UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 20072009
OR
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 333-114888033-28976
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-0823832 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1099 Ameriprise Financial Center, Minneapolis, Minnesota |
| 55474 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code(612) 671-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate 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
Indicate 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
Indicate 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 No o
Indicate 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’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 smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (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
Indicate 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 | |
Common Stock (par value $30 per share) |
| 100,000 shares |
All outstanding shares of the registrant are directly owned by Ameriprise Financial, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
TABLE OF CONTENTS
Form 10-K |
| Page |
|
|
|
|
| |
1 | ||
7 | ||
15 | ||
15 | ||
15 | ||
15 | ||
|
| |
15 | ||
15 | ||
16 | ||
29 | ||
30 | ||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 69 | |
69 | ||
70 | ||
|
| |
70 | ||
70 | ||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 70 | |
Certain Relationships and Related Transactions, and Director Independence | 70 | |
70 | ||
|
| |
71 | ||
| 72 | |
| E-1 |
Form 10-K
Item Number
ITEM 1. |
Introduction
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company. RTA is a stock company domiciled in Delaware and is a 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”.
A majority of RiverSource Life’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.
��
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express is now complete.
Currently, Ameriprise Financial uses two brand names for its businesses: Ameriprise Financial and RiverSource. The RiverSource brand is used for annuity and life insurance products.was completed in 2007.
Annuities: Product Features and Risks
RiverSource Life offers both deferred variable and fixed annuity productsannuities to a broad range of consumers through multipleits 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 distribution channels.agreements for annuity products in place with more than 120 third party distributors, with annual cash sales of $2.1 billion in 2009. Deferred variable and fixed 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 nine months ended September 30, 2007, its variable annuity productsRiverSource Life ranked ninth in newvariable annuity sales of variable annuities according(according to Morningstar Annuity Research Center.the LIMRA International® survey dated September 30, 2009, the most recent report available). RiverSource Life had fixed and variable annuity cash sales in 20072009 of $11.2$9.3 billion an increase of more than 4% from 2006 as a result of an increase in variable annuities sales, partially offset by a decline in fixed annuity sales.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 of lacklusterweak 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. These fees are impacted by both market movements and net asset flows. Profitability of the annuity business is significantly impacted by the spread between net investment income and interest credited to fixed accounts.
Variable Annuities
A variable annuity provides a contractholder with investment returns linked to underlying investment accounts of the contractholder’s choice. Investment options may include RiverSource Variable Series Trust funds as well as variable product funds of other companies. Most variable annuity products inforcein force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging up to 4.0% as of December 31, 2007.2009.
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 various optional benefit provisions to their contracts to meet their needs. These include enhanced guaranteed minimum death benefit (“GMDB”),needs, including guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions. In 2007,Approximately 98% of RiverSource Life introduced a newLife’s overall variable annuity feature called Secure Source rider, an updated versionassets include a GMDB provision and approximately 40% of the optional guaranteed lifetime withdrawal benefit rider that provides for joint as well as single coverage.RiverSource Life’s overall variable annuity assets include a GMWB or GMAB provision. In general, these provisionsfeatures can help protect contractholders 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 contracts RiverSource Life offers contain GMDB provisions. RiverSource Life’s largest-selling variable annuities are the RiverSource® Retirement Advisor PlusSM 4 series of variable annuities, which include the RiverSource Retirement Advisor 4 Advantage PlusSM Variable Annuity® variable annuity and the RiverSource Retirement Advisor 4 Select PlusSM Variable Annuity (the® variable annuity (collectively, the “Retirement Advisor PlusSM4 Variable Annuities”). Under the Retirement Advisor PlusSM4 Variable Annuities, the standard GMDB provides that if the contractholder 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 the contractholder 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 PlusSM Variable Annuity variable annuity contractholders age 76 or older at contract issue 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.
Contractholders 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 contractholders also may purchase an·An enhanced earnings death benefit or an enhanced earnings plus death benefit for an additional charge.benefit. These death benefit riders are intended to provide additional benefits to offset expenses after the contractholder’s death.
Available features for annuity products also include the GMWB and GMWB for life. The GMWB is designed to protect the contractholder’s principal by allowing the client to withdraw the principal over a period of time, regardless of the investment performance of the contract. The GMWB for life is an enhanced benefit that also allows periodic withdrawals for the life of the policyholder,contractholder, regardless of the investment performance of the contract.
Variable annuity contractholders 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 guaranteed minimum income benefit (“GMIB”) feature which, after 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. RiverSource Life bears the risk that protracted under-performance of the financial markets could result in GMIB being higher than what accumulated contractholder account balances would support. In May 2007, RiverSource Life ceased offering contracts with GMIB provisions.
RiverSource Life earns fee-based revenue in the form of mortality and expense risk fees, marketing support and administrative fees, fees charged for optional features elected by the contractholder and any surrender or withdrawal charges.
The general account assets of RiverSource Life support the contractual obligations under the guaranteed benefit provisions (see “General and Separate Account Assets — General 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. RiverSource Life’s exposure to risk from guaranteed benefits generally will increase when equity markets decline.
decline, as evidenced by the significant decline experienced in 2008 and early 2009. For a discussion of liabilities related to RiverSource Life’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 contractholder with cash value that increases by a fixed or indexed interest rate. FixedRiverSource Life periodically resets rates are periodically reset at theits discretion of RiverSource Life, subject to certain policy terms establishing minimum guaranteed interest crediting rates. RiverSource Life’s earnings from fixed annuities are based upon the spread between rates earned on assets purchased with fixed annuity deposits and the rates at which interest is credited to its fixed annuity contracts.
In 2007, RiverSource Life discontinued new sales of equity indexed annuities.
Revenues for RiverSource Life resetsLife’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 on a number of factors, including interest rate scenario models and risk/return measures. the fixed account balances.
The fixed annuity contracts inforcein force provide guaranteed minimum interest crediting rates ranging from 1.5% to 5.0% as of December 31, 2007.2009. New contracts issued provide guaranteed minimum interest rates in compliance with state laws providing for indexed guaranteed rates.
Insurance: Product Features and Risks
RiverSource Life issues both variable and fixed universal life insurance, traditional whole and term life insurance and disability income (“DI”) insurance. Universal life insurance is a form of permanent life insurance characterized by its flexible premiums, its flexible death benefit amountsbenefits and its 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. RiverSource Life 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 2007,2009, as measured by scheduled annual premiums, lump sum and excess premiums, consisted of 79%39% variable universal life, 16%53% fixed universal life and 5%8% traditional life. RiverSource Life issues only non-participating life insurance policies, which do not pay dividends to policyholders from the 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 Insurance
RiverSource Life’s best-selling life insurance products areLife is a leader in variable universal life insurance policies.insurance. Variable universal life insurance provides life insurance coverage along with investment returns linked to underlying investment accounts of the policyholder’s choice. OptionsInvestment options may include RiverSource Variable Portfolio FundsSeries Trust funds as well as variable portfolioproduct funds of other companies. Most variable universal life insurance products inforcein force offered a fixed account investment option with guaranteed minimum interest crediting rates ranging from 3.0% to 4.5% as of December 31, 2007.2009. RiverSource Life Insurance Company ranked fourthfifth in sales of variable universal life based on total premiums (according to the Tillinghast Towers-PerrinTillinghast-Towers Perrin’s ValueTM Survey, dated September 30, 2007,2009, the most recent report available). RiverSource Life’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 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’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 inforcein force provided guaranteed minimum interest crediting rates ranging from 3.0% to 5.0% as of December 31, 2007.2009.
RiverSource Life also offers non-participating traditional whole life insurance, which combines a death benefit with a cash value that generally increases gradually in amount over a period of years and does not pay a dividend.years. RiverSource Life has sold very little traditional whole life insurance in recent years.
Term Life Insurance
Term life insurance only provides a death benefit but it does not build up cash value 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 experience 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
DI insurance provides monthly benefits to individuals who are unable to earn income either at either their occupation at time of disability (“own occupation”) or at any suitable occupation (“any occupation”) for premium payments that are guaranteed not to
3
change. Depending upon occupational and medical underwriting criteria, applicants for DI insurance can choose “own occupation” and “any occupation” coverage for varying benefit periods. In 2007, RiverSource Life made available new RiverSource Income Protection and RiverSource Income Protection Plus products, which provide “own occupation” and “any occupation” coverage, respectively, with varying benefit periods up to age 67. In some states, applicants may also choose various benefit provisions 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. For the nine months ended September 30, 2007, RiverSource Life was ranked as the seventheighth 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 long 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 risk on a coinsurance basis to affiliatessubsidiaries of Genworth Financial, Inc. (“Genworth”). In addition, in May 2003, RiverSource Life began outsourcing claims administration on its existing block of LTC policies to Genworth.
Beginning inIn 2004, RiverSource Life Insurance Company and RiverSource Life of NY filedbegan to file for approval to implement rate increases on most of their existing blockblocks of nursing home-only indemnity LTC insurance policies. Implementation of these rate increases began in early 2005 and socontinues. So far, approvals have been received for some or all requested increases in 4750 states, with an average approved cumulative rate increase of 29.4%62.2% of premium on all such policies where an increase was requested.
Beginning inIn 2007, RiverSource Life Insurance Company and RiverSource Life of NY filedbegan to file for approval to implement rate increases on most of their existing blockblocks of comprehensive reimbursement LTC insurance policies. Implementation of these rate increases began in late 2007 and socontinues. So far, approvals have been received for some or all requested increases in 4146 states, with an average approved cumulative rate increase of 12.4%15.4% of premium on all such policies where an increase was requested.
AdditionalRiverSource Life may seek additional rate increases may be sought with respect to these and other existing blocks of LTC insurance policies, in each case subject to regulatory approval.
General and Separate Account Assets
Depending on the life insurance and annuity product purchased, the assets of RiverSource Life’s policyholders and contractholders may be placed in the general account of RiverSource Life (the “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 “separate accounts”).
General 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’ 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 contractholders’ accounts subject to each contract’s guaranteed minimum interest crediting rate. As of December 31, 2007,2009, this rate varied among fixed accounts and was as low as 1.5% and as high as 7.4%8.4%. To the extent the yield on RiverSource Life’s invested general account asset portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’s profitability would be negatively affected.
4
The interest rates credited to 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 RiverSource Life’s strategy includes the use of derivatives, such as interest rate swaptions, for risk management purposes. These derivatives help protect margins by increasing investment returns if there is a sudden and severe rise in interest rates, thereby lessening the impact of an increase in rates credited to contractholders’ fixed accounts. Conversely, in a low interest rate environment, margins may be negatively impacted as the interest rates available on RiverSource Life’s invested assets approach guaranteed minimum interest rates on the insurance or annuity contracts inforce.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.
Separate Accounts
Variable annuity and insurance products offer separate account investment options. In addition, many of these products offer fixed account options. Under the separate account option, contractholders and policyholders bear the investment risk. The separate accounts are registered as unit investment trusts under the Investment Company Act of 1940. State insurance law prescribes that separate accounts constitute a distinct 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 each separate account, RiverSource Life credits or charges income, capital gains and losses only to that subaccount.
Generally, the separate accounts consist of a number of subaccounts, each of which invests in shares of a particular fund. Contractholders and policyholders can allocate their payments among these separate 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 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. RiverSource Life also receives revenues from assets allocated to subaccounts investing in RiverSourceVariable Portfolio Funds.Series Trust funds. These revenues include shareholder services payments as well as payments for marketing, administrative services, training and other services provided by RiverSource Life.
In addition to the revenues described above, RiverSource Life receives shareholder servicing payments from other companies’ funds included as investment options under its variable annuity and life insurance products. It also receives marketing and administrative support payments from the affiliates of other companies’ funds which are included as investment options in its variable annuity and life insurance products. These fees are generally based on the level of separate account assets held in a particular fund and accordingly will vary based on market conditions.
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’s annuity and/or insurance products include:
· financial strength ratings from agencies such as A.M. Best;
· the breadth, quality, design and pricing of products and services offered;
· guaranteed benefit features;
· the quality of underwriting;
· the effectiveness of advertising and promotion campaigns;
· reputation and recognition in the marketplace;
· distribution capabilities and compensation; and
· the quality of customer service.
5
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”) 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 investment activity)activities) are often subject to pre-notification and continuing evaluation by the Domiciliary Regulators. Virtually all states require participation in insurance guaranty associations which assess fees to insurance companies in order to fund claims of policyholders and contractholders of insolvent insurance companies.
Because RiverSource Life issues variable annuity and life insurance products required to be registered under federal and state securities laws, many aspects of its business are subject to extensive regulation and examination by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority, commonly referred to as FINRA, and other federal and state regulatory bodies.
Insurance companies have recently been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced investigations regarding sales and marketing practices (including sales to older consumers), compensation arrangements and anticompetitive activities, and market timing and late trading in connection with insurance, annuity and mutual fund products. RiverSource Life has been contacted by regulatory agencies for information relating to some of these investigations and is cooperating with those inquiries.
At the federal level, there is periodic interest in enacting new regulations relating to various aspects of the insurance industry, including taxation of annuities and life insurance policies, accounting procedures, the use of travel in underwriting, and the treatment of persons differently because of gender with respect to terms, conditions, rates or benefits of an insurance policy. Adoption of any new federal regulation in any of these or other areas could materially 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 unprecedented amount of government intervention in financial markets, including direct investment in financial institutions. Governments and regulators in the U.S. and abroad are considering or have implemented new and more expansive laws and regulations which may directly impact RiverSource Life’s businesses. Additional discussion of 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 RiverSource Life’s ratings could have a material adverse affect on its ability to market its products and could lead to increased surrenders of its products. Rating agencies continually evaluate the financial
soundness and claims-paying ability of insurance companies basedcontinually, and base their ratings on a number of different factors.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’s balance sheet strength, operating performance and business profile. Balance sheet strength reflects a company’s ability to meet its current and ongoing obligations to its contractholders and policyholders and includes analysis of a company’s capital adequacy. The evaluation of operating performance centers on the stability and sustainability of a company’s source of earnings. The business profile component of the rating considers a company’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 separate accounts.
RiverSource Life Insurance CompanyCompany’s claims-paying ability is currently rated “A+” (Superior) by A.M. Best Company, Inc. and its claims-paying ability/financial strength was rated “Aa3” (Excellent) by Moody’s Investors Service, Inc. (Moody’s), “AA-” (Very Strong) by Fitch Ratings Ltd., and “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
RiverSource Life reinsures a portion of the insurance risks associated with its life, DI and LTC insurance products through reinsurance agreements with unaffiliated reinsurance companies. Reinsurance is usedRiverSource Life uses reinsurance in order to limit losses, reduce exposure to large risks and provide additional capacity for future growth. To manage exposure to losses from reinsurer insolvencies, RiverSource Life
6
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’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurer actually paying.reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level beginning induring 2001 (2002 for RiverSource Life of NY) for term life insurance and 2002 (2003 for RiverSource Life of NY) for individual fixed and variable and universal life insurance. Policies issued prior to these dates are not subject to these same reinsurance levels. Generally, the maximum amount of life insurance risk retained by RiverSource Life is $1.5 million (increased from $750,000 during 2008) on any policy insuring a single life and $1.5 million on any flexible premium survivorship variable life policy. As a result of the increase in single life retention during 2008, RiverSource Life is in the process of recapturing some older blocks of business representing less than 1% of current reinsured life insurance risk. 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 on a coinsurance basis the remaining 50% of the risk to affiliatesGenworth. As of December 31, 2009, RiverSource Life’s credit exposure to Genworth Financial, Inc. Risk on variable lifeunder this reinsurance arrangement was approximately $1.3 billion under U.S. generally accepted accounting principles (“GAAP”) and universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.$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 in most states and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. RiverSource Life retains all risk for new claims on DI contracts sold on other policy forms. RiverSource Life also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.
In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies. 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
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 action level,” defined as total adjusted capital level between 100% and 75% of the RBC requirement, an insurer must submit a plan for corrective action with its primary state regulator. The “regulatory 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 a company’s total adjusted capital falls between 50% and 35% of its RBC requirement, referred to as “authorized control level,” the insurer’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, 2007,2009, RiverSource Life Insurance Company’s company action level RBC was $442$803 million, and the corresponding total adjusted capital was $3.0$3.5 billion, which represents 683%430% of company 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 level required by the Minnesota Department of Commerce, its primary regulator.RBC requirement.
ITEM 1A. |
If any of the followingRiverSource 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 RiverSource Life’s business, financial condition or results of operations. Based on currentthe information currently known, RiverSource Life believes that the following information identifies the most significant riskmaterial factors affecting RiverSource Life 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 uncertainties which are not presently known to RiverSource Life or which are currently believed to be immaterial may also adversely affect RiverSource Life’s business.
Risks Relating to RiverSource Life’s Business
RiverSource Life’s financial condition and results of operations may be adversely affected by market fluctuations, interest rate fluctuations and by economic and other factors.
RiverSource Life’s financial condition and results of operations may be materially affected by market fluctuations, interest rate fluctuations and economic and other factors. Many factors of a global or localized nature include: political, economic and market conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates, 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 RiverSource Life’s businesses. Moreover, fluctuations in economic and market activity could impact the way then-existing customers allocate their available resources, which could affect RiverSource Life’s persistency, surrender and product cash value loan experience and could negatively impact its business. RiverSource Life’s insurance and annuity products are sensitive to interest rate fluctuations, and its
7
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 products to 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,” 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 expected flowoutflow of cash out offrom the business. Also, increases in market interest rates may result in extension of the maturity of some of RiverSource Life’s investment assets. These earlier outflows and asset maturity extensions may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on RiverSource Life’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”), which would increase its expenses and reduce its net earnings.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,spread may be reduced or could become negative, primarily because some of these products have guaranteed minimum crediting rates. Due to the long termlong-term nature of the liabilities associated with RiverSource Life’s fixed annuities and guaranteed benefits on variable annuities, sustained declines in long termlong-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’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, which increases the risk that RiverSource Life may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments.
Significant downturns and volatility in equity markets have had and could continue to have an adverse effect on RiverSource Life’s financial condition and results of operations. Market downturns and volatility may cause, and have caused, potential new purchasers to refrain from purchasing RiverSource Life’s variable annuities and variable universal life insurance products that have returns linked to the performance of the equity markets. Downturns may also cause contractholders in annuity products and policyholders in insurance products to withdraw cash values from those products.
Additionally, downturns and volatility in equity markets can have, and have had, an adverse effect on RiverSource Life’s asset-based revenues because the value of equity-based separate account assets will be reduced.
The 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 contract. Changes in the fair value of these GMAB and GMWB obligations are recorded through earnings with fair value calculated by estimating the present value of future benefits less applicable fees charged for the rider 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 and GMWB liabilities. Although RiverSource Life typically hedges against such changes, a significant change in interest rateseither equity price levels or equity market volatility may result in somea net adverse impact to current period financial statements.
For additional information regarding the sensitivity of the fixed income securities in Further, RiverSource Life’s investment portfolio tocost of hedging these guarantees has increased significantly in recent periods as a result of low interest rate fluctuations, see “Item 7 — Management’s Narrative Analysis — Risk Management.”
Many factors of a global or localized nature include: political, economicrates and market conditions; technological changes and events; inflation; investor sentiment and confidencecontinuing volatility in the financial markets; terrorism events and armed conflicts; and natural disasters such as weather catastrophes and widespread health emergencies.equity markets. In addition, during periods of unfavorable market or economic conditions,continued heightened volatility creates greater uncertainty for the level of consumer investing and insuring activity may also decrease, which may negatively impact the resultsaccuracy of RiverSource Life’s businesses. Moreover, fluctuationsfuture hedging effectiveness.
A significant market decline in economicequity price levels could also result in guaranteed minimum benefits under GMDB and market activity could impact the way then-existing customers allocate their available resources,GMIB provisions being higher than current account values, which could affecthave an adverse effect on RiverSource Life’s persistency, surrenderfinancial condition and product cash value loan experience and could negatively impact its business.results of operations. RiverSource 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.
PoorThe impairment of other financial institutions could adversely affect RiverSource Life.
RiverSource Life has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment performancebanks, 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 a decline 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 loan or derivative exposure due to it. RiverSource Life also has exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions, (including with respect to derivatives hedging its exposure on variable annuity contracts with guaranteed benefits), reinsurance and underwriting arrangements and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely impact RiverSource Life’s business and results of operations. Downgrades in the credit or financial strength ratings assigned to the counterparties with whom RiverSource Life transacts could create the perception that its financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally, RiverSource Life could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions.
The failure of other insurers could require RiverSource Life to pay higher assessments to state insurance guaranty funds.
RiverSource Life Insurance Company and RiverSource Life of NY are required by law to be a member of the guaranty fund association in every state where 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 way RiverSource Life conducts its business and manages its capital, and may require RiverSource Life to satisfy increased capital requirements, which in turn could materially impact its financial condition, results of operations and liquidity.
Defaults in RiverSource Life’s variable productsfixed maturity securities portfolio could adversely affect its earnings.
Issuers of the fixed maturity securities that RiverSource Life owns may default on principal and interest payments. As of December 31, 2009, 5% of RiverSource Life’s invested assets had ratings below investment-grade. Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those with investment-grade ratings, that default on their debt obligations. Default-related declines in the value of RiverSource Life’s fixed maturity securities portfolio could cause its net earnings to decline and could weaken its capital position.
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 believes that investmentuses 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 is an important factorrisk 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 growthcost of derivative instruments, have increased significantly in connection with RiverSource Life’s strategies to hedge guaranteed benefit obligations under its variable annuity and variable life
insurance business. Poor investment performance could impair revenues and earnings, as well asproducts. If RiverSource Life’s prospects for growth, because:
·counterparties fail to honor their obligations under the derivative instruments in a timely manner, RiverSource Life’s ability to attract funds from existing and new clients might diminish; and
·existing clients might withdraw assets fromhedges of the related risk will be ineffective. That failure could have a material adverse effect on RiverSource Life’s variable products in favorfinancial condition and results of better performing productsoperations. This risk of other companies, which would result in lower revenues.failure of RiverSource Life’s hedge transactions may be increased by capital market volatility.
A downgrade or a potential downgrade inThe 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 strength ratingsposition 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 a loss of business andchanges to investment valuations that may materially adversely affectimpact its financial condition andor results of operations.
Financial strength ratings,Fixed maturity, equity, trading securities and short-term investments which various ratings organizations publish as a measureare reported at fair value on the Consolidated Balance Sheets, represent the majority of an insurance company’s ability to meet contractholder and policyholder obligations, are important to maintaining public confidence in RiverSource Life’s products,total cash and invested assets. The determination of fair values by management in the abilityabsence 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 its productsinformation and its competitive position. Any downgradejudgments 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 strength ratings,condition or results of operations.
Some of RiverSource Life’s investments are relatively illiquid.
RiverSource Life invests a portion of its general 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 represented 15% of the announced potentialcarrying value of RiverSource Life’s investment portfolio as of December 31, 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 a downgrade,an amount less than it would otherwise have been able to realize, or both, which could have a significantan adverse effect on itsRiverSource Life’s 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.operations.
Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively affectimpact 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.
Currently,Historically, Ameriprise Financial’s branded advisor network distributes(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. IfThe 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 further opened or expanded its distribution ofto annuity and insurance products of other companies, RiverSource Life could experience lower sales of its products, higher surrenders or other developments, which could have a material adverse effect on RiverSource Life’sadversely affect its financial condition and results of operations.
Downturns and volatilityPoor investment performance in equity marketsRiverSource Life’s variable products could adversely affect RiverSource Life’s business and profitability.
Significant downturns and volatility in equity markets could have an adverse effect on RiverSource Life’sits financial condition and results of operations. Market downturns and volatility may cause potential new purchasers to refrain from purchasing RiverSource Life’s variable annuities and variable universal life insurance products that have returns linked to the performance of the equity markets. Downturns may also cause contractholders in annuity products and policyholders in insurance products to withdraw cash values from those products.
Additionally, downturns in equity markets can have an adverse effect on RiverSource Life’s asset-based revenues because the value of equity-based separate account assets will be reduced.
The 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 contract. Changes in the fair value of these GMAB and GMWB obligations are recorded through earnings with fair value calculated by estimating the present value of future benefits less applicable fees charged for the rider using actuarial models, which simulate various economic scenarios. Changes in equity prices and/or equity market volatility may impact the fair value of the GMAB
9
and 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 some net adverse impact to current period financial statements.
A significant market decline in equity price levels could also result in guaranteed minimum benefits under GMDB and GMIB provisions being higher than current account values, which could have an adverse effect on RiverSource Life’s financial condition and results of operations. RiverSource Life does not currently hedge or reinsure GMDB or GMIB provisions.
For additional information regarding the sensitivity of RiverSource Life’s business results to equity market fluctuations, see “Item 7 — Management’s Narrative Analysis — Risk Management.”
Defaults in RiverSource Life’s fixed maturity securities portfolio would adversely affect its earnings.
Issuers of the fixed maturity securities that RiverSource Life owns may default on principal and interest payments. At both December 31, 2007 and 2006, 6% of RiverSource Life’s investment portfolio had ratings below investment-grade. Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those with investment-grade ratings, that default on their debt obligations. Default-related declines in the value of RiverSource Life’s fixed maturity securities portfolio could cause its net earnings to decline and could weaken its capital position.
Some of RiverSource Life’s investments are relatively illiquid.
RiverSource Life invests a portionbelieves that investment performance is an important factor in the growth of its general account assets in certain privately placed fixed income securities, mortgage loans, policy loans,variable annuity and collateralized debt obligations, among others, all of which are relatively illiquid. These asset classes represented 19.0% of the carrying value ofvariable life insurance business. Poor investment performance could impair revenues and earnings, as well as RiverSource Life’s investment portfolio as of December 31, 2007. 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 themprospects for an amount less than it would otherwise have been able to realize, or both. 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 investments could have an adverse effect on growth, because:
·RiverSource Life’s financial conditionability to attract funds from existing and resultsnew clients might diminish; and
·existing clients might withdraw assets from RiverSource Life’s variable products in favor of operations.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’s affiliated selling firm will be successful in its efforts to recruit and retain new advisors to its network. If RiverSource Life’s affiliated selling firm is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSource Life’s annuity and insurance products and RiverSource Life’s financial condition and results of operations could be materially adversely affected.
RiverSource Life and its affiliates face intense competition in attracting and retaining key talent.
RiverSource Life is dependent on Ameriprise Financial’s network of branded advisors for a significant portion of the sales of its annuity products and substantially all of the sales of its insurance products. In addition, RiverSource Life’s continued success depends to a substantial degree on its, and its affiliates’, ability to attract and retain qualified personnel to conduct its business.personnel. The market for qualified talent is extremely competitive 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 adversely affected.
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. See “Item 1 — 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 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. See Note 2 and Note 13 to the Consolidated Financial Statements.
10
In addition, RiverSource Life uses derivative instruments to hedge various business risks. The amount and breadth of exposure to derivative counterparties 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 in a timely manner their obligations under the derivative instruments, RiverSource Life’s hedges of the related risk will be ineffective. That failure could have a material adverse effect on RiverSource Life’s financial condition and results of operations. This risk of failure of RiverSource Life’s hedge transactions may be increased by capital market volatility, such as the volatility that has been experienced since the second half of 2007.impacted.
RiverSource Life’s business is heavily regulated, and changes in legislation or regulation may reduce its profitability and limit its 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. FinancialInsurance regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation. Market conditions and recent events could result in increases or changes in current regulations and regulatory structures including higher licensing fees and assessments. Significant discussion and activity by regulators concernconcerns the sale and suitability of financial products and services to persons planning for retirement, as well as to older investors. In addition, RiverSource Life is subject to heightened requirements and associated costs and risks relating to privacy and the protection of customer data. RiverSource Life’s information systems, moreover, may be subject to increased efforts of “hackers” by reason of the customer data it possesses. These requirements, costs and risks, as well as possible legislative or regulatory changes, may constrain RiverSource Life’s ability to market its products and services to its target demographic and potential customers, and could negatively affectimpact RiverSource Life’s profitability and make it more difficult for RiverSource Life to pursue its growth strategy.
RiverSource Life is subject to state regulation soand 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. Moreover, RiverSource Life is subjectThe NAIC has adopted a change to capital requirementsrequire principles-based reserves for variable annuity contracts with guaranteed death or living benefits. These requirements may have an impact on future statutory reserves and regulatory capital in the event equity market values fall in the future. Moreover, there is active discussionannuities at the National Associationend of Insurance Commissioners (“NAIC”) of2009, and continues to discuss moving to a principles-based reserving system. This could changesystem 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 statutory reserve requirements significantlyreserves and itrisk-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 at this time.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 its 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 RiverSource Life’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 RiverSource Life’s financial condition and results of operations. For a further discussion of the regulatory framework in which RiverSource 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’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 competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively affectimpact RiverSource Life’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.
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’s employees and agents and its 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’s businesses and could include:
· attempting to bind RiverSource Life to transactions that exceed authorized limits;
· hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;
· improperly using, disclosing, or otherwise compromising confidential information;
· recommending transactions that are not suitable;
· engaging in fraudulent or otherwise improper activity;
· engaging in unauthorized or excessive trading to the detriment of customers; or
· otherwise not complying with laws, regulations or RiverSource Life’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.
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 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 Life monitors its reserve 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 and incur 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 Note 2 to the Consolidated Financial Statements.Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
RiverSource Life may face losses if morbidityMorbidity rates or mortality rates that differ significantly from itsRiverSource Life’s pricing expectations.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 RiverSource Life’s actual experience compares with its pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than its pricing assumptions, RiverSource Life could be required to make greater payments under DI and LTC insurance 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 extent 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 it hadhas projected.
The risk that RiverSource Life’s claims experience may differ significantly from its pricing assumptions is particularly significant for its LTC insurance products, notwithstanding RiverSource Life’s ability to implement future price increases.increases subject to regulatory approvals. As with life insurance, LTC insurance policies provide for long-duration coverage and, therefore, its actual claims experience will emerge over many years. However, as a relatively new product in the market, LTC insurance does not have the extensive claims experience history of life insurance, and, as a result, RiverSource Life’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 by limiting its present LTC insurance offerings to policies underwritten fully by an unaffiliated third party insurers, and RiverSource Life has also implemented rate increases on certain inforcein force policies as described in Item 1 of this Annual
Report on Form 10-K — Business“Business — Insurance: Product Features and Risks — Long Term Care Insurance. There can be
12
no assurance that” RiverSource Life will notmay be required to implement additional rate increases in the future and may or that RiverSource Life willmay not receive regulatory approval tofor 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’s insurance and deferred annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions including those related to persistency, which is the probability that a policy or contract will remain inforcein 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’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 inforcein 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 and poorer loss experience than RiverSource Life had assumed, which led it to increase premium rates on certain of these policies.
Because RiverSource Life’s assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and policy claims and other policyholders’ funds may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of its products 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 RiverSource Life’s products do not permit RiverSource Life to increase premiums or limit those increases during the life of the policy or 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 RiverSource Life’s products.
RiverSource Life may be required to accelerate the amortization of DAC, which would increase its expenses and reduce profitability.
DAC representrepresents the costscost 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, DAC areis amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC areis generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.
RiverSource Life’s projections underlying the amortization of DAC requirerequires 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 both December 31, 2007 and 2006, RiverSource Life had $4.4 billion of DAC, and it amortized $470 million and $356 million of DAC as a current period expense for the years ended December 31, 2007 and 2006, respectively. For more information regarding DAC, see “ItemItem 7 in this Annual Report on Form 10-K — Management’s“Management’s Narrative Analysis — Critical Accounting Policies — Deferred Acquisition Costs and Deferred Sales Inducement Costs” and “— Recent Accounting Pronouncements.”
Changes in U.S. federal income or estate tax law could make some of RiverSource Life’s products less attractiveLife may not be able to clients.protect its intellectual property and may be subject to infringement claims.
Many of the products RiverSource Life issuesrelies 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 on whichmisappropriate its business is based (including both insurance productsintellectual property. RiverSource Life may have to litigate to enforce and non-insurance products) enjoy favorable treatment under current U.S. federal incomeprotect its copyrights, trademarks, patents, trade secrets and know-how or estate tax law. Changes in U.S. federal income or estate tax law could make some of its products less attractive to clients.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 third parties, all of which could have a material adverse effect on RiverSource Life’s business, financial condition and results 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 consumerclient 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 publicized. RiverSource Life cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in its systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks used in connection with its products and services.
Protection from system interruptions 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 toward developingto develop its risk management policies and procedures and will continue to do so in the future.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 methods are based may not be valid. As a result, these methods may not accurately predict future exposures, which could be significantly greater than what its models indicate. This could cause RiverSource Life to incur investment losses or cause its hedging and other risk management strategies to be ineffective. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters 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 — whichinformation. These risks are difficult to detect in advance and deter, and could harm itsRiverSource 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 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. 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 less attractive to 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 is subject to tax contingencies that could adversely affect the 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 different 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.
14
In addition, changes to the Internal Revenue Code, administrative rulings or court decisions could increase RiverSource Life’s provision for income taxes. For example, on August 16, 2007, the Internal Revenue Service (“IRS”) issued a revenue ruling which purports, among other things, to modify the calculation of the deduction for dividends received by life insurance companies. Subsequently on September 25, 2007, the IRS issued another revenue ruling that suspended the August 16 ruling and announced a new regulation project on the issue. The income tax benefit of the separate account dividends received deduction for current year dividends was approximately $46 million for the fiscal year ended December 31, 2007.
UNRESOLVED STAFF COMMENTS None. PROPERTIES RiverSource Life Insurance Company occupies office space in Minneapolis, Minnesota, which LEGAL PROCEEDINGS 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 wouldITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESis leasedit either owns or owned 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 occupied suit its needs.are suitable and adequate.ITEM 3. LEGAL PROCEEDINGSThe SecuritiesInsurance companies have recently been the subject of increasing regulatory, legislative and Exchange Commission, the Financial Industry Regulatory Authority, commonly referredjudicial scrutiny. Numerous state and federal regulatory agencies have commenced investigations regarding sales and marketing practices (including sales to as FINRA,older consumers), compensation arrangements and several state authorities have brought proceedings challenging severalanticompetitive activities, and market timing and late trading in connection with insurance, annuity and mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements.products. RiverSource Life has received requestsbeen contacted by regulatory agencies for information concerningrelating to some of these practicesinvestigations and is cooperating fully with thesethose inquiries.
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Item omitted pursuant to General Instructions I(2) (c) of Form 10-K. All of RiverSource Life Insurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc. There is no established public trading market for RiverSource Life Insurance Company’s common stock. For discussion regarding RiverSource Life Insurance Company’s payment of dividends and restrictions on dividends, see SELECTED FINANCIAL DATA Item omitted pursuant to General Instructions I(2) (a) of Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS“ItemItem 7 of this Annual Report on Form 10-K — Management’s“Management’s Narrative Analysis — Liquidity and Capital Resources — Capital Activity” and Note 11 of13 to the Notes to Consolidated Financial Statements.Statements included in Part II, Item 8 of this Annual Report on Form 10-K.ITEM 6. SELECTED FINANCIAL DATA15
MANAGEMENT’S NARRATIVE ANALYSIS |
Overview
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company. RTA is domiciled in Delaware and is a 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”.
The accompanying financial information has been presented as if RTA had been a wholly owned subsidiary prior to January 1, 2006 and is accounted for as a pooling of interests for entities under common control.
The following discussion and management’s narrative analysis of the financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements,” “Item 1A - Risk Factors” and the Consolidated Financial Statements and Notes. Management’s narrative analysis is presented pursuant to General Instructions I(2) (a) of Form 10-K in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain reclassifications of prior year amounts have been made to conform to the current presentation.
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders.
Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express was completed in 2007.
Critical 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’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 RiverSource Life’s accounting policies.
Valuation of Investments
The most significant component of RiverSource Life’s investments is now complete.its Available-for-Sale securities, which RiverSource Life carries at fair value within its Consolidated Balance Sheets. The fair value of RiverSource Life’s Available-for-Sale securities at December 31, 2009 was 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 as 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. RiverSource Life recognizes gains and losses in results of operations upon disposition of the securities.
Effective January 1, 2009, RiverSource Life early adopted an accounting standard that significantly 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 and RiverSource 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 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 structure, 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 exceeds the present value of the projected 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 of the expected cash flows.
Deferred Acquisition Costs and Deferred Sales Inducement Costs
For RiverSource Life’s annuity and life, disability income (“DI”) and long 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 RiverSource Life’s annuity products are typically 10 to 25 years, while projection periods for RiverSource Life’s life, DI and LTC insurance products are often 50 years or longer. Management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made. For 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. 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 the Consolidated Statements of 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 factors used to project interest margins, while assumptions about equity and bond market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance businesses during the DAC amortization period.
The client asset value growth rates are the rates at which variable annuity and variable universal life insurance contract values invested in separate accounts are assumed to appreciate in the future. The rates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life typically uses a five-year mean reversion process as a guideline in setting near-
term equity asset growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. In 2009, management continued to follow the mean reversion process, decreasing near-term equity asset growth rates to reflect the positive market. The long-term client asset value growth rates are based on assumed gross annual total returns of 9% for equities and 6.5% for fixed income securities.
A decrease of 100 basis points in various rate assumptions is likely to result 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 |
| |
|
| (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 would result in an increase to pretax income of approximately 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’s DAC and 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.
Liabilities for Future Policy Benefits and Policy Claims and Other Policyholders’ Funds
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest 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 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”) 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 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 annuity guarantees 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.
The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value. See Note 11 to the Consolidated Financial Statements for information regarding the fair value measurement of embedded derivatives. The liability for the life contingent benefits associated with GMWB provisions is determined in the same way as the 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.
Derivative Instruments and Hedging Activities
RiverSource Life uses derivative instruments to manage its exposure to various market risks. All derivatives are recorded at fair value. The fair value of RiverSource Life’s derivative instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available.
The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any. RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (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, 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 certain annuity liabilities.
For derivative instruments 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. Any ineffective portion of the gain or loss is reported currently in earnings. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) 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.
For further details on the types of derivatives RiverSource Life uses and how it accounts for them, see Note 2 and Note 15 to the Consolidated Financial Statements.
Income 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 taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items. In the event that the ultimate tax treatment of items differs from RiverSource Life’s estimates, it may be required to significantly change the provision for income taxes recorded in its Consolidated Financial Statements.
In connection with the provision for income taxes, the Consolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among 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 will not be able to file a consolidated U.S. federal income tax return with the other members of the Ameriprise Financial affiliated group until 2010 which will result in net operating and capital losses, credits and other tax attributes generated by one group not being available to offset income earned or taxes owed by the other group during the period of non-consolidation. This lack of consolidation could affect RiverSource Life’s ability to fully realize certain deferred tax assets, including the capital losses.
RiverSource Life is required to establish a valuation allowance for 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 and avoid the establishment of a valuation allowance with respect to such assets. In the opinion of management, it is currently more likely than not that RiverSource Life will realize the benefit of its deferred tax assets, including its capital loss deferred tax assets; therefore, no such valuation allowance has been established.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on RiverSource Life’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.
Results of Operations for the Year Ended December 31, 20072009 compared to the Year Ended December 31, 20062008
The following table presents RiverSource Life’s consolidated results of operations:
|
| Year Ended |
|
|
|
|
| |||||
|
| 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 $421$740 million for the year ended December 31, 20072009 compared to $486$71 million for the year ended December 31, 2006, a decrease2008, an increase of $65$669 million. Pretax income decreased $158 millionincreased $1.1 billion to $520$985 million for the year ended December 31, 20072009 from $678a pretax loss of $118 million for the year ended December 31, 2006.2008. The decrease isincrease 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 dueprimarily 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 market volatilitythe 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 guaranteed living benefit reserves, higher deferred acquisition costs (“DAC”)riders, net of hedges and DAC and DSIC amortization were as follows:
Pretax Benefit (Charge) |
| Premiums |
| Policy and |
| Benefits, |
| Amortization |
| Other |
| 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 higher other insuranceexpenses for the year ended December 31, 2008 attributable to the review of valuation assumptions, the valuation system conversion and operating expenses offset partially by income from hedges forthe impact of markets on DAC and DSIC amortization, GMDB and GMIB riders, and variable annuity guaranteed living benefitsbenefit riders, net of hedges and policy and contract charges.DAC amortization were as follows:
Pretax Benefit (Charge) |
| Premiums |
| Policy and |
| Benefits, |
| Amortization |
| Other |
| 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, 20072009 were $3.6$3.4 billion, an increase of $98$569 million or 20% from the year ended December 31, 2006 of $3.5 billion.$2.9 billion in 2008. The increase is primarily due to net realized investment gains in total revenues was primarily driven by an increase2009 compared to net realized investment losses in cost of insurance charges on variable universal life products as a result of volume increases2008 and an increase in rider charges and mortality and expense charges reflecting higher average separate account assets.
Total premiums decreased $48 million or 9.0% to $485 million for the year ended December 31, 2007. The decrease in premiums was primarily due to a decline in premiums related to immediate annuities with life contingencies attributable to lower volumes. There was alsonet investment income offset partially by a decrease in premiums for disability income (“DI”)policy and long term care (“LTC”) insurance of $10 million due to a $15 million favorable adjustment as a result of a review of RiverSource Life’s LTC reinsurance arrangements during the third quarter of 2006.contract charges.
Net investment income decreased $102increased $274 million or 6.2%22% to $1.6$1.5 billion for the year ended December 31, 2007 reflecting declining average2009 compared to $1.3 billion in the prior year. The increase is due to higher invested asset levels due to fixed account balances, partially offset by income related to derivatives hedging guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions.annuity net inflows as well as higher yields on longer term investments.
Policy and contract charges increased $172decreased $196 million or 16.5%14% to $1.2 billion for the year ended December 31, 2007.2009 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 increasedecrease also reflects higher average values ofdecreased separate account assets due to positive net flows and market appreciation and an increase in the cost of insurance charges on variable universal life (“VUL”) productsfee revenue as a result of volume increases and charges for variable annuity guaranteed living benefit riders.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 increased $66decreased $22 million or 34.9%9% to $255$233 million for the year ended December 31, 20072009 compared to $255 million in the prior year reflecting higherlower marketing support and administrative fees due to an increase inlower average underlying assetsseparate account asset values.
Net realized investment gains were $61$59 million for the year ended December 31, 20072009 compared to $51net realized investment losses of $442 million for the year ended December 31, 2006.2008. 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 gainslosses for the year ended December 31, 2007 was a decrease2008 is $440 million of $21other-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, 2007, $642008, $13 million of gross realized investment gains were partially offset by $20$6 million of gross realized losses as well as $4 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. 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.Available-for-Sale securities.
Benefits and ExpensesIncome Tax Accounting
Total benefitsIncome 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 taking into account the recognition and expensesmeasurement for uncertain tax positions. Inherent in the year ended December 31, 2007 were $3.1 billion, an increaseprovision for income taxes are estimates and judgments regarding the tax treatment of $256 millioncertain items. In the event that the ultimate tax treatment of items differs from RiverSource Life’s estimates, it may be required to significantly change the year ended December 31, 2006 total of $2.8 billion.provision for income taxes recorded in its Consolidated Financial Statements.
In 2007, RiverSource Life recorded a net expense from unlocking of $30 million, primarily comprised of $16 million DAC amortization expense and a $14 million increase in benefits, claims, losses and settlement expenses. In 2006, RiverSource Life recorded a net benefit from DAC unlocking of $25 million, primarily comprised of a $38 million benefit in DAC amortization expense, a $12 million increase in benefits, claims, losses and settlement expenses and a $1 million decrease in policy and contract charges. The DAC unlocking net expense of $30 million in 2007 consisted of a $35 million increase in expense from updating product persistency assumptions, a $13 million decrease in expense from updating assumptionsconnection with the provision for income taxes, the Consolidated Financial Statements reflect certain amounts related to separate account fee levelsdeferred tax assets and net variable annuity rider chargesliabilities, which result from temporary differences between the assets and an $8 million increaseliabilities 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 expense from updating all other assumptions. The DAC unlocking net benefit in 2006 primarily reflected a $25 million benefit from modeling increased product persistency and a $15 million benefit from modeling improvements in mortality, offset by negative impacts of $8 million from modeling lower variable product fund fee revenue and $8 million from model changes related to variable life second to die insurance.which the capital losses are recognized for tax purposes.
B25enefits, claims, losses and settlement expenses increased $150 million or 21.3% to $855 million for the year ended December 31, 2007. The cost of providing for guaranteed benefits associated with the variable annuity living benefits increased $210 million, primarily due to changes in financial market factors. The increase in variable annuity living benefit costs was partially offset by a $6 million related change in deferred sales inducement costs (“DSIC”), $23 million in lower VUL/universal life (“UL”) claims and a $41 million decrease in benefit provisions for life contingent annuities. The impact of the annual detailed review of DAC valuation assumptions (“DAC unlocking”) was an increase of $14 million in 2007, compared to $12 million in 2006.
Interest credited to fixed accounts decreased by $118 million or 12.2% to $850 million for the year ended December 31, 2007 primarily due to lower average accumulation values of annuities.
Amortization of DAC increased $114 million to $470 million for the year ended December 31, 2007 from $356 million for the year ended December 31, 2006. DAC unlocking resulted in an increase of $16 million in DAC amortization expense in 2007 compared to a decrease of $38 million in 2006. In addition, underlying increases in amortization of DAC in 2007 were due to growth in business volumes and the recurring impact of adopting Statement of Position (“SOP”) 05-1 “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” partially offset by a decrease in the amortization of DAC driven by the mark-to-market impact of variable annuity guaranteed living benefit riders.
For the years ended December 31, 2007 and 2006, RiverSource Life incurred $97 million and $131 million, respectively, in separation costs. Separation costs incurred during 2007 and 2006 primarily related to technology costs. Separation costs incurred in 2006 also included costs related to marketing and rebranding. All separation costs have been incurred as of December 31, 2007.
Other insurance and operating expenses increased $144 million or 22.6% to $781 million for the year ended December 31, 2007 primarily reflecting increased sales and marketing expenses and corporate overhead expenses.
17
Income Taxes
RiverSource Life’s effectiveLife will not be able to file a consolidated U.S. federal income tax rate was 19.0% and 28.3% forreturn with the years ended December 31, 2007 and 2006, respectively. The decrease in the effective tax rate primarily reflects lower pretax income as well as higher levels of tax advantaged items, including dividends received deduction and foreign tax credits, relative to pretax income for the year ended December 31, 2007 as well as a $7 million tax benefit related to the finalization of the prior year tax return.
On September 25, 2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 in which it announced that it intends to 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 and has added the project to the 2007-2008 Priority Guidance Plan. 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. For the twelve months ended December 31, 2007, RiverSource Life recorded a benefit of approximately $46 million related to the current year’s separate account DRD.
Critical Accounting Policies
The accounting and reporting policies that RiverSource Life uses affect its ConsolidatedAmeriprise Financial Statements. Certain of RiverSource Life’s accounting and reporting policies are critical to an understanding of RiverSource Life’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 RiverSource Life’s accounting policies.
Valuation of Investments
The most significant component of RiverSource Life’s investments is its Available-for-Sale securities,affiliated group until 2010 which RiverSource Life generally carries at fair value within its Consolidated Balance Sheets. The fair value ofRiverSource Life’s Available-for-Sale securities at December 31, 2007 was 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 as 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, 2007, RiverSource Life had net unrealized pretax losses on Available-for-Sale securities of $229 million. RiverSource Life recognizes gains and losses in results of operations upon disposition of the securities. RiverSource Life also recognizes losses in results of operations when management determines that a decline in value is other-than-temporary. This determination requires the exercise of judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default or bankruptcy. RiverSource Life also considers the extent to which cost exceeds fair value and the duration of that difference and management’s judgment about the issuer’s current and prospective financial condition, as well as its ability and intent to hold until recovery.As of December 31, 2007, RiverSource Life had $399 million in gross unrealized losses that related to $14.0 billion of Available-for-Sale securities, of which $11.5 billion has been in a continuous unrealized loss position for 12 months or more. These investment securities had an overall ratio of 97% of fair value to amortized cost at December 31, 2007. As part of RiverSource Life’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on these securities were attributable to changes in interest rates and credit spreads across asset classes. Additionally, because RiverSource Life has the ability as well as the intent to hold these securities for a time sufficient to recover its cost, RiverSource Life concluded that none of these securities were other-than-temporarily impaired at December 31, 2007.
Deferred Acquisition Costs
For RiverSource Life’s annuity and life, DI and LTC insurance products, the DAC 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 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 RiverSource Life’s annuity products are typically 10 to 25 years, while
18
projection periods for RiverSource Life’s life, DI and LTC insurance products are often 50 years or longer. Management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease innet 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 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 inother group during the period in which such changes are made.
For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities, and therefore are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable or if premium rates charged for the contract are changed. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in consolidated results of operations.
For annuity and life, DI and LTC insurance products, key assumptions underlying these long term projections include interest rates (both earning rates on invested assets and rates credited to policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about interest rates are the primary factor used to project interest margins, while assumptions about rates credited to policyholder accounts and equity market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance business during the DAC amortization period.
The client asset value growth rate is the rate at which variable annuity and variable universal life insurance contract values are assumed to appreciate in the future. The rate is netnon-consolidation. This lack of asset fees and anticipates a blend of equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life uses a mean reversion method as a guideline in setting near-term client asset value growth rates based on a long term view of financial market performance as well as actual historical performance. In periods when market performance results in actual contract value growth at a rate that is different than that assumed, RiverSource Life reassesses the near-term rate in order to continue to project its best estimate of long term growth. The near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. DAC amortization expense recorded in a period when client asset value growth rates exceed our near-term estimate will typically be less than in a period when growth rates fall short of our near-term estimate. The long term client asset value growth rate is based on an equity return assumption of 8%, net of management fees, with adjustments made for fixed income allocations. If RiverSource Life increased or decreased its assumption related to this growth rate by 100 basis points, the impact on the DAC and DSIC balances would be an increase or decrease of approximately $37 million.
Management monitors other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, eachconsolidation could impactaffect RiverSource Life’s DAC balances. For example, if RiverSource Life increased or decreased its interest margin on its universal life insurance and onability to fully realize certain deferred tax assets, including 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 $4 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 and DSIC balances would be an increase or decrease of approximately $24 million. The amortization impact of extending or reducing the amortization period any additional years is not linear.
The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless management identifies a significant deviation over the course of the quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results.
19
capital losses.
RiverSource Life adopted SOP 05-1 on January 1, 2007. See Note 2is 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 Note 3the amount of such allowance if required. Factors used in making this determination include estimates relating to the Consolidated Financial Statements for additionalperformance 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 and avoid the establishment of a valuation allowance with respect to such assets. In the opinion of management, it is currently more likely than not that RiverSource Life will realize the benefit of its deferred tax assets, including its capital loss deferred tax assets; therefore, no such valuation allowance has been established.
Recent Accounting Pronouncements
For information about the effect ofregarding recent accounting pronouncements and their expected impact on RiverSource Life’s adoptionfuture consolidated financial condition or results of SOP 05-1 and the accounting policies for the amortization and capitalization of DAC. In periods prior to 2007, RiverSource Life’s policy had been to treat certain internal replacement transactions as continuations and to continue amortization of DAC associated with the existing contract against revenues from the new contract. For details regarding the balances of and changes in DAC for the years ended December 31, 2007 and 2006,operations, see Note 63 to the Consolidated Financial Statements.
LiabilitiesResults of Operations for Future Policy Benefits and Policy Claims and Other Policyholders’ Fundsthe Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
The following table presents RiverSource Life’s consolidated results of operations:
|
| Year Ended |
|
|
|
|
| |||||
|
| 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.
Fixed Annuities and Variable Annuity GuaranteesOverview
Future policy benefitsConsolidated 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 policy claimsnet realized investment gains compared to net realized investment losses in the prior year period and other policyholders’ funds relateda decrease in amortization of DAC. These increases to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.
The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payablenet income were partially offset by a certain percentage of contract earnings which are referred to as gain gross-up (“GGU”) benefits. In addition, RiverSource Life offers contracts with GMWB and GMAB provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.
In determining the liabilities for variable annuity death benefits, GMIB and the life contingent benefits associated with GMWB, RiverSource Life projects these benefitsdecrease in policy and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management will review, and where appropriate, adjust its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will review and update these assumptions annually in the third quarter of each year.
The variable annuity death benefit liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.
GMAB and the non-life contingent benefits associated with GMWB provisions are considered embedded derivatives and are recorded at fair value. The fair value of these embedded derivatives is based on the present value of future benefits less applicable fees charged for the provision. The liability for the life contingent benefits associated with GMWB provisions are determined in the same way as the liability for variable annuity death benefits. The changes in both the fair values of the GMWB and GMAB embedded derivatives and the liability for life contingent benefits are reflectedan increase in benefits, claims, losses and settlement expenses.
LiabilitiesIn 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 equity indexed annuities are equalcertain life insurance products and from the impact of updating product spreads and expense assumptions partially offset by a decrease in revenues related to the accumulationreinsurance impacts from updating product mortality assumptions. In the third quarter of host contract values covering guaranteed benefits2008, the valuation assumptions review and the marketvaluation 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 embedded equity options.existing reinsurance agreements and a decrease in expense from modeling annuity amortization periods at the individual policy level.
LiabilitiesThe total pretax impacts on RiverSource Life’s revenues and expenses 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% atthe year ended December 31, 2007, depending2009 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 |
| Benefits, |
| Amortization |
| Other |
| 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 issue, with an average ratevaluation assumptions, the valuation system conversion and the impact of approximately 5.8%.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 |
| Benefits, |
| Amortization |
| Other |
| 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.
20
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.
Life, Disability IncomePolicy and Long Term Care Insurance
Future policy benefits and policy claims and other policyholders’ funds relatedcontract charges decreased $196 million or 14% to life, DI and LTC insurance include liabilities$1.2 billion 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 incurredthe year ended December 31, 2009 compared to $1.4 billion in the future.
Liabilities for fixedprior 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 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 estimatesfee revenue as a result of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimatedecrease in average separate account assets. Average separate account assets decreased $5.9 billion or 11% from 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, 2007, with an average rate of 4.9%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2007, with an average rate of 4.2%.
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, 2007, depending on policy form, issueprior year and policy duration. Anticipated interest rates for DI were 7.5% at policy issue grading to 5.0% over five years. Anticipated discount rates for LTC vary by plan and were 5.4% at December 31, 2007 grading up to 6.8% or 9.4% over 40 years.
Where applicable, benefit amounts expected to be recoverable from other insurers who share in 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.
Derivative Financial Instruments and Hedging Activities
RiverSource Life uses derivative financial instruments to manage its exposure to various market risks. All derivatives are recorded at fair value. The fair value of RiverSource Life’s derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction. The accounting for changes in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. RiverSource Lifeperiod primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (2) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”).
For derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings, generally as a component of net investment income. These derivatives primarily provide economic hedgesdue to equity market exposures. Examples include structured derivatives and options and futures that economically hedge the equity and interest rate components of derivatives embedded in certain annuity liabilities.declines partially offset by net inflows.
For derivative financial instruments that qualify as fair value hedges, changesOther revenue decreased $22 million or 9% to $233 million for the year ended December 31, 2009 compared to $255 million in the fair value of the derivatives, as well as of the corresponding hedged assets, liabilities or firm commitments, are recognized in current earnings. If a fair value hedge designation isprior year reflecting lower marketing support and administrative fees due to lower average underlying separate account asset values.
21
removed orNet realized investment gains were $59 million for the hedge is terminated prioryear ended December 31, 2009 compared to maturity, previous adjustments tonet realized investment losses of $442 million for the carrying valueyear ended December 31, 2008. For the year ended December 31, 2009, net realized gains from sales of the hedged item are recognized into earnings over the remaining life of the hedged item.
For derivative financial 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)Available-for-Sale securities were $135 million and reclassified into earnings when the hedged item or transaction impacts earnings. Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) may be recognized into earnings over the period that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) areother-than-temporary impairments recognized in earnings immediately.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.
For further details on the types of derivatives RiverSource Life uses and how it accounts for them, see Note 14 to the Consolidated Financial Statements.
Income 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 taking in tointo account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items. In the event that the ultimate tax treatment of items differs from RiverSource Life’s estimates, it may be required to significantly change the provision for income taxes recorded in its Consolidated Financial Statements.
In connection with the provision for income taxes, the Consolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among 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 will not be able to file a consolidated U.S. federal income tax return with the other members of the Ameriprise Financial affiliated group until 2010 which will result in net operating and capital losses, credits and other tax attributes generated by one group not being available to offset income earned or taxes owed by the other group during the period of non-consolidation. This lack of consolidation could affect RiverSource Life’s ability to fully realize certain deferred tax assets, including the capital losses.
RiverSource Life is required to establish a valuation allowance for 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 and avoid the establishment of a valuation allowance with respect to such assets. In the opinion of management, it is currently more likely than not that RiverSource Life will realize the benefit of its deferred tax assets, including its capital loss deferred tax assets; therefore, no such valuation allowance has been established.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on RiverSource Life’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.
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’s total assets and liabilities increased in 2007 primarily due to higher separate account assets and liabilities, which increased as a resultconsolidated results of positive variable annuity net flows and market appreciation.operations:
|
| Year Ended |
|
|
|
|
| |||||
|
| 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.
Investments primarily include corporate debt securities and mortgage and other asset-backed securities. At December 31, 2007, RiverSource Life’s corporate debt securities comprised a diverse portfolio with the largest concentrations accounting for approximately 69% of the portfolio in the following industries: banking and finance, utilities, and communications and media. Investments also included $3.7 billion of commercial mortgage loans, policy loans and other investments at December 31, 2007 and 2006. Investments are principally funded by sales of insurance and annuities and by reinvested income.
Overview
Investments include $1.6
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 $1.8net 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 |
| Benefits, |
| Amortization |
| Other |
| 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 |
| Benefits, |
| Amortization |
| Other |
| 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 2009 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 at 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 of a 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 and due diligence reviews of vendors.
Inactive Markets
Through RiverSource Life’s own experience transacting in the marketplace and through discussions with its pricing vendors, RiverSource Life believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services). RiverSource Life considers market observable yields for other asset classes of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities. The discount rates used for the fair value of these securities at December 31, 20072009 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 2006, respectively. These investments represent 6%asset backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting standards by some originators, has led to higher delinquency and loss rates for some of these investments. Market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of RiverSource Life’s investment portfoliorisk management process, an internal rating system is used in conjunction with market data as the basis of analysis to assess the likelihood that RiverSource Life will not receive all contractual principal and interest payments for these investments. For the investments that are more at both December 31, 2007 and 2006.risk for impairment,
Separate account assets primarily represent funds held for the exclusive benefit of variable annuity contractholders and variable life insurance policyholders. These assets are generally carried at market value and separate account liabilities are equal to separate account assets. 29
RiverSource Life earns administrationperforms its own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds, loss severity, and other fees from the related accounts. geographic concentrations to determine if an other-than-temporary impairment should be recognized.
The increase in separate account assets and liabilities to $58.1 billionfollowing table presents, as of December 31, 2007 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 |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||||||||||
|
| (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 $49.3 billionsubordinate tranches as of December 31, 2006, resulted from net inflows of $5.4 billion and market appreciation of $2.6 billion.2009.
Fair Value of Liabilities and Nonperformance Risk
Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for RiverSource Life’s obligations of its variable annuity riders, RiverSource Life holds 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 current and future obligationsmarket estimate of RiverSource Life’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are relatedadjusted to fixed 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 and life, DIDSIC amortization and LTC insurance. Reserves related to fixed annuities, guarantees under variable annuities and life, DI and LTC insurance are reflected in future policy benefits in the Consolidated Balance Sheets. Reserves for fixed annuities and universal life contracts are equal to the underlying contract accumulation values. Reserves for other life, DI and LTC insurance products areincome taxes, based on various assumptions, including mortality rates, morbidity rates and policy persistency.December 31, 2009 credit spreads.
Liquidity and Capital Resources
Liquidity 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 an available linelines 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.
At December 31, 2007 and 2006, RiverSource Life had no securities sold under repurchase agreements and no amounts were outstanding on the line of credit with Ameriprise Financial.
Capital 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 payments of dividends for amounts in excess of statutorily defined thresholds. See Note 13 to the Consolidated Financial Statements for additional information.
During 2007,2008, RiverSource Life Insurance Company paid $900received a non-cash capital contribution of $83 million comprised of cash dividends tobelow investment grade syndicated bank loans from Ameriprise Financial, a portion of which was considered extraordinary. During 2006,Financial. In addition, RiverSource Life Insurance Company paid $300received a $239 million of dividends tocontribution from Ameriprise Financial, a portionconsisting of which was considered extraordinary. Prior toall the paymentissued and outstanding shares of the extraordinary cash dividends,RTA.
During 2009, RiverSource Life Insurance Company 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 non-cash capital contribution of $650$131 million comprised of two buildings and the related land from Ameriprise Financial duringFinancial. As part of the third quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs. During the fourth quarter of 2005,transaction, RiverSource Life Insurance Company paid dividendsentered 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. In the second quarter of 2007, 2006 and 2005, RiverSource Life of NY paid cash dividends of $83 million, $25 million and $23 million, respectively to RiverSource Life Insurance Company. A portion of the 2007 dividends was considered extraordinary and was paid only after making the required advance notice to the New York State Insurance Department, RiverSource Life of NY’s primary state regulator.
23
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:
|
| December 31, |
| ||||||||||||||||||||
|
| Actual Capital(a) |
| Regulatory Capital |
|
| Actual Capital(a) |
| Regulatory Capital |
| |||||||||||||
|
| 2007 |
| 2006 |
| Requirement(b) |
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| |||||||
|
| (in millions) |
|
| (in millions) |
| |||||||||||||||||
RiverSource Life Insurance Company |
| $ | 3,017 |
| $ | 3,511 |
| $ | 442 |
|
| $ | 3,450 |
| $ | 2,722 |
| $ | 803 |
| $ | 551 |
|
RiverSource Life Insurance Co. of New York |
| 288 |
| 348 |
| 34 |
|
| 286 |
| 229 |
| 44 |
| 58 |
| |||||||
(a) Actual capital, as defined by the National Association of Insurance Commissioners (“NAIC”) for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the most recent statutory risk-based capital filing as of December 31, 2007.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, 20072009 are as follows:
|
| Payments due in year ending |
| |||||||||||||
|
| Total |
| 2008 |
| 2009- |
| 2011- |
| 2013 and thereafter |
| |||||
|
| (in millions) |
| |||||||||||||
Insurance and annuities (1) |
| $ | 40,031 |
| $ | 3,442 |
| $ | 5,638 |
| $ | 4,610 |
| $ | 26,341 |
|
|
| Total |
| 2010 |
| 2011- |
| 2013- |
| 2015 and |
| |||||
|
| (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 $27.0$30.4 billion at December 31, 20072009 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.
(2)The fair value of the deferred premium options recorded on the Consolidated Balance Sheets was $1.1 billion as of December 31, 2009. See Note 15 to the Consolidated Financial Statements for more information about deferred premium options.
Off-Balance Sheet Arrangements(3)The line of credit agreement with Ameriprise Financial does not include a repayment schedule. The outstanding balance at December 31, 2009 was repaid in full with payments in January and February 2010.
Consolidated Variable Interest Entities
DuringDue to the year endeduncertainty with respect to the timing of future cash flows associated with RiverSource Life’s unrecognized tax benefits at December 31, 2005,2009, RiverSource Life consolidated two secured loan trusts (“SLTs”) which provided returnsis unable to investors primarily based onmake reasonably reliable estimates of the performanceperiod of an underlying portfoliocash settlement with the respective taxing authority. Therefore, $77 million of high-yield loansunrecognized tax benefits and which were managed by an affiliate. The SLTs were liquidated in 2005, resulting in a $14 million pretax gainits associated interest have been excluded from the contractual obligations table above. See Note 14 for the year ended December 31, 2005. There is no remaining exposure related to these SLTs as a result of their liquidation.
Retained Interest in Assets Transferred to Unconsolidated Entities
In 2001, RiverSource Life placed a majority of its rated collateralized debt obligation (“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.additional 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’ 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
24
future benefit payments under its insurance and annuity obligations. These same objectives must be consistent with management’s overall investment objectives for the general account investment portfolio.
RiverSource Life’s owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to provide clients with a competitive rate of return on their investments while managing risk. Investment in fixed maturity securities is designed to provide RiverSource Life with a targeted margin between the yield earned on investments and the interest rate credited to clients’ accounts. RiverSource Life does not trade in securities to generate short-term profits for its own account.
As part of RiverSource Life’s investment process, management, with the assistance of its investment advisors, conducts a quarterly review of investment performance. The review process involves the review of certain invested assets which the committee evaluates to determine whether or not any investments are other-than-temporarily impaired and/or which specific interest earning investments should be put on an interest non-accrual basis.
RiverSource Life has 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 derivative financial instruments, such as structured derivatives, options, futures, interest rate swaps caps, floors and swaptions, which change the interest rate characteristics of client liabilities or investment assets. Because certain of its investment activities are impacted by the value of its managed equity-based portfolios, from time to time RiverSource Life enters into risk management strategies that may include the use of equity derivative financial instruments, such as equity options, to mitigate its exposure to volatility in the equity markets.
Quantitative and Qualitative Disclosures aboutAbout Market RisksRisk
Interest rate, equity price and 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 equity markets.
At December 31, 2007, aggregating RiverSource Life’s exposure from all sources ofprices. The interest rate risk net of financial derivatives hedging that exposure detailed below, RiverSource Life estimatestest assumes a negative impact of $3 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 a negative impact of $23 million made at December 31, 2006 for 12 months following a hypotheticalsudden 100 basis point increaseparallel shift in interestthe yield curve, with rates then staying at December 31, 2006.
Equity price risk includes absolute market level and implied market volatility changes.those levels for the next 12 months. The estimates of net equity price risk exposure presented below assume no changes in implied market volatility. At December 31, 2007, aggregating RiverSource Life’s exposure from equity price risk net of financial derivatives hedging that exposure detailed below, RiverSource Life estimatestest assumes a negative impact of $64 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 a negative impact of $79 million made at December 31, 2006 for 12 months following a hypotheticalsudden 10% drop in equity marketsprices, with equity prices then staying at December 31, 2006.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 below showpresent RiverSource Life’s estimate of the pretax impactimpacts of these hypothetical market moves, net of hedging and DAC, as, of December 31, 2007. Following the table is a discussion by source of risk and the portfolio management techniques and derivative financial instruments RiverSource Life uses to mitigate these risks.2009.
|
| Net Risk Exposure to |
| ||||
Sources of Market Risk |
| Interest Rate |
| Equity Price |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Asset-based fees |
| $ | (11 | ) | $ | (55 | ) |
Variable annuity riders |
| 14 |
| (9 | ) | ||
Fixed annuities, fixed portion of variable annuities and fixed insurance products |
| (6 | ) | — |
| ||
Total |
| $ | (3 | ) | $ | (64 | ) |
|
| Equity Price Exposure to Pretax Income |
| |||||||
Equity Price Decline 10% |
| Before |
| Hedge |
| Net |
| |||
|
| (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 |
| Net |
| |||
|
| (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 on 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 hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins and with 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 Life and not hedged. In 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.
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 the 12 month period following the hypothetical market decline, that there are no changes in implied market volatility and the100 basis point increase in interest rates producesis a parallel shift inof 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% equity marketprice decline should not be construed as a prediction of future market events. Impacts 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 Expenses
RiverSource Life earns asset-based management fees on its owned separate account assets partially offset by certain expenses. At December 31, 2009, the value of these assets was $54.3 billion. This source of revenue is subject to both interest rate and
equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. RiverSource Life does not 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 the basis of estimated gross profits. Estimated gross profits are a proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase current period estimated gross profits, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income.
Variable Annuity Riders
The total value of all variable annuity contracts has increased from $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 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 the underlying investment 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 total value of all variable annuity contracts has grown from $49.5 billion at December 31, 2006 to $57.2 billion at December 31, 2007. These contract values include GMWB and GMAB contractscore derivative instruments with which have grown from $7.2 billion and $1.4 billion at December 31, 2006 to $13.1 billion and $2.3 billion at December 31, 2007, respectively. At December 31, 2007, the reserves for the GMWB and GMAB were a positive $136 million and $33 million compared to reserves of negative $12 million and $5 million at December 31, 2006, respectively. The large increases in the reserves for the GMWB and GMAB reflect the effects of a substantial increase in long term volatility on the mark-to-market value of the guarantees. At December 31, 2007, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $27 million compared to $31 million at December 31, 2006.
RiverSource Life manageshedges the marketequity price risk on the guaranteed benefits by product design and by the use of financial derivatives which hedge the GMWB and GMAB. The design of the GMWB is an example of how RiverSource Life uses product design to manage risk. 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.
As a means of economically hedging its obligations under GMWB and GMAB provisions RiverSource Life purchases equityare longer dated put and call options, enters into interest rate swaps and tradesderivatives; these core instruments are supplemented with equity futures contracts. The notional amounts and total return swaps. In the fair valuethird quarter of assets (liabilities)2009, RiverSource Life entered into a limited number of derivatives hedging its GMWB and GMAB were as follows:
|
| December 31, |
| ||||||||||
|
| 2007 |
| 2006 |
| ||||||||
|
| Notional Amount |
| Fair |
| Notional Amount |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Purchased options and futures |
| $ | 6,318 |
| $ | 338 |
| $ | 1,410 |
| $ | 171 |
|
Interest rate swaps |
| 202 |
| 2 |
| 359 |
| (1 | ) | ||||
Written S&P 500 futures(1) |
| (202 | ) | — |
| (111 | ) | — |
| ||||
(1) These Standard & Poor’s (“S&P”) 500 futures are cash settled daily and, therefore, have no fair value.derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009. See Note 15 to the Consolidated Financial Statements for further information on RiverSource Life’s derivative instruments.
Interest Rate Risk — Variable Annuity Riders
The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at fair value separately from the underlying host variable annuity contract. Changes in 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 GMWB and GMAB liabilities. At December 31, 2007, if interest rates had increased by, hypothetically, 100 basis points and remain at that level for 12 months, RiverSource Life estimates that the fair values of its GMWB and GMAB liabilities would decrease by $127 million and $23 million, respectively, with a favorable impact to pretax income. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives, and interest rate swaps. RiverSource Life began utilizing the putsswaps and calls as a way to improve effectiveness and reduce hedging costs.swaptions. These derivatives are an alternative to the more
26
customized equity puts that were previously used. At December 31, 2007, RiverSource Life had equity puts and calls with notional amounts of $5.3 billion and $954 million related to GMWB and GMAB, respectively. The interest rate swaps had notional amounts of $193 million and $9 million related to GMWB and GMAB, respectively. RiverSource Life entered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to increase, RiverSource Life would have to pay more to the swap counterparty and the fair value of its equity puts would decrease, resulting in a negative impact to itsRiverSource 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 impact of the derivatives on pretax income would be $114 million. Of the $114 million, $95 million is attributable to its GMWB and $19 million is attributable to its GMAB. The net impact on pretax income after hedging would be a favorable $14 million which consists of a $32 million and $4 million favorable impact attributable to its GMWB and GMAB, respectively, and a $22 million negative impact related to DAC amortization.
Separate account assets are primarily held for the exclusive benefit of variable annuity contractholders. RiverSource Life does, however, receive asset-based fees on fixed income investments the annuity contractholders 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, 2007, RiverSource Life estimates the interest rate risk from this exposure on pretax income if, hypothetically, interest rates had increased by 100 basis points and remain at that level for 12 months to be a negative $11 million for the 12 month period. RiverSource Life does not hedge this exposure.
Equity Price Risk — Variable Annuity Riders
The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions, regardless of the performance of the investment assets. For this reason, when equity markets decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to earnings. If, hypothetically, equity markets had declined by 10% at December 31, 2007 and remain at that level for 12 months, RiverSource Life estimates the negative impact on pretax income before hedging to be $23 million attributable to GMWB, $13 million attributable to GMAB and $11 million attributable to GMDB and GMIB.
The core derivative instruments with which RiverSource Life hedges the equity price risk of its GMWB and GMAB are longer dated put and call derivatives; these core instruments are supplemented with equity futures. The put and call contracts had notional amounts of $5.3 billion and $954 million at December 31, 2007 for GMWB and GMAB, respectively. The equity futures had notional amounts of $174 million and $69 million at December 31, 2007 for GMWB and GMAB, respectively. If, hypothetically, equity markets had declined by 10% at December 31, 2007 and remain at that level for 12 months, RiverSource Life estimates a positive impact to pretax income of $27 million and $13 million from the options and futures for GMWB and GMAB, respectively. The net equity price exposure to pretax income from all of its variable annuity guaranteed benefits after hedging would be a negative $9 million, which includes a $4 million favorable impact attributable to GMWB, an $11 million negative impact attributable to GMDB and GMIB and a $2 million negative impact related to DAC amortization. The positive impact of RiverSource Life’s hedging strategy offsets negative impact attributable to GMAB for an immaterial net exposure.
A decline in equity markets would also reduce the asset-based fees RiverSource Life earns on equity market investments that its annuity contractholders have in separate accounts. At December 31, 2007, 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 $55 million for the 12 month period.
Fixed Annuities, Fixed Portion of Variable Annuities and Fixed Insurance Products
Interest rate exposures arise primarily with respect to the fixed account portion of RiverSource Life’s annuity and insurance products and its investment portfolio. RiverSource Life guarantees an interest rate to the holders of these products. Premiums and deposits collected from clients are primarily invested in fixed rate securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments.
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 $26.8Of the $30.4 billion in reserves in future policy benefits on itsRiverSource Life’s Consolidated Balance Sheets at
at December 31, 20072009, $30.1 billion related to recognize liabilities created by these products. To hedge against the risk of higher interest rates, RiverSource Life has purchased swaption contracts which had the following notional amounts and fair value assets:
|
| December 31, |
| ||||||||||
|
| 2007 |
| 2006 |
| ||||||||
|
| Notional Amount |
| Fair |
| Notional Amount |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Purchased swaptions |
| $ | 800 |
| $ | 1 |
| $ | 1,200 |
| $ | 2 |
|
If interest rates had increased by, hypothetically, 100 basis points at December 31, 2007 and remain at that level for 12 months, RiverSource Life estimates the impact on pretax income for the 12 month period to be a negative $6 million.did not hedge this exposure.
Equity Indexed Annuities
RiverSource Life’s equity indexed annuity product is a single premium annuity issued with an initial term of seven years. The annuity guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation value upon renewal plus a return that is linked to the performance of the S&P 500 Index. The equity-linked return is based on a participation rate initially set at between 50% and 90% of the S&P 500 Index which is guaranteed for the initial seven-year term when the contract is held to full term. Of the $27.4 billion in future policy benefits atAt December 31, 2007, $3062009, RiverSource Life had $168 million relatesin reserves related to the liabilities created by this product.equity indexed annuities. In 2007, RiverSource Life discontinued new sales of equity indexed annuities. The notional amounts and fair value assets (liabilities) of derivatives hedging this product were as follows:
|
| December 31, |
| ||||||||||
|
| 2007 |
| 2006 |
| ||||||||
|
| Notional Amount |
| Fair |
| Notional Amount |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Purchased options and futures |
| $ | 164 |
| $ | 39 |
| $ | 185 |
| $ | 37 |
|
Purchased Knock-in-Puts |
| 73 |
| 4 |
| 86 |
| 3 |
| ||||
Written Knock-in-Puts |
| (57 | ) | (1 | ) | (67 | ) | (1 | ) | ||||
Written S&P 500 futures(1) |
| (1 | ) | — |
| — |
| — |
| ||||
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair value.
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 prices. To hedge this exposure, a portion of the proceeds from the sale of equity indexed annuities is used to purchase futures, calls and puts which generate returns to replicate what RiverSource Life must credit to client accounts. In conjunction with purchasing puts, RiverSource Life also writes puts. Pairing purchased puts with written puts allows RiverSource Life to better match the characteristics of the liability.
Interest Rate Risk — Equity Indexed Annuities
Most of the proceeds from the sale of equity indexed annuities are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. RiverSource Life earns income from the difference between the return earned on invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount credited is affected by changes in interest rates. RiverSource Life estimates that if, hypothetically, interest rates had increased by 100 basis points at December 31, 2007 and remain at that level for 12 months, the unhedged exposure would be a negative impact of $1 million on pretax income for the 12 month period offset by a positive impact of $1 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 portion of the proceeds from the sale of equity indexed annuities is used to purchase futures, calls and puts which generate returns to replicate what RiverSource Life must credit to client accounts. In conjunction with purchasing puts, RiverSource Life also writes puts. Pairing purchased puts with written puts allows RiverSource Life to better match the characteristics of the liability. For this product, RiverSource Life estimates that if, hypothetically, the equity markets had declined by 10% at December 31, 2007 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 of its hedging strategy offsets that gain for an immaterial net exposure.
28
Credit Risk
RiverSource Life’sLife is exposed to credit risk within its investment portfolio, including its loan portfolio, and through its derivative and reinsurance activities. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the financial instrument or contract. RiverSource Life considers its total potential derivative credit exposure to each counterparty is aggregated with all ofand its other exposuresaffiliates to the counterparty to determineensure compliance with establishedpre-established credit and market risk limitsguidelines at the time RiverSource 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 a new type or structurederivative counterparty’s net positive fair value of derivative contract,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 the variabilityevent 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 credit exposures and whether such variability might reasonably be expected to create exposurerisk is related to a counterparty in excesslong term care coinsurance treaty with life insurance subsidiaries of established limits.Genworth 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’s plans, estimates and beliefs. RiverSource Life’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”“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 uncertainties whichthat 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:
·changes in interest rates, equity price levels, equity market volatility and other financial market factors;
·changes in the litigation and 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;
·RiverSource Life’s investment management performance and consumer acceptance of RiverSource Life’s products;
·effects of competition in the financial services industry and changes in RiverSource Life’s product distribution mix and distribution channels;
·RiverSource Life’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings;
·risks of default by issuers of investments RiverSource Life owns or by counterparties to derivative or reinsurance arrangements;
·experience deviations from RiverSource Life’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products;
·successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;
·RiverSource Life’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
·the impact of intercompany allocations to RiverSource Life from Ameriprise Financial and its affiliates;
·Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute RiverSource Life’s products through current and future distribution channels;
·the impact of Ameriprise Financial’s efforts to improve distribution economics and of RiverSource Life’s efforts to grow third party distribution and to realize benefits from 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; and
·general economic and political factors, including consumer confidence in the economy, and in applicable legislation and regulation, including tax law, tax treaties and regulatory rulings and pronouncements.
A further description of these and other risks and uncertainties can be found under “Item 1A - Risk Factors”. 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“Management’s Narrative Analysis - Risk Management.Quantitative and Qualitative Disclosures about Market Risk.”
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. |
| |
Consolidated Financial Statements:
Consolidated Financial Statements:
| 39 | |
|
| |
Consolidated Balance Sheets |
| 40 |
|
| |
| 41 | |
|
| |
| 42 | |
|
| |
| 43 | |
|
| |
| 44 |
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 Notes thereto or is not required. Therefore, all schedules have been omitted.
Report of Independent Registered Public Accounting Firm
The Board of Directors
RiverSource Life Insurance Company
We have audited the accompanying consolidated balance sheets of RiverSource Life Insurance Company, (a wholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) as of December 31, 20072009 and 2006,2008, and the related consolidated statements of income, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2007.2009. These financial statements are the responsibility of RiverSource Life Insurance Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RiverSource Life Insurance Company at December 31, 20072009 and 2006,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007,2009, in conformity with U.S. generally accepted accounting principles.
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 Financial Accounting Standards Board (FASB) Interpretation No. 48, Accountingnew guidance related to the accounting for Uncertaintyuncertainty in Income Taxes — an interpretationincome taxes as well as new guidance related to accounting for deferred acquisition costs in connection with modifications or exchanges of FASB Statement No. 109,insurance and American Institute of Certified Public Accountants Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modification or Exchanges of Insurance Contracts.annuity contracts.
/s/ Ernst & Young LLP | |
| |
|
31Minneapolis, Minnesota
February 23, 2010
RIVERSOURCE LIFE INSURANCE COMPANY
(in millions, except share amounts)
|
| December 31, |
|
| December 31, |
| ||||||||
|
| 2007 |
| 2006 |
|
| 2009 |
| 2008 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Investments: |
|
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale: |
|
|
|
|
|
|
|
|
|
| ||||
Fixed maturities, at fair value (amortized cost: 2007, $21,020; 2006, $25,289) |
| $ | 20,792 |
| $ | 24,995 |
| |||||||
Common and preferred stocks, at fair value (cost: 2007 and 2006, $30) |
| 29 |
| 31 |
| |||||||||
Commercial mortgage loans, at cost (less allowance for loan losses: 2007, $16; 2006, $37) |
| 2,892 |
| 2,790 |
| |||||||||
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 |
| 697 |
| 650 |
|
| 715 |
| 722 |
| ||||
Trading securities and other investments |
| 67 |
| 241 |
|
| 310 |
| 452 |
| ||||
Total investments |
| 24,477 |
| 28,707 |
|
| 29,579 |
| 21,997 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| 973 |
| 160 |
|
| 811 |
| 3,307 |
| ||||
Restricted cash |
| 184 |
| — |
| |||||||||
Reinsurance recoverables |
| 1,290 |
| 1,137 |
|
| 1,688 |
| 1,592 |
| ||||
Amounts due from brokers |
| 123 |
| 7 |
| |||||||||
Other accounts receivable |
| 118 |
| 90 |
| |||||||||
Deferred income taxes, net |
| 63 |
| 599 |
| |||||||||
Other receivables |
| 332 |
| 102 |
| |||||||||
Accrued investment income |
| 252 |
| 301 |
|
| 303 |
| 239 |
| ||||
Deferred acquisition costs |
| 4,429 |
| 4,411 |
|
| 4,285 |
| 4,324 |
| ||||
Deferred sales inducement costs |
| 511 |
| 452 |
|
| 524 |
| 518 |
| ||||
Other assets |
| 539 |
| 320 |
|
| 936 |
| 2,658 |
| ||||
Separate account assets |
| 58,070 |
| 49,287 |
|
| 54,267 |
| 41,787 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 90,782 |
| $ | 84,872 |
|
| $ | 92,972 |
| $ | 77,123 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholder’s Equity |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Future policy benefits |
| $ | 26,977 |
| $ | 29,561 |
|
| $ | 30,383 |
| $ | 28,753 |
|
Policy claims and other policyholders’ funds |
| 91 |
| 89 |
|
| 123 |
| 172 |
| ||||
Amounts due to brokers |
| 361 |
| 132 |
| |||||||||
Deferred income taxes, net |
| 133 |
| 90 |
| |||||||||
Line of credit with Ameriprise Financial, Inc. |
| 300 |
| — |
| |||||||||
Other liabilities |
| 430 |
| 443 |
|
| 1,955 |
| 2,672 |
| ||||
Separate account liabilities |
| 58,070 |
| 49,287 |
|
| 54,267 |
| 41,787 |
| ||||
Total liabilities |
| 86,062 |
| 79,602 |
|
| 87,028 |
| 73,384 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Shareholder’s equity: |
|
|
|
|
|
|
|
|
|
| ||||
Common stock, $30 par value; |
|
|
|
|
| |||||||||
100,000 shares authorized, issued and outstanding |
| 3 |
| 3 |
| |||||||||
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding |
| 3 |
| 3 |
| |||||||||
Additional paid-in capital |
| 2,031 |
| 2,021 |
|
| 2,445 |
| 2,116 |
| ||||
Retained earnings |
| 2,842 |
| 3,455 |
|
| 3,114 |
| 2,336 |
| ||||
Accumulated other comprehensive loss, net of tax: |
|
|
|
|
| |||||||||
Net unrealized securities losses |
| (116 | ) | (168 | ) | |||||||||
Net unrealized derivative losses |
| (40 | ) | (41 | ) | |||||||||
Total accumulated other comprehensive loss |
| (156 | ) | (209 | ) | |||||||||
Accumulated other comprehensive income (loss), net of tax |
| 382 |
| (716 | ) | |||||||||
Total shareholder’s equity |
| 4,720 |
| 5,270 |
|
| 5,944 |
| 3,739 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholder’s equity |
| $ | 90,782 |
| $ | 84,872 |
|
| $ | 92,972 |
| $ | 77,123 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in(in millions)
|
| Years ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
|
| 2009 |
| 2008 |
| 2007 |
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Premiums |
| $ | 485 |
| $ | 533 |
| $ | 521 |
|
| $ | 450 |
| $ | 438 |
| $ | 439 |
|
Net investment income |
| 1,555 |
| 1,657 |
| 1,786 |
|
| 1,526 |
| 1,252 |
| 1,424 |
| ||||||
Policy and contract charges |
| 1,217 |
| 1,045 |
| 898 |
|
| 1,156 |
| 1,352 |
| 1,217 |
| ||||||
Other revenue |
| 255 |
| 189 |
| 127 |
| |||||||||||||
Net realized investment gain |
| 61 |
| 51 |
| 48 |
| |||||||||||||
Other revenues |
| 233 |
| 255 |
| 255 |
| |||||||||||||
Net realized investment gains (losses) |
| 59 |
| (442 | ) | 61 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total revenues |
| 3,573 |
| 3,475 |
| 3,380 |
|
| 3,424 |
| 2,855 |
| 3,396 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefits, claims, losses and settlement expenses |
| 855 |
| 705 |
| 697 |
|
| 841 |
| 673 |
| 760 |
| ||||||
Interest credited to fixed accounts |
| 850 |
| 968 |
| 1,020 |
|
| 903 |
| 790 |
| 847 |
| ||||||
Amortization of deferred acquisition costs |
| 470 |
| 356 |
| 316 |
|
| 145 |
| 861 |
| 470 |
| ||||||
Separation costs |
| 97 |
| 131 |
| 121 |
|
| — |
| — |
| 97 |
| ||||||
Other insurance and operating expenses |
| 781 |
| 637 |
| 585 |
|
| 550 |
| 649 |
| 735 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total benefits and expenses |
| 3,053 |
| 2,797 |
| 2,739 |
|
| 2,439 |
| 2,973 |
| 2,909 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pretax income |
| 520 |
| 678 |
| 641 |
| |||||||||||||
Income tax provision |
| 99 |
| 192 |
| 182 |
| |||||||||||||
Pretax income (loss) |
| 985 |
| (118 | ) | 487 |
| |||||||||||||
Income tax provision (benefit) |
| 245 |
| (189 | ) | 53 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 421 |
| $ | 486 |
| $ | 459 |
|
| $ | 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(in millions)
|
| Years ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Cash Flows from Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 421 |
| $ | 486 |
| $ | 459 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Amortization of deferred acquisition costs and deferred sales inducement costs |
| 523 |
| 404 |
| 356 |
| |||
Capitalization of deferred acquisition costs and deferred sales inducement costs |
| (828 | ) | (813 | ) | (727 | ) | |||
Amortization of premium, net |
| 70 |
| 75 |
| 83 |
| |||
Deferred income taxes |
| 83 |
| 123 |
| 122 |
| |||
Contractholder and policyholder charges, non-cash |
| (206 | ) | (220 | ) | (232 | ) | |||
Net realized investment gains |
| (61 | ) | (51 | ) | (48 | ) | |||
Net realized gain on trading securities and equity method investments in hedge |
| (1 | ) | (16 | ) | (24 | ) | |||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Trading securities and equity method investments in hedge funds, net |
| 124 |
| 297 |
| 247 |
| |||
Future policy benefits for traditional life, disability income and long term care |
| 275 |
| 274 |
| 230 |
| |||
Policy claims and other policyholders’ funds |
| 2 |
| 3 |
| 19 |
| |||
Reinsurance recoverables |
| (153 | ) | (154 | ) | (106 | ) | |||
Other accounts receivable |
| (28 | ) | (27 | ) | (11 | ) | |||
Accrued investment income |
| 49 |
| 21 |
| 23 |
| |||
Other assets and liabilities, net |
| (32 | ) | (104 | ) | (31 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by operating activities |
| $ | 238 |
| $ | 298 |
| $ | 360 |
|
|
|
|
|
|
|
|
| |||
|
| 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 CASH FLOWS (continued)
(in millions)
|
| Years ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Cash Flows from Investing Activities |
|
|
|
|
|
|
| |||
Available-for-Sale securities: |
|
|
|
|
|
|
| |||
Proceeds from sales |
| $ | 3,020 |
| $ | 1,897 |
| $ | 3,124 |
|
Maturities, sinking fund payments and calls |
| 1,908 |
| 2,014 |
| 2,242 |
| |||
Purchases |
| (687 | ) | (1,433 | ) | (5,780 | ) | |||
Other investments, excluding policy loans: |
|
|
|
|
|
|
| |||
Proceeds from sales, maturities, sinking fund payments and calls |
| 473 |
| 519 |
| 653 |
| |||
Purchases |
| (504 | ) | (441 | ) | (543 | ) | |||
Change in policy loans, net |
| (47 | ) | (36 | ) | (17 | ) | |||
Change in amounts due to and from brokers, net |
| 113 |
| 97 |
| (128 | ) | |||
Change in restricted cash |
| — |
| — |
| 536 |
| |||
Net cash provided by investing activities |
| 4,276 |
| 2,617 |
| 87 |
| |||
|
|
|
|
|
|
|
| |||
Cash Flows from Financing Activities |
|
|
|
|
|
|
| |||
Activity related to investment contracts and universal life-type insurance: |
|
|
|
|
|
|
| |||
Considerations received |
| 1,093 |
| 1,267 |
| 1,532 |
| |||
Net transfers to separate accounts |
| (50 | ) | (307 | ) | (13 | ) | |||
Surrenders and other benefits |
| (3,838 | ) | (3,688 | ) | (2,126 | ) | |||
Other |
| (8 | ) | — |
| — |
| |||
Tax adjustment of share-based incentive employee compensation plan |
| 2 |
| 1 |
| — |
| |||
Capital contribution from Ameriprise Financial, Inc. |
| — |
| — |
| 650 |
| |||
Cash dividend to Ameriprise Financial, Inc. |
| (900 | ) | (300 | ) | (380 | ) | |||
Net cash used in financing activities |
| (3,701 | ) | (3,027 | ) | (337 | ) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 813 |
| (112 | ) | 110 |
| |||
Cash and cash equivalents at beginning of year |
| 160 |
| 272 |
| 162 |
| |||
Cash and cash equivalents at end of year |
| $ | 973 |
| $ | 160 |
| $ | 272 |
|
|
|
|
|
|
|
|
| |||
Supplemental disclosures: |
|
|
|
|
|
|
| |||
Income taxes paid (received), net |
| $ | (4 | ) | $ | 64 |
| $ | 96 |
|
Interest paid on borrowings |
|
| — |
|
| 1 |
|
| — |
|
See Notes to Consolidated Financial Statements.
35
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
THREE YEARS ENDED DECEMBER 31, 20072009
(in millions)
|
| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances at December 31, 2004 |
| $ | 3 |
| $ | 1,370 |
| $ | 3,190 |
| $ | 341 |
| $ | 4,904 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other 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 other 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 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other 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 other 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 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Change in accounting principles |
| — |
| — |
| (134 | ) | — |
| (134 | ) | |||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 421 |
| — |
| 421 |
| |||||
Change in unrealized holding losses on securities, net |
| — |
| — |
| — |
| 52 |
| 52 |
| |||||
Change in unrealized derivative losses, net |
| — |
| — |
| — |
| 1 |
| 1 |
| |||||
Total other comprehensive income |
| — |
| — |
| — |
| — |
| 474 |
| |||||
Cash dividends to Ameriprise Financial, Inc. |
| — |
| — |
| (900 | ) | — |
| (900 | ) | |||||
Non-cash capital contribution from Ameriprise Financial, Inc. |
| — |
| 8 |
| — |
| — |
| 8 |
| |||||
Tax adjustment of share-based incentive employee compensation plan |
| — |
| 2 |
| — |
| — |
| 2 |
| |||||
Balances at December 31, 2007 |
| $ | 3 |
| $ | 2,031 |
| $ | 2,842 |
| $ | (156 | ) | $ | 4,720 |
|
|
| Common |
| Additional |
| Retained |
| Accumulated |
| 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 Presentation
Nature of Business
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company. RTA is domiciled in Delaware and is a 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”.
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express is now complete.was completed in 2007.
RiverSource Life’s principal products are variable deferred annuities and variable universal life insurance which are issued primarily to individuals. It also offers fixed annuities where assets accumulate until the contract is surrendered, the contractholder (or in some contracts, the annuitant) dies, or the contractholder or annuitant begins receiving benefits under an annuity payout option. It also offers immediate annuities in which payments begin within one year of issue and continue for life or for a fixed period of time. RiverSource Life’s fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, RiverSource Life has the option of paying a higher rate set at its discretion. In addition, persons owning one type 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 insurance including whole life and term life and disability income (“DI”) insurance. Universal life insurance is a form of permanent life insurance characterized by its flexible premiums, its flexible death benefit amounts and its 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’s variable life insurance and variable annuity products described above, the purchaser may choose among investment options that include RiverSource Life’s “general account” as well as from a variety of portfolios including common stocks, bonds, managed assets and/or short-term securities.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its wholly owned subsidiary,subsidiaries, RiverSource Life of NY. All significant intercompany accountsNY and transactions have been eliminated in consolidation.RTA.
37
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.Nature of Business and Basis of Presentation (Continued)RiverSource Life evaluated events or transactions that may have 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”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 11.13. Certain reclassifications of prior periodyear amounts have been made to conform to the current presentation, including new income statement captions which are described in Note. 2. These reclassifications were made to enhance transparency and to better alignpresentation. In the financial statement line captions with the key driversfirst quarter of the business. RiverSource Life did not change its revenue and expense recognition policies and the reclassifications did not result in any changes to consolidated net income or shareholder’s equity. The following is a summary of the reclassifications made:
Income Statement Reclassifications
·RiverSource Life reclassified the portion of 12b-1 fees identified as service fees on proprietary funds and marketing support type payments received from non-proprietary fund families for variable annuity and variable universal life products from other revenue to policy and contract charges to better align with industry standards.
·RiverSource Life reclassified premiums related to immediate annuities with life contingencies from interest credited to fixed accounts to premiums.
·2009, RiverSource Life reclassified reinsurance premiums paidallowances for universalcoinsurance contracts for traditional life and variable universal life productslong term care insurance from benefits, claims, losses and settlement expensespremiums to policy and contract charges, where cost of insurance fees are reported.
·RiverSource Life reclassified benefit expenses related to immediate annuities with life contingencies from interest credited to fixed accounts to benefits, claims, losses and settlement expenses.
·RiverSource Life reclassified mortality and expense risk fees to policy and contract charges.
·RiverSource Life reclassified additional investment-related expenses from other insurance and operating expenses to net investment income.with the associated expenses.
The following tables showtable shows the impact of the new captions andreclassification of the reclassificationsreinsurance allowances made to RiverSource Life’s previously reported Consolidated Statements of Income.
|
| December 31, 2006 |
| December 31, 2005 |
| ||||||||
|
| Previously |
| Reclassified |
| Previously |
| Reclassified |
| ||||
|
| (in millions) |
| (in millions) |
| ||||||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Premiums |
| $ | 394 |
| $ | 533 |
| $ | 370 |
| $ | 521 |
|
Net investment income |
| 1,661 |
| 1,657 |
| 1,789 |
| 1,786 |
| ||||
Policy and contract charges |
| 637 |
| 1,045 |
| 577 |
| 898 |
| ||||
Other revenue |
| 636 |
| 189 |
| 489 |
| 127 |
| ||||
Net realized investment gain |
| 51 |
| 51 |
| 48 |
| 48 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total revenues |
| 3,379 |
| 3,475 |
| 3,273 |
| 3,380 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Benefits and expenses |
|
|
|
|
|
|
|
|
| ||||
Benefits, claims, losses and settlement expenses |
| 521 |
| 705 |
| 496 |
| 697 |
| ||||
Interest credited to fixed accounts |
| 1,052 |
| 968 |
| 1,111 |
| 1,020 |
| ||||
Amortization of deferred acquisition costs |
| 356 |
| 356 |
| 316 |
| 316 |
| ||||
Separation costs |
| 131 |
| 131 |
| 121 |
| 121 |
| ||||
Other insurance and operating expenses |
| 641 |
| 637 |
| 588 |
| 585 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total benefits and expenses |
| 2,701 |
| 2,797 |
| 2,632 |
| 2,739 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pretax income |
| 678 |
| 678 |
| 641 |
| 641 |
| ||||
Income tax provision |
| 192 |
| 192 |
| 182 |
| 182 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 486 |
| $ | 486 |
| $ | 459 |
| $ | 459 |
|
38
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.Nature of Business and Basis of Presentation (Continued)
Statement of Cash Flows Reclassifications
RiverSource Life has reclassified certain prior year balances in the Consolidated Statements of Cash Flows.
·RiverSource Life previously classified transfers to and from the fixed account option within its variable annuity product as an operating activity in its Consolidated Statements of Cash Flows. RiverSource Life has reclassified these transfers as a financing activity in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”.
·RiverSource Life previously classified the net change in annuity policy loans as an operating activity and the net change in universal life policy loans as a financing activity. RiverSource Life has reclassified the net change in policy loans as an investing activity in accordance with the AICPA Audit and Accounting Guide: Life and Health Insurance Entities.
The effect of these reclassifications on prior year net cash flows related to operating, investing and financing activities is summarized below.
|
| Years Ended December 31, |
| |||||
|
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||
Net cash provided by operating activities, previous presentation |
| $ | 116 |
| $ | 437 |
| |
Reclassification for annuity transfers |
| 184 |
| (68 | ) | |||
Reclassification for policy loans |
| 4 |
| 3 |
| |||
Other reclassifications |
| (6 | ) | (12 | ) | |||
Net cash provided by operating activities, adjusted for these reclassifications |
| $ | 298 |
| $ | 360 |
| |
|
|
|
|
|
| |||
Net cash provided by investing activities, previous presentation |
| $ | 2,654 |
| $ | 104 |
| |
Reclassification for policy loans |
| (36 | ) | (17 | ) | |||
Other reclassifications |
| (1 | ) | — |
| |||
Net cash provided by investing activities, adjusted for these reclassifications |
| $ | 2,617 |
| $ | 87 |
| |
|
|
|
|
|
| |||
Net cash used in financing activities, previous presentation |
| $ | (2,882 | ) | $ | (431 | ) | |
Reclassification for annuity transfers |
| (184 | ) | 68 |
| |||
Reclassification for policy loans |
| 32 |
| 14 |
| |||
Other reclassifications |
| 7 |
| 12 |
| |||
Net cash used in financing activities, adjusted for these reclassifications |
| $ | (3,027 | ) | $ | (337 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2008 |
| Year Ended December 31, 2007 |
| ||||||||
|
| Previously |
| Reclassified |
| Previously |
| 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 Consolidation
RiverSource Life consolidates all entities in which it holds a greater than 50% voting interest or when certain conditions are met for variable interest entities (“VIEs”) and limited partnerships, except for immaterial seed money investments in separate accounts, which are accounted for as trading securities. Entities in which RiverSource Life holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. Additionally, other investments in hedge funds in which RiverSource Life holds an interest that is less than 50% are accounted for under the equity method. All other investments that are not reported at fair value as Available-for-Sale or trading securities are accounted for under the cost method where RiverSource Life owns less than a 20% voting interest and does not exercise significant influence, or as Available-for-Sale securities, as applicable.influence.
RiverSource Life also consolidates all VIEs for which it is considered to be the primary beneficiary. The determination as to whether an entity isGenerally, 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 the amount and characteristics of the entity’s equity. The determination asentity to support its activities. To determine whether RiverSource Life is consideredmust consolidate a VIE, it analyzes the
design of the VIE to beidentify the primary beneficiary is based onvariable interests it holds. Then RiverSource Life quantitatively determines whether its variable interests will absorb a majority of the VIE’s variability. If RiverSource Life determines it will absorb a majority of the VIE’s expected losses, receive a majorityvariability, RiverSource Life consolidates the VIE and is referred to as the primary beneficiary. The calculation of variability is based on an analysis of projected probability-weighted cash flows based on the design of the VIE’s expected residual return, or both.particular VIE.
All material intercompany transactions and balances between and among RiverSource Life liquidatedand its interestsubsidiaries have been eliminated in all consolidated VIEs during 2005. There were no consolidated VIEs as of December 31, 2007 and 2006.consolidation.
39
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 which RiverSource Life sold all of its retained interests in 2005.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other-than-temporary impairments, valuation of deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, derivative financial instruments and hedging activities, claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.
Balance Sheet
Investments
Investments consist of the following:
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet date. Gains and losses are recognized in consolidated resultsthe Consolidated Statements of operationsIncome upon disposition of the securities. In addition, losses are also recognized when management determines
Effective 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 and timingRiverSource 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 recovery. 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 the extent to which cost exceeds fair value, the duration of that differencefactors such as overall deal structure and management’s judgment about the issuer’s current and prospective financial condition, as well as its ability and intent to hold until recovery. Other-than-temporary impairment charges are recorded in net realized gains (losses) on investmentsposition within the Consolidated Statementsstructure, quality of Income. Fairunderlying 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 exceeds the present value is generally obtained from third party pricing sources.of the projected 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 of the expected cash flows.
Commercial Mortgage Loans, Net
Commercial mortgage loans, net, reflect principal amounts outstanding less the allowance for loan losses. The allowance for loan losses is measured asprimarily based on RiverSource Life’s past loan loss experience, known and inherent risks in the excessportfolio, composition of the loan’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 the present value of its expected principal and interest payments discounted atportfolio. For larger balance or restructured loans that are collateral dependent, the loan’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’s judgment as to the ultimate collectibilitycollectability of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan.
Policy Loans
Policy loans include life insurance policy and annuity loans. These loans are carried at the aggregate of the unpaid loan balances, which do not exceed the cash surrender values of underlying products, plus accrued interest.
Trading Securities and Other Investments
Included in trading securities and other investments are separate account and mutual fund seed money, equity method investments, trading bonds, interests in hedge fundsaffordable housing partnerships and below investment grade syndicated bank loans. Separate account and mutual fund seed money is carried at fair value with changes in value
recognized within net investment income. The carrying value ofAffordable housing partnerships are accounted for under the equity method investments in hedge funds reflects RiverSource Life’s originalmethod. Below investment and its share of earnings or losses of the hedge funds subsequent to the date of investment and approximates fair value. Syndicatedgrade syndicated bank loans reflect amortized cost less allowance for losses.
40
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less.
Restricted 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 the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the risks associated with itsreinsurance contracts. Traditional life, DI and long term care (“LTC”) and DI reinsurance premium, net of the change in any prepaid reinsurance asset, is reported as a reduction of premiums. Fixed and variable universal life reinsurance premium is reported as a reduction of policy and contract charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.
Insurance liabilities are reported before the effects of reinsurance. Future policy benefits and policy claims and other policyholders’ funds recoverable under reinsurance contracts are recorded as reinsurance recoverables.
RiverSource Life also assumes life insurance products through reinsurance agreementsand fixed annuity business from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted for consistently with unaffiliated reinsurance companies. Reinsurance isthe basis used in order to limit losses, reduce exposure to large risksaccounting for the policies from which risk is reinsured and provide additional capacity for future growth. To manage exposure to losses from reinsurer insolvencies, the financial condition of reinsurers is evaluated prior to entering into new reinsurance treaties and on a periodic basis duringconsistently with the terms of the treaties. RiverSource Life remains primarily liable as the direct insurer on all risks reinsured.reinsurance contracts. Liabilities for assumed business are recorded within future policy benefits.
Generally, RiverSource Life reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products. RiverSource Life began reinsuring risks at this level beginning in 2001See Note 7 for term life insurance and 2002 for variable and universal life insurance. Policies issued prior to these dates are not subject to the same reinsurance levels. Generally, the maximum amount of life insurance risk retained by RiverSource Life is $750,000additional information on any policy insuring a single life and $1.5 million on any flexible premium survivorship variable life policy. For existing LTC policies, except those sold by RiverSource Life of NY prior to 1996, RiverSource Life retained 50% of the risk and ceded on a coinsurance basis the remaining 50% of the risk to affiliates of Genworth Financial, Inc. (“Genworth”). Reinsurance recoverable from Genworth related to RiverSource Life’s LTC liabilities was $1.0 billion at December 31, 2007, while amounts recoverable from each other reinsurer were much smaller. Risk on variable life and universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis.
Generally, RiverSource Life retains at most $5,000 per month of risk per life on DI policy forms introduced in October 2007 in most states and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. RiverSource Life retains all risk on DI contracts sold on other policy forms. RiverSource Life also retains all risk of accidental death benefit claims and substantially all risk associated with waiver of premium provisions.reinsurance.
Deferred Acquisition CostsLand, Buildings, Equipment and SoftwareDAC represent
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 generally uses the costsstraight-line method of acquiring new business, principally direct sales commissionsdepreciation and other distributionamortization over periods ranging from three to 30 years. During 2009, RiverSource Life received a non-cash capital contribution of $131 million comprised of two buildings and underwriting costs that have been deferred on the salerelated land from Ameriprise Financial.
At December 31, 2009 and 2008, land, buildings, equipment and software were $190 million and $43 million, respectively, net of annuityaccumulated depreciation of $52 million and insurance products. These costs are deferred to$9 million, respectively. Depreciation and amortization expense for the extent they are recoverable from future profits or premiums. The DAC associated with insurance or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periodsyears ended December 31, 2009, 2008 and other valuation assumptions.2007 was $8 million, $5 million and $1 million, respectively.
Deferred Sales Inducement CostsDeferred 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.
Derivative Financial Instruments and Hedging ActivitiesDerivative financial
Freestanding derivative instruments are recorded at fair value. Thevalue and are reflected in other assets or other liabilities. See Note 11 for information regarding RiverSource Life’s fair value measurement of RiverSource Life’s derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available. In certain instances, the fair value includes structuring costs incurred at the inception of the transaction.instruments. The accounting for changes in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1)(i) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (2)(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 financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings, generallyearnings. 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 a componenteconomic hedges are presented in the Consolidated Statements of net investment income.Income with the corresponding change in the hedged asset or liability.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
For derivative financial instruments 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 financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) may beis 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 financial instruments that are entered into for hedging purposes are designated as such at the time RiverSource Life enters into the contract. For all derivative financial instruments that are designated for hedging activities, RiverSource Life formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. RiverSource Life formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, RiverSource Life will discontinue the application of hedge accounting.
The equity component of the equity indexed annuity obligations areis considered an embedded derivatives.derivative. Additionally, certain annuities contain guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”) provisions. The GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives. The fair value of embedded derivatives associated with annuities is included in future policy benefits. The changeschange in the fair value of the equity indexed annuity embedded derivatives areis reflected in the interest credited to fixed accounts. The changes in the fair value of the GMWB and GMAB embedded derivatives are reflected in benefits, claims, losses and settlement expenses.
Deferred Acquisition Costs
DAC represents the cost of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity and insurance products. These costs are deferred to the extent they are recoverable from future profits or premiums. The DAC associated with insurance or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periods and other valuation assumptions.
Direct sales commissions and other costs deferred as DAC is amortized over time. For annuity and universal life (“UL”) contracts, DAC is amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC is generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.
For annuity and UL insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.
For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and therefore are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC is not recoverable. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSource Life’s Consolidated Statements of Income.
For annuity, 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 factors used to project interest margins, while assumptions about equity and bond market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance businesses during the DAC amortization period.
The client asset value growth rates are the rates at which variable annuity and variable universal life (“VUL”) insurance contract values invested in separate accounts are assumed to appreciate in the future. The rates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life typically uses a five-year mean reversion process as a guideline in setting near-term equity asset growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. In 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 its quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.
Deferred Sales Inducement Costs
DSIC consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. The amortization of DSIC is recorded in benefits, claims, losses and settlement expenses.
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 contractholders.policyholders. RiverSource Life receives mortality and expense risk and other fees, guarantee fees and cost of insurance charges from the related accounts.
Future Policy Benefits and Policy Claims and Other Policyholders’ Funds
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.
The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits. In addition, RiverSource Life offers contracts withcontaining GMWB and GMAB provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.
42
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
In determining the liabilities for variable annuity death benefits,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 will review,reviews, and where appropriate, adjustadjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will reviewreviews and updateupdates these assumptions annually in the third quarter of each year.
The variable annuity death benefitGMDB 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 considered embedded derivatives and are recorded at fair value. TheSee Note 11 for information regarding the fair value measurement of these embedded derivatives is based on the present value of future benefits less applicable fees charged for the provision.derivatives. The liability for the life contingent benefits associated with GMWB provisions areis determined in the same way as the liability for variable annuity death benefits.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 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, 2007,2009, depending on year of issue, with an average rate of approximately 5.8%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, 2007,2009, with an average rate of 4.9%4.7%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2007,2009, with an average rate of 4.2%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.
43
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
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, 2007,2009, 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.years and 4.5% over 20 years, respectively. Anticipated discountinterest rates for LTC policy reserves can vary by plan and were 5.4%year and ranged from 5.8% to 9.4% at December 31, 2007 grading up to 6.8% or 9.4% over 40 years.2009.
Where applicable, benefit amounts expected to be recoverable from other insurersreinsurance companies who share in 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.recoverables.
Revenues and ExpensesSources of Revenue
RiverSource Life’s principal sources of revenue include premium revenues, net investment income and policy and contract charges and other revenue.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;Available-for-Sale, commercial mortgage loans and policy loans; mark-to-market adjustment onloans, other investments and cash and cash equivalents; the changes in fair value of trading securities and certain derivatives, including derivatives hedging variable annuity living benefits;derivatives; and the pro-rata share of net income or loss ofon equity method investments in hedge funds.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 are recognized as revenue when earned, whereasand contract charges and surrender charges on annuities and universal and variable universal life insurance are recognized as revenue when collected.
Other RevenueOther revenue includes marketing support and administrative fees which are generally computed as a contractual rate based on the underlying asset values and are generally received monthly.
Net Realized Investment Gain
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 are recorded when securities arefor investments determined to be other-than-temporarily impaired.
44
RIVERSOURCE LIFE INSURANCE COMPANYimpaired and related to credit losses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
Benefits, Claims, Losses and Settlement ExpensesBenefits, claims, losses and settlementexpenses consist of amounts paid and changes in liabilities held for anticipated future benefit payments under insurance policies and annuity contracts, including benefits paid under optional variable annuity guaranteed benefit riders along with costs to process and pay such amounts. Amounts are net of benefit payments recovered or expected to be recovered under reinsurance contracts. Benefits, claims, losses and settlementexpenses also include amortization of DSIC.
Interest Credited to Fixed AccountsInterest credited to fixed accounts represents amounts earned by contractholders and policyholders 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 CostsDirect sales commissions and other costs associated with the sale of annuity and insurance products are deferred as DAC and amortized over time. For annuity and universal life contracts, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.
For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and therefore are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable or if premium rates charged for the contract are changed. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSource Life’s consolidated results of operations.
For annuity, life, DI and LTC insurance products, key assumptions underlying those long term projections include interest rates (both earning rates on invested assets and rates credited to policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about interest rates are the primary factor used to project interest margins, while assumptions about rates credited to policyholder accounts and equity market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing annuity and insurance business during the DAC amortization period.
The client asset value growth rate is the rate at which variable annuity and variable universal life insurance contract values are assumed to appreciate in the future. The rate is net of asset fees and anticipates a blend of equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life uses a mean reversion method as a guideline in setting near-term client asset value growth rates based on a long term view of financial market performance as well as actual historical performance. In periods when market performance results in actual contract value growth at a rate that is different than that assumed, RiverSource Life reassesses the near-term rate in order to continue to project its best estimate of long term growth. The near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance. DAC amortization expense recorded in a period when client asset value growth rates exceed near-term estimate will typically be less than in a period when growth rates fall short of near-term estimate.
45
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Summary of Significant Accounting Policies (Continued)
The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless management identifies a significant deviation over the course of its quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.
Separation CostsSeparation 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. The separation from American Express was completed in 2007.
Other Insurance and Operating Expenses
Other insurance and operating expenses primarily includesinclude expenses allocated to RiverSource Life from its parent, Ameriprise Financial, for RiverSource Life’s share of compensation, professional and consultant fees and expenses associated with information technology and communications, facilities and equipment, advertising and promotion and legal and regulatory.regulatory costs.
Income Taxes
As a result of the Separation of Ameriprise Financial from American Express, RiverSource Life will not be able to file a consolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010. RiverSource Life’s provision for income taxes represents the net amount of income taxes that it expects
to pay or to receive from various taxing jurisdictions in connection with its operations. RiverSource Life provides for income taxes based on amounts that it believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.
In connection with the provision for income taxes, the consolidated financial statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among RiverSource Life’s deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes.
RiverSource Life is required to establish a valuation allowance for any portion of 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 Pronouncements
In December 2007,January 2010, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principlesupdated the accounting standards to clarify the accounting and disclosure requirements for how an acquirer recognizes and measureschanges in the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree, and goodwill acquired. SFAS 141(R) also requires an acquirer to disclose information about the financial effectsownership percentage of a business combination. SFAS 141(R)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 prospectively for business combinations with an acquisition date on or after the beginning of the first interim or annual reporting period beginning on orending 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.
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.
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.
In June 2009, the FASB established the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in
conformity 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.
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
In April 2009, the FASB updated the accounting standards to provide guidance on estimating the fair value of 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 expand disclosures about fair value measurements. RiverSource 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 value of 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.
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 intend 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 for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At the date of adoption, the portion of previously recognized other-than-temporary impairments that represent the noncredit related loss component shall be recognized as a cumulative effect of adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other
comprehensive 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 prohibited.permitted. RiverSource Life will applyapplied the standard to any business combinations withinnew disclosure requirements in the scopefirst quarter of SFAS 141(R) occurring after December 31, 2008.2009. See Note 15 for the required disclosures.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interestsupdated the accounting standards for noncontrolling interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishesconsolidated financial statements to establish the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent. SFAS 160The standard requires that 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 interestinterests to be disclosed on the face of the Consolidated Statements of Income. SFAS 160The standard is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions of SFAS 160the standard are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Life is currently evaluatingadopted the impactnew standard as of SFAS 160January 1, 2009 and there was no impact on its consolidated financial condition and results of operations.
In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide ‘Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for InvestmentsUncertainty in Investment Companies” (“SOP 07-1”). SOP 07-1 provided clarification on the definition of an investment company. In February 2008, the FASB decided to indefinitely defer the effective date of SOP 07-1.In May 2007, the FASB issued FASB Staff Position (“FSP”) FASB Interpretation No. (“FIN”) 46(R)-7, “Application of FIN 46(R) to Investment Companies” (“FSP 46(R)-7”). FSP 46(R)-7 is dependent upon clarification of the definition of an investment company as provided in SOP 07-1 and is effective upon the adoption of that SOP. With the deferral of SOP 07-1, RiverSource Life will defer the adoption of both SOP 07-1 and FSP 46(R)-7.Income Taxes
46
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.Recent Accounting Pronouncements (Continued)
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 gives entities the option to measure certain financial instruments and other items at fair value that are not currently permitted to be measured at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 requires entities to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. RiverSource Life did not adopt SFAS 159 for any of its existing eligible assets or liabilities and has no current plans to adopt SFAS 159 for any new financial instruments.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted provided the entity 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. Any retrospective application will be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year of adoption. RiverSource Life adopted SFAS 157 effective January 1, 2008. As a result of adopting SFAS 157, RiverSource Life will record a cumulative effect after-DAC, DSIC and tax reduction to retained earnings of approximately $35 million related to adjusting the fair value of structured derivatives RiverSource Life uses to hedge its exposure to GMWB provisions. RiverSource Life initially recorded these derivatives in accordance with Emerging Issues Task Force Issue No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” SFAS 157 requires these derivatives to be marked to the price RiverSource Life would receive to sell the derivatives to a market participant (an exit price). On January 18, 2008, the FASB published for comment Proposed FSP FAS 157-c “Measuring Liabilities under FASB Statement No. 157” (“FSP 157-c”). FSP 157-c states that in the absence of a quoted price for the identical liability in an active market, a reporting entity may measure the fair value of its liability at the amount it would receive as proceeds if it were to issue that liability at the measurement date. FSP 157-c shall be applied on a prospective basis effective on the later of (a) the beginning of the period that includes the issuance date of the FSP or (b) the beginning of the period in which an entity initially applies SFAS 157. RiverSource Life is evaluating the impact that this proposed FSP will have on the valuation of its embedded derivatives. Any change to the valuation of RiverSource Life’s embedded derivatives as a result of adopting SFAS 157 and FSP 157-c will be recorded in earnings as of the date of adoption. In accordance with FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), RiverSource Life will defer the adoption of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.
In 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 accounting forstandards related to uncertainty in income taxes 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 adopted FIN 48the standard as of January 1, 2007. The effect of adopting FIN 48the standard on RiverSource Life’s consolidated financial condition and results of operations was not material.
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
47
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.Recent Accounting Pronouncements (Continued)
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 RiverSource Life’s consolidated financial condition and results of operations was not material.
In September 2005, the AICPA issued SOP 05-1, “Accounting by Insurance Enterprises for Deferred AcquisitionDAC Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1
In 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 for DAC associated with an insurance or annuity contract that is significantly modified or is internally replaced with another contract. Prior to adoption, RiverSource Life accounted for many of these transactions as contract continuations and continued amortizing existing DAC against revenue for the new or modified contract. Effective January 1, 2007, RiverSource Life adopted SOP 05-1the standard resulting in these transactions being prospectively accounted for as contract terminations. Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periods and other valuation assumptions. As a result of adopting SOP 05-1,the standard, RiverSource Life recorded as a cumulative change in accounting principle $206 million, reducing DAC by $204 million, DSIC by $11 million and liabilities for future policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134 million.
Fair 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 05-1, among other things, resultedthe standard will not impact RiverSource Life’s consolidated financial condition and results of operations.
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 an increaseVIEs. The standard is effective for interim and annual reporting periods beginning after November 15, 2009, with early adoption prohibited. RiverSource Life does not expect the adoption to DAChave a material effect on its consolidated financial condition and DSIC amortization in 2007.results of operations.
4. Investments
Available-for-Sale Securitiessecurities distributed by type were as follows:
The following is a summary of Available-for-Sale securities by type:
|
| December 31, 2009 |
| |||||||||||||
Description of Securities |
| Amortized |
| Gross |
| Gross |
| Fair |
| Non-Credit |
| |||||
|
| (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 | ) |
December 31, 2007 |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
| $ | 12,870 |
| $ | 112 |
| $ | (307 | ) | $ | 12,675 |
|
Mortgage and other asset-backed securities |
| 7,637 |
| 33 |
| (84 | ) | 7,586 |
| ||||
U.S. government and agencies obligations |
| 249 |
| 7 |
| (1 | ) | 255 |
| ||||
State and municipal obligations |
| 165 |
| 3 |
| (6 | ) | 162 |
| ||||
Foreign government bonds and obligations |
| 97 |
| 15 |
| — |
| 112 |
| ||||
Structured investments(a) |
| 2 |
| — |
| — |
| 2 |
| ||||
Total fixed maturities |
| 21,020 |
| 170 |
| (398 | ) | 20,792 |
| ||||
Common and preferred stocks |
| 30 |
| — |
| (1 | ) | 29 |
| ||||
Total |
| $ | 21,050 |
| $ | 170 |
| $ | (399 | ) | $ | 20,821 |
|
(a)(1) Includes unconsolidated collateralized debt obligations.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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.Investments (Continued)
December 31, 2006 |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
| $ | 15,312 |
| $ | 158 |
| $ | (330 | ) | $ | 15,140 |
|
Mortgage and other asset-backed securities |
| 9,398 |
| 27 |
| (175 | ) | 9,250 |
| ||||
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.
|
| December 31, 2008 |
| ||||||||||
Description of Securities |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (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, 20072009 and 2006,2008, fixed maturity securities comprised approximately 85%88% and 87%82%, respectively, of RiverSource Life’s total investments. These securities were rated by Moody’s Investors Service Inc. (“Moody’s”) and, Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings Ltd. (“Fitch”), except for approximately $1.3 billion and $1.2$1.1 billion of securities at both December 31, 20072009 and 2006, respectively,2008, which were rated by RiverSource Investments, LLC’s internal analysts using criteria similar to Moody’s, S&P and S&P.Fitch. Ratings on investment gradefixed maturity securities are presented using the median of ratings from Moody’s, S&P’s convention&P and ifFitch. If only two of the two agencies’ ratings differ,are available, the lower rating is used. A summary of fixed maturity securities by rating was as follows:
| December 31, 2007 |
| December 31, 2006 |
|
| December 31, 2009 |
| December 31, 2008 |
| |||||||||||||||||||||||||
Rating |
| Amortized |
| Fair |
| Percent of Total Fair Value |
| Amortized Cost |
| Fair |
| Percent of Total Fair Value |
| |||||||||||||||||||||
Ratings |
| Amortized |
| Fair |
| Percent of |
| Amortized |
| Fair |
| Percent of |
| |||||||||||||||||||||
|
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||||||||||||||||||||
AAA |
| $ | 7,854 |
| $ | 7,815 |
| 38 | % | $ | 9,638 |
| $ | 9,497 |
| 38 | % |
| $ | 9,194 |
| $ | 9,520 |
| 37 | % | $ | 7,038 |
| $ | 6,779 |
| 38 | % |
AA |
| 2,046 |
| 2,029 |
| 10 |
| 2,229 |
| 2,197 |
| 9 |
|
| 1,081 |
| 1,084 |
| 4 |
| 1,071 |
| 1,017 |
| 6 |
| ||||||||
A |
| 3,973 |
| 3,938 |
| 19 |
| 4,893 |
| 4,832 |
| 19 |
|
| 4,182 |
| 4,326 |
| 17 |
| 4,132 |
| 3,883 |
| 21 |
| ||||||||
BBB |
| 5,586 |
| 5,514 |
| 26 |
| 6,831 |
| 6,782 |
| 27 |
|
| 9,276 |
| 9,826 |
| 38 |
| 5,901 |
| 5,388 |
| 30 |
| ||||||||
Below investment grade |
| 1,561 |
| 1,496 |
| 7 |
| 1,698 |
| 1,687 |
| 7 |
|
| 1,409 |
| 1,243 |
| 4 |
| 1,310 |
| 1,003 |
| 5 |
| ||||||||
Total fixed maturities |
| $ | 21,020 |
| $ | 20,792 |
| 100 | % | $ | 25,289 |
| $ | 24,995 |
| 100 | % |
| $ | 25,142 |
| $ | 25,999 |
| 100 | % | $ | 19,452 |
| $ | 18,070 |
| 100 | % |
At December 31, 20072009 and 2006,2008, approximately 45%19% and 47%44%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage-backedmortgage backed securities. No holdings of any other issuer were greater than 10% of shareholder’s equity.
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 loss position as of December 31, 2007:position:
|
| Less than 12 months |
| 12 months or more |
| Total |
| |||||||||||||||||||||||||||||||||||||
Description of securities: |
| Fair |
| Unrealized Losses |
| Fair |
| Unrealized Losses |
| Fair |
| Unrealized Losses |
| |||||||||||||||||||||||||||||||
|
| (in millions) |
|
| December 31, 2009 |
| ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||||||||
Description of Securities |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| |||||||||||||||||||||||||
|
| (in millions, except number of securities) |
| |||||||||||||||||||||||||||||||||||||||||
Corporate debt securities |
| $ | 1,477 |
| $ | (45 | ) | $ | 7,083 |
| $ | (262 | ) | $ | 8,560 |
| $ | (307 | ) |
| 133 |
| $ | 1,088 |
| $ | (18 | ) | 165 |
| $ | 1,313 |
| $ | (88 | ) | 298 |
| $ | 2,401 |
| $ | (106 | ) |
Mortgage and other asset-backed securities |
| 888 |
| (15 | ) | 4,219 |
| (69 | ) | 5,107 |
| (84 | ) | |||||||||||||||||||||||||||||||
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 |
| — |
| — |
| 154 |
| (1 | ) | 154 |
| (1 | ) |
| 2 |
| 89 |
| (1 | ) | — |
| — |
| — |
| 2 |
| 89 |
| (1 | ) | ||||||||||||
State and municipal obligations |
| 47 |
| (4 | ) | 63 |
| (2 | ) | 110 |
| (6 | ) | |||||||||||||||||||||||||||||||
Foreign government bonds and obligations |
| — |
| — |
| 2 |
| — |
| 2 |
| — |
|
| — |
| — |
| — |
| 2 |
| 4 |
| (1 | ) | 2 |
| 4 |
| (1 | ) | ||||||||||||
Other structured investments |
| — |
| — |
| — |
| 2 |
| — |
| — |
| 2 |
| — |
| — |
| |||||||||||||||||||||||||
Common and preferred stock |
| 29 |
| (1 | ) | — |
| — |
| 29 |
| (1 | ) |
| — |
| — |
| — |
| 2 |
| 23 |
| (7 | ) | 2 |
| 23 |
| (7 | ) | ||||||||||||
Total |
| $ | 2,441 |
| $ | (65 | ) | $ | 11,521 |
| $ | (334 | ) | $ | 13,962 |
| $ | (399 | ) |
| 250 |
| $ | 3,016 |
| $ | (67 | ) | 285 |
| $ | 2,186 |
| $ | (377 | ) | 535 |
| $ | 5,202 |
| $ | (444 | ) |
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, 2006:
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||
Description of securities: |
| Fair |
| Unrealized Losses |
| Fair |
| Unrealized Losses |
| Fair |
| Unrealized Losses |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt securities |
| $ | 1,362 |
| $ | (19 | ) | $ | 9,514 |
| $ | (311 | ) | $ | 10,876 |
| $ | (330 | ) |
Mortgage and other asset-backed securities |
| 862 |
| (5 | ) | 6,616 |
| (170 | ) | 7,478 |
| (175 | ) | ||||||
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 |
| — |
| ||||||
Total |
| $ | 2,232 |
| $ | (24 | ) | $ | 16,428 |
| $ | (490 | ) | $ | 18,660 |
| $ | (514 | ) |
In evaluating potential other-than-temporary impairments, RiverSource Life considers the extent to which amortized costs exceeds fair value and the duration of that difference. 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, 2007:
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||
Ratio of Fair Value |
| Number of Securities |
| Fair |
| Gross Unrealized Losses |
| Number |
| Fair |
| Gross Unrealized Losses |
| Number |
| Fair |
| Gross Unrealized Losses |
| ||||||
|
| (in millions, except number of securities) |
| ||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||
95% - 100% |
| 164 |
| $ | 2,015 |
| $ | (25 | ) | 486 |
| $ | 10,169 |
| $ | (180 | ) | 650 |
| $ | 12,184 |
| $ | (205 | ) |
90% - 95% |
| 31 |
| 305 |
| (22 | ) | 48 |
| 811 |
| (57 | ) | 79 |
| 1,116 |
| (79 | ) | ||||||
80% - 90% |
| 4 |
| 121 |
| (18 | ) | 32 |
| 461 |
| (66 | ) | 36 |
| 582 |
| (84 | ) | ||||||
< 80% |
| 1 |
| — |
| — |
| 10 |
| 80 |
| (31 | ) | 11 |
| 80 |
| (31 | ) | ||||||
Total |
| 200 |
| $ | 2,441 |
| $ | (65 | ) | 576 |
| $ | 11,521 |
| $ | (334 | ) | 776 |
| $ | 13,962 |
| $ | (399 | ) |
50
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.Investments (Continued)
|
| December 31, 2008 |
| ||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||
Description of Securities |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| ||||||
|
| (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 RiverSource Life’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to changes in interest rates and credit spreads across asset classes. As notedsectors. The primary driver of lower unrealized losses in 2009 compared to 2008 was the table above,tightening of credit spreads across sectors, partially offset by higher interest rates. In addition, a significant 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 Life recorded a cumulative effect increase to the amortized cost of previously other-than-temporarily impaired investments that increased the gross unrealized losses relates toon Available-for-Sale 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. The securities with a fair value to amortized cost ratio of 80%-90% primarily relateby $64 million. This impact is due to the consumer products, financial and home building industries. impairment of Available-for-Sale securities recognized in other comprehensive income (loss) previously recognized through earnings for factors other than credit.
The total gross unrealized lossfollowing 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 portion of the home building industrysecurities’ total other-than-temporary impairments was $28 million. The securities with a fair value to cost of less than 80% primarily relate to the financial and home building industries. The largest unrealized loss associated with an individual issuer, excluding GNMA, FNMA and FHLMC mortgage-backed securities, was $14 million. The securities related to this issuer have a fair value to amortized cost ratio of 88% and have beenrecognized in an unrealized loss position for more than 12 months. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value. In addition, RiverSource Life has the ability and intent to hold these securities until anticipated recovery which may not be until maturity.other comprehensive income (loss):
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. Additionally, RiverSource Life has the ability and intent to hold these securities for a time sufficient to recover its amortized cost and has, therefore, concluded that none had other-than-temporary impairment at December 31, 2007.
RiverSource Life’s total mortgage and asset backed exposure at December 31, 2007 was $7.6 billion which included $4.1 billion of residential mortgage backed securities and $2.7 billion of commercial mortgage backed securities. At December 31, 2007, residential mortgage backed securities included $3.5 billion of agency-backed securities, $0.4 billion of Alt-A securities, and $0.2 billion of prime, non-agency securities. With respect to the Alt-A securities, the vast majority are rated AAA. None of the structures are levered, and the majority of the AAA-rated holdings are “super senior” bonds, meaning they have more collateral support or credit enhancement than required to receive a AAA rating. While overall delinquencies in the market continue to deteriorate, most of these positions are performing in-line or better than their vintage. With regard to asset backed securities, RiverSource Life’s exposure at December 31, 2007 was $0.8 billion, which included $115 million of securities backed by subprime collateral. These securities are predominantly AAA-rated bonds backed by seasoned, traditional, first lien collateral. Holdings include both floating rate and short-duration, fixed securities. RiverSource Life has no other structured or hedge fund investments with exposure to subprime residential mortgages.
|
| (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 sales and other-than-temporary impairments of Available-for-Sale securities (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 and annuity liabilities,reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates. 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 the change in net unrealized securities gains (losses), net of tax, on Available-for-Sale securities included in accumulated other comprehensive loss for the years ended December 31:income (loss):
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Holding (losses) gains, net of tax of $38, $63 and $261, respectively |
| $ | 70 |
| $ | (116 | ) | $ | (485 | ) |
Reclassification of realized gains, net of tax of $16, $17 and $17, respectively |
| (28 | ) | (33 | ) | (32 | ) | |||
DAC, net of tax of $5, $15 and $28, respectively |
| (7 | ) | 29 |
| 53 |
| |||
DSIC, net of tax of nil, $2 and $5, respectively |
| (1 | ) | 3 |
| 8 |
| |||
Fixed annuity liabilities, net of tax of $11, $22 and $3, respectively |
| 18 |
| 40 |
| (5 | ) | |||
Net unrealized securities gains (losses) |
| $ | 52 |
| $ | (77 | ) | $ | (461 | ) |
|
| Net |
| Deferred |
| Accumulated Other |
| |||
|
| (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.
RIVERSOURCE LIFE INSURANCE COMPANYNet 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| 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 | ) | |||
4.Investments (Continued)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, 20072009 were as follows:
|
| Amortized |
| Fair |
|
| Amortized Cost |
| Fair Value |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Due within one year |
| $ | 1,272 |
| $ | 1,277 |
|
| $ | 738 |
| $ | 751 |
|
Due after one year through five years |
| 5,567 |
| 5,537 |
|
| 6,638 |
| 6,862 |
| ||||
Due after five years through 10 years |
| 5,339 |
| 5,186 |
|
| 4,786 |
| 5,062 |
| ||||
Due after 10 years |
| 1,203 |
| 1,204 |
|
| 2,976 |
| 3,197 |
| ||||
|
| 13,381 |
| 13,204 |
|
| 15,138 |
| 15,872 |
| ||||
Mortgage and other asset-backed securities |
| 7,637 |
| 7,586 |
| |||||||||
Structured investments |
| 2 |
| 2 |
| |||||||||
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 |
| 29 |
|
| 30 |
| 23 |
| ||||
Total |
| $ | 21,050 |
| $ | 20,821 |
|
| $ | 25,172 |
| $ | 26,022 |
|
The expected payments onActual 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 and structured investments mayare not coincide 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:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Sales |
| $ | 3,020 |
| $ | 1,897 |
| $ | 3,124 |
|
Maturities, sinking fund payments and calls |
| 1,908 |
| 2,014 |
| 2,242 |
| |||
Purchases |
| (687 | ) | (1,433 | ) | (5,780 | ) | |||
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, are noted in the following table for the years ended December 31:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Gross realized gains from sales |
| $ | 64 |
| $ | 60 |
| $ | 108 |
|
Gross realized losses from sales |
| (20 | ) | (10 | ) | (39 | ) | |||
Other-than-temporary impairments |
| (4 | ) | — |
| (19 | ) | |||
The $4 million of other-than-temporary impairments in 2007 related to corporate debt securities in the publishing and home building industries which were downgraded in 2007. 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, 20072009 and 2006,2008, bonds carried at $7 million and $18$6 million, respectively, were on deposit with various states as required by law.
52
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.Investments (Continued)
Commercial mortgage loans and syndicated loans, netMortgage Loans, Net
The following is a summary of commercial mortgage loans and syndicated loans at December 31:loans:
|
| December 31, |
| |||||||||||
|
| 2007 |
| 2006 |
|
| 2009 |
| 2008 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Commercial mortgage loans |
| $ | 2,908 |
| $ | 2,827 |
|
| $ | 2,562 |
| $ | 2,754 |
|
Less: allowance for loan losses |
| (16 | ) | (37 | ) |
| (30 | ) | (17 | ) | ||||
Commercial mortgage loans, net |
| $ | 2,892 |
| $ | 2,790 |
|
| $ | 2,532 |
| $ | 2,737 |
|
|
|
|
|
|
| |||||||||
Syndicated loans |
| $ | 62 |
| $ | 112 |
| |||||||
Less: allowance for loan losses |
| (4 | ) | (4 | ) | |||||||||
Net syndicated loans |
| $ | 58 |
| $ | 108 |
| |||||||
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 |
| Funding |
| On-Balance |
| Funding |
| ||||
|
| (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 |
| Funding |
| On-Balance |
| Funding |
| ||||
|
| (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 were made in the ordinary course of business. The funding commitments at December 31, 2009 and 2008 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, 2007 and 2006, RiverSource Life had not recorded any investment in impaired commercial mortgage loans. RiverSource Life did not recognize any interest incomeTrading Securities
Net recognized gains (losses) related to impaired commercial mortgage loans for the years ended December 31, 2007, 2006 and 2005.
The balances of and changes in the allowance for loan losses were as follows:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 37 |
| $ | 41 |
| $ | 45 |
|
Provision for loan losses |
| (21 | ) | — |
| — |
| |||
Foreclosures, write-offs and loan sales |
| — |
| (4 | ) | (4 | ) | |||
Balance at December 31 |
| $ | 16 |
| $ | 37 |
| $ | 41 |
|
In 2007, RiverSource Life recorded a $21 million decrease to the allowance for loan losses on commercial mortgage loans.
Concentrations of credit risk of commercial mortgage loans by regiontrading securities held at December 31, were:
|
| 2007 |
| 2006 |
| ||||||||
Commercial mortgage loans by U.S. region |
| On-Balance |
| Funding |
| On-Balance |
| Funding |
| ||||
|
| (in millions) |
| ||||||||||
Atlantic |
| $ | 922 |
| $ | 22 |
| $ | 859 |
| $ | 40 |
|
North Central |
| 687 |
| 33 |
| 739 |
| 22 |
| ||||
Pacific |
| 461 |
| 21 |
| 397 |
| 15 |
| ||||
Mountain |
| 343 |
| 9 |
| 298 |
| 13 |
| ||||
South Central |
| 298 |
| 8 |
| 337 |
| 2 |
| ||||
New England |
| 197 |
| 8 |
| 197 |
| 2 |
| ||||
|
| 2,908 |
| 101 |
| 2,827 |
| 94 |
| ||||
Less: allowance for loan losses |
| (16 | ) | — |
| (37 | ) | — |
| ||||
Total |
| $ | 2,892 |
| $ | 101 |
| $ | 2,790 |
| $ | 94 |
|
2009, 2008 and 2007 were nil, $9 million and $(2) million, respectively.
53
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.Investments (Continued)
Concentrations of credit risk of commercial mortgage loans by property type at December 31 were:
|
| 2007 |
| 2006 |
| ||||||||
Commercial mortgage loans by property type |
| On-Balance |
| Funding |
| On-Balance |
| Funding |
| ||||
|
| (in millions) |
| ||||||||||
Office buildings |
| $ | 874 |
| $ | 12 |
| $ | 962 |
| $ | 4 |
|
Shopping centers and retail |
| 860 |
| 66 |
| 718 |
| 71 |
| ||||
Apartments |
| 419 |
| 8 |
| 470 |
| 2 |
| ||||
Industrial buildings |
| 510 |
| 9 |
| 458 |
| 12 |
| ||||
Hotels and motels |
| 78 |
| — |
| 89 |
| 4 |
| ||||
Medical buildings |
| 42 |
| — |
| 45 |
| — |
| ||||
Mixed use |
| 52 |
| 1 |
| 44 |
| — |
| ||||
Other |
| 73 |
| 5 |
| 41 |
| 1 |
| ||||
|
| 2,908 |
| 101 |
| 2,827 |
| 94 |
| ||||
Less: allowance for loan losses |
| (16 | ) | — |
| (37 | ) | — |
| ||||
Total |
| $ | 2,892 |
| $ | 101 |
| $ | 2,790 |
| $ | 94 |
|
Commitments to fund commercial mortgages were made in the ordinary course of business. The funding commitments at December 31, 2007 and 2006 approximate fair value.
Sources of investment incomeInvestment Income and net realized investment gainNet Realized Investment Gains (Losses)
Net investment income for the years ended December 31 is summarized as follows:
|
| Years Ended December 31, |
| |||||||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
|
| 2009 |
| 2008 |
| 2007 |
| ||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||
Income on fixed maturities |
| $ | 1,187 |
| $ | 1,409 |
| $ | 1,461 |
|
| $ | 1,371 |
| $ | 1,043 |
| $ | 1,187 |
|
Income on commercial mortgage loans |
| 173 |
| 181 |
| 197 |
|
| 160 |
| 173 |
| 173 |
| ||||||
Trading securities and other investments |
| 213 |
| 86 |
| 156 |
|
| 35 |
| 55 |
| 82 |
| ||||||
|
| 1,573 |
| 1,676 |
| 1,814 |
|
| 1,566 |
| 1,271 |
| 1,442 |
| ||||||
Less: investment expenses |
| 18 |
| 19 |
| 28 |
|
| (40 | ) | (19 | ) | (18 | ) | ||||||
Total |
| $ | 1,555 |
| $ | 1,657 |
| $ | 1,786 |
|
| $ | 1,526 |
| $ | 1,252 |
| $ | 1,424 |
|
Net realized investment gains for the years ended December 31 is(losses) are summarized as follows:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Fixed maturities |
| $ | 40 |
| $ | 50 |
| $ | 50 |
|
Commercial mortgage loans |
| — |
| 1 |
| (2 | ) | |||
Reduction in the allowance for loan losses |
| 21 |
| — |
| — |
| |||
Total |
| $ | 61 |
| $ | 51 |
| $ | 48 |
|
54
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| 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 year ended December 31, 2005,RTA, a subsidiary of RiverSource Life consolidated two 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. The SLTs were liquidatedInsurance Company, has variable interests in 2005, resulting in a $14 million pretax gain for the year ended December 31, 2005. There is no remaining exposure to these SLTs as a result of their liquidations.
RiverSource Life has other significant variable interestsaffordable housing partnerships for which it is not considered the 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’s
RTA’s maximum exposure to loss as a result of its investment in the CDO residual tranchesaffordable housing partnerships is represented bylimited to the carrying value.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 Costs
During 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 |
| Reinsurance |
| DAC |
| DSIC |
| Other |
| Future |
| Other |
| 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 |
| Benefits, |
| Amortization |
| Other |
| 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:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 4,411 |
| $ | 4,036 |
| $ | 3,638 |
|
Impact of SOP 05-1 at adoption |
| (204 | ) | — |
| — |
| |||
Capitalization of acquisition costs |
| 704 |
| 687 |
| 633 |
| |||
Amortization, excluding impact of annual third quarter changes in DAC-related consumptions |
| (454 | ) | (394 | ) | (383 | ) | |||
Amortization, impact of annual third quarter changes in DAC-related assumptions |
| (16 | ) | 38 |
| 67 |
| |||
Impact of changes in net unrealized securities losses (gains) |
| (12 | ) | 44 |
| 81 |
| |||
Balance at December 31 |
| $ | 4,429 |
| $ | 4,411 |
| $ | 4,036 |
|
|
| 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:
|
| 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 adopted a new accounting standard on the recognition and presentation of other-than-temporary impairments in the first quarter of 2009. The adoption had no net impact to DAC and DSIC.
Effective January 1, 2008, RiverSource Life adopted a new 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 and
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 452 |
| $ | 370 |
| $ | 303 |
|
Impact of SOP 05-1 at adoption |
| (11 | ) | — |
| — |
| |||
Capitalization of sales inducements |
| 124 |
| 126 |
| 94 |
| |||
Amortization |
| (53 | ) | (48 | ) | (40 | ) | |||
Impact of changes in net unrealized securities losses (gains) |
| (1 | ) | 4 |
| 13 |
| |||
Balance at December 31 |
| $ | 511 |
| $ | 452 |
| $ | 370 |
|
DSIC, 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 modifications or exchanges of insurance contracts and recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to DAC and DSIC, respectively.
7. Lines of CreditReinsurance
Generally, RiverSource Life has availablereinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products. As a committed lineresult, RiverSource Life typically retains and is at risk for, at most, 10% of crediteach policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level during 2001 (2002 for RiverSource Life of NY) for term life insurance and 2002 (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, the maximum amount of life insurance risk retained by RiverSource Life 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 Ameriprise Financial aggregating $200 million. The interest rate for any borrowings is established by reference to LIBOR plus 28 basis points. There were no amounts outstanding on this line of credit at December 31, 2007 and 2006.a policy.
Also,For existing LTC policies, RiverSource Life has(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 collateral loan agreementcoinsurance 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 Ameriprise Financial aggregating up to $75 million. The interest rateunaffiliated reinsurance companies. RiverSource Life retains all risk for any borrowings is equal to the preceding month’s effective new money rate forclaims on DI contracts sold on other policy forms. RiverSource Life’s permanent investments. There were no amounts outstanding atLife also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.
In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies.
At December 31, 20072009 and 2006.2008, 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 Life also reinsures a portion of the risks assumed under its DI and LTC policies.
The effect of reinsurance on premiums was as follows:
55
|
| 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 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 from its primary obligation to policyholders.
Included in reinsurance recoverables is approximately $1.3 billion and $1.2 billion related to LTC risk ceded to Genworth as of December 31, 2009 and 2008, respectively. Included in future policy benefits is $667 million and $689 million related to assumed reinsurance arrangements as of December 31, 2009 and 2008, respectively.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.Variable Annuity Guarantees
The majority of the variable annuity contracts offered by RiverSource Life contain GMDB provisions. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as GGU benefits. In addition, RiverSource Life offers contracts with GMWB and GMAB provisions. RiverSource Life previously offered contracts containing GMIB provisions. RiverSource Life has established additional liabilities for the variable annuity death benefits, GMIB provisions and for life contingent benefits associated with GMWB provisions. GMAB and non-life contingent benefits associated with GMWB provisions are considered embedded derivatives and are recorded at fair value.
The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on equity market performance. At issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance. The GMWB offered initially guarantees that the client can withdraw 7% per year until the amount withdrawn is equal to the guaranteed amount, regardless of the performance of the underlying funds. In 2006, RiverSource Life began offering an enhanced withdrawal benefit that gives 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. In 2007, RiverSource Life added a new GMWB benefit design that is available in a joint version that promises 6% withdrawals while either contractholder remains alive. In addition, once withdrawals begin, the policyholder’s funds are moved to one of the three less aggressive asset allocation models (of the five that are available prior to withdrawal).
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.
56
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.Variable Annuity Guarantees (Continued)
The following table provides summary information related to all variable annuity guarantees for which RiverSource Life has established additional liabilities as of December 31:
Variable Annuity Guarantees by Benefit Type(1) |
| 2007 |
| 2006 |
| ||
|
| (in millions, except age) |
| ||||
Contracts with GMDB providing for return of premium: |
|
|
|
|
| ||
Total contract value |
| $ | 25,804 |
| $ | 17,418 |
|
Contract value in separate accounts |
| $ | 23,892 |
| $ | 15,859 |
|
Net amount at risk(2) |
| $ | 26 |
| $ | 13 |
|
Weighted average attained age |
| 60 |
| 61 |
| ||
Contracts with GMDB providing for six-year reset: |
|
|
|
|
| ||
Total contract value |
| $ | 20,231 |
| $ | 23,544 |
|
Contract value in separate accounts |
| $ | 17,617 |
| $ | 20,058 |
|
Net amount at risk(2) |
| $ | 167 |
| $ | 227 |
|
Weighted average attained age |
| 60 |
| 61 |
| ||
Contracts with GMDB providing for one-year ratchet: |
|
|
|
|
| ||
Total contract value |
| $ | 7,908 |
| $ | 6,729 |
|
Contract value in separate accounts |
| $ | 7,143 |
| $ | 5,902 |
|
Net amount at risk(2) |
| $ | 81 |
| $ | 26 |
|
Weighted average attained age |
| 61 |
| 61 |
| ||
Contracts with GMDB providing for five-year ratchet: |
|
|
|
|
| ||
Total contract value |
| $ | 1,211 |
| $ | 907 |
|
Contract value in separate accounts |
| $ | 1,163 |
| $ | 870 |
|
Net amount at risk(2) |
| $ | 1 |
| $ | — |
|
Weighted average attained age |
| 58 |
| 57 |
| ||
Contracts with other GMDB: |
|
|
|
|
| ||
Total contract value |
| $ | 693 |
| $ | 586 |
|
Contract value in separate accounts |
| $ | 639 |
| $ | 530 |
|
Net amount at risk(2) |
| $ | 12 |
| $ | 11 |
|
Weighted average attained age |
| 65 |
| 64 |
| ||
Contracts with GGU death benefit: |
|
|
|
|
| ||
Total contract value |
| $ | 950 |
| $ | 811 |
|
Contract value in separate accounts |
| $ | 873 |
| $ | 730 |
|
Net amount at risk(2) |
| $ | 80 |
| $ | 62 |
|
Weighted average attained age |
| 62 |
| 62 |
| ||
Contracts with GMIB: |
|
|
|
|
| ||
Total contract value |
| $ | 927 |
| $ | 928 |
|
Contract value in separate accounts |
| $ | 859 |
| $ | 853 |
|
Net amount at risk(2) |
| $ | 18 |
| $ | 14 |
|
Weighted average attained age |
| 62 |
| 61 |
| ||
Contracts with GMWB: |
|
|
|
|
| ||
Total contract value |
| $ | 5,104 |
| $ | 4,791 |
|
Contract value in separate accounts |
| $ | 4,980 |
| $ | 4,761 |
|
Benefit amount in excess of account value |
| $ | 22 |
| $ | — |
|
Weighted average attained age |
| 62 |
| 61 |
| ||
Contracts with GMWB for life: |
|
|
|
|
| ||
Total contract value |
| $ | 7,958 |
| $ | 2,396 |
|
Contract value in separate accounts |
| $ | 7,685 |
| $ | 2,349 |
|
Benefit amount in excess of account value |
| $ | 33 |
| $ | — |
|
Weighted average attained age |
| 62 |
| 63 |
| ||
57
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.Variable Annuity Guarantees (Continued)
Variable Annuity Guarantees by Benefit Type(1) (Continued) |
| 2007 |
| 2006 |
| ||
|
| (in millions, except age) |
| ||||
Contracts with GMAB: |
|
|
|
|
| ||
Total contract value |
| $ | 2,260 |
| $ | 1,350 |
|
Contract value in separate accounts |
| $ | 2,205 |
| $ | 1,340 |
|
Benefit amount in excess of account value |
| $ | 3 |
| $ | — |
|
Weighted average attained age |
| 55 |
| 55 |
| ||
|
| |
|
| |
For the year ended December 31, 2007, additional liabilities (assets) and incurred claims were:
|
| GMDB & GGU |
| GMIB |
| GMWB |
| GMAB |
| ||||
|
| (in millions) |
| ||||||||||
Liability (asset) balance at January 1 |
| $ | 26 |
| $ | 5 |
| $ | (12 | ) | $ | (5 | ) |
Reported claims |
| 3 |
| 2 |
| — |
| — |
| ||||
Liability balance at December 31 |
| 24 |
| 3 |
| 136 |
| 33 |
| ||||
Incurred claims (sum of reported and change in liability (assets)) |
| 1 |
| — |
| 148 |
| 38 |
| ||||
For the year ended December 31, 2006, additional liabilities (assets) and incurred 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 | ) | ||||
The liabilities for guaranteed benefits are supported by general account assets. Changes in these liabilities are included in benefits, claims, losses and settlement expenses.
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.
58
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities
Future policy benefits and policy claims and other policyholders’ funds as of December 31, consisted of the following:
|
| December 31, |
| |||||||||||
|
| 2007 |
| 2006 |
|
| 2009 |
| 2008 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Fixed annuities |
| $ | 14,382 |
| $ | 16,841 |
|
| $ | 16,558 |
| $ | 14,058 |
|
Equity indexed annuities accumulated host values |
| 253 |
| 267 |
|
| 159 |
| 228 |
| ||||
Equity indexed annuities embedded derivative |
| 53 |
| 50 |
| |||||||||
Equity indexed annuities embedded derivatives |
| 9 |
| 16 |
| |||||||||
Variable annuities fixed sub-accounts |
| 5,419 |
| 5,975 |
|
| 6,127 |
| 5,623 |
| ||||
GMWB variable annuity guarantees |
| 136 |
| (12 | ) | |||||||||
GMAB variable annuity guarantees |
| 33 |
| (5 | ) | |||||||||
Variable annuity GMWB |
| 204 |
| 1,471 |
| |||||||||
Variable annuity GMAB |
| 100 |
| 367 |
| |||||||||
Other variable annuity guarantees |
| 27 |
| 31 |
|
| 12 |
| 67 |
| ||||
Total annuities |
| 20,303 |
| 23,147 |
|
| 23,169 |
| 21,830 |
| ||||
Variable universal life (“VUL”)/universal life (“UL”) insurance |
| 2,568 |
| 2,562 |
| |||||||||
VUL/ UL insurance |
| 2,595 |
| 2,526 |
| |||||||||
Other life, DI and LTC insurance |
| 4,106 |
| 3,852 |
|
| 4,619 |
| 4,397 |
| ||||
Total future policy benefits |
| 26,977 |
| 29,561 |
|
| 30,383 |
| 28,753 |
| ||||
Policy claims and other policyholders’ funds |
| 91 |
| 89 |
|
| 123 |
| 172 |
| ||||
Total future policy benefits and policy claims and other policyholders’ funds |
| $ | 27,068 |
| $ | 29,650 |
|
| $ | 30,506 |
| $ | 28,925 |
|
Separate account liabilities as of December 31 consisted of the following:
|
| December 31, |
| |||||||||||
|
| 2007 |
| 2006 |
|
| 2009 |
| 2008 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Variable annuity variable sub-accounts |
| $ | 51,764 |
| $ | 43,515 |
|
| $ | 48,982 |
| $ | 37,657 |
|
VUL insurance variable sub-accounts |
| 6,244 |
| 5,709 |
|
| 5,239 |
| 4,091 |
| ||||
Other insurance variable sub-accounts |
| 62 |
| 63 |
|
| 46 |
| 39 |
| ||||
Total separate account liabilities |
| $ | 58,070 |
| $ | 49,287 |
|
| $ | 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 risks under these obligations are partially hedgedrelated to fixed annuities with derivative instruments. These derivatives were intended to be cash flow hedgesAs of interest credited on forecasted sales rather than a hedge of inforce risk. These derivatives consisted of interest rate swaptions with a notional value of $0.8 billion and $1.2 billion at December 31, 20072009 and 2006, respectively. Effective January 1, 2007, RiverSource Life removed the cash flow hedged designation from its swaptions because they2008, there were no longer considered highly effective. The fair value ofoutstanding derivatives to hedge these swaptions was $1 million and $2 million at December 31, 2007 and 2006, respectively.
59
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’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 derivative and is accounted for separately. The change in fair value of the embedded derivative reserve is reflected in interest credited to fixed accounts. As a means of economically hedging its obligation under the stock market return provision,instruments. In 2007, RiverSource Life purchases and writes index options and enters into futures contracts. The changes in the fair valuediscontinued new sales of these 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.
|
| 2007 |
| 2006 |
| ||||||||
|
| Notional |
| Fair |
| Notional |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Purchased options and futures |
| $ | 237 |
| $ | 43 |
| $ | 271 |
| $ | 40 |
|
Written options and futures |
| (58 | ) | (1 | ) | (67 | ) | (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 provisions. GMAB and non-life contingent benefits associated with GMWB provisions are considered embedded derivatives and are recorded at fair value. The changes in fair values of these embedded derivatives are reflected in benefits, claims, losses and settlement expenses. The negative fair values for GMWB and GMAB at December 31, 2006 reflected that under conditions and expectations at that time, RiverSource Life believed the applicable fees chargedpreviously offered contracts with GMIB provisions. See Note 2 and Note 9 for the rider would more than offset the future benefits paid to policyholders under the rider provisions.additional information regarding RiverSource Life’s variable annuity guarantees. RiverSource Life does not currently hedge its risk under the 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 total
value of variable annuity contracts with GMWB riders increased from $7.2$12.7 billion at December 31, 20062008 to $13.1$19.2 billion at December 31, 2007.2009. The total value of variable annuity contracts with GMAB riders increased from $1.4$2.0 billion at December 31, 20062008 to $2.3$2.9 billion at December 31, 2007. As a means of economically hedging its obligations under GMWB and GMAB provisions, RiverSource Life purchases equity put and call options, enters into interest rate swaps and trades equity futures contracts.2009. The changes in the fairtotal value of these 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 GMDB riders increased from $42.2 billion at December 31, were as follows:
|
| 2007 |
| 2006 |
| ||||||||
|
| Notional |
| Fair |
| Notional |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Purchased options and futures |
| $ | 6,318 |
| $ | 338 |
| $ | 1,410 |
| $ | 171 |
|
Interest rate swaps |
| 202 |
| 2 |
| 359 |
| (1 | ) | ||||
Sold equity futures |
| (202 | ) | — |
| (111 | ) | — |
| ||||
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.
60
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)
Insurance Liabilities
VUL/UL is the largest group of insurance policies written by RiverSource Life. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for VUL contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders.policyholders. RiverSource Life also offers term and whole life insurance as well as disability products. RiverSource Life no longer offers LTC products but has inforcein force policies from prior years. Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims, and obligations for anticipated future claims.
10.9. Income TaxesVariable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by RiverSource Life contain GMDB provisions. RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as GGU benefits. In addition, RiverSource Life offers contracts with GMWB and GMAB provisions. RiverSource Life previously offered contracts containing GMIB provisions. See Note 2 and Note 8 for additional information regarding the liabilities related to variable annuity guarantees.
The GMDB provisions provide a specified minimum return upon death of the contractholder. The death benefit payable is the greater of (i) the contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract. RiverSource Life has three primary GMDB provisions:
·Return of premium — provides purchase payments minus adjusted partial surrenders.
·Reset — provides that the value resets to the account value every sixth contract anniversary minus adjusted partial surrenders. This provision is often provided in combination with the return of premium provision. This provision is no longer offered.
·Ratchet — provides that the value ratchets up to the maximum account value at specified anniversary intervals, plus subsequent purchase payments less adjusted partial surrenders.
The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on equity market performance. At issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance.
RiverSource Life qualifies ashas GMWB riders in force with the following provisions:
·withdrawals at a life insurance company for federal income tax purposes. As such, RiverSource Lifespecified rate per year until the amount withdrawn is subjectequal to the Internal Revenue Code provisions applicableguaranteed 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 life insurance companies.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 to increase the guaranteed amount as long as withdrawals have not been taken.
ProvisionsVariable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for income taxes were:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Current income tax: |
|
|
|
|
|
|
| |||
Federal |
| $ | 15 |
| $ | 66 |
| $ | 56 |
|
State |
| 1 |
| 3 |
| 4 |
| |||
Total current income tax |
| 16 |
| 69 |
| 60 |
| |||
Deferred federal income tax |
| 83 |
| 123 |
| 122 |
| |||
Income tax provision |
| $ | 99 |
| $ | 192 |
| $ | 182 |
|
an additional charge. The principal reasonsGMAB rider guarantees that, regardless of market performance at the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35% are as follows:
|
| 2007 |
| 2006 |
| 2005 |
|
Tax at U.S. statutory rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
Changes in taxes resulting from: |
|
|
|
|
|
|
|
Tax-exempt interest and dividend income |
| (10.3 | ) | (6.5 | ) | (9.4 | ) |
State taxes, net of federal benefit |
| 0.1 |
| 0.3 |
| 0.4 |
|
Foreign tax credit, net of addback |
| (2.1 | ) | (0.7 | ) | (0.5 | ) |
Taxes applicable to prior years |
| (3.7 | ) | 0.1 |
| 2.8 |
|
Other, net |
| — |
| 0.1 |
| 0.1 |
|
Income tax provision effective rate |
| 19.0 | % | 28.3 | % | 28.4 | % |
RiverSource Life’s effective tax rate was 19.0% and 28.3% for the years ended December 31, 2007 and 2006, respectively. The decrease in the effective tax rate primarily reflects lower pretax income as well as higher levels of tax advantaged items, including dividends received deduction and foreign tax credits, relative to pretax income for the year ended December 31, 2007 as well as a $7 million tax benefit related to the finalizationend of the prior year tax return.10-year waiting period, the contract value will be no less than the original investment or
RIVERSOURCE LIFE INSURANCE COMPANY80% 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 |
| Total |
| Contract |
| Net |
| Weighted |
| Total |
| Contract |
| Net |
| Weighted |
| ||||||
|
| (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 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(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 & |
| 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. Income Taxes (Continued)Lines of Credit
Deferred income tax assetsIn 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, 2009, the outstanding balance under this credit line was $300 million which was repaid in full with payments in January and liabilities result from temporary differences betweenFebruary 2010.
RiverSource Life has available a committed line of credit with Ameriprise Financial aggregating $200 million. The interest rate for any borrowings is established by reference to LIBOR. There were no amounts outstanding on this line of credit at December 31, 2009 and 2008.
In September 2008, RiverSource Life, as the assets and liabilities measured for U.S. GAAP reporting versus income tax return purposes. The significant componentslender, 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 deferred income taxstatutory admitted assets and liabilitiesas 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, are reflected in the following table:2009 and 2008.
|
| 2007 |
| 2006 |
| ||
|
| (in millions) |
| ||||
Deferred income tax assets: |
|
|
|
|
| ||
Liabilities for future policy benefits |
| $ | 1,212 |
| $ | 1,146 |
|
Investment related |
| 29 |
| 75 |
| ||
Net unrealized losses on Available-for Sale securities and derivatives |
| 87 |
| 115 |
| ||
Tax credit carryforwards |
| 19 |
| — |
| ||
Other |
| 44 |
| 45 |
| ||
Gross deferred income tax assets |
| 1,391 |
| 1,381 |
| ||
|
|
|
|
|
| ||
Deferred income tax liabilities: |
|
|
|
|
| ||
DAC |
| 1,253 |
| 1,253 |
| ||
DSIC |
| 179 |
| 158 |
| ||
Other |
| 92 |
| 60 |
| ||
Gross deferred income tax liabilities |
| 1,524 |
| 1,471 |
| ||
Net deferred income tax liabilities |
| $ | 133 |
| $ | 90 |
|
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, requiredan exit price. The exit price assumes the asset or liability is not exchanged subject to establish 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 allowance for any portiontechniques. 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 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 lossesfair value hierarchy are recognized for tax purposes.
Additionally, RiverSource Life has $11.9 million in Alternative Minimum Tax (AMT) and $6.9 million foreign tax credit carryforwards included in the deferred tax assets as of December 31, 2007. The AMT carryforward has no expiration and the foreign tax credit carryforward expires on December 31, 2026. 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, 2007 and 2006.
Effective January 1, 2007, RiverSource Life adopted the provisions of FIN 48. The amount RiverSource Life recognized as a result of the implementation of FIN 48 was not material.
A reconciliation of the beginning and ending amount of unrecognized tax benefits isdefined as follows:
|
| 2007 |
| |
|
| (in millions) |
| |
Balance at January 1 |
| $ | 73 |
|
Additions based on tax positions related to the current year |
| 34 |
| |
Additions for tax positions of prior years |
| 16 |
| |
Reductions for tax positions of prior years |
| (26 | ) | |
Balance at December 31 |
| $ | 97 |
|
Level 1Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
If recognized, approximately $27 millionLevel 2Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and $49 million, net of federal tax benefits, ofliabilities.
Level 3Prices or valuations that require inputs that are both significant to the unrecognized tax benefits as of January 1, 2007fair value measurement and December 31, 2007, respectively, would affect the effective tax rate.unobservable.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.Income Taxes (Continued)Determination of Fair Value
RiverSource Life recognizes interestuses valuation techniques consistent with the market and penalties relatedincome approaches to unrecognized tax benefits as a component ofmeasure the income tax provision. RiverSource Life recognized a net reduction of $11 million in interest and penalties for the year ended December 31, 2007. RiverSource Life had $10 million and ($1) million for the payment of interest and penalties accrued at January 1, 2007 and December 31, 2007, respectively.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of RiverSource Life, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $35 million to $40 million in the next 12 months.
RiverSource Life or one or morefair value of its subsidiaries files income tax returns in the U.S. federal jurisdictionassets and various state jurisdictions. With few exceptions,liabilities. RiverSource Life is no longer subject to U.S. federalLife’s market approach uses prices and other relevant information generated by market transactions involving identical 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, commenced an examination of thecomparable assets or liabilities. RiverSource Life’s income tax returns for 1997 through 2002 in the third quarter of 2005. In the first quarter of 2007, the IRS expanded the period of the examapproach uses valuation techniques to include 2003 through 2004.convert future projected cash flows to a single discounted present value amount. When applying either approach, RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2005.
On September 25, 2007,maximizes the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies and has added the project to the 2007-2008 Priority Guidance Plan. 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. For the twelve months ended December 31, 2007, RiverSource Life recorded a benefit of approximately $46 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 loss in the Consolidated Statements of Shareholder’s Equity are presented net of the following income tax benefit amounts:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Net unrealized securities gains (losses) |
| $ | 28 |
| $ | (41 | ) | $ | (248 | ) |
Net unrealized derivative gains (losses) |
| — |
| (1 | ) | (6 | ) | |||
Net income tax provision (benefit) |
| $ | 28 |
| $ | (42 | ) | $ | (254 | ) |
11.Statutory Capital and Surplus
State insurance statutes contain limitations as to the amount of dividends or distributions that insurers may make without providing prior notification to state regulators. For RiverSource Life Insurance Company, dividends or distributions in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by the State of Minnesota, require advance notice to the Minnesota Department of Commerce, RiverSource Life Insurance Company’s primary regulator, and are subject to potential disapproval. RiverSource Life Insurance Company’s statutory unassigned surplus aggregated $0.8 billion and $1.2 billion as of December 31, 2007 and 2006, respectively.
63
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.Statutory Capital and Surplus (Continued)
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 greater of the previous year’s statutory net gain from operations or 10% of the 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 and capital and surplus as of December 31 are summarized as follows:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
|
| (unaudited) |
|
|
|
|
|
|
| |
Statutory net gain from operations |
| $ | 523 |
| $ | 469 |
| $ | 327 |
|
Statutory net income |
| 555 |
| 514 |
| 339 |
| |||
Statutory capital and surplus |
| 2,820 |
| 3,258 |
| 2,942 |
| |||
12.Related Party Transactions
Ameriprise Financial was the investment manager for the proprietary mutual funds used as investment options by RiverSource Life’s variable annuity and variable life insurance contractholders through the third quarter of 2005. In the fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise Financial as the investment manager. RiverSource Life provides all fund management services, other than investment management, and is compensated for the administrative services it provides. For the years ended December 31, 2007 and 2006, RiverSource Life received $97 million and $76 million, respectively, from RiverSource Investments, LLC for administrative services provided by RiverSource Life. 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.
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’ 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 by ERISA. RiverSource Life’s share of the total net periodic pension cost was approximately $1 million for each of the years ended December 31, 2007, 2006 and 2005.
RiverSource Life participates in the Ameriprise Financial 2005 Incentive Compensation Plan. Employees, directors and independent contractors are eligible to receive incentive awards including stock options, restricted stock awards, restricted stock units, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction. The expense for incentive awards was $3 million in 2007, $2 million in 2006 and $1 million in 2005.
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’s eligible compensation or basic contributions. Costs of these plans charged to operations in 2007, 2006 and 2005 were $3 million, $3 million and $2 million, 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 2007, 2006 and 2005 were $2 million, $1 million and $1 million, respectively.
Charges by Ameriprise Financial and affiliated companies to RiverSource Life for use of joint facilities, technology support, marketing servicesobservable inputs and other services aggregated $909 million, $755 million and $725 million for 2007, 2006 and 2005, respectively. Certainminimizes the use 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.
64
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.Related Party Transactions (Continued)
During 2007, RiverSource Life Insurance Company paid $900 million of cash dividends to Ameriprise Financial, a portion of which is considered extraordinary. During 2006, RiverSource Life Insurance Company paid $300 million of dividends to Ameriprise Financial, a portion of which is considered extraordinary. Prior to the payment of the extraordinary cash dividends, RiverSource Life Insurance Company 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 did not require prior notification and response from the Minnesota Department of Commerce. In connection with the Separation, RiverSource Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its current financial strength ratings and to cover the allocated separation costs. During the fourth quarter of 2005, RiverSource Life Insurance Company paid dividends to Ameriprise Financial of $380 million. During 2007, 2006 and 2005, RiverSource Life of NY paid cash dividends of $83 million, $25 million and $23 million, respectively, to RiverSource Life Insurance Company. A portion of the 2007 dividends was considered extraordinary and was paid only after making the required advance notice to the New York State Insurance Department, RiverSource Life of NY’s primary state regulator.
Included in other liabilities at December 31, 2007 and 2006 are nil and $1 million, respectively, payable to Ameriprise Financial for federal income taxes.
13.Reinsurance
At December 31, 2007, 2006 and 2005, traditional life and universal life insurance inforce aggregated $187.3 billion, $174.1 billion and $160.1 billion, respectively, of which $117.4 billion, $102.4 billion and $86.3 billion were reinsured at the respective year ends. Life insurance inforce is reported on a statutory basis. RiverSource Life also reinsures a portion of the risks assumed under its DI and LTC policies.
The effect of reinsurance on premiums for the years ended December 31 is as follows:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Direct premiums |
| $ | 621 |
| $ | 645 |
| $ | 643 |
|
Reinsurance assumed |
| 2 |
| 3 |
| 2 |
| |||
Reinsurance ceded |
| (138 | ) | (115 | ) | (124 | ) | |||
Net premiums |
| $ | 485 |
| $ | 533 |
| $ | 521 |
|
Policy and contract charges are presented on the Consolidated Statements of Income net of $57 million, $55 million and $52 million of reinsurance ceded for the years ended December 31, 2007, 2006 and 2005, respectively.
Reinsurance recovered from reinsurers amounted to $126 million, $115 million and $106 million for the years ended December 31, 2007, 2006 and 2005, respectively. Reinsurance contracts do not relieve RiverSource Life from its primary obligation to policyholders.
14.Derivative Financial Instruments and Hedging Activities
Derivative financial instruments enable RiverSource Life to manage its exposure to various 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 does not engage in any derivative instrument trading activities. Credit risk associated with RiverSource Life’s derivatives is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. To mitigate such risk, counterparties are all required to be preapproved. Additionally, RiverSource Life may, from time to time, enter into master netting agreements wherever practical. As of December 31, 2007 and 2006, the total net fair values, excluding accruals, of derivative assets were $385 million and $212 million, respectively, and derivative liabilities were $9 million and $7 million, respectively. The net notional amount of derivatives as of December 31, 2007 was $7.3 billion, consisting of $7.6 billion purchased and $0.3 billion written.
Cash Flow HedgesRiverSource Life uses interest rate derivative products, primarily interest rate swaptions, to hedge the risk of increasing interest rates on forecasted fixed premium product sales.
65
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.Derivative Financial Instruments and Hedging Activities (Continued)unobservable inputs.
The following is a summary of net unrealized gains (losses) related to cash flow hedging activity, net of tax for the years ended December 31 as follows:
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
Holding gains (losses), net of tax of $1, $2 and $5, respectively |
| $ | — |
| $ | (4 | ) | $ | (10 | ) |
Reclassification of realized losses (gains), net of tax of $1, $1 and $1, respectively |
| 1 |
| 3 |
| (1 | ) | |||
Net change in unrealized derivative gains (losses) |
| $ | 1 |
| $ | (1 | ) | $ | (11 | ) |
At December 31, 2007, RiverSource Life expects to reclassify approximately $4 million of net pretax losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months as a resultdescription of the amortizationvaluation techniques used to measure fair value and the general classification of deferred expense relatedthese instruments pursuant to interest rate swaptions that will be recorded in net investment income.the fair value hierarchy.
IfAssets
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 hedge designation is removed or a hedge is terminated prior to maturity,reasonable estimate of fair value because of the amount previously recorded in accumulated other comprehensive income (loss) may be recognized into earnings overshort time between the period thatpurchase of the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecasted transaction is notinstrument and its expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately. Effective January 1, 2007, RiverSource Life removed the cash flow hedge designation from its swaptions because the swaptions were no longer highly effective. Accordingly, all changes inrealization.
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 swaptions are recorded directlypresent 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 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 earnings. provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services). RiverSource Life considers market observable yields for other asset classes it considers to be of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities.
Separate Account Assets
The removalfair value of assets held by separate accounts is determined by the NAV of the cash flow designation did not cause any amountsfunds in accumulated other comprehensive income (loss) to be reclassified into earnings becausewhich those separate accounts are invested. The NAV represents the forecasted transactions being hedgedexit price for the separate account. Separate account assets are still likely to occur. There were no cash flow hedges for which hedge accounting was terminated for these reasons during 2006 or 2005. No hedge relationships were discontinued during the years ended December 31, 2007, 2006 and 2005 due to forecasted transactions no longer expected to occur according to the original hedge strategy.
Currently, the longest period of time over which RiverSource Life is hedging exposure to the variabilityclassified as Level 2 as they are traded in future cash flows is 11 years and relates to forecasted fixed annuity sales. For the years ended December 31, 2007, 2006 and 2005, there were $2 million, $4 million and $2 million, respectively, in losses on derivative transactions or portions thereof that were ineffective as hedges excluded from the assessment of hedge effectiveness or reclassified into earnings as a result of the discontinuance of cash flow hedges.principal-to-principal markets with little publicly released pricing information.
Derivatives Not Designated as HedgesRiverSource Life has economic hedges that either do not qualify or are not designated for hedge accounting treatment.
The fair value assets (liabilities) of these purchasedderivatives that are traded in certain over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and writtenequity 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 for the years ended December 31 were as follows:
|
| 2007 |
| 2006 |
| ||||||||
|
| Purchased |
| Written |
| Purchased |
| Written |
| ||||
|
| (in millions) |
| ||||||||||
Equity indexed annuities |
| $ | 43 |
| $ | (1 | ) | $ | 40 |
| $ | (1 | ) |
GMWB and GMAB |
| 340 |
| — |
| 170 |
| — |
| ||||
Total |
| $ | 383 |
| $ | (1 | ) | $ | 210 |
| $ | (1 | ) |
Futures contractsthat are settled dailyused by exchanging cash with the counterparty and gains and losses are reported in earnings. Accordingly, there are no amounts on the Consolidated Balance SheetsRiverSource Life to hedge its exposure to market risk related to certain variable annuity riders are classified as Level 3. RiverSource Life settled these contracts.derivatives in the second quarter of 2009 and has not entered into any additional structured derivatives since then.
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. 69Purchased 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 or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of
66
RIVERSOURCE LIFE INSURANCE COMPANYLiabilities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.Derivative Financial Instruments and Hedging Activities (Continued)
considerations received at the beginning of the contract period, after a specified holding period, respectively. RiverSource Life economically hedges the exposure related to the GMWB and GMAB provisions using various equity futures, equity options and interest rate swaps. The premium associated with certain of these options is paid semi-annually over the life of the option contract. As of December 31, 2007, the remaining payments RiverSource Life is scheduled to make for these options total $313 million through December 31, 2022.
RiverSource Life earns fees from the management of equity securities in variable annuities and variable insurance. The amount of fees is generally based on the value of the portfolios, and thus is subject to fluctuation with the general level of equity market values. To reduce the sensitivity of RiverSource Life’s fee revenues to the general performance of equity markets, RiverSource Life from time to time enters into various combinations of financial instruments such as equity market put and collar options that mitigate the negative effect on fees that would result from a decline in the equity markets.
Embedded Derivatives
The equity component of the equity indexed annuity obligations are considered embedded derivatives. Additionally, certain annuities containVariable Annuity Riders — GMAB and non-life contingent GMWB
RiverSource Life values the embedded derivative liability attributable to the provisions whichof 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 also consideredclassified as Level 3. The embedded derivatives. derivative liability attributable to these provisions is recorded in future policy benefits.
Equity Indexed AnnuitiesThe
RiverSource Life uses various Black-Scholes calculations to determine the fair value of the embedded derivatives for annuity related productsderivative liability associated with the provisions of its equity indexed annuities. The inputs to these calculations are includedprimarily 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 assets and liabilities measured 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 following tables provide a summary of changes in Level 3 assets and liabilities measured 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 a $81 million gain included in net investment income in the Consolidated Statements of the equity indexed annuity embedded derivatives are reflected in interest credited to fixed accounts. The changes in fair value of the GMWB and GMAB embedded derivatives are reflectedIncome.
(2)Included in benefits, claims, losses and settlement expenses. At December 31, 2007 and 2006,expenses in the totalConsolidated Statements of Income.
(3)Represents securities with a fair value of these instruments, excluding$79 million that were transferred to Level 2 as the host contract andfair value of the securities is now obtained from a liability for life contingent GMWB benefitsnationally-recognized pricing service net of $2a security with a fair value of $9 million and nil, respectively,that was a net liabilitytransferred to Level 3 as the fair value of $220 million and $33 million, respectively.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 |
| — |
| — |
| ||||||
Fair Value(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 Financial InstrumentsIncome.
(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 fair values of financial instruments are estimates based upon market conditionsfollowing table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and perceived risksliabilities held at December 31 2007 and 2006, and require management judgment to estimate such values. These figures may not be indicative of future fair values. Additionally, management believesfor the value of excludedyear then ended:
|
| 2009 |
| 2008 |
| |||||||||||||||
|
| Net |
| Net |
| Benefits, |
| Net |
| Net |
| Benefits, Claims, |
| |||||||
|
| (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 andor liabilities is significant. Themeasured at fair value of RiverSource Life, therefore, cannot be estimated by aggregating the amounts presented herein. The following table discloses carrying values and fair values of financial instruments at December 31:
|
| 2007 |
| 2006 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Financial Assets |
|
|
|
|
|
|
|
|
| ||||
Assets for which carrying values approximate fair values |
| $ | 80,946 |
| $ | 80,946 |
| $ | 75,336 |
| $ | 75,336 |
|
Commercial mortgage loans, net |
| 2,892 |
| 2,868 |
| 2,790 |
| 2,875 |
| ||||
Other investments |
| 58 |
| 59 |
| 108 |
| 112 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Financial Liabilities |
|
|
|
|
|
|
|
|
| ||||
Net liabilities for which carrying values approximate fair values |
| $ | 177 |
| $ | 177 |
| $ | (10 | ) | $ | (10 | ) |
Fixed account reserves |
| 18,622 |
| 18,077 |
| 21,626 |
| 20,981 |
| ||||
Separate account liabilities |
| 51,764 |
| 49,388 |
| 43,516 |
| 41,623 |
| ||||
on a nonrecurring basis.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.Fair ValueThe following table provides the carrying value and the estimated fair value of Financial Instruments (Continued)
Financial AssetsAssets for which carrying values approximatefinancial instruments that are not reported at fair values include cash and cash equivalents, Available-for-Sale securities, policy loans, trading securities, separate accountvalue. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and derivative financial instruments. Generally these assets are either short-term in duration, variable rate in nature or are recordedliabilities measured at fair value on the Consolidated Balance Sheets.a recurring basis.
|
| December 31, |
| ||||||||||
|
| 2009 |
| 2008 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
| (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, was estimatedis determined by discounting contractual cash flows using discounted cash flow analysis, based ondiscount rates that reflect current interest ratespricing for loans with similar terms to borrowers of similar credit quality.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 values were basedvalue is determined using the same adjustments as above with an additional adjustment for RiverSource Life’s estimate of the amount recoverable on estimatesthe loan.
Policy loans
The fair value of futurepolicy loans is determined using discounted cash flows discounted at rates commensurate with the risk inherent in the revised cash flow projections, or for collateral dependent loans, on collateral values.flows.
Other investments
Other investments include RiverSource Life’s interest inprimarily consist of syndicated loans. The fair value of syndicated loans which are carried at amortized cost less allowance for losses. Fair values were based on quoted market prices.is obtained from a nationally-recognized pricing service.
Financial Liabilities
Restricted CashLiabilities 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.
Fair valuesRestricted 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, wereis 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 as the accumulatedearly policy surrender behavior and RiverSource Life’s nonperformance risk specific to these liabilities. The fair value less applicable surrender charges. Forof 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 related separate account assets. Carrying value is a reasonable estimate of the fair value was estimated using discounted cash flows based on current interest rates. 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 these reserves excludedthe line of credit is determined by discounting cash flows with an adjustment for RiverSource Life’s nonperformance risk specific to this liability. Due to the short-term nature of the line of credit, the carrying value is an approximation of the fair value.
12. Related Party Transactions
RiverSource Investments, LLC is the investment manager for the proprietary mutual funds used as investment options by RiverSource Life’s variable annuity contractholders and variable life insurance-related elements of $1.5 billion as of bothinsurance policyholders. RiverSource Life provides all fund management services, other than investment management, and is compensated for the administrative services it provides. For the years ended December 31, 2009, 2008 and 2007, RiverSource Life received $87 million, $101 million and 2006. If$97 million, respectively, from RiverSource Investments, LLC for these services.
RiverSource Life participates in the fair valueAmeriprise 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’ 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 by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). RiverSource Life’s share of the fixed annuitiestotal net periodic pension cost was $2 million in 2009, and $1 million in both 2008 and 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 $3 million in 2009, 2008 and 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’s eligible compensation or basic contributions. Costs of these plans charged to operations were realized,$2 million, nil and $3 million in 2009, 2008 and 2007, respectively.
RiverSource Life participates in the write-offdefined benefit health care plans of DACAmeriprise Financial that provide health care and DSIC would be $308life 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 2009, 2008 and 2007 was nil, $1 million and $422$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 $580 million, $673 million and $909 million for 2009, 2008 and 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.
Dividends paid and 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 for amounts in excess of statutorily defined thresholds. See Note 13 for additional information.
During 2008, RiverSource Life received a non-cash capital contribution of $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, consisting of all the issued and outstanding shares of RTA.
During 2009, RiverSource Life Insurance Company received a non-cash capital contribution of $131 million comprised of two buildings and the 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 credit. See Note 10 for more information on RiverSource Life’s lines of credit.
There were no amounts included in other liabilities at December 31, 2009 and 2008 payable to Ameriprise Financial for federal income taxes.
During 2009, RiverSource Life sold corporate bonds of $27 million to Ameriprise Financial and recognized a gain of $9 million.
13. Statutory Capital and Surplus
State insurance statutes contain limitations as to the amount of dividends or distributions that insurers may make without providing prior notification to state regulators. For RiverSource Life Insurance Company, dividends or distributions in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by the State of Minnesota, require advance notice to the Minnesota Department of Commerce, RiverSource Life Insurance Company’s primary regulator, and are subject to potential disapproval. RiverSource Life Insurance Company’s statutory unassigned surplus aggregated $433 million and $173 million as of December 31, 20072009 and 2006,2008, respectively.
Fair valuesIn addition, dividends or distributions, whose fair market value, together with that of separate account liabilities, excluding life insurance-related elementsother dividends or distributions made within the preceding 12 months, exceed the greater of $6.3 billionthe previous year’s statutory net gain from operations or 10% of the previous year-end statutory capital and $5.8 billionsurplus 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 and capital and surplus as of December 31 are summarized as follows:
|
| 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 that 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 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.
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 2006,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, were estimatedrelated 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 accumulated value less applicable surrender charges. Ifoverall examination of the fair valueAmerican 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 1998 through 2006.
On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and 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 liabilities were realized,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 surrender charges received would be offset byAdministration’s 2011 Revenue Proposals is a provision to modify the write-offDRD 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 DACseparation of Ameriprise Financial from American Express, RiverSource Life and DSICsubsidiaries 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 instruments enable RiverSource Life to manage its exposure to various 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 into derivative agreements for risk management purposes related to RiverSource Life’s products and operations.
RiverSource Life uses 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 |
| Asset |
| Balance Sheet |
| 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 equity, interest rate and credit markets.
See Note 11 for additional information regarding RiverSource Life’s fair value measurement of derivative instruments.
Derivatives Not Designated as Hedges
The following table presents a summary of the 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 |
| Location of Gain (Loss) |
| Amount of Gain (Loss) |
| |
|
|
|
| (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 result 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 to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of considerations received at the beginning of the contract period, after a specified holding period, respectively. RiverSource Life economically hedges the exposure related to 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 into a 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, 2009, the gross notional amount of these contracts was $38.7 billion and $77 million for RiverSource Life’s GMWB and GMAB provisions and GMDB provisions, respectively. The premium associated with separate accountcertain 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 |
| Premiums |
| ||
|
| (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, 2009.
Embedded Derivatives
Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the 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 reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As noted above, RiverSource Life uses derivatives to mitigate the financial statement impact of these embedded derivatives.
Cash Flow Hedges
RiverSource Life has amounts classified in accumulated other comprehensive 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, 2009, RiverSource Life expects to reclassify $6 million of deferred loss on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 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 9 years and relates to interest credited on forecasted fixed premium product sales.
Credit 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 the applicable derivative contract. To mitigate such risk, RiverSource Life has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements wherever practical. As of December 31, 2009, RiverSource Life held $88 million in cash and cash equivalents and recorded a corresponding liability in other liabilities for collateral RiverSource Life is obligated to return to counterparties. As of $2.5 billionDecember 31, 2009, RiverSource Life had accepted additional collateral consisting of various securities with a fair market value of $22 million, which are not reflected on the Consolidated Balance Sheets. As of December 31, 2009, RiverSource Life’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and $2.3 billioncollateral 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 all derivative instruments containing such credit risk features was $296 million. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 2007 and 2006, respectively.2009 was $269 million. If the credit risk features of derivative contracts that were in a net liability position at December 31, 2009 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $27 million.
16. Commitments and Contingencies
At December 31, 20072009 and 2006,2008, RiverSource Life had no material commitments to purchase investments other than mortgage loan fundings (seefundings. See Note 4).4 for additional information.
RiverSource Life’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31, 2007,2009, these guarantees range up to 5.0%. To the extent the yield on RiverSource Life’s invested assets portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’s profitability would be negatively affected.
The Securities and Exchange Commission, the Financial 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL | ||
DISCLOSURE |
None.
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
RiverSource Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to Securities and Exchange Commission (“SEC”) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Life’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, RiverSource Life’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
RiverSource Life’s management, under the supervision and with the participation of RiverSource Life’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, RiverSource Life’s principal executive officer and chief financial officer have concluded that RiverSource Life’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2007.2009.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Life’s internal control over financial reporting 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, 2007.2009. 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, 2007,2009, RiverSource Life’s internal control over financial reporting is effective.
69
This annual report does not include an attestation report of River SourceRiverSource Life’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by RiverSource Life’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit RiverSource Life to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Life’s internal control over financial reporting.
OTHER INFORMATION |
None.
DIRECTORS, |
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
EXECUTIVE COMPENSATION |
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR | ||
INDEPENDENCE |
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The Audit Committee of the Board of Directors of Ameriprise Financial has appointed Ernst & Young LLP (“Ernst & Young”) as independent registered public accounting firm to audit the Consolidated Financial Statements of RiverSource Life for the years ended December 31, 20072009 and 2006.2008.
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’s financial statements for the years ended December 31, 20072009 and 20062008 and other fees billed for other services rendered by Ernst & Young during those periods.
|
| 2007 |
| 2006 |
|
| 2009 |
| 2008 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Audit Fees(1) |
| $ | 1,819 |
| $ | 1,741 |
| |||||||
Audit Fees (1) |
| $ | 2,361 |
| $ | 2,183 |
| |||||||
Audit-related Fees |
| 26 |
| 25 |
| |||||||||
Tax Fees |
| — |
| — |
|
| — |
| — |
| ||||
All Other Fees |
| — |
| — |
|
| — |
| — |
| ||||
Total |
| $ | 1,819 |
| $ | 1,741 |
|
| $ | 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 20072009 and 2006,2008, 100% of the services provided by Ernst & Young for RiverSource Life were pre-approved by the Audit Committee of Ameriprise Financial.
(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
Registrant
February |
| By |
|
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 23, 2010 |
|
| |
| |||
|
| ||
|
| ||
| |||
|
| ||
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.
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
|
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 as 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 as 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.
10.1Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective Jan. 1, 2007, 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, 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, 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, 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, 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, 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, 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, filed as Exhibit 10.8 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.
EXHIBIT INDEX (Continued)
*31.1Certification of Timothy V. Bechtold, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*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. *32.1Certification of Timothy V. Bechtold, President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| |
|
| ||
|
|
* Filed electronically herewith.