
(17
)
—
(16
)
—
Total
$
2,737
$
43
$
2,892
$
101
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
December 31,
2008
2007
On-Balance
Sheet
Funding
Commitments
On-Balance
Sheet
Funding
Commitments
Commercial mortgage loans by property type
(in millions)
Office buildings
$
777
$
18
$
874
$
12
Shopping centers and retail
869
23
860
66
Apartments
383
—
419
8
Industrial buildings
485
2
510
9
Hotels and motels
76
—
78
—
Medical buildings
32
—
42
—
Mixed use
50
—
52
1
Other
82
—
73
5
2,754
43
2,908
101
Less: allowance for loan losses
(17
)
—
(16
)
—
Total
$
2,737
$
43
$
2,892
$
101
Commitments to fund commercial mortgages were made in the ordinary course of business. The funding commitments at December 31, 2008 and 2007 approximate fair value.
Below investment grade syndicated bank loans, net
The following is a summary of below investment grade syndicated bank loans:
December 31,
2008
2007
(in millions)
Below investment grade syndicated bank loans
$
260
$
62
Less: allowance for loan losses
(12
)
(4
)
Net below investment grade syndicated bank loans
$
248
$
58
Below investment grade syndicated bank loans, which are included as a component of other investments, represent loans in which a group of lenders provide funds to borrowers. There is usually one originating lender which retains a small percentage and syndicates the remainder.
59
Trading Securities
Net recognized gains related to trading securities were $10 million at December 31, 2008 and net recognized losses were $24 million and $36 million for the years ended December 31, 2007 and 2006, respectively.
Sources of investment income and net realized investment gains (losses)
Net investment income is summarized as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Income on fixed maturities
$
1,043
$
1,187
$
1,409
Income on commercial mortgage loans
173
173
181
Trading securities and other investments
55
82
51
1,271
1,442
1,641
Less: Investment expenses
19
18
19
Total
$
1,252
$
1,424
$
1,622
Net realized investment gains (losses) are summarized as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Fixed maturities
$
(433
)
$
40
$
50
Commercial mortgage loans
(1
)
—
1
Trading securities and other investments
(8
)
—
—
Reduction in the allowance for loan losses
—
21
—
Total
$
(442
)
$
61
$
51
5. Variable Interest Entities
RiverSource Tax Adv. Inv., a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.
RiverSource Tax Adv. Inv.’s maximum exposure to loss as a result of its investment in the affordable housing partnerships is limited to the carrying values. RiverSource Tax Adv. Inv. has no obligation to provide further financial or other support to the affordable housing partnerships nor has RiverSource Tax Adv. Inv. provided any additional support to the affordable housing partnerships. RiverSource Life had no liabilities recorded as of December 31, 2008 and 2007 related to the affordable housing partnerships.
RiverSource Tax Adv. Inv. is a limited partner in affordable housing partnerships which qualify for government sponsored low income housing tax credit programs. In most cases, RiverSource Tax Adv. Inv. has less than 50% interest in the partnerships sharing in benefits and risks with other limited partners in proportion to RiverSource Tax Adv. Inv.’s ownership interest. In the limited cases in which RiverSource Tax Adv. Inv. has a greater than 50% interest in affordable housing partnerships, it was determined that the relationship with the general partner is an agent relationship and the general partner was most closely related to the partnership as it is the key decision maker and controls the operations. The carrying values are reflected in trading securities and other investments and were $54 million and $88 million as of December 31, 2008 and 2007, respectively.
60
6. Deferred Acquisition Costs and Deferred Sales Inducement Costs
During the third quarter of 2008, RiverSource Life completed the annual detailed review of valuation assumptions. In addition, during the third quarter of 2008, RiverSource Life converted to a new industry standard valuation system that provides enhanced modeling capabilities.
The total pretax impacts on RiverSource Life’s assets and liabilities attributable to the review of valuation assumptions and the valuation system conversion during the third quarter of 2008 and the review of the valuation assumptions during the third quarter of 2007 and 2006 were as follows:
Balance Sheet Impact
Debit (Credit)
Reinsurance
Recoverables
DAC
DSIC
Other
Assets
Future
Policy
Benefits
Other
Liabilities
Total
(in millions)
2008 period
$
92
$
(82
)
$
(6
)
$
1
$
96
$
5
$
106
2007 period
(2
)
(16
)
3
—
(15
)
—
(30
)
2006 period
(1
)
38
—
—
(12
)
—
25
The total pretax impacts on RiverSource Life’s revenues and expenses attributable to the review of the valuation assumptions and the valuation system conversion for the year ended December 31, 2008 and the review of the valuation assumptions for the years ended December 31, 2007 and 2006 were as follows:
Pretax
Benefit (Charge)
Premiums
Policy and
Contract
Charges
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization
of DAC
Other
Insurance
and
Operating
Expenses
Total
(in millions)
2008 period
$
2
$
95
$
90
$
(82
)
$
1
$
106
2007 period
—
(2
)
(12
)
(16
)
—
(30
)
2006 period
—
(1
)
(12
)
38
—
25
The balances of and changes in DAC were as follows:
2008
2007
2006
(in millions)
Balance at January 1
$
4,429
$
4,411
$
4,036
Cumulative effect of accounting change
36
(204
)
—
Capitalization of acquisition costs
592
704
687
Amortization, excluding impacts of valuation assumptions review and valuation system conversion
(779
)
(454
)
(394
)
Amortization, impact of valuation assumptions review and valuation system conversion
(82
)
(16
)
38
Impact of change in net unrealized securities losses (gains)
228
(12
)
44
Balance at December 31
$
4,424
$
4,429
$
4,411
The balances of and changes in DSIC were as follows:
2008
2007
2006
(in millions)
Balance at January 1
$
511
$
452
$
370
Cumulative effect of accounting change
9
(11
)
—
Capitalization of sales inducements
87
124
126
Amortization, excluding impacts of valuation assumptions review and valuation system conversion
(115
)
(56
)
(48
)
Amortization, impact of valuation assumptions review and valuation system conversion
(6
)
3
—
Impact of change in net unrealized securities losses (gains)
32
(1
)
4
Balance at December 31
$
518
$
511
$
452
61
Effective January 1, 2008, RiverSource Life adopted SFAS 157 and recorded as a cumulative change in accounting principle a pretax increase of $36 million and $9 million to DAC and DSIC, respectively. See Note 3 and Note 11 for additional information regarding SFAS 157.
Effective January 1, 2007, RiverSource Life adopted SOP 05-1 and recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to DAC and DSIC, respectively.
7. Reinsurance
Generally, RiverSource Life reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products. As a result, RiverSource Life typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level beginning in 2001 for term life insurance and 2002 for individual fixed and variable universal life insurance. Policies issued prior to these dates are not subject to these same reinsurance levels. Generally, the maximum amount of life insurance risk retained by RiverSource Life is $1.5 million (increased from $750,000 during 2008) on any policy insuring a single life and $1.5 million on any flexible premium survivorship life policy. Risk on fixed and variable universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.
For existing LTC policies, RiverSource Life (and RiverSource Life of NY for 1996 and later issues) retained 50% of the risk and ceded the remaining 50% of the risk on a coinsurance basis to a subsidiary of Genworth Financial, Inc. (“Genworth”).
Generally, RiverSource Life retains at most $5,000 per month of risk per life on DI policies sold on policy forms introduced in October 2007 in most states and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. RiverSource Life retains all risk for new claims on DI contracts sold on other policy forms. RiverSource Life also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.
In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies.
At December 31, 2008, 2007 and 2006, traditional life and universal life insurance in force aggregated $192.3 billion, $187.3 billion and $174.1 billion, respectively, of which $127.6 billion, $117.4 billion and $102.4 billion were reinsured at the respective year ends. Life insurance in force is reported on a statutory basis. RiverSource Life also reinsures a portion of the risks assumed under its DI and LTC policies.
The effect of reinsurance on premiums was as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Direct premiums
$
631
$
621
$
645
Reinsurance assumed
2
2
3
Reinsurance ceded
(152
)
(138
)
(115
)
Net premiums
$
481
$
485
$
533
Policy and contract charges are presented on the Consolidated Statements of Income net of $61 million, $57 million and $55 million of reinsurance ceded for the years ended December 31, 2008, 2007 and 2006, respectively.
Reinsurance recovered from reinsurers was $142 million, $126 million and $115 million for the years ended December 31, 2008, 2007 and 2006, respectively. Reinsurance contracts do not relieve RiverSource Life from its primary obligation to policyholders.
Included in reinsurance recoverables is approximately $1.2 billion and $1.0 billion related to LTC risk ceded to Genworth as of December 31, 2008 and 2007, respectively. Included in future policy benefits is $689 million and $730 million related to assumed reinsurance arrangements as of December 31, 2008 and 2007, respectively.
62
8. Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities
Future policy benefits and policy claims and other policyholders’ funds consisted of the following:
December 31,
2008
2007
(in millions)
Fixed annuities
$
14,058
$
14,382
Equity indexed annuities accumulated host values
228
253
Equity indexed annuities embedded derivatives
16
53
Variable annuities fixed sub-accounts
5,623
5,419
Variable annuity GMWB
1,471
136
Variable annuity GMAB
367
33
Other variable annuity guarantees
67
27
Total annuities
21,830
20,303
Variable universal life (“VUL”)/universal life (“UL”) insurance
2,526
2,568
Other life, DI and LTC insurance
4,397
4,106
Total future policy benefits
28,753
26,977
Policy claims and other policyholders’ funds
172
91
Total future policy benefits and policy claims and other policyholders’ funds
$
28,925
$
27,068
Separate account liabilities consisted of the following:
December 31,
2008
2007
(in millions)
Variable annuity variable sub-accounts
$
37,657
$
51,764
VUL insurance variable sub-accounts
4,091
6,244
Other insurance variable sub-accounts
39
62
Total separate account liabilities
$
41,787
$
58,070
Fixed Annuities
Fixed annuities include both deferred and payout contracts. Deferred contracts offer a guaranteed minimum rate of interest and security of the principal invested. Payout contracts guarantee a fixed income payment for life or the term of the contract. RiverSource Life generally invests the proceeds from the annuity payments in fixed rate securities. The interest rate risks under these obligations were partially hedged with derivative instruments designated as a cash flow hedge of the interest credited on forecasted sales. As of January 1, 2007 the hedge designation was removed. See Note 15 for additional information regarding RiverSource Life’s derivative instruments.
Equity Indexed Annuities
The Index 500 Annuity, RiverSource Life’s equity indexed annuity product, is a single premium deferred fixed annuity. The contract is issued with an initial term of seven years and interest earnings are linked to the S&P 500 Index. This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders. RiverSource Life generally invests the proceeds from the annuity deposits in fixed rate securities and hedges the equity risk with derivative instruments. See Note 15 for additional information regarding RiverSource Life’s derivative instruments.
Variable Annuities
Purchasers of variable annuities can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for variable annuity contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders.
63
Most of the variable annuity contracts issued by RiverSource Life contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU provisions. RiverSource Life previously offered contracts with GMIB provisions. See Note 2 and Note 9 for additional information regarding RiverSource Life’s variable annuity guarantees. RiverSource Life does not currently hedge its risk under the GMDB, GGU and GMIB provisions. The total value of variable annuity contracts with GMWB riders decreased from $13.1 billion at December 31, 2007 to $12.7 billion at December 31, 2008. The total value of variable annuity contracts with GMAB riders decreased from $2.3 billion at December 31, 2007 to $2.0 billion at December 31, 2008. See Note 15 for additional information regarding derivative instruments used to hedge GMWB and GMAB risk.
Insurance Liabilities
VUL/UL is the largest group of insurance policies written by RiverSource Life. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for VUL contracts are held in separate accounts where the assets are held for the exclusive benefit of those policyholders. RiverSource Life also offers term and whole life insurance as well as disability products. RiverSource Life no longer offers LTC products but has in-force policies from prior years. Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims, and obligations for anticipated future claims.
9. Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by RiverSource Life contain GMDB provisions. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as GGU benefits. In addition, RiverSource Life offers contracts with GMWB and GMAB provisions. RiverSource Life previously offered contracts containing GMIB provisions. See Note 2 and Note 8 for additional information regarding the liabilities related to variable annuity guarantees.
The GMDB provisions provide a specified minimum return upon death of the contractholder. The death benefit payable is the greater of (i) the contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract. RiverSource Life has three primary GMDB provisions:
·Return of premium — provides purchase payments minus adjusted partial surrenders.
·Reset — provides that the value resets to the account value every sixth contract anniversary minus adjusted partial surrenders. This provision is often provided in combination with the return of premium provision. This provision is no longer offered.
·Ratchet — provides that the value ratchets up to the maximum account value at specified anniversary intervals, plus subsequent purchase payments less adjusted partial surrenders.
The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on equity market performance. At issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance. The GMWB offered initially guarantees that the contractholder can withdraw 7% per year until the amount withdrawn is equal to the guaranteed amount, regardless of the performance of the underlying funds. In 2006, RiverSource Life began offering an enhanced withdrawal benefit that gives contractholders a choice to withdraw 6% per year for the life of the contractholder (“GMWB for life”) or 7% per year until the amount withdrawn is equal to the guaranteed amount. In 2007, RiverSource Life added a new GMWB benefit design that is available in a joint version that promises 6% withdrawals while either contractholder remains alive. In addition, once withdrawals begin, the contractholder’s funds are moved to one of the three less aggressive asset allocation models (of the five that are available prior to withdrawal).
64
Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or 80% of the highest anniversary value, adjusted for withdrawals. If the contract value is less than the guarantee at the end of the 10 year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
Certain universal life contracts offered by RiverSource Life provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.
The following table provides summary information related to all variable annuity guarantees for which RiverSource Life has established additional liabilities:
December 31, 2008
December 31, 2007
Variable annuity
guarantees by
benefit type (1)
Total
contract
value
Contract
value in
separate
accounts
Net amount
at risk(2)
Weighted
average
attained
age
Total
contract
value
Contract
value in
separate
accounts
Net
amount
at risk(2)
Weighted
average
attained
age
(in millions, except age)
GMDB:
Return of Premium
$
22,249
$
20,153
$
4,873
61
$
25,804
$
23,892
$
26
60
Six-Year Reset
12,719
10,063
2,802
61
20,231
17,617
167
60
One-Year Ratchet
5,770
5,061
2,163
62
7,908
7,143
81
61
Five-Year Ratchet
951
888
199
59
1,211
1,163
1
58
Other
471
429
192
66
693
639
12
65
Total — GMDB
$
42,160
$
36,594
$
10,229
61
$
55,847
$
50,454
$
287
60
GGU death benefit
$
699
$
619
$
65
63
$
950
$
873
$
80
62
GMIB
$
567
$
511
$
245
63
$
927
$
859
$
18
62
GMWB:
GMWB
$
3,513
$
3,409
$
1,312
63
$
5,104
$
4,980
$
22
62
GMWB for life
9,194
8,764
2,704
63
7,958
7,685
33
62
Total — GMWB
$
12,707
$
12,173
$
4,016
63
$
13,062
$
12,665
$
55
62
GMAB
$
2,006
$
1,937
$
608
56
$
2,260
$
2,205
$
3
55
(1)Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit always equals account value are not shown in this table.
(2)Represents the current guaranteed benefit amount in excess of the current contract value. GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract. As a result of the recent market decline, the amount by which guarantees exceed the accumulation value has increased significantly.
Changes in additional liabilities (assets) were as follows:
GMDB &
GGU
GMIB
GMWB
GMAB
UL
(in millions)
Liability (asset) balance at January 1, 2007
$
26
$
5
$
(12
)
$
(5
)
$
1
Incurred claims
1
—
148
38
4
Paid claims
(3
)
(2
)
—
—
(1
)
Liability balance at December 31, 2007
24
3
136
33
4
Incurred claims
58
10
1,335
334
6
Paid claims
(27
)
(1
)
—
—
(3
)
Liability balance at December 31, 2008
$
55
$
12
$
1,471
$
367
$
7
The liabilities for guaranteed benefits are supported by general account assets.
65
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
December 31,
2008
2007
(in millions)
Mutual funds:
Equity
$
21,899
$
34,540
Bond
12,135
12,549
Other
3,463
4,478
Total mutual funds
$
37,497
$
51,567
No gains or losses were recognized on assets transferred to separate accounts for the periods presented.
10.Lines of Credit
In September 2008, RiverSource Life, as the lender, entered into a revolving credit agreement with Ameriprise Financial as the borrower. This line of credit is not to exceed 3% of RiverSource Life’s statutory admitted assets as of the prior year end. The interest rate for any borrowing is established by reference to LIBOR plus 28 basis points. In the event of default, an additional 1% interest will accrue during such period of default. There were no amounts outstanding on this revolving credit agreement as of December 31, 2008.
RiverSource Life had a collateral loan agreement with Ameriprise Financial aggregating up to $75 million which expired on October 31, 2008.
RiverSource Life has available a committed line of credit with Ameriprise Financial aggregating $200 million. The interest rate for any borrowings is established by reference to LIBOR plus 28 basis points. There were no amounts outstanding on this line of credit at December 31, 2008 and 2007.
11.Fair Values of Assets and Liabilities
Effective January 1, 2008, RiverSource Life adopted SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
Under SFAS 157, RiverSource Life categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by RiverSource Life’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2
Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Determination of Fair Value
RiverSource Life uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. RiverSource Life’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. RiverSource Life’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, RiverSource Life maximizes the use of observable inputs and minimizes the use of unobservable inputs.
66
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. RiverSource Life’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques such as the present value of cash flows. Level 1 securities include U.S. Treasuries. Level 2 securities include corporate and municipal bonds, agency mortgage backed securities, commercial mortgage backed securities, asset backed securities and U.S. and foreign government and agency securities. Level 3 securities include corporate bonds, non-agency residential mortgage backed securities and asset backed securities.
Through RiverSource Life’s own experience transacting in the marketplace and through discussions with its pricing vendors, RiverSource Life believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services). RiverSource Life considers market observable yields for other asset classes it considers to be of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities.
At the beginning of the fourth quarter of 2008, $219 million of prime non-agency residential mortgage backed securities were transferred from Level 2 to Level 3 of the fair value hierarchy because management believes the market for these prime quality assets is now inactive. The loss recognized on these assets during the fourth quarter of 2008 was $47 million of which $13 million was included in net investment income and $34 million was included in other comprehensive loss.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
Derivatives
The fair value of derivatives that are traded in certain over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include interest rate swaps and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements. Structured derivatives that are used by RiverSource Life to hedge its exposure to market risk related to certain variable annuity riders are classified as Level 3.
67
Liabilities
Embedded Derivatives
Variable Annuity Riders — Guaranteed Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal Benefit
RiverSource Life values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk, and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to policyholder behavior assumptions and margins for risk, profit and expenses that RiverSource Life believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of RiverSource Life’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.
Equity Indexed Annuities
RiverSource Life uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its equity indexed annuities. The inputs to these calculations are primarily market observable. As a result, these measurements are classified as Level 2. The embedded derivative liability attributable to the provisions of RiverSource Life’s equity indexed annuities is recorded in future policy benefits.
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:
December 31, 2008
Level 1
Level 2
Level 3
Total
(in millions)
Assets
Available-for-Sale:
Fixed maturities
$
21
$
16,336
$
1,713
$
18,070
Common and preferred stocks
—
16
—
16
Trading securities
70
77
—
147
Cash equivalents
432
2,861
—
3,293
Other assets
—
2,238
200
2,438
Separate account assets
—
41,787
—
41,787
Total assets at fair value
$
523
$
63,315
$
1,913
$
65,751
Liabilities
Future policy benefits
$
—
$
16
$
1,832
$
1,848
Other liabilities
—
645
—
645
Total liabilities at fair value
$
—
$
661
$
1,832
$
2,493
68
The following table provides a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2008:
Available-
for-Sale
Securities:
Fixed
Maturities
Other
Assets
Future
Policy
Benefits
Other
Liabilities
(in millions)
Balance, January 1
$
1,810
$
280
$
(158
)
$
—
Total gains (losses) included in:
Net income (loss)
(169
)(1)
149
(2)
(1,611
)(2)
(9
)(2)
Other comprehensive loss
(304
)
—
—
—
Purchases, sales, issuances and settlements, net
157
(229
)
(63
)
9
Transfers into Level 3
219
(3)
—
—
—
Balance, December 31
$
1,713
$
200
$
(1,832
)
$
—
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31
$
(172
)(4)
$
126
(2)
$
(1,608
)(2)
$
—
(1)Represents a $176 million loss included in net realized investment gains (losses) and a $7 million gain included in net investment income in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(3)Represents prime non-agency residential mortgage backed securities previously classified as Level 2 for which management believes the market for these prime quality assets is now inactive.
(4)Represents a $175 million loss included in net realized investment gains (losses) and a $3 million gain included in net investment income in the Consolidated Statements of Income.
During the reporting period, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following table provides the carrying value and the estimated fair value of financial instruments that are not reported at fair value as of December 31, 2008 and 2007. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.
December 31,
2008
2007
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
Financial Assets
Commercial mortgage loans, net
$
2,737
$
2,506
$
2,892
$
2,868
Policy loans
722
779
697
697
Other investments
248
202
58
59
Financial Liabilities
Future policy benefits
13,116
12,418
18,622
18,077
Separate account liabilities
386
386
748
748
Commercial mortgage loans, net
The fair value of commercial mortgage loans, except those with significant credit deterioration is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for RiverSource Life’s estimate of the amount recoverable on the loan.
69
Policy loans
The fair value of policy loans has been determined using discounted cash flows.
Future policy benefits
The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior and RiverSource Life’s non-performance risk specific to these liabilities. The fair value of fixed annuities, in payout status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for expense margin and RiverSource Life’s non-performance risk specific to these liabilities. Variable annuity fixed sub-accounts classified as investment contracts and equity indexed annuities fair value is determined by discounting cash flows adjusted for policyholder behavior and RiverSource Life’s non-performance risk specific to these liabilities.
Separate account liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. Carrying value is a reasonable estimate of the fair value as it represents the exit value as evidenced by withdrawal transactions between contractholders and RiverSource Life. A non-performance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize non-performance risk.
12. Related Party Transactions
RiverSource Investments, LLC is the investment manager for the proprietary mutual funds used as investment options by
IDS Life'sRiverSource Life’s variable annuity contractholders and variable life insurancecontract owners in the fourth quarter of 2003, Ameriprise Financial received management fees from these funds. IDSpolicyholders. RiverSource Lifecontinues to provideprovides all fund management services, other than investment management, andentered into an administrative services agreement with Ameriprise Financial to beis compensated for the administrative servicesIDS Lifeit provides. For the years ended December 31,2005, 20042008, 2007 and2003, IDS2006, RiverSource Life received$55.7$101 million,$81.5$97 million and$14.1$76 million, respectively,under the agreement with Ameriprise Financial. In the fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise Financial as the investment manager. As a result, IDS Life's administrative service fees were payablefrom RiverSource Investments, LLCrather than Ameriprise Financial during the fourth quarter of 2005. For the year ended December 31, 2005, IDS Life received $19.5 million under the agreement withfor administrative services provided by RiverSourceInvestments, LLC. IDSLife.RiverSource Life participates in the Ameriprise Financial Retirement Plan which covers all permanent employees age 21 and over who have met certain employment requirements.
CompanyRiverSource Life contributions to the plan are based onparticipants'participants’ age, years of service and total compensation for the year. Funding of retirement costs for this plan complies with the applicable minimum funding requirements specified byERISA. IDS Life'sthe Employee Retirement Income Security Act of 1974, as amended (“ERISA”). RiverSource Life’s share of the total net periodic pension cost was$0.9approximately $1 million for each of the years ended December 31, 2008, 2007 and 2006.RiverSource Life participates in the Ameriprise Financial 2005 Incentive Compensation Plan. Employees, directors and independent contractors are eligible to receive incentive awards including stock options, restricted stock awards, restricted stock units, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction. The expense for incentive awards was $3 million in
2005, $0.52008, $3 million in2004,2007 and$0.3$2 million in2003. IDS2006.RiverSource Life also participates in the defined contribution pension plans of Ameriprise Financial which cover all employees who have met certain employment requirements.
CompanyRiverSource Life contributions to the plans are a percent of either eachemployee'semployee’s eligible compensation or basic contributions. Costs of these plans charged to operations were nil in2005, 20042008 and2003 were $3.2$3 million$2.4 million,in both 2007 and$2.2 million, respectively. IDS2006.RiverSource Life participates in the defined benefit health care plans of Ameriprise Financial that provide health care and life insurance benefits to retired employees and retired financial advisors. The plans include participant contributions and service related eligibility requirements. Upon retirement, such employees are considered to have been employees of Ameriprise Financial. Ameriprise Financial expenses these benefits and allocates the expenses to its subsidiaries. The cost of these plans charged to operations in
2005, 20042008, 2007 and2003 was $1.12006 were $1 million,$0.5$2 million and$2.1$1 million, respectively.70
Charges by Ameriprise Financial and affiliated companies to RiverSource Life for use of joint facilities, technology support, marketing services and other services aggregated
$725.2$673 million,$600.6$909 million and$549.2$755 million for2005, 20042008, 2007 and2003,2006, respectively. Certain of these costs are included in DAC. Expenses allocated toIDSRiverSource Life may not be reflective of expenses that would have been incurred byIDSRiverSource Life on a stand-alone basis.In connection with the separation, IDSDividends paid and received were as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Cash dividends paid to Ameriprise Financial
$
775
$
900
$
300
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY
77
83
25
Non-cash dividend paid to Ameriprise Financial from RiverSource Tax Adv. Inv.
118
—
—
Notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds. See Note 13 for additional information.
During 2008, RiverSource Life received a non-cash capital contribution of
$650$83 million comprised of below investment grade syndicated bank loans from Ameriprise Financial.In addition, RiverSource Life Insurance Company received a $239 million contribution from Ameriprise Financial,
duringconsisting of all thethird quarterissued and outstanding shares of2005 to support its current financial strength ratings and to cover the allocated separation costs. During the fourth quarter of 2005, IDS Life approved and paid dividends to Ameriprise Financial of $380 million. During the second and fourth quarter of 2004, IDS Life approved and paid dividends to Ameriprise Financial of $430 million and $500 million, respectively. IDS Life expects to continue to maintain adequate capital to meet internal and external Risk-Based Capital requirements. IncludedRiverSource Tax Adv. Inv.There were no amounts included in other liabilities at December 31,
20052008 and2004 are $7.6 million and $30.1 million, respectively,2007 payable to Ameriprise Financial for federal income taxes.F-33IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Reinsurance ----------- At13. Statutory Capital and Surplus
State insurance statutes contain limitations as to the amount of dividends or distributions that insurers may make without providing prior notification to state regulators. For RiverSource Life Insurance Company, dividends or distributions in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by the State of Minnesota, require advance notice to the Minnesota Department of Commerce, RiverSource Life Insurance Company’s primary regulator, and are subject to potential disapproval. RiverSource Life Insurance Company’s statutory unassigned surplus aggregated $173 million and $788 million as of December 31,
2005, 20042008 and2003, traditional life and universal life insurance in force aggregated $160.1 billion, $147.5 billion and $131.1 billion, respectively,2007, respectively.In addition, dividends or distributions, whose fair market value, together with that of
which $86.3 billion, $70.9 billion and $53.8 billion, was reinsured atother dividends or distributions made within therespective year ends. IDS Life also reinsures a portionpreceding 12 months, exceed the greater of therisks assumed under LTC policies. Under all reinsurance agreements, premiums cededprevious year’s statutory net gain from operations or 10% of the previous year-end statutory capital and surplus are referred toreinsurers amountedas “extraordinary dividends.” Extraordinary dividends also require advance notice to$174.9 million, $159.6 millionthe Minnesota Department of Commerce, and$144.7 millionare subject to potential disapproval.Statutory net gain from operations and
reinsurance recovered from reinsurers amounted to $105.6 million, $73.3 million and $60.3 million,net income for the years ended December 31 and capital and surplus as of December 31 are summarized as follows:
2008
2007
2006
(in millions)
(unaudited)
Statutory net gain (loss) from operations (1)
$
(1,184
)
$
523
$
469
Statutory net income (loss) (1)
(1,407
)
555
514
Statutory capital and surplus
2,529
2,820
3,258
(1) An increase in statutory reserves for variable annuity guaranteed benefits contributed significantly to the loss in 2008, but was substantially offset by unrealized gains on derivatives which are not included in the statutory income statement, but recorded directly to surplus.
71
14. Income Taxes
RiverSource Life qualifies as a life insurance company for federal income tax purposes. As such, RiverSource Life is subject to the Internal Revenue Code provisions applicable to life insurance companies.
The components of income tax provision (benefit) were as follows:
Years Ended December 31,
2008
2007
2006
(in millions)
Current income tax:
Federal
$
42
$
(30
)
$
8
State
3
—
—
Total current income tax
45
(30
)
8
Deferred income tax
Federal
(236
)
83
124
State
2
—
(3
)
Total deferred income tax
(234
)
83
121
Income tax provision (benefit)
$
(189
)
$
53
$
129
The principal reasons that the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35% are as follows:
Years Ended December 31,
2008
2007
2006
Tax at U.S. statutory rate
35.0
%
35.0
%
35.0
%
Changes in taxes resulting from:
Tax-exempt interest and dividend income
56.6
(10.9
)
(6.8
)
State taxes, net of federal benefit
(3.7
)
—
(0.4
)
Low income housing credit
27.9
(7.0
)
(6.9
)
Foreign tax credit, net of addback
15.3
(2.3
)
(0.7
)
Taxes applicable to prior years
29.2
(4.0
)
—
Other, net
(0.2
)
—
0.1
Income tax provision
160.1
%
10.8
%
20.3
%
RiverSource Life’s effective tax rate was 160.1% and 10.8% for the years ended December 31, 2008 and 2007, respectively. The increase in the effective tax rate is primarily due to a pretax loss in relation to a net tax benefit for 2008 compared to pretax income for 2007. RiverSource Life’s effective tax rate for 2008 included a $39 million tax benefit related to changes in the status of current audits. RiverSource Life’s effective tax rate for 2007 included a $7 million tax benefit related to the finalization of the prior year tax return.
72
Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for U.S. GAAP reporting versus income tax return purposes. The significant components of RiverSource Life’s deferred income tax assets and liabilities are reflected in the following table:
December 31,
2008
2007
(in millions)
Deferred income tax assets:
Liabilities for future policy benefits
$
1,744
$
1,144
Investment related
—
61
Net unrealized losses on Available-for Sale securities and derivatives
399
87
Net operating loss and tax credit carryforwards
159
125
Other
44
38
Gross deferred income tax assets
2,346
1,455
Deferred income tax liabilities:
DAC
1,168
1,253
Investment related
398
—
DSIC
181
179
Other
—
14
Gross deferred income tax liabilities
1,747
1,446
Net deferred income tax assets
$
599
$
9
RiverSource Life is required to establish a valuation allowance for any portion of the deferred income tax assets that management believes will not be realized. Included in RiverSource Life’s 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. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, a) future taxable income exclusive of reversing temporary differences and carryforwards, b) future reversals of existing taxable temporary differences, c) taxable income in prior carryback years, and d) tax planning strategies.
Additionally, RiverSource Life has net operating loss carryforwards of $15 million which expire on December 31, 2025 and 2026 as well as tax credit carryforwards of $124 million which expire December 31, 2025, 2026, 2027 and 2028. RiverSource Life also has $20 million of foreign tax credit carryforwards which expire on December 31, 2016 and 2017. Based on analysis of RiverSource Life’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable RiverSource Life to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of December 31, 2008 and 2007.
Effective January 1, 2007, RiverSource Life adopted the provisions of FIN 48. The amount RiverSource Life recognized as a result of the implementation of FIN 48 was not material.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
2008
(in millions)
Balance at December 31, 2007
$
97
Additions based on tax positions related to the current year
(165
)
Additions for tax positions of prior years
38
Reductions for tax positions of prior years
(59
)
Balance at December 31, 2008
$
(89
)
73
If recognized, approximately $30 million and $49 million, net of federal tax benefits, of the unrecognized tax benefits as of December 31, 2008 and 2007, respectively, would affect the effective tax rate.
RiverSource Life recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. RiverSource Life recognized a net reduction of $14 million in interest and penalties for the year ended December 31, 2008. RiverSource Life had a $15 million and a $1 million receivable for the payment of interest and penalties accrued at December 31, 2008 and 2007, respectively.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. However, there are a number of open audits and quantification of a range cannot be made at this time.
RiverSource Life or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, RiverSource Life is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 1997. The Internal Revenue Service (“IRS”), as part of the overall examination of the American Express Company consolidated return completed its field examination of the RiverSource Life’s income tax returns for 1997 through 2002 during 2008. However, for federal income tax purposes, these years continue to remain open as a consequence of certain issues under appeal. The IRS continued its examination of 2003 through 2004 which is expected to be completed during 2009. In the fourth quarter of 2008, the IRS commenced an examination of RiverSource Life’s U.S. income tax returns for 2005
2004through 2007. RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2006.On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and
2003, respectively. Reinsurance contracts doIRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only.As a result of the separation of Ameriprise Financial from American Express, RiverSource Life and subsidiaries will not
relieve IDS Life from its primary obligationbe able topolicyholders. Life insurance in force is reported onfile astatutory basis. 10. Derivative Financial Instrumentsconsolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010.The items comprising other comprehensive loss are presented net of the following income tax provision (benefit) amounts:
Years ended December 31,
2008
2007
2006
(in millions)
Net unrealized securities gains (losses)
$
(302
)
$
28
$
(41
)
Net unrealized derivative gains (losses)
2
—
(1
)
Net income tax provision (benefit)
$
(300
)
$
28
$
(42
)
74
15. Derivatives and Hedging Activities
-------------------------------------------------------Derivative
financialinstruments enablethe end usersRiverSource Life to manage its exposure tocredit andvarious market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity and interest rate indices or prices.IDS Life enters into various derivative financial instruments as part of its ongoing risk management activities. IDSRiverSource Life does not engage in any derivative instrument trading activities. The following table presents a summary of the notional amount and the current fair value of derivative instruments held at:
December 31,
2008
2007
Notional
Fair Value
Notional
Fair Value
Amount
Asset
Liability
Amount
Asset
Liability
(in millions)
Interest rate swaps
$
11,445
$
853
$
(250
)
$
202
$
6
$
(3
)
Swaptions
3,200
26
—
800
1
—
Purchased equity options
16,572
1,512
(79
)
6,485
416
(36
)
Written equity options
2,766
22
(255
)
57
—
(1
)
Total return swaps
1,706
24
(60
)
—
—
—
Equity futures purchased (1)
1
—
—
70
—
—
Equity futures sold (1)
599
—
—
202
—
—
Total (2)
$
36,289
$
2,437
$
(644
)
$
7,816
$
423
$
(40
)
(1) Equity futures have no recorded value as they are cash settled daily.
(2) The above table does not include certain embedded derivatives.
The following table presents a summary of the notional amount and fair value of derivative instruments based on the risk they hedge:
December 31,
2008
2007
Notional
Fair Value
Notional
Fair Value
Amount
Asset
Liability
Amount
Asset
Liability
(in millions)
Equity indexed annuities
$
213
$
3
$
—
$
295
$
43
$
(1
)
GMWB and GMAB
36,076
2,434
(644
)
6,721
379
(39
)
Other
—
—
—
800
1
—
Total
$
36,289
$
2,437
$
(644
)
$
7,816
$
423
$
(40
)
See Note 11 for additional information regarding RiverSource Life’s fair value measurement of derivative instruments.
Cash Flow Hedges
RiverSource Life uses interest rate derivative products, primarily swaps and swaptions, to manage funding costs related to RiverSource Life’s fixed annuity business. As of January 1, 2007, RiverSource Life removed the hedge designation from its swaptions used to hedge the risk of increasing interest rates on forecasted fixed premium product sales. The designation was removed due to the hedge relationship no longer being highly effective. Accordingly, all changes in fair value of the swaptions were recorded directly to earnings. As of December 31, 2008, all of these swaptions had expired. Amounts previously recorded in accumulated other comprehensive income (loss) are reclassified into earnings as the originally forecasted transactions occur.
75
The following is a summary of net unrealized derivatives gains (losses) related to cash flow hedging activity, net of tax:
2008
2007
2006
(in millions)
Net unrealized derivatives losses at January 1
$
(40
)
$
(41
)
$
(40
)
Holding losses, net of tax of nil, $1 and $2, respectively
(1
)
—
(4
)
Reclassification of realized gains, net of tax of $2, $1 and $1, respectively
3
1
3
Net unrealized derivatives losses at December 31
$
(38
)
$
(40
)
$
(41
)
At December 31, 2008, RiverSource Life expects to reclassify $6 million of net pretax gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months related to interest rate swaptions that will be recorded in net investment income.
If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) may be recognized into earnings over the period that the hedged item impacts earnings. As discussed above, RiverSource Life removed the hedge designation from its swaptions in 2007 and during 2008 and 2006 there were no other hedges that were terminated or the hedge designation removed. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately. No hedge relationships were discontinued during the years ended December 31, 2008, 2007 and 2006 due to forecasted transactions no longer expected to occur according to the original hedge strategy.
Currently, the longest period of time over which RiverSource Life is hedging exposure to the variability in future cash flows is 10 years and relates to interest credited on forecasted fixed premium product sales. For the years ended December 31, 2008, 2007 and 2006, there were nil, $2 million and $4 million, respectively, in losses on derivative transactions or portions thereof that were ineffective as hedges, excluded from the assessment of hedge effectiveness or reclassified into earnings as a result of the discontinuance of cash flow hedges.
Derivatives Not Designated as Hedges
RiverSource Life holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of interest rate risk related to various RiverSource Life products.
Certain annuity products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the amount of expenses incurred by RiverSource Life related to equity indexed annuities products will positively or negatively impact earnings. As a means of economically hedging its obligations under the provisions of these products, RiverSource Life writes and purchases index options and occasionally enters into futures contracts. Additionally, certain annuity products contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of considerations received at the beginning of the contract period, after a specified holding period, respectively. RiverSource Life economically hedges the exposure related to GMWB and GMAB provisions using various equity futures, equity options, swaptions and interest rate swaps. The premium associated with certain of these options is paid semi-annually over the life of the option contract. As of December 31, 2008, the remaining payments RiverSource Life is scheduled to make for these options, net of amounts receivable on written deferred premium options, were $805 million through July 31, 2023.
76
Embedded Derivatives
The equity component of the equity indexed annuity product obligations is considered an embedded derivative. Additionally, certain annuities contain GMAB and non-life contingent GMWB provisions which are also considered embedded derivatives. The fair value of embedded derivatives for annuity related products is included in future policy benefits. The change in fair value of the equity indexed annuity embedded derivatives is reflected in interest credited to fixed accounts. The changes in fair values of the GMWB and GMAB embedded derivatives are reflected in benefits, claims, losses and settlement expenses. At December 31, 2008 and 2007, the total fair value of these embedded derivatives, excluding the host contract and a liability for life contingent GMWB benefits of $5 million and $2 million, respectively, was a net liability of $1.8 billion and $220 million, respectively.
Credit Risk
Credit risk associated with
IDS Life'sRiverSource Life’s derivatives islimited tothe risk that a derivative counterparty will not perform in accordance with the terms of the contract. To mitigate such risk, counterparties are all required to be preapproved. Additionally,IDSRiverSource Life may, from time to time, enter into master nettingagreementsarrangements and collateral arrangements wherever practical.The following summarizes IDS Life's useAt December 31, 2008 and 2007, RiverSource Life accepted collateral consisting primarily ofderivative financial instruments. Cash Flow Hedges IDS Life uses interest rate products, primarily interest rate swaptions, to hedge the risk of increasing interest rates on forecasted fixed annuity sales. During 2005, 2004cash and2003, no amounts were reclassified into earnings from accumulated other comprehensive income. Additionally, IDS Life does not expect to reclassify any material amounts from accumulated other comprehensive income to earnings during the next twelve months. Currently, the longest period of time over which IDS Life is hedging exposure to the variability in future cash flows is 13 years and relates to forecasted fixed annuity sales. There were lossessecurities of $1.8 billion and $243 million,for the year endedrespectively, from counterparties. In addition, as of December 31,20052008, RiverSource Life provided collateral consisting primarily of cash andno gains or losses for the years ended December 31, 2004securities of $432 million and2003 on derivative transactions or portions thereof that were ineffective as hedges or excluded from the assessment of hedge effectiveness. During 2005, 2004 and 2003, IDS Life recognized the following impacts in other comprehensive income related$14 million, respectively, toits cash flow hedging activity, net of tax:
(Thousands) 2005 2004 2003 ----------------------------------------------------------------------------------------------------------Holding losses, net of tax of $6,628, $11,901, and $3,663, respectively $ (12,309) $ (22,102) $ (6,802) Reclassification for realized losses (gains), net of tax of $624, $525, and $525, respectively 1,159 (975) (975) ---------------------------------------------------------------------------------------------------------- Net unrealized derivative losses $ (11,150) $ (23,077) $ (7,777) ----------------------------------------------------------------------------------------------------------Derivatives Not Designated as Hedges IDS Life has economic hedges that either do not qualify or are not designated for hedge accounting treatment. F-34IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain annuity products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the amount of expenses incurred by IDS Life related to equity-indexed annuities will positively or negatively impact earnings. As a means of economically hedging its obligations under the provisions of these products, IDS Life writes and purchases index options and occasionally enters into futures contracts. Purchased options used in conjunction with these products are reported in other assets and written options are included in other liabilities. Additionally, certain annuity products contain GMWB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments. The GMWB provision is considered an embedded derivative and is valued each period by estimating the present value of future benefits less applicable fees charged for the rider using actuarial models, which simulate various economic scenarios. IDS Life economically hedges the exposure related to the GMWB provision using various equity futures and structured derivatives.counterparties. As of December 31,20052008, RiverSource Life’s maximum credit exposure to derivative transactions after considering netting arrangements with counterparties and2004, the fair value of the purchased derivatives used in conjunction with these productscollateral arrangements was$124.6 million and $27.8 million, respectively. As of December 31, 2005 and 2004, the fair value of the written options was $(0.8) million and $(0.9) million, respectively. Futures contracts are settled daily by exchanging cash with the counterparty and gains and losses are reported in earnings. Embedded Derivatives As noted above, certain annuity products have returns tied to the performance of equity markets. The equity component of the annuity product obligations are considered embedded derivatives. Additionally, certain annuities contain GMWB and GMAB provisions, which are also considered embedded derivatives. The changes in fair value of the equity indexed annuities are recognized in interest credited to account values and the changes in fair value of the GMWB and GMAB features are recognized in death and other benefits for investment contracts and universal life-type insurance. The fair value of the embedded derivatives for equity indexed annuities is recognized in future policy benefits for fixed annuities and the fair value of the embedded options for GMWB and GMAB is recognized in future policy benefits for variable annuity guarantees in the Consolidated Balance Sheets. The total fair value of these instruments, excluding the host contract, was $47.9 million and $34.6 million at December 31, 2005 and 2004, respectively. F-35IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Fair Value of Financial Instruments ----------------------------------- The following table discloses fair value information for financial instruments. Certain items, such as life insurance obligations, employee benefit obligations, investments accounted for under the equity method, DAC and DSIC are not reflected in the table as they are not required to be disclosed in such table by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The fair values of financial instruments are estimates based upon market conditions and perceived risks at December 31, 2005 and 2004 and require management judgment to estimate such values. These figures may not be indicative of future fair values. Additionally, management believes the value of excluded assets and liabilities is significant. The fair value of IDS Life, therefore, cannot be estimated by aggregating the amounts presented herein. The following table discloses carrying value and fair value information for financial instruments at December 31:
2005 2004 ------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (Thousands) Value Value Value Value -------------------------------------------------------------------------------------------------------------------Financial Assets ---------------- Assets for which carrying values approximate fair values $ 233,589 $ 233,589 $ 667,248 $ 667,248 Available-for-Sale securities 27,753,195 27,753,195 28,162,451 28,162,451 Mortgage loans on real estate, net 2,842,362 2,976,688 2,923,542 3,149,986 Policy loans 605,212 605,212 588,574 588,574 Trading securities 23,956 23,956 168,055 168,055 Other investments 127,369 131,475 135,795 140,428 Separate account assets 37,929,960 37,929,960 32,454,032 32,454,032 Derivative financial instruments 133,263 133,263 97,784 97,784 Financial Liabilities --------------------- Liabilities for which carrying values approximate fair values $ 25,000 $ 25,000 $ 47,000 $ 47,000 Fixed annuity reserves 24,637,806 23,840,988 25,522,643 24,733,010 Separate account liabilities 33,154,528 31,742,503 28,284,118 27,164,063 Derivative financial instruments 6,941 6,941 4,290 4,290 -------------------------------------------------------------------------------------------------------------------As of December 31, 2005 and 2004, the carrying and fair values of off-balance sheet financial instruments are not material. See Note 2 for carrying and fair value information regarding Available-for-Sale securities and mortgage loans on real estate (net of allowance for loan losses). The following methods were used to estimate the fair values of financial assets and financial liabilities: FINANCIAL ASSETS Assets for which carrying values approximate fair values include cash and cash equivalents, restricted cash and certain other assets. The carrying value approximates fair value due to the short-term nature of these instruments. Available-for-Sale securities are carried at fair value in the Consolidated Balance Sheets. Gains and losses are recognized in the results of operations upon disposition. In addition, impairment losses are recognized when management determines that a decline in value is other-than-temporary. F-36IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of mortgage loans on real estate, except those with significant credit deterioration, are estimated using discounted cash flow analysis, based on current interest rates for loans with similar terms to borrowers of similar credit quality. For loans with significant credit deterioration, fair values are based on estimates of future cash flows discounted at rates commensurate with the risk inherent in the revised cash flow projections, or for collateral dependent loans, on collateral values. The fair value of policy loans approximates carrying value. Trading securities are carried at fair value in the Consolidated Balance Sheets with changes in fair value recognized in current period earnings. Other investments include IDS Life's interest in syndicated loans, which are carried at amortized cost less allowance for losses in the Consolidated Balance Sheets. Fair values are based on quoted market prices. Separate account assets are carried at fair value in the Consolidated Balance Sheets. Derivative financial instruments are carried at fair value within other assets or other liabilities. The fair value of the derivative financial instruments are determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. FINANCIAL LIABILITIES Liabilities for which carrying values approximate fair values include certain other liabilities. The carrying value approximates fair value due to the short-term nature of these instruments. Fair values of fixed annuities in deferral status are estimated as the accumulated value less applicable surrender charges. For annuities in payout status, fair value is estimated using discounted cash flows based on current interest rates. The fair value of these reserves excludes life insurance related elements of $1.5 billion as of both December 31, 2005 and 2004. If the fair value of the fixed annuities were realized, the surrender charges received would be offset by the write off of the DAC and DSIC associated with the fixed annuities of $496.4 million and $534.4 million as of December 31, 2005 and 2004, respectively. Fair values of separate account liabilities, excluding life insurance-related elements of $4.8 billion and $4.2 billion at December 31, 2005 and 2004, respectively, are estimated as the accumulated value less applicable surrender charges. If the fair value of the separate account liabilities were realized, the surrender charges received would be offset by the write off of the DAC and DSIC associated with separate account liabilities of $2.0 billion and $1.7 billion as of December 31, 2005 and 2004, respectively. F-37IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12.approximately $83 million.16. Commitments and Contingencies
-----------------------------At December 31,
20052008 and2004, IDS2007, RiverSource Life had no material commitments to purchase investments other than mortgage loanfundings (seefundings. See Note2)4 for additional information.RiverSource Life’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31, 2008, these guarantees range up to 5.0%. To the extent the yield on RiverSource Life’s invested assets portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’s profitability would be negatively affected.
The Securities and Exchange Commission, the
National Association of Securities DealersFinancial Industry Regulatory Authority, commonly referred to as FINRA, and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements.IDSRiverSource Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries.IDSRiverSource Life is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities.
IDSRiverSource Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
RiverSource Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in and pursuant to Securities and Exchange Commission (“SEC”) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Life’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, RiverSource Life’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
RiverSource Life’s management, with the participation of RiverSource Life’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, RiverSource Life’s principal executive officer and chief financial officer have concluded that RiverSource Life’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2008.
Management’s Report on Internal Control Over Financial Reporting
The
IRS routinely examines IDS Life's federal income tax returnsmanagement of RiverSource Life is responsible for establishing andrecently completedmaintaining adequate internal control over financial reporting.RiverSource Life’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:
· Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of RiverSource Life;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of RiverSource Life are being made only in accordance with authorizations of management and directors of RiverSource Life; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of RiverSource Life’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
RiverSource Life’s management assessed the effectiveness of RiverSource Life’s internal control over financial reporting as of December 31, 2008. In making this assessment, RiverSource Life’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Based on management’s assessment and those criteria, RiverSource Life believes that, as of December 31, 2008, RiverSource Life’s internal control over financial reporting is effective.
78
This annual report does not include an attestation report of RiverSource Life’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by RiverSource Life’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit RiverSource Life to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Life’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of Ameriprise Financial has appointed Ernst & Young LLP (“Ernst & Young”) as independent registered public accounting firm to audit the Consolidated Financial Statements of
IDSRiverSource Life for the1993 through 1996 tax years.years ended December 31, 2008 and 2007.Fees Paid to the Registrant’s Independent Auditor
The
IRS is currently conducting anfollowing table presents fees for professional services rendered by Ernst & Young for the audit ofIDS LifeRiverSource Life’s financial statements for the1997 throughyears ended December 31, 2008 and 2007 and other fees billed for other services rendered by Ernst & Young during those periods.
2008
2007
(in thousands)
Audit Fees (1)
$
2,183
$
1,819
Tax Fees
—
—
All Other Fees
—
—
Total
$
2,183
$
1,819
(1) Audit fees included audit work performed in the review and preparation of the financial statements, as well as services that generally only the independent auditor can be expected to provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Securities and Exchange Commission.
79
Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002,
tax years. Management does not believe there willthe terms of the engagement of Ernst & Young are subject to the specific pre-approval of the Audit Committee of Ameriprise Financial. All audit and permitted non-audit services to bea material adverse effectperformed by Ernst & Young for RiverSource Life require pre-approval by the Audit Committee of Ameriprise Financial in accordance with pre-approval procedures established by the Audit Committee of Ameriprise Financial. The procedures require all proposed engagements of Ernst & Young for services to RiverSource Life of any kind to be directed to the General Auditor of Ameriprise Financial, and then submitted for approval to the Audit Committee of Ameriprise Financial prior to the beginning of any services.In 2008 and 2007, 100% of the services provided by Ernst & Young for RiverSource Life were pre-approved by the Audit Committee of Ameriprise Financial.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) and (2)
Financial Statements and Financial Statement Schedules
The information required herein has been provided in Item 8.
(3)
Exhibits
See Exhibit Index on pages E-1 through E-2 hereof.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
IDS Life's consolidated financial condition or resultsits behalf by the undersigned, thereunto duly authorized.RIVERSOURCE LIFE INSURANCE COMPANY
Registrant
March 2, 2009
By
/s/ Timothy V. Bechtold
Date
Timothy V. Bechtold, President
Pursuant to the requirements of
operations as a resultthe Securities Exchange Act ofthese audits. F-381934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 2, 2009
/s/ Timothy V. Bechtold
Date
Timothy V. Bechtold, Director and President
(Principal Executive Officer)
March 2, 2009
/s/ Brian J. McGrane
Date
Brian J. McGrane, Director, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
March 2, 2009
/s/ Gumer C. Alvero
Date
Gumer C. Alvero, Director and Executive Vice
President - Annuities
March 2, 2009
/s/ David K. Stewart
Date
David K. Stewart, Vice President and Controller
(Principal Accounting Officer)
March 2, 2009
/s/ Kevin E. Palmer
Date
Kevin E. Palmer, Director, Vice President and
Chief Actuary
81
EXHIBIT INDEX
-------------The following exhibits are filed as part of this Annual Report or, where indicated, were already filed and are hereby incorporated by reference.
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company filed electronically as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance Company, dated May 5, 1989, establishing IDS Life Account MGA filed electronically as Exhibit 3.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.1 Copy of Non-tax qualified Group Annuity Contract, Form 30363C, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.2 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate filed electronically as Exhibit 4.4 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed electronically as Exhibit 4.8 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference.
3.1
Copy of Certificate of Incorporation of IDS Life Insurance Company filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated by reference.
3.1.1
Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference.
3.2
Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference.
4.1
Instruments defining the rights of security holders, including indentures, are incorporated by reference to Registration Statement Nos. 333-92297, 333-139763, 333-73958, 333-139759, 333-74865, 333-139760, 333-82149, 333-139761, 333-85567, 333-139762, 33-47302, 333-79311, 333-114888 and 33-28976.
10.1
Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective Jan. 1, 2007, filed as Exhibit 10.1 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.2
Copy of Selling Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. effective Jan. 1, 2007, filed as Exhibit 10.2 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.3
Copy of Marketing Support Services Agreement between Ameriprise Financial Services, Inc. and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.3 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.4
Copy of Investment Management and Services Agreement between RiverSource Investments, LLC and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.4 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.5
Form of Federal Income Tax Sharing Agreement by and among RiverSource Life Insurance Company, RiverSource Life Insurance Co. of New York and Ameriprise Financial, Inc. effective Jan. 1, 2007, filed as Exhibit 10.5 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.6
Copy of Agreement by and among RiverSource Life Insurance Company, Ameriprise India Private Limited, and Ameriprise Financial, Inc. (a/k/a/ Supplementary Agreement No. 1) effective Jan. 1, 2007, filed as Exhibit 10.6 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.7
Copy of Management, Service & Marketing Support Agreement by and between RiverSource Investments, LLC, RiverSource Service Corporation and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.7 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
10.8
Copy of RiverSource Variable Portfolio Funds Service Agreement by and between RiverSource Distributors, Inc. and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.8 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
E-1
4.9 Copy of Non-tax qualified Individual Annuity Contract, Form 30365D, filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.10 Copy of Endorsement No. 30379 to the Individual Annuity Contract, filed electronically as Exhibit 4.10 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C, filed electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed electronically as Exhibit 4.12 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13 to Post-Effective Amendment No. 12 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.15 Copy of Group Annuity Certificate, Form 30360D, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.16 Form of Deferred Annuity Contract, Form 30365E, filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-48701 is incorporated herein by reference. 4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111, filed electronically as Exhibit 4.1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114, filed electronically as Exhibit 4.2 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed electronically as Exhibit 4.3 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed electronically as Exhibit 4.4 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.22 Copy of Group IRA Annuity Contract, Form 33113, filed electronically as Exhibit 4.5 to Registration Statement No. 333-42793 is incorporated herein by reference.EXHIBIT INDEX (Continued)
*31.1
Certification of Timothy V. Bechtold, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*31.2
Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*32.1
Certification of Timothy V. Bechtold, President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
E-2
4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed electronically as Exhibit 4.6 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484, filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485, filed electronically as Exhibit 4.8 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.26 Copy of Individual IRA Contract, Form 30486, filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 10.1 Copy of Gross Administrative Charge Agreement by and between American Express Financial Corporation and IDS Life Insurance Company, dated November 1, 2003 filed electronically as Exhibit 10 to the 2003 Form 10-K is incorporated herein by reference. 10.2 Copy of Gross Administrative Charge Agreement by and between Ameriprise Financial, Inc. and RiverSource Investments, LLC, dated October 1, 2005, filed electronically as Exhibit 10.1 to the Form 10-Q for the quarterly period ending September 30, 2005 is incorporated herein by reference. 10.3 Copy of Investment Management and Services Agreement by and between IDS Life Insurance Company and RiverSource Investments, LLC, dated October 1, 2005, filed electronically as Exhibit 10.2 to the Form 10-Q for the quarterly period ending September 30, 2005 is incorporated herein by reference. *31.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *31.2 Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* Filed electronically herewith. E-3