==============================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
----------------FORM 10-K
---------------- |X|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31,
20062009OR
| |oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO ________ COMMISSION FILE NUMBER 333-114888For 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 organization)
(I.R.S.(I.R.S. Employer Identification No.)
55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA
1099 Ameriprise Financial Center, Minneapolis, Minnesota
55474
(Address(Address of principal executive offices)
(Zip(Zip Code)
Registrant'sRegistrant’s telephone number, including area code (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act:
NONENoneSecurities registered pursuant to Section 12(g) of the Act:
NONENoneIndicate 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 Section 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate 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|(Check one):
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'sregistrant’s classes of common stock, as of the latest practicable date.CLASS OUTSTANDING AT FEBRUARY 28, 2007 - -------------------------------------- -------------------------------- Common Stock (par value $30 per share) 100,000 shares
Class
Outstanding at February 23, 2010
Common Stock (par value $30 per share)
100,000shares
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 NUMBERPART I PAGE 1. Business................................................................................................ 1 1A. Risk Factors............................................................................................ 8 1B. Unresolved Staff Comments............................................................................... 16 2. Properties.............................................................................................. 16 3. Legal Proceedings....................................................................................... 16 4. Submission of Matters to a Vote of Security Holders..................................................... 16 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....................................................................................... 16 6. Selected Financial Data................................................................................. 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 17 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................. 32 8. Financial Statements and Supplementary Data............................................................. 32 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 71 9A. Controls and Procedures................................................................................. 71 9B. Other Information....................................................................................... 72 PART III 10. Directors and Executive Officers of the Registrant...................................................... 72 11. Executive Compensation.................................................................................. 72 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......... 72 13. Certain Relationships and Related Transactions, and Director Independence............................... 72 14. Principal Accountant Fees and Services.................................................................. 72 PART IV 15. Exhibits and Financial Statement Schedules.............................................................. 73 Signatures.............................................................................................. 74 Exhibit Index........................................................................................... E-1TABLE OF CONTENTS
Form 10-K
Item Number
PART I
------ ITEM 1. BUSINESS INTRODUCTION ------------
ITEM 1.
Introduction
RiverSource
Life Insurance Company, formerly known as IDSLife Insurance Company is a stock life insurance company with onewholly-ownedwholly owned operating subsidiary, RiverSource Life Insurance Co. of New York("(“RiverSource Life ofNY"NY”). RiverSource Life Insurance Company is awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.("(“AmeripriseFinancial"Financial”).o·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.
o·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
North Dakota.Delaware. RiverSource Life of NY issues insurance and annuity products.On December 31,
2006, IDS Life Insurance Company completed an Agreement and Plan of Merger with both American Enterprise Life Insurance Company ("American Enterprise Life") and American Partners Life Insurance Company ("American Partners Life") whereby both companies merged with and into IDS Life Insurance Company. As a result2008, Ameriprise Financial contributed all of themerger, American Enterprise Lifeissued andAmerican Partners Life ceased to exist. Prior to the merger, both companies were wholly-owned operating subsidiariesoutstanding shares ofIDS Life Insurance Company. Immediately following the merger, IDS Life Insurance Company changed its nameRiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.Also on December 31, 2006, American Centurion Life Assurance Company ("American Centurion Life") merged withRTA is a stock company domiciled in Delaware andinto IDS Life Insurance Company of New York ("IDS Life of New York"). Asis aresult of the merger, American Centurion Life ceased to exist. Prior to the merger, American Centurion Life was a wholly-owned operating subsidiary of IDS Life Insurance Company. Immediately following the merger, IDS Life of New York changed its name to RiverSource Life Insurance Co. of New York.limited partner in affordable housing partnership investments.RiverSource Life Insurance Company and its
subsidiarysubsidiaries are referred to collectively in this Form 10-K as"RiverSource Life"“RiverSource Life”.A majority of RiverSource
Life'sLife’s business is sold through the retail distribution channel of Ameriprise Financial Services, Inc., a subsidiary of Ameriprise Financial. RiverSource Distributors, Inc., a subsidiary of Ameriprise Financial, serves as the principal underwriter and distributor of variable annuity and life insurance products issued by RiverSource Life.No material effect on consolidated financial condition and results of operations is expected for RiverSource Life as a result of the mergers.��
Ameriprise Financial was formerly a
wholly-ownedwholly owned subsidiary of American Express Company("(“AmericanExpress"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"“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"“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.Ameriprise Financial has incurred $654 million of pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to incur a total of approximately $875 million.Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.RiverSource Life has been allocated $252 millionThe separation from American Express was completed intotal pretax non-recurring separation costs since the Separation announcement through December 31, 20062007.Annuities: Product Features and
expects to be allocated a significant portion of the remaining separation costs in 2007. RiverSource Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. -1-AMERIPRISE FINANCIAL'S NEW BRAND -------------------------------- In 2005, in connection with the Separation, Ameriprise Financial launched a new brand name strategy for its businesses. In October 2005, it began marketing products, including life insurance and annuities, under the RiverSource(SM) brand. The transition of the life insurance and annuity products to the RiverSource(SM) brand was substantially complete as of December 31, 2006. As described above, Ameriprise Financial streamlined the organizational structure of its life insurance business by consolidating its five life insurance subsidiaries into two as of December 31, 2006, RiverSource Life Insurance Company and RiverSource Life of NY. RiverSource Life of NY is a wholly-owned subsidiary of RiverSource Life Insurance Company. This reorganization incorporated the RiverSource(SM) branding strategy into the names of Ameriprise Financial's life insurance company subsidiaries and is expected to result in certain expense and capital-deployment efficiencies. ANNUITIES: PRODUCT FEATURES AND RISKS -------------------------------------RisksRiverSource Life offers both deferred variable and fixed
and variable deferred annuity productsannuities to a broad range of consumers throughmultipleits affiliated retail broker-dealer and through third party banks and broker dealers, such as Wachovia Securities, Inc., SunTrust Securities, Inc. and Wells Fargo Securities, Inc. As of December 31, 2009, RiverSource Life had distributionchannels. Fixedagreements for annuity products in place with more than 120 third party distributors, with annual cash sales of $2.1 billion in 2009. Deferred variable andvariable deferredfixed annuities are products 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. RiverSource Life 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 is one of the largest issuers of annuities in the United States.
For the year ended December 31, 2006, on a consolidated basis, itsRiverSource Life ranked ninth in variable annuityproducts ranked eighth in newsalesof variable annuities according(according toVARDS(R)the LIMRA International® survey dated September 30, 2009, the most recent report available). RiverSource Life hadfixed and variableannuity cash sales in20062009 of$12.9 billion, up from$9.3 billionin 2005. Variable annuities cash sales increased 46%, partially offset by a 13% decrease in cash sales of fixed annuities.compared to $9.2 billion for 2008. 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.RiverSource Life receives fees charged on assets allocated to its separate accounts. Investment management performance is also critical to the profitability of the annuity business. VARIABLE ANNUITIESVariable Annuities
A variable annuity provides a
contract ownercontractholder with investment returns linked to underlying investment accounts of thecontract owner'scontractholder’s choice. Investment options may include RiverSource Variable Series Trust funds as well as variable product funds of other companies. 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 31,2006.2009.RiverSource Life’s Portfolio Navigator asset allocation program is available under its variable annuities. The Portfolio Navigator program is designed to help a contract purchaser select an asset allocation model portfolio from the choices available under the program, based on the purchaser’s stated investment time horizon, risk tolerance and investment goals. RiverSource Life believes the benefits of the Portfolio Navigator asset allocation program include a well-diversified annuity portfolio, disciplined, professionally created asset allocation models, simplicity and ease of use, access to multiple well-known money managers within each model portfolio and automatic rebalancing of the client’s contract value on a quarterly basis. RiverSource Investments, LLC, RiverSource Life’s investment manager, designs and periodically updates the model portfolios based on recommendations from Morningstar Associates, an unaffiliated investment advisor.
The majority of the variable annuity contracts RiverSource Life issues include guaranteed minimum death benefit (“GMDB”) provisions. Contract purchasers can choose to add
variousoptional benefit provisions to their contracts to meet theirneeds. These include enhanced guaranteed minimum death benefit ("GMDB"),needs, including guaranteed minimum withdrawal benefit("GMWB"), guaranteed minimum income benefit ("GMIB"(“GMWB”) and guaranteed minimum accumulation benefit("GMAB"(“GMAB”) provisions. Approximately 98% of RiverSource Life’s overall variable annuity assets include a GMDB provision and approximately 40% of RiverSource Life’s overall variable annuity assets include a GMWB or GMAB provision. 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.The majority of the variable annuity contractsRiverSource
Life offers contain GMDB provisions. RiverSource Life'sLife’s largest-selling variable annuities are the RiverSource® Retirement AdvisorPlus(SM)Plus 4 series of variable annuities, which include the RiverSource Retirement Advisor 4 AdvantagePlus(SM) Variable Annuity® variable annuity and the RiverSource Retirement Advisor 4 SelectPlus(SM)® variable annuity (collectively, the “Retirement Advisor 4 VariableAnnuity (the "Retirement Advisor Plus(SM) Variable Annuities"Annuities”). Under the Retirement AdvisorPlus(SM)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.AdditionalThe following additional optional GMDBs are also
available. For example,available for an additional charge:·A return of purchase payment death benefit for RiverSource Retirement Advisor 4 Advantage
Plus(SM) Variable Annuity contract ownersvariable annuity contractholders age 76 or older at contractissue may purchase the optional Return of Purchase Payment Death Benefit for an additional charge whichissue. This rider adds the return of purchase payments less adjusted partial surrenders to the standard death benefit.-2-Contract owners may also purchase a·A maximum anniversary value death benefit or a five-year maximum anniversary value death
benefit for an additional charge.benefit. 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.RiverSource Life's contract owners also may purchase an·An enhanced earnings death benefit or an enhanced earnings plus death
benefit for an additional charge.benefit. Thesedeath benefitriders are intended to provide additional benefits to offset expenses after thecontract owner'scontractholder’s death.Available 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 thepolicyholder,contractholder, regardless of the investment performance of the contract.Variable annuity contract
ownersholders can also obtain a lump sum principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB provides a guaranteed contract value at the end of a ten-year waiting period regardless of the investment performance of the contract. The guarantee is equal to the greater of the total amount of purchase payments made or 80% of the highest anniversary value, adjusted for any withdrawals.Certain variable annuity contracts contain a
GMIBguaranteed 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. In 2007, RiverSource Lifebears the risk that protracted under-performance of the financial markets could result inceased offering contracts with GMIBbeing higher than what accumulated contract owner account balances would support.provisions.RiverSource Life earns fee-based revenue in the form of mortality and expense risk
chargesfees, marketing support and administrative fees, fees charged for optional features elected by the contractownerholder andthe other contractany surrender or withdrawal charges.The general account assets of RiverSource Life support the contractual obligations under the guaranteed benefit
riders RiverSource Life issuesprovisions (see"General“General andVariableSeparate AccountAssets-TheAssets — GeneralAccount"Account” below). As a result, RiverSource 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. RiverSourceLife'sLife’s exposure to risk from guaranteed benefits generally will increase when equity marketsdecline. FIXED ANNUITIESdecline, as evidenced by the significant decline experienced in 2008 and early 2009. For a discussion of liabilities related to RiverSourceLife'sLife’s annuity products, see Note 2 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.Fixed Annuities
RiverSource Life’s fixed annuity products provide a
contract ownercontractholder with cash value that increases by a fixed or indexed interest rate.FixedRiverSource Life periodically resets ratesare periodically resetattheits discretionof RiverSource Life,subject to certain policy terms establishing minimum guaranteed interest crediting rates. RiverSourceLife'sLife’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.In 2007, RiverSource Life
resetsdiscontinued new sales of equity indexed annuities.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,
2006. In 2003, and in response to a declining interest rate environment, several states adopted an interim regulation allowing for a2009. New contracts issued provide guaranteed minimum interestcrediting rate of 1.5% and/or a model regulationrates in compliance with state laws providing foraindexed guaranteedindexed raterates.Insurance: Product Features and
have now adopted regulations that mirror the National Association of Insurance Commissioners ("NAIC") model regulation for a guaranteed index rate. In response, RiverSource Life filed a number of contract changes in recent years to implement lower minimum guarantees. RiverSource Life will continue to implement contract changes as states continue to adopt the new model regulation or as the interim regulation expires according to its terms. INSURANCE: PRODUCT FEATURES AND RISKS -------------------------------------RisksRiverSource Life issues both variable and fixed universal life insurance, traditional life insurance
including whole life and term lifeand disability income("DI"(“DI”) insurance.(RiverSource Life discontinued underwriting new long term care ("LTC") policies as of December 31, 2002).Universal life insurance is a form of permanent life insurance characterized byitsflexible premiums,itsflexible deathbenefit amountsbenefits andits unbundling of theunbundled 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.-3-RiverSource Life'sLife also offers a chronic care rider, AdvanceSource, on its new permanent insurance products. This rider allows its policyholder to accelerate a portion of the life insurance death benefit in the event of a qualified chronic care need.RiverSource Life’s sales of individual life insurance in
2006,2009, as measured by scheduled annual premiums,excludinglump sum and excess premiums, consisted of82%39% variable universal life,9%53% fixed universal life and9%8% traditional life. RiverSource 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 for RiverSource Life to mitigate this risk.VARIABLE UNIVERSAL LIFE INSURANCEVariable Universal Life Insurance
RiverSource
Life's best-selling life insurance products areLife is a leader in variable universal lifeinsurance policies.insurance. Variable universal life insurance provides life insurance coverage along with investment returns linked to underlying investment accounts of thepolicyholder'spolicyholder’s choice.OptionsInvestment options may include RiverSource VariablePortfolio FundsSeries Trust funds as well as variable product 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 31,2006.2009. RiverSource Life Insurance Company rankedfirstfifth in sales of variable universal life based on total premiums (according to theTillinghast Towers-Perrin Value(TM)Tillinghast-Towers Perrin’s Value Survey, dated September 30,2006,2009, the most recent report available). RiverSourceLife'sLife’s major source of revenue from variable universal life insurance is cost of insurance and other charges.FIXED UNIVERSAL LIFE INSURANCE AND TRADITIONAL WHOLE LIFE INSURANCEFixed Universal Life Insurance and Traditional Whole Life Insurance
Fixed universal life and traditional whole life insurance policies do not subject the policyholder to the investment risks associated with variable universal life insurance.
RiverSource
Life'sLife’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 RiverSource 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 from 3.0% to 5.0% as of December 31,2006.2009.RiverSource Life also offers
non-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.years. RiverSource Life has sold very little traditional whole life insurance in recent years.TERM LIFE INSURANCE RiverSourceTerm Life
also 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, RiverSource 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 RiverSource Life also issues DI insurance. For the nine months ended September 30, 2006, RiverSource Life was ranked as the seventh largest provider of individual (non-cancelable) DI insurance based on premiums (according to LIMRA International(R)).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 INSURANCERiverSource Life was ranked as the eighth largest provider of individual (non-cancelable) DI insurance based on premiums (according to the LIMRA International® survey dated September 30, 2009, the most recent report available).Long Term Care Insurance
As of December 31, 2002, RiverSource Life discontinued underwriting
LTClong term care (“LTC”) insurance. Although new product sales were discontinued in the fourth quarter of 2002, RiverSource Life generally retained 50% of the risk on existing contracts and ceded the remaining 50% of the riskwas cededon a coinsurance basis toaffiliatessubsidiaries of Genworth Financial, Inc.("Genworth"(“Genworth”).In
addition, in May 2003, RiverSource Life began outsourcing claims administration on its existing block of LTC policies to Genworth. Beginning in2004, RiverSource LifefiledInsurance Company and RiverSource Life of NY began to 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 in4750 states,covering 86% of the eligible premiums,with an average approved cumulative rate increase of33.2%.62.2% of premium on all such policies where an increase was requested.In 2007, RiverSource Life Insurance Company and RiverSource Life of NY began to file for approval to implement rate increases on most of their existing blocks of comprehensive reimbursement LTC insurance policies. Implementation of these rate increases
is expected to continuebegan 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 15.4% of premium on all such policies where an increase was requested.RiverSource Life may
be soughtseek additional rate increases with respect to these and other existing blocks oflong term careLTC insurance policies,in each casesubject to regulatory approval.-4-GENERAL AND VARIABLE ACCOUNT ASSETS -----------------------------------General and Separate Account Assets
Depending on the life insurance and annuity product purchased, the assets of RiverSource
Life'sLife’s policyholders and contractholders may be placed in the general account of RiverSource Life (the"general 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 (the"variable account"“separate accounts”).THE GENERAL ACCOUNTGeneral Account
Assets in the general account support all obligations of RiverSource Life other than those supported by the separate accounts. RiverSource Life bears the investment risk of the general account assets.
In the general account, RiverSource 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. RiverSource Life does not invest in securities to generate trading profits.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'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 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 31,2006,2009, this rate varied among fixed accounts and was as low as 1.5% and as high as7.4%8.4%. To the extent the yield on RiverSourceLife'sLife’s invested general account asset portfolio declines below its target spread plus the minimum guarantee, RiverSourceLife'sLife’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 of RiverSourceLife'sLife’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, margins may be negatively impacted as the interest rates available on RiverSourceLife'sLife’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.THE VARIABLE ACCOUNTSeparateAccounts
Variable annuity and insurance products offer
variableseparate 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, RiverSource 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.RiverSource Life's major source of revenue from the variable annuities it issues is the fees it receives under the terms of the variable annuity contracts. These fees include, for example, mortality and expense risk charges, administrative charges and fees for optional benefit riders and surrender or withdrawal charges. In addition,RiverSource Life receives payments from its affiliate, RiverSource Investments, LLC, for providing certain sponsor and related servicing activity for the RiverSource Variable
Portfolio FundsSeries Trust funds which are available as investment options under the variable annuity and life insurance products.Prior to the fourth quarter of 2005, Ameriprise Financial was the investment manager for the RiverSource Variable Portfolio Funds. -5-In the fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise Financial as the investment manager. As a result,RiverSource Lifenowalso receivesinternal allocationrevenues from assets allocated to subaccounts investing in RiverSourceVariable Series Trust funds. These revenues include shareholder services payments ascompensation fromwell as payments for marketing, administrative services, training and other services provided by RiverSourceInvestments, LLC for providing these non-investment advisory services to the RiverSource Variable Portfolio Funds.Life.In addition to the revenues described above, RiverSource Life receives shareholder servicing payments from other
companies'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 and life insurance products. These fees are generally based on the level ofvariableseparate account assets held in a particular fund and accordingly will vary based on market conditions.COMPETITION -----------Competition
RiverSource Life competes with other insurers and product manufacturers including insurance companies, such as Hartford 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.
Competitive factors affecting the sale of RiverSource
Life'sLife’s annuity and/or insurance products 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.
REGULATION ----------Regulation
The Minnesota Department of Commerce regulates RiverSource Life Insurance Company, and the New York State Insurance Department (together with the Minnesota Department of Commerce, the
"Domiciliary Regulators"“Domiciliary Regulators”) regulates RiverSource Life of NY.In addition to being regulated by their Domiciliary Regulators, RiverSource Life Insurance Company and RiverSource Life of NY are regulated by each of the insurance regulators in the states where each is authorized to transact the business of insurance.
OtherThese 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 of RiverSource 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
National Association of Securities DealersFinancial 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. RiverSource Life has been contacted by regulatory agencies for information relating to some of these investigations and is cooperating with those inquiries.
RiverSource Life has reviewed its compensation arrangements and other operations that may be affected by these regulatory investigations. In addition, RiverSource Life is reviewing the legal precedents and new industry-wide legislation, rules and regulations that may arise from ongoing investigations. -6-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
areasor other areas couldpotentiallymaterially affect RiverSource Life’s financial condition and results of operations.The instability and decline in global financial markets experienced during 2008 and 2009 and through the present time have resulted in an
adverse effect upon RiverSource 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 thepromotion of tax-advantaged savingsU.S. and abroad are considering or have implemented new and more expansive laws and regulations which mayadverselydirectly impact RiverSourceLife's salesLife’s businesses. Additional discussion ofannuity and life insurance products if enacted. FINANCIAL STRENGTH RATINGS --------------------------potential risks arising from enactment of new 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. Ratings are important to
maintainingmaintain public confidence in RiverSource Life. Lowering of RiverSourceLife'sLife’s ratings could have a material adverseeffectaffect on its ability to market its products and could lead to increasedsurrenders.surrenders of its products. Rating agenciescontinuallyevaluate the financialsoundness 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 of abusiness 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.RiverSource 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 Service,Inc. (Moody's), "AA-"“AA-” (Very Strong) by Fitch Ratings Ltd., and"AA-"“AA-” (Very Strong) by Standard &Poor's.Poor’s Ratings Services.Generally, RiverSource Life of NY does not receive an individual rating, but receives the same rating as RiverSource Life Insurance Company.
REINSURANCE -----------Reinsurance
RiverSource Life reinsures a portion of the insurance risks associated with its life, DI and LTC insurance products through reinsurance agreements with unaffiliated
insurancereinsurance companies.Reinsurance is usedRiverSource Life uses reinsurance in order to limit losses,minimizereduce exposure to large risks and provide additional capacity for futuregrowth and to effect business-sharing arrangements.growth. Tominimizemanage exposure tosignificantlosses from reinsurer insolvencies, RiverSource Life evaluates the financial condition of its reinsurers 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.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'spolicy’s death benefit from the first dollar of coverage for new sales of these policies, subject to thereinsurer actually paying.reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this levelbeginning induring 2001 (2002 for RiverSource Life of NY) for term life insurance and 2002 (2003 for RiverSource Life of NY) 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 by RiverSource Life is $1.5 million (increased from $750,000 during 2008) onany policy insuringa single life and $1.5 million on any flexible premium survivorshipvariablelife policy.For existing LTC policies,As a result of the increase in single life retention during 2008, RiverSource Liferetained 50%is in the process ofthe risk and the remaining 50%recapturing some older blocks ofthe risk was ceded on a coinsurance basis to affiliatesbusiness representing less than 1% ofGenworth Financial, Inc.current reinsured life insurance risk. Risk on fixed and variablelife anduniversal life policies is reinsured on a yearly renewable term basis.Starting in 2001, riskRisk on most term life policies starting in 2001 (2002 for RiverSource Life of NY) is reinsured on a coinsurancebasis.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 on a coinsurance basis the remaining 50% of the risk to Genworth. As of December 31, 2009, RiverSource Life’s credit exposure to Genworth under this reinsurance arrangement was approximately $1.3 billion under U.S. generally accepted accounting principles (“GAAP”) and $1.8 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.other policy forms. RiverSource Life also retains all risk on accidental death benefit claims andalmostsubstantially 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, 2009, the amount related to assumed reinsurance arrangements was $667 million under GAAP and $678 million under statutory accounting principles.
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.
RiverSource 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.-7-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,
2006,2009, RiverSource Life InsuranceCompany'sCompany’s company action level RBC was$590$803 million, and the corresponding total adjusted capital was $3.5 billion, which represents595%430% ofthecompany action level RBC.At December 31, 2009, RiverSource Life of NY’s company action level RBC was $44 million, and the corresponding total adjusted capital was $286 million, which represents 653% of company action level RBC.
As described above, RiverSource Life Insurance Company
maintainsand RiverSource Life of NY maintain capital well in excess of the company action levelrequired by the Minnesota Department of Commerce, its primary regulator. ITEM 1A. RISK FACTORS If any of the followingRBC requirement.
ITEM 1A.
RiverSource Life’s operations and financial results are subject to various risks and uncertainties,
develops into actual events, these eventsincluding those described below, that could have a material adverse effect on RiverSourceLife'sLife’s business, financial condition or results of operations. Based oncurrentthe information currently known, RiverSource Life believes that the following information identifies the mostsignificant riskmaterial factors affecting RiverSourceLife in each of these categories of risk.Life. However, the risks and uncertainties RiverSource Life faces are not limited to those described below. Additional risks and uncertaintieswhich arenot presently known to RiverSource Life or which are currently believed to be immaterial may also adversely affect RiverSourceLife'sLife’s business.RISKS RELATING TO RIVERSOURCE LIFE'S BUSINESS --------------------------------------------- RIVERSOURCE LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS AND BY ECONOMIC AND OTHER FACTORS.Risks Relating to RiverSource
Life'sLife’s BusinessRiverSource 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
suchfactors 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, currency values 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 RiverSourceLife'sLife’s businesses. Moreover, fluctuations in economic and market activity could impact the way then-existing customers allocate their available resources, which could affect RiverSourceLife'sLife’s persistency, surrender and product cash value loan experience and could negatively impact its business. RiverSourceLife'sLife’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.Although U.S. and global capital markets demonstrated signs of improvement and stabilization in the second half of 2009, current market conditions remain precarious and any further declines or volatility in U.S. and global market conditions could impact RiverSource Life’s business. RiverSource Life’s business has been and in the future may be adversely affected by 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 United States and global economies generally. In addition, since the second half of 2007, 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 and uncertain market conditions.
During periods of increasing market interest rates, RiverSource Life must offer higher crediting rates on interest-sensitive products, such as fixed universal life insurance and fixed annuities
and 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 rates and 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 of RiverSourceLife'sLife’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 on RiverSourceLife'sLife’s financial condition and results of operations. An increase in policy surrenders and withdrawals also may require RiverSource Life to accelerate amortization of deferred acquisition costs("DAC"(“DAC”), which would increase its expenses and reduce its netearnings.income.During periods of falling interest rates, RiverSource
Life's "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,Life’s spread may be reduced or could become negative, primarily because some of these products have guaranteed minimum crediting rates.-8-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 rates may subject RiverSource Life to reinvestment risks and increased hedging costs. Interest rate fluctuations also could have an adverse effect on the results of RiverSource
Life'sLife’s investment portfolio. During periods of declining market interest rates, the interest RiverSource Life receives on variable interest rate investments decreases. In addition, during those periods, RiverSource 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 that RiverSource 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 RiverSource Life's investment portfolio to interest rate fluctuations, see "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Management." POOR INVESTMENT PERFORMANCE IN RIVERSOURCE LIFE'S 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: o sales of variable products might decrease; o 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; and o RiverSource Life's ability to attract funds from existing and new clients might diminish. 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. Any 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: o reducing new sales of insurance and annuity products; o adversely affecting RiverSource 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 RiverSource Life to reduce prices for many of its products to remain competitive; and o adversely affecting RiverSource Life's ability to obtain reinsurance or obtain reasonable pricing on reinsurance. INTENSE COMPETITION AND THE ECONOMICS OF CHANGES IN RIVERSOURCE LIFE'S PRODUCT REVENUE MIX AND DISTRIBUTION CHANNELS COULD NEGATIVELY AFFECT RIVERSOURCE LIFE'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE AND PROFITABILITY. RiverSource Life operates in an intensely competitive industry. RiverSource Life competes based on a number of factors including name recognition, service, product performance and features, price, perceived financial strength, and claims-paying ratings. RiverSource Life's competitors include insurers and other financial institutions. RiverSource Life may face competitors that have greater market share, offer a broader range of products, have greater financial resources or offer higher claims-paying ratings than RiverSource Life does. Currently, Ameriprise Financial's branded advisor network distributes annuity and insurance products issued almost exclusively by RiverSource Life. If Ameriprise Financial's branded advisor network opened or expanded its distribution of annuity and insurance products of other companies, RiverSource Life could experience lower sales of its products or other developments, which could have a material adverse effect on RiverSource Life's financial condition and results of operations. -9-DOWNTURNS AND VOLATILITY IN EQUITY MARKETS COULD ADVERSELY AFFECT RIVERSOURCE LIFE'S BUSINESS AND PROFITABILITY.Significant downturns and volatility in equity markets have had and could continue to have an adverse effect on RiverSource
Life'sLife’s financial condition and results of operations. Market downturns and volatility may cause, and have caused, potential new purchasers to refrain from purchasing RiverSourceLife'sLife’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.Additionally, downturns and volatility in equity markets can have, and have had, an adverse effect on RiverSource
Life'sLife’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 on RiverSourceLife'sLife’s financial condition and results of operations.AlthoughRiverSource Life does not currently hedge or reinsure GMIB or a significant portion of GMDB provisions.Adverse capital and credit market conditions may significantly affect RiverSource Life’s ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of 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 agencies 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
hedgedexposure 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. The operations of U.S. and global financial services institutions are highly interconnected and aportiondecline in the financial condition of one or more financial services institutions may expose RiverSource Life to credit losses or defaults, limit access to liquidity or otherwise disrupt the operations of RiverSource Life’s business.Many transactions with and investments in the products and securities of other financial institutions 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
guarantees forloan 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 contractsin order to mitigate the financial risk of anwith guaranteed benefits), reinsurance and underwriting arrangements and equitymarket decline, thereinvestments. There can be no assurance that any sucha declinelosses 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 they are 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.
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.
Capital and credit market volatility can exacerbate, and has exacerbated the risk of third-party defaults, bankruptcy filings, foreclosures, 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 enhanced oversight, new capital requirements, additional fees and taxes or other regulations, that could materially impact its financial condition, results of operations and liquidity in ways that it cannot predict.
Recent economic conditions have caused the U.S. federal government, Federal Reserve and other U.S. governmental and regulatory bodies to take or to consider taking legislative and regulatory actions designed to address the financial crisis and to mitigate against the risk of similar crises going forward. In 2009, the U.S. Senate and House of Representatives passed various forms of legislation setting forth a comprehensive plan for regulatory reform in the financial industry. While such legislation has not been finalized, these plans contemplate significant structural reforms, including heightened governmental powers to regulate risk across the financial system and the creation of a new consumer financial protection agency. The legislation also calls for increased substantive regulation of the financial industry, including heightened regulation of large financial institutions whose combination of size, leverage, and interconnectedness could, upon the failure of such an institution, pose a threat to financial stability, expanded regulation over credit ratings agencies and derivatives and securitization markets, effective increases in regulatory capital requirements, and various corporate governance initiatives. In addition, specific taxes targeted at larger financial institutions have been proposed that could increase RiverSource Life’s costs and reduce its earnings. There can be no assurance as to whether or when any of the parts of the proposed financial reform plans will be enacted into legislation, and if adopted, what the final provisions of such legislation will be.
This legislation or similar proposals may fail to stabilize the financial markets or the economy generally. Any new legislation or regulatory changes could require RiverSource Life to change certain of its business practices, impose additional costs on RiverSource Life, or otherwise adversely affect RiverSource Life’s business operations, regulatory reporting relationships, financial condition or results of operations. Consequences may include 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. Financial conditions may prompt, and have prompted, 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
profitabilityway 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 ofcertain products or product lines. For additional information regarding the sensitivity ofoperations and liquidity.Defaults in RiverSource
Life's business results to equity market fluctuations, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Management." DEFAULTS IN RIVERSOURCE LIFE'S FIXED INCOME SECURITIES PORTFOLIO WOULD ADVERSELY AFFECT ITS EARNINGS.Life’s fixed maturity securities portfolio could adversely affect its earnings.Issuers of the fixed
incomematurity securities that RiverSource Life owns may default on principal and interest payments.At bothAs of December 31,2006 and 2005, 7%2009, 5% of RiverSourceLife's investment portfolioLife’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 debt obligations.As of December 31, 2006, RiverSource 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 $33 million.Default-related declines in the value of RiverSourceLife'sLife’s fixedincomematurity securities portfolio could cause its net earnings to decline and could weaken its capital position.SOME OF RIVERSOURCE LIFE'S INVESTMENTS ARE RELATIVELY ILLIQUID.If 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.
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 derivative instruments, 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.
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, certain 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, and collateralized debt obligations, among others, all of which are relatively illiquid. These asset classes represented15.8%15% of the carrying value of RiverSourceLife'sLife’s investment portfolio as of December 31,2006.2009. If RiverSource 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 RiverSource 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 on RiverSourceLife'sLife’s financial condition and results of operations.RIVERSOURCE LIFE'S AFFILIATED DISTRIBUTOR MAY BE UNABLE TO ATTRACT AND RETAIN FINANCIAL ADVISORS.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. RiverSource Life competes based on a number of factors including name recognition, service, investment performance, product features, price, perceived financial strength, and claims-paying ratings. RiverSource Life’s competitors include insurers, asset managers and other financial institutions. RiverSource Life may face competitors that have greater market share, offer a broader range of products, have greater financial resources or have higher claims-paying ratings than RiverSource Life does. Some 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 and market share as a result of these factors.
Historically, Ameriprise Financial’s branded advisor network (both franchisee advisors and those employed by RiverSource Life’s affiliated broker-dealer selling firm) distributed annuity and insurance products issued almost exclusively (in the case of annuities) or predominantly (in the case of insurance products) by RiverSource Life. The primary exception to this general practice is that the branded advisors who joined Ameriprise Financial in connection with an acquisition continued to offer annuities from competitors as they did prior to the acquisition. Ameriprise Financial expects they will continue to do so until it harmonizes the competitive products offered by all of its branded advisors, as described below, at which point some of these advisors will offer a more limited number of competitors’ products. In 2010, Ameriprise Financial plans to begin expanding the offerings available to its branded advisors to include variable annuities issued by a limited number of unaffiliated insurance companies. As a result of this and further openings 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 broker-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 affiliated selling firm. There can be no assurance that RiverSource
Life'sLife’s affiliated selling firm will be successful in its efforts to recruit and retain new advisors to its network. If RiverSourceLife'sLife’s affiliated selling firm is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSourceLife'sLife’s annuity and insurance products and RiverSourceLife'sLife’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'sLife 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'affiliates’, ability to attract and retain qualifiedpersonnel to conduct its business.personnel. The market for qualified talent is extremelycompetitive and has grown more so in recent periods due to industry growth. There can be no assurance that RiverSource Life will be successful in its efforts to recruit and retain the required personnel.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 adverselyaffected. -10-IF 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.impacted.RiverSource
Life uses reinsurance to mitigateLife’s business is heavily regulated, and changes in legislation or regulation may reduce itsrisks in various circumstances. See "Item 1 - Business-Reinsurance." Reinsurance does not relieve RiverSource Life ofprofitability and limit itsdirect liability to its policyholders, even when the reinsurer is liable to RiverSource Life. Accordingly, RiverSource Life bears credit risk with respect to its reinsurers. RiverSource 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 RiverSource Life's financial condition and results of operations that could be material. In addition, RiverSource Life uses derivative instruments to hedge various business risks. RiverSource Life enters into a variety of derivative instruments with a number of counterparties. If RiverSource Life's counterparties fail to honor their obligations under the derivative instruments, RiverSource Life's hedges of the related risk will be ineffective. That failure could have an adverse effect on RiverSource Life's financial condition and results of operations that could be material. RIVERSOURCE LIFE'S BUSINESS IS HEAVILY REGULATED, AND CHANGES IN REGULATION MAY REDUCE ITS PROFITABILITY AND LIMIT ITS GROWTH.growth.RiverSource 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.
RegulatorsInsurance regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation.VariousMarket 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. These requirements, costs and risks, as well as possible legislative or regulatory changes, may constrain RiverSource Life’s ability to market its products andbusiness practicesservices to its target demographic andthose of its employeespotential customers, andto bring regulatory or other legal actions againstcould negatively impact RiverSource Life’s profitability and make it more difficult for RiverSource Lifeif,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 operations of insurance companies, including their underwriting and sales practices. 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. The requirement for principles-based variable annuity reserves, along with a similar risk-based capital requirement adopted previously, may result in
their view,statutory reserves and risk-based capital for variable annuities being more sensitive to changes in equity prices and other market factors. It is not possible at this time to estimate the potential impact of future changes in statutory reserve and capital requirements. 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 itspractices, 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
materiallyRiverSourceLife'sLife’s direct and indirect compliance and other expenses of doing business. Ameriprise Financial’s financial advisors may decide that the direct cost of compliance and the indirect cost of time spent on compliance matters outweigh the benefits of a career as a financial advisor, which could lead to financial advisor attrition. The costs of the compliance requirements RiverSource Life faces, and the constraints they impose on its operations, could have a material adverse effect on RiverSourceLife'sLife’s financial condition and results of operations.For a further discussion of the regulatory framework in whichRiverSource
Life operates, see "Item 1 - Business-Regulation." For more information regarding ongoing investigations, see "Item 3-Legal Proceedings." 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. 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. COMPETITIVE AND REGULATORY PRESSURES MAY REQUIRE RIVERSOURCE LIFE TO REDUCE THE LEVELS OF ITS FEES. RiverSource Life'sLife’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 RiverSource 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 RiverSourceLife'sLife’s product revenue mix and distribution channels could negativelyaffectimpact RiverSourceLife'sLife’s ability to maintain or increase its market share and profitability."” In addition, RiverSource 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 at RiverSource Life.See the risk factor entitled "RiverSource Life's business is heavily regulated, and changes in regulation may reduce its profitability and limit its growth" and "Item 3-Legal Proceedings" for more information regarding this and other regulatory matters.Reductions or other changes in the fees that RiverSource Life charges for its products and services could reduce its revenues and earnings.-11-MISCONDUCT BY RIVERSOURCE LIFE'S EMPLOYEES AND ITS AFFILIATES' EMPLOYEES IS DIFFICULT TO DETECT AND DETER AND COULD HARM RIVERSOURCE LIFE'S BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION.A failure to properly manage conflicts of interest could adversely affect RiverSource Life’s business.
RiverSource Life has to address potential conflicts of interest, including those relating to the activities of its affiliated entities. For example, conflicts may arise between RiverSource Life’s position as a manufacturer of insurance and annuity products and the position of RiverSource Life’s affiliated broker-dealer, the distributor of these products. RiverSource Life and its affiliated entities have procedures and controls in place that are designed to address conflicts of interest. Appropriately dealing with conflicts of interest, however, is complex and difficult and RiverSource Life’s reputation could be damaged if it fails, or appears to fail, to deal appropriately with conflicts of interest. In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. It is possible that potential or perceived conflicts could give rise to litigation or enforcement actions. Also, it is possible that the regulatory scrutiny of, and litigation in connection with, conflicts of interest could make RiverSource Life’s clients less willing to enter into transactions in which such a conflict may occur, and could adversely affect RiverSource Life’s business.
Misconduct by RiverSource
Life'sLife’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 RiverSource
Life'sLife’s businesses and could include:o·attempting to bind RiverSource Life to transactions that exceed authorized limits;
o·hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;
o·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 RiverSource
Life'sLife’s control procedures.RiverSource Life cannot always deter misconduct by employees and agents and its affiliate’s employees and agents and the precautions RiverSource Life takes to prevent and detect this activity may not be effective in all cases. RiverSource Life also cannot
provide 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.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 RESULTS OF OPERATIONS AND FINANCIAL CONDITION.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 or as a result of turbulent times such as those RiverSource Life has experienced, 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 maintain 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, the ratings organizations have heightened the level of scrutiny that they apply and have requested additional information from companies that they rate, and may increase the frequency and scope of their reviews or adjust upward the capital and other requirements employed in the ratings organizations’ models for maintenance of ratings levels. Ratings 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.
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 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 expenses RiverSource Life expects to incur over time. The assumptions and estimates RiverSource Life makes in establishing reserves require certain judgments about future experience and, therefore, are inherently uncertain. RiverSource 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. RiverSource Lifecontinuallymonitors its reservelevels.levels continually. If RiverSource 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 of operations. For more information on how RiverSource Life sets its reserves, see Note12 to the Consolidated FinancialStatements. RIVERSOURCE LIFE MAY FACE LOSSES IF MORBIDITY RATES OR MORTALITY RATES DIFFER SIGNIFICANTLY FROM ITS PRICING EXPECTATIONS.Statements 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 RiverSource Life makes about its policyholders and contractholders, the morbidity rates, or likelihood of sickness, and the mortality rates, or likelihood of
death, of its policyholders and contractholders.death. The long-term profitability of these products depends upon how RiverSourceLife'sLife’s actual experience compares with its pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than its pricing assumptions, RiverSource Life could be required to make greater payments under DIand LTCinsurance policies, chronic care riders and immediate annuity contracts than it had projected. The same holds true for LTC policies RiverSource 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, RiverSource Life could be required to make greater payments under its life insurance policies and annuity contracts with GMDBs than ithadhas projected.The risk that RiverSource
Life'sLife’s claims experience may differ significantly from its pricing assumptions is particularly significant for its LTC insuranceproducts. Althoughproducts, notwithstanding RiverSourceLife has theLife’s ability toseek andimplement futurerateprice increasessuch increases aresubject to regulatoryapproval.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, RiverSourceLife'sLife’s ability to forecast future claim rates for LTC insurance is more limited than for life insurance. RiverSource 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. -12-RIVERSOURCE 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 AnnualReport 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 RiverSource
Life'sLife’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 because RiverSource Life would be required to accelerate the amortization of expenses it deferred in connection with the acquisition of the policy or contract.For RiverSource
Life'sLife’s LTC insurance and certain universal life insurance policies, actual persistency that is higher than its persistency assumptions could have a negative impact on profitability. If these policies remain in force longer than RiverSource Life assumed, then RiverSource 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 than RiverSource Life had assumed, which led it to increase premium rates on certain of these policies.Because RiverSource
Life'sLife’s assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and policy claims and otherpolicyholders'policyholders’ funds may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of its products permit RiverSource Life to increase premiums during the life of the policy or contract, RiverSource 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 of RiverSourceLife'sLife’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 of RiverSourceLife'sLife’s products.RIVERSOURCE 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
representrepresents thecostscost of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life, DI and LTC insurance. For annuity and universal life products, DACareis amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DACareis generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.RiverSource
Life'sLife’s projections underlying the amortization of DACrequirerequires the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. RiverSource Life periodically reviews and, where appropriate, adjusts its assumptions. When RiverSource 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, 2006 and 2005, RiverSource Life had $4.4 billion and $4.0 billion of DAC, respectively, and it amortized $356 million and $316 million, respectively, of DAC as a current period expense for the years ended December 31, 2006 and 2005, respectively.For more information regarding DAC, see
"ItemItem 7- Management's Discussion andin this Annual Report on Form 10-K — “Management’s Narrative Analysisof Financial Condition and Results of Operations -— Critical Accounting Policies-— Deferred AcquisitionCosts"Costs and"-Deferred Sales Inducement Costs” and “— Recent Accounting Pronouncements." STATE INSURANCE REGULATORS MAY ADOPT NEW RESERVE OR CAPITAL REQUIREMENTS, POTENTIALLY IMPACTING RIVERSOURCE LIFE'S FINANCIAL STRENGTH RATINGS.”RiverSource Life
must complymay not be able to protect its intellectual property and may be subject to infringement claims.RiverSource Life relies on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect its intellectual property. Although RiverSource Life uses a broad range of measures to protect its intellectual property rights, third parties may infringe or misappropriate its intellectual property. RiverSource Life may have to litigate to enforce and protect its copyrights, trademarks, patents, trade secrets and know-how or to determine their scope,
validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of RiverSource Life’s intellectual property assets could have a material adverse effect on its business and its ability to compete.
RiverSource Life also may be subject to costly litigation in the event that another party alleges its operations or activities infringe upon such other party’s intellectual property rights. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by RiverSource Life’s products, methods, processes or services or could otherwise limit its ability to offer certain product features. Any party that holds such a patent could make a claim of infringement against RiverSource Life. RiverSource Life may also be subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any resulting litigation could result in significant liability for damages. If RiverSource Life were found to have infringed a third-party patent or other intellectual property rights, it could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to its customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with
statutory reservethird parties, all of which could have a material adverse effect on RiverSource Life’s business, financial condition andcapital requirements. State regulatorsresults of operations.Breaches of security, or the perception that RiverSource Life’s technology infrastructure is not secure, could harm its business.
RiverSource Life’s business requires the appropriate and secure utilization of client and other sensitive information. RiverSource Life’s operations require the secure transmission of confidential information over public networks. Security breaches in connection with the delivery of its products and services, including products and services utilizing the Internet, as well as intrusions resulting from the efforts of “hackers” seeking the sensitive data RiverSource possesses 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 to its business and reputation if attempted security breaches are
continually reviewingpublicized. 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 andupdatingservices.Protection from system interruptions and operating errors is important to RiverSource Life’s business. If RiverSource Life experienced a sustained interruption to its telecommunications or data processing systems or other failure in operational execution, 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 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, exchanges, clearing houses or other financial intermediaries that RiverSource Life uses to facilitate or are component providers to its securities transactions and other product manufacturing and distribution activities. These risks are heightened by RiverSource Life’s deployment in response to both client interest and evolution in the financial markets of increasingly sophisticated products, such as those which incorporate automatic asset re-allocation, multiple portfolios or funds and business-driven hedging, compliance and other risk management strategies. 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 identifying or 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 to develop its risk management policies and procedures and will continue to do so. Nonetheless, RiverSource 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
requirements. There continuesmethods 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 beactive discussion atineffective. Other risk management methods depend upon theNAICevaluation ofmovinginformation regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to RiverSource 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 and verify a
principles-based reserving system. Capital requirements for fixedlarge number of transactions andvariable annuitiesevents, andfixed single pay life insurancethese policies and procedures may not be fully effective in mitigating RiverSource Life’s risk exposure in all market environments or against all types of risk. Insurance and other traditional risk-shifting tools may be held by or available to RiverSource Life in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency.Changes in U.S. federal income or estate tax law could make some of RiverSource Life’s products
are currently principles-based and the NAIC is discussing similar requirements for other products. This could change statutory reserve requirements significantly, and it is not possibleless attractive toestimate the impact at this time. -13-CHANGES IN U.S. FEDERAL INCOME OR ESTATE TAX LAW COULD MAKE SOME OF RIVERSOURCE LIFE'S PRODUCTS LESS ATTRACTIVE TO CLIENTS.clients.Many of the products 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 of its products less attractive to clients.
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.RiverSource Life
has devoted significant resources toward developing its risk management policies and procedures and expectsis subject tocontinue to do so intax contingencies that could adversely affect thefuture. Nonetheless, RiverSource 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. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what its models indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to RiverSource Life, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to properly record and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating RiverSource Life's risk exposure in all market environments or against all types of risk. RIVERSOURCE LIFE IS SUBJECT TO TAX CONTINGENCIES THAT COULD ADVERSELY AFFECT THE PROVISION FOR INCOME TAXES.provision 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.interpretations. 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 RIVERSOURCE LIFE'S SEPARATION FROM AMERICAN EXPRESS. Although RiverSource Life generally operated independently of American Express' other operations with respect to client services priorIn addition, changes to theSeparation and Distribution,Internal Revenue Code, administrative rulings or court decisions could increase RiverSourceLife 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, RiverSource 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. RiverSource Life cannot provide assurance that the clients it gained as a result of being affiliated with American Express will not move some or all of their existing business from RiverSource Life to another company. Loss of a significant portion of these clients could negatively impact RiverSource Life's business. AMERIPRISE FINANCIAL AND RIVERSOURCE 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 operational and administrative infrastructure. These initiatives have been costly to implement. In 2005, Ameriprise Financial developed an allocation policyLife’s provision forseparation costs resulting in the allocation of certain costs to RiverSource Life that it considered to be a reasonable reflection of separation costs benefiting RiverSource 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. RiverSource Life has been allocated $252 million in total pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to incur significant additional separation costs in 2007. This risk has been partly offset by the contribution of capital from American Express to Ameriprise Financial, and in turn, from Ameriprise Financial to RiverSource Life. -14-As a result of the Separation, Ameriprise Financial (and hence, RiverSource 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, which could decrease its overall profitability. RIVERSOURCE 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, RiverSource Life) is required to maintain higher capital ratios to retain its credit ratings. In addition, RiverSource 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 "Item 1 - 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 RiverSource Life to cover, among other things, allocated separation costs, RiverSource Life cannot be certain that this capital contribution will be sufficient to cover all of the additional costs. If it is not sufficient, RiverSource Life's financial condition could be adversely affected and its financial strength ratings may be downgraded. RiverSource Life has been allocated $252 million in total pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to be allocated a significant portion of the remaining separation costs in 2007. AS AMERIPRISE FINANCIAL BUILDS ITS INFORMATION TECHNOLOGY INFRASTRUCTURE AND TRANSITIONS ITS DATA AND THAT OF ITS AFFILIATES, SUCH AS RIVERSOURCE LIFE, TO ITS OWN SYSTEMS, IT COULD EXPERIENCE TEMPORARY BUSINESS INTERRUPTIONS AND INCUR SUBSTANTIAL ADDITIONAL COSTS. Ameriprise Financial (and hence, RiverSource Life) is in the process of installing and implementing an information technology infrastructure to support its business functions, including accounting and reporting, customer service and distribution. RiverSource Life anticipates this will involve significant costs. RiverSource 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. RiverSource Life may not be successful in implementing its new technology infrastructure and transitioning its data, and RiverSource Life may incur substantially higher costs for implementation than currently anticipated. RiverSource 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 RiverSource Life's business and make it vulnerable to its competitors. Ameriprise Financial (and hence, RiverSource Life) continues to rely on American Express' disaster recovery capabilities as part of its business continuity processes. RiverSource Life will only have the right to use American Express' disaster recovery resources until September 30, 2007. RiverSource 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. RiverSource 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. RiverSource 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. AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS COULD INCREASE RIVERSOURCE LIFE'S U.S. FEDERAL INCOME TAX COSTS. Due to the Separation, RiverSource 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. As a result of these and other inefficiencies, the aggregate amount of U.S. federal income tax that RiverSource Life pays may increase and RiverSource Life may, in addition, not be able to fully realize certain of its deferred tax assets. -15-ITEM 1B. UNRESOLVED STAFF COMMENTStaxes.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
PROPERTIES
RiverSource Life Insurance Company occupies office space in Minneapolis, Minnesota, which
is leasedit either owns orowned byleases from Ameriprise Financial. RiverSource Life Insurance Company reimburses Ameriprise Financial for rent based on direct and indirect allocation methods. RiverSource Life of NY rents office space in Albany, New York. RiverSource Life believes that the facilities occupiedsuit its needs. ITEM 3. LEGAL PROCEEDINGS The Securitiesare suitable andExchange Commission,adequate.
LEGAL PROCEEDINGS
Insurance companies have recently been the
National Associationsubject ofSecurities Dealersincreasing regulatory, legislative andseveraljudicial scrutiny. Numerous stateauthoritiesand federal regulatory agencies havebrought proceedings challenging severalcommenced 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 fundand variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements.products. RiverSource Life hasreceived requestsbeen contacted by regulatory agencies for informationconcerningrelating to some of thesepracticesinvestigations and is cooperatingfullywiththesethose inquiries.RiverSource 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. RiverSource 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
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART II
------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of RiverSource Life Insurance
Company'sCompany’s outstanding common stock is owned by Ameriprise Financial, Inc. There is no established public trading market for RiverSource Life InsuranceCompany'sCompany’s common stock.For discussion regarding RiverSource Life Insurance
Company'sCompany’s payment of dividends and restrictions on dividends, see"ItemItem 7- Management's Discussion andof this Annual Report on Form 10-K — “Management’s Narrative Analysisof Financial Condition and Results of Operations -— Liquidity and Capital Resources-— CapitalStrategy"Activity” and Note11 of13 to the Notes to Consolidated FinancialStatements. ITEM 6. SELECTED FINANCIAL DATAStatements included in Part II, Item 8 of this Annual Report on Form 10-K.
SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
-16-ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW
MANAGEMENT’S NARRATIVE ANALYSIS
Overview
RiverSource
Life Insurance Company, formerly known as IDSLife Insurance Company is a stock life insurance company with onewholly-ownedwholly owned operating subsidiary, RiverSource Life Insurance Co. of New York("(“RiverSource Life ofNY"NY”). RiverSource Life Insurance Company is awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.("(“AmeripriseFinancial"Financial”).o·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.
o·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
North Dakota.Delaware. RiverSource Life of NY issues insurance and annuity products.On December 31,
2006, IDS Life Insurance Company completed an Agreement and Plan of Merger with both American Enterprise Life Insurance Company ("American Enterprise Life") and American Partners Life Insurance Company ("American Partners Life") whereby both companies merged with and into IDS Life Insurance Company. As a result2008, Ameriprise Financial contributed all of themerger, American Enterprise Lifeissued andAmerican Partners Life ceased to exist. Prior to the merger, both companies were wholly-owned operating subsidiariesoutstanding shares ofIDS Life Insurance Company. Immediately following the merger, IDS Life Insurance Company changed its nameRiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.Also on December 31, 2006, American Centurion Life Assurance Company ("American Centurion Life") merged withRTA is domiciled in Delaware andinto IDS Life Insurance Company of New York ("IDS Life of New York"). Asis aresult of the merger, American Centurion Life ceased to exist. Prior to the merger, American Centurion Life was a wholly-owned operating subsidiary of IDS Life Insurance Company. Immediately following the merger, IDS Life of New York changed its name to RiverSource Life Insurance Co. of New York.limited partner in affordable housing partnership investments.RiverSource Life Insurance Company and its
subsidiarysubsidiaries are referred to collectively in this Form 10-K as"RiverSource Life"“RiverSource Life”.No material effect on the United States generally accepted accounting principles ("U.S. GAAP") consolidatedThe accompanying financial
conditioninformation has been presented as if RTA had been a wholly owned subsidiary prior to January 1, 2006 andresults of operationsisexpectedaccounted forRiverSource Lifeas aresultpooling ofthe mergers.interests for entities under common control.The following discussion and
management'smanagement’s narrative analysis of the financial condition and results of operations should be read in conjunction with the"Forward-Looking“Forward-Looking Statements," "Item” “Item 1A - RiskFactors"Factors” and the Consolidated Financial Statements and Notes.Management'sManagement’s narrative analysis is presented pursuant to General Instructions I(2) (a) of Form 10-K in lieu ofManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations. Certain reclassifications of prior year amounts have been made to conform to the current presentation.Ameriprise Financial was formerly a
wholly-ownedwholly owned subsidiary of American Express Company("(“AmericanExpress"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"“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"“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.Ameriprise Financial has incurred $654 million of pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to incur a total of approximately $875 million.Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.RiverSource Life has been allocated $252 millionThe separation from American Express was completed intotal pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to be allocated a significant portion of the remaining separation costs in2007.RiverSource Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. -17-RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005 Overview Consolidated net income was $486 million for the year ended December 31, 2006 compared to $459 million for the year ended December 31, 2005, an increase of $27 million. The net income growth was positively impacted by strong growth in separate account assets, both from variable annuity net flows and market appreciation. Net flows of client assets are a measure of new sales of, or deposits into, RiverSource Life's products offset by redemptions of, or withdrawals from, RiverSource Life's products. Net flows can have a significant impact on RiverSource Life's results of operations due to their impact on revenues and expenses. These positive impacts were partially offset by lower account balances and spread compression in the fixed annuity products. Revenues Total revenues for the year ended December 31, 2006 were $3.4 billion, an increase of $106 million from the year ended December 31, 2005 of $3.3 billion. Total premiums increased $24 million or 6.5% to $394 million for the year ended December 31, 2006. Premiums for disability income ("DI") and long term care ("LTC") insurance increased $27 million or 9.2% including $15 million as a result of a review of RiverSource Life's LTC reinsurance arrangements during the third quarter of 2006. Higher DI insurance in force levels also contributed to the increase in premiums. Net investment income decreased $128 million or 7.2% to $1.7 billion for the year ended December 31, 2006 reflecting a decrease in both the average yield and the average level of invested assets. The lower level of invested assets reflects declining fixed annuity account values due to a shift in sales from fixed to variable products. Also, the decrease reflects unfavorable mark-to-market adjustments on derivatives economically hedging guaranteed minimum withdrawal benefit ("GMWB") riders and equity method investments in hedge funds. Fluctuations in the value of the GMWB embedded derivative which partially offsets the mark-to-market of the GMWB hedges are reported in the death and other benefits for investment contracts and universal life-type insurance line item on RiverSource Life's Consolidated Statements of Income. These changes were partially offset by favorable mark-to-market adjustments on derivatives economically hedging equity index annuities ("EIA"). Fluctuations in the EIA embedded derivative are reported in interest credited to account values on RiverSource Life's Consolidated Statements of Income. Contractholder and policyholder charges increased $60 million or 10.4% to $637 million for the year ended December 31, 2006 primarily due to an increase in the cost of insurance charges on variable universal life products and charges for variable annuity GMWB riders as well as $18 million from recognizing previously deferred cost of insurance revenues. Mortality and expense risk and other fees increased $147 million or 30.1% to $636 million for the year ended December 31, 2006 reflecting higher average values of separate account assets due to positive net flows and market appreciation. Net realized investment gains were $51 million for the year ended December 31, 2006 compared to $48 million for the year ended December 31, 2005. For the year ended December 31, 2006, $61 million of gross realized investment gains were partially offset by $10 million of gross realized investment losses classified as Available-for-Sale. For the year ended December 31, 2005, $108 million of gross realized investment gains were partially offset by $39 million of gross realized investment losses, as well as $19 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. Included in net realized investment gains classified as Available-for-Sale for the year ended December 31, 2005 were gross realized investment gains and losses of $39 million and $14 million, respectively, related to the sale of all of RiverSource Life's retained interest in a collateralized debt obligation ("CDO") securitization trust. Benefits and Expenses Total benefits and expenses for the year ended December 31, 2006 were $2.7 billion, an increase of $69 million from the year ended December 31, 2005 total of $2.6 billion. Death and other benefits for traditional life insurance decreased $14 million or 33.3% to $28 million for the year ended December 31, 2006 reflecting lower claims volume. -18-Death and other benefits for investment contracts and universal life-type insurance increased $35 million or 15.1% to $267 million for the year ended December 31, 2006 reflecting a net increase in guaranteed minimum death benefit ("GMDB") costs of $17 million, $26 million of additional claims expense (including $7 million in connection with the recognition of the previously deferred cost of insurance revenues discussed above), the impact of $12 million in deferred acquisition costs ("DAC") unlocking reserve for certain variable plans, higher sales inducement costs of $6 million and other increases in costs and benefits of $5 million, partially offset by a net decrease in GMWB costs of $31 million. Death and other benefits for DI and LTC insurance increased $7 million or 9.2% to $83 million for the year ended December 31, 2006 reflecting unfavorable claims experience relative to 2005. Interest credited to account values decreased by $59 million or 5.3% to $1.1 billion for the year ended December 31, 2006 primarily due to lower interest crediting rates and lower average accumulation values of annuities, partially offset by the effect of appreciation on EIA linked to the S&P 500 Index in 2006 versus depreciation in 2005. Amortization of DAC increased $40 million to $356 million for the year ended December 31, 2006 from $316 million for the year ended December 31, 2005. For the year ended December 31, 2006, RiverSource Life recorded a net benefit from DAC unlocking of $26 million, primarily resulting in a $38 million benefit in DAC amortization expense and a $12 million increase in death and other benefits for investment contracts and universal life-type insurance. DAC unlocking for the third quarter of 2005 resulted in a $67 million reduction to DAC amortization. The DAC unlocking net benefit for the third quarter of 2006 primarily reflected a $25 million benefit from modeling increased product persistency and a $15 million benefit from modeling improvements in mortality, offset by negative impacts of $8 million from modeling lower variable product fund fee revenue and $8 million from model changes related to variable life second to die insurance. The DAC unlocking net benefit for the third quarter of 2005 primarily reflected a $32 million benefit from modeling improvements in mortality, a $33 million benefit from lower than previously assumed surrender rates and higher associated surrender charges and a $2 million net benefit from other changes in DAC valuation assumptions. For the years ended December 31, 2006 and 2005, RiverSource Life incurred $131 million and $121 million, respectively, in separation costs. Separation costs incurred during 2006 and 2005 primarily related to technology costs and marketing and rebranding. Separation costs incurred during 2005 also included costs related to advisor retention programs. Other insurance and operating expenses increased $53 million or 9.0% to $641 million for the year ended December 31, 2006 primarily reflecting increased corporate overhead expenses, business reinvestment initiatives and compensation costs offset by a decrease in business services expenses. Income Taxes RiverSource Life's effective tax rate was 28.3% and 28.4% for the years ended December 31, 2006 and 2005, respectively. CRITICAL ACCOUNTING POLICIESCritical Accounting Policies
The accounting and reporting policies that RiverSource Life uses affect its Consolidated Financial Statements. Certain of RiverSource Life’s accounting and reporting policies are critical to an understanding of RiverSource
Life'sLife’s financial condition and results of operations 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 the Consolidated Financial Statements. The accounting and reporting policies RiverSource Life has identified as fundamental to a full understanding of its financial condition and results of operations are described below. See Note 2 to the Consolidated Financial Statements for further information about RiverSourceLife'sLife’s accounting policies.-19-VALUATION OF INVESTMENTSValuation of Investments
The most significant component of RiverSource Life’s investments is its Available-for-Sale securities, which RiverSource Life
generallycarries at fair value within its Consolidated Balance Sheets. The fair value ofapproximately 95% ofRiverSourceLife'sLife’s Available-for-Sale securities at December 31,20062009 wasdetermined by quoted market prices.primarily obtained from third-party pricing sources. RiverSource Life records unrealized securities gains (losses) in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such asDAC,deferred acquisition costs (“DAC”), to reflect the expected impact on their carrying values had the unrealized securities gains (losses) been realized as of the respective balance sheet dates.At December 31, 2006, RiverSource Life had net unrealized pretax losses on Available-for-Sale securities of $293 million.RiverSource Life recognizes gains and losses in results of operations upon disposition of the securities.Effective January 1, 2009, RiverSource Life
also recognizes losses in results of operations when management determinesearly adopted an accounting standard thata decline in value is other-than-temporary. This determination requires the exercise of judgmentsignificantly changed RiverSource Life’s accounting policy regarding the timing and amount of other-than-temporary impairments for Available-for-Sale securities. When the fair value of an investment is less than its amortized cost, RiverSource Life assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not RiverSource Life will be required to sell the security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment is considered to have occurred andtiming of recovery. Indicators ofRiverSource Life must recognize an other-than-temporary impairment for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria and RiverSource Life does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Life separates the total impairment into the credit loss component and the amount of the loss related to other factors. The amount of the total other-than-temporary impairments related to credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”), certain benefit reserves and income taxes. For Available-for-Sale securities that have recognized an other-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive income (loss).For all securities that are considered temporarily impaired, RiverSource Life does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Life will be required to sell the security before recovery of its amortized cost basis. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.
Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. In order to determine the amount of the credit loss component for corporate debt securities
include issuer downgrade, default or bankruptcy.considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized costbasis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and RiverSource Life’s position in the debtor’s overall capital structure.
For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments), RiverSource Life also considers factors such as overall deal structure and its position within the
extentstructure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections in assessing potential other-than-temporary impairments 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. Generally, the credit loss component for the non-agency residential mortgage backed securities is determined as the amount the amortized cost basis exceedsfairthe present valueand 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. As of December 31, 2006, there were $514 million in gross unrealized losses that related to $18.7 billion of Available-for-Sale securities, of which $16.4 billion has been in a continuous unrealized loss position for 12 months or more. These investment securities had a ratio of 97% of fair value to cost at December 31, 2006. As part of RiverSource Life's ongoing monitoring process, management determined that a majorityof thegross unrealized losses onprojected cash flows expected to be collected. Significant inputs considered in thesesecurities is attributableprojections are consistent with the factors considered in assessing potential other-than-temporary impairment for these investments. Current contractual interest rates considered in these cash flow projections are used tochanges in interest rates. Additionally, because RiverSource Life hascalculate theability as well asdiscount rate used to determine theintent to hold these securities for a time sufficient to recover its cost, RiverSource Life concluded that nonepresent value ofthese securities was other-than-temporarily impaired at December 31, 2006. DEFERRED ACQUISITION COSTSthe expected cash flows.Deferred Acquisition Costs and Deferred Sales Inducement Costs
For RiverSource
Life'sLife’s annuity and life,DIdisability income (“DI”) andLTClong term care (“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 for RiverSourceLife'sLife’s annuity products are typically 10 to 25 years, while projection periods for RiverSourceLife'sLife’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.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. For 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 is not
recoverable or if premium rates charged for the contract are changed.recoverable. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded inconsolidated resultsthe Consolidated Statements ofoperations.Income.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 insurancebusinessbusinesses during the DAC amortization period.-20-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 a regular basis. RiverSource Life typically uses a five-year mean reversionmethodprocess as a guideline in settingnear-term clientnear-term equity asset
valuegrowth 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, RiverSource Life reassesses 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.DAC amortization expense recorded in a period when clientIn 2009, management continued to follow the mean reversion process, decreasing near-term equity assetvaluegrowth ratesexceed our near-term estimate will typically be less than in a period when growth rates fall short of our near-term estimate.to reflect the positive market. The long-term client asset value growthrate isrates are based onan equity return assumptionassumed gross annual total returns of8%, net of management fees, with adjustments made9% for equities and 6.5% for fixed incomeallocations. If RiverSource Life increased or decreased its assumption relatedsecurities.A decrease of 100 basis points in various rate assumptions is likely to
this growth rateresult in an increase in DAC and DSIC amortization and an increase in benefits and claims expense from variable annuity guarantees. The following table presents the estimated impact to pretax income:
Estimated Impact
to Pretax Income(1)
(in millions)
Decrease in future near and long-term equity returns by 100 basis points
$
(44
)
Decrease in future near and long-term fixed income returns by 100 basis points
(18
)
Decrease in near-term equity asset growth rates by 100 basis points
(28
)
(1)An increase in the above assumptions by 100 basis points
the impact on the DAC balancewouldberesult in an increaseor decreaseto pretax income of approximately$35 million.the same amount.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 RiverSource
Life'sLife’s DACbalances. For example, if RiverSource 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 the DAC balance would be an increase or decrease of approximately $5 million. Additionally, if RiverSource Life extended or reduced the amortization periods by one year for variable annuities to reflect changes in premium paying persistency and/or surrender assumptions, the impact on the DAC balance would be an increase or decrease of approximately $32 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.
In periods prior to 2007, RiverSource Life's policy has been to treat certain internal replacement transactions as continuationsLiabilities for Future Policy Benefits and
to continue amortization of DAC associated with the existing contract against revenues from the new contract. RiverSource Life will account for many of these transactions differently as a result of adopting 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") effective January 1, 2007. See Note 3 to the Consolidated Financial Statements for additional information about the effect of RiverSource Life's adoption of SOP 05-1. For additional information about RiverSource Life's accounting policies for amortizationPolicy Claims andcapitalization of DAC, see Note 2 and Note 3 to the Consolidated Financial Statements. For details regarding the balances of and changes in DAC for the years ended December 31, 2006, 2005 and 2004, see Note 6 to the Consolidated Financial Statements. LIABILITIES FOR FUTURE POLICY BENEFITS AND POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDSOther Policyholders’ FundsFixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other
policyholders'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
GMDBguaranteed minimum death benefit (“GMDB”) provisions. When market values of thecustomer'scustomer’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 contractearnings; theseearnings which are referred to as gain gross-up("GGU")benefits. In addition, RiverSource Life offers contracts with guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit("GMIB"), GMWB and guaranteed minimum accumulation benefit ("GMAB"(“GMIB”) provisions.-21-In determining the liabilities for
variable annuity deathGMDB, GMIB and the life contingent benefitsand GMIB,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, managementwill review,reviews, and where appropriate,adjustadjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, managementwill reviewreviews andupdateupdates these assumptions annually in the third quarter of each year. The amounts in the table above in “Deferred Acquisition Costs and Deferred Sales Inducement Costs” include the estimated impact to benefits and claims expense related to variable annuitydeath benefitguarantees resulting from a decrease of 100 basis points in various rate assumptions.The GMDB 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.
GMWB and GMAB provisions are consideredThe embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value.
TheSee Note 11 to the Consolidated Financial Statements for information regarding the fair value measurement oftheseembedded derivatives. The liability for the life contingent benefits associated with GMWB provisions is determined in the same way as the GMDB liability. The changes in both the fair values of the GMWB and GMAB embedded derivativesis based onand thepresent value of futureliability for life contingent benefitsless applicable fees charged for the provision. Changes in fair valueare reflected indeathbenefits, claims, losses andother benefits for investment contracts and universal life-type insurance.settlement expenses.Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the
marketfair value of embedded equity options.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,
2006,2009, depending on year of issue, with an average rate of approximately5.9%5.7%.Life, Disability Income and Long Term Care Insurance
Future policy benefits and policy claims and other
policyholders'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'sLife’s experience. Interest rates used with DI claimsrangeranged from 3.0% to 8.0% at December 31,2006,2009, with an average rate of5.0%4.7%. Interest rates used with LTC claimsrangeranged from 4.0% to 7.0% at December 31,2006,2009, with an average rate of4.4%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'sLife’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 liferangeranged from 4.0% to 10.0% at December 31,2006,2009, depending on policy form, issue year and policy duration. Anticipated interest rates for DIarevary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over5 years.five years and 4.5% over 20 years, respectively. Anticipateddiscountinterest rates for LTCare currently 5.4%policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31,2006 grading up to 9.4% over 40 years. -22-2009. Where applicable, benefit amounts expected to be recoverable from
other insurersreinsurance companies who share in the risk are separately recorded as reinsurancerecoverable within receivables.recoverables.Derivative Instruments and Hedging Activities
RiverSource Life
issues only non-participating life and health insurance policies, which do not pay dividendsuses derivative instruments topolicyholders from realized policy margins. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIESmanage its exposure to various market risks. All derivatives are recorded at fair value. The fair value of RiverSourceLife'sLife’s derivativefinancialinstruments 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 marketdata inputs. In certain instances,observable inputs to thefair value includes structuring costs incurred at the inception of the transaction.extent available.The accounting for
the changechanges in the fair value of a derivativefinancialinstrument depends on its intended use and the resulting hedge designation, if any. RiverSource Lifecurrentlyprimarily 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 (i) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (ii) 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”).RiverSource Life’s policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement.
For derivative instruments that do not qualify for hedge accounting or are not designated as hedges,
or,changes in fair value are recognized in current period earnings. The changes in fair value of derivatives hedging variable annuity living benefits and certain variable annuity death benefits are included within benefits, claims, losses and settlement expenses. The changes in fair value of derivatives hedging equity indexed annuities are included in interest credited to fixed accounts. The changes in fair value of all other derivatives are 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 certaincircumstances, does not designateannuity liabilities.For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as
accounting hedges.well as of the hedged risk within 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
financialinstruments 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 ortransactions impacttransaction impacts earnings. Any ineffective portion of the gain or loss isalsoreported 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) is recognized into earningsas a component of net investment income.over the period that the hedged item impacts earnings. Forderivative financial instrumentsany hedge relationships thatdoare discontinued because the forecasted transaction is notqualify for hedge accounting or are not designated as hedges, changesexpected to occur according to the original strategy, any related amounts previously recorded infair valueaccumulated other comprehensive income (loss) are recognized incurrent periodearningsgenerally as a component of net investment income. These derivatives primarily provide economic hedges to equity market exposures. Examples include structured derivatives and options and futures that economically hedge the equity components of certain annuities.immediately.For further details on the types of derivatives RiverSource Life uses and how it accounts for them, see Note
142 and Note 15 to the Consolidated Financial Statements.INCOME TAX ACCOUNTINGIncome Tax Accounting
Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of income taxes that RiverSource Life expects to pay to or 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.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 certainitems and the realization of certain offsets and credits.items. In the event that the ultimate tax treatment of itemsor the realization of offsets or creditsdiffers from RiverSourceLife'sLife’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 RiverSource
Life'sLife’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.RiverSource 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,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 RiverSourceLife'sLife’s ability to fully realize certain deferred tax assets, including the capital losses.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, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) 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
relating to capital lossesand avoid the establishment of a valuation allowance with respect toit.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.-23-RECENT ACCOUNTING PRONOUNCEMENTSRecent 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.
FINANCIAL CONDITIONResults of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
The following table presents RiverSource
Life'sLife’s consolidated results of operations:
Year Ended
December 31,
2009
2008
Change
(in millions, except percentages)
Revenues
Premiums
$
450
$
438
$
12
3
%
Net investment income
1,526
1,252
274
22
Policy and contract charges
1,156
1,352
(196
)
(14
)
Other revenue
233
255
(22
)
(9
)
Net realized investment gains (losses)
59
(442
)
501
NM
Total revenues
3,424
2,855
569
20
Benefits and expenses
Benefits, claims, losses and settlement expenses
841
673
168
25
Interest credited to fixed accounts
903
790
113
14
Amortization of deferred acquisition costs
145
861
(716
)
(83
)
Other insurance and operating expenses
550
649
(99
)
(15
)
Total benefits and expenses
2,439
2,973
(534
)
(18
)
Pretax income
985
(118
)
1,103
NM
Income tax provision (benefit)
245
(189
)
434
NM
Net income
$
740
$
71
$
669
NM
Supplemental Disclosures:
Net realized investment gains (losses):
Net realized investment gains before impairment losses on securities
$
121
Total other-than-temporary impairment losses on securities
(50
)
Portion of loss recognized in other comprehensive income
(12
)
Net impairment losses recognized in net realized investment gains (losses)
(62
)
Net realized investment gains (losses)
$
59
NM Not Meaningful.
Overview
Consolidated net income was $740 million for the year ended December 31, 2009 compared to $71 million for the year ended December 31, 2008, an increase of $669 million. Pretax income increased $1.1 billion to $985 million for the year ended December 31, 2009 from a pretax loss of $118 million for the year ended December 31, 2008. The increase was primarily driven by an increase in net investment income and net realized investment gains compared to net realized investment losses in the prior year period and a decrease in amortization of DAC. These increases to net income were partially offset by a decrease in policy and contract charges and an increase in benefits, claims, losses and settlement expenses.
In the third quarter of 2009, the annual valuation assumptions review resulted in a net pretax benefit of $134 million consisting of a decrease in expenses primarily from updating product mortality assumptions for certain life insurance products and from the impact of updating product spreads and expense assumptions partially offset by a decrease in revenues related to the reinsurance impacts from updating product mortality assumptions. In the third quarter of 2008, the valuation assumptions review and the valuation system conversion resulted in a net pretax benefit of $106 million consisting of a decrease in expenses primarily from updating product mortality and expense assumptions for certain life insurance products and from updating fund mix and policyholder 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 total pretax impacts on RiverSource Life’s revenues and expenses for the year ended December 31, 2009 attributable to the review of valuation assumptions and the impact of markets on DAC and DSIC amortization, GMDB and GMIB riders, and variable annuity living benefit riders, net of hedges and DAC and DSIC amortization 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)
Review of valuation assumptions
$
—
$
(65
)
$
80
$
119
$
—
$
134
Market impacts
—
—
(144
)
139
—
(5
)
Total
$
—
$
(65
)
$
(64
)
$
258
$
—
$
129
The total pretax impacts on RiverSource Life’s revenues and expenses for the year ended December 31, 2008 attributable to the review of valuation assumptions, the valuation system conversion and the impact of markets on DAC and DSIC amortization, GMDB and GMIB riders, and variable annuity living benefit riders, net of hedges and DAC amortization 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)
Review of valuation assumptions and valuation system conversion
$
2
$
95
$
89
$
(81
)
$
1
$
106
Market impacts
—
—
(9
)
(404
)
—
(413
)
Total
$
2
$
95
$
80
$
(485
)
$
1
$
(307
)
Revenues
Total revenues for the year ended December 31, 2009 were $3.4 billion, an increase of $569 million or 20% from $2.9 billion in 2008. The increase is primarily due to net realized investment gains in 2009 compared to net realized investment losses in 2008 and an increase in net investment income offset partially by a decrease in policy and contract charges.
Net investment income increased $274 million or 22% to $1.5 billion for the year ended December 31, 2009 compared to $1.3 billion in the prior year. The increase is due to higher invested asset levels due to fixed annuity net inflows as well as higher yields on longer term investments.
Policy and contract charges decreased $196 million or 14% to $1.2 billion for the year ended December 31, 2009 compared to $1.4 billion in the prior year primarily due to a $65 million expense from updating valuation assumptions in the third quarter of 2009 compared to a benefit of $95 million from updating valuation assumptions and converting to a new valuation system in the third quarter of 2008. The decrease also reflects decreased separate account fee revenue as a result of the decrease in average separate account assets. Average separate account assets decreased $5.9 billion or 11% from the prior year period primarily due to equity market declines partially offset by net inflows.
Other revenue decreased $22 million or 9% to $233 million for the year ended December 31, 2009 compared to $255 million in the prior year reflecting lower marketing support and administrative fees due to lower average underlying separate account asset values.
Net realized investment gains were $59 million for the year ended December 31, 2009 compared to net realized investment losses of $442 million for the year ended December 31, 2008. For the year ended December 31, 2009, net realized gains from sales of Available-for-Sale securities were $135 million and other-than-temporary impairments recognized in earnings were $62 million related to credit losses on non-agency residential mortgage backed securities and corporate debt securities in the gaming industry and banking and finance industries. For the year ended December 31, 2009, the reserves on commercial mortgage loans increased by $13 million. 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 securities, an increase of $1 million to the allowance for loan losses on commercial mortgage loans and an increase of $8 million to the allowance for loan losses on below investment grade syndicated bank loans. For the year ended December 31, 2008, $13 million of gross realized investment gains were offset by $6 million of gross realized losses on Available-for-Sale securities.
Benefits and Expenses
Total benefits and expenses for the year ended December 31, 2009 were $2.4 billion, a decrease of $534 million or 18% from $3.0 billion in 2008. This decrease is primarily due to a decrease in DAC amortization, partially offset by increases in benefits, claims, losses and settlement expenses and interest credited to fixed accounts.
Benefits, claims, losses and settlement expenses increased $168 million or 25% to $841 million for the year ended December 31, 2009 compared to $673 million in the prior year driven by an increase in expenses from variable annuity living benefit guarantees. Benefits, claims, losses and settlement expenses in 2009 were impacted by $148 million of market impacts on variable annuity benefit expenses, net of hedges and DSIC, compared to a benefit of $32 million in 2008. The non-cash impact of the nonperformance spread on the fair value of living benefit liabilities increased benefits, claims, losses and settlement expenses in
20062009 compared to a decrease in 2008. Benefits, claims, losses and settlement expenses in 2009 included a benefit of $80 million from updating valuation assumptions compared to a benefit of $89 million in the prior year from updating valuation assumptions and converting to a new valuation system. The impact of market performance in 2009 decreased DSIC amortization by $4 million compared to an expense of $41 million in the prior year.Interest credited to fixed accounts increased $113 million or 14% to $903 million for the year ended December 31, 2009 compared to $790 million for the year ended December 31, 2008, primarily due to higher average fixed annuity account balances and higher average fixed annuity crediting rates compared to the prior year. Average fixed annuities contract accumulation values increased $1.9 billion, or 16% compared to the prior year. The average fixed annuity crediting rate excluding capitalized interest increased to 3.9% in 2009 compared to 3.7% in the prior year.
Amortization of DAC decreased $716 million or 83% to $145 million for the year ended December 31, 2009 compared to $861 million in the prior year. DAC amortization in 2009 included a $119 million benefit from updating valuation assumptions in the third quarter of 2009 compared to an expense of $81 million from updating valuation assumptions and converting to a new valuation system in the prior year. DAC amortization in 2009 was reduced by $139 million due to market impacts, including $113 million offsetting higher variable annuity benefits expenses, net of hedges. DAC amortization in 2008 was increased by $404 million due to market impacts, including a $111 million expense offsetting gains on variable annuity benefits, net of hedges.
Other insurance and operating expenses decreased $99 million or 15% to $550 million for the year ended December 31, 2009 primarily due to decreased sales and marketing expenses and lower corporate overhead expenses.
Income Taxes
RiverSource Life’s effective tax rate was 24.9% and 160.1% for the years ended December 31, 2009 and 2008, respectively. The decrease in the effective tax rate is primarily due to pretax income for 2009 compared to a pretax loss in relation to a net tax benefit for 2008. RiverSource Life’s effective tax rate for 2008 included a $39 million tax benefit related to changes in the status of current audits.
On September 25, 2007, the Internal Revenue Service (“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 IRS 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. Additionally, included in the Administration’s 2011 Revenue Proposals is a provision to modify the DRD for life insurance companies’ separate accounts which if enacted could significantly reduce the DRD tax benefits RiverSource Life receives, prospectively, beginning in 2011. For the year ended December 31, 2009, RiverSource Life recorded a benefit of approximately $62 million related to the current year’s separate account DRD.
Fair Value Measurements
RiverSource Life reports certain assets and liabilities
which increased as aat fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions. Companies are not permitted to use market prices that are the result ofpositive variable annuity net flowsa forced liquidation or distressed sale. RiverSource Life includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained 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 andmarket appreciation. Investments primarily include corporate debt securities and mortgage and other asset-backed securities. At December 31, 2006,due diligence reviews of vendors.Inactive Markets
Through RiverSource
Life's corporate debt securities comprise a diverse portfolio with the largest concentrations accounting for approximately 67% of the portfolioLife’s own experience transacting in thefollowing industries: bankingmarketplace andfinance, utilities,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 andcommunicationsa 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 of similar risk which includes nonperformance andmedia. Investments also include $3.7 billion and $4.0 billionliquidity 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 the fair value ofmortgage loans on real estate, policy loans and other investmentsthese securities at December 31,20062009 ranged from 11% to 22%.Non-agency 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 predominantly through mortgage backed and
2005, respectively. Investments are principally fundedasset backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting standards bysales of insurancesome originators, has led to higher delinquency andannuities and by reinvested income. Maturitiesloss rates for some of theseinvestment securities are largely matched withinvestments. Market conditions have increased theexpected future paymentslikelihood ofinsurance and annuity obligations. Investments include $1.7 billion and $2.1 billion of below investment grade securities classified as Available-for-Sale securities (excluding net unrealized appreciation and depreciation) at December 31, 2006 and 2005, respectively. These investments represent 7%other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of RiverSourceLife's investment portfolio at both December 31, 2006 and 2005. Separate account assets represent funds held forLife’s risk management process, an internal rating system is used in conjunction with market data as theexclusive benefitbasis ofvariable annuity contractholders and variable life insurance policyholders. These assets are generally carried at market value, and separate account liabilities are equalanalysis toseparate account assets.assess the likelihood that RiverSource Lifeearns administrationwill not receive all contractual principal andother fees frominterest payments for these investments. For therelated accounts.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.
The
increase in separate account assets and liabilities to $49.3 billionfollowing table presents, as of December 31,2006 compared2009, RiverSource Life’s non-agency residential mortgage backed and asset backed securities backed by sub-prime, Alt-A or prime mortgage loans by credit rating and vintage year:
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
(in millions)
Sub-prime
2003 & prior
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
2004
3
3
7
2
—
—
—
—
—
—
10
5
2005
42
40
11
6
12
12
7
7
19
11
91
76
2006
—
—
6
5
—
—
5
5
—
—
11
10
2007
—
—
—
—
—
—
—
—
—
—
—
—
2008
—
—
7
6
—
—
—
—
—
—
7
6
Total Sub-prime
$
45
$
43
$
31
$
19
$
12
$
12
$
12
$
12
$
19
$
11
$
119
$
97
Alt-A
2003 & prior
$
15
$
16
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
15
$
16
2004
7
7
60
53
5
3
—
—
17
8
89
71
2005
5
3
38
21
32
17
5
3
172
115
252
159
2006
—
—
—
—
—
—
—
—
13
7
13
7
2007
—
—
—
—
—
—
—
—
29
16
29
16
2008
—
—
—
—
—
—
—
—
—
—
—
—
Total Alt-A
$
27
$
26
$
98
$
74
$
37
$
20
$
5
$
3
$
231
$
146
$
398
$
269
Prime
2003 & prior
$
206
$
198
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
206
$
198
2004
22
23
—
—
28
26
13
13
—
—
63
62
2005
13
16
36
41
69
68
31
26
93
43
242
194
2006
21
21
—
—
6
2
35
34
—
—
62
57
2007
43
44
—
—
—
—
—
—
15
12
58
56
2008
—
—
��
—
—
—
—
—
—
—
—
—
Re-Remic(1)
1,842
1,935
—
—
—
—
—
—
—
—
1,842
1,935
Total Prime
$
2,147
$
2,237
$
36
$
41
$
103
$
96
$
79
$
73
$
108
$
55
$
2,473
$
2,502
Grand Total
$
2,219
$
2,306
$
165
$
134
$
152
$
128
$
96
$
88
$
358
$
212
$
2,990
$
2,868
(1)Re-Remics of mortgage backed securities are prior vintages with cash flows structured into senior and subordinated bonds. Credit enhancement on senior bonds is increased through the Re-Remic process. All senior bonds are rated AAA by Moody’s Investors Service, Standard & Poor’s Rating Services or Fitch Ratings Ltd. RiverSource Life did not have any exposure to
$37.9 billionsubordinate tranches as of December 31,2005, resulted from net inflows2009.Fair Value of
$5.3 billionLiabilities and Nonperformance RiskCompanies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market
appreciation.participant (an exit price). Since there is not a market for RiverSource Life’s obligations of its variable annuity riders, RiverSource Lifeholds reservesconsiders 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 contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a currentand future obligationsmarket estimate of RiverSource Life’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that arerelatedadjusted tofixed annuities, certain guaranteed payments under variable annuitiesestimate 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, 2009. 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 $28 million, net of DAC andlife, DIDSIC amortization andLTC 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 areincome taxes, based onvarious assumptions, including mortality rates, morbidity ratesDecember 31, 2009 credit spreads.Liquidity and
policy persistency. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY STRATEGYCapital ResourcesLiquidity Strategy
The liquidity requirements of RiverSource 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. Other liquidity sources RiverSource Life has established are repurchase agreements and
anavailablelinelines of credit with Ameriprise Financial aggregating$200 million.$1 billion. Also, in March 2009, RiverSource Life Insurance Company became a member of the Federal Home Loan Bank of Des Moines (“FHLB of Des Moines”), which provides RiverSource Life Insurance Company access to collateralized borrowings. At December 31, 2009 and 2008, RiverSource Life had no securities sold under repurchase agreements and there were no borrowings from the FHLB of Des Moines.As of December 31, 2009, the outstanding balance under the lines of credit with Ameriprise Financial was $300 million which was repaid in full with payments in January and February 2010.
See Note 10 to the Consolidated Financial Statements for additional information on the lines of credit.
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. RiverSource Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
RiverSource LifeCapital Activity
Dividends paid and received were as follows:
2009
2008
2007
(in millions)
Cash dividends paid to Ameriprise Financial
$
—
$
775
$
900
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY
—
77
83
Cash dividends paid to RiverSource Life Insurance Company from RTA
22
—
—
Non-cash dividend paid to Ameriprise Financial from RTA
—
118
—
Notifications to state insurance regulators were made in advance of
NY paid ordinary dividends to RiverSource Life during the second quarter of 2006 of $23 million. At December 31, 2006 and 2005, RiverSource Life had securities sold under repurchase agreements totaling nil and $25 million, respectively and no amounts were outstanding on the line of credit with Ameriprise Financial. -24-CAPITAL ACTIVITY RiverSource Life paid $300 millionpayments of dividendsto Ameriprise Financial during 2006 comprisedfor amounts in excess of$100 million of extraordinary cash dividends in each of the second and third quarters of 2006 and $100 million of ordinary cash dividends in the fourth quarter of 2006. Priorstatutorily defined thresholds. See Note 13 to thepayment of the extraordinary cash dividends, RiverSource Life made the required advance notices to the Minnesota Department of Commerce, its primary state regulator, and received responses stating there were no objections to the payment of these dividends. In connection with the Separation, RiverSource Life received a capital contribution of $650 million from AmeripriseConsolidated Financialduring the third quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs.Statements for additional information.During
the fourth quarter of 2005, RiverSource Life paid dividends to Ameriprise Financial of $380 million. As a result of the mergers described in the Overview, both2008, RiverSource Life Insurance Companyand RiverSource Lifereceived a non-cash capital contribution ofNY were able to release certain statutory reserves previously held as a result$83 million comprised ofasset adequacy testing.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 outstanding shares of RTA.During 2009, RiverSource Life Insurance Company received a non-cash capital contribution of
NY reduced statutory reserves by $112$131 million comprised of two buildings and$22the related land from Ameriprise Financial. As part of the transaction, RiverSource Life Insurance Company entered into an agreement to lease the buildings to Ameriprise Financial. In addition, RiverSource Life Insurance Company received a non-cash capital contribution of $200 millionrespectively, asconsisting ofDecember 31, 2006. REGULATORY CAPITALa reduction of the outstanding balance due to Ameriprise Financial under a line of credit agreement.Regulatory Capital
RiverSource Life Insurance Company and RiverSource 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:
ACTUAL CAPITAL(a) DECEMBER 31, REGULATORY ----------------------- CAPITAL 2006 2005 REQUIREMENT(b) ---------- --------- ----------------- (IN MILLIONS)RiverSource Life Insurance Company...................... $ 3,511 $ 3,270 $ 590 RiverSource Life Insurance Co. of New York.............. 348 308 38 (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. (b) Regulatory capital requirement is based on the most recent statutory risk-based capital filing as of December 31, 2006.CONTRACTUAL COMMITMENTS
December 31,
Actual Capital(a)
Regulatory Capital
Requirement(b)
2009
2008
2009
2008
(in millions)
RiverSource Life Insurance Company
$
3,450
$
2,722
$
803
$
551
RiverSource Life Insurance Co. of New York
286
229
44
58
(a)Actual capital, as defined by the National Association of Insurance Commissioners 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,
20062009 are as follows:
PAYMENTS DUE IN YEAR ENDING --------------------------------------------------------------- 2008- 2010- 2012 AND TOTAL 2007 2009 2011 THEREAFTER ---------- ----------- ---------- ----------- ------------ (IN MILLIONS)Insurance and annuities (1) ........ $ 44,599 $ 3,517 $ 6,329 $ 5,506 $ 29,247 (1) These scheduled payments are represented by reserves of approximately $30
Total
2010
2011-
2012
2013-
2014
2015 and
thereafter
(in millions)
Insurance and annuities (1)
$
47,922
$
3,025
$
5,668
$
6,138
$
33,091
Deferred premium options (2)
1,201
189
341
261
410
Line of credit with Ameriprise Financial (3)
300
300
—
—
—
Total
$
49,423
$
3,514
$
6,009
$
6,399
$
33,501
(1)These scheduled payments are represented by reserves of approximately $30.4 billion at
December 31, 2006 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.OFF-BALANCE SHEET ARRANGEMENTS Consolidated Variable Interest Entities During the years endedDecember 31,20052009 and2004, RiverSource Life consolidated three secured loan trusts ("SLTs") which provided returns to investors primarilyare 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 the
performancedeferred premium options recorded on the Consolidated Balance Sheets was $1.1 billion as ofan underlying portfolio of high-yield loans and which were managed by an affiliate. One SLT was liquidated in 2004, resulting in a cumulative pretax charge of $24 million. An additional $4 million pretax charge was incurred in 2004 dueDecember 31, 2009. See Note 15 to theexpected liquidationConsolidated Financial Statements for more information about deferred premium options.(3)The line of
the two remaining SLTs in 2005. Those remaining SLTs were liquidated in 2005, resulting incredit agreement with Ameriprise Financial does not include a$14 million pretax gain for the year endedrepayment schedule. The outstanding balance at December 31,2005. There2009 wasno remaining exposurerepaid in2006 relatedfull with payments in January and February 2010.Due to
these SLTs as a resultthe uncertainty with respect to the timing oftheir liquidation. -25-Retained Interest in Assets Transferred to Unconsolidated Entities In 2001,future cash flows associated with RiverSourceLife 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 million, into a securitization trust. In return, RiverSource Life received $90 million in cash (excluding transaction expenses) relating to sales to unaffiliated investors and retained interests with allocated book amounts aggregating $586 million. During the second quarter of 2005, RiverSource Life sold all of its retained interest in the CDO-related securitization trust and realized a net pretax gain of $25 million. RECENT DEVELOPMENTSLife’s unrecognized tax benefits at December 31, 2009, RiverSource Life isassessing a commentunable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $77 million of unrecognized tax benefits and its associated interest have been excluded from theMinnesota Department of Commerce related to the actuarial calculation of disability income insurance unpaid claims, received as part of its routine financial examination of RiverSource Life Insurance Companycontractual obligations table above. See Note 14 foreach of the five years in the period ended December 31, 2005. RiverSource Life's management does not believe that there will be a material adverse effect on its consolidated financial condition and results of operations upon resolution of this comment. RISK MANAGEMENTadditional information.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'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'smanagement’s overall investment objectives for the general account investment portfolio.RiverSource
Life'sLife’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 toclients'clients’ accounts. RiverSource Life does not trade in securities to generate short-term profits for its own account.As part of RiverSource
Life'sLife’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
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. 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 derivativefinancialinstruments, such as structured derivatives, options, futures, interest rate swapscaps, floorsand 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 derivativefinancialinstruments, such as equity options, to mitigate its exposure to volatility in the equity markets.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSQuantitative and Qualitative Disclosures About Market Risk
Interest rate,
andequity pricerisksand credit risk are the market risks to which RiverSource Life has material exposure. Equity price and interest rate fluctuations can have a significant impact on RiverSource Life’s results of operations, primarily due to the asset-based fees and expenses, the “spread” 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.The guaranteed benefits associated with RiverSource Life’s variable annuities are GMWB, GMAB, GMDB and GMIB options. Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.
RiverSource Life continues to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. This program can generally be described as a “Static 3-Greek” hedging program. This style of hedging focuses mainly on first order sensitivities of the assets and liabilities; Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. RiverSource Life uses various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to manage the risk exposures. The exposures are measured and monitored daily and adjustments to the hedge portfolio are made as necessary.
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
andor a hypothetical 10% decline in equitymarkets. -26-At December 31, 2006, aggregating RiverSource Life's exposure from all sources ofprices. The interest rate risknet of financial derivatives hedging that exposure detailed below, RiverSource Life estimatestest assumes anegative impact of $23 million on pretax income for the 12 month period if, hypothetically, interest rates had increased by 100 basis points and remain at that level for 12 months. This compares with an estimate of $27 million made at December 31, 2005 for 12 months following asudden 100 basis pointincreaseparallel shift ininterestthe yield curve, with rates then staying atDecember 31, 2005. At December 31, 2006, aggregating RiverSource Life's exposure from all sources ofthose levels for the next 12 months. The equity pricerisk net of financial derivatives hedging that exposure detailed below, RiverSource Life estimatestest assumes anegative impact of $79 million on pretax income for the 12 month period if, hypothetically, equity markets had declined by 10% and remain at that level for 12 months. This compares with an estimate of $51 million made at December 31, 2005 for 12 months following a hypotheticalsudden 10% drop in equitymarketsprices, with equity prices then staying atDecember 31, 2005.those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities and the associated hedge assets, RiverSource Life assumed no change in implied market volatility despite the 10% drop in equity prices.The
numberstables belowshowpresent RiverSourceLife'sLife’s estimate of the pretaximpactimpacts of these hypothetical market moves, net of hedging as, of December 31,2006. Following the table2009.
Equity Price Exposure to Pretax Income
Equity Price Decline 10%
Before
Hedge Impact
Hedge
Impact
Net
Impact
(in millions)
Asset-based fees and expenses
$
(54
)
$
—
$
(54
)
DAC and DSIC amortization(1)
(136
)
—
(136
)
Variable annuity riders:
GMDB and GMIB
(34
)
3
(31
)
GMWB
(62
)
76
14
GMAB
(20
)
26
6
DAC and DSIC amortization(2)
N/A
N/A
(10
)
Total variable annuity riders
(116
)
105
(21
)
Equity indexed annuities
1
(1
)
—
Total
$
(305
)
$
104
$
(211
)
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
$
(14
)
$
—
$
(14
)
Variable annuity riders:
GMWB
166
(230
)
(64
)
GMAB
33
(46
)
(13
)
DAC and DSIC amortization(2)
N/A
N/A
30
Total variable annuity riders
199
(276
)
(47
)
Fixed annuities, fixed portion of variable annuities and fixed insurance products
(5
)
—
(5
)
Total
$
180
$
(276
)
$
(66
)
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 to pretax income of $258 million related to a 10% equity price decline and $45 million related to a 100 basis point increase in interest rates as of December 31, 2008. The reduced equity impact in 2009 is a result of market dislocation in 2008 and changes to RiverSource Life’s valuation models. The discount rates and credit spreads RiverSource Life used in 2008 to value certain of its investments were negatively impacted by the market, which 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 evaluating equity price risk, the estimated impact on DAC and DSIC amortization resulting from lower projected profits as a result of the equity price decline is shown separately from the estimated impact on DAC and DSIC amortization resulting from changes in the values of GMWB and GMAB riders net of hedges. In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, RiverSource Life has not changed its assumed equity asset growth rates. This is a significantly more conservative estimate than if RiverSource Life assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. See Critical Accounting Policies for additional discussion
by source of riskon RiverSource Life’s DAC and DSIC accounting policies. RiverSource Life makes this same conservative assumption in estimating the impact from GMDB and GMIB riders.Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the
portfolio management techniqueshedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins andderivative financial instrumentswith discount rates increased to reflect a current market estimate of RiverSource Life’s risk of nonperformance specific to these liabilities. Management has elected to hedge based on best estimate policyholder assumptions and explicitly does not hedge nonperformance spread risk. Net impacts shown in the above table from GMDB and GMIB reflect the fact that these guaranteed benefits are primarily retained by RiverSource Lifeusesand not hedged. In the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts tomitigate these risks.economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.
NET RISK EXPOSURE TO PRETAX INCOME ---------------------------------- SOURCES OF MARKET RISK INTEREST RATE EQUITY PRICE --------------------------------------------------------------------- ---------------- ---------------- (IN MILLIONS)Variable annuities and variable universal life ("VUL") products.... $ 7 $ (95) Fixed annuities, fixed portion of variable annuities, fixed portion of VUL and fixed insurance products...................... (22) - Deferred acquisition costs ("DAC") reserves........................ (8) 16 ---------------- ---------------- Total............................................................ $ (23) $ (79) ================ ================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 liabilitiesthat implied market volatility does not change when equity values fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the12 month period following the market shock and assuming the100 basis point increase in interest ratesproducesis a parallel shiftinof the yield curve. Furthermore, RiverSource Life has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has RiverSource Life tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.The selection of a 100 basis point interest rate increase
andas well as a 10% equitymarketprice decline should not be construed as a prediction of future market events.VARIABLE ANNUITIES AND VUL PRODUCTS With variable annuitiesImpacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.Asset-Based Fees and
VUL products, the policyholder chooses how the premiums are invested. They can choose equity or non-equity investments and those investments are carried inExpensesRiverSource Life earns asset-based management fees on its owned separate account
assets. Annuity payouts, VUL cashassets partially offset by certain expenses. At December 31, 2009, the valueand death benefits fluctuate with the performanceofthe investments that the policyholder chooses. Therefore, fortheseproducts, policyholders assume the bulkassets was $54.3 billion. This source ofthe investment risk. RiverSource Life facesrevenue is subject to both interest rate andequity 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 currently hedge the interest rate or the equity price risk of this exposure.
DAC and DSIC Amortization
For annuity and universal life products, DAC and DSIC are amortized on
these productsthe 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 total value of all variable annuity contracts has increased from
two primary sources:$43.3 billion at December 31, 2008 to $55.1 billion at December 31, 2009. These contract values include GMWB and GMAB contracts which have increased from $12.7 billion and $2.0 billion, respectively, at December 31, 2008 to $19.2 billion and $2.9 billion at December 31, 2009, respectively. At December 31, 2009, reserves for GMWB and GMAB were $204 million and $100 million, respectively, compared to reserves of $1.5 billion and $367 million at December 31, 2008, respectively. The decrease in reserves for GMWB and GMAB reflect the changes in economic factors impacting the mark-to-market value of the guarantees. At December 31, 2009, the reserve for the other variable annuity guaranteed benefits,associated with variable annuities and the management fees earned on separate account assets. The guaranteed benefits associated with the variable annuities are GMWB, GMAB,GMDB and GMIB,options. Each of thewas $12 million compared to $67 million at December 31, 2008.Equity Price Risk — Variable Annuity Riders
The variable annuity guaranteed benefits
mentioned above guaranteesguarantee payouts to the annuity holder under certain specific conditions regardless of the performance of theunderlyinginvestment assets. For this reason, when equity prices 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 provisions are longer dated put and call derivatives; these core instruments are supplemented with equity futures and total
valuereturn swaps. In the third quarter ofall2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contractshas grown from $39.8 billion at December 31, 2005written previously in 2009. See Note 15 to$49.2 billion at December 31, 2006. These contract values include GMWB contracts which have grown from $2.5 billion at December 31, 2005 to $7.2 billion at December 31, 2006. Reserve liabilitiesthe Consolidated Financial Statements forthe guaranteed benefits are recorded in future policy benefitsfurther information on RiverSourceLife's Consolidated Balance Sheets. At December 31, 2006,Life’s derivative instruments.Interest Rate Risk — Variable Annuity Riders
The GMAB and the
reserve fornon-life contingent benefits associated with the GMWBwas a negative $12 million compared with a reserve of a positive $9 million at December 31, 2005. The negative reserve indicates that RiverSource Life expects the GMWB fees charged to more than offset the future benefits to be paid to policyholders under the guaranteed benefit provisions. At December 31, 2006, the reserve for the other variable annuity guaranteed benefits, GMAB, GMDB and GMIB, was $26 million compared with $21 million at December 31, 2005. -27-RiverSource Life manages the market risk on the guaranteed benefits by product design and by the use of financialprovisions create embedded derivativeswhich hedge the GMWB. The design of the GMWB is an example of how RiverSource Life uses product design to manage risk. First, the GMWB provision requires that policyholders invest their funds in one of five asset allocation models, thus ensuring diversification across asset classes and underlying funds, reducing the likelihood that payouts from the guaranteed benefits will be required to compensate policyholders for investment losses. Second, the GMWB provision does not offer automatic annual percentage increases to the guaranteed amount, thus preventing the guaranteed amount from growing during a down market. In addition to product design, RiverSource Life has implemented a comprehensive hedging program which utilizes a primarily static hedging approach. A primarily static approach improves mitigation of market dislocation and operational risks as compared to a primarily dynamic hedging approach. Currently, RiverSource Life only hedges GMWB. The notional amounts and fair value assets (liabilities) of derivatives hedging GMWB were as follows:
DECEMBER 31, ---------------------------------------------------- 2006 2005 -------------------------- ------------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------- ------------ ------------ (IN MILLIONS)Purchased puts................................ $ 1,410 $ 171 $ 629 $ 95 Interest rate swaps........................... 359 (1) - - Written S&P 500 futures(1).................... (111) - - - - -------------------------- (1) These Standard & Poor's ("S&P") 500 futures are cash settled daily and, therefore, have no fair value.INTEREST RATE RISK - VARIABLE ANNUITIES The GMWB create obligationswhich are carried at fair value separately from the underlying host variable annuity contract. Changes in the fair value of the GMWB and GMAB liabilities 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 GMWBliability. At December 31, 2006, if interest rates had increased by 100 basis pointsandremain at that level for 12 months, RiverSource Life estimates that the fair value would decrease by $57 million with a favorable impact to pretax income.GMAB liabilities. The GMWB and GMAB interest rate exposure is hedged with a portfolio ofcustomized equity index putslonger dated put andinterest rate swaps. At December 31, 2006, RiverSource Life had equity puts with a notional amount of $1.4 billion, andcall derivatives, interest rate swapswith a notional amount of $359 million. Terms ofand swaptions. These derivatives are an alternative to theswaps designatemore customized equity puts that were previously used. RiverSource Lifeas theentered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable ratepayor.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.For a hypothetical 100 basis point increase in interest rates sustained for a 12 month period, RiverSource Life estimates that the negative impactFixed Annuities, Fixed Portion of
the derivatives on pretax income would be $53 million. The net impact on pretax income after hedging would be a favorable $4 million. GMAB creates interest rate risk in the same way as the GMWB discussed above - the fair value of the guaranteed benefits changes with changes in interest rates. For a hypothetical 100 basis point increase in interest rates at December 31, 2006, sustained for 12 months, the fair value of the GMAB would decrease by $8 million, with a corresponding favorable impact on pretax income. RiverSource Life does not hedge the interest rate exposure on GMAB. Separate account assets are held for the exclusive benefit of variable annuityVariable Annuities andVUL contract holders. RiverSource Life does, however, receive asset-based investment management fees on fixed income investments the annuity and VUL policyholders have in the separate accounts. An increase in interest rates would decrease fixed rate separate account assets and decrease related fees with a negative impact to pretax income. At December 31, 2006, RiverSource Life estimates the interest rate risk from this exposure on pretax income if, hypothetically, interest rates had increased immediately by 100 basis points and remain at that level for 12 months to be a negative $5 million for the 12 month period. RiverSource Life does not hedge this exposure. -28-EQUITY PRICE RISK - VARIABLE ANNUITIES AND VUL PRODUCTS 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 earnings. RiverSource Life estimates the negative impact on pretax income before hedging to be $42 million if, hypothetically, equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months. Of the $42 million, $7 million is attributable to GMWB. Currently RiverSource Life only hedges GMWB. RiverSource Life's hedging program is static which reduces risk to major disruptions in the market and severe liquidity events because its program does not rely on frequent dynamic rebalancing and the ability to trade in the market. In addition, the primarily static nature of the hedge reduces the likelihood of operational and execution errors. The core derivative instrument with which RiverSource Life hedges the equity price risk of GMWB is a long-dated structured equity put contract; this core instrument is supplemented with equity futures. The equity put contracts had a notional amount of $1.4 billion at December 31, 2006. If, hypothetically, equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months, RiverSource Life estimates a positive impact to pretax income of $4 million from the puts and futures. The net equity price exposure to pretax income from all variable annuity guarantee benefits would be a negative $38 million. A decline in equity markets would also reduce the asset-based management fees RiverSource Life earns on equity market investments that its annuity and VUL policyholders have in separate accounts. At December 31, 2006, RiverSource Life estimates the equity price risk from this exposure on pretax income if, hypothetically, equity markets decreased immediately by 10% and remain at that level for 12 months to be a negative impact of $57 million for the 12 month period. FIXED ANNUITIES, FIXED PORTION OF VARIABLE ANNUITIES, FIXED PORTION OF VUL AND FIXED INSURANCE PRODUCTSFixed Insurance ProductsInterest rate exposures arise primarily with respect to the fixed account portion of RiverSource
Life'sLife’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 toclients'clients’ accounts generally reset at shorter intervals than the yield on the underlying investments.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 $26.5Of the $30.4 billionin reservesin future policy benefits onitsRiverSource Life’s Consolidated Balance Sheetsat December 31,
20062009, $30.1 billion related torecognizeliabilities created by these products.To hedge against the risk of higher interest rates,RiverSource Lifehas purchased swaption contracts which had the notional amounts and fair value assets as follows:
DECEMBER 31, ---------------------------------------------------- 2006 2005 -------------------------- ------------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------- ------------ ------------ (IN MILLIONS)Purchased swaptions........................... $ 1,200 $ 2 $ 1,200 $ 8If interest rates had increased by 100 basis points at December 31, 2006 and remain at that level for 12 months,did not hedge this exposure.Equity Indexed Annuities
RiverSource
Life estimates the impact on pretax income for the 12 month period to be a negative $22 million. EQUITY INDEXED ANNUITIES RiverSource Life'sLife’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.-29-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 $29.6 billion in future policy benefits atAt December 31,2006, $3172009, RiverSource Life had $168 millionrelatesin reserves related to equity indexed annuities. In 2007, RiverSource Life discontinued new sales of equity indexed annuities.Equity Price Risk — Equity Indexed Annuities
The equity-linked return to investors creates equity price risk as the
liabilities created byamount credited depends on changes in equity prices. To hedge thisproduct. The notional amountsexposure, a portion of the proceeds from the sale of equity indexed annuities is used to purchase futures, calls andfair value assets (liabilities)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 ofderivatives hedging this product were as follows:
DECEMBER 31, ---------------------------------------------------- 2006 2005 -------------------------- ------------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------- ------------ ------------ (IN MILLIONS)Purchased calls............................... $ 151 $ 37 $ 197 $ 27 Purchased Knock-in-Puts....................... 86 3 129 3 Written Knock-in-Puts......................... (67) (1) (101) (1) Purchased S&P 500 futures(1).................. 34 - 32 - - ----------------------- (1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.INTEREST RATE RISK - EQUITY INDEXED ANNUITIESthe 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
estimates that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2006is exposed to credit risk within its investment portfolio, including its loan portfolio, andremain at that level for 12 months,through its derivative and reinsurance activities. Credit risk relates to theunhedged exposure would be a negative impactuncertainty of$2 million on pretax income foran obligor’s continued ability to make timely payments in accordance with the12 month period offset by a positive impact of nearly $2 million from its hedging strategy for an immaterial net exposure. 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 portioncontractual terms of theproceeds from the sale of equity indexed annuities are used to purchase futures, calls and puts which generate returns to replicate whatfinancial instrument or contract. RiverSource Lifemust 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. For this product, RiverSource Life estimates that if, hypothetically, the equity markets had declined by 10% at December 31, 2006 and remain at that level for 12 months, the impact to pretax income for the 12 month period without hedging would be a positive $15 million. The impact ofconsiders itshedging strategy offsets that gain for an immaterial net exposure. DAC For annuity and universal life products, DAC are amortized on the basis of estimated gross profits. Estimated gross profits are a proxy for pretax income prior to the recognition of DAC amortization expense. When events occur that reduce or increase current period estimated gross profits, DAC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income. INTEREST RATE RISK - DAC An increase in interest rates would result in a significant decrease in guaranteed living benefit reserves associated with RiverSource Life's variable annuity products, with the decrease partially offset by changes in hedge asset values. This would result in increased estimated gross profits and increased DAC amortization. RiverSource Life estimates that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2006 and remain at that level for 12 months, the negative impact to pretax income from increased DAC amortization would be $8 million. -30-EQUITY PRICE RISK - DAC A decline in equity markets would result in reduced fee revenue and an increase in guaranteed death and living benefit reserves associated with RiverSource Life's variable annuity products, with the increase partly offset by changes in hedge asset values. This would result in decreased estimated gross profits and decreased DAC amortization. RiverSource Life estimates that if, hypothetically, equity markets declined by 10% at December 31, 2006, the positive impact to pretax income from decreased DAC amortization would be $16 million over a 12 month period. CREDIT RISK RiverSource Life'stotal potentialderivativecredit exposure to each counterpartyis aggregated with all ofand itsother exposuresaffiliates tothe counterparty to determineensure compliance withestablishedpre-established creditand market risk limitsguidelines at the timeRiverSource Lifeit enters into a transaction which would potentially increase RiverSource Life’s credit risk. These guidelines and oversight of credit risk are managed through a comprehensive enterprise risk management program that includes members of senior management.RiverSource Life manages the risk of credit-related losses in the event of nonperformance by counterparties 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 underlying investment type. 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.
RiverSource Life manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting arrangements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Generally, RiverSource Life’s current credit exposure on over-the-counter derivative
transaction. Credit exposures may take into account enforceable netting arrangements. Before executingcontracts is limited to anew type or structurederivative counterparty’s net positive fair value of derivativecontract,contracts after taking into consideration the existence of netting arrangements and any collateral received. This exposure is monitored and managed to an acceptable threshold level.Because exchange-traded futures are effected through regulated exchanges and positions are marked to market and generally cash settled on a daily basis, RiverSource Life
determineshas minimal exposure to credit-related losses in thevariabilityevent of nonperformance by counterparties to such derivative instruments.RiverSource Life manages its credit risk related to reinsurance treaties by evaluating the financial condition of reinsurance counterparties prior to entering into new reinsurance treaties. In addition, RiverSource Life regularly evaluates their financial strength during the terms of the
contract's potential market andtreaties. As of December 31, 2009, RiverSource Life’s largest reinsurance creditexposures and whether such variability might reasonably be expected to create exposurerisk is related to acounterparty in excesslong term care coinsurance treaty with life insurance subsidiaries ofestablished limits. FORWARD-LOOKING STATEMENTSGenworth Financial, Inc. See Note 7 to the Consolidated Financial Statements for additional information on reinsurance.Forward-Looking Statements
This report contains forward-looking statements that reflect RiverSource
Life'sLife’s plans, estimates and beliefs. RiverSourceLife'sLife’s actual results could differ materially from those described in these forward-looking statements. 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"“believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on pace,” “project” 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 uncertaintieswhichthat could cause actual results to differ materially from such statements.Such factors include, but are not limited to:
·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;
·changes to RiverSource Life’s reputation that may arise from employee or affiliated advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;
·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 agencies and other analysts or RiverSource Life’s regulators, distributors or policyholders and contractholders in response to any change or prospect of change in any 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 any such third parties published by rating agencies or other analysts and the reactions of other market participants or RiverSource Life’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
·experience deviations from RiverSource Life’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing DAC and DSIC or market volatility underlying RiverSource Life’s valuation and hedging of guaranteed living 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;
·changes in capital requirements that may be indicated, required or advised by regulators or rating agencies;
·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;
·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 of certain financial services firms for 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 and inclination to invest in financial instruments and products other than cash and cash 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 policies regarding the financial services industry and regulatory rulings and pronouncements.
RiverSource Life cautions the reader that the
followingabove 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: o changes in the interest rate, equity market and other financial market environments; o changes in the regulatory environment and judicial or legislative developments, including the increasing focus on customer suitability, sales practices and disclosure, as well as ongoing legal proceedings and regulatory actions; o RiverSource Life's investment management performance; o effects of competition in the financial services industry and changes in RiverSource Life's product distribution mix and distribution channels; o RiverSource Life's capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings; o risks of default by issuers of investments RiverSource Life owns or by counterparties to derivative or reinsurance arrangements; o experience deviations from RiverSource Life's assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products; o successfully cross-selling insurance and annuity products and services to Ameriprise Financial's customer base; o RiverSource Life's ability to effectively hedge risks relating to guaranteed benefit riders and certain other products; o the impact of the separation of Ameriprise Financial from American Express; o the impact of intercompany allocations to RiverSource Life from Ameriprise Financial and its affiliates; o Ameriprise Financial's ability to attract, recruit and retain qualified advisors and employees and its ability to distribute its products through current and future distribution channels; o RiverSource Life's ability to establish its new brands; o changes in U.S. federal income or estate tax laws potentially making RiverSource Life's products less attractive to clients; o RiverSource Life's ability to recover from catastrophes, both natural and man-made; and o general economic and political factors, including consumer confidence in the economy.A further description of these and other risks and uncertainties can be found under
"Item“Item 1A - RiskFactors". -31-ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKFactors” in this Annual Report on Form 10-K.
Items required under this section are included in
"ItemItem 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis -Management's DiscussionQuantitative andAnalysis of Financial Condition and Results of Operations - Risk Management."Qualitative Disclosures about Market Risk.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NUMBERCONSOLIDATED FINANCIAL STATEMENTS:Consolidated Financial Statements:
SCHEDULES:Schedules:
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
notesNotes thereto or is not required. Therefore, all schedules have been omitted.-32-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,
formerly IDS Life Insurance Company,(awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) as of December 31,20062009 and2005,2008, and the related consolidated statements of income,shareholder'sshareholder’s equity, and cash flows for each of the three years in the period ended December 31,2006.2009. These financial statements are the responsibility of RiverSource Life InsuranceCompany'sCompany’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'sCompany’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 theCompany'sCompany’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,
20062009 and2005,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2006,2009, in conformity with U.S. generally accepted accounting principles./s/As discussed in Note 3 to the consolidated financial statements, in 2009 the Company adopted new accounting guidance related to the recognition and presentation of other-than-temporary impairments. Also, in 2008, the Company adopted new accounting guidance related to the measurement of fair value and in 2007, the Company adopted new guidance related to the accounting for uncertainty in income taxes as well as new guidance related to accounting for deferred acquisition costs in connection with modifications or exchanges of insurance and annuity contracts.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February
26, 2007 - 33 -
RIVERSOURCE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (in millions, except share amounts)DECEMBER 31, -------------------------- 2006 2005 ----------- -----------ASSETS Investments: Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2006, $25,289; 2005, $27,817)............... $ 24,995 $ 27,753 Common and preferred stocks, at fair value (cost: 2006, $30; 2005, $0)....................... 31 - Mortgage loans on real estate, at cost (less allowance for loan losses: 2006, $37; 2005, $41).. 2,790 2,842 Policy loans................................................................................... 642 605 Trading securities and other investments....................................................... 241 548 ----------- ----------- Total investments.......................................................................... 28,699 31,748 Cash and cash equivalents...................................................................... 160 272 Reinsurance recoverables....................................................................... 1,137 983 Amounts due from brokers....................................................................... 7 4 Other accounts receivable...................................................................... 90 63 Accrued investment income...................................................................... 309 329 Deferred acquisition costs..................................................................... 4,411 4,036 Deferred sales inducement costs................................................................ 452 370 Other assets................................................................................... 321 220 Separate account assets........................................................................ 49,287 37,930 ----------- ----------- Total assets............................................................................... $ 84,873 $ 75,955 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits......................................................................... $ 29,561 $ 32,312 Policy claims and other policyholders' funds................................................... 93 90 Amounts due to brokers......................................................................... 132 32 Deferred income taxes, net..................................................................... 90 9 Other liabilities.............................................................................. 440 421 Separate account liabilities................................................................... 49,287 37,930 ----------- ----------- Total liabilities.......................................................................... 79,603 70,794 ----------- ----------- Shareholder's equity: Common stock, $30 par value; 100,000 shares authorized, issued and outstanding.......................................... 3 3 Additional paid-in capital..................................................................... 2,021 2,020 Retained earnings.............................................................................. 3,455 3,269 Accumulated other comprehensive loss, net of tax: Net unrealized securities losses .......................................................... (168) (91) Net unrealized derivative losses .......................................................... (41) (40) ----------- ----------- Total accumulated other comprehensive loss..................................................... (209) (131) ----------- ----------- Total shareholder's equity................................................................. 5,270 5,161 ----------- ----------- Total liabilities and shareholder's equity................................................. $ 84,873 $ 75,955 =========== =========== See Notes to Consolidated Financial Statements.-34-
RIVERSOURCE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (in millions)YEARS ENDED DECEMBER 31, ----------------------------------------- 2006 2005 2004 ----------- ----------- -----------REVENUES Premiums: Traditional life insurance............................................. $ 72 $ 75 $ 68 Disability income and long term care insurance......................... 322 295 284 ----------- ----------- ----------- Total premiums..................................................... 394 370 352 Net investment income.................................................... 1,661 1,789 1,775 Contractholder and policyholder charges.................................. 637 577 555 Mortality and expense risk and other fees................................ 636 489 430 Net realized investment gain............................................. 51 48 27 ----------- ----------- ----------- Total revenues..................................................... 3,379 3,273 3,139 ----------- ----------- ----------- BENEFITS AND EXPENSES Death and other benefits: Traditional life insurance............................................. 28 42 37 Investment contracts and universal life-type insurance................. 267 232 228 Disability income and long term care insurance......................... 83 76 67 Increase in liabilities for future policy benefits: Traditional life insurance............................................. - 5 1 Disability income and long term care insurance......................... 143 141 123 Interest credited to account values...................................... 1,052 1,111 1,128 Amortization of deferred acquisition costs............................... 356 316 261 Separation costs......................................................... 131 121 - Other insurance and operating expenses................................... 641 588 502 ----------- ----------- ----------- Total benefits and expenses...................................... 2,701 2,632 2,347 ----------- ----------- ----------- Income before income tax provision and accounting change.................... 678 641 792 Income tax provision........................................................ 192 182 226 ----------- ----------- ----------- Income before accounting change............................................. 486 459 566 Cumulative effect of accounting change, net of tax.......................... - - (70) ----------- ----------- ----------- Net income.................................................................. $ 486 $ 459 $ 496 =========== =========== =========== See Notes to Consolidated Financial Statements.-35-
RIVERSOURCE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)YEARS ENDED DECEMBER 31, -------------------------------------- 2006 2005 2004 ---------- ---------- ----------CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 486 $ 459 $ 496 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change, net of tax.......................... - - 70 Amortization of deferred acquisition costs................................... 356 316 261 Amortization of deferred sales inducement costs.............................. 48 40 34 Capitalization of deferred acquisition costs................................. (687) (633) (534) Capitalization of deferred sales inducement costs............................ (126) (94) (71) Amortization of premium, net................................................. 75 83 93 Deferred income taxes........................................................ 123 122 70 Contractholder and policyholder charges, non-cash............................ (220) (232) (232) Net realized investment gain................................................. (51) (48) (27) Net realized gain on trading securities and equity method investments in hedge funds............................................................... (16) (24) (38) Change in operating assets and liabilities: Trading securities and equity method investments in hedge funds, net......... 297 247 7 Future policy benefits for traditional life, disability income and long term care insurance............................................................ 274 230 235 Policy claims and other policyholders' funds................................. 2 20 2 Policy loans, excluding universal life-type insurance: Repayment................................................................. 35 36 37 Issuance.................................................................. (39) (39) (39) Reinsurance recoverables..................................................... (154) (106) (122) Other accounts receivable.................................................... (27) (10) 16 Accrued investment income.................................................... 20 23 4 Other assets and liabilities, net............................................ (280) 47 (3) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... $ 116 $ 437 $ 259 ---------- ---------- ---------- See Notes to Consolidated Financial Statements.-36-
RIVERSOURCE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in millions)YEARS ENDED DECEMBER 31, -------------------------------------- 2006 2005 2004 ---------- ---------- ----------CASH FLOWS FROM INVESTING ACTIVITIES Available-for-Sale securities: Proceeds from sales............................................................ $ 1,897 $ 3,124 $ 1,603 Maturities, sinking fund payments and calls.................................... 2,014 2,242 1,931 Purchases...................................................................... (1,433) (5,780) (4,393) Other investments, excluding policy loans: Proceeds from sales, maturities, sinking fund payments and calls............... 519 653 690 Purchases...................................................................... (441) (543) (402) Change in amounts due to and from brokers, net................................... 98 (128) (71) Change in restricted cash........................................................ - 536 299 ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.............................. 2,654 104 (343) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Activity related to investment contracts and universal life-type insurance: Considerations received........................................................ 1,267 1,532 2,351 Interest credited to account values............................................ 1,052 1,111 1,128 Surrenders and other benefits.................................................. (4,869) (3,330) (2,716) Policy loans: Repayment...................................................................... 108 89 84 Issuance....................................................................... (140) (103) (93) Capital contribution from Ameriprise Financial, Inc. ............................ - 650 - Cash dividend to Ameriprise Financial, Inc. ..................................... (300) (380) (930) ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES............................................ (2,882) (431) (176) ---------- ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (112) 110 (260) Cash and cash equivalents at beginning of year................................... 272 162 422 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 160 $ 272 $ 162 ========== ========== ========== Supplemental disclosures: Income taxes paid, net...................................................... $ 64 $ 96 $ 196 Interest paid on borrowings................................................. $ 1 $ - $ - See Notes to Consolidated Financial Statements.-37-
RIVERSOURCE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY THREE YEARS ENDED DECEMBER 31, 2006 (in millions) ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME/(LOSS) TOTAL ------------ ------------ ------------ ----------------- ------------BALANCES AT DECEMBER 31, 2003........................ $ 3 $ 1,370 $ 3,624 $ 399 $ 5,396 Comprehensive income: Net income....................................... - - 496 - 496 Change in unrealized holding losses on securities, net................................ - - - (35) (35) Change in unrealized derivative losses, net...... - - - (23) (23) ------------ Total comprehensive income........................... - - - - 438 Cash dividends to Ameriprise Financial, Inc......... - - (930) - (930) ------------ ------------ ------------- ----------------- ------------ BALANCES AT DECEMBER 31, 2004........................ $ 3 $ 1,370 $ 3,190 $ 341 $ 4,904 Comprehensive loss: Net income....................................... - - 459 - 459 Change in unrealized holding losses on securities, net................................ - - - (461) (461) Change in unrealized derivative losses, net..... - - - (11) (11) ------------ Total comprehensive loss............................. - - - - (13) Capital contribution from Ameriprise Financial, Inc.................................... - 650 - - 650 Cash dividend to Ameriprise Financial, Inc........... - - (380) - (380) ------------ ------------ ------------- ----------------- ------------ BALANCES AT DECEMBER 31, 2005........................ $ 3 $ 2,020 $ 3,269 $ (131) $ 5,161 Comprehensive income: Net income....................................... - - 486 - 486 Change in unrealized holding losses on securities, net................................ - - - (77) (77) Change in unrealized derivative losses, net..... - - - (1) (1) ------------ Total comprehensive income........................... - - - - 408 Tax adjustment of share-based incentive employee compensation plan................................. - 1 - - 1 Cash dividend to Ameriprise Financial, Inc........... - - (300) - (300) ------------ ------------ ------------- ----------------- ------------ BALANCES AT DECEMBER 31, 2006........................ $ 3 $ 2,021 $ 3,455 $ (209) $ 5,270 ============ ============ ============= ================= ============ See Notes to Consolidated Financial Statements.-38-23, 2010 RIVERSOURCE LIFE INSURANCE COMPANY
(in millions, except share amounts)
December 31,
2009
2008
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2009, $25,142; 2008, $19,452)
$
25,999
$
18,070
Common and preferred stocks, at fair value (cost: 2009 and 2008, $30)
23
16
Commercial mortgage loans, at cost (less allowance for loan losses: 2009, $30; 2008, $17)
2,532
2,737
Policy loans
715
722
Trading securities and other investments
310
452
Total investments
29,579
21,997
Cash and cash equivalents
811
3,307
Restricted cash
184
—
Reinsurance recoverables
1,688
1,592
Deferred income taxes, net
63
599
Other receivables
332
102
Accrued investment income
303
239
Deferred acquisition costs
4,285
4,324
Deferred sales inducement costs
524
518
Other assets
936
2,658
Separate account assets
54,267
41,787
Total assets
$
92,972
$
77,123
Liabilities and Shareholder’s Equity
Liabilities:
Future policy benefits
$
30,383
$
28,753
Policy claims and other policyholders’ funds
123
172
Line of credit with Ameriprise Financial, Inc.
300
—
Other liabilities
1,955
2,672
Separate account liabilities
54,267
41,787
Total liabilities
87,028
73,384
Shareholder’s equity:
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding
3
3
Additional paid-in capital
2,445
2,116
Retained earnings
3,114
2,336
Accumulated other comprehensive income (loss), net of tax
382
(716
)
Total shareholder’s equity
5,944
3,739
Total liabilities and shareholder’s equity
$
92,972
$
77,123
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
Years Ended December 31,
2009
2008
2007
Revenues
Premiums
$
450
$
438
$
439
Net investment income
1,526
1,252
1,424
Policy and contract charges
1,156
1,352
1,217
Other revenues
233
255
255
Net realized investment gains (losses)
59
(442
)
61
Total revenues
3,424
2,855
3,396
Benefits and expenses
Benefits, claims, losses and settlement expenses
841
673
760
Interest credited to fixed accounts
903
790
847
Amortization of deferred acquisition costs
145
861
470
Separation costs
—
—
97
Other insurance and operating expenses
550
649
735
Total benefits and expenses
2,439
2,973
2,909
Pretax income (loss)
985
(118
)
487
Income tax provision (benefit)
245
(189
)
53
Net income
$
740
$
71
$
434
Supplemental Disclosures:
Net realized investment gains (losses):
Net realized investment gains before impairment losses on securities
$
121
Total other-than-temporary impairment losses on securities
(53
)
Portion of loss recognized in other comprehensive income
(9
)
Net impairment losses recognized in net realized investment gains (losses)
(62
)
Net realized investment gains (losses)
$
59
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
2009
2008
2007
Cash Flows from Operating Activities
Net income
$
740
$
71
$
434
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Capitalization of deferred acquisition and deferred sales inducement costs
(640
)
(674
)
(823
)
Amortization of deferred acquisition and deferred sales inducement costs
155
982
523
Depreciation, amortization and accretion, net
(68
)
61
71
Deferred income tax (benefit) expense
(81
)
(234
)
83
Contractholder and policyholder charges, non-cash
(259
)
(248
)
(206
)
Net realized investment gains
(135
)
(7
)
(44
)
Other-than-temporary impairments and provision for loan losses recognized in net realized investment (gains) losses
76
449
(17
)
Change in operating assets and liabilities:
Trading securities and equity method investments, net
136
(110
)
166
Future policy benefits for traditional life, disability income and long term care insurance
282
308
275
Policy claims and other policyholders’ funds
(49
)
81
2
Reinsurance recoverables
(96
)
(302
)
(153
)
Other receivables
(5
)
20
(28
)
Accrued investment income
(64
)
14
49
Derivatives collateral, net
(1,928
)
1,591
242
Other assets and liabilities, net
670
23
(226
)
Net cash provided by (used in) operating activities
(1,266
)
2,025
348
Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales
5,215
246
3,020
Maturities, sinking fund payments and calls
3,486
2,510
1,908
Purchases
(13,696
)
(1,684
)
(677
)
Proceeds from sales and maturities of commercial mortgage loans
279
263
424
Funding of commercial mortgage loans
(104
)
(110
)
(504
)
Proceeds from sales of other investments
43
19
49
Purchases of other investments
(11
)
(140
)
—
Change in policy loans, net
7
(25
)
(47
)
Net cash provided by (used in) investing activities
(4,781
)
1,079
4,173
Cash Flows from Financing Activities
Policyholder and contractholder account values:
Considerations received
4,863
2,913
1,093
Net transfers from (to) separate accounts
195
91
(50
)
Surrenders and other benefits
(1,923
)
(2,931
)
(3,838
)
Proceeds from line of credit with Ameriprise Financial, Inc.
500
—
—
Deferred premium options, net
(82
)
(77
)
(8
)
Tax adjustment on share-based incentive compensation plan
(2
)
2
2
Cash dividend to Ameriprise Financial, Inc.
—
(775
)
(900
)
Net cash provided by (used in) financing activities
3,551
(777
)
(3,701
)
Net increase (decrease) in cash and cash equivalents
(2,496
)
2,327
820
Cash and cash equivalents at beginning of year
3,307
980
160
Cash and cash equivalents at end of year
$
811
$
3,307
$
980
Supplemental Disclosures:
Income taxes paid (received), net
$
72
$
168
$
(4
)
Interest paid on borrowings
1
—
—
Non-cash transactions:
Capital contributions from Ameriprise Financial, Inc.
$
331
$
322
$
8
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
THREE YEARS ENDED DECEMBER 31, 2009
(in millions)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balances at January 1, 2007
$
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, 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 on 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 on 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
Change in accounting principles, net of tax
—
—
38
(38
)
—
Comprehensive income:
Net income
—
—
740
—
740
Other comprehensive income, net of tax:
Change in net unrealized securities losses
—
—
—
1,109
1,109
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities
—
—
—
23
23
Change in net unrealized derivative losses
—
—
—
4
4
Total comprehensive income
1,876
Tax adjustment on share-based incentive compensation plan
—
(2
)
—
—
(2
)
Non-cash capital contribution from Ameriprise Financial, Inc.
—
331
—
—
331
Balances at December 31, 2009
$
3
$
2,445
$
3,114
$
382
$
5,944
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS AND BASIS OF PRESENTATIONNature of Business and Basis of PresentationNature of Business
RiverSource
Life Insurance Company, formerly known as IDSLife Insurance Company is a stock life insurance company with onewholly-ownedwholly owned operating subsidiary, RiverSource Life Insurance Co. of New York("(“RiverSource Life ofNY"NY”). RiverSource Life Insurance Company is awholly-ownedwholly owned subsidiary of Ameriprise Financial, Inc.("(“AmeripriseFinancial"Financial”).o·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.
o·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
North Dakota.Delaware. RiverSource Life of NY issues insurance and annuity products.On December 31,
2006, IDS Life Insurance Company completed an Agreement and Plan of Merger with both American Enterprise Life Insurance Company ("American Enterprise Life") and American Partners Life Insurance Company ("American Partners Life") whereby both companies merged with and into IDS Life Insurance Company. As a result2008, Ameriprise Financial contributed all of themerger, American Enterprise Lifeissued andAmerican Partners Life ceased to exist. Prior to the merger, both companies were wholly-owned operating subsidiariesoutstanding shares ofIDS Life Insurance Company. Immediately following the merger, IDS Life Insurance Company changed its nameRiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.Also on December 31, 2006, American Centurion Life Assurance Company ("American Centurion Life") merged withRTA is domiciled in Delaware andinto IDS Life Insurance Company of New York ("IDS Life of New York"). Asis aresult of the merger, American Centurion Life ceased to exist. Prior to the merger, American Centurion Life was a wholly-owned operating subsidiary of IDS Life Insurance Company. Immediately following the merger, IDS Life of New York changed its name to RiverSource Life Insurance Co. of New York.limited partner in affordable housing partnership investments.RiverSource Life Insurance Company and its
subsidiarysubsidiaries are referred to collectively in this Form 10-K as"RiverSource Life"“RiverSource Life”.No material effect on the consolidated financial condition and results of operations is expected for RiverSource Life as a result of the mergers.Ameriprise Financial was formerly a
wholly-ownedwholly owned subsidiary of American Express Company("(“AmericanExpress"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"“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"“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.Ameriprise Financial has incurred $654 million of pretax non-recurring separation costs since the Separation announcement through December 31, 2006 and expects to incur a total of approximately $875 million.Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.RiverSource Life has been allocated $252 million in total pretax non-recurringThe separationcosts since the Separation announcement through December 31, 2006 and expects to be allocated a significant portion of the remaining separation costsfrom American Express was completed in 2007.RiverSource
Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. -39-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) RiverSource Life'sLife’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. RiverSourceLife'sLife’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 owningone type ofan equity indexed 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 insuranceincluding whole life and term lifeand disability incomeinsurance. (RiverSource Life discontinued underwriting new long term care ("LTC"(“DI”)policies as of December 31, 2002).insurance. Universal life insurance is a form of permanent life insurance characterized byitsflexible premiums,itsflexible death benefit amounts andits unbundling of theunbundled 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'sLife’s variable life insurance and variable annuity products described above, the purchaser may choose among investment options that include RiverSourceLife's "general account"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 RiverSource Life Insurance Company and its
wholly-owned subsidiary,wholly owned subsidiaries, RiverSource Life ofNY. All significant intercompany accountsNY and RTA.RiverSource Life evaluated events or transactions that may have
been eliminated in consolidation.occurred after the balance sheet date for potential recognition or disclosure through February 23, 2010, the date the financial statements were issued.Reclassifications
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles
("U.S. GAAP"(“GAAP”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note11.13. Certain reclassifications of priorperiodyear amounts have been made to conform to the current presentation. In the first quarter of 2009, RiverSource Life reclassified reinsurance allowances for coinsurance contracts for traditional life and long term care insurance from premiums to other insurance and operating expenses to net with the associated expenses.The following table shows the impact of the reclassification of the reinsurance allowances made to RiverSource Life’s previously reported Consolidated Statements of Income.
Year Ended December 31, 2008
Year Ended December 31, 2007
Previously
Reported
Reclassified
Previously
Reported
Reclassified
(in millions)
(in millions)
Revenues
Premiums
$
481
$
438
$
485
$
439
Net investment income
1,252
1,252
1,424
1,424
Policy and contract charges
1,352
1,352
1,217
1,217
Other revenue
255
255
255
255
Net realized investment gain
(442
)
(442
)
61
61
Total revenues
2,898
2,855
3,442
3,396
Benefits and expenses
Benefits, claims, losses and settlement expenses
673
673
760
760
Interest credited to fixed accounts
790
790
847
847
Amortization of deferred acquisition costs
861
861
470
470
Separation costs
—
—
97
97
Other insurance and operating expenses
692
649
781
735
Total benefits and expenses
3,016
2,973
2,955
2,909
Pretax income
(118
)
(118
)
487
487
Income tax provision
(189
)
(189
)
53
53
Net income
$
71
$
71
$
434
$
434
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATIONSummary of Significant Accounting PoliciesPrinciples of Consolidation
RiverSource Life consolidates all entities in which it holds a greater than 50% voting interest
except for variable interest entities which are consolidatedor 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 inhedge funds inwhich 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 significantinfluence, or as Available-for-Sale securities, as applicable. RiverSource Life also consolidates all variable interest entities ("VIEs") for which it is considered to be the primary beneficiary. The determination as to whether an entity isinfluence.Generally, a VIE is
based ona corporation, partnership, trust or any other legal structure that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for theamount and characteristics of the entity's equity. The determination asentity to support its activities. To determine whether RiverSource Lifeis consideredmust consolidate a VIE, it analyzes thedesign of the VIE to
beidentify theprimary beneficiary is based onvariable interests it holds. Then RiverSource Life quantitatively determines whetherRiverSource Lifeits variable interests will absorb a majority of theVIE's expected losses, receiveVIE’s variability. If RiverSource Life determines it will absorb a majority of theVIE'sVIE’s expectedresidual return, or both.variability, RiverSource Lifeliquidated its interest in all consolidated VIEs during 2004consolidates the VIE and2005. There were no consolidated VIEsis referred to as the primary beneficiary. The calculation ofDecember 31, 2006variability is based on an analysis of projected probability-weighted cash flows based on the design of the particular VIE.All material intercompany transactions and
2005. -40-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Qualifying Special Purpose Entities ("QSPEs") are not consolidated. Such QSPEs included a securitization trust containing a majority of RiverSource Life's rated collateralized debt obligations ("CDOs") for whichbalances between and among RiverSource Lifesold all ofand itsretained interestssubsidiaries have been eliminated in2005. AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONSconsolidation.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"(“DAC”) and the corresponding recognition of DAC amortization, derivativefinancialinstruments 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.BALANCE SHEET INVESTMENTSInvestments
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 resultsthe Consolidated Statements ofoperationsIncome upon disposition of the securities.In addition, losses are also recognized when management determinesEffective January 1, 2009, RiverSource Life early adopted an accounting standard that
a decline in value is other-than-temporary, which requires judgmentsignificantly changed RiverSource Life’s accounting policy regarding the timing and amount of other-than-temporary impairments for Available-for-Sale securities. When the fair value of an investment is less than its amortized cost, RiverSource Life assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not RiverSource Life will be required to sell the security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment is considered to have occurred andtimingRiverSource Life must recognize an other-than-temporary impairment for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria and RiverSource Life does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Life separates the total impairment into the credit loss component and the amount ofrecovery. Indicatorsthe loss related to other factors. The amount of the total other-than-temporary impairments related to credit loss is recognized in earnings. The amount of the total other-than-temporary impairments related to other factors is recognized in other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”), certain benefit reserves and income taxes. For Available-for-Sale securities that have recognized an other-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive income (loss). RiverSource Life’s Consolidated Statements of Shareholder’s Equity present all changes in other comprehensive income (loss) associated with Available-for-Sale debt securities that have been other-than-temporarily impaired on a separate line from fair value changes recorded in other comprehensive income (loss) from all other securities.RiverSource Life provides a supplemental disclosure on the face of its Consolidated Statements of Income that presents: (i) total other-than-temporary impairment losses recognized during the period and (ii) the portion of other-than-temporary impairment losses recognized in other comprehensive income (loss). The sum of these amounts represents the credit-related portion of other-than-temporary impairments that were recognized in earnings during the period. The portion of other-than-temporary losses recognized in other comprehensive income (loss) includes: (i) the portion of other-than-temporary impairment losses related to factors other than credit recognized during the period and (ii) reclassifications of other-than-temporary impairment losses previously determined to be related to factors other than
credit that are determined to be credit-related in the current period. The amount presented on the Consolidated Statements of Income as the portion of other-than-temporary losses recognized in other comprehensive income (loss) excludes subsequent increases and decreases in the fair value of these securities.
For all securities that are considered temporarily impaired, RiverSource Life does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Life will be required to sell the security before recovery of its amortized cost basis. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.
Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. In order to determine the amount of the credit loss component for corporate debt securities
include issuer downgrade, default or bankruptcy.considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and RiverSource Life’s position in the debtor’s overall capital structure.For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments), RiverSource Life also considers factors such as overall deal structure and its position within the
extentstructure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections in assessing potential other-than-temporary impairments 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. For the year ended December 31, 2009, certain non-agency residential mortgage backed securities were deemed other-than-temporarily impaired. Generally, the credit loss component for the non-agency residential mortgage backed securities is determined as the amount the amortized cost basis exceedsfairthe present value of thedurationprojected cash flows expected to be collected. Significant inputs considered in these projections are consistent with the factors considered in assessing potential other-than-temporary impairment for these investments. Current contractual interest rates considered in these cash flow projections are used to calculate the discount rate used to determine the present value ofthat difference and management's judgment abouttheissuer'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.expected cash flows.Commercial Mortgage Loans,
on Real Estate,NetCommercial mortgage loans,
on real estate,net, reflect principal amounts outstanding less the allowance for loan losses. The allowance for loan losses ismeasured asprimarily based on RiverSource Life’s past loan loss experience, known and inherent risks in theexcessportfolio, composition of theloan's recorded investment overloan portfolio, current economic conditions, and other relevant factors. Loans in this portfolio are generally smaller balance and homogeneous in nature and accordingly RiverSource Life follows accounting guidance on contingencies when establishing necessary reserves for losses inherent in thepresent value of its expected principal and interest payments discounted atportfolio. For larger balance or restructured loans that are collateral dependent, theloan's effective interest rate, orallowance is based on 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'smanagement’s judgment as to the ultimatecollectibilitycollectability 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
the related policies. -41-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)underlying products, plus accrued interest.Trading Securities and Other Investments
Included in trading securities and other investments are
hedge fund investments,separate account and mutual fund seed money, equity method investments, trading bonds, interests in affordable housing partnerships and below investment grade syndicated bank loans. Separate account and mutual fund seed money is carried at fairmarketvalue with changes in valuerecognized within net investment income.
The carrying value ofAffordable housing partnerships are accounted for under the equitymethod investments in hedge funds reflects RiverSource Life's originalmethod. Below investmentand its share of earnings or losses of the hedge funds subsequent to the date of investment, and approximate fair value. Syndicatedgrade syndicated bank loans reflect amortized cost less allowance for losses.CASH AND CASH EQUIVALENTS RiverSource Life has defined cashCash and Cash Equivalents
Cash equivalents
toinclude highly liquid investments with original maturities of 90 days or less.REINSURANCERestricted Cash
Total restricted cash at December 31, 2009 and 2008 was $184 million and nil, respectively, consisting of cash that is pledged to counterparties.
Reinsurance
RiverSource Life
reinsures a portioncedes significant amounts of insurance risk to other insurers under reinsurance agreements. Reinsurance premiums paid and benefits received are accounted for consistently with therisks associated with its life and LTC insurance products through reinsurance agreements with unaffiliated insurance companies. Reinsurance isbasis used inorder to limit losses, minimize exposure to large risks, provide additional capacityaccounting forfuture growththe policies from which risk is reinsured andto effect business-sharing arrangements. To minimize exposure to significant losses from reinsurer insolvencies, RiverSource Life evaluates the financial condition of its reinsurers prior to entering into new reinsurance treaties and on a periodic basis duringconsistently with the terms of thetreaties. RiverSource Life remains primarily liable as the direct insurer on all risks reinsured. Generally, RiverSource Life reinsures 90%reinsurance contracts. Traditional life, long term care (“LTC”) and DI reinsurance premium, net of thedeath benefit liability related to individual fixedchange 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 andterm life insurance products.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
began reinsuring risks at this level beginning in 2001 for termalso assumes life insurance and2002fixed annuity business from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted forvariableconsistently with the basis used in accounting for the policies from which risk is reinsured anduniversal life insurance. Policies issued prior to these datesconsistently with the terms of the reinsurance contracts. Liabilities for assumed business arenot subject to the same reinsurance levels. The maximum amount of life insurance risk retained byrecorded within future policy benefits.See Note 7 for additional information on reinsurance.
Land, Buildings, Equipment and Software
Land, buildings, equipment and internally developed or purchased software are carried at cost less accumulated depreciation or amortization and are reflected within other assets. RiverSource Life
is $750,000 on any policy insuring a single lifegenerally uses the straight-line method of depreciation and$1.5 million on any flexible premium survivorship variable life policy. For existing LTC policies except those sold byamortization over periods ranging from three to 30 years. During 2009, RiverSource Life received a non-cash capital contribution ofNY prior to 1996, RiverSource Life retained 50%$131 million comprised ofthe risktwo buildings and theremaining 50% of the risk was ceded on a coinsurance basis to affiliates of Genworth Financial, Inc. ("Genworth"). Reinsurance recoverablerelated land fromGenworth related to RiverSource Life's long term care liabilities was $945 million atAmeriprise Financial.At December 31,
2006, while amounts recoverable from each other reinsurer2009 and 2008, land, buildings, equipment and software weremuch smaller. Risk on variable life$190 million anduniversal life policies is reinsured on a yearly renewable term basis. Starting in 2001, risk on most term life policies is reinsured on a coinsurance basis. RiverSource Life retains all risk$43 million, respectively, net of accumulated depreciation of $52 million and $9 million, respectively. Depreciation and amortization expense fornew claims on disability income ("DI") contracts. Risk is currently managed by limitingtheamount of disability insurance written on any one individual. RiverSource Life also retains all accidental death benefityears ended December 31, 2009, 2008 andalmost all waiver of premium risk. DEFERRED ACQUISITION COSTS DAC represent the costs of acquiring new business, principally direct sales commissions2007 was $8 million, $5 million andother distribution$1 million, respectively.Derivative Instruments 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. 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. -42-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Derivative financialHedging ActivitiesFreestanding derivative instruments are recorded at fair value
withinand are reflected in other assets or other liabilities.TheSee Note 11 for information regarding RiverSource Life’s fair value measurement ofRiverSource Life'sderivativefinancial 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.instruments. The accounting forthe changechanges in the fair value of a derivativefinancialinstrument depends on its intended use and the resulting hedge designation, if any. RiverSource Lifegenerallyprimarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designatesitsderivatives as (i) hedgesasof changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (ii) 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”).RiverSource Life’s policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement.
For derivative instruments that do not qualify for hedge accounting or are not designated as hedges,
or accounts for themchanges in fair value are recognized in current period earnings. Changes in fair value of derivatives are presented in the Consolidated Statements of Income based on the nature and use of the instrument. Changes in derivatives used as economichedges.hedges are presented in the Consolidated Statements of Income with the corresponding change in the hedged asset or liability.For derivative
financialinstruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of the hedged risk within 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
de-designatedremoved or a hedge 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 in earnings immediately.See Note 15 for information regarding the impact of derivatives on the Consolidated Statements of Income.
Derivative
financialinstruments that are entered into for hedging purposes are designated as such at the time RiverSource Life enters into the contract. For all derivativefinancialinstruments 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 isnotno longer highly effective as a hedge, RiverSource Life will discontinue the application of hedge accounting.RiverSource Life currently has economic hedges that either do not qualify or are not designated as accounting hedges. 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 aThe equity component of
net investment income. SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate account assets and liabilities are primarily funds held for exclusive benefit of variable annuity and variable life insurance contractholders. 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 indexedannuities 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. -43-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The majority of the variableannuitycontracts offered by RiverSource Lifeobligations is considered an embedded derivative. Additionally, certain annuities contain guaranteed minimumdeathaccumulation benefit("GMDB"(“GMAB”)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 guaranteed minimum income benefit ("GMIB"),and guaranteed minimum withdrawal benefit("GMWB") and guaranteed minimum accumulation benefit ("GMAB"(“GMWB”) provisions.In determiningThe GMAB and theliabilities for variable annuity deathnon-life contingent benefitsand GMIB, 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 consistentassociated withthose 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.GMWBand GMABprovisions are also considered embeddedderivatives and are recorded at fair value.derivatives. The fair value oftheseembedded derivatives associated with annuities is included in future policy benefits. The change in the fair value of the equity indexed annuity embedded derivatives isbased onreflected in thepresentinterest credited to fixed accounts. The changes in the fair value offuture benefits less applicable fees charged fortheprovision. Changes in fair valueGMWB and GMAB embedded derivatives are reflected indeathbenefits, claims, losses and settlement expenses.Deferred Acquisition Costs
DAC represents the cost of acquiring new business, principally direct sales commissions and other
benefits for investment contractsdistribution anduniversal life-type insurance. 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. 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, 2006, depending on year of issue, with an average rate of approximately 5.9%. 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. -44-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 RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 range from 3.0% to 8.0% at December 31, 2006, with an average rate of 5.0%. Interest rates used with LTC claims range from 4.0% to 7.0% at December 31, 2006, with an average rate of 4.4%. Liabilities for estimated benefits payable on claimsunderwriting costs that have beenincurred 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 baseddeferred on thenet level premium method, using anticipated premium payments, mortalitysale of annuity andmorbidity rates, policy persistency and interest rates earned on assets supportinginsurance products. These costs are deferred to theliability. Anticipated mortality and morbidity ratesextent they arebased 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 range from 4.0% to 10.0% at December 31, 2006, depending on policy form, issue year and policy duration. Anticipated interest rates for DI are 7.5% at policy issue grading to 5.0% over five years. Anticipated discount rates for LTC are currently 5.4% at December 31, 2006 grading up to 9.4% over 40 years. Where applicable, benefit amounts expected to berecoverable fromother insurers who sharefuture profits or premiums.the risk are separately recorded as reinsurance recoverable within receivables. RiverSource Life issues only non-participating life and health insurance policies, which do not pay dividends to policyholders from realized policy margins. REVENUES AND EXPENSES RiverSource Life's principal sources of revenue include premium revenues, net investment income, contractholder and policyholder charges and mortality and expense riskestablishing amortization periods and otherfees. Premium Revenues Premium revenues include premiums on traditional life, DI and LTC insurance products. Such premiums are net of reinsurance ceded and are recognized as revenue when due. Net Investment Income Net investment income primarily includes interest income earned on fixed maturity securities classified as Available-for-Sale; commercial mortgage loans on real estate and policy loans; mark-to-market of trading securities and certain derivatives; and pro-rata share of net income or loss of 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, and commercial 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. -45-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 RiverSource Life's separate account assets. RiverSource Life's management and other fees are generally computed as a contractual rate based on the underlying asset values and are generally received monthly. Net Realized Investment Gain 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. Death and Other Benefits Death and other benefits expenses consist of amounts paid under insurance policies and annuity contracts, including benefits paid under optional variable annuity guaranteed benefit riders. Amounts are net of benefit payments recovered or expected to be recovered under reinsurance contracts. Death and other benefits expenses also include amortization of DSIC. Interest Credited to Account Values Interest credited to account values represents amounts earned on fixed account values associated with fixed and variable universal life and annuity contracts and equity indexed annuities in accordance with contract provisions. Amortization of Deferred Acquisition Costsvaluation assumptions.Direct sales commissions and other costs deferred as DAC
associated with the sale of annuity and insurance products areis amortized over time. For annuity and universal life (“UL”) contracts, DACareis amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DACareis generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.For annuity and
universal lifeUL insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense aremanagement'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.-46-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)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 is not
recoverable or if premium rates charged for the contract are changed.recoverable. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSourceLife's consolidated resultsLife’s Consolidated Statements ofoperations.Income.For annuity, life, DI and LTC insurance products, key assumptions underlying
thosethese 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 primaryfactorfactors 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 insurancebusinessbusinesses during the DAC amortization period.The client asset value growth
rate isrates are theraterates at which variable annuity and variable universal life (“VUL”) 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 a regular basis. RiverSource Life typically uses a five-year mean reversionmethodprocess as a guideline 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, RiverSource Life reassesses 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. In 2009, management continued to follow the mean reversion process, decreasing near-term equity asset growth rates to reflect the positive market. DAC amortization expense recorded in a period when client asset value growth rates exceed management’s near-term estimate will typically be less than in a period when growth rates fall short of management’s near-term estimate.RiverSource Life monitors other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, each could impact RiverSource Life’s DAC balances.
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
theits quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.SeparationDeferred Sales Inducement Costs
Separation costs generallyDSIC consist of
allocated financial advisorbonus interest credits andemployee retention program costs, re-brandingpremium credits added to certain annuity contract andmarketing costsinsurance 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 andcostsassumptions used toseparateamortize DAC. The amortization of DSIC is recorded in benefits, claims, losses andreestablish technology platformssettlement expenses.Separate Account Assets and Liabilities
Separate account assets and liabilities are primarily funds held for the exclusive benefit of variable annuity contractholders 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
Separation.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.
In determining the liabilities for GMDB, 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 reviews, and where appropriate, adjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.
The GMDB 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 is determined in the same way as the GMDB liability. 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 equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.
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, 2009, depending on year of issue, with an average rate of approximately 5.7%.
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, 2009, with an average rate of 4.7%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2009, 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, 2009, 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 interest rates for LTC policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31, 2009.
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.
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, other investments and cash and cash equivalents; the changes in fair value of trading securities and certain derivatives; and the pro-rata share of net income or loss on equity method investments. 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 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 on the sale of securities are recognized using the specific identification method, on a trade date basis, and charges for investments determined to be other-than-temporarily impaired and related to credit losses.
Other Insurance and Operating Expenses
Other insurance and operatingexpenses primarily
includesinclude expenses allocated to RiverSource Life from its parent, Ameriprise Financial, for RiverSourceLife'sLife’s share of compensation, professional and consultant fees and expenses associated with information technology and communications, facilities and equipment, advertising and promotion and legal andregulatory. -47-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)regulatory costs.Income Taxes
As a result of the Separation of Ameriprise Financial from American Express,
RiverSource Life was required to file a short period income tax return through September 30, 2005 which was included as part of the American Express consolidated income tax return for the year ending December 31, 2005. Additionally,RiverSource Life will not be able to file a consolidated U.S. federal income tax return with other members of AmeripriseFinancial'sFinancial’s affiliated groupfor five tax years following the Distribution. Therefore,until 2010. RiverSourceLife was also required to file a separate short period consolidated life insurance company income tax return for the period October 1, 2005 through December 31, 2005. RiverSource Life'sLife’s provision for income taxes represents the net amount of income taxes that it expectsto 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
judgmentjudgments regarding the tax treatment of certainoffsetsitems.In connection with the provision for income taxes, the consolidated financial statements reflect certain amounts related to deferred tax assets and
credits.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 its 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: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies.
3.
RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting PronouncementsAdoption of New Accounting Standards
Accounting and Reporting for Decreases in Ownership of a Subsidiary
In
September 2006,January 2010, the Financial Accounting Standards Board("FASB"(“FASB”)issued Statementupdated the accounting standards to clarify the accounting and disclosure requirements for changes in the ownership percentage ofFinanciala subsidiary. The additional disclosures primarily relate to instances when a subsidiary is deconsolidated or a group of assets is derecognized. The additional disclosures primarily relate to fair value considerations, the parent’s involvement with the deconsolidated entity and related party considerations. The standard is effective for the first interim or annual reporting period ending after December 15, 2009. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have any effect on RiverSource Life’s consolidated financial condition and results of operations.Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
In September 2009, the FASB updated the accounting standards to allow for net asset value (“NAV”) to be used as a practical expedient in estimating the fair value of alternative investments without readily determinable fair values. The standard also requires additional disclosure by major category of investment related to restrictions on the investor’s ability to redeem the investment as of the measurement date, unfunded commitments and the investment strategies of the investees. The disclosures are required for all investments within the scope of the standard regardless of whether the fair value of the investment is measured using the NAV or another method. The standard is effective for interim and annual periods ending after December 15, 2009, with early adoption permitted. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
Measuring Liabilities at Fair Value
In August 2009, the FASB updated the accounting standards to provide additional guidance on estimating the fair value of a liability. The standard is effective for the first reporting period, including interim periods, beginning after issuance. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
The Hierarchy of GAAP
In June 2009, the FASB established the FASB Accounting Standards
("SFAS"CodificationTM (“Codification”)No. 157, "Fairas the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements inconformity with GAAP. The Codification supersedes existing nongrandfathered, non-SEC accounting and reporting standards. The Codification did not change GAAP but rather organized it into a hierarchy where all guidance within the Codification carries an equal level of authority. The Codification became effective on July 1, 2009. The Codification did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
Subsequent Events
In May 2009, the FASB updated the accounting standards on the recognition and disclosure of subsequent events. The standard also requires the disclosure of the date through which subsequent events were evaluated. The standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. RiverSource Life adopted the standard in the second quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.
Fair Value
Measurements" ("SFAS 157"). SFAS 157 definesIn April 2009, the FASB updated the accounting standards to provide guidance on estimating the fair value
establishesof a financial asset or liability when the trade volume and level of activity for the asset or liability have significantly decreased relative to historical levels. The standard requires entities to disclose the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, debt and equity securities as defined by GAAP shall be disclosed by major category. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. RiverSource Life early adopted the standard in the first quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.In September 2006, the FASB updated the accounting standards to define fair value, establish a framework for measuring fair value and
expandsexpand disclosures about fair value measurements.SFAS 157 applies under other accounting pronouncements that require or permitRiverSource Life adopted the standard 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 valuemeasurements. Accordingly, SFAS 157of certain derivatives RiverSource Life uses to hedge its exposure to market risk related to certain variable annuity riders. Prior to January 1, 2008, RiverSource Life recorded these derivatives in accordance with accounting guidance for derivative contracts held for trading purposes and contracts involved in energy trading and risk management activities. The new standard nullifies the previous guidance 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 the standard 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.Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB updated the accounting standards for the recognition and presentation of other-than-temporary impairments. The standard amends existing guidance on other-than-temporary impairments for debt securities and requires that the credit portion of other-than-temporary impairments be recorded in earnings and the noncredit portion of losses be recorded in other comprehensive income (loss) when the entity does not
require any new fair value measurements. SFAS 157intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery of its cost basis. The standard requires separate presentation of both the credit and noncredit portions of other-than-temporary impairments on the financial statements and additional disclosures. This standard is effective forfiscal years beginninginterim and annual reporting periods ending afterNovemberJune 15,2007, and interim2009, with early adoption permitted for periodswithin those fiscal years. Earlyending after March 15, 2009. At the date of adoption,is permitted providedthe portion of previously recognized other-than-temporary impairments that represent theentity has not issued financial statements for any period within the year of adoption. 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 which will require retrospective application of SFAS 157. The transition adjustment, if any, willnoncredit related loss component shall be recognized as acumulative-effectcumulative effect of adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated othercomprehensive income (loss). RiverSource Life adopted the standard in the first quarter of 2009 and recorded a cumulative effect increase to the opening balance of retained earnings of $38 million, net of DAC and DSIC amortization, certain benefit reserves and income taxes, and a corresponding increase to accumulated other comprehensive loss, net of impacts to DAC and DSIC amortization, certain benefit reserves and income taxes. See Note 4 for RiverSource Life’s required disclosures.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB updated the accounting standards for disclosures about derivative instruments and hedging activities. The standard 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. The standard 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. The standard is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. RiverSource Life applied the new disclosure requirements in the first quarter of 2009. See Note 15 for the required disclosures.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB updated the accounting standards for noncontrolling interests in consolidated financial statements to establish the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent. The standard requires noncontrolling (minority) interests to be classified as equity (instead of as a liability) within the Consolidated Balance Sheets, and net income (loss) attributable to both the parent and the noncontrolling interests to be disclosed on the face of the Consolidated Statements of Income. The standard is effective for fiscal
yearyears beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions ofadoption.the standard are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Lifeis currently evaluatingadopted theimpactnew standard as ofSFAS 157January 1, 2009 and there was no impact on its consolidated financial condition and results of operations.In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying MisstatementsUncertainty in
Current Year Financial Statements" ("SAB 108"). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 does not change the SEC staff's previous positions in SAB No. 99, "Materiality," regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 was effective for fiscal years ending after November 15, 2006. The effect of adopting SAB 108 on RiverSource Life's consolidated financial condition and results of operations was insignificant.Income TaxesIn June 2006, the FASB
issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifiesupdated the accountingforstandards related to uncertainty in incometaxes recognized in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48taxes. The standard 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 48The standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. RiverSource Life adoptedFIN 48the standard as of January 1, 2007. The effect of adoptingFIN 48the standard on RiverSourceLife'sLife’s consolidated financial condition and results of operations was not material.-48-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 155: (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (ii) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133; (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. RiverSource Life adopted SFAS 155 as of January 1, 2007. The effect of adopting SFAS 155 on its consolidated financial condition and results of operations is not expected to be significant. Effective January 1, 2006, RiverSource Life adopted SFAS No. 154, "Accounting Changes and Error Corrections," ("SFAS 154"). This Statement replaced APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changed the requirements for the accounting for and reporting of a change in accounting principle. The effect of adopting SFAS 154 on RiverSource Life's consolidated financial condition and results of operations was insignificant. Effective January 1, 2006, RiverSource Life adopted 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"). 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. The impact of the adoption of FSP FAS 115-1 and FAS 124-1 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 AcquisitionDAC Costs in Connection With Modifications or Exchanges of Insurance Contracts
" ("SOP 05-1"). SOP 05-1In September 2005, the accounting standards related to DAC in connection with modifications or exchanges of insurance contracts were updated. The standard provides clarifying guidance on accounting
by insurance enterprisesfor DAC associated withanyan insurance or annuity contract that is significantly modified or is internally replaced with anothercontract or significantly modified. SOP 05-1 is effective for transactions occurring in fiscal years beginning after December 15, 2006.contract. Prior to adoption, RiverSource Lifehasaccounted for many of these transactions as contract continuations andhascontinuedamortization ofamortizing existing DAC against revenuefromfor the new or modified contract.In addition,Effective January 1, 2007, RiverSource Lifehas not anticipatedadopted the standard resulting in these transactions being prospectively accounted for as contract terminations. Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periodsorand otherDACvaluation assumptions.Many of these transactions no longer qualify as continuations under SOP 05-1. Effective with RiverSource Life's adoption of SOP 05-1 as of January 1, 2007, RiverSource Life will account for such transactions as contract terminations which will result in accelerated DAC amortization.As a result of adoptingSOP 05-1,the standard, RiverSource Lifehas determined that in the first quarter of 2007 it will recordrecorded as a cumulative change in accounting principlea pretax reduction to$206 million, reducing DACof approximately $210by $204 million, DSIC by $11 million andanliabilities for future policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134 million.Future Adoption of
approximately $137 million.New Accounting StandardsFair Value
In January 2010, the FASB updated the accounting standards related to disclosure about fair value measurements. The standard expands the current disclosure requirements to include additional detail about significant transfers between Levels 1 and 2 within the fair value hierarchy and presenting activity in the rollforward of Level 3 activity on a gross basis. The standard also clarifies existing disclosure requirements related to the level of disaggregation to be used for assets and liabilities as well as disclosures about the inputs and valuation techniques used to measure fair value. The standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements related to the Level 3 rollforward, which are effective for interim and annual periods beginning after December 15, 2010. RiverSource Life will adopt the standard in the first quarter of 2010 except for the additional disclosures related to the Level 3 rollforward, which RiverSource Life will adopt in the first quarter of 2011. The adoption of
SOP 05-1the standard will not impact RiverSource Life’s consolidated financial condition and results of operations.Consolidation of Variable Interest Entities
In June 2009, the FASB updated the accounting standards related to the consolidation of variable interest entities. The standard amends current consolidation guidance and requires additional disclosures about an enterprise’s involvement in VIEs. The standard is
also expected to result in an increase in DAC amortization in 2007. The expected increase to amortization expense may vary depending upon future changes in underlying valuation assumptions. -49-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) Effective January 1, 2004,effective for interim and annual reporting periods beginning after November 15, 2009, with early adoption prohibited. RiverSource Lifeadopted SOP 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1"). SOP 03-1 provides guidance on; (i) the classification and valuation of long-duration contract liabilities; (ii) the accounting for sales inducements; and (iii) separate account presentation and valuation. The adoption of SOP 03-1 resulted in a cumulative effect of accounting change that reduced first quarter 2004 results by $71 million ($109 million pretax). The cumulative effect of accounting change consisted of: (i) $43 million pretax from establishing additional liabilities for certain variable annuity guaranteed benefits ($33 million) and from considering these liabilities in valuing DAC and DSIC associated with those contracts ($10 million); and (ii) $66 million pretax from establishing additional liabilities for certain variable universal life and single pay universal life insurance contracts under which contractual costs of insurance charges are expected to be less than future death benefits ($92 million) and from considering these liabilities in valuing DAC associated with those contracts ($26 million offset). Prior to RiverSource Life's adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. Amounts expensed in 2004 to establish and maintain additional liabilities for certain variable annuity guaranteed benefits were $53 million (of which $33 million was part ofdoes not expect the adoptioncharges described previously). RiverSource Life's accounting for separate accounts was already consistent with the provisions of SOP 03-1 and, therefore, there was no impact relatedtothis 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 nothave a material effect onRiverSource Life's calculationits consolidated financial condition and results ofliabilities that were recorded in the first quarter of 2004 upon adoption of SOP 03-1.operations.4.
INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary ofInvestmentsAvailable-for-Sale securities distributed by
type:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2006 COST GAINS LOSSES VALUE ---------------------------------------------- ------------ ------------ ------------ ----------- (IN MILLIONS)Fixed maturities: Corporate debt securities..................... $ 12,232 $ 119 $ (262) $ 12,089 Mortgage and other asset-backed securities.... 9,398 27 (175) 9,250 Foreign corporate bonds and obligations....... 3,080 39 (68) 3,051 U.S. government and agencies obligations...... 295 13 (5) 303 State and municipal obligations............... 165 4 (4) 165 Foreign government bonds and obligations...... 117 18 - 135 Structured investments (a).................... 2 - - 2 ------------ ------------ ------------ ----------- Total fixed maturities........................ 25,289 220 (514) 24,995 Common and preferred stocks................... 30 1 - 31 ------------ ------------ ------------ ----------- Total ........................................ $ 25,319 $ 221 $ (514) $ 25,026 ============ ============ ============ =========== (a) Includes unconsolidated collateralized debt obligations.-50-type were as follows:
RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED)GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2005 COST GAINS LOSSES VALUE ---------------------------------------------- ------------ ------------ ------------ ----------- (IN MILLIONS)Fixed maturities: Corporate debt securities..................... $ 13,319 $ 208 $ (199) $ 13,328 Mortgage and other asset-backed securities.... 10,805 46 (159) 10,692 Foreign corporate bonds and obligations....... 3,149 67 (55) 3,161 U.S. government and agencies obligations...... 300 16 (5) 311 State and municipal obligations............... 114 3 (3) 114 Foreign government bonds and obligations...... 128 17 - 145 Structured investments (a).................... 2 - - 2 ------------ ------------ ------------ ----------- Total fixed maturities........................ 27,817 357 (421) 27,753 Common and preferred stocks................... - - - - ------------ ------------ ------------ ----------- Total ........................................ $ 27,817 $ 357 $ (421) $ 27,753 ============ ============ ============ =========== (a) Includes unconsolidated collateralized debt obligations.
December 31, 2009
Description of Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI(1)
(in millions)
Fixed maturities:
Corporate debt securities
$
14,245
$
855
$
(106
)
$
14,994
$
1
Residential mortgage backed securities
5,249
185
(238
)
5,196
(41
)
Commercial mortgage backed securities
3,874
182
(16
)
4,040
—
Asset backed securities
877
32
(29
)
880
—
State and municipal obligations
647
12
(46
)
613
—
U.S. government and agencies obligations
152
7
(1
)
158
—
Foreign government bonds and obligations
94
14
(1
)
107
—
Other structured investments
4
7
—
11
7
Total fixed maturities
25,142
1,294
(437
)
25,999
(33
)
Common and preferred stocks
30
—
(7
)
23
—
Total
$
25,172
$
1,294
$
(444
)
$
26,022
$
(33
)
(1)Represents the amount of other-than-temporary impairment losses in Accumulated Other Comprehensive Income, which starting January 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities subsequent to the impairment date. These amounts are included in gross unrealized gains and losses at December 31, 2009.
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
Residential mortgage backed securities
3,697
59
(220
)
3,536
Commercial mortgage backed securities
2,582
35
(174
)
2,443
Asset backed securities
682
4
(60
)
626
State and municipal obligations
164
1
(20
)
145
U.S. government and agencies obligations
200
11
—
211
Foreign government bonds and obligations
95
16
(4
)
107
Other structured investments
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
At December 31,
20062009 and2005,2008, fixed maturity securitiesexcluding net unrealized appreciation and depreciation,comprised approximately87%88% and 82%, respectively, of RiverSourceLife'sLife’s total investments. These securitiesarewere rated byMoody'sMoody’s Investors ServiceInc. ("Moody's"(“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) andStandard & Poor's ("S&P"Fitch Ratings Ltd. (“Fitch”), except for approximately$1.2 billion and $1.0$1.1 billion of securities at both December 31,20062009 and2005, respectively,2008, whicharewere rated by RiverSource Investments,LLC'sLLC’s internal analysts using criteria similar toMoody'sMoody’s, S&P andS&P.Fitch. Ratings oninvestment gradefixed maturity securities are presented using the median of ratings from Moody’s, S&P's convention&P andifFitch. If only two of thetwo agencies'ratingsdiffer,are available, the lower rating is used. A summary of fixed maturity securities by ratingexcluding net unrealized appreciation and depreciation, on December 31 iswas as follows:
RATING 2006 2005 ------------------------------------------------------------------ ---------------- ----------------AAA............................................................ 38% 40% AA............................................................. 9 6 A.............................................................. 19 21 BBB............................................................ 27 26 Below investment grade......................................... 7 7 ---------------- ---------------- Total...................................................... 100% 100% ================ ================
December 31, 2009
December 31, 2008
Ratings
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
(in millions, except percentages)
AAA
$
9,194
$
9,520
37
%
$
7,038
$
6,779
38
%
AA
1,081
1,084
4
1,071
1,017
6
A
4,182
4,326
17
4,132
3,883
21
BBB
9,276
9,826
38
5,901
5,388
30
Below investment grade
1,409
1,243
4
1,310
1,003
5
Total fixed maturities
$
25,142
$
25,999
100
%
$
19,452
$
18,070
100
%
At December 31,
20062009 and2005,2008, approximately47%19% and 44%, respectively, of the securities rated AAAarewere GNMA, FNMA and FHLMCmortgage-backedmortgage backed securities. No holdings of any other issuer were greater than 10% ofstockholder'sshareholder’s equity.-51-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED)The following
table providestables 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 lossposition asposition:
December 31, 2009
Less than 12 months
12 months or more
Total
Description of Securities
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
(in millions, except number of securities)
Corporate debt securities
133
$
1,088
$
(18
)
165
$
1,313
$
(88
)
298
$
2,401
$
(106
)
Residential mortgage backed securities
43
1,184
(34
)
68
363
(204
)
111
1,547
(238
)
Commercial mortgage backed securities
33
353
(4
)
26
297
(12
)
59
650
(16
)
Asset backed securities
7
70
(1
)
18
87
(28
)
25
157
(29
)
State and municipal obligations
32
232
(9
)
2
99
(37
)
34
331
(46
)
U.S. government and agencies obligations
2
89
(1
)
—
—
—
2
89
(1
)
Foreign government bonds and obligations
—
—
—
2
4
(1
)
2
4
(1
)
Other structured investments
—
—
—
2
—
—
2
—
—
Common and preferred stock
—
—
—
2
23
(7
)
2
23
(7
)
Total
250
$
3,016
$
(67
)
285
$
2,186
$
(377
)
535
$
5,202
$
(444
)
December 31, 2008
Less than 12 months
12 months or more
Total
Description of Securities
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
(in millions, except number of securities)
Corporate debt securities
312
$
5,086
$
(372
)
221
$
3,309
$
(751
)
533
$
8,395
$
(1,123
)
Residential mortgage backed securities
34
305
(85
)
52
466
(135
)
86
771
(220
)
Commercial mortgage backed securities
26
387
(23
)
54
867
(151
)
80
1,254
(174
)
Asset backed securities
17
187
(31
)
15
124
(29
)
32
311
(60
)
State and municipal obligations
2
17
(1
)
2
78
(19
)
4
95
(20
)
U.S. government and agencies obligations
—
—
—
1
11
—
1
11
—
Foreign government bonds and obligations
7
20
(4
)
—
—
—
7
20
(4
)
Other structured investments
—
—
—
2
—
—
2
—
—
Common and preferred stock
—
—
—
2
16
(14
)
2
16
(14
)
Total
398
$
6,002
$
(516
)
349
$
4,871
$
(1,099
)
747
$
10,873
$
(1,615
)
As part of
December 31, 2006:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL ------------------------- ------------------------- ------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES: VALUE LOSSES VALUE LOSSES VALUE LOSSES ----------------------------- ----------- ----------- ----------- ----------- ----------- ----------- (IN MILLIONS)Corporate debt securities... $ 1,166 $ (16) $ 7,680 $ (246) $ 8,846 $ (262) Mortgage and other asset-backed securities. 862 (5) 6,616 (170) 7,478 (175) Foreign corporate bonds and obligations......... 196 (3) 1,834 (65) 2,030 (68) U.S. government and agencies obligations.... 5 - 214 (5) 219 (5) State and municipal obligations............. 3 - 81 (4) 84 (4) Foreign government bonds and obligations......... - - 3 - 3 - Structured investments...... 1 - - - 1 - ----------- ----------- ----------- ----------- ----------- ----------- Total................... $ 2,233 $ (24) $ 16,428 $ (490) $ 18,661 $ (514) =========== =========== =========== =========== =========== ===========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:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL ------------------------- ------------------------- ------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES: VALUE LOSSES VALUE LOSSES VALUE LOSSES ----------------------------- ----------- ----------- ----------- ----------- ----------- ----------- (IN MILLIONS)Corporate debt securities... $ 6,184 $ (133) $ 1,619 $ (66) $ 7,803 $ (199) Mortgage and other asset-backed securities. 6,002 (88) 2,059 (71) 8,061 (159) Foreign corporate bonds and obligations......... 1,204 (31) 535 (24) 1,739 (55) U.S. government and agencies obligations.... 149 (3) 72 (2) 221 (5) State and municipal obligations............. 67 (2) 15 (1) 82 (3) Foreign government bonds and obligations......... 13 - - - 13 - Structured investments...... 2 - - - 2 - ----------- ----------- ----------- ----------- ----------- ----------- Total................... $ 13,621 $ (257) $ 4,300 $ (164) $ 17,921 $ (421) =========== =========== =========== =========== =========== ===========-52-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) In evaluating potential other-than-temporary impairments,RiverSourceLife considers the extent to which amortized costs exceed 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, 2006:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL ---------------------------------- ---------------------------------- ---------------------------------- NUMBER GROSS NUMBER GROSS NUMBER GROSS RATIO OF FAIR VALUE OF FAIR UNREALIZED OF FAIR UNREALIZED OF FAIR UNREALIZED TO AMORTIZED COST SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES)95% - 100%.......... 178 $ 2,233 $ (24) 657 $ 15,304 $ (407) 835 $ 17,537 $ (431) 90% - 95%........... - - - 59 1,035 (69) 59 1,035 (69) 80% - 90%........... - - - 6 89 (14) 6 89 (14) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total........... 178 $ 2,233 $ (24) 722 $ 16,428 $ (490) 900 $ 18,661 $ (514) ========== ========== ========== ========== ========== ========== ========== ========== ==========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 were attributable to changes in interest rates. A portion of the gross unrealized losses particularly related to corporate debt securities was also attributed to credit spreads and specific issuer credit events. As noted in the table above, a significant portion of the gross unrealized losses relates to securities that have a fair value to amortized cost ratio of 95% or above resulting in an overall 97% ratio of fair value to amortized cost for all securities with an unrealized loss. From an overall perspective, the gross unrealized losses were 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, was $5 million. The securities related to this issuer have a fair value to amortized cost ratio of 95%-100% and have been in an unrealized loss position for more than 12 months. There were no securities with a fair value to amortized cost ratio less than 80% in the portfolio. RiverSource Life monitors the investments and metrics described previously on a quarterly basis to identify and evaluate investments that have indications of possible other-than-temporary impairments. See the Investments section of Note 2 for information regarding RiverSource Life's policy for determining when an investment's decline in value is other-than-temporary. As stated earlier, RiverSource Life'sLife’s ongoing monitoring process,has revealedmanagement determined that asignificant portionmajority of the gross unrealized losses on its Available-for-Sale securities are attributable to changes in credit spreads across sectors. The primary driver of lower unrealized losses in 2009 compared to 2008 was the tightening of credit spreads across sectors, partially offset by higher interest rates.Additionally,In addition, a portion of the decrease in unrealized losses was offset by an increase due to the adoption of a new accounting standard effective January 1, 2009. RiverSource Lifehasrecorded a cumulative effect increase to theability and intentamortized cost of previously other-than-temporarily impaired investments that increased the gross unrealized losses on Available-for-Sale securities by $64 million. This impact is due tohold thesethe impairment of Available-for-Sale securities recognized in other comprehensive income (loss) previously recognized through earnings for factors other than credit.The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on securities for which a
time sufficient to recover its amortized cost and has, therefore, concluded that none hadportion of the securities’ total other-than-temporaryimpairment at December 31, 2006.impairments was recognized in other comprehensive income (loss):
(in millions)
Beginning balance of credit losses on securities held for which a portion of other-than-temporary impairment was recognized in other comprehensive income
$
102
Additional amount related to credit losses for which an other-than-temporary impairment was not previously recognized
7
Reductions for securities sold during the period (realized)
(58
)
Additional increases to the amount related to credit losses for which an other-than-temporary impairment was previously recognized
31
Ending balance of credit losses on securities held as of December 31, 2009 for which a portion of other-than-temporary impairment was recognized in other comprehensive income
$
82
The change in net unrealized securities gains (losses) in other comprehensive income (loss) 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));period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to salesand other-than-temporary impairmentsof Available-for-Salesecurities (reclassification of realized gains (losses))securities; and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC, benefit reserves andannuity liabilitiesreinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.-53-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED)As a result of the adoption of a new accounting standard effective January 1, 2009, net unrealized investment gains (losses) arising during the period also includes other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income (loss) during the period. Additionally, reclassification of (gains) losses included in net income contains noncredit other-than-temporary impairment losses that were previously unrealized, but have been recognized in current period net income due to their reclassification as credit losses.The following table presents
the componentsa rollforward of thechange innet unrealized securities gains (losses), net of tax,on Available-for-Sale securities included in accumulated other comprehensive income (loss):
2006 2005 2004 ---------- ---------- ---------- (IN MILLIONS)Holding (losses) gains, net of tax of $63, $261 and $23, respectively.................................... $ (116) $ (485) $ 42 Reclassification of realized gains, net of tax of $17, $17 and $11, respectively............................ (33) (32) (20) DAC, net of tax of $15, $28 and $3, respectively....... 29 53 6 DSIC, net of tax of $2, $5 and $4, respectively........ 3 8 (7) Fixed annuity liabilities, net of tax of $22, $3 and $30, respectively.................................... 40 (5) (56) ---------- ---------- ---------- Net unrealized securities losses....................... $ (77) $ (461) $ (35) ========== ========== ==========
Net
Unrealized
Investment
Gains (Losses)
Deferred
Income Tax
Accumulated Other
Comprehensive Income
(Loss) Related to Net
Unrealized Investment
Gains (Losses)
(in millions)
Balance at January 1, 2007
$
(258
)
$
90
$
(168
)
Net unrealized investment gains arising during the period
103
(36
)
67
Reclassification of gains included in net income
(39
)
14
(25
)
Impact on DAC, DSIC and benefit reserves
15
(5
)
10
Balance at December 31, 2007
$
(179
)
$
63
$
(116
)
Net unrealized investment losses arising during the period
(1,598
)
559
(1,039
)
Reclassification of losses included in net income
431
(151
)
280
Impact on DAC, DSIC and benefit reserves
303
(106
)
197
Balance at December 31, 2008
$
(1,043
)
$
365
$
(678
)
Cumulative effect of accounting change
(58)
(1)
20
(38
)
Net unrealized investment gains arising during the period
2,378
(832
)
1,546
Reclassification of gains included in net income
(73
)
26
(47
)
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables
(566
)
199
(367
)
Balance at December 31, 2009
$
638
$
(222
)
$
416
(2)
(1)Amount represents the cumulative effect of adopting a new accounting standard on January 1, 2009, net of DAC and DSIC amortization and certain benefit reserves. See Note 3 for additional information on the adoption impact.
(2)At December 31, 2009, Accumulated Other Comprehensive Income Related to Net Unrealized Investment Gains included $(16) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains (losses) were as follows:
Years Ended December 31,
2009
2008
2007
(in millions)
Gross realized investment gains from sales
$
185
$
13
$
64
Gross realized investment losses from sales
(50
)
(6
)
(20
)
Other-than-temporary impairments related to credit
(62
)
(440
)
(4
)
The $62 million of other-than-temporary impairments recognized in net realized investment gains (losses) in 2009 were related to credit losses on non-agency residential mortgage backed securities and corporate debt securities in the gaming industry and banking and finance industries. The $440 million of other-than-temporary impairments recognized in net realized investment gains (losses) in 2008 primarily to credit 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 recognized in net realized investment gains (losses) in 2007 related to corporate debt securities in the publishing and home building industries.
Available-for-Sale securities by contractual maturity at December 31,
20062009 were as follows:
AMORTIZED FAIR COST VALUE ------------ ------------ (IN MILLIONS)Due within one year.................................... $ 521 $ 522 Due after one year through five years.................. 6,625 6,592 Due after five years through 10 years.................. 7,558 7,395 Due after 10 years..................................... 1,185 1,234 ------------ ------------ 15,889 15,743 Mortgage and other asset-backed securities............. 9,398 9,250 Structured investments................................. 2 2 Common and preferred stocks............................ 30 31 ------------ ------------ Total ................................................. $ 25,319 $ 25,026 ============ ============The expected payments on
Amortized Cost
Fair Value
(in millions)
Due within one year
$
738
$
751
Due after one year through five years
6,638
6,862
Due after five years through 10 years
4,786
5,062
Due after 10 years
2,976
3,197
15,138
15,872
Residential mortgage backed securities
5,249
5,196
Commercial mortgage backed securities
3,874
4,040
Asset backed securities
877
880
Other structured investments
4
11
Common and preferred stocks
30
23
Total
$
25,172
$
26,022
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other
asset-backed securities andstructured investmentsmayare notcoincide with their contractual maturities.due at a single maturity date. As such, these securities, as well as common and preferred 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:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Sales............................................ $ 1,897 $ 3,124 $ 1,603 Maturities, sinking fund payments and calls...... $ 2,014 $ 2,242 $ 1,931 Purchases........................................ $ (1,433) $ (5,780) $ (4,393)-54-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) Net realized gains and losses on Available-for-Sale securities, using the specific identification method, are noted in the following table for the years ended December 31:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Gross realized gains from sales.................. $ 60 $ 108 $ 48 Gross realized losses from sales................. $ (10) $ (39) $ (18) Other-than-temporary impairments................. $ - $ (19) $ -The $19 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. During the second quarter of 2005, RiverSource Life sold all of its retained interest in a CDO securitization trust and realized a net pretax gain of $25 million.At December 31,
20062009 and2005,2008, bonds carried at$18$7 million and$16$6 million, respectively, were on deposit with various states as required by law.COMMERCIAL MORTGAGE LOANS ON REAL ESTATE AND SYNDICATED LOANS, NETCommercial Mortgage Loans, Net
The following is a summary of commercial mortgage
loans on real estate and syndicated loans at December 31:loans:
2006 2005 ----------- ----------- (IN MILLIONS)Commercial mortgage loans on real estate...............$ 2,827 $ 2,883 Less: allowance for loan losses......................... (37) (41) ----------- ----------- Commercial mortgage loans on real estate, net..........$ 2,790 $ 2,842 =========== =========== Syndicated loans.......................................$ 112 $ 131 Less: allowance for loan losses......................... (4) (4) ----------- ----------- Net syndicated loans...................................$ 108 $ 127 =========== ===========
December 31,
2009
2008
(in millions)
Commercial mortgage loans
$
2,562
$
2,754
Less: allowance for loan losses
(30
)
(17
)
Commercial mortgage loans, net
$
2,532
$
2,737
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,
2009
2008
2007
(in millions)
Balance at January 1
$
17
$
16
$
37
Provision for loan losses
14
1
(21
)
Foreclosures, write-offs and loan sales
(1
)
—
—
Balance at December 31
$
30
$
17
$
16
Concentrations of credit risk of commercial mortgage loans by region were as follows:
December 31,
2009
2008
On-Balance
Sheet
Funding
Commitments
On-Balance
Sheet
Funding
Commitments
(in millions)
Commercial mortgage loans by U.S. region:
Atlantic
$
835
$
13
$
880
$
3
North Central
538
16
629
10
Pacific
487
13
463
20
Mountain
296
—
319
10
South Central
248
8
287
—
New England
158
—
176
—
2,562
50
2,754
43
Less: allowance for loan losses
(30
)
—
(17
)
—
Total
$
2,532
$
50
$
2,737
$
43
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
December 31,
2009
2008
On-Balance
Sheet
Funding
Commitments
On-Balance
Sheet
Funding
Commitments
(in millions)
Commercial mortgage loans by U.S. property type:
Shopping centers and retail
$
842
$
16
$
869
$
23
Office buildings
702
6
777
18
Industrial buildings
468
12
485
2
Apartments
340
—
383
—
Hotels and motels
61
—
76
—
Mixed use
46
—
50
—
Medical buildings
28
16
32
—
Other
75
—
82
—
2,562
50
2,754
43
Less: allowance for loan losses
(30
)
—
(17
)
—
Total
$
2,532
$
50
$
2,737
$
43
Commitments to fund commercial mortgages
arewere made in the ordinary course of business. The funding commitments at December 31,20062009 and20052008 approximate fair value.Below Investment Grade Syndicated Bank Loans, Net
The following is a summary of below investment grade syndicated bank loans:
December 31,
2009
2008
(in millions)
Below investment grade syndicated bank loans
$
228
$
260
Less: allowance for loan losses
(12
)
(12
)
Net below investment grade syndicated bank loans
$
216
$
248
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.
At December 31, 2006 and 2005, RiverSource Life's recorded investment in impaired commercial mortgage loans on real estate was nil and $14 million, respectively, with related allowances for commercial mortgage loan losses of nil and $4 million, respectively. During 2006 and 2005, the average recorded investment in impaired commercial mortgage loans on real estate was $3 million and $6 million, respectively. RiverSource LifeTrading Securities
Net recognized
nil, nil, and $1 million of interest incomegains (losses) related toimpaired commercial mortgage loans on real estate for the years ended December 31, 2006, 2005 and 2004, respectively. -55-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) The balances of and changes in the allowance for commercial mortgage loan losses were as follows:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)BALANCE AT JANUARY 1.................................. $ 41 $ 45 $ 47 Provision for commercial mortgage loan losses......... - - 9 Foreclosures, write-offs and loan sales............... (4) (4) (11) ----------- ----------- ----------- BALANCE AT DECEMBER 31................................ $ 37 $ 41 $ 45 =========== =========== ===========Concentrations of credit risk of commercial mortgage loans on real estate by regiontrading securities held at December 31,were:
2006 2005 --------------------------------- -------------------------------- ON-BALANCE FUNDING ON-BALANCE FUNDING COMMERCIAL MORTGAGE LOANS BY U.S. REGION SHEET COMMITMENTS SHEET COMMITMENTS --------------- ----------------- -------------- ----------------- (IN MILLIONS)Atlantic.........................................$ 859 $ 41 $ 852 $ 22 North Central.................................... 739 22 843 6 Pacific.......................................... 397 15 364 27 Mountain......................................... 298 13 352 9 South Central.................................... 337 1 308 22 New England...................................... 197 2 164 21 --------------- ----------------- -------------- ----------------- 2,827 94 2,883 107 Less: allowance for loan losses.................. (37) - (41) - --------------- ----------------- -------------- ----------------- Total.........................................$ 2,790 $ 94 $ 2,842 $ 107 =============== ================= ============== =================Concentrations2009, 2008 and 2007 were nil, $9 million and $(2) million, respectively.Sources of
credit risk of commercial mortgage loans on real estate by property type at December 31 were:
2006 2005 --------------------------------- -------------------------------- ON-BALANCE FUNDING ON-BALANCE FUNDING COMMERCIAL MORTGAGE LOANS BY PROPERTY TYPE SHEET COMMITMENTS SHEET COMMITMENTS --------------- ----------------- -------------- ----------------- (IN MILLIONS)Office buildings.................................$ 962 $ 4 $ 1,048 $ 36 Shopping centers and retail...................... 718 71 704 37 Apartments....................................... 470 2 454 11 Industrial buildings............................. 458 12 454 12 Hotels and motels................................ 89 4 92 6 Medical buildings................................ 45 - 47 3 Mixed use........................................ 44 - 39 - Retirement homes................................. - - 5 - Other............................................ 41 1 40 2 --------------- ----------------- --------------- ---------------- 2,827 94 2,883 107 Less: allowance for loan losses.................. (37) - (41) - --------------- ----------------- --------------- ---------------- Total.........................................$ 2,790 $ 94 $ 2,842 $ 107 =============== ================= =============== ================Commitments to fund commercial mortgages were made in the ordinary course of business. The funding commitments at December 31, 2006Investment Income and2005 approximate fair value. -56-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) SOURCES OF INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINNet Realized Investment Gains (Losses)Net investment income
for the years ended December 31is summarized as follows:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Income on fixed maturities........................ $ 1,408 $ 1,449 $ 1,451 Income on commercial mortgage loans on real estate 181 197 221 Trading securities and other investments.......... 89 164 138 ----------- ----------- ----------- 1,678 1,810 1,810 Less: investment expenses......................... 17 21 35 ----------- ----------- ----------- Total.......................................... $ 1,661 $ 1,789 $ 1,775 =========== =========== ===========
Years Ended December 31,
2009
2008
2007
(in millions)
Income on fixed maturities
$
1,371
$
1,043
$
1,187
Income on commercial mortgage loans
160
173
173
Trading securities and other investments
35
55
82
1,566
1,271
1,442
Less: investment expenses
(40
)
(19
)
(18
)
Total
$
1,526
$
1,252
$
1,424
Net realized investment
gain for the years ended December 31 isgains (losses) are summarized as follows:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Fixed maturities.................................. $ 50 $ 50 $ 31 Commercial mortgage loans on real estate.......... 1 (2) (3) Trading securities and other investments.......... - - (1) ----------- ----------- ----------- Total.......................................... $ 51 $ 48 $ 27 =========== =========== ===========
Years Ended December 31,
2009
2008
2007
(in millions)
Fixed maturities
$
73
$
(433
)
$
40
Commercial mortgage loans
(13
)
(1
)
—
Trading securities and other investments
(1
)
(8
)
—
Reduction in the allowance for loan losses
—
—
21
Total
$
59
$
(442
)
$
61
5.
VARIABLE INTEREST ENTITIES During the years ended December 31, 2005 and 2004,Variable Interest EntitiesRTA, a subsidiary of RiverSource Life
consolidated three secured loan trusts ("SLTs") which provided returns to investors primarily based on the performance of an underlying portfolio of high-yield loans and which were managed by an affiliate. One SLT was liquidatedInsurance Company, has variable interests in2004, resulting in a cumulative pretax charge of $24 million. An additional $4 million pretax charge was incurred in 2004 due to the expected liquidation of the two remaining SLTs in 2005. Those remaining SLTs were liquidated in 2005, resulting in a $14 million pretax gain for the year ended December 31, 2005. Consolidated results of operations for the year ended December 31, 2004 included non-cash charges related to the liquidated SLTs of $28 million that included a $24 million charge related to the complete liquidation of an SLT in 2004. RiverSource Life has other significant variable interestsaffordable housing partnerships for which it is notconsideredthe primary beneficiary and, therefore, does not consolidate.These interests are represented by carrying values of $2 million of CDO residual tranches managed by an affiliate where RiverSource Life is not the primary beneficiary. RiverSource Life'sRTA’s maximum exposure to loss as a result of its investment in the
CDO residual tranchesaffordable housing partnerships isrepresented bylimited to the carryingvalue. -57-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)values. The carrying values are reflected in trading securities and other investments and were $28 million and $54 million as of December 31, 2009 and 2008, respectively. RTA has no obligation to provide further financial or other support to the affordable housing partnerships nor has it provided any additional support to the affordable housing partnerships. RiverSource Life had no liabilities recorded as of December 31, 2009 and 2008 related to the affordable housing partnerships.6.
DEFERRED ACQUISITION COSTS AND DEFERRED SALES INDUCEMENT COSTSDeferred Acquisition Costs and Deferred Sales Inducement CostsDuring the third quarter of 2009, 2008 and 2007, RiverSource Life completed the annual detailed review of valuation assumptions of its products. 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 during the third quarter of 2009, 2008 and 2007 and the valuation system conversion during the third quarter of 2008 were as follows:
Balance Sheet Impact
Debit (Credit)
Reinsurance
Recoverables
DAC
DSIC
Other
Assets
Future
Policy
Benefits
Other
Liabilities
Total
(in millions)
2009 period
$
(65
)
$
119
$
9
$
—
$
71
$
—
$
134
2008 period
92
(81
)
(6
)
1
95
5
106
2007 period
(2
)
(16
)
3
—
(15
)
—
(30
)
The total pretax impacts on RiverSource Life’s revenues and expenses attributable to the review of the valuation assumptions for the years ended December 31, 2009, 2008 and 2007 and the valuation system conversion for the year ended December 31, 2008 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)
2009 period
$
—
$
(65
)
$
80
$
119
$
—
$
134
2008 period
2
95
89
(81
)
1
106
2007 period
—
(2
)
(12
)
(16
)
—
(30
)
The balances of and changes in DAC were as follows:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Balance, beginning of year............................. $ 4,036 $ 3,638 $ 3,336 Impact of SOP 03-1..................................... - - 20 Capitalization of acquisition costs.................... 687 633 534 Amortization, excluding impact of changes in assumptions........................................ (409) (383) (341) Amortization, impact of annual third quarter changes in DAC-related assumptions......................... 38 67 24 Amortization, impact of other quarter changes in DAC-related assumptions(a) ........................ 15 - 56 Impact of changes in net unrealized securities losses.. 44 81 9 ----------- ----------- ----------- Balance, end of year................................... $ 4,411 $ 4,036 $ 3,638 =========== =========== =========== (a) Amount in 2004 was primarily related to a $66 million reduction in DAC amortization expense to reflect the lengthening of the amortization periods for certain annuity and life insurance products impacted by RiverSource Life's adoption of SOP 03-1 on January 1, 2004, partially offset by a $10 million increase in amortization expense due to a LTC DAC valuation system conversion.
2009
2008
2007
(in millions)
Balance at January 1
$
4,324
$
4,334
$
4,321
Cumulative effect of accounting change
—
36
(204
)
Capitalization of acquisition costs
558
587
699
Amortization, excluding impacts of valuation assumptions review and valuation system conversion
(264
)
(780
)
(454
)
Amortization, impact of valuation assumptions review and valuation system conversion
119
(81
)
(16
)
Impact of change in net unrealized securities losses (gains)
(452
)
228
(12
)
Balance at December 31
$
4,285
$
4,324
$
4,334
The balances of and changes in DSIC were as follows:
2006 2005 2004 ----------- ----------- ----------- (IN MILLIONS)Balance, beginning of year............................. $ 370 $ 303 $ 279 Impact of SOP 03-1..................................... - - (3) Capitalization of sales inducements.................... 126 94 71 Amortization........................................... (48) (40) (34) Impact of changes in net unrealized securities losses (gains) ........................................... 4 13 (10) ----------- ----------- ----------- Balance, end of year................................... $ 452 $ 370 $ 303 =========== =========== ===========7. LINES OF CREDIT
2009
2008
2007
(in millions)
Balance at January 1
$
518
$
511
$
452
Cumulative effect of accounting change
—
9
(11
)
Capitalization of sales inducements costs
82
87
124
Amortization, excluding impacts of valuation assumptions review and valuation system conversion
(19
)
(115
)
(56
)
Amortization, impact of valuation assumptions review and valuation system conversion
9
(6
)
3
Impact of change in net unrealized securities losses (gains)
(66
)
32
(1
)
Balance at December 31
$
524
$
518
$
511
RiverSource Life
has availableadopted acommitted linenew accounting standard on the recognition and presentation ofcredit with Ameriprise Financial aggregating $200 million.other-than-temporary impairments in the first quarter of 2009. Theinterest rate for any borrowings is established by referenceadoption had no net impact toLIBOR plus 28 basis points. There were no amounts outstanding on this line of credit at December 31, 2006. Also,DAC and DSIC.Effective January 1, 2008, RiverSource Life
hasadopted acollateral loan agreementnew accounting standard on fair value measurements and recorded as a cumulative change in accounting principle a pretax increase of $36 million and $9 million to DAC andDSIC, respectively. See Note 3 for additional information regarding RiverSource Life’s adoption of fair value accounting standards.
Effective January 1, 2007, RiverSource Life adopted a new accounting standard related to DAC in connection with
Ameriprise Financial aggregating upmodifications or exchanges of insurance contracts and recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to$75 million. The interest rateDAC 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,
any borrowings is equalat most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to thepreceding month's effective new money ratereinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level during 2001 (2002 for RiverSourceLife's permanent investments. There were no amounts outstanding at December 31, 2006Life of NY) for term life insurance and2005. 8. VARIABLE ANNUITY GUARANTEES The majority2002 (2003 for RiverSource Life of NY) for individual fixed and variable universal life insurance. Policies issued prior to these dates are not subject to these same reinsurance levels. Generally, thevariable annuity contracts offeredmaximum amount of life insurance risk retained by RiverSource Lifecontain GMDB provisions.is $1.5 million (increased from $750,000 during 2008) on 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 (2002 for RiverSource Life of NY) 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 subsidiaries 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 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 sold on other policy forms. RiverSource Life also
offers GGU provisionsretains all risk onvariable annuities withaccidental death benefitprovisionsclaims andcontracts containing GMIBsubstantially all risk associated with waiver of premium provisions.In addition, RiverSource Life
has established additional liabilities for these variableassumes life insurance and fixed annuitydeath benefitsrisk under reinsurance arrangements with unaffiliated insurance companies.At December 31, 2009 and
GMIB provisions. The variable annuity contracts offered by2008, traditional life and universal life insurance in force aggregated $192.8 billion and $192.3 billion, respectively, of which $131.2 billion and $127.6 billion were reinsured at the respective year ends. Life insurance in force is reported on a statutory basis. RiverSource Lifemayalsocontain GMWBreinsures a portion of the risks assumed under its DI andGMAB provisions, whichLTC policies.The effect of reinsurance on premiums was as follows:
Years Ended December 31,
2009
2008
2007
(in millions)
Direct premiums
$
721
$
641
$
628
Reinsurance ceded
(271
)
(203
)
(189
)
Net premiums
$
450
$
438
$
439
Policy and contract charges are
considered embedded derivatives.presented on the Consolidated Statements of Income net of $62 million, $61 million and $57 million of reinsurance ceded for the years ended December 31, 2009, 2008 and 2007, respectively.Reinsurance recovered from reinsurers was $167 million, $142 million and $126 million for the years ended December 31, 2009, 2008 and 2007, respectively. Reinsurance contracts do not relieve RiverSource Life
has established additional liabilities for these embedded derivatives at fair value. -58-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. VARIABLE ANNUITY GUARANTEES (CONTINUED) 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 financial market performance. Most of the GMWB in-force guarantee that over a period offrom its primary obligation to policyholders.Included in reinsurance recoverables is approximately
14 years the client can withdraw an amount equal to what has been paid into the contract, regardless of the performance of the underlying funds. In May 2006, RiverSource Life began offering an enhanced withdrawal benefit that gives policyholders a choice to withdraw 6% per year for the life of the policyholder or 7% per year until the amount withdrawn is equal to the guaranteed amount. At issue, the guaranteed amount is equal to the amount deposited, but the guarantee can be increased annually to the account value (a "step-up") in the case of favorable market performance. Variable annuity contract owners age 79 or younger at contract issue can also obtain the principal-back guarantee by purchasing the optional GMAB rider for an additional charge, which provides a guaranteed contract value at the end of a 10-year waiting period. The following table provides summary information$1.3 billion and $1.2 billion related toall variable annuity guarantees for which RiverSource Life has established additional liabilitiesLTC risk ceded to Genworth as of December31:
VARIABLE ANNUITY GUARANTEES BY BENEFIT TYPE(1) 2006 2005 ------------------------------------------------------------------------------ --------- --------- (IN MILLIONS, EXCEPT AGE)CONTRACTS WITH GMDB PROVIDING FOR RETURN OF PREMIUM: Total contract value....................................................... $ 17,418 $ 9,107 Contract value in separate accounts........................................ $ 15,859 $ 7,410 Net amount at risk(2)...................................................... $ 13 $ 17 Weighted average attained age.............................................. 61 60 CONTRACTS WITH GMDB PROVIDING FOR SIX-YEAR RESET: Total contract value....................................................... $ 23,544 $ 24,608 Contract value in separate accounts........................................ $ 20,058 $ 20,362 Net amount at risk(2)...................................................... $ 227 $ 763 Weighted average attained age.............................................. 61 61 CONTRACTS WITH GMDB PROVIDING FOR ONE-YEAR RATCHET: Total contract value....................................................... $ 6,729 $ 5,129 Contract value in separate accounts........................................ $ 5,902 $ 4,211 Net amount at risk(2)...................................................... $ 26 $ 45 Weighted average attained age.............................................. 61 61 CONTRACTS WITH GMDB PROVIDING FOR FIVE-YEAR RATCHET: Total contract value....................................................... $ 907 $ 537 Contract value in separate accounts........................................ $ 870 $ 502 Net amount at risk(2)...................................................... $ - $ - Weighted average attained age.............................................. 57 56 CONTRACTS WITH OTHER GMDB: Total contract value....................................................... $ 586 $ 456 Contract value in separate accounts........................................ $ 530 $ 390 Net amount at risk(2)...................................................... $ 11 $ 16 Weighted average attained age.............................................. 64 63 CONTRACTS WITH GGU DEATH BENEFIT: Total contract value....................................................... $ 811 $ 620 Contract value in separate accounts........................................ $ 730 $ 536 Net amount at risk(2)...................................................... $ 62 $ 35 Weighted average attained age.............................................. 62 61-59-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. VARIABLE ANNUITY GUARANTEES (CONTINUED)
DECEMBER 31, ----------------------- VARIABLE ANNUITY GUARANTEES BY BENEFIT TYPE(1) (CONTINUED) 2006 2005 ------------------------------------------------------------------------------ ----------- ---------- (IN MILLIONS, EXCEPT AGE)CONTRACTS WITH GMIB: Total contract value....................................................... $ 928 $ 793 Contract value in separate accounts........................................ $ 853 $ 712 Net amount at risk(2)...................................................... $ 14 $ 16 Weighted average attained age.............................................. 61 60 CONTRACTS WITH GMWB: Total contract value....................................................... $ 4,791 $ 2,542 Contract value in separate accounts........................................ $ 4,761 $ 2,510 Benefit amount in excess31, 2009 and 2008, respectively. Included in future policy benefits is $667 million and $689 million related to assumed reinsurance arrangements as ofaccount value.................................. $ - $ 1 Weighted average attained age.............................................. 61 60 CONTRACTS WITH GMWB FOR LIFE: Total contract value....................................................... $ 2,396 $ - Contract value in separate accounts........................................ $ 2,349 $ - Benefit amount in excess of account value.................................. $ - $ - Weighted average attained age.............................................. 63 - CONTRACTS WITH GMAB: Total contract value....................................................... $ 1,350 $ 161 Contract value in separate accounts........................................ $ 1,340 $ 161 Benefit amount in excess of account value.................................. $ - $ 1 Weighted average attained age.............................................. 55 56 (1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. (2) 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.For the year endedDecember 31,2006, additional liabilities (assets)2009 andincurred claims (adjustments) were:
GMDB & GGU GMIB GMWB GMAB ----------------- ---------- ------------ ---------- (IN MILLIONS)Liability balance at January 1......................... $ 16 $ 4 $ 9 $ 1 Reported claims........................................ 8 - - - Liability (asset) balance at December 31............... 26 5 (12) (5) Incurred claims (adjustments) (sum of reported and change in liability (assets))................... 18 1 (21) (6)For the year ended December 31, 2005, additional liabilities2008, respectively.8.Future Policy Benefits, Policy Claims and
incurred claims (adjustments) were:
GMDB & GGU GMIB GMWB GMAB ----------------- ---------- ------------ ---------- (IN MILLIONS)Liability balance at January 1......................... $ 29 $ 3 $ - $ - Reported claims........................................ 12 - - - Liability balance at December 31....................... 16 4 9 1 Incurred claims (adjustments) (sum of reported and change in liability)............................ (1) 1 9 1The liabilities for guaranteed benefits are supported by general account assets. Changes in these liabilities are included in deathOther Policyholders’ Funds andother benefits. Contract values in separate 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. -60-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS AND SEPARATE ACCOUNT LIABILITIESSeparate Account LiabilitiesFuture policy benefits and policy claims and other
policyholders'policyholders’ fundsas of December 31,consisted of the following:
2006 2005 ----------- ----------- (IN MILLIONS)Fixed annuities................................................................ $ 16,841 $ 18,793 Equity indexed annuities accumulated host values............................... 267 296 Equity indexed annuities embedded derivative reserve........................... 50 38 Variable annuities, with fixed sub-accounts.................................... 5,975 6,999 GMWB variable annuity guarantees............................................... (12) 9 Other variable annuity guarantees.............................................. 26 21 ----------- ----------- Total annuities.............................................................. 23,147 26,156 VUL/UL insurance contract fixed sub-account.................................... 2,562 2,552 Other life, disability income and long term care insurance..................... 3,852 3,604 ----------- ----------- Total future policy benefits................................................. 29,561 32,312 Policy claims and other policyholders' funds................................... 93 90 ----------- ----------- Total future policy benefits and policy claims and other policyholders' funds $ 29,654 $ 32,402 =========== ===========
December 31,
2009
2008
(in millions)
Fixed annuities
$
16,558
$
14,058
Equity indexed annuities accumulated host values
159
228
Equity indexed annuities embedded derivatives
9
16
Variable annuities fixed sub-accounts
6,127
5,623
Variable annuity GMWB
204
1,471
Variable annuity GMAB
100
367
Other variable annuity guarantees
12
67
Total annuities
23,169
21,830
VUL/ UL insurance
2,595
2,526
Other life, DI and LTC insurance
4,619
4,397
Total future policy benefits
30,383
28,753
Policy claims and other policyholders’ funds
123
172
Total future policy benefits and policy claims and other policyholders’ funds
$
30,506
$
28,925
Separate account liabilities
as of December 31,consisted of the following:
2006 2005 ------------ ------------ (IN MILLIONS)Variable annuity contract reserves.................................. $ 43,515 $ 33,155 VUL insurance contract reserves..................................... 5,772 4,775 ------------ ------------ Total separate account liabilities................................ $ 49,287 $ 37,930 ============ ============
December 31,
2009
2008
(in millions)
Variable annuity variable sub-accounts
$
48,982
$
37,657
VUL insurance variable sub-accounts
5,239
4,091
Other insurance variable sub-accounts
46
39
Total separate account liabilities
$
54,267
$
41,787
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.
TheRiverSource Life may hedge the interest rate risksunder these obligations are partially hedgedrelated to fixed annuities with derivative instruments.These derivatives are cash flow hedgesAs ofinterest credited on forecasted sales rather than a hedge of in-force risk. These derivatives consisted of interest rate swaptions with a notional value of $1.2 billion at bothDecember 31,20062009 and2005. The fair value of2008, there were no outstanding derivatives to hedge theseswaptions was $2 million and $8 million at December 31, 2006 and 2005, respectively. -61-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS AND SEPARATE ACCOUNT LIABILITIES (CONTINUED)risks.Equity Indexed Annuities
The Index 500 Annuity, RiverSource
Life'sLife’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.The equity component of these annuities is considered an embeddedSee Note 15 for additional information regarding RiverSource Life’s derivativeand is accounted for separately. The change in fair value of the embedded derivative reserve is reflected in interest credited to account values. As a means of economically hedging its obligation under the stock market return provision,instruments. In 2007, RiverSource Lifepurchases and writes index options and enters into futures contracts. The changes in the fair valuediscontinued new sales ofthese hedge derivatives are included in net investment income. The notional amounts and fair value assets (liabilities) of these options and futures as of December 31 were as follows:equity indexed annuities.
2006 2005 --------------------- -------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE --------------------------------------------- (IN MILLIONS)Purchased options and futures............... $ 271 $ 40 $ 358 $ 30 Written options............................. $ (67) $ (1) $ (101) $ (1)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.
Most of the variable annuity contracts issued by RiverSource Life contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU
andprovisions. RiverSource Life previously offered contracts with GMIB provisions.The GMWBSee Note 2 andGMAB provisions are considered embedded derivatives and are accountedNote 9 forseparately. The changes in fair values of these embedded derivative reserves are reflected in death and other benefits for investment contracts and universal life-type insurance. The negative reserve in GMWB at December 31, 2006 reflects that under current conditions and expectations,additional information regarding RiverSourceLife believes the applicable fees charged for the rider will more than offset the future benefits paid to policyholders under the rider provisions.Life’s variable annuity guarantees. RiverSource Life does not currently hedge its risk under theGMAB, GMDB,GGU and GMIB provisions. During the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009. The totalvalue of variable annuity contracts with GMWB riders increased from
$2.5$12.7 billion at December 31,20052008 to$7.2$19.2 billion at December 31,2006. As a means of economically hedging its obligation under the GMWB provisions, RiverSource Life purchases structured equity put options, enters into interest rate swaps and trades equity futures contracts.2009. Thechanges in the fairtotal value ofthese hedge derivatives are included in net investment income. The notional amounts and fair value assets (liabilities) of these options, swaps and futures as ofvariable annuity contracts with GMAB riders increased from $2.0 billion at December 31,were as follows:
2006 2005 ------------------------ -------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ----------------------------------------------- (IN MILLIONS)Purchased options........................... $ 1,410 $ 171 $ 629 $ 95 Interest rate swaps......................... $ 359 $ (1) $ - $ - Sold equity futures......................... $ (111) $ - $ - $ --62-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS AND SEPARATE ACCOUNT LIABILITIES (CONTINUED)2008 to $2.9 billion at December 31, 2009. The total value of variable annuity contracts with GMDB riders increased from $42.2 billion at December 31, 2008 to $53.7 billion at December 31, 2009, of which $5.2 billion have corresponding hedges. See Note 15 for additional information regarding derivative instruments used to hedge risks related to GMWB, GMAB and GMDB provisions.Insurance Liabilities
Variable universal life ("VUL") and universal life ("UL")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
contractholders.policyholders. RiverSource Life also offers term and whole life insurance as well as disability products. RiverSource Life no longer offerslong term careLTC products but hasin-forcein force policies from prior years. Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims, and obligations for anticipated future claims.10. INCOME TAXES9.Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by RiverSource Life
qualifies as a life insurance company for federal income tax purposes. As such,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
Internal Revenue CodeGMDB provisionsapplicablespecified 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
life insurance companies. Provisions (benefits) for income taxesthe 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.
RiverSource Life has GMWB riders in force with the following provisions:
·withdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.
·withdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).
·withdrawals at a specified rate per year for joint contractholders while either is alive. Once withdrawals begin, the contractholder’s funds are moved to one of three less aggressive asset allocation models (of the five that are available prior to withdrawal).
·withdrawals based on performance of the contract or issue age. On some contracts, credits are applied annually for the first ten years
endedto increase the guaranteed amount as long as withdrawals have not been taken.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 UL 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 information related to variable annuity guarantees for which RiverSource Life has established additional liabilities:
December 31, 2009
December 31, 2008
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
$
30,938
$
28,415
$
974
61
$
22,249
$
20,153
$
4,873
61
Six-Year Reset
13,886
11,197
926
61
12,719
10,063
2,802
61
One-Year Ratchet
7,081
6,400
873
63
5,770
5,061
2,163
62
Five-Year Ratchet
1,256
1,171
38
59
951
888
199
59
Other
582
542
98
67
471
429
192
66
Total — GMDB
$
53,743
$
47,725
$
2,909
61
$
42,160
$
36,594
$
10,229
61
GGU death benefit
$
853
$
775
$
70
63
$
699
$
619
$
65
63
GMIB
$
628
$
582
$
126
63
$
567
$
511
$
245
63
GMWB:
GMWB
$
4,196
$
4,067
$
454
64
$
3,513
$
3,409
$
1,312
63
GMWB for life
14,988
14,333
795
63
9,194
8,764
2,704
63
Total — GMWB
$
19,184
$
18,400
$
1,249
63
$
12,707
$
12,173
$
4,016
63
GMAB
$
2,926
$
2,853
$
153
56
$
2,006
$
1,937
$
608
56
(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 equals the 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.
Changes in additional liabilities were as follows:
GMDB &
GGU
GMIB
GMWB
GMAB
UL
(in millions)
Liability balance at January 1, 2008
$
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
Incurred claims
12
(5
)
(1,267
)
(267
)
8
Paid claims
(61
)
(1
)
—
—
—
Liability balance at December 31, 2009
$
6
$
6
$
204
$
100
$
15
The liabilities for guaranteed benefits are supported by general account assets.
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
December 31,
2009
2008
(in millions)
Mutual funds:
Equity
$
29,379
$
21,899
Bond
16,537
12,135
Other
2,889
3,463
Total mutual funds
$
48,805
$
37,497
No gains or losses were recognized on assets transferred to separate accounts for the periods presented.
10.Lines of Credit
In July 2009, RiverSource Life Insurance Company, as the borrower, entered into a revolving credit agreement with Ameriprise Financial as the lender. The aggregate amount outstanding under the line of credit may not exceed $800 million at any time. The interest rate for any borrowing under the new agreement is established by reference to LIBOR plus 28 basis points. Amounts borrowed may be repaid at any time with no prepayment penalty. As of December 31,
were:2009, the outstanding balance under this credit line was $300 million which was repaid in full with payments in January and February 2010.
2006 2005 2004 ---------- ---------- ---------- (IN MILLIONS)Current income tax: Federal.............................................. $ 66 $ 56 $ 160 State................................................ 3 4 (4) ---------- ---------- ---------- Total current income tax................................ 69 60 156 Deferred federal income tax............................. 123 122 70 ---------- ---------- ---------- Income tax provision.................................... $ 192 $ 182 $ 226 ========== ========== ==========RiverSource Life has available a committed line of credit with Ameriprise Financial aggregating $200 million. The
principal reasonsinterest rate for any borrowings is established by reference to LIBOR. There were no amounts outstanding on this line of credit at December 31, 2009 and 2008.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, 2009 and 2008.
RiverSource Life had a collateral loan agreement with Ameriprise Financial aggregating up to $75 million which expired on October 31, 2008.
11.Fair Values of Assets and Liabilities
GAAP 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
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 1Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3Prices 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.
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 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, commercial 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
aggregate income tax provisionmarket 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 differentfrom that computed by using the U.S. statutory rate of 35%pricing services for theyears ended December 31same 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.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
follows:
2006 2005 2004 ---------- ---------- ----------Tax at U.S. statutory rate.............................. 35.0% 35.0% 35.0% Changes in taxes resulting from: Tax-exempt interest and dividend income............ (6.5) (9.4) (4.0) State taxes, netLevel 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. RiverSource Life settled these derivatives in the second quarter of 2009 and has not entered into any additional structured derivatives since then.
Liabilities
Embedded Derivatives
Variable Annuity Riders — GMAB and GMWB
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 contractholder 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 tables present the balances of
federal benefit................ 0.3 0.4 (0.3) Taxes applicable to prior years.................... - 3.2 (2.6) Other, net......................................... (0.5) (0.8) 0.4 ---------- ---------- ---------- Income tax provision.................................... 28.3% 28.4% 28.5% ========== ========== ==========-63-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities result from temporary differences between theassets and liabilities measuredfor U.S. GAAP reporting versus income tax return purposes.at fair value on a recurring basis:
December 31, 2009
Level 1
Level 2
Level 3
Total
(in millions)
Assets
Available-for-Sale securities:
Fixed maturities:
Corporate debt securities
$
—
$
13,755
$
1,239
$
14,994
Residential mortgage backed securities
—
2,424
2,772
5,196
Commercial mortgage backed securities
—
3,968
72
4,040
Asset backed securities
—
665
215
880
State and municipal obligations
—
613
—
613
U.S. government and agencies obligations
11
147
—
158
Foreign government bonds and obligations
—
107
—
107
Other structured investments
—
—
11
11
Total Available-for-Sale securities: Fixed maturities
11
21,679
4,309
25,999
Common and preferred stocks
—
23
—
23
Trading securities
—
36
—
36
Cash equivalents
2
801
—
803
Other assets
—
615
—
615
Separate account assets
—
54,267
—
54,267
Total assets at fair value
$
13
$
77,421
$
4,309
$
81,743
Liabilities
Future policy benefits
$
—
$
9
$
299
$
308
Other liabilities
—
757
—
757
Total liabilities at fair value
$
—
$
766
$
299
$
1,065
December 31, 2008
Level 1
Level 2
Level 3
Total
(in millions)
Assets
Available-for-Sale securities:
Fixed maturities:
Corporate debt securities
$
—
$
9,907
$
1,086
$
10,993
Residential mortgage backed securities
—
3,016
520
3,536
Commercial mortgage backed securities
—
2,440
3
2,443
Asset backed securities
—
531
95
626
State and municipal obligations
—
145
—
145
U.S. government and agencies obligations
21
190
—
211
Foreign government bonds and obligations
—
107
—
107
Other structured investments
—
—
9
9
Total Available-for-Sale securities: 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
The
significant componentsfollowing tables provide a summary ofRiverSource Life's deferred income taxchanges in Level 3 assets and liabilitiesas of December 31, 2006measured at fair value on a recurring basis:
Purchases,
Total Gains
Sales,
(Losses) Included in
Issuances
Transfers
Balance,
Other
and
In/(Out)
Balance,
January 1,
Net
Comprehensive
Settlements,
of
December 31,
2009
Income
Income
Net
Level 3
2009
(in millions)
Available-for-Sale securities:
Fixed maturities
Corporate debt securities
$
1,086
$
—
$
194
$
20
$
(61
)
$
1,239
Residential mortgage backed securities
520
65
156
2,031
—
2,772
Commercial mortgage backed securities
3
—
8
61
—
72
Asset backed securities
95
7
10
112
(9
)
215
Other structured investments
9
2
—
—
—
11
Total Available-for-Sale securities:
Fixed maturities
1,713
74
(1)
368
2,224
(70
)(3)
4,309
Other assets
200
(37
)(2)
—
(163
)
—
—
Future policy benefits
(1,832
)
1,611
(2)
—
(78
)
—
(299
)
(1)Represents a $7 million loss included in net realized investment gains (losses) and
2005 are reflecteda $81 million gain included inthe following table:
2006 2005 ---------- ---------- (IN MILLIONS)Deferrednet investment incometax assets: Liabilities for future policy benefits........................... $ 1,146 $ 1,102 Investment related............................................... 75 70 Net unrealized losses on Available-for Sale securities and derivatives.................................................... 115 71 Other............................................................ 45 62 ---------- ---------- Gross deferred income tax assets.................................... 1,381 1,305 Deferred income tax liabilities: Deferred acquisition costs....................................... 1,253 1,154 Deferred sales inducement costs.................................. 158 130 Other............................................................ 60 30 ---------- ---------- Gross deferred income tax liabilities............................... 1,471 1,314 ---------- ---------- Net deferred income tax liabilities................................. $ 90 $ 9 ========== ==========A portion of RiverSource 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, 2006, RiverSource Life no longer had a policyholders' surplus account balance. 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. RiverSource Life has made distributions of $1 million in 2006, 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 RiverSource Life is liquidated. Deferred income taxes had not been previously established. RiverSource Life is required to establish a valuation allowance for any portion of the deferred 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 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. RiverSource Life has $156 million in capital loss carryforwards that expire December 31, 2009 for which the deferred tax benefit is reflected in the investment related deferred tax assets, net of other related items. Additionally, RiverSource Life has $45 million in capital loss carryforwards that expire December 31, 2009 as a result of the 2005 first short period tax return filed with American Express. 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, 2006 and 2005. As a result of the Distribution, RiverSource Life was required to file a short period income tax return through September 30, 2005 which was included as part of the American Express consolidated income tax return for the year ended December 31, 2005. Additionally, RiverSource Life will not be able to file a consolidated U.S. federal income tax return with other members of the Ameriprise Financial affiliated group for five tax years following the Distribution. Therefore, RiverSource Life was also required to file a separate short period income tax return for the period October 1, 2005 through December 31, 2005. -64-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) The items comprising other comprehensive lossin the Consolidated Statements ofShareholder's Equity are presentedIncome.(2)Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(3)Represents securities with a fair value of $79 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service net of a security with a fair value of $9 million that was transferred to Level 3 as the fair value of the security is now based on broker quotes.
Purchases,
Total Gains
Sales,
(Losses) Included in
Issuances
Transfers
Balance,
Other
and
In/(Out)
Balance,
January 1,
Net
Comprehensive
Settlements,
of
December 31,
2008
Income
Loss
Net
Level 3
2008
(in millions)
Available-for-Sale securities:
Fixed maturities
Corporate debt securities
$
1,271
$
(30
)
$
(152
)
$
(3
)
$
—
$
1,086
Residential mortgage backed securities
417
(144
)
(134
)
162
219
520
Commercial mortgage backed securities
5
—
—
(2
)
—
3
Asset backed securities
115
1
(24
)
3
—
95
Other structured investments
2
4
6
(3
)
—
9
Total Available-for-Sale securities:
Fixed maturities
1,810
(169
)(1)
(304
)
157
219
(3)
1,713
Other assets
280
149
(2)
—
(229
)
—
200
Future policy benefits
(158
)
(1,611
)(2)
—
(63
)
—
(1,832
)
Other liabilities
—
(9)
(2)
—
9
—
—
(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.
The following table presents the changes in unrealized gains (losses) included in net income
tax benefit amounts:
2006 2005 2004 ---------- ---------- ---------- (IN MILLIONS)Net unrealized securities losses.................... $ 41 $ 248 $ 19 Net unrealized derivative losses.................... 1 6 12 ---------- ---------- ---------- Net income tax benefit.............................. $ 42 $ 254 $ 31 ========== ========== ==========11. STATUTORY CAPITAL AND SURPLUS State insurance statutes contain limitationsrelated to Level 3 assets and liabilities held at December 31 for the year then ended:
2009
2008
Net
Investment
Income
Net
Realized
Investment
Gains
(Losses)
Benefits,
Claims,
Losses and
Settlement
Expenses
Net
Investment
Income
Net
Realized
Investment
Gains
(Losses)
Benefits, Claims,
Losses and
Settlement
Expenses
(in millions)
Available-for-Sale securities:
Fixed maturities
Corporate debt securities
$
—
$
—
$
—
$
—
$
(29
)
$
—
Residential mortgage backed securities
80
(31
)
—
2
(146
)
—
Asset backed securities
1
—
—
1
—
—
Total Available-for-Sale securities:
Fixed maturities
81
(31
)
—
3
(175
)
—
Other assets
—
—
—
—
—
126
Future policy benefits
—
—
1,582
—
—
(1,608
)
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. 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,
2009
2008
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
Financial Assets
Commercial mortgage loans, net
$
2,532
$
2,519
$
2,737
$
2,506
Policy loans
715
790
722
779
Other investments
226
245
248
202
Restricted cash
184
184
—
—
Financial Liabilities
Future policy benefits
$
15,540
$
15,657
$
13,116
$
12,418
Separate account liabilities
406
406
386
386
Line of credit with Ameriprise Financial
300
300
—
—
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.
Policy loans
The fair value of policy loans is determined using discounted cash flows.
Other investments
Other investments primarily consist of syndicated loans. The fair value of syndicated loans is obtained from a nationally-recognized pricing service.
Restricted Cash
Restricted cash is generally set aside for specific business transactions and restrictions are specific to RiverSource Life and does not transfer to third party market participants, therefore, the carrying value amount is a reasonable estimate of fair value.
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 nonperformance risk specific to these liabilities. The fair value of other liabilities including non-life contingent fixed annuities in payout status, equity indexed annuity host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner.
Separate account liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the
amountrelated separate account assets. Carrying value is a reasonable estimate ofdividends or distributions that insurers may make without providing prior notificationthe fair value as it represents the exit value as evidenced by withdrawal transactions between contractholders and RiverSource Life. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.Line of credit with Ameriprise Financial
The fair value of the line of credit is determined by discounting cash flows with an adjustment for RiverSource Life’s nonperformance risk specific 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 noticethis liability. Due to theMinnesota 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 $1.2 billion and $925 million as of December 31, 2006 and 2005, respectively. In addition, dividends or distributions, whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceed the greatershort-term nature of theprevious year's statutory net gain from operations or 10%line of credit, the carrying value is an approximation of theprevious year-end statutory capital and surplus are referred to as "extraordinary dividends." Extraordinary dividends also require advance notice to the Minnesota Department of Commerce, and are subject to potential disapproval. For 2007, dividends or distributions in excess of $469 million would be extraordinary. Statutory net gain from operations and net income for the years ended December 31 and capital and surplus as of December 31 are summarized as follows:fair value.
2006 2005 2004 ---------- ---------- ---------- (IN MILLIONS)Statutory net gain from operations................. $ 469 $ 327 $ 438 Statutory net income............................... 514 339 438 Statutory capital and surplus...................... 3,258 2,942 2,27712.
RELATED PARTY TRANSACTIONS Ameriprise Financial wasRelated Party TransactionsRiverSource Investments, LLC is the investment manager for the proprietary mutual funds used as investment options by RiverSource
Life'sLife’s variable annuity contractholders and variable life insurancecontract owners for the period from the third quarter of 2003 through the third quarter of 2005. In the fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise Financial as the investment manager.policyholders. RiverSource Life provides all fund management services, other than investment management, and is compensated for the administrative services it provides. For theyearyears ended December 31,2006,2009, 2008 and 2007, RiverSource Life received$76$87 million, $101 million and $97 million, respectively, from RiverSource Investments, LLC foradministrative services RiverSource Life provided. For the year ended December 31, 2005, RiverSource Life received $56 million from Ameriprise Financial and $20 million from RiverSource Investments, LLC for services provided for the periods they each were investment managers. For the year ended December 31, 2004, RiverSource Life received $82 million from Ameriprise Financial for administrativethese services.-65-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. RELATED PARTY TRANSACTIONS (CONTINUED)RiverSource Life participates in the Ameriprise Financial Retirement Plan which covers all permanent employees age 21 and over who have met certain employment requirements. RiverSource Life contributions to the plan are based on
participants'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.the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). RiverSourceLife'sLife’s share of the total net periodic pension cost wasapproximately$2 million in 2009, and $1 millionfor each of the years ended December 31, 2006, 2005in both 2008 and2004.2007.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
$2$3 million in2006, $1 million in 20052009, 2008 and$1 million in 2004.2007.RiverSource Life also participates in the defined contribution pension plans of Ameriprise Financial which cover all employees who have met certain employment requirements. RiverSource Life contributions to the plans are a percent of either each
employee'semployee’s eligible compensation or basic contributions. Costs of these plans charged to operationsin 2006, 2005were $2 million, nil and2004 were$3 million$2 millionin 2009, 2008 and$2 million,2007, respectively.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
2006, 20052009, 2008 and20042007 wasapproximatelynil, $1 millioneach year.and $2 million, respectively.Charges by Ameriprise Financial and affiliated companies to RiverSource Life for use of joint facilities, technology support, marketing services and other services aggregated
$755$580 million,$725$673 million and$601$909 million for2006, 20052009, 2008 and2004,2007, respectively. Certain of these costs are included in DAC. Expenses allocated to RiverSource Life may not be reflective of expenses that would have been incurred by RiverSource Life on a stand-alone basis.RiverSource LifeDividends paid
$300 millionand received were as follows:
Years Ended December 31,
2009
2008
2007
(in millions)
Cash dividends paid to Ameriprise Financial
$
—
$
775
$
900
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY
—
77
83
Cash dividend paid to RiverSource Life Insurance Company from RTA
22
—
—
Non-cash dividend paid to Ameriprise Financial from RTA
—
118
—
Notifications to state insurance regulators were made in advance of payments of dividends
to Ameriprise Financial during 2006, comprisedfor amounts in excess of$100 million of extraordinary cash dividends in each of the second and third quarters of 2006 and $100 million of ordinary cash dividends in the fourth quarter of 2006. Prior to the payment of the extraordinary cash dividends, RiverSource Life made the required advance notices to the Minnesota Department of Commerce, its primary state regulator, and received responses stating there were no objections to the payment of these dividends. The ordinary cash dividends paid in the fourth quarter 2006 did not require prior notification and response from the Minnesota Department of Commerce. RiverSource Life of NY paid ordinary dividends to RiverSource Life during the second quarter of 2006 of $23 million. In connection with the Separation,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.RTA.During
the fourth quarter of 2005,2009, RiverSource LifeapprovedInsurance Company received a non-cash capital contribution of $131 million comprised of two buildings andpaid dividendsthe related land from Ameriprise Financial. As part of the transaction, RiverSource Life Insurance Company entered into an agreement to lease the buildings to Ameriprise Financial. In addition, RiverSource Life Insurance Company received a non-cash capital contribution of $200 million consisting of a reduction of the outstanding balance due to Ameriprise Financial under a line of$380 million. Includedcredit. See Note 10 for more information on RiverSource Life’s lines of credit.There were no amounts included in other liabilities at December 31,
20062009 and2005 are $1 million and $8 million, respectively,2008 payable to Ameriprise Financial for federal income taxes.-66-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)During 2009, RiverSource Life sold corporate bonds of $27 million to Ameriprise Financial and recognized a gain of $9 million.
13.
REINSURANCE AtStatutory Capital and SurplusState 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 $433 million and $173 million as of December 31,
2006, 20052009 and2004, traditional life and universal life insurance in force aggregated $174.1 billion, $160.1 billion and $147.5 billion, respectively,2008, respectively.In addition, dividends or distributions, whose fair market value, together with that of
which $102.4 billion, $86.3 billion and $70.9 billion was reinsured atother dividends or distributions made within therespective year ends. Life insurance in force is reported on a statutory basis. RiverSource Life also reinsures a portionpreceding 12 months, exceed the greater of therisks assumed under LTC policies. The effectprevious year’s statutory net gain from operations or 10% ofreinsurance on premiumsthe previous year-end statutory capital and surplus are referred to as “extraordinary dividends.” Extraordinary dividends also require advance notice to the Minnesota Department of Commerce, and are subject to potential disapproval.Statutory net gain from operations and net income for the years ended December 31
isand capital and surplus as of December 31 are summarized as follows:
2006 2005 2004 ---------- ---------- ---------- (IN MILLIONS)Direct premiums.................................... $ 561 $ 544 $ 508 Reinsurance assumed................................ 3 2 4 Reinsurance ceded.................................. (170) (176) (160) ---------- ---------- ----------- Net premiums....................................... $ 394 $ 370 $ 352 ========== ========== ===========Reinsurance recovered
2009
2008
2007
(in millions)
(unaudited)
Statutory net gain (loss) from operations(1)
$
1,793
$
(1,184
)
$
523
Statutory net income (loss)(1)
1,887
(1,407
)
555
Statutory capital and surplus
3,371
2,529
2,820
(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. These impacts were substantially reversed in 2009.
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,
2009
2008
2007
(in millions)
Current income tax:
Federal
$
325
$
42
$
(30
)
State
1
3
��
Total current income tax
326
45
(30
)
Deferred income tax
Federal
(80
)
(236
)
83
State
(1
)
2
—
Total deferred income tax
(81
)
(234
)
83
Total income tax provision (benefit)
$
245
$
(189
)
$
53
The principal reasons that the aggregate income tax provision is different from
reinsurers amounted to $115 million, $106 millionthat computed by using the U.S. statutory rate of 35% are as follows:
Years Ended December 31,
2009
2008
2007
Tax at U.S. statutory rate
35.0
%
35.0
%
35.0
%
Changes in taxes resulting from:
Tax-exempt interest and dividend income
(7.2
)
56.6
(10.9
)
State taxes, net of federal benefit
—
(3.7
)
—
Low income housing credit
(2.0
)
27.9
(7.0
)
Foreign tax credit, net of addback
(1.0
)
15.3
(2.3
)
Taxes applicable to prior years
0.1
29.2
(4.0
)
Other, net
—
(0.2
)
—
Income tax provision
24.9
%
160.1
%
10.8
%
RiverSource Life’s effective tax rate was 24.9% and
$73 million,160.1% for the years ended December 31,2006, 20052009 and2004,2008, respectively.Reinsurance contracts do not relieveThe decrease in the effective tax rate is primarily due to pretax income for 2009 compared to a pretax loss in relation to a net tax benefit for 2008. RiverSource Life’s effective tax rate for 2008 included a $39 million tax benefit related to changes in the status of current audits.Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for 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,
2009
2008
(in millions)
Deferred income tax assets:
Liabilities for future policy benefits
$
1,390
$
1,744
Investment related
163
—
Net unrealized losses on Available-for-Sale securities and derivatives
—
399
Net operating loss and tax credit carryforwards
185
159
Other
—
44
Gross deferred income tax assets
1,738
2,346
Deferred income tax liabilities:
DAC
1,264
1,168
Investment related
—
398
Net unrealized gains on Available-for-Sale securities
203
—
DSIC
193
181
Other
15
—
Gross deferred income tax liabilities
1,675
1,747
Net deferred income tax assets
$
63
$
599
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, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies.
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, 2009 and 2008.
Additionally, RiverSource Life has tax benefits related to net operating loss carryforwards of $16 million which expire beginning December 31, 2025 as well as tax credit carryforwards of $149 million which expire beginning December 31, 2025.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
2009
2008
2007
(in millions)
Balance at January 1
$
(89
)
$
97
$
73
Additions (reductions) based on tax positions related to the current year
1
(165
)
34
Additions for tax positions of prior years
18
38
16
Reductions for tax positions of prior years
(7
)
(59
)
(26
)
Balance at December 31
$
(77
)
$
(89
)
$
97
If recognized, approximately $49 million, $30 million and $49 million, net of federal tax benefits, of the unrecognized tax benefits as of December 31, 2009, 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 $1 million, $14 million and $11 million in interest and penalties for the year ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009 and 2008, RiverSource Life had a receivable of $16 million and $15 million, respectively, related to accrued interest and penalties.
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 and completed its field examination of 2003 through 2004 in the third quarter of 2009. However, for federal income tax purposes, these years continue to remain open as a consequence of certain issues under appeal. In the fourth quarter of 2008, the IRS commenced an examination of RiverSource Life’s U.S. income tax returns for 2005 through 2007, which is expected to be completed in 2010. RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from
its primary obligation1998 through 2006.On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to
policyholders. 14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIESissue 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 IRS 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. Additionally, included in the Administration’s 2011 Revenue Proposals is a provision to modify the DRD for life insurance companies’ separate accounts, which if enacted could significantly reduce the DRD tax benefits RiverSource Life receives, prospectively, beginning in 2011. For the year ended December 31, 2009, RiverSource Life recorded a benefit of approximately $62 million related to the current year’s separate account DRD.As a result of the separation of Ameriprise Financial from American Express, RiverSource Life and subsidiaries 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.
The items comprising other comprehensive income (loss) are presented net of the following income tax provision (benefit) amounts:
Years Ended December 31,
2009
2008
2007
(in millions)
Net unrealized securities gains (losses)
$
166
$
(302
)
$
28
Net unrealized derivative gains
2
2
—
Net income tax provision (benefit)
$
168
$
(300
)
$
28
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. RiverSource Life primarily enters intovariousderivativefinancial instruments as part of its ongoingagreements for risk managementactivities.purposes related to RiverSource Life’s products and operations.RiverSource Life
does not engageuses derivatives as economic hedges and occasionally holds derivatives designated for hedge accounting. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives, by type of derivative and product at December 31, 2009:
Derivatives not designated as hedging instruments
Balance Sheet
Location
Asset
Balance Sheet
Location
Liability
(in millions)
(in millions)
Interest rate contracts
GMWB and GMAB
Other assets
$
176
Other liabilities
$
280
Equity contracts
GMWB and GMAB
Other assets
437
Other liabilities
474
GMDB
—
Other liabilities
2
Equity indexed annuities
Other assets
2
—
Equity indexed annuities embedded derivatives
—
Future policy benefits
9
Other
GMWB and GMAB embedded derivatives(1)
—
Future policy benefits
299
Total
$
615
$
1,064
(1)The fair values of GMWB and GMAB embedded derivatives fluctuate primarily based on changes in
anyequity, interest rate and credit markets.See Note 11 for additional information regarding RiverSource Life’s fair value measurement of derivative
instrument trading activities. Credit risk associated with RiverSource Life's derivatives is limited to the risk thatinstruments.Derivatives Not Designated as Hedges
The following table presents a
derivative counterparty will not perform in accordance with the termssummary of thecontract. To mitigate such risk, counterparties are all required to be preapproved. Additionally,impact of derivatives not designated as hedging instruments on the Consolidated Statements of Income for the year ended December 31, 2009:
Derivatives not designated as
hedging instruments
Location of Gain (Loss)
on Derivatives Recognized in Income
Amount of Gain (Loss)
on Derivatives
Recognized in Income
(in millions)
Interest rate contracts
GMWB and GMAB
Benefits, claims, losses and settlement expenses
$
(435
)
Equity contracts
GMWB and GMAB
Benefits, claims, losses and settlement expenses
(1,310
)
GMDB
Benefits, claims, losses and settlement expenses
(10
)
Equity indexed annuities
Interest credited to fixed accounts
4
Equity indexed annuities embedded derivatives
Interest credited to fixed accounts
7
Other
GMWB and GMAB embedded derivatives
Benefits, claims, losses and settlement expenses
1,533
Total
$
(211
)
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 equity and interest rate risk related to various RiverSource Life products and transactions.
The majority of RiverSource Life’s annuity contracts contain GMDB provisions, which may
from timeresult in a death benefit payable that exceeds the contract accumulation value when market values of customers’ accounts decline. Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right totime, entermake 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 non-life contingent GMWB and GMAB provisions using various equity futures, equity options, total return swaps, interest rate swaptions and interest rate swaps. In the third quarter of 2009, RiverSource Life entered intomaster netting agreements wherever practical. Asa limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009. At December 31,2006 and 2005,2009, thetotal net fair values, excluding accruals, of derivative product assets were $212 million and $133 million, respectively, and derivative liabilities were $7 million at both balance sheet dates. The netgross notional amount ofderivatives asthese contracts was $38.7 billion and $77 million for RiverSource Life’s GMWB and GMAB provisions and GMDB provisions, respectively. The premium associated with certain of the above options is paid or received semi-annually over the life of the option contract.The following is a summary of the payments RiverSource Life is scheduled to make and receive for these options:
Premiums
Payable
Premiums
Receivable
(in millions)
2010
$
189
$
5
2011
181
4
2012
160
3
2013
143
2
2014
118
1
2015-2024
410
4
Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.
Equity indexed annuities have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by RiverSource Life related to equity indexed annuities products will positively or negatively impact earnings over the life of these products. As a means of economically hedging its obligations under the provisions of these products, RiverSource Life enters into index options and occasionally enters into futures contracts. The gross notional amount of these derivative contracts was $129 million at December 31,
2006 was $3.1 billion, consisting2009.Embedded Derivatives
Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of
$3.2 billion purchasedthe equity indexed annuity product obligations is also considered an embedded derivative. As captured in the tables above, embedded derivatives are bifurcated from their host contracts and$0.1 billion written. Cash Flow Hedgesreported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As noted above, RiverSource Life usesinterest rate products, primarily interest rate swaptions,derivatives tohedgemitigate theriskfinancial statement impact ofincreasing interest rates on forecasted fixed premium product sales. During 2006, 2005 and 2004, nothese embedded derivatives.Cash Flow Hedges
RiverSource Life has amounts
were reclassified into earnings fromclassified in accumulated other comprehensiveincome.income (loss) related to gains and losses associated with the effective portion of previously designated cash flow hedges. RiverSource Life reclassifies these amounts into income as the forecasted transactions impact earnings. During the year ended December 31, 2009, RiverSource Life held no derivatives that were designated as cash flow hedges.The following is a summary of unrealized derivatives gains (losses) included in accumulated other comprehensive income (loss) related to cash flow hedges:
2009
2008
2007
(in millions)
Net unrealized derivatives losses at January 1
$
(38
)
$
(40
)
$
(41
)
Unrealized derivative losses arising during the period
—
(1
)
(1
)
Reclassification of realized gains(1)
6
5
2
Income tax provision (benefit)
(2
)
(2
)
—
Net unrealized derivatives losses at December 31
$
(34
)
$
(38
)
$
(40
)
(1)Gain reclassified from Accumulated Other Comprehensive to Net Investment Income on Consolidated Statements of Income.
At December 31,
2006,2009, RiverSource Life expects to reclassifyapproximately $1$6 million ofnet pretax lossesdeferred loss on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12months.months that will be recorded in net investment income. These were originally losses on derivative instruments related to interest rate swaptions. 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, 2009, 2008 and 2007 due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the years ended December 31, 2009 and 2008, there were no amounts recognized in earnings on derivative transactions that were ineffective. For the year ended December 31, 2007, RiverSource Life recognized $2 million in net investment income related to ineffectiveness on its swaptions.Currently, the longest period of time over which RiverSource Life is hedging exposure to the variability in future cash flows is
129 years and relates to interest credited on forecasted fixedannuitypremium product sales.There were lossesCredit Risk
Credit risk associated with RiverSource Life’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of
$4 million fortheyear ended December 31, 2006, $2 million for the year ended December 31, 2005 and no gains or losses for the year ended December 31, 2004 onapplicable derivativetransactions or portions thereof that were ineffective as hedges or excluded from the assessment of hedge effectiveness. -67-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED) During 2006, 2005 and 2004, RiverSource Life recognized the following impacts in other comprehensive income related to its cash flow hedging activity, net of tax:
2006 2005 2004 ------------ ----------- ----------- (IN MILLIONS)Holding losses, net of tax of $6, $11 and $11, respectively... $ (10) $ (21) $ (21) Reclassification of realized losses (gains), net of tax of $5, $5 and $1, respectively ................................ 9 10 (2) ------------ ----------- ----------- Net change in unrealized derivative losses.................... $ (1) $ (11) $ (23) ============ =========== ===========Derivatives Not Designated as Hedgescontract. To mitigate such risk, RiverSource Life haseconomic hedgesestablished guidelines and oversight of credit risk through a comprehensive enterprise risk management program thateither do not qualify orincludes members of senior management. Key components of this program arenot designated for hedge accounting treatment. The fair value assets (liabilities)to require preapproval ofthese purchased and written derivatives for the years ended December 31 were as follows:
2006 2005 ---------------------- ---------------------- PURCHASED WRITTEN PURCHASED WRITTEN --------- ---------- --------- ---------- (IN MILLIONS)Equity indexed annuities..................... $ 40 $ (1) $ 30 $ (1) GMWB......................................... 170 - 95 - --------- ---------- --------- ---------- Total........................................ $ 210 $ (1) $ 125 $ (1) ========= ========== ========= ==========Futures contracts are settled daily by exchanging cash with the counterparty and gains and losses are reported in earnings. Accordingly, there are no amounts on the balance sheet related to these contracts. 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 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. 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. RiverSource Life economically hedges the exposure related to the GMWB provision using various equity futures, interest rate swaps and structured derivatives. 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 fair value of the embedded derivative is included as part of the equity indexed annuities. The changes in fair value of the equity indexed annuities are reflected in interest credited to account valuescounterparties and thechanges in fair valueuse ofthe GMWBmaster netting arrangements andGMAB features are reflected in death and other benefits for investment contracts and universal life-type insurance. The fair value of the embedded derivatives for equity indexed annuities and the fair value of the embedded options for GMWB and GMAB are recognized in future policy benefits in the Consolidated Balance Sheets. The total fair value of these instruments, excluding the host contract, was $33 million and $48 million at December 31, 2006 and 2005, respectively. -68-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of financial instruments are estimates based upon market conditions and perceived risks at December 31, 2006 and 2005, 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 RiverSource Life, therefore, cannot be estimated by aggregating the amounts presented herein. The following table discloses carrying values and fair values for financial instruments at December 31:collateral arrangements wherever practical. As of December 31,
2006 2005 -------------------------- --------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ------------ (IN MILLIONS)Financial Assets ---------------- Assets for which carrying values approximate fair values.................................. $ 75,336 $ 75,336 $ 66,718 $ 66,718 Commercial mortgage loans on real estate, net.. 2,790 2,875 2,842 2,977 Other investments.............................. 108 112 127 131 Financial Liabilities --------------------- Liabilities (assets) for which carrying values approximate fair values...................... $ (10) $ (10) $ 32 $ 32 Fixed annuity reserves......................... 21,626 20,981 24,638 23,841 Separate account liabilities................... 43,516 41,623 33,154 31,7432006 and 2005, the carrying and fair values of off-balance sheet financial instruments are not material. 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 include2009, RiverSource Life held $88 million in cash and cash equivalentsAvailable-for-Saleand recorded a corresponding liability in other liabilities for collateral RiverSource Life is obligated to return to counterparties. As of December 31, 2009, RiverSource Life had accepted additional collateral consisting of various securitiespolicy loans, trading securities, separate account assets and derivative financial instruments. Generally these assetswith a fair market value of $22 million, which areshort-term in duration, variable rate in nature or are recorded at fair valuenot reflected on the Consolidated Balance Sheets.TheAs of December 31, 2009, RiverSource Life’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $53 million.Certain of RiverSource Life’s derivative instruments contain provisions that adjust the level of collateral RiverSource Life is required to post based on RiverSource Life’s financial strength rating (or based on the debt rating of RiverSource Life’s parent, Ameriprise Financial). Additionally, certain of RiverSource Life’s derivative contracts contain provisions that allow the counterparty to terminate the contract if RiverSource Life does not maintain a specific financial strength rating or Ameriprise Financial’s debt does not maintain a specific credit rating (generally an investment grade rating). If these termination provisions were to be triggered, RiverSource Life’s counterparty could require immediate settlement of any net liability position. At December 31, 2009, the aggregate fair value of
commercial mortgage loans on real estate, except those with significantall derivative instruments containing such creditdeterioration,risk features wasestimated 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. Other investments include RiverSource Life's interest in syndicated loans, which are carried at amortized cost less allowance for losses. Fair values were based on quoted market prices. FINANCIAL LIABILITIES Liabilities for which carrying values approximate fair values include certain other liabilities and derivative liabilities. Generally these liabilities are either short-term in duration, variable rate in nature or are recorded at fair value on the Consolidated Balance Sheets. -69-RIVERSOURCE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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.$296 million. The aggregate fair value ofthese reserves excluded life insurance-related elements of $1.5 billionassets posted asof both December 31, 2006 and 2005. If the fair value of the fixed annuities were realized, the surrender charges received would be offset by the write-off of DAC and DSIC associated with the fixed annuities of $422 million and $496 millioncollateral for such instruments as of December 31,2006 and 2005, respectively. Fair values2009 was $269 million. If the credit risk features ofseparate account liabilities, excluding life insurance-related elements of $5.8 billion and $4.8 billion as ofderivative contracts that were in a net liability position at December 31,2006 and 2005, respectively, are estimated as2009 were triggered, theaccumulated value less applicable surrender charges. If theadditional fair value ofthe separate accountassets needed to settle these derivative liabilitieswere realized, the surrender charges receivedwouldbe offset by the write-off of DAChave been $27 million.16.Commitments and
DSIC associated with separate account liabilities of $2.3 billion and $2.0 billion as of December 31, 2006 and 2005, respectively. 16. COMMITMENTS AND CONTINGENCIESContingenciesAt December 31,
20062009 and2005,2008, RiverSource Life had no material commitments to purchase investments other than mortgage loanfundings (seefundings. See Note4).4 for additional information.RiverSource
Life'sLife’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31,2006,2009, these guarantees range up to 5.0%. To the extent the yield on RiverSourceLife'sLife’s invested assets portfolio declines below its target spread plus the minimum guarantee, RiverSourceLife'sLife’s profitability would be negatively affected.The
SEC,Securities and Exchange Commission, theNational 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. RiverSource Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries.RiverSource 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. RiverSource 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.
-70-ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE RiverSource Life's Consolidated Financial Statements for the years ended December 31, 2006, 2005
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
CONTROLS AND PROCEDURES
Disclosure Controls and
2004 have been audited by Ernst & Young LLP, RiverSource Life's independent registered public accounting firm. Through 2004, Ernst & Young LLP provided audit services to RiverSource Life as part of the audit services it provided to American Express Company ("American Express"). In 2004, the American Express Audit Committee of its 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 10 years. At a meeting held on November 22, 2004, the American Express Audit Committee approved the future engagement of PricewaterhouseCoopers LLP as the independent registered public accountants for the fiscal year ending December 31, 2005 and dismissed Ernst & Young LLP for 2005. This decision also applied to RiverSource Life. Ernst & Young LLP continued as auditors of American Express and RiverSource Life for the year ended December 31, 2004. Ernst & Young LLP's reports on RiverSource Life's Consolidated Financial Statements for the fiscal years ended December 31, 2004, 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 RiverSource Life's Consolidated Financial Statements for the year ended December 31, 2004, 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 American Express Audit Committee of its Board of Directors dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP to be the independent registered public accountants of RiverSource Life for the year ended December 31, 2005. PricewaterhouseCoopers LLP continued as the independent registered public accountants for the consolidated financial statements of American Express for 2005. PricewaterhouseCoopers LLP did not issue any report on RiverSource Life's Consolidated Financial Statements for either of 2005 or 2004. During the period from November 22, 2004 and through February 18, 2005, there were no disagreements between RiverSource 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 PROCEDURESProceduresRiverSource 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"“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 toSECSecurities and Exchange Commission (“SEC”) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSourceLife'sLife’s management, including itsChief Executive Officerprincipal executive officer andChief Financial Officer,chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, RiverSourceLife'sLife’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'sLife’s management, under the supervision and with the participation of RiverSourceLife's Chief Executive OfficerLife’s principal executive officer andChief Financial Officer,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, RiverSourceLife's Chief Executive OfficerLife’s principal executive officer andChief Financial Officerchief financial officer have concluded that RiverSourceLife'sLife’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31,2006. -71-CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING2009.Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource
Life'sLife’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, RiverSourceLife'sLife’s internal control over financial reporting for RiverSource Life.Management’s Report on Internal Control Over Financial Reporting
The management of RiverSource Life is responsible for establishing and maintaining adequate internal control over financial reporting.
RiverSource Life’s internal control over financial reporting is a process designed by or under the supervision of, RiverSource Life’s principal executive and principal financial officers and effected by RiverSource Life’s Board of Directors, management and other personnel 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, with the participation of its principal executive officer and chief financial officer, assessed the effectiveness of RiverSource Life’s internal control over financial reporting as of December 31, 2009. 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, 2009, RiverSource Life’s internal control over financial reporting is effective.
This annual report does not include an attestation report of RiverSource Life’s independent registered public accounting firm regarding internal control over financial reporting.
ITEM 9B. OTHER INFORMATIONManagement’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.
OTHER INFORMATION
None.
PART III
-------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
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
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
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
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of Ameriprise Financial has appointed Ernst & Young LLP
("(“Ernst &Young"Young”) as independentauditorsregistered public accounting firm to audit the Consolidated Financial Statements of RiverSource Life for the years ended December 31,20062009 and2005. FEES PAID TO THE REGISTRANT'S INDEPENDENT AUDITOR2008.Fees Paid to the Registrant’s Independent Auditor
The following table presents fees for professional services rendered by Ernst & Young for the audit of RiverSource
Life'sLife’s financial statements for the years ended December 31,20062009 and20052008 and other fees billed for other services rendered by Ernst & Young during those periods.
2006 2005 --------- --------- (IN THOUSANDS)Audit Fees (1) ................................................. $ 1,469 $ 1,423 Tax Fees (2) ................................................... - - All Other Fees (3) ............................................. - - --------- --------- Total .......................................................... $ 1,469 $ 1,423 ========= ========= (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.-72-POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY INDEPENDENT AUDITOR
2009
2008
(in thousands)
Audit Fees (1)
$
2,361
$
2,183
Audit-related Fees
26
25
Tax Fees
—
—
All Other Fees
—
—
Total
$
2,387
$
2,208
(1)Audit fees included audit work performed in the review 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.
Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm
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 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
2006,2009 and 2008, 100% of the services provided by Ernst & Young for RiverSource Life were pre-approved by the Audit Committee of Ameriprise Financial.In 2005, 100% of the services provided by Ernst & Young for RiverSource Life were pre-approved by the Audit Committee of American Express prior to the Distribution and, thereafter, by the Audit Committee of Ameriprise Financial.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. -73-
(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.
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.
RIVERSOURCE LIFE INSURANCE COMPANY
----------------------------------Registrant
February 28, 2007 By /s/ Mark E. Schwarzmann - ----------------- -------------------------------------------------- Date Mark E. Schwarzmann, Chairman of the Board and Chief Executive Officer
February 23, 2010
By
/s/ Timothy V. Bechtold
Date
Timothy V. Bechtold, President
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.
February 28, 2007 /s/ Gumer C. Alvero - ----------------- ----------------------------------------------- Date Gumer C. Alvero, Director and Executive Vice President - Annuities February 28, 2007 /s/ Timothy V. Bechtold - ----------------- ----------------------------------------------- Date Timothy V. Bechtold, Director and President February 28, 2007 /s/ Brian J. McGrane - ----------------- ----------------------------------------------- Date Brian J. McGrane, Director, Executive Vice President and Chief Financial Officer February 28, 2007 /s/ David K. Stewart - ----------------- ----------------------------------------------- Date David K. Stewart, Vice President and Controller February 28, 2007 /s/ Kevin E. Palmer - ----------------- ----------------------------------------------- Date Kevin E. Palmer, Director, Vice President and Chief Actuary February 28, 2007 /s/ Mark E. Schwarzmann - ----------------- ----------------------------------------------- Date Mark E. Schwarzmann, Director, Chairman of the Board and Chief Executive Officer -74-
February 23, 2010
/s/ Timothy V. Bechtold
Date
Timothy V. Bechtold, Director and President
(Principal Executive Officer)
February 23, 2010
/s/ Brian J. McGrane
Date
Brian J. McGrane, Director, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
February 23, 2010
/s/ Gumer C. Alvero
Date
Gumer C. Alvero, Director
February 23, 2010
/s/ David K. Stewart
Date
David K. Stewart, Vice President and Controller
(Principal Accounting Officer)
February 23, 2010
/s/ Kevin E. Palmer
Date
Kevin E. Palmer, Director
The following exhibits are filed as part of this Annual Report or, where indicated, were already filed and are hereby incorporated by reference.
2.1 Copy of Articles of Merger by and between IDS Life Insurance Company and American Enterprise Life Insurance Company dated March 17, 2006, filed electronically as Exhibit 99.1 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference. 2.2 Copy of Articles of Merger by and between IDS Life Insurance Company and American Partners Life Insurance Company dated March 17, 2006, filed electronically as Exhibit 99.2 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference.3.1Copy 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.
3.1.1Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed
electronicallyas Exhibit 3.1 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference.3.2Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed
electronicallyas Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference.4.1Instruments 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.
*10.110.1Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective Jan. 1,
2007. *10.22007, filed as Exhibit 10.1 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.2Copy of Selling Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. effective Jan. 1,
2007. *10.32007, filed as Exhibit 10.2 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.3Copy of Marketing Support Services Agreement between Ameriprise Financial Services, Inc. and RiverSource Life Insurance Company effective Jan. 1,
2007. *10.42007, filed as Exhibit 10.3 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.4Copy of Investment Management and Services Agreement between RiverSource Investments, LLC and RiverSource Life Insurance Company effective Jan. 1,
2007. *10.52007, filed as Exhibit 10.4 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.5Form 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. *10.62007, filed as Exhibit 10.5 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.6Copy 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. *10.72007, filed as Exhibit 10.6 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.7Copy of Management, Service & Marketing Support Agreement by and between RiverSource Investments, LLC, RiverSource Service Corporation and RiverSource Life Insurance Company effective Jan. 1,
2007. *10.82007, filed as Exhibit 10.7 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.10.8Copy of RiverSource Variable Portfolio Funds Service Agreement by and between RiverSource Distributors, Inc. and RiverSource Life Insurance Company effective Jan. 1,
2007.2007, filed as Exhibit 10.8 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.EXHIBIT INDEX
(CONTINUED) *31.1(Continued)*31.1Certification of
Mark E. Schwarzmann, Chief Executive Officer,Timothy V. Bechtold, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.*31.2*31.2Certification 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*32.1Certification of
Mark E. Schwarzmann, Chief Executive Officer,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.