UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedFiscal Year Ended December 31, 20092011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periodTransition Period from to
Commission file number 033-28976
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 ox 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 registrant’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.
RIVERSOURCE LIFE INSURANCE COMPANY
FORM 10-K
TABLE OF CONTENTS
Form 10-K
Item Number
ITEM 1. |
Introduction
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operatingstock life insurance company 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 domiciled and holds a stock life insurance company domiciled in New York, which holds CertificatesCertificate of Authority in New York, North Dakota and Delaware.York. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares ofRiverSource Life Insurance Company also wholly owns 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 subsidiariesRiverSource Life of NY are referred to collectively in this Item 1 and Item 1A of 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. (“AFSI”), 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.
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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.
Annuities: Product Features and Risks
RiverSource Life offers both deferred variable and fixed annuities to a broad range of consumers through its affiliated retail broker-dealerAFSI. In 2011, cash sales for annuities sold through AFSI were $6.8 billion, of which $6.4 billion were for variable annuity sales and $431 million were for fixed annuity sales.
In the fourth quarter of 2010, RiverSource Life discontinued the sale of variable annuities through third partythird-party banks and broker dealers, such as Wachovia Securities, Inc., SunTrust Securities, Inc.broker-dealers in order to focus on the distribution of its variable product offerings and Wells Fargo Securities, Inc. As of December 31, 2009,sales through AFSI. In 2011, RiverSource Life had distribution agreements for annuity products in place with more than 120 third party distributors, with annualtotal cash sales for fixed annuities through third-party banks and broker-dealers of $2.1 billion in 2009. $158 million.
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 immediateImmediate annuities in which paymentsare products that begin payment 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. RiverSource Life ranked ninth in variable annuity sales (according to the LIMRA International® survey dated September 30, 2009, the most recent report available). RiverSource Life had annuity cash sales in 2009 of $9.3 billion 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 weak performance in equity markets, fixedFixed sales are generally stronger. Instronger when yields available in the fixed income markets are relatively high than when yields are relatively low. Variable sales are generally stronger in times of superior performance in equity markets variable sales are generally stronger.than in times of weak performance in equity markets. The relative proportion between fixed and variable annuity sales is also influenced by product design and other factors.
Variable Annuities
A variable annuity provides a contractholder with investment returns linked to underlying investment accounts of the contractholder’s choice. InvestmentThese underlying investment options may include affiliated RiverSource Variable Series Trust, Columbia Funds Variable Insurance Trust, Columbia Funds Variable Insurance Trust I and Wanger Advisors Trust funds (collectively, “VST Funds”) as well as variable product funds of other companies. Most variable annuity products in force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging up to 4.0% as of December 31, 2009.2011.
RiverSource Life’s Portfolio Navigator asset allocation program is available under its variable annuities. The Portfolio Navigator program allows clients to allocate their contract value to one of five funds of funds, each of which invests in various underlying funds. The Portfolio Navigator program is designed to helpallow a contract purchaser to select an asset allocation model portfolio from the choices available under the program,investment options 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 includehelps a well-diversified annuity portfolio, disciplined, professionally created asset allocation models, simplicitycontract purchaser tailor the performance of annuities and ease of use, accesslife insurance policies to multiple well-known money managers within each model portfoliotheir specific needs and automatic rebalancing of the client’s contract valueto keep investment allocations on a quarterly basis. RiverSource Investments,track over time. Columbia Management Investment Advisers, LLC (“CMIA”), RiverSource Life’s investment manager, designsserves as investment adviser for the funds of funds and periodically updatesall of the model portfolios based on recommendations from Morningstar Associates, an unaffiliated investment advisor.underlying funds in which the funds of funds invest.
The majority of the variable annuity contracts RiverSource Life issues include guaranteed minimum death benefit (“GMDB”) provisions. Contract purchasers can choose to add optional benefit provisions to their contracts to meet their needs, including guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions. 1
Approximately 98% of RiverSource Life’s overall variable annuity assets include a GMDBguaranteed minimum death benefit (“GMDB”) provision and approximately 40%50% of RiverSource Life’s overall variable annuity assets include a GMWBguaranteed minimum withdrawal benefit (“GMWB”) or GMABguaranteed minimum accumulation benefit (“GMAB”) provision. In general, these features 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.
RiverSource Life’s largest-selling variable annuities are the RiverSource® Retirement Advisor Plus 4RAVA 5 series of variable annuities, which include the RiverSource Retirement Advisor 4RAVA 5 Advantage®SM variable annuity, RAVA 5 SelectSM variable annuity and the RiverSource Retirement Advisor 4 SelectRAVA 5 Access®SM variable annuity (collectively, the “Retirement Advisor 4“RAVA 5 Variable Annuities”). Under the Retirement Advisor 4RAVA 5 Variable Annuities, the standard GMDB provides that if the contractholder is age 7579 or younger on the date the contract is issued, the beneficiary will receive the greater of (i) the contract value less a pro-rata portion of any rider fees, (ii) the purchase payment credits subject to recapturepayments minus adjusted partial surrenders; or (iii) the full surrender value. If the contractholder is age 80 or older at contract issue, the beneficiary will receive the greater of (i) the contract value, 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.full surrender value.
The following additional optional GMDBs are also available for an additional charge:
· A return of purchase payment death benefit for RiverSource Retirement Advisor 4 Advantage variable annuity contractholders age 7680 or older at contract issue. This rider, in effect, adds the return of purchase payments less adjusted partial surrenders to the standard death benefit.
· A maximum anniversary value death benefit or a five-year maximum anniversary value death 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.
·A 5% accumulation death benefit. This rider in effect, adds a 5% accumulation death benefit floor to the return of purchase payment death benefit.
· An enhanced earningsdeath benefit. This rider, in effect, adds the maximum anniversary value death benefit or an enhanced earningsto the 5% accumulation death benefit.
·Benefit protector and benefit protector plus death benefit.benefits. These riders are intended to provide an additional benefitsbenefit to help offset expenses after the contractholder’s death.
Available features for annuity products for an additional charge also include the GMWB and GMWB for life.GMWB. 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 guaranteed periodic withdrawals for the life of the 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. In 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 provisionsbenefits RiverSource Life offers (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, as evidenced by the significant decline experienced in 2008 and early 2009.decline. For a discussion of liabilities and reserves related to RiverSource Life’s annuity products, see Part II, Item 7A of this Annual Report on Form 10-K — “Quantitative and Qualitative Disclosures About Market Risk” as well as Note 2, Note 9, Note 10 and Note 16 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. RiverSource Life periodically resets rates at its discretion 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.annuities, however RiverSource Life continues to service existing policies.
Revenues for RiverSource Life’s fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.
The fixed annuity contracts in force provide guaranteed minimum interest crediting rates ranging from 1.5%1.0% to 5.0% as of December 31, 2009.2011. New contracts issued provide guaranteed minimum interest rates in compliance with state laws providing for indexed guaranteed rates.laws.
Insurance: Product Features and Risks
RiverSource Life issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance. These solutions are designed to help clients protect their income, grow assets and give to those individuals or causes that they care most about. Universal life insurance is a form of permanent life insurance characterized by flexible premiums, flexible death benefits and unbundled pricing factors (i.e., mortality, interest and expenses). Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium. Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith. Traditional life insurance refers to whole and term life insurance policies. RiverSource Life also offers a chronic care rider, AdvanceSource® rider, on its new permanent insurance products. This rider allows its policyholderpolicyholders 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 2009,2011, as measured by scheduled annual premiums, lump sum and excess premiums, consisted of 39%30% variable universal life, 53%65% fixed universal life and 8%5% traditional life. RiverSource Life issues only non-participating life insurance policies whichthat do not pay dividends to policyholders from the insurers’ earnings.policyholders. 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 forutilized by RiverSource Life to mitigate this risk.
Variable Universal Life Insurance
RiverSource Life is a leader in variable universal life insurance. Variable universal life insurance provides life insurance coverage along with investment returns linked to underlying investment accounts of the policyholder’s choice. Investment options may include RiverSource Variable Series Trust fundsaffiliated VST Funds as well as variable product funds of other companies. Most variable universal life insurance products in force offeredoffer a fixed account investment option with guaranteed minimum interest crediting rates ranging from 3.0% to 4.5% as of December 31, 2009. RiverSource Life Insurance Company ranked fifth in sales of variable universal life based on total premiums (according to the Tillinghast-Towers Perrin’s Value Survey, dated September 30, 2009, the most recent report available).2011. RiverSource Life’s major source of revenue from variable universal life insurance is cost of insurance and other charges. RiverSource Life’s Portfolio Navigator asset allocation program, as described in “Annuities: Product Features and Risks — Variable Annuities” is also available under its variable universal life insurance products.
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. Fixed universal life insurance productspolicies in force providedprovide guaranteed minimum interest crediting rates ranging from 3.0%2.0% to 5.0% as of December 31, 2009.2011. The majority of fixed universal life policies issued in recent years provide a secondary guarantee that ensures, 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. Approximately 7% of the face amount of RiverSource Life’s in force life insurance is fixed universal life, of which approximately 30% contain a secondary guarantee that generates an additional liability.
In 2009, RiverSource Life also offersdiscontinued new sales of traditional whole life insurance, which combineshowever RiverSource Life continues to service existing policies. RiverSource Life’s in force traditional whole life insurance policies combine a death benefit with a cash value that generally increases gradually over a period of years.
In 2011, RiverSource Life has sold very little traditional wholebegan offering indexed universal life (“IUL”) insurance. IUL is similar to universal life insurance in recent years.that it provides life insurance coverage and cash value that increases as a result of credited interest. Also, like universal life insurance, there is a minimum guaranteed credited rate of interest. Unlike universal life insurance, the rate of credited interest above the minimum guarantee is linked to the S&P 500 Index (subject to cap).
Term Life Insurance
Term life insurance provides a death benefit but it does not build up cash 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, or the policy expires with no value. RiverSource Life also offers a term life insurance product that pays the death benefit in the form of a monthly income stream.
Disability Income Insurance
DI insurance provides monthly benefits to individuals who are unable to earn income either at their occupation at time of disability (“own occupation”) or at any suitable occupation (“any occupation”) for premium payments that are guaranteed not to change. Depending upon occupational and medical underwriting criteria, applicants for DI insurance can choose “own occupation” and “any occupation” coverage for varying benefit periods. 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. RiverSource Life was ranked as the eighth largest provider of individual (non-cancelable) DI insurance based on premiums (according to the LIMRA International® survey dated September 30, 2009, the most recent report available).
Long Term Care Insurance
As of December 31, 2002, RiverSource Life discontinued underwriting 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 subsidiaries of Genworth Financial, Inc. (“Genworth”). For policies issued by RiverSource Life of NY, this coinsurance only applies to policies issued in 1996 or later.
In 2004, RiverSource Life Insurance Company and RiverSource Life of NY began to file for approval to implement rate increases on most of theirits existing blocks of nursing home-only indemnity LTC insurance policies. Implementation of these rate increases began in early 2005 and continues. So far, approvalsApprovals have been received for some or all requested increases in the 50 states where increases have been requested, with an average approved cumulative rate increase of 62.2%76.4% of premium on all such policies where an increase was requested.
In 2007, RiverSource Life Insurance Company and RiverSource Life of NY began to file for approval to implement rate increases on most of theirits existing blocks of comprehensive reimbursement LTC insurance policies. Implementation of these rate increases began in late 2007 and continues. So far, approvalsApprovals have been received for some or all requested increases in 4648 states, with an average approved cumulative rate increase of 15.4%23.9% of premium on all such policies where an increase was requested.
RiverSource Life mayintends to seek additional rate increases with respect to these and other existing blocks of LTC insurance policies, 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,CMIA, 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 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, 2009, this rate varied among fixed accounts and was as low as 1.5% and as high as 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.
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 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,CMIA, for providing certain sponsor and related servicing activity for the RiverSource Variable Series Trust fundsVST 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 Series Trust funds.VST 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;features and hedging capability;
· 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.
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,the Minnesota Department of Commerce, RiverSource Life Insurance Company and RiverSource Life of NY areis regulated by each of the insurance regulators in the states where eachit is authorized to transact the business of insurance.business. These 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 activities) are often subject to pre-notification and continuing evaluation by the Domiciliary Regulators.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 arrangementsclaims handling, and anticompetitive activities,unclaimed property and market timingescheatment practices 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.procedures.
AtIn July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted into law. The Dodd-Frank Act created the Federal Insurance Office (“FIO”) within the Department of Treasury. The FIO does not have substantive regulatory responsibilities, though it is tasked with monitoring the insurance industry and the effectiveness of its regulatory framework and providing periodic reports to the President and Congress. The scope and impact of the research and reports provided by the FIO, and the extent to which such work may ultimately lead to a more prominent role of the federal level, there is periodic interestgovernment in enacting new regulations relating to various aspectsthe regulation 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.is uncertain.
The instabilityNational Association of Insurance Commissioners (“NAIC”) has established risk-based capital (“RBC”) requirements that virtually all state insurance departments have adopted, with minor modifications. The RBC requirements are used by the NAIC and declinestate 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 falls below defined RBC action levels. 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, 2011, RiverSource Life Insurance Company’s company action level RBC was $619 million, and the corresponding total adjusted capital was $3.1 billion, which represents 494% of company action level RBC.
At December 31, 2011, RiverSource Life of NY’s company action level RBC was $41 million, and the corresponding total adjusted capital was $254 million, which represents 619% of company action level RBC.
As described above, RiverSource Life Insurance Company and RiverSource Life of NY maintain capital levels well in global financial markets experienced during 2008 and 2009 and throughexcess of 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.”company action level.
Financial Strength Ratings
RiverSource Life Insurance Company receivesand RiverSource Life of NY receive ratings from independent rating agencies.organizations. Ratings are important to maintain 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 evaluate the financial
organizations evaluate the financial soundness and claims-paying ability of insurance companies continually, and base their ratings on a number of different 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 financial strength ratings for RiverSource Life Insurance Company’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, “AA-” (Very Strong) by Fitch Ratings Ltd., and “AA-” (Very Strong) by Standard & Poor’s Ratings Services.
Generally, RiverSource Life of NY does not receive ancan be found at ir.ameriprise.com. For the most current ratings information, please see the individual rating but receives the same rating as RiverSource Life Insurance Company.agency’s website.
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. RiverSource 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 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 currently reinsures 90% of the death benefit liability related to almost all individual fixed and variable universal life and term life insurance products. As a result, RiverSource Life typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations. RiverSource Life began reinsuring risks at this level 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. 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 Genworth. For RiverSource Life of NY, this reinsurance arrangement applies for 1996 and later issues only. As of December 31, 2009,2011, RiverSource Life’s credit exposure to Genworth under this reinsurance arrangement was approximately $1.3 billion under U.S. generally accepted accounting principles (“GAAP”) and $1.8 billion under statutory accounting principles.$1.5 billion. 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 (August 2010 for RiverSource Life of NY) 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 assumesalso has life insurance and fixed annuity risk previously assumed under reinsurance arrangements with unaffiliated insurance companies. As of December 31, 2009,2011, the amount related to assumed reinsurance arrangements was $667 million under GAAP and $678 million under statutory accounting principles.$629 million.
See Note 78 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 fell 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, 2009, RiverSource Life Insurance Company’s company action level RBC was $803 million, and the corresponding total adjusted capital was $3.5 billion, which represents 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 and RiverSource Life of NY maintain capital well in excess of the company action level RBC requirement.
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RiverSource Life’s operations and financial results are subject to various risks and uncertainties, including those described below, that could have a material adverse effect on RiverSource Life’s business, financial condition or results of operations. Based on the information currently known, RiverSource Life believes that the following information identifies the most material factors affecting RiverSource Life. However, the risks and uncertainties RiverSource Life faces are not limited to those described below. Additional risks and uncertainties 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, social, 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 future costsimpacts associated with such variations may differ from its historical costs.impacts. 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 againstto mitigate some of the effect of such fluctuations, a significant changechanges in interest rates could have a material adverse impact on RiverSource Life’s results of operations.
Although U.S.Declines 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 impacthave impacted RiverSource Life’s business.business in the past and may continue to do so. 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 StatesU.S. 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 offeroffers higher crediting rates on interest-sensitive products, such as fixed universal life insurance and fixed annuities and RiverSource Life increases crediting rates on in force 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 outflow of cash from 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 income.
During periods of falling interest rates or stagnancy of low interest rates, RiverSource Life’s spread may be reduced or could become negative, primarily because some of these products have guaranteed minimum crediting rates. Due to the long-term nature of the liabilities associated with RiverSource Life’s long term care and fixed universal life with secondary guarantees, as well as fixed annuities and guaranteed benefits on variable annuities, sustained declines in or stagnancy of low long-term interest rates may subject RiverSource Life to reinvestment risks and increased hedging costs. In addition, reduced or negative spreads may require RiverSource Life to accelerate amortization of DAC, which would increase its expenses and reduce its net income.
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 or stagnancy of low 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 may have, had and could continue to have in the past had, 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. Downturns and volatility may also have an adverse effect on the performance of RiverSource Life’s investment portfolio. In addition, market downturns and volatility in equity markets may cause and have caused RiverSource Life to accelerate amortization of DAC, which increases its expenses and reduces its net income.
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, 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 either equity price levels or equity market volatility may result in a net adverse impact to current period financial statements. Further, RiverSource Life’s cost of hedging these guarantees has increased significantly in recent periods as a result of low interest rates and continuing volatility in the equity markets. In addition, continued heightened volatility creates greater uncertainty for the accuracy of RiverSource Life’s future hedging effectiveness.
A significant market decline in equity price levels could also result in guaranteed minimum benefits under GMDB and GMIB provisions being higher than current account values would support, which could have an adverse effect on RiverSource Life’s financial condition and 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 tomay experience, and have experienced, 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 abelieves the level of cash and securities which,it maintains, when 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 onaccess financing sources from its parent holding company, its other affiliates or third parties. The availability of additional financing willwould 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 partythird-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 agenciesorganizations 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;requirements, generate fee income and market-related revenue to meet liquidity needs;needs and access the capital necessary to grow its business. As such, RiverSource Life may be forced to use different types of capital than it would otherwise use, less effectively deploy such capital or bear an unattractive cost of capital which could decrease RiverSource Life’s profitability and significantly reduce its financial flexibility.
The impairment of other financial institutions could adversely affect RiverSource Life.
RiverSource Life has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers,broker-dealers, commercial banks, investment banks, hedge
funds, insurers, reinsurers and other investment funds and other institutions. The operations of U.S. and global financial services institutions are highly interconnected and 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, withWith 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 business 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. The financial crisis of 2008 and 2009 and subsequent uncertainty and volatility in the U.S. economy and financial markets have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.
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 reformChanges 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 systemsupervision 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.business.
In addition, July 2010, the Dodd-Frank Act was enacted into law. The Dodd-Frank Act calls for sweeping changes in the supervision and regulation of the financial services industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures, and provide greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act became effective immediately, though the details of many provisions are subject to additional studies and will not be known until regulatory agencies adopt final rules. The impact of the Dodd-Frank Act on RiverSource Life, the financial industry and the economy cannot be known until the rules and regulations called for under the Dodd-Frank Act have been finalized, and, in some cases, implemented over time.
Insurance companies and the business of insurance are exempted from several major provisions of the Dodd-Frank Act. However, because the Dodd-Frank Act significantly changes the regulation of the financial services industry and financial markets generally, and because the Dodd-Frank Act will apply directly to certain key affiliates of RiverSource Life, implementation of the Dodd-Frank Act could nevertheless materially impact RiverSource Life’s business. For example, to the extent that RiverSource Life invests in debt securities issued by a financial company that becomes subject to the orderly liquidation authority under the Dodd-Frank Act, RiverSource Life’s rights as a creditor could be adversely affected. RiverSource Life could also be subject to assessments to repay federal funding advanced to liquidated financial companies. Further, RiverSource Life may be impacted by the creation of the FIO within the Department of the Treasury, which is required to monitor the insurance industry and gather relevant information, including issues or gaps in the current state-based solvency regulation system.
In July 2010, the SEC proposed certain measures that would establish a new framework to replace the requirements of Rule 12b-1 under the Investment Company Act of 1940, with respect to how mutual funds and underlying funds of separate accounts collect and pay fees to cover the costs of selling and marketing their shares. The proposed changes have been subject to a public comment period and, following any enactment, would be phased in over a number of years. As these measures are not final nor undergoing implementation throughout the financial services industry, the impact of changes such as those currently proposed cannot be predicted at this time.
RiverSource Life’s business is regulated heavily, and changes to the laws and regulations may have an adverse effect on RiverSource Life’s operations, reputation and financial condition.
RiverSource Life is subject to extensivevarious federal and state laws and regulations, that are administered and enforcedis required to obtain and maintain licenses for its business in addition to being subject to regulatory oversight. For a discussion of the regulatory framework in which RiverSource Life operates, see Item 1 of this Annual Report on Form 10-K — “Regulation.” Compliance with these applicable laws and regulations is time-consuming and personnel-intensive, and RiverSource Life has invested and will continue to invest substantial resources to ensure compliance by a numberits parent company and its subsidiaries, directors, officers, employees and affiliated employees and agents. Any changes to the laws and regulations applicable to RiverSource Life’s business, as well as changes to the interpretation and enforcement of different governmental authoritiessuch laws and non-governmental self-regulatory organizations,regulations, may affect its operations and financial condition. Such changes may impact the operations and profitability of RiverSource Life, including state securitieswith respect to the scope of products 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 waysservices provided and the U.S. government may createincurrence of additional regulators or materially changecosts of doing business. The recent economic crisis has resulted in numerous changes to regulation and oversight of the authoritiesinsurance industry, the full impact of existing regulators. All of these possibilities, if they occurred, could impact the waywhich has yet to be realized. Any incremental requirements, costs and risks imposed on RiverSource Life conductsin connection with such current or future legislative or regulatory changes, may constrain its businessability to market its products to potential customers, and managescould negatively impact its capital,profitability and may requiremake it more difficult for RiverSource Life to satisfy increasedpursue its growth strategy.
Some of the changes resulting from rules and regulations called for under the Dodd-Frank Act could present operational challenges and increase costs. For example, in the area of derivatives, higher margin and capital requirements, whichcoupled with more restrictive collateral rules, could impact RiverSource Life’s ability to effectively manage and hedge risk. Ultimately these complexities and increased costs could have an impact on RiverSource Life’s ability to offer cost-effective and innovative insurance products to its clients.
RiverSource Life is subject to state regulation and must comply with statutory reserve and capital requirements, including preparing financial statements in turnaccordance with statutory accounting principles. State regulators continually review and update these requirements and other requirements relating to the business operations of insurance companies, including their underwriting and sales practices. The NAIC adopted a change to require principles-based reserves for variable annuities at the end of 2009, and continues to discuss moving to a principles-based reserving system for other insurance and annuity products. The requirement for principles-based variable annuity reserves, along with a similar risk-based capital requirement adopted previously, may result in statutory reserves and risk-based capital for variable annuities being more sensitive to changes in equity prices and other market factors. It is not possible at this time to estimate the potential impact of future changes in statutory reserve and capital requirements. Further, RiverSource Life cannot predict the effect that proposed federal legislation, such as the option of federally chartered insurers or a mandated federal systemic risk regulator, may have on RiverSource Life or its competitors.
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 materiallylead 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 impact 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. Reductions or other changes in the fees that RiverSource Life charges for its products and services could reduce its revenues and earnings.
Changes in and the adoption of accounting standards could have a material impact on RiverSource Life’s financial statements.
RiverSource Life prepares its financial statements in accordance with U.S. generally accepted accounting principles. From time to time, the Financial Accounting Standards Board (“FASB”), the SEC, and other regulators change the financial accounting and reporting standards governing the preparation of RiverSource Life’s financial statements. In some cases, RiverSource Life could be required to apply a new or revised standard retroactively, resulting in the restating of prior period
financial statements. These changes are difficult to predict and it is possible that such changes could have a material effect on RiverSource Life’s financial condition and results of operations and liquidity.operations.
Defaults in RiverSource Life’s fixed 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%2011, 6% 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 uses reinsurance to mitigate its risks in various circumstances as described in Item 1 of this Annual Report on Form 10-K — “Business — Reinsurance.” Reinsurance does not relieve RiverSource Life of its direct liability to its policyholders, even when the reinsurer is liable to RiverSource Life. Accordingly, RiverSource Life bears credit and performance risk with respect to its reinsurers. A reinsurer’s insolvency or its inability or unwillingness to make payments under the terms of its reinsurance agreement could have a material adverse effect on RiverSource Life’s financial condition and results of operations. See Note 2 and Note 78 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.10-K for additional information regarding reinsurance.
In addition, RiverSource Life uses a variety of derivative instruments (including options, forwards and interest rate swaps) with a number of counterparties to hedge business risks. The amount and breadth of exposure to derivative counterparties, as well as the cost of derivative instruments, have increased significantly in connection with RiverSource Life’s strategies to hedge guaranteed benefit obligations under its variable annuity products. If RiverSource Life’s counterparties fail to honor their obligations under the derivative instruments in a timely manner, RiverSource Life’s hedges of the related risk will be ineffective. That failure could have a material adverse effect on RiverSource Life’s financial condition and results of operations. This risk of failure of RiverSource Life’s hedge transactions from counterparty default may be increased by capital market volatility.
The determination of the amount of allowances and impairments taken on certain investments is subject to managementmanagement’s’s evaluation and judgment and could materially impact RiverSource Life’s financial position or results of operations.
The determination of the amount of allowances and impairments vary by investment type and is based upon RiverSource Life’s periodic evaluation and assessment of inherent and known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer, and management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential, which assumptions and estimates are more difficult to make with certainty under current market conditions.
RiverSource Life’s valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely impact its financial condition or results of operations.
Fixed maturity, equity, trading securities and short-term investments which are reported at fair value on the Consolidated Balance Sheets, represent the majority of RiverSource Life’s total cash and invested assets. The determination of fair values by management in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities RiverSource Life deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions,
sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption, including periods of significantly rising or high interest rates and/or 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, the valuation of 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 whichthat are more sophisticated or require greater estimation, thereby resulting in values which may be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could
materially impact the valuation of securities as reported within RiverSource Life’s consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on RiverSource Life’s financial condition or results of operations.
Some of RiverSource Life’s investments are relatively illiquid.
RiverSource Life invests a portion of its 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%16% of the carrying value of RiverSource Life’s investment portfolio as of December 31, 2009.2011. If RiverSource Life requires significant amounts of cash on short notice in excess of its normal cash requirements, it may have difficulty selling these investments in a timely manner, or be forced to sell them for an amount less than it would otherwise have been able to realize, or both, which could have an adverse effect on RiverSource Life’s financial condition and results of operations.
Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively impact RiverSource Life’s ability to maintain or increase its market share and profitability.
RiverSource Life operates in an intensely competitive industry. RiverSource Life competes based on a number of factors including name recognition, service, investment performance, product features, price, perceived financial strength, and claims-paying ability 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 ability ratings than RiverSource Life does. Some of RiverSource Life’s competitors may possess or acquire intellectual property rights that could provide a competitive advantage to them in certain markets or for certain products, which could make it more difficult for RiverSource Life to introduce new products and services. Some of RiverSource Life’s competitors’ proprietary products or technology could be similar to its own, and this could result in disputes that could impact RiverSource Life’s financial condition or results of operations. In addition, over time, certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This convergence could result in RiverSource Life’s competitors gaining greater resources and RiverSource Life may experience pressures on its pricing and market share as a result of these factors.
Historically, Ameriprise Financial’s brandedaffiliated advisor network (both franchiseefranchise advisors and those employed by RiverSource Life’s affiliated broker-dealer selling firm) distributedAFSI) provided annuity and insurance products issued almost exclusively (in the case of annuities) or predominantly (in the case of insurance products) by RiverSource Life. The primary exception to this general practice is that the branded advisors who joined Ameriprise Financial in connection with an acquisition continued to offer annuities from competitors as they did prior to the acquisition. Ameriprise Financial expects they will continue to do so until it harmonizes the competitive products offered by all of its branded advisors, as described below, at which point some of these advisors will offer a more limited number of competitors’ products. In 2010, Ameriprise Financial plans to begin expandingexpanded the offerings available to its brandedaffiliated 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 brandedaffiliated advisor network to annuity and insurance products of other companies, RiverSource Life could experience lower sales of its products, higher surrenders or other developments, which could adversely affect its financial condition and results of operations.
In late 2010, RiverSource Life discontinued the distribution of its variable annuities through third-party channels. This could impact the persistency of business sold previously through these channels, possibly resulting in the acceleration of DAC amortization or other adverse effects on RiverSource Life’s results of operations.
Poor investment performance in RiverSource Life’s variable products could adversely affect its financial condition and results of operations.
RiverSource Life believes that investment performance is an important factor in the growth of its variable annuity and variable life insurance business. Poor investment performance could impair revenues and earnings, as well as RiverSource Life’s prospects for growth, because:
·because RiverSource Life’s ability to attract funds from existing and new clients might diminish; and
diminish and existing clients might withdraw assets from RiverSource Life’s variable products in favor of better performing products of other companies, which would result in lower revenues.
RiverSource Life’s affiliated distributorAFSI may be unable to attract and retain financial advisors.
RiverSource Life is dependent on the brandedaffiliated financial advisors of its affiliated broker-dealer selling firmAFSI for a significant portion of the sales of its annuity and insurance products. A significant number of its brandedthe affiliated financial advisors operate as
independent contractors under a franchise agreement with its affiliated selling firm.AFSI. There can be no assurance that RiverSource Life’s affiliated selling firmAFSI will be successful in its efforts to maintain its current network of financial advisors or to recruit and retain new advisors to its network. If RiverSource Life’s affiliated selling firmAFSI 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.people. The market for qualified talent is extremely competitive. If RiverSource Life is unable to attract and retain qualified individuals or its recruiting and retention costs increase significantly, its financial condition and results of operations could be materially adversely impacted.
Damage to the reputation of RiverSource Life’sLife or its affiliates could adversely affect the business is heavily regulated, and changes in legislation or regulation may reduce its profitability and limit its growth.of RiverSource Life.
The ability of RiverSource Life operates in ato market and sell its products is highly regulated industry, and is required to obtain and maintain licenses fordependent upon external perceptions of its business in addition to being subject to regulatory oversight. Insurance regulators have significantly increased the level of regulation in recent yearspractices 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 concerns the sale and suitability of financial products and services to persons planning for retirement,condition, as well as the business practices and financial condition of its affiliates. Damage to older investors. In addition,the reputation of RiverSource Life is subjector its affiliates could cause significant harm to heightened requirementsthe business and associated costsprospects of RiverSource Life and risks relatingmay arise from numerous sources, including litigation or regulatory actions, failing to privacydeliver minimum standards of service and quality, compliance failures, unethical behavior and the protectionmisconduct of customer data. These requirements, costsemployees, affiliated advisors and risks, as well as possible legislative or regulatory changes,counterparties. Adverse developments with respect to the financial industry may constrain RiverSource Life’s ability to market its products and services to its target demographic and potential customers, and couldalso, by association, negatively impact RiverSource Life’s profitability and make it more difficult for RiverSource Life to pursue its growth strategy.
RiverSource Life is subject to state regulation and must comply with statutory reserve and capital requirements. State regulators are continually reviewing and updating these requirements and other requirements relating to the business operations of insurance companies, including their underwriting and sales practices. The NAIC has adopted a change to require principles-based reserves for variable annuities at the end of 2009, and continues to discuss moving to a principles-based reserving system for other insurance and annuity products. The requirement for principles-based variable annuity reserves, along with a similar risk-based capital requirement adopted previously, mayreputation or result in statutory reserves and risk-based capital for variable annuities being more sensitive to changes in equity prices and other market factors. It is not possible at this time to estimate the potential impact of future changes in statutory reserve and capital requirements. Further, RiverSource Life cannot predict the effect that proposed federal legislation, such as the option of federally chartered insurersgreater regulatory or a mandated federal systemic risk regulator, may have on RiverSource Lifelegislative scrutiny 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.litigation.
RiverSource Life’s profit margins and earnings arereputation is also dependent in part on its ability to maintain current fee levels for the productscontinued identification of 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 impact 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. 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 potentialmitigation against 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,AFSI, the distributor of these products. RiverSource Life and its affiliated entities have procedures and controls in place that are designed to identify, address and appropriately disclose perceived conflicts of interest. Appropriately dealing withHowever, identifying and appropriately addressing 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 withaddress conflicts of interest.interest appropriately. 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 couldwill make RiverSource Life’s clients less willing to enter into transactions in which such a conflict may occur, and couldwill 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 bindbinding 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’saffiliates’ employees and agents and the precautions RiverSource Life takes to prevent and detect this activity may not be effective in all cases. RiverSource Life cannot also cannot assure that misconduct by employees and agents and its affiliate’saffiliates’ 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 current or future legal or regulatory actions could have a material adverse 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,certain companies in the insurance industry, the ratings organizations have heightened the level of scrutiny that they apply and have requested additional information from the companies that they rate, andrate. They 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,ratings, which may in turn impact the ratings assigned to insurance companies.
RiverSource Life cannot predict what actions ratingratings organizations may take, or what actions RiverSource Life may take in response to the actions of ratingratings 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 couldwould 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 couldwould 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 included in Part II, Item 8 of this Annual Report on Form 10-K.
Morbidity rates or mortality rates that differ significantly from RiverSource Life’s pricing expectations would negatively affect profitability.
RiverSource Life sets prices for its life, DI and LTC insurance and some annuity products based upon expected claim payment patterns, derived from assumptions RiverSource Life makes about its policyholders and contractholders, the morbidity rates, or likelihood of sickness, and the mortality rates, or likelihood of death. 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 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 has 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 subject towith 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 unaffiliated third partythird-party insurers, and RiverSource Life has also implemented rate increases on certain in force policies as described in Item 1 of this Annual
Report on Form 10-K — “Business — Insurance: Product Features and Risks — Long Term Care Insurance.” RiverSource Life may be required to implement additional rate increases in the future and may or may not receive regulatory approval for the full extent and timing of any rate increases that RiverSource Life may seek.
RiverSource Life may face losses if there are significant deviations from its assumptions regarding the future persistency of its insurance policies and annuity contracts.
The prices and expected future profitability of RiverSource Life’s insurance and deferred annuity products are based in part upon assumptions related to persistency, which is the probability that a policy or contract will remain in force from one period to the next. Given the ongoing economic and market dislocations, future consumer persistency behaviors could vary materially from the past. The effect of persistency on profitability varies for different products. For most of its life insurance and deferred annuity products, actual persistency that is lower than its persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily because RiverSource Life would be required to accelerate the amortization of expenses it deferred in connection with the acquisition of the policy or contract.
For RiverSource Life’s LTC insurance and certain universal life insurance policies with secondary guarantees, as well as variable annuities with GMWB, actual persistency that is higher than its persistency assumptions could have a negative impact on profitability. If these policies remain in force longer than RiverSource Life assumed, then RiverSource Life could be required to make greater benefit payments than it had anticipated when it priced or partially reinsured these products. Some of its LTC insurance policies have experienced higher persistency and poorer lossmorbidity 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 representsrepresent the costcosts 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 LTCDI insurance. For annuity and universal life
products, DAC isare amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC isare 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 requiresrequire 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.
For more information regarding DAC, see Part II, Item 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis — Critical Accounting Policies — Deferred Acquisition Costs and Deferred Sales Inducement Costs” and “— Recent Accounting Pronouncements.”
The occurrence of natural or man-made disasters and catastrophes could adversely affect the financial condition and results of operations of RiverSource Life.
The occurrence of natural disasters and catastrophes, including earthquakes, hurricanes, floods, tornadoes, fires, severe winter weather, explosions, pandemic disease and man-made disasters, including acts of terrorism insurrections and military actions, could adversely affect the financial condition or results of operations of RiverSource Life. Such disasters and catastrophes may damage its facilities, preventing its employees from performing their roles or otherwise disturbing its ordinary business operations, and by impacting claims, as described below. Such disasters and catastrophes may also impact RiverSource Life indirectly by changing the condition and behaviors of its customers, business counterparties and regulators, as well as by causing declines or volatility in the economic and financial markets.
The effects of natural and man-made disasters and catastrophes on the business of RiverSource Life include but are not limited to the following: a catastrophic loss of life may materially increase the amount of or accelerate the timing in which benefits are paid under its insurance policies; an increase in claims and any resulting increase in claims reserves caused by a disaster may harm the financial condition of its reinsurers, thereby impacting the cost and availability of reinsurance and the probability of default on reinsurance recoveries; and declines and volatility in the financial markets may harm its financial condition.
RiverSource Life cannot predict the timing and frequency with which natural and man-made disasters and catastrophes may occur, nor can RiverSource Life predict the impact that changing climate conditions may have on the frequency and severity of natural disasters. As such, RiverSource Life cannot be sure that its actions to identify and mitigate the risks associated with such disasters and catastrophes, including predictive modeling, establishing liabilities for expected claims, acquiring insurance and reinsurance and developing business continuity plans, will be effective.
RiverSource Life may not be able to protect its intellectual property and may be subject to infringement claims.
RiverSource Life relies on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect its intellectual property. Although RiverSource Life uses a broad range of measures to protect its intellectual property rights, third parties may infringe or misappropriate its intellectual property. RiverSource Life may have to litigate to enforce and protect its copyrights, trademarks, patents, trade secrets and know-how or to determine their scope,
validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of RiverSource Life’s intellectual property assets could have a material adverse effect on its business and its ability to compete.
RiverSource Life also may be subject to costly litigation in the event that another party alleges its operations or activities infringe upon such other party’s intellectual property rights. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by RiverSource Life’s products, methods, processes or services or could otherwise limit its ability to offer certain product features. Any party that holds such a patent could make a claim of infringement against RiverSource Life. RiverSource Life may also be subject to claims by third parties for breach of copyright, trademark, license usage rights, or misappropriation of 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 or misappropriated 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 thatinterference with RiverSource Life’s technology infrastructure, is not secure, could harm its business.
The business of RiverSource Life and its affiliates is reliant upon technology systems and networks, including systems and networks managed by third parties, to process, transmit and store information and to conduct business activities and transactions with clients, distributors, vendors and other third parties. Maintaining the integrity of the systems and networks of RiverSource Life and its affiliates is critical to the success of RiverSource Life’s business requiresoperations, including the appropriateretention of clients, and secure utilizationto the protection of client and other sensitive information. RiverSource Life’s operations require the secure transmission of confidentialproprietary information over public networks. Securityand RiverSource Life’s clients’ personal information. Accordingly, any breaches in connectionor interference with the delivery of its productssuch systems and services, including products and services utilizing the Internet, as well as intrusions resulting from the efforts of “hackers” seeking the sensitive datanetworks by third parties or by RiverSource possesses and the trend toward broad consumer and general public notification of such incidents, could significantly harmLife’s employees may have a material adverse impact on RiverSource Life’s business, financial condition or results of operations.
RiverSource Life and its affiliates have implemented security measures designed to protect against breaches of security and other interference with systems and networks resulting from attacks by third parties, including hackers, and from employee error or malfeasance. RiverSource Life and its affiliates also require third party vendors who, in the provision of services to RiverSource Life and its affiliates, are provided with or process information pertaining to RiverSource Life’s business or its clients to meet certain information security standards. Despite these measures, RiverSource Life cannot assure that the systems and networks of RiverSource Life and its affiliates will not be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access to or the disclosure or loss of RiverSource Life’s proprietary information or RiverSource Life’s clients’ personal information, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further exposure, the loss of clients or other damage to its business. 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 and systems 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 employee error or malfeasance, interference by third parties, including hackers, 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 and other natural disasters, power losses, equipment failures, failures of internal or vendor software or systems and other events beyond its control. Further, RiverSource Life faces the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries that RiverSource Life uses to facilitate or are component providers to its securities transactions and other product manufacturing and distribution activities. These risks are heightened by RiverSource Life’s deployment in response to both client interest and evolution in the financial markets of increasingly sophisticated products, such as those which incorporate automatic asset re-allocation, multiple portfolios or funds and business-driven hedging, compliance and other risk management strategies. Any such failure, termination or constraint could adversely impact its ability to effect transactions, service its clients and manage its exposure to risk.
RiverSource Life’s risk management policies and procedures may not be fully effective in identifying or mitigating its risk exposure in all market environments or against all types of risk, including employee and financial advisor misconduct.
RiverSource Life has devoted significant resources to develop its risk management policies and procedures and will continue to do so. Nonetheless, RiverSource Life’s policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating its risk exposure in all market environments or against all types of risk. Many of its methods
of managing risk and exposures are based upon its use of observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid. As a result, these methods may not accurately predict future exposures accurately, 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. These risks are difficult to detect in advance and deter, and could harm RiverSource Life’s business, financial condition or results of operations. RiverSource Life is further subject to the risk of nonperformance or inadequate performance of contractual obligations by third-party vendors of products and services that are used in its businesses. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a 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) enjoyreceive 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. 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. In addition, changes to the Internal Revenue Code, administrative rulings or court decisions could increase RiverSource Life’s provision for income taxes.
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None.
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RiverSource Life Insurance Company occupiesowns and leases office space in Minneapolis, Minnesota, which it either owns or leases from Ameriprise Financial. RiverSource Life Insurance Company reimburses Ameriprise Financial for rent based on direct and indirect allocation methods.Minnesota. RiverSource Life of NY rents office space in Albany, New York. RiverSource Life believes that the facilities occupiedit occupies are suitable and adequate.
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Insurance companies have recently been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced investigationsexaminations and other inquiries of insurance companies regarding sales and marketing practices (including sales to older consumers)consumers and disclosure practices), compensation arrangementsclaims handling, and anticompetitive activities,unclaimed property and escheatment practices and procedures. With regard to an industry-wide investigation of unclaimed property and escheatment practices and procedures, RiverSource Life is responding to regulatory audits, market timingconduct examinations and late trading in connection with insurance, annuityother inquires (including inquiries from the States of Minnesota and mutual fund products.New York). RiverSource Life has been contacted by regulatory agencies for information relatingcooperated and will continue to some of these investigations and is cooperatingcooperate with thosethe applicable regulators regarding their 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 investigation or 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.
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Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.Not applicable.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
All of RiverSource Life Insurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc. There is no established public trading market for RiverSource Life Insurance Company’s common stock.
For discussion regarding RiverSource Life Insurance Company’s payment of dividends and restrictions on dividends, see Item 7 of this Annual Report on Form 10-K — “Management’s Narrative Analysis — Liquidity and Capital Resources — Capital Activity” and Note 1315 to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Item omitted pursuant to General Instructions I(2)(a) of Form 10-K.
Overview
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operatingstock life insurance company 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 domiciled and holds a stock life insurance company domiciled in New York, which holds CertificatesCertificate of Authority in New York, North Dakota and Delaware.York. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares ofRiverSource Life Insurance Company also wholly owns 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 subsidiaries are referred to collectively in this Form 10-K as “RiverSource Life”the “Company”.
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 Lifethe Company uses affect its Consolidated Financial Statements. Certain of RiverSource Life’sthe Company’s accounting and reporting policies are critical to an understanding of RiverSource Life’sthe Company’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 Lifethe Company 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’sthe Company’s accounting policies.
Valuation of Investments
The most significant component of RiverSource Life’sthe Company’s investments is its Available-for-Sale securities, which RiverSource Lifethe Company carries at fair value within its Consolidated Balance Sheets. The fair value of RiverSource Life’sthe Company’s Available-for-Sale securities at December 31, 20092011 was primarily obtained from third-party pricing sources. RiverSource LifeThe Company 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 asimpacts to 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
deferred sales inducement costs (“DSIC”), certain benefit reserves and income taxes. The Company recognizes gains and losses in results of operations upon disposition of the securities.
Effective January 1, 2009, RiverSource Lifethe Company early adopted an accounting standard that significantly changed RiverSource Life’sthe Company’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 Lifethe Company 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 Lifethe Company 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 Lifethe Company 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 Lifethe Company does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Lifethe Company 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 impairmentimpairments related to other factors is recognized in other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”),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 significantsustained 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 Lifethe Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Lifethe Company will be required to sell the security before recovery of its amortized cost basis. RiverSource LifeThe Company 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 Lifethe Company considers in determining whether declines in the fair value of fixed-maturityfixed 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’sthe Company’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 Lifethe Company 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’sthe Company’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 thatwhether 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’sthe Company’s annuity products are typically 1030 to 25 years, while projection50 years. Projection periods for RiverSource Life’sits life DI and LTC insurance products are often 50 years or longer.longer and projection periods for its DI products can be up to 45 years. Management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.
For annuity and universal life (“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 products with associated DSIC, the same policy applies in calculating the DSIC balance and periodic DSIC amortization.
For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC isare not recoverable. If management concludes that DAC isare not recoverable, DAC isare 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 thesethose 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 LifeThe long-term client asset value growth rates are based on assumed gross annual returns of 9% for equity funds and 6% for fixed income funds. The Company typically uses a five-year mean reversion process as a guideline in setting near-
termnear-term equity assetfund growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term equity fund growth rate is reviewed quarterly 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 current period pretax income:
|
| Estimated Impact |
|
| Estimated Impact to |
| ||
|
| (in millions) |
|
| (in millions) |
| ||
Decrease in future near and long-term fixed income returns by 100 basis points |
| $ | (38 | ) | ||||
|
|
|
| |||||
Decrease in near-term equity fund growth returns by 100 basis points |
| (37 | ) | |||||
Decrease in long-term equity fund growth returns by 100 basis points |
| (27 | ) | |||||
Decrease in future near and long-term equity returns by 100 basis points |
| $ | (44 | ) |
| $ | (64 | ) |
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’sthe Company’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 (“EIA”) 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 Lifethe Company 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 LifeThe Company 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 Lifethe Company offers contracts with guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions and, until May 2007, RiverSource Lifethe Company 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 Lifethe Company 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 1113 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. Significant assumptions made in projecting future benefits and fees relate to persistency and benefit utilization. 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 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 annuitiesEIA 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%4.25% to 9.5% at December 31, 2009,2011, depending on year of issue, with an average rate of approximately 5.7%5.47%.
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 indexed accounts of indexed universal life (“IUL”) products, 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 indexed accounts of IUL products are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.
A portion of the Company’s fixed and variable universal life contracts have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. 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.
In determining the liability for contracts with profits followed by losses, the Company projects benefits and contract assessments using actuarial models. 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 liability for these future losses is determined by estimating the death benefits in excess of account value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). See Note 9 to the Consolidated Financial Statements for information regarding the liability for contracts with secondary guarantees.
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’sthe Company’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2009,2011, with an average rate of 4.7%4.5%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2009,2011, with an average rate of 4.1%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’sthe Company’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, 2009,2011, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by planpolicies ranged from 4.0% to 7.5% at December 31, 2011, depending on policy form, issue year and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively.duration. Anticipated interest rates for LTC policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31, 2009.2011.
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 LifeThe Company uses derivative instruments to manage its exposure to various market risks. Examples include index options, interest rate swaps and swaptions, total return swaps and futures that economically hedge the equity and interest rate exposure of derivatives embedded in certain annuity and life liabilities. All derivatives are recorded at fair value. The fair value of RiverSource Life’sthe Company’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 LifeThe Company primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource LifeThe Company 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’sThe Company’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 accounting 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, when applicable, are included within benefits, claims, losses and settlement expenses. The changes in fair value of derivatives hedging equity indexed annuitiesEIA and IUL products are included inwithin interest credited to fixed accounts. The changes in fair value of all other derivatives that do not qualify for hedge accounting or are not designated as hedges 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 changes in the fair value of the hedged risk within the corresponding hedged assets, liabilities or firm commitments, are recognized on a net basis in current period earnings. The carrying value of the hedged item is adjusted for the change in fair value from the designated hedged risk. 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 portionsportion of the gain or loss on the derivative instruments areis 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.current period 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) is recognized intoreclassified to 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 Lifethe Company uses and how it accounts for them, see Note 2 and Note 1516 to the Consolidated Financial Statements.
Reinsurance
The Company cedes 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 reinsurance contracts. Reinsurance premiums for traditional life, LTC and DI ceded on a coinsurance basis, net of the change in any prepaid reinsurance asset, are reported as a reduction of premiums. Fixed and variable universal life reinsurance premiums are reported as a reduction of policy and contract charges. In addition, for fixed and variable universal life insurance policies, the net cost of reinsurance ceded, which represents the discounted amount of the expected cash flows between the reinsurer and the Company, is recognized as an asset and amortized over the term of the reinsurance contract, in proportion to the estimated gross profits and is subject to retrospective adjustment in a manner similar to retrospective adjustment of DAC. The assumptions used to project the expected cash flows are consistent with those used for DAC asset valuation for the same contracts. Changes in the net cost of reinsurance are reflected as a component 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.
Income Tax Accounting
Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of income taxes that RiverSource Lifethe Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. RiverSource LifeThe Company 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’sthe Company’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’sthe Company’s deferred tax assetstaxes 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 as well as future deductible capital losses realized 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 LifeThe Company 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,determination: (i) future taxable income exclusive of reversing temporary differences and carryforwards,carryforwards; (ii) future reversals of existing taxable temporary differences,differences; (iii) taxable income in prior carryback years, and (iv) tax planning strategies. It is likely that management willManagement may need to identify and implement appropriate planning strategies to ensure itsthe Company’s ability to realize its 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 Lifethe Company will not realize the full benefit of its deferred tax assets, including its capital loss deferred tax assets;certain state net operating losses, and therefore no sucha valuation allowance of $4 million has been established.established at December 31, 2011.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on RiverSource Life’sthe Company’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.
The Company adopted new accounting rules for the deferral of insurance and annuity acquisition costs on January 1, 2012 on a retrospective basis. The change reduced the DAC asset by $2.0 billion, which decreased retained earnings by $1.4 billion after tax. The Company estimates that the adoption will have a marginal impact to net income in 2012.
Results of Operations for the Year Ended December 31, 20092011 compared to the Year Ended December 31, 20082010
The following table presents RiverSource Life’sthe Company’s consolidated results of operations:
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| Year Ended |
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| Years Ended December 31, |
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| 2009 |
| 2008 |
| Change |
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| 2011 |
| 2010 |
| Change |
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| (in millions, except percentages) |
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| (in millions, except percentages) |
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Revenues |
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| ||||||
Premiums |
| $ | 450 |
| $ | 438 |
| $ | 12 |
| 3 | % |
| $ | 493 |
| $ | 489 |
| $ | 4 |
| 1 | % |
Net investment income |
| 1,526 |
| 1,252 |
| 274 |
| 22 |
|
| 1,593 |
| 1,629 |
| (36 | ) | (2 | ) | ||||||
Policy and contract charges |
| 1,156 |
| 1,352 |
| (196 | ) | (14 | ) |
| 1,540 |
| 1,389 |
| 151 |
| 11 |
| ||||||
Other revenue |
| 233 |
| 255 |
| (22 | ) | (9 | ) | |||||||||||||||
Net realized investment gains (losses) |
| 59 |
| (442 | ) | 501 |
| NM |
| |||||||||||||||
Other revenues |
| 303 |
| 272 |
| 31 |
| 11 |
| |||||||||||||||
Net realized investment gains |
| 5 |
| 16 |
| (11 | ) | (69 | ) | |||||||||||||||
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Total revenues |
| 3,424 |
| 2,855 |
| 569 |
| 20 |
|
| 3,934 |
| 3,795 |
| 139 |
| 4 |
| ||||||
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Benefits and expenses |
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Benefits, claims, losses and settlement expenses |
| 841 |
| 673 |
| 168 |
| 25 |
|
| 950 |
| 1,203 |
| (253 | ) | (21 | ) | ||||||
Interest credited to fixed accounts |
| 903 |
| 790 |
| 113 |
| 14 |
|
| 853 |
| 909 |
| (56 | ) | (6 | ) | ||||||
Amortization of deferred acquisition costs |
| 145 |
| 861 |
| (716 | ) | (83 | ) |
| 539 |
| 53 |
| 486 |
| NM |
| ||||||
Other insurance and operating expenses |
| 550 |
| 649 |
| (99 | ) | (15 | ) |
| 645 |
| 582 |
| 63 |
| 11 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total benefits and expenses |
| 2,439 |
| 2,973 |
| (534 | ) | (18 | ) |
| 2,987 |
| 2,747 |
| 240 |
| 9 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Pretax income |
| 985 |
| (118 | ) | 1,103 |
| NM |
|
| 947 |
| 1,048 |
| (101 | ) | (10 | ) | ||||||
Income tax provision (benefit) |
| 245 |
| (189 | ) | 434 |
| NM |
| |||||||||||||||
Income tax provision |
| 168 |
| 252 |
| (84 | ) | (33 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net income |
| $ | 740 |
| $ | 71 |
| $ | 669 |
| NM |
|
| $ | 779 |
| $ | 796 |
| $ | (17 | ) | (2 | ) |
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Net realized investment gains (losses): |
|
|
|
|
|
|
|
|
| |||||||||||||||
Net realized investment gains before impairment losses on securities |
| $ | 121 |
|
|
|
|
|
|
| ||||||||||||||
Total other-than-temporary impairment losses on securities |
| (50 | ) |
|
|
|
|
|
| |||||||||||||||
Portion of loss recognized in other comprehensive income |
| (12 | ) |
|
|
|
|
|
| |||||||||||||||
Net impairment losses recognized in net realized investment gains (losses) |
| (62 | ) |
|
|
|
|
|
| |||||||||||||||
Net realized investment gains (losses) |
| $ | 59 |
|
|
|
|
|
|
|
NM Not Meaningful.
Overview
Consolidated net income was $740$779 million for the year ended December 31, 20092011 compared to $71$796 million for the year ended December 31, 2008, an increase2010, a decrease of $669 million.$17 million or 2%. Pretax income increased $1.1 billiondecreased $101 million or 10% to $985$947 million for the year ended December 31, 20092011 from a pretax loss of $118 million$1.0 billion for the year ended December 31, 2008.2010. The increasedecrease was primarily driven by an increasea decrease in net investment income and net realized investment gains compared to net realized investment losses in the prior year period and a decreaseincreases in amortization of DAC.DAC and other insurance and operating expenses. These increasesdecreases to net income were partially offset by a decreasean increase in policy and contract charges and an increasedecreases in benefits, claims, losses and settlement expenses.expenses and interest credited to fixed accounts.
Results of operations will continue to be negatively impacted by the ongoing low interest rate environment in 2012. In addition to continuing spread compression in the third quarter of 2009,Company’s interest sensitive product lines throughout 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 assumptionsyear, there is also the potential for certain life insurance productsinterest rate related impacts to DAC 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 reviewDSIC amortization and the valuation system conversion resulted inlevel of reserves as 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 modelingresult of the expected valueCompany’s ongoing review of existing reinsurance agreements and a decrease in expense from modeling annuity amortization periods at the individual policy level.various actuarial related assumptions, which could be material.
The total pretax impacts on RiverSource Life’sthe Company’s revenues and expenses for the year ended December 31, 2009 attributable to the review of valuation assumptions and themodel changes were as follows:
|
| Years Ended December 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in millions) |
| ||||
Pretax Benefit (Charge) |
|
|
| ||||
Policy and contract charges |
| $ | (20 | ) | $ | (20 | ) |
Benefits, claims, losses and settlement expenses |
| 40 |
| (249 | ) | ||
Amortization of DAC |
| (61 | ) | 358 |
| ||
Total |
| $ | (41 | ) | $ | 89 |
|
The market 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 totalwas a $17 million pretax impacts on RiverSource Life’s revenues and expensescharge for the year ended December 31, 2008 attributable2011 compared to a $34 million pretax benefit for the reviewprior year period. The market impact on variable annuity guaranteed living benefits expense, net of valuation assumptions, the valuation system conversion and the impact of markets onhedges, DAC and DSIC amortization GMDBwas a $61 million pretax expense for both years ended December 31, 2011 and GMIB riders, and variable annuity living benefit riders, net of hedges and DAC amortization were as follows:2010.
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 increased $139 million or 4% to $3.9 billion for the year ended December 31, 2009 were $3.4 billion, an increase of $569 million or 20% from $2.92011 compared to $3.8 billion in 2008. The increase is2010 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.charges and other revenue.
Net investment incomePolicy and contract charges increased $274$151 million or 22%11% 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, 20092011 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 inhigher fees on variable annuities driven by higher average separate account assets.balances. Average separate account assets decreased $5.9variable annuities contract accumulation values increased $6.4 billion or 11%12% from the prior year period primarily due to higher average equity market declines partially offset bylevels as well as net inflows.
Other revenue decreased $22revenues increased $31 million or 9%11% to $233$303 million for the year ended December 31, 20092011 compared to $255$272 million in the prior year reflecting lowerhigher marketing support and administrativeservice fees due to lowerhigher average underlying separate account asset values.balances.
Net realized investment gains were $59decreased $11 million or 69% to $5 million for the year ended December 31, 20092011 compared to net realized investment losses of $442$16 million for the year ended December 31, 2008.2010. For the year ended December 31, 2009,2011, net realized gains from sales ofon Available-for-Sale securities due to sales, calls and tenders were $135$28 million andpartially offset by other-than-temporary impairments recognized in earnings of $24 million which related to credit losses on non-agency residential mortgage backed securities. For the year ended December 31, 2010, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $62$47 million partially offset by other-than-temporary impairments recognized in earnings of $28 million which primarily related to credit losses on non-agency residential mortgage backed securities andas well as corporate debt securities in the gaming industry and banking and finance industries.industry. For the year ended December 31, 2009,2011, the reserves on commercial mortgage loans increaseddecreased by $13 million. Included in net$3 million partially offset by a 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 increaseloss 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, $132010, the allowance for loan losses on syndicated loans decreased by $7 million of gross realized investment gains werepartially offset by a $6 million of gross realized lossesincrease in the reserves on Available-for-Sale securities.commercial mortgage loans.
Benefits and Expenses
Total benefits and expenses increased $240 million or 9% to $3 billion for the year ended December 31, 2009 were $2.42011 compared to $2.7 billion a decrease of $534 million or 18% from $3.0 billion in 2008.for the year ended December 31, 2010. This decreaseincrease is primarily due to a decreaseincreases in amortization of DAC amortization,and other insurance and operating expenses partially offset by increasesa decrease in benefits, claims, losses and settlement expenses and interest credited to fixed accounts.
Benefits,Benefits, claims, losses and settlement expenses increased $168decreased $253 million or 25%21% to $841$950 million for the year ended December 31, 20092011 compared to $673 million$1.2 billion in the prior year driven by an increase in expenses from variable annuity living benefit guarantees.year. Benefits, claims, losses and settlement expenses for the year ended December 31, 2011 included a benefit of $40 million from updating valuation assumptions and models compared to an expense of $249 million in 2009 were impacted by $148 million ofthe prior year. The market impactsimpact on variable annuity benefit expenses,guaranteed living benefits, net of hedges and DSIC amortization, increased benefits expense by $71 million in 2011 compared to a benefit of $32$64 million in 2008.the prior year. The non-cashmarket impact in both periods was primarily driven by the impact of the nonperformance credit spread on the fair valuevaluation of living benefit liabilities, increasedwhich the Company does not hedge. These decreases were partially offset by an unfavorable change in reserves relative to the prior year for immediate annuities with life contingencies, driven by higher premiums. In addition, benefits, claims, losses and settlement expenses increased as a result of higher UL claims and an increase in 2009ongoing reserve levels for UL products with secondary guarantees compared to the prior year. The market impact to DSIC was an expense of $2 million in 2011 compared to a decreasebenefit of $3 million in 2008.the prior year. 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 infor the prior year from updating valuation assumptions and convertingincluded a $17 million expense, net of DSIC, as a result of the implementation of
changes to the Portfolio Navigator program (“PN program”), a new valuation system. The impact of market performance in 2009 decreased DSIC amortization by $4 million compared to an expense of $41 millionvariable annuity asset allocation program, in the prior year.second quarter of 2010.
Interest credited to fixed accounts increased $113decreased $56 million or 14%6% to $903$853 million for the year ended December 31, 20092011 compared to $790$909 million for the prior year driven by lower average variable annuities fixed sub-account balances and a lower average crediting rate on interest sensitive fixed annuities, as well as lower average fixed annuity account balances. Average variable annuities fixed sub-account balances decreased $580 million or 11% to $4.8 billion for the year ended December 31, 2008,2011 compared to the prior year primarily due to higher average fixed annuity account balances and higherthe implementation of changes to the PN program in the second quarter of 2010. The average fixed annuity crediting ratesrate excluding capitalized interest decreased to 3.7% for the year ended December 31, 2011 compared to 3.8% for the prior year. Average fixed annuities contract accumulation values increased $1.9decreased $265 million or 2% to $14.3 billion or 16%for the year ended December 31, 2011 compared to the prior year. The average fixed annuity crediting rate excluding capitalizedyear due to outflows. Fixed annuities remained in net outflows due to low client demand given current interest increased to 3.9% in 2009 compared to 3.7% in the prior year.rates.
Amortization of DAC decreased $716increased $486 million or 83% to $145$539 million for the year ended December 31, 20092011 compared to $861$53 million in the prior year. Amortization of DAC amortization in 20092011 included a $119 million benefit from updating valuation assumptions in the third quarter of 2009 compared to an expense of $81$61 million from updating valuation assumptions and convertingmodels compared to a new valuation systembenefit of $358 million in the prior year. Amortization of DAC amortization in 2009 was reduced by $139 million due to market impacts, including $113 million offsetting higher variable annuity benefits expenses, net2011 included an expense of hedges. DAC amortization in 2008 was increased by $404$5 million due to market impacts, including a $111$10 million expensebenefit offsetting gains onhigher variable annuity guaranteed living benefits netexpense. Amortization of hedges.DAC in 2010 included a benefit of $34 million due to market impacts, including a $3 million benefit offsetting higher variable annuity guaranteed living benefits expense. Amortization of DAC in 2010 also included a benefit of $17 million as a result of the implementation of changes to the PN program.
Other insurance and operating expenses decreased $99increased $63 million or 15%11% to $550$645 million for the year ended December 31, 20092011 compared to $582 million in the prior year. The increase is primarily due to decreased sales and marketingan increase in allocated corporate overhead expenses and lower corporate overhead expenses.distribution expenses in 2011 compared to the prior year.
Income Taxes
RiverSource Life’sThe Company’s effective tax rate was 24.9% and 160.1%18% for the yearsyear ended December 31, 2009 and 2008, respectively.2011 compared to 24% for the year ended December 31, 2010. The decrease in the effective tax rate is primarily due to pretax income for 2009 compared to the prior year primarily reflects 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 millionfavorable audit settlement related to the current year’s separate account DRD.dividends received deduction as well as lower pretax income relative to tax advantaged items.
It is possible there will be corporate tax reform in the next few years. While impossible to predict, corporate tax reform is likely to include a reduction in the corporate tax rate coupled with reductions in tax preferred items. Any changes could have a material impact on the Company’s income tax expense and deferred tax balances.
Fair Value Measurements
RiverSource LifeThe Company 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 LifeThe Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. BrokerNon-binding broker quotes are obtained when quotes from third-party pricing services are not available. RiverSource LifeThe Company 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.as described in Note 13 in the Company’s Consolidated Financial Statements.
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, 2009 ranged from 11% to 22%.
Non-agencyNon-Agency Residential Mortgage Backed Securities Backed by Subprime,Sub-prime, 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 LifeThe Company has exposure to each of these types of loans predominantly through mortgage backed and asset backed securities. The slow downslowdown 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. MarketPersistent 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’sthe Company’s risk management process, an internal rating system is used in conjunction with market data as the basis of analysis to assess the likelihood that RiverSource Lifethe Company will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment,
RiverSource Life the Company performs its own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds and loss severity and geographic concentrations to determine if an other-than-temporary impairment should be recognized.
The following table presents, as of December 31, 2009, RiverSource Life’s2011, the Company’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 |
|
| AAA |
| AA |
| A |
| BBB |
| BB & Below |
| Total |
| ||||||||||||||||||||||||||||||||||||||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||||||||||||||||||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sub-prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
2003 & prior |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
2004 |
| 3 |
| 3 |
| 7 |
| 2 |
| — |
| — |
| — |
| — |
| — |
| — |
| 10 |
| 5 |
|
| — |
| — |
| 2 |
| 2 |
| — |
| — |
| — |
| — |
| 7 |
| 4 |
| 9 |
| 6 |
| ||||||||||||||||||||||||
2005 |
| 42 |
| 40 |
| 11 |
| 6 |
| 12 |
| 12 |
| 7 |
| 7 |
| 19 |
| 11 |
| 91 |
| 76 |
|
| 2 |
| 2 |
| 19 |
| 16 |
| 10 |
| 10 |
| — |
| — |
| 22 |
| 17 |
| 53 |
| 45 |
| ||||||||||||||||||||||||
2006 |
| — |
| — |
| 6 |
| 5 |
| — |
| — |
| 5 |
| 5 |
| — |
| — |
| 11 |
| 10 |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 2 |
| 2 |
| 1 |
| 1 |
| 3 |
| 3 |
| ||||||||||||||||||||||||
2007 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||
2008 |
| — |
| — |
| 7 |
| 6 |
| — |
| — |
| — |
| — |
| — |
| — |
| 7 |
| 6 |
|
| — |
| — |
| 6 |
| 5 |
| — |
| — |
| — |
| — |
| — |
| — |
| 6 |
| 5 |
| ||||||||||||||||||||||||
Total Sub-prime |
| $ | 45 |
| $ | 43 |
| $ | 31 |
| $ | 19 |
| $ | 12 |
| $ | 12 |
| $ | 12 |
| $ | 12 |
| $ | 19 |
| $ | 11 |
| $ | 119 |
| $ | 97 |
|
| $ | 2 |
| $ | 2 |
| $ | 27 |
| $ | 23 |
| $ | 10 |
| $ | 10 |
| $ | 2 |
| $ | 2 |
| $ | 30 |
| $ | 22 |
| $ | 71 |
| $ | 59 |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
2003 & prior |
| $ | 15 |
| $ | 16 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 15 |
| $ | 16 |
|
| $ | — |
| $ | — |
| $ | 9 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 11 |
| $ | 13 |
|
2004 |
| 7 |
| 7 |
| 60 |
| 53 |
| 5 |
| 3 |
| — |
| — |
| 17 |
| 8 |
| 89 |
| 71 |
|
| — |
| — |
| — |
| — |
| 15 |
| 17 |
| 44 |
| 38 |
| 13 |
| 10 |
| 72 |
| 65 |
| ||||||||||||||||||||||||
2005 |
| 5 |
| 3 |
| 38 |
| 21 |
| 32 |
| 17 |
| 5 |
| 3 |
| 172 |
| 115 |
| 252 |
| 159 |
|
| — |
| — |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 182 |
| 124 |
| 183 |
| 125 |
| ||||||||||||||||||||||||
2006 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 13 |
| 7 |
| 13 |
| 7 |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8 |
| 4 |
| 8 |
| 4 |
| ||||||||||||||||||||||||
2007 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 29 |
| 16 |
| 29 |
| 16 |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 24 |
| 14 |
| 24 |
| 14 |
| ||||||||||||||||||||||||
2008 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||
Re-Remic(1) |
| 13 |
| 13 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 13 |
| 13 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total Alt-A |
| $ | 27 |
| $ | 26 |
| $ | 98 |
| $ | 74 |
| $ | 37 |
| $ | 20 |
| $ | 5 |
| $ | 3 |
| $ | 231 |
| $ | 146 |
| $ | 398 |
| $ | 269 |
|
| $ | 13 |
| $ | 13 |
| $ | 9 |
| $ | 10 |
| $ | 16 |
| $ | 18 |
| $ | 46 |
| $ | 41 |
| $ | 227 |
| $ | 152 |
| $ | 311 |
| $ | 234 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
2003 & prior |
| $ | 206 |
| $ | 198 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 206 |
| $ | 198 |
|
| $ | 55 |
| $ | 58 |
| $ | — |
| $ | — |
| $ | 58 |
| $ | 56 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 113 |
| $ | 114 |
|
2004 |
| 22 |
| 23 |
| — |
| — |
| 28 |
| 26 |
| 13 |
| 13 |
| — |
| — |
| 63 |
| 62 |
|
| 6 |
| 6 |
| 12 |
| 12 |
| 1 |
| 1 |
| — |
| — |
| 25 |
| 25 |
| 44 |
| 44 |
| ||||||||||||||||||||||||
2005 |
| 13 |
| 16 |
| 36 |
| 41 |
| 69 |
| 68 |
| 31 |
| 26 |
| 93 |
| 43 |
| 242 |
| 194 |
|
| — |
| — |
| 3 |
| 3 |
| 15 |
| 16 |
| — |
| — |
| 135 |
| 114 |
| 153 |
| 133 |
| ||||||||||||||||||||||||
2006 |
| 21 |
| 21 |
| — |
| — |
| 6 |
| 2 |
| 35 |
| 34 |
| — |
| — |
| 62 |
| 57 |
|
| — |
| — |
| — |
| — |
| 14 |
| 15 |
| — |
| — |
| 29 |
| 29 |
| 43 |
| 44 |
| ||||||||||||||||||||||||
2007 |
| 43 |
| 44 |
| — |
| — |
| — |
| — |
| — |
| — |
| 15 |
| 12 |
| 58 |
| 56 |
|
| — |
| — |
| — |
| — |
| 8 |
| 8 |
| — |
| — |
| 31 |
| 28 |
| 39 |
| 36 |
| ||||||||||||||||||||||||
2008 |
| — |
| — |
| �� |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||
Re-Remic(1) |
| 1,842 |
| 1,935 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,842 |
| 1,935 |
|
| 1,158 |
| 1,226 |
| 175 |
| 187 |
| 98 |
| 102 |
| — |
| — |
| 9 |
| 16 |
| 1,440 |
| 1,531 |
| ||||||||||||||||||||||||
Total Prime |
| $ | 2,147 |
| $ | 2,237 |
| $ | 36 |
| $ | 41 |
| $ | 103 |
| $ | 96 |
| $ | 79 |
| $ | 73 |
| $ | 108 |
| $ | 55 |
| $ | 2,473 |
| $ | 2,502 |
|
| $ | 1,219 |
| $ | 1,290 |
| $ | 190 |
| $ | 202 |
| $ | 194 |
| $ | 198 |
| $ | — |
| $ | — |
| $ | 229 |
| $ | 212 |
| $ | 1,832 |
| $ | 1,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Grand Total |
| $ | 2,219 |
| $ | 2,306 |
| $ | 165 |
| $ | 134 |
| $ | 152 |
| $ | 128 |
| $ | 96 |
| $ | 88 |
| $ | 358 |
| $ | 212 |
| $ | 2,990 |
| $ | 2,868 |
|
| $ | 1,234 |
| $ | 1,305 |
| $ | 226 |
| $ | 235 |
| $ | 220 |
| $ | 226 |
| $ | 48 |
| $ | 43 |
| $ | 486 |
| $ | 386 |
| $ | 2,214 |
| $ | 2,195 |
|
(1) Re-Remics of mortgage backed securities are prior vintages with cash flows structured into senior and subordinated bonds. Credit enhancement on senior bonds ishas been 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 subordinate tranchesprocess on the securities the Company owns.
European Exposure
The following table presents, as of December 31, 2009.2011, the Company’s exposure to European debt by country segregated between sovereign and non-sovereign (financial and non-financial corporate debt) exposure:
|
| Sovereign |
| Financials |
| Non-Financials |
| Total |
| ||||||||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| % of |
| ||||||||
|
| (in millions, except percentages) |
|
|
| ||||||||||||||||||||||
Greece |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| — | % |
Italy |
| — |
| — |
| — |
| — |
| 117 |
| 114 |
| 117 |
| 114 |
| 0.4 |
| ||||||||
Ireland |
| — |
| — |
| — |
| — |
| 40 |
| 39 |
| 40 |
| 39 |
| 0.1 |
| ||||||||
Portugal |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||
Spain |
| — |
| — |
| — |
| — |
| 130 |
| 126 |
| 130 |
| 126 |
| 0.4 |
| ||||||||
Subtotal |
| — |
| — |
| — |
| — |
| 287 |
| 279 |
| 287 |
| 279 |
| 0.9 |
| ||||||||
Other European exposure |
| 30 |
| 31 |
| 420 |
| 387 |
| 813 |
| 877 |
| 1,263 |
| 1,295 |
| 4.1 |
| ||||||||
Total |
| $ | 30 |
| $ | 31 |
| $ | 420 |
| $ | 387 |
| $ | 1,100 |
| $ | 1,156 |
| $ | 1,550 |
| $ | 1,574 |
| 5.0 | % |
(1)Invested assets include cash and cash equivalents and investments.
The non-financial corporate debt holdings in Greece, Italy, Ireland, Portugal and Spain are primarily in utilities/telecommunications. The non-financial corporate debt holdings in other European countries are multinational companies concentrated in utilities and non-cyclical industrials. The Company has no exposure to deeply subordinated
instruments. The Company does not hedge its European exposure and has no unfunded commitments related to its European debt holdings as of December 31, 2011.
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’sthe Company’s obligations of its variable annuity riders, RiverSource Lifethe Company considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, RiverSource Lifethe Company 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 market estimate of RiverSource Life’sthe Company’s nonperformance risk. The nonperformance risk adjustment is based on non-binding broker quotes for credit default swaps that are adjusted to estimate the risk of RiverSource Lifethe Company not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of December 31, 2009.2011. As RiverSource Life’sthe Company’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$226 million, net of DAC and DSIC amortization and income taxes, based on December 31, 20092011 credit spreads.
Liquidity and Capital Resources
Liquidity Strategy
The liquidity requirements of RiverSource Lifethe Company 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 Lifethe Company has established are repurchase agreements and available lines of credit with Ameriprise Financial aggregating $1 billion. Also, in March 2009,
RiverSource Life Insurance Company becameis a member of the Federal Home Loan Bank of Des Moines (“FHLB of Des Moines”FHLB”), which provides RiverSource Life Insurance Company access to collateralized borrowings. At December 31, 20092011 and 2008, RiverSource Life2010, the Company had no securities sold under repurchase agreements and there were no borrowings from the FHLBFHLB. Beginning in 2010, the Company entered into repurchase agreements to reduce reinvestment risk from higher levels of Des Moines.expected annuity net cash flows. Repurchase agreements allow the Company to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements at December 31, 2011 and 2010 was $504 million and $397 million, respectively, which are collateralized with agency residential mortgage backed securities and commercial mortgage backed securities from the Company’s investment portfolio.
As of December 31, 2009,2011, the outstanding balance under the lines of credit with Ameriprise Financial was $300 million. As of December 31, 2010, the outstanding balance under the lines of credit with Ameriprise Financial was $3 million which was repaid in full with paymentsa payment in January and February 2010.2011.
See Note 1011 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 LifeThe Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
Capital Activity
Dividends paid and received by RiverSource Life Insurance Company 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 |
| — |
| |||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Cash dividends paid to Ameriprise Financial |
| $ | 750 |
| $ | 500 |
| $ | — |
|
Non-cash dividend paid to Ameriprise Financial |
| 850 |
| — |
| — |
| |||
Cash dividends received from RiverSource Life of NY |
| 79 |
| 28 |
| — |
| |||
Cash dividends received from RTA |
| 53 |
| 63 |
| 22 |
| |||
Cash dividends received from RiverSource REO 1, LLC |
| 3 |
| — |
| — |
| |||
NotificationsFor dividends from the life insurance companies, notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds. See Note 13Note15 to the Consolidated Financial Statements for additional information.
During 2008,2011, RiverSource Life Insurance Company made cash contributions to RTA of $111 million for ongoing funding commitments related to affordable housing partnership investments.
During 2010, RiverSource Life Insurance Company received a non-cash capital contribution of $83$14 million comprised of below investment grade syndicated bank loansaffordable housing partnership investments 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 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 as of December 31 for each of the life insurance entities are as follows:
|
| December 31, |
| |||||||||||||||||||||||
|
| Actual Capital(a) |
| Regulatory Capital |
|
| Actual Capital(a) |
| Regulatory Capital |
| ||||||||||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||||||||
RiverSource Life Insurance Company |
| $ | 3,450 |
| $ | 2,722 |
| $ | 803 |
| $ | 551 |
|
| $ | 3,058 |
| $ | 3,813 |
| $ | 619 |
| $ | 652 |
|
RiverSource Life Insurance Co. of New York |
| 286 |
| 229 |
| 44 |
| 58 |
| |||||||||||||||||
RiverSource Life of NY |
| 254 |
| 291 |
| 41 |
| 38 |
|
(a) Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the statutory risk-based capital filing.
Contractual Commitments
The contractual obligations identified in the table below include balance sheet transactions that represent material expected or contractually committed future obligations of RiverSource Life.obligations. Payments due by period as of December 31, 2009 are2011 were as follows:
|
| 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 |
|
|
| Total |
| 2012 |
| 2013- |
| 2015- |
| 2017 and |
| |||||
|
| (in millions) |
| |||||||||||||
Insurance and annuities(1) |
| $ | 48,653 |
| $ | 2,582 |
| $ | 5,587 |
| $ | 5,834 |
| $ | 34,650 |
|
Deferred premium options(2) |
| 2,531 |
| 372 |
| 673 |
| 561 |
| 925 |
| |||||
Line of credit with Ameriprise Financial(3) |
| 300 |
| 300 |
| — |
| — |
| — |
| |||||
Affordable housing partnerships(4) |
| 267 |
| 168 |
| 96 |
| 1 |
| 2 |
| |||||
Total |
| $ | 51,751 |
| $ | 3,422 |
| $ | 6,356 |
| $ | 6,396 |
| $ | 35,577 |
|
(1) These scheduled payments are represented by reserves of approximately $30.4$31.2 billion at December 31, 20092011 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 recordedthese commitments included on the Consolidated Balance Sheets was $1.1$2.4 billion as of December 31, 2009.2011. See Note 1516 to the Consolidated Financial Statements for more information about deferred premium options.
(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.
Due(4)Affordable housing partnership commitments are related to investments in low income housing tax credit partnerships. Call dates for the obligations presented are either date or event specific. For date specific obligations, the Company is required to fund a specified amount on a stated date provided there are no defaults under the agreement. For event specific obligations, the Company is required to fund a specified amount of its capital commitment when properties in a fund become fully stabilized. For event specific obligations, the estimated call date of these commitments is used in the table above.
Total loan funding commitments, which are not included in the table above due to uncertainty with respect to the timing of future cash flows, associated with RiverSource Life’s unrecognized tax benefitswere $15 million at December 31, 2009, RiverSource Life is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $77 million of unrecognized tax benefits and its associated interest have been excluded from the contractual obligations table above. See Note 14 for additional information.2011.
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 LifeThe Company 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 Lifethe Company develops specific investment guidelines that are designed to optimize trade offs between risk and return and help ensure RiverSource Lifethe Company is able to support future benefit payments under its insurance and annuity obligations. These same objectives must be consistent with management’s overall investment objectives for the general account investment portfolio.
RiverSource Life’sThe Company’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. InvestmentInvestments in fixed maturity securities isare designed to provide RiverSource Lifethe Company with a targeted margin between the yield earned on investments and the interest rate credited to clients’ accounts. RiverSource LifeThe Company does not trade in securities to generate short-term profits for its own account.
As part of RiverSource Life’sthe Company’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 LifeThe Company has interest rate risk and equity market risk. Interest rate risk results from investing in assets that are somewhat longer and reset less frequently than the liabilities they support. RiverSource LifeThe Company 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 Lifethe Company enters into derivative instruments, such as structured derivatives, options, futures, interest rate swaps and swaptions, which change the interest rate characteristics of client liabilities or investment assets. Because certain of its investment activities are impacted by the value of its managed equity-based portfolios, from time to time RiverSource Lifethe Company enters into risk management strategies that may include the use of equity derivative instruments, such as equity options, to mitigate its exposure to volatility in the equity markets.
Quantitative and Qualitative Disclosures About Market Risk
InterestThe Company’s primary market risk exposures are interest rate, equity price and credit risk are the market risks to which RiverSource Life has material exposure.risk. Equity price and interest rate fluctuations can have a significant impact on RiverSource Life’sthe Company’s results of operations, primarily due to the effects on asset-based fees and expenses, the “spread”spread income generated on its annuities and universal life (“UL”)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’sthe Company’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 LifeThe Company 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. ThisThe Company’s comprehensive hedging 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 LifeThe Company 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 Lifethe Company 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 or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuitiesEIAs and the associated hedge assets, RiverSource Lifethe Company assumed no change in implied market volatility despite the 10% drop in equity prices.
The tables below present RiverSource Life’s estimate of the pretax impacts of these hypothetical market moves, net of hedging as, of December 31, 2009.
|
| 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 | ) |
The following tables present the Company’s estimate of the impact on pretax income from these hypothetical market movements as of December 31, 2011:
|
| Equity Price Exposure to Pretax Income |
| |||||||
Equity Price Decline 10% |
| Before |
| Hedge |
| Net |
| |||
|
| (in millions) |
| |||||||
Asset-based fees and expenses |
| $ | (59 | ) | $ | — |
| $ | (59 | ) |
DAC and DSIC amortization(1) (2) |
| (137 | ) | — |
| (137 | ) | |||
Variable annuity riders: |
|
|
|
|
|
|
| |||
GMDB and GMIB(2) |
| (53 | ) | — |
| (53 | ) | |||
GMWB |
| (148 | ) | 198 |
| 50 |
| |||
GMAB |
| (52 | ) | 68 |
| 16 |
| |||
DAC and DSIC amortization(3) |
| N/A |
| N/A |
| (25 | ) | |||
Total variable annuity riders |
| (253 | ) | 266 |
| (12 | ) | |||
Equity indexed annuities |
| 1 |
| (1 | ) | — |
| |||
Total |
| $ | (448 | ) | $ | 265 |
| $ | (208 | ) |
|
| Interest Rate Exposure to Pretax Income |
| |||||||
Interest Rate Increase 100 Basis Points |
| Before |
| Hedge |
| Net |
| |||
|
| (in millions) |
| |||||||
Asset-based fees and expenses |
| $ | (19 | ) | $ | — |
| $ | (19 | ) |
Variable annuity riders: |
|
|
|
|
|
|
| |||
GMWB |
| 544 |
| (580 | ) | (36 | ) | |||
GMAB |
| 51 |
| (52 | ) | (1 | ) | |||
DAC and DSIC amortization(3) |
| N/A |
| N/A |
| 10 |
| |||
Total variable annuity riders |
| 595 |
| (632 | ) | (27 | ) | |||
Fixed annuities, fixed portion of variable annuities and fixed insurance products |
| 22 |
| — |
| 22 |
| |||
Total |
| $ | 598 |
| $ | (632 | ) | $ | (24 | ) |
N/ANot Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected profits.
(2)In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, the Company has not changed its assumed equity asset growth rates. This is a significantly more conservative estimate than if the Company assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. The Company makes this same conservative assumption in estimating the impact from GMDB and GMIB riders.
(3)Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.
The above results compare to an estimated negative impactsnet impact to pretax income of $258$209 million related to a 10% equity price decline and $45an estimated positive net impact to pretax income of $52 million related to a 100 basis point increase in interest rates as of December 31, 2008.2010. The reduced equity impactchange in 2009interest rate sensitivity at December 31, 2011 compared to the prior year is primarily due to a result of market dislocationdecrease 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 growthinterest 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’sthe Company’s risk of nonperformance specific to these liabilities. Management hasFor variable annuity riders introduced prior to mid-2009, management elected to hedge based on best estimate policyholder assumptions and explicitly does not hedgebehavior assumptions. For riders issued since mid-2009, management has been hedging on a basis that includes risk margins related to policyholder behavior. The 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 andrisk is 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 that implied market volatility does not change when equity valuesprices 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 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, RiverSource Lifethe Company has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has RiverSource Lifethe Company 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 as well as a 10% equity price 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 LifeThe Company earns asset-based management fees on its owned separate account assets partially offset by certain expenses. At December 31, 2009,2011, the value of these assets was $54.3$63.2 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 LifeThe Company does not currently hedge the interest rate or the equity price risk of this exposure.
DAC and DSIC Amortization
For annuity and universal lifeUL 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 contract value of all variable annuity contracts has increased from $43.3annuities at December 31, 2011 was $62.3 billion compared to $62.6 billion at December 31, 2008 to $55.1 billion at December 31, 2009.2010. These contract values include GMWB and GMAB contracts which have increased from $12.7were $27.6 billion and $2.0$3.5 billion, respectively, at December 31, 20082011 compared to $19.2$24.7 billion and $2.9$3.5 billion, respectively, at December 31, 2009, respectively.2010. At December 31, 2009,2011, reserves for GMWB and GMAB were $204 million$1.4 billion and $100$237 million, respectively, compared to reserves of $1.5 billion$337 million and $367$104 million, respectively, at December 31, 2008, respectively.2010. The decreaseincrease in reserves for GMWB and GMAB reflect the changes in economic factors impacting the mark-to-market value of the guarantees.guarantees and increased volume of business. At December 31, 2009,2011, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $12$14 million compared to $67$13 million at December 31, 2008.2010.
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 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’sthe Company’s earnings.
The core derivative instruments with which RiverSource Lifethe Company hedges the equity price risk of its GMWB and GMAB provisions are longer dated put and call derivatives; these core instruments are supplemented with equity futures and total return 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. See Note 1516 to the Consolidated Financial Statements for further information on RiverSource Life’sthe Company’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. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives, interest rate swaps and swaptions. These derivatives are an alternative to the more customized equity puts that were previously used. RiverSource LifeThe Company 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 Lifethe Company would have to pay more to the swap counterparty and the fair value of its equity puts would decrease, resulting in a negative impact to RiverSource Life’sthe Company’s pretax income.
Fixed Annuities, Fixed Portion of Variable Annuities and Fixed Insurance Products
Interest rate exposures arise primarily with respect to the fixed account portion of RiverSource Life’sthe Company’s annuity and insurance products and its investment portfolio. RiverSource LifeThe Company 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 interest 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. Of the $30.4$31.2 billion in future policy benefits on RiverSource Life’sthe Company’s Consolidated Balance Sheets
at December 31, 2009, $30.12011, $29.5 billion related to liabilities created by these products. RiverSource LifeThe Company did not hedge this exposure.
Equity Indexed Annuities
RiverSource Life’sThe Company’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. At December 31, 2009, RiverSource Life2011, the Company had $168$60 million in reserves related to equity indexed annuities. In 2007, RiverSource LifeThe Company discontinued new sales of equity indexed annuities.annuities in 2007.
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 purchaseCompany purchases futures, calls and puts which generate returns to replicate what RiverSource Lifethe Company must credit to client accounts. In conjunction with purchasing puts, RiverSource Lifethe Company also writes puts. Pairing purchased puts with written puts allows RiverSource Lifethe Company to better match the characteristics of the liability.
Interest Rate Risk — Equity Indexed Annuities
Most of the proceeds received 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 LifeThe Company 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.
Indexed Universal Life
In 2011, the Company began offering IUL insurance. IUL is similar to UL in that it provides life insurance coverage and cash value that increases as a result of credited interest. Also, like UL, there is a minimum guaranteed credited rate of interest. Unlike UL, the rate of credited interest above the minimum guarantee is linked to the S&P 500 Index (subject to a cap). At December 31, 2011, the Company had $7 million in reserves related to the index account of IUL. 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 IUL is used to purchase call spreads which generate returns to replicate what the Company must credit to client accounts. The estimate of the impact on pretax income for a hypothetical 10% equity market movement as of December 31, 2011 is not material.
Credit Risk
RiverSource LifeThe Company 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 LifeThe Company considers its total potential credit exposure to each counterparty and its affiliates to ensure compliance with pre-established credit guidelines at the time it enters into a transaction which would potentially increase RiverSource Life’sthe Company’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 LifeThe Company 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 LifeThe Company 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 LifeThe Company 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’sthe Company’s current credit exposure on over-the-counter derivative contracts is limited to a derivative counterparty’s net
positive fair value of derivative 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 Lifethe Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.
RiverSource LifeThe Company 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 Lifethe Company regularly evaluates their financial strength during the terms of the treaties. As of December 31, 2009, RiverSource Life’s2011, the Company’s largest reinsurance credit risk is related to a long term care coinsurance treaty with life insurance subsidiaries of Genworth Financial, Inc. See Note 78 to the Consolidated Financial Statements for additional information on reinsurance.
Forward-Looking Statements
This report contains forward-looking statements that reflect RiverSource Life’sthe Company’s plans, estimates and beliefs. RiverSource Life’sThe Company’s actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:
· statements of the Company’s plans, intentions, expectations, objectives, or goals, including those related to the consolidated tax rate;
·other 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,” “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 thatwhich 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 and the adoption of relevant accounting standards, as well as 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;legislation, including the rules and regulations implemented or to be implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act;
· RiverSource Life’sthe Company’s investment management performance and consumer acceptance of RiverSource Life’sthe Company’s products;
· effects of competition in the financial services industry and changes in RiverSource Life’sthe Company’s product distribution mix and distribution channels;
· changes to RiverSource Life’sthe Company’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’sthe Company’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’sthe Company’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 Lifethe Company owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from RiverSource Life’sthe Company’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’sthe Company’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
· experience deviations from RiverSource Life’sthe Company’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing or unlocking DAC and DSIC or market volatility underlying RiverSource Life’sthe Company’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’sthe Company’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
· the impact of intercompany allocations to RiverSource Lifethe Company 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’sthe Company’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 impactimpacts 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 foror 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 Lifethe Company 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 LifeThe Company cautions the reader that the aboveforegoing list of factors is not exhaustive. There may also be other risks that RiverSource Lifethe Company 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 LifeThe Company undertakes no obligation to update publicly or revise any forward-looking statements.
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 Item 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis - Quantitative and Qualitative Disclosures about Market Risk.”
ITEM 8. |
Consolidated Financial Statements:
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
To the Board of Directors and Shareholder of RiverSource Life Insurance Company:
We have audited the accompanying consolidated balance sheet of RiverSource Life Insurance Company and its subsidiaries (the “Company”) as of December 31, 2011 and the related consolidated statements of income, shareholder’s equity, and cash flows for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RiverSource Life Insurance Company at December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 24, 2012
Report of Independent Registered Public Accounting Firm
The Board of Directors
RiverSource Life Insurance Company
We have audited the accompanying consolidated balance sheetssheet of RiverSource Life Insurance Company, (a wholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) as of December 31, 2009 and 2008,2010, and the related consolidated statements of income, shareholder’s equity, and cash flows for each of the threetwo years in the period ended December 31, 2009.2010. These financial statements are the responsibility of RiverSource Life Insurancethe 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 auditsaudit 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’sCompany���s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RiverSource Life Insurance Company at December 31, 2009 and 2008,2010, and the consolidated results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2009,2010, 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 new guidance related to the accounting for uncertainty in income taxes as well as new guidance related to accounting for deferred acquisition costs in connection with modifications or exchanges of insurance and annuity contracts.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 23, 20102011
RIVERSOURCE LIFE INSURANCE COMPANY
(in millions, except share amounts)
|
| December 31, |
|
| December 31, |
| ||||||||
|
| 2009 |
| 2008 |
|
| 2011 |
| 2010 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Investments: |
|
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale: |
|
|
|
|
|
|
|
|
|
| ||||
Fixed maturities, at fair value (amortized cost: 2009, $25,142; 2008, $19,452) |
| $ | 25,999 |
| $ | 18,070 |
| |||||||
Common and preferred stocks, at fair value (cost: 2009 and 2008, $30) |
| 23 |
| 16 |
| |||||||||
Commercial mortgage loans, at cost (less allowance for loan losses: 2009, $30; 2008, $17) |
| 2,532 |
| 2,737 |
| |||||||||
Fixed maturities, at fair value (amortized cost: 2011, $24,398; 2010, $24,818) |
| $ | 26,577 |
| $ | 26,442 |
| |||||||
Common stocks, at fair value (cost: 2011, $1; 2010, $1) |
| 2 |
| 2 |
| |||||||||
Commercial mortgage loans, at cost (less allowance for loan losses: 2011, $32; 2010, $36) |
| 2,473 |
| 2,470 |
| |||||||||
Policy loans |
| 715 |
| 722 |
|
| 739 |
| 729 |
| ||||
Trading securities and other investments |
| 310 |
| 452 |
| |||||||||
Other investments |
| 730 |
| 496 |
| |||||||||
Total investments |
| 29,579 |
| 21,997 |
|
| 30,521 |
| 30,139 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| 811 |
| 3,307 |
|
| 828 |
| 76 |
| ||||
Restricted cash |
| 184 |
| — |
|
| 26 |
| 66 |
| ||||
Reinsurance recoverables |
| 1,688 |
| 1,592 |
|
| 1,953 |
| 1,829 |
| ||||
Deferred income taxes, net |
| 63 |
| 599 |
| |||||||||
Other receivables |
| 332 |
| 102 |
|
| 162 |
| 166 |
| ||||
Accrued investment income |
| 303 |
| 239 |
|
| 307 |
| 309 |
| ||||
Deferred acquisition costs |
| 4,285 |
| 4,324 |
|
| 4,367 |
| 4,578 |
| ||||
Deferred sales inducement costs |
| 524 |
| 518 |
|
| 464 |
| 545 |
| ||||
Other assets |
| 936 |
| 2,658 |
|
| 3,578 |
| 1,123 |
| ||||
Separate account assets |
| 54,267 |
| 41,787 |
|
| 63,174 |
| 63,795 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 92,972 |
| $ | 77,123 |
|
| $ | 105,380 |
| $ | 102,626 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholder’s Equity |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Future policy benefits |
| $ | 30,383 |
| $ | 28,753 |
|
| $ | 31,182 |
| $ | 29,680 |
|
Policy claims and other policyholders’ funds |
| 123 |
| 172 |
|
| 121 |
| 134 |
| ||||
Deferred income taxes, net |
| 620 |
| 514 |
| |||||||||
Borrowings under repurchase agreements |
| 504 |
| 397 |
| |||||||||
Line of credit with Ameriprise Financial, Inc. |
| 300 |
| — |
|
| 300 |
| 3 |
| ||||
Other liabilities |
| 1,955 |
| 2,672 |
|
| 3,607 |
| 1,555 |
| ||||
Separate account liabilities |
| 54,267 |
| 41,787 |
|
| 63,174 |
| 63,795 |
| ||||
Total liabilities |
| 87,028 |
| 73,384 |
|
| 99,508 |
| 96,078 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Shareholder’s equity: |
|
|
|
|
|
|
|
|
|
| ||||
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding |
| 3 |
| 3 |
|
| 3 |
| 3 |
| ||||
Additional paid-in capital |
| 2,445 |
| 2,116 |
|
| 2,461 |
| 2,460 |
| ||||
Retained earnings |
| 3,114 |
| 2,336 |
|
| 2,589 |
| 3,410 |
| ||||
Accumulated other comprehensive income (loss), net of tax |
| 382 |
| (716 | ) | |||||||||
Accumulated other comprehensive income, net of tax |
| 819 |
| 675 |
| |||||||||
Total shareholder’s equity |
| 5,944 |
| 3,739 |
|
| 5,872 |
| 6,548 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholder’s equity |
| $ | 92,972 |
| $ | 77,123 |
|
| $ | 105,380 |
| $ | 102,626 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Premiums |
| $ | 450 |
| $ | 438 |
| $ | 439 |
|
| $ | 493 |
| $ | 489 |
| $ | 450 |
|
Net investment income |
| 1,526 |
| 1,252 |
| 1,424 |
|
| 1,593 |
| 1,629 |
| 1,526 |
| ||||||
Policy and contract charges |
| 1,156 |
| 1,352 |
| 1,217 |
|
| 1,540 |
| 1,389 |
| 1,156 |
| ||||||
Other revenues |
| 233 |
| 255 |
| 255 |
|
| 303 |
| 272 |
| 233 |
| ||||||
Net realized investment gains (losses) |
| 59 |
| (442 | ) | 61 |
| |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Net realized investment gains |
| 5 |
| 16 |
| 59 |
| |||||||||||||
Total revenues |
| 3,424 |
| 2,855 |
| 3,396 |
|
| 3,934 |
| 3,795 |
| 3,424 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefits, claims, losses and settlement expenses |
| 841 |
| 673 |
| 760 |
|
| 950 |
| 1,203 |
| 841 |
| ||||||
Interest credited to fixed accounts |
| 903 |
| 790 |
| 847 |
|
| 853 |
| 909 |
| 903 |
| ||||||
Amortization of deferred acquisition costs |
| 145 |
| 861 |
| 470 |
|
| 539 |
| 53 |
| 145 |
| ||||||
Separation costs |
| — |
| — |
| 97 |
| |||||||||||||
Other insurance and operating expenses |
| 550 |
| 649 |
| 735 |
|
| 645 |
| 582 |
| 550 |
| ||||||
|
|
|
|
|
|
|
| |||||||||||||
Total benefits and expenses |
| 2,439 |
| 2,973 |
| 2,909 |
|
| 2,987 |
| 2,747 |
| 2,439 |
| ||||||
|
|
|
|
|
|
|
| |||||||||||||
Pretax income (loss) |
| 985 |
| (118 | ) | 487 |
| |||||||||||||
Income tax provision (benefit) |
| 245 |
| (189 | ) | 53 |
| |||||||||||||
Pretax income |
| 947 |
| 1,048 |
| 985 |
| |||||||||||||
Income tax provision |
| 168 |
| 252 |
| 245 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 740 |
| $ | 71 |
| $ | 434 |
|
| $ | 779 |
| $ | 796 |
| $ | 740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net realized investment gains (losses): |
|
|
|
|
|
|
| |||||||||||||
Net realized investment gains: |
|
|
|
|
|
|
| |||||||||||||
Net realized investment gains before impairment losses on securities |
| $ | 121 |
|
|
|
|
|
| $ | 29 |
| $ | 44 |
| $ | 121 |
| ||
Total other-than-temporary impairment losses on securities |
| (53 | ) |
|
|
|
|
| (47 | ) | (22 | ) | (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 |
|
|
|
|
| ||||||||||||
Portion of gain (loss) recognized in other comprehensive income |
| 23 |
| (6 | ) | (9 | ) | |||||||||||||
Net impairment losses recognized in net realized investment gains |
| (24 | ) | (28 | ) | (62 | ) | |||||||||||||
Net realized investment gains |
| $ | 5 |
| $ | 16 |
| $ | 59 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 740 |
| $ | 71 |
| $ | 434 |
|
| $ | 779 |
| $ | 796 |
| $ | 740 |
|
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 |
|
| (73 | ) | (79 | ) | (68 | ) | ||||||
Deferred income tax (benefit) expense |
| (81 | ) | (234 | ) | 83 |
| |||||||||||||
Deferred income tax expense (benefit) |
| 28 |
| 416 |
| (81 | ) | |||||||||||||
Contractholder and policyholder charges, non-cash |
| (259 | ) | (248 | ) | (206 | ) |
| (264 | ) | (259 | ) | (259 | ) | ||||||
Net realized investment gains |
| (135 | ) | (7 | ) | (44 | ) |
| (26 | ) | (46 | ) | (135 | ) | ||||||
Other-than-temporary impairments and provision for loan losses recognized in net realized investment (gains) losses |
| 76 |
| 449 |
| (17 | ) | |||||||||||||
Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains |
| 21 |
| 29 |
| 76 |
| |||||||||||||
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trading securities and equity method investments, net |
| 136 |
| (110 | ) | 166 |
| |||||||||||||
Deferred acquisition costs |
| 120 |
| (406 | ) | (412 | ) | |||||||||||||
Deferred sales inducement costs |
| 72 |
| (38 | ) | (73 | ) | |||||||||||||
Equity method investments |
| 33 |
| 29 |
| 136 |
| |||||||||||||
Future policy benefits for traditional life, disability income and long term care insurance |
| 282 |
| 308 |
| 275 |
|
| 253 |
| 302 |
| 282 |
| ||||||
Policy claims and other policyholders’ funds |
| (49 | ) | 81 |
| 2 |
|
| (13 | ) | 11 |
| (49 | ) | ||||||
Reinsurance recoverables |
| (96 | ) | (302 | ) | (153 | ) |
| (127 | ) | (143 | ) | (96 | ) | ||||||
Other receivables |
| (5 | ) | 20 |
| (28 | ) |
| 25 |
| (53 | ) | (5 | ) | ||||||
Accrued investment income |
| (64 | ) | 14 |
| 49 |
|
| 2 |
| (6 | ) | (64 | ) | ||||||
Derivatives collateral, net |
| (1,928 | ) | 1,591 |
| 242 |
|
| 649 |
| 55 |
| (1,928 | ) | ||||||
Other assets and liabilities, net |
| 670 |
| 23 |
| (226 | ) |
| 189 |
| 271 |
| 684 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash provided by (used in) operating activities |
| (1,266 | ) | 2,025 |
| 348 |
|
| 1,668 |
| 879 |
| (1,252 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Proceeds from sales |
| 5,215 |
| 246 |
| 3,020 |
|
| 664 |
| 1,268 |
| 5,215 |
| ||||||
Maturities, sinking fund payments and calls |
| 3,486 |
| 2,510 |
| 1,908 |
|
| 3,200 |
| 3,719 |
| 3,486 |
| ||||||
Purchases |
| (13,696 | ) | (1,684 | ) | (677 | ) |
| (4,084 | ) | (4,970 | ) | (13,696 | ) | ||||||
Proceeds from sales and maturities of commercial mortgage loans |
| 279 |
| 263 |
| 424 |
| |||||||||||||
Proceeds from sales, maturities and repayments of commercial mortgage loans |
| 202 |
| 207 |
| 279 |
| |||||||||||||
Funding of commercial mortgage loans |
| (104 | ) | (110 | ) | (504 | ) |
| (207 | ) | (154 | ) | (104 | ) | ||||||
Proceeds from sales of other investments |
| 43 |
| 19 |
| 49 |
|
| 114 |
| 95 |
| 43 |
| ||||||
Purchases of other investments |
| (11 | ) | (140 | ) | — |
| |||||||||||||
Purchase of other investments |
| (296 | ) | (86 | ) | (11 | ) | |||||||||||||
Purchase of land, buildings, equipment and software |
| (6 | ) | (15 | ) | (14 | ) | |||||||||||||
Change in policy loans, net |
| 7 |
| (25 | ) | (47 | ) |
| (10 | ) | (14 | ) | 7 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash provided by (used in) investing activities |
| (4,781 | ) | 1,079 |
| 4,173 |
|
| (423 | ) | 50 |
| (4,795 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Policyholder and contractholder account values: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Considerations received |
| 4,863 |
| 2,913 |
| 1,093 |
|
| 1,378 |
| 1,593 |
| 4,863 |
| ||||||
Net transfers from (to) separate accounts |
| 195 |
| 91 |
| (50 | ) | |||||||||||||
Net transfers from(to) separate accounts |
| 39 |
| (1,337 | ) | 195 |
| |||||||||||||
Surrenders and other benefits |
| (1,923 | ) | (2,931 | ) | (3,838 | ) |
| (1,311 | ) | (1,338 | ) | (1,923 | ) | ||||||
Change in borrowings under repurchase agreements, net |
| 107 |
| 397 |
| — |
| |||||||||||||
Proceeds from line of credit with Ameriprise Financial, Inc. |
| 500 |
| — |
| — |
|
| 415 |
| 13 |
| 500 |
| ||||||
Payments on line of credit with Ameriprise Financial, Inc. |
| (118 | ) | (310 | ) | — |
| |||||||||||||
Deferred premium options, net |
| (82 | ) | (77 | ) | (8 | ) |
| (254 | ) | (182 | ) | (82 | ) | ||||||
Tax adjustment on share-based incentive compensation plan |
| (2 | ) | 2 |
| 2 |
|
| 1 |
| — |
| (2 | ) | ||||||
Cash dividend to Ameriprise Financial, Inc. |
| — |
| (775 | ) | (900 | ) |
| (750 | ) | (500 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash provided by (used in) financing activities |
| 3,551 |
| (777 | ) | (3,701 | ) |
| (493 | ) | (1,664 | ) | 3,551 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net increase (decrease) in cash and cash equivalents |
| (2,496 | ) | 2,327 |
| 820 |
|
| 752 |
| (735 | ) | (2,496 | ) | ||||||
Cash and cash equivalents at beginning of year |
| 3,307 |
| 980 |
| 160 |
| |||||||||||||
Cash and cash equivalents at beginning of period |
| 76 |
| 811 |
| 3,307 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents at end of year |
| $ | 811 |
| $ | 3,307 |
| $ | 980 |
| ||||||||||
Cash and cash equivalents at end of period |
| $ | 828 |
| $ | 76 |
| $ | 811 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income taxes paid (received), net |
| $ | 72 |
| $ | 168 |
| $ | (4 | ) | ||||||||||
Income taxes paid, net |
| $ | 176 |
| $ | 112 |
| $ | 72 |
| ||||||||||
Interest paid on borrowings |
| 1 |
| — |
| — |
|
| 5 |
| 3 |
| 1 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-cash transactions: |
|
|
|
|
|
|
| |||||||||||||
Non-cash investing activity: |
|
|
|
|
|
|
| |||||||||||||
Capital contributions from Ameriprise Financial, Inc. |
| $ | 331 |
| $ | 322 |
| $ | 8 |
|
| $ | — |
| $ | 14 |
| $ | 331 |
|
Dividend to Ameriprise Financial, Inc. |
| 850 |
| — |
| — |
| |||||||||||||
Affordable housing partnership commitments not yet remitted |
| 137 |
| 171 |
| — |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
THREE YEARS ENDED DECEMBERThree Years Ended December 31, 20092011
(in millions)
|
| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
|
| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Balances at January 1, 2007 |
| $ | 3 |
| $ | 2,021 |
| $ | 3,788 |
| $ | (209 | ) | $ | 5,603 |
| ||||||||||||||||
Balances at January 1, 2009 |
| $ | 3 |
| $ | 2,116 |
| $ | 2,336 |
| $ | (716 | ) | $ | 3,739 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Change in accounting principles, net of tax |
| — |
| — |
| (134 | ) | — |
| (134 | ) |
| — |
| — |
| 38 |
| (38 | ) | — |
| ||||||||||
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 |
|
| — |
| — |
| 740 |
| — |
| 740 |
| ||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Change in net unrealized securities losses |
| — |
| — |
| — |
| 1,109 |
| 1,109 |
|
| — |
| — |
| — |
| 1,109 |
| 1,109 |
| ||||||||||
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities |
| — |
| — |
| — |
| 23 |
| 23 |
|
| — |
| — |
| — |
| 23 |
| 23 |
| ||||||||||
Change in net unrealized derivative losses |
| — |
| — |
| — |
| 4 |
| 4 |
|
| — |
| — |
| — |
| 4 |
| 4 |
| ||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 1,876 |
|
|
|
|
|
|
|
|
|
| 1,876 |
| ||||||||||
Tax adjustment on share-based incentive compensation plan |
| — |
| (2 | ) | — |
| — |
| (2 | ) |
| — |
| (2 | ) | — |
| — |
| (2 | ) | ||||||||||
Non-cash capital contribution from Ameriprise Financial, Inc. |
| — |
| 331 |
| — |
| — |
| 331 |
|
| — |
| 331 |
| — |
| — |
| 331 |
| ||||||||||
Balances at December 31, 2009 |
| $ | 3 |
| $ | 2,445 |
| $ | 3,114 |
| $ | 382 |
| $ | 5,944 |
|
| 3 |
| 2,445 |
| 3,114 |
| 382 |
| 5,944 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net income |
| — |
| — |
| 796 |
| — |
| 796 |
| |||||||||||||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Change in net unrealized securities gains |
| — |
| — |
| — |
| 285 |
| 285 |
| |||||||||||||||||||||
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities |
| — |
| — |
| — |
| 4 |
| 4 |
| |||||||||||||||||||||
Change in net unrealized derivative losses |
| — |
| — |
| — |
| 4 |
| 4 |
| |||||||||||||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 1,089 |
| |||||||||||||||||||||
Tax adjustment on share-based incentive compensation plan |
| — |
| 1 |
| — |
| — |
| 1 |
| |||||||||||||||||||||
Cash dividends to Ameriprise Financial, Inc. |
| — |
| — |
| (500 | ) | — |
| (500 | ) | |||||||||||||||||||||
Non-cash capital contribution from Ameriprise Financial, Inc. |
| — |
| 14 |
| — |
| — |
| 14 |
| |||||||||||||||||||||
Balances at December 31, 2010 |
| 3 |
| 2,460 |
| 3,410 |
| 675 |
| 6,548 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net income |
| — |
| — |
| 779 |
| — |
| 779 |
| |||||||||||||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Change in net unrealized securities gains |
| — |
| — |
| — |
| 146 |
| 146 |
| |||||||||||||||||||||
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities |
| — |
| — |
| — |
| (6 | ) | (6 | ) | |||||||||||||||||||||
Change in net unrealized derivative losses |
| — |
| — |
| — |
| 4 |
| 4 |
| |||||||||||||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 923 |
| |||||||||||||||||||||
Tax adjustment on share-based incentive compensation plan |
| — |
| 1 |
| — |
| — |
| 1 |
| |||||||||||||||||||||
Cash dividends to Ameriprise Financial, Inc. |
| — |
| — |
| (750 | ) | — |
| (750 | ) | |||||||||||||||||||||
Non-cash dividend to Ameriprise Financial, Inc. |
| — |
| — |
| (850 | ) | — |
| (850 | ) | |||||||||||||||||||||
Balances at December 31, 2011 |
| $ | 3 |
| $ | 2,461 |
| $ | 2,589 |
| $ | 819 |
| $ | 5,872 |
|
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 operatingstock life insurance company 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 domiciled and holds a stock life insurance company domiciled in New York, which holds CertificatesCertificate of Authority in New York, North Dakota and Delaware.York. RiverSource Life of NY issues insurance and annuity products.
On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares ofRiverSource Life Insurance Company also wholly owns 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.
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its subsidiaries are referred to collectivelycompanies in this Form 10-K as “RiverSource Life”which it directly or indirectly has a controlling financial interest (collectively, the “Company”). All intercompany transactions and balances have been eliminated in consolidation.
AmeripriseThe accompanying Consolidated Financial was formerly a wholly owned subsidiaryStatements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 15. Certain reclassifications of American Express Company (“American Express”). On February 1, 2005,prior period amounts have been made to conform to 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.current presentation.
RiverSource Life’sThe Company’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’sThe Company’s fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, RiverSource Lifethe Company has the option of paying a higher rate set at its discretion. In addition, persons owning an equity indexed annuity (“EIA”) may have their interest calculated based on an increase in a broad-based stock market index. RiverSource Life
The Company issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance. Universal life insurance is a form of permanent life insurance characterized by flexible premiums, flexible death benefit amounts and unbundled pricing factors (i.e., mortality, interest and expenses). Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium. Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith. Waiver of premium and accidental death benefit riders are generally available with these life insurance products. In 2011, RiverSource Life began offering indexed universal life (“IUL”) insurance. IUL is similar to universal life insurance in that it provides life insurance coverage and cash value that increases as a result of credited interest. Also, like universal life insurance, there is a minimum guaranteed credited rate of interest. Unlike universal life insurance, the rate of credited interest above the minimum guarantee is linked to the S&P 500 Index (subject to a cap). The Company issues only non-participating life insurance policies which do not pay dividends to policyholders from realized policy margins.
Under RiverSource Life’sthe Company’s variable life insurance and variable annuity products described above, the purchaser may choose among investment optionsa fixed account option that include RiverSource Life’sis part of the Company’s “general account”, as well as investment options from a variety of portfolios includingthat include 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 subsidiaries, RiverSource Life of NY and RTA.
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 (“GAAP”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 13. Certain reclassifications of prior year amounts have been made to conform to the current presentation. In the first quarter of 2009, RiverSource Life reclassified reinsurance allowances for coinsurance contracts for traditional life and long term care insurance from premiums to other insurance and operating expenses to net with the associated expenses.
The following table shows the impact of the reclassification of the reinsurance allowances made to RiverSource Life’s previously reported Consolidated Statements of Income.
|
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|
|
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|
|
|
|
|
|
| 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
The Company 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.partnerships. Entities in which RiverSource Lifethe Company exercises significant influence or holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. Additionally, other investments 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-Saletrading or tradingAvailable-for-Sale securities are accounted for under the cost method where RiverSource Lifethe Company owns less than a 20% voting interest and does not exercise significant influence.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A VIE is a corporation, partnership, trust or any other legal structurean entity that either does not havehas equity investors withthat lack certain essential characteristics of a controlling financial interest (including substantive voting rights, the obligation to absorb the entity’s losses, or the rights to receive the entity’s returns) or has equity investors that do not provide sufficient financial resources for the entity to support its activities. To determineA VIE is required to be assessed for consolidation under two models:
·If the VIE is a money market fund or is an investment company, or has the financial characteristics of an investment company, and the following is true:
(i)the entity does not have an explicit or implicit obligation to fund the investment company’s losses; and
(ii)the investment company is not a securitization entity, asset backed financing entity, or an entity formally considered a qualifying special purpose entity,
then, the VIE will be consolidated by the entity that determines it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. Examples of entities that are likely to be assessed for consolidation under this framework include hedge funds, property funds, private equity funds and venture capital funds.
·If the VIE does not meet the criteria above, the VIE will be consolidated by the entity that determines it has both:
(i)the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and
(ii)the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
When determining whether RiverSource Life must consolidatethe Company stands to absorb the majority of a VIE,VIE’s expected losses or receive a majority of a VIE’s expected returns, it analyzes the
design of the VIE to identify the variable interests it holds. Then RiverSource Lifethe Company quantitatively determines whether its variable interests will absorb a majority of the VIE’s variability. If RiverSource Lifethe Company determines it has control over the activities that most significantly impact the economic performance of the VIE and it will absorb a majority of the VIE’s expected variability, RiverSource Lifethe Company consolidates the VIE and is referred to as the primary beneficiary.VIE. The calculation of variability is based on an analysis of projected probability-weighted cash flows based on the design of the particular VIE. When determining whether the Company has the power and the obligation to absorb losses or rights to receive benefits from the VIE that could potentially be significant, the Company qualitatively determines if its variable interests meet these criteria. If the Company consolidates a VIE under either scenario, it is referred to as the VIE’s primary beneficiary.
All material intercompany transactions and balances between and among RiverSource Life and its subsidiaries have been eliminated in consolidation.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other-than-temporary impairments, valuation of deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, derivative instruments and hedging activities, claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.
Investments
Investments consist of the following:
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”), certain benefit reserves and 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.taxes. Gains and losses are recognized in the Consolidated Statements of Income upon disposition of the securities.
Effective January 1, 2009, RiverSource Lifethe Company early adopted an accounting standard that significantly changed RiverSource Life’sthe Company’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 Lifethe Company 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 Lifethe Company 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 Lifethe Company 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 Lifethe Company does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Lifethe Company 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
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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”),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 significantsustained 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’sThe Company’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 LifeThe Company 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 Lifethe Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Lifethe Company will be required to sell the security before recovery of its amortized cost basis. RiverSource LifeThe Company 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 Lifethe Company considers in determining whether declines in the fair value of fixed-maturityfixed 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’sthe Company’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 Lifethe Company 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. 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 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 primarily based on RiverSource Life’s past loan loss experience, known and inherent risks in the portfolio, composition of the loan 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 portfolio. For larger balance or restructured loans that are collateral dependent, the allowance is based on the fair value of collateral. 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 collectability 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
Other investments are separate account and mutual fund seed money, equity method investments, trading bonds,primarily consist of interests in affordable housing partnerships, syndicated loans 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.trading securities. Affordable housing partnerships are accounted for under the equity method. BelowTrading securities are carried at fair value with changes in value recognized within net investment grade syndicated bankincome.
Financing Receivables
Commercial Mortgage Loans and Syndicated Loans
Commercial mortgage loans reflectare reflected at amortized cost less the allowance for loan losses.
Syndicated loans represent the Company’s investment in below investment grade loan syndications. Syndicated loans are reflected in other investments at amortized cost less the allowance for loan losses.
Interest income is accrued on the unpaid principal balances of the loans as earned.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Policy Loans
Policy loans include life insurance policy and annuity loans and are reported at the unpaid principal balance, plus accrued interest. When originated, the loan balances do not exceed the cash surrender value of the underlying products. As there is minimal risk of loss related to policy loans, the Company does not record an allowance for loan losses for policy loans.
Nonaccrual Loans
Generally, loans are evaluated for or placed on nonaccrual status when either the collection of interest or principal has become 90 days past due or is otherwise considered doubtful of collection. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Interest payments received on loans on nonaccrual status are generally applied to principal or in accordance with the loan agreement unless the remaining principal balance has been determined to be fully collectible.
Commercial mortgage loans are evaluated for impairment when the loan is considered for nonaccrual status, restructured or foreclosure proceedings are initiated on the property. If it is determined that the fair value is less than the current loan balance, it is written down to fair value less selling costs. Foreclosed property is recorded as real estate owned in other investments. Syndicated loans are placed on nonaccrual status when management determines it will not collect all contractual principal and interest on the loan.
Allowance for Loan Losses
Management determines the adequacy of the allowance for loan losses by portfolio based on the overall loan portfolio composition, recent and historical loss experience, and other pertinent factors, including when applicable, internal risk ratings, loan-to-value ratios and occupancy rates, along with economic and market conditions. This evaluation is inherently subjective as it requires estimates, which may be susceptible to significant change.
The Company determines the amount of the allowance required for certain sectors based on management’s assessment of relative risk characteristics of the loan portfolio. The allowance is recorded for homogeneous loan categories on a pool basis, based on an analysis of product mix and risk characteristics of the portfolio, including geographic concentration, bankruptcy experiences, and historical losses, adjusted for current trends and market conditions.
While the Company attributes portions of the allowance to specific loan pools as part of the allowance estimation process, the entire allowance is available to absorb losses inherent in the total loan portfolio. The allowance is increased through provisions charged to net realized investment gains (losses) and reduced/increased by net charge-offs/recoveries.
Impaired Loans
The Company considers a loan to be impaired when, based on current information and events, it is probable the Company will not be able to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans may also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulties. Management evaluates for impairment all restructured loans and loans with higher impairment risk factors. The impairment recognized is measured as the excess of the loan’s recorded investment over: (i) the present value of its expected principal and interest payments discounted at the loan’s effective interest rate, (ii) the fair value of collateral or (iii) the loan’s observable market price.
Restructured Loans
A loan is classified as a restructured loan when the Company makes certain concessionary modifications to contractual terms for borrowers experiencing financial difficulties. When the interest rate, minimum payments, and/or due dates have been modified in an attempt to make the loan more affordable to a borrower experiencing financial difficulties, the modification is considered a troubled debt restructuring. Generally, performance prior to the restructuring or significant events that coincide with the restructuring are considered in assessing whether the borrower can meet the new terms which may result in the loan being returned to accrual status at the time of the restructuring or after a performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status.
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, 20092011 and 20082010 was $184$26 million and nil,$66 million, respectively, consisting of cash that ishas been pledged to counterparties.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reinsurance
RiverSource Life
The Company cedes 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 reinsurance contracts. TraditionalReinsurance premiums for traditional life, long term care (“LTC”) and DI reinsurance premium,ceded on a coinsurance basis, net of the change in any prepaid reinsurance asset, isare reported as a reduction of premiums. Fixed and variable universal life reinsurance premium ispremiums are reported as a reduction of policy and contract charges. In addition, for fixed and variable universal life insurance policies, the net cost of reinsurance ceded, which represents the discounted amount of the expected cash flows between the reinsurer and the Company, is recognized as an asset and amortized over the term of the reinsurance contract, in proportion to the estimated gross profits and is subject to retrospective adjustment in a manner similar to retrospective adjustment of DAC. The assumptions used to project the expected cash flows are consistent with those used for DAC asset valuation for the same contracts. Changes in the net cost of reinsurance are reflected as a component 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 LifeThe Company also assumes life insurance and fixed annuity business from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Liabilities for assumed business are recorded within future policy benefits.
See Note 78 for additional information on reinsurance.
Land, Buildings, Equipment and Software
Land, buildings, equipment and internally developed or purchased software are carried at cost less accumulated depreciation or amortization and are reflected within other assets. RiverSource LifeThe Company generally uses the straight-line method of depreciation and amortization over periods ranging from three to 30 years. During 2009, RiverSource Lifethe Company received a non-cash capital contribution of $131 million comprised of two buildings and the related land from Ameriprise Financial.
At December 31, 20092011 and 2008,2010, land, buildings, equipment and software were $190$182 million and $43$191 million, respectively, net of accumulated depreciation of $52$75 million and $9$59 million, respectively. Depreciation and amortization expense for the years ended December 31, 2011, 2010 and 2009 2008 and 2007 was $8$16 million, $5$14 million and $1$8 million, respectively.
Derivative Instruments and Hedging Activities
Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities. See Note 11 for information regarding RiverSource Life’sThe Company’s policy is to not offset fair value measurement of derivative instruments.amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. 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 LifeThe Company primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. RiverSource LifeThe Company 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 offsetDerivative instruments that are entered into for hedging purposes are designated as such at the time the Company enters into the contract. For all derivative instruments that are designated for hedging activities, the Company 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. The Company formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value amounts recognized for derivatives and collateral arrangements executed withor cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, the same counterparty underCompany will discontinue the same master netting arrangement.application of hedge accounting.
For derivative instruments that do not qualify for hedge accounting or are not designated as accounting hedges, changes in fair value are recognized in current period earnings. Changes in fair value of derivatives are presented in the Consolidated Statements of Income based on the nature and use of the instrument. Changes in fair value of derivatives used as economic hedges are presented in the Consolidated Statements of Income with the corresponding change in the hedged asset or liability.
For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as changes in the fair value of the hedged risk within the corresponding hedged assets, liabilities or firm commitments, are recognized on a net basis in current period
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
earnings. The carrying value of the hedged item is adjusted for the change in fair value from the designated hedged risk. 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 portionsportion of the gain or loss on the derivative instruments areis 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 current period 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) is recognized intoreclassified to 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 1513 for information regarding the Company’s fair value measurement of derivative instruments and Note 16 for the impact of derivatives on the Consolidated Statements of Income.
Derivative instruments that are entered into for hedging purposes are designated as such at the time RiverSource Life enters into the contract. For all derivative instruments that are designated for hedging activities, RiverSource Life formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. RiverSource Life formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, RiverSource Life will discontinue the application of hedge accounting.
The equity component of equity indexed annuityEIA and IUL obligations is considered an embedded 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 these embedded derivatives associated with annuities and IUL is included in future policy benefits. The change in the fair value of the equity indexed annuityEIA and IUL embedded derivatives is reflected in the interest credited to fixed accounts. The changes in the fair value of the GMWBGMAB and GMABGMWB embedded derivatives are reflected in benefits, claims, losses and settlement expenses.
Deferred Acquisition Costs
DAC representsrepresent the costcosts 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 isare amortized over time. For annuity and universal life (“UL”) contracts, DAC isare amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC isare 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 isare not recoverable. If management concludes that DAC isare not recoverable, DAC isare reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSource Life’sthe Consolidated Statements of Income.
For annuity, life, DI and LTC insurance products, key assumptions underlying thesethose 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 LifeThe Company typically uses a five-year mean reversion process as a guideline in setting near-term equity assetfund growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term equity fund growth rate is reviewed quarterly 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 LifeThe Company 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’sthe Company’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 the Company’s management identifies a significant deviation over the course of itsthe 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 policyholders. RiverSource Lifepolicyholders, who assume the related investment risk. Income and losses on separate account assets accrue directly to the contractholder or policyholder and are not reported in the Company’s Consolidated Statements of Income. Separate account assets are recorded at fair value. Changes in the fair value of separate account assets are offset by changes in the related separate account liabilities. The Company 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 annuitiesEIAs 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 Lifethe Company 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 LifeThe Company 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 Lifethe Company offers contracts containingwith GMWB and GMAB provisions, and until May 2007, RiverSource Lifethe Company 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 Lifethe Company 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.
The GMDB liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.
The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value. See Note 1113 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. Significant assumptions made in projecting future benefits and fees relate to persistency and benefit utilization. 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 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 annuitiesEIAs 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%.rates.
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 indexed accounts of IUL products, 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 indexed accounts of IUL products are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.
A portion of the Company’s fixed and variable universal life contracts have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. 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.
In determining the liability for contracts with profits followed by losses, the Company projects benefits and contract assessments using actuarial models. 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 liability for these future losses is determined by estimating the death benefits in excess of account value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). See Note 9 for information regarding the liability for contracts with secondary guarantees.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported DI and LTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for RiverSource Life’sthe Company’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’sthe Company’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life ranged from 4.0% to 10.0% at December 31, 2009, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively. Anticipated interest rates for LTC policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31, 2009.
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.
Sources of Revenue
RiverSource Life’s
The Company’s principal sources of revenue include premium revenues,premiums, net investment income and policy and contract charges.
Premium RevenuesPremiums
Premium revenues
Premiums include premiums on traditional life, DI and LTC insurance products and immediate annuities with a life contingent feature. Premiums on traditional life, DI and LTC insurance are net of reinsurance ceded and are recognized as revenue when due.
Net Investment Income
Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial mortgage loans, and policy loans, other investments and cash and cash equivalents; the changes in fair value of trading securities and certain derivatives; and the pro-rata share of net income or loss on equity method investments. Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale and commercial mortgage loans so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term.
Policy and Contract Charges
Policy and contract charges include mortality and expense risk fees and certain other charges assessed on annuities and fixed and variable universal life insurance, such aswhich consist of cost of insurance charges, net of reinsurance premiums and cost of reinsurance 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’sthe Company’s separate account assets. Cost of insurance charges on fixed and variable universal life insurance and contract charges and surrender charges on annuities and universalfixed and variable universal life insurance are recognized as revenue when collected.
Net Realized Investment Gains (Losses)
Realized gains and losses on the sale of securities are recognized using the specific identification method, on a trade date basis, and charges for investments determined to be other-than-temporarily impaired and related to credit losses.
Other Insurance and Operating Expenses
Other insurance and operating expenses primarily include expenses allocated to RiverSource Lifethe Company from its parent, Ameriprise Financial, for RiverSource Life’sthe Company’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 costs.
Income Taxes
As a result Also included are commissions, sales and marketing expenses and other operating expenses. These expenses are presented net 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 expectsacquisition cost deferrals.
to pay or to receive from various taxing jurisdictionsRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Taxes
The Company’s taxable income is included in connection with its operations. RiverSource Lifethe consolidated federal income tax return of Ameriprise Financial. The Company provides for income taxes based on amountsa separate return basis, except that, under an agreement between Ameriprise Financial and the Company, tax benefits are recognized for losses to the extent they can be used in the consolidated return. It is the policy of Ameriprise Financial that it believes it will ultimately owe taking into account the recognition and measurementreimburse its subsidiaries for uncertainany tax positions.benefits recorded. 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 statementsConsolidated 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’sthe Company’s deferred tax assetstaxes 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 as well as future deductible capital losses realized 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 LifeThe Company 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. Management may need to identify and implement appropriate planning strategies to ensure the Company’s ability to realize its 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 the Company will not realize the full benefit of certain state net operating losses (“NOL”) and therefore a valuation allowance of $4 million has been established at December 31, 2011.
3. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Accounting and Reporting for Decreases in Ownership of a SubsidiaryReceivables
In January 2010,April 2011, the Financial Accounting Standards Board (“FASB”) updated the accounting standards for troubled debt restructurings. The new standard includes indicators that a lender should consider in determining whether a borrower is experiencing financial difficulties and provides clarification for determining whether the lender has granted a concession to clarify the accounting and disclosure requirements for changes in the ownership percentage of a 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.borrower. The standard issets the effective dates for the first interim or annual reporting period ending after December 15, 2009. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have any effecttroubled debt restructuring disclosures required by recent guidance 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.credit quality disclosures. The standard is effective for interim and annual periods endingbeginning on or after DecemberJune 15, 2009, with early adoption permitted. RiverSource Life2011, and is to be applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption. For purposes of measuring impairments of receivables that are considered impaired as a result of applying the new guidance, the standard should be applied prospectively for the interim or annual period beginning on or after June 15, 2011. The Company adopted the standard in the fourththird quarter of 2009.2011. The adoption did not have a materialany effect on RiverSource Life’sthe Company’s consolidated financial condition and results of operations. See Note 6 for the required disclosures.
Measuring Liabilities at Fair Value
In August 2009,January 2010, the FASB updated the accounting standards related to providedisclosures on fair value measurements. The standard expands the current disclosure requirements to include additional guidance on estimatingdetail about significant transfers between Levels 1 and 2 within the fair value hierarchy and presents activity in the rollforward of Level 3 activity on a liability.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 on the inputs and valuation techniques used to measure fair value. The standard is effective for the firstinterim and annual reporting period, including interim periods beginning after issuance. RiverSource LifeDecember 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. The Company adopted the standard in the fourthfirst quarter of 2009.2010, except for the additional disclosures related to the Level 3 rollforward, which the Company adopted in the first quarter of 2011. The adoption did not have a material effect on RiverSource Life’simpact the Company’s consolidated financial condition and results of operations.
In June 2009, See Note 13 for 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 inrequired disclosures.
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.RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Subsequent EventsConsolidation of Variable Interest Entities
In MayJune 2009, the FASB updated the accounting standards related to the consolidation of VIEs. The standard amends the guidance on the recognition and disclosure of subsequent events. The standard also requires the disclosuredetermination of the date through which subsequent events were evaluated.primary beneficiary of a VIE from a quantitative model to a qualitative model and requires additional disclosures about an enterprise’s involvement in VIEs. Under the new qualitative model, the primary beneficiary must have both the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive gains that could be potentially significant to the VIE. In February 2010, the FASB amended this guidance to defer application of the consolidation requirements for certain investment funds. The standard isstandards are effective for interim and annual reporting periods endingbeginning after JuneNovember 15, 2009, and shall be applied prospectively. RiverSource Life2009. The Company adopted the standard in the second quarter of 2009. The adoptioneffective January 1, 2010 which did not have a material effect on RiverSource Life’simpact its 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 Lifeincome. The Company 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 45 for RiverSource Life’sthe Company’s required disclosures.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB updated the accounting standards for disclosures about derivative instruments and hedging activities. The standard intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about their impact on an entity’s financial position, financial performance, and cash flows. The standard requires disclosures regarding the objectives for using derivative instruments, the fair value of derivative instruments and their related gains and losses, and the accounting for derivatives and related hedged items. The standard is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. RiverSource Life applied the new disclosure requirements in the first quarter of 2009. See Note 15 for the required disclosures.
In December 2007, the FASB updated the accounting standards for noncontrolling interests in consolidated financial statements to establish the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent. The standard requires noncontrolling (minority) interests to be classified as equity (instead of as a liability) within the Consolidated Balance Sheets, and net income (loss) attributable to both the parent and the noncontrolling interests to be disclosed on the face of the Consolidated Statements of Income. The standard is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions of the standard are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Life adopted the new standard as of January 1, 2009 and there was no impact on its consolidated financial condition and results of operations.
Uncertainty in Income Taxes
In June 2006, the FASB updated the accounting standards related to uncertainty in income taxes. 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. The standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. RiverSource Life adopted the standard as of January 1, 2007. The effect of adopting the standard on RiverSource Life’s consolidated financial condition and results of operations was not material.
DAC Costs in Connection With Modifications or Exchanges of Insurance Contracts
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 the standard resulting in these transactions being prospectively accounted for as contract terminations. Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periods and other valuation assumptions. As a result of adopting 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 ValueBalance Sheet
In January 2010,December 2011, the FASB updated the accounting standards related to disclosurerequire new disclosures about fair value measurements.offsetting assets and liabilities. The standard expands the current disclosure requirementsrequires an entity to include additional detaildisclose both gross and net information about significant transfers between Levels 1instruments and 2 within the fair value hierarchy and presenting activitytransactions eligible for offset in the rollforwardstatement of Level 3 activity onfinancial position and instruments and transactions subject to an agreement similar to 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.master netting arrangement. The standard is effective for interim and annual reporting periods beginning on or after December 15, 2009, except forJanuary 1, 2013 on a retrospective basis. The Company is currently evaluating 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 adoptionimpact of the 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 VIEs. 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 have a material effect on its consolidated financial condition and results of operations.
Comprehensive Income
In June 2011, the FASB updated the accounting standards related to the presentation of comprehensive income. The standard requires entities to present all nonowner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard is effective for interim and annual periods beginning after December 15, 2011. The standard is to be applied retrospectively. The adoption of the standard will not impact the Company’s consolidated financial condition and results of operations.
Fair Value
In May 2011, the FASB updated the accounting standards related to fair value measurement and disclosure requirements. The standard requires entities, for assets and liabilities measured at fair value in the statement of financial position which are Level 3 fair value measurements, to disclose quantitative information about unobservable inputs and assumptions used in the measurements, a description of the valuation processes in place, and a qualitative discussion about the sensitivity of the measurements to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. In addition, the standard requires disclosure of fair value by level within the fair value hierarchy for each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The standard is effective for interim and annual periods beginning on or after December 15, 2011. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB updated the accounting standards related to accounting for repurchase agreements and other similar agreements. The standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings as opposed to sales. The standard is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB updated the accounting standards for DAC. Under this new standard, only the following costs incurred in the acquisition of new and renewal insurance contracts would be capitalizable as DAC: (i) incremental direct costs of a successful contract acquisition, (ii) portions of employees’ salaries and benefits directly related to time spent performing specified acquisition activities (that is, underwriting, policy issuance and processing, medical and inspection, and sales force contract selling) for a contract that has actually been acquired, (iii) other costs related to the specified acquisition activities that would not have been incurred had the acquisition contract not occurred, and (iv) advertising costs that meet the capitalization criteria in other GAAP guidance for certain direct-response marketing. All other costs are to be expensed as incurred. The Company retrospectively adopted the standard on January 1, 2012. The cumulative effect of the adoption reduced retained earnings by $1.4 billion after-tax at January 1, 2012.
4.Variable Interest Entities
RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.
RTA’s maximum exposure to loss as a result of its investments in the affordable housing partnerships is limited to the carrying values of these investments. The carrying values are reflected in other investments and were $384 million and $244 million as of December 31, 2011 and 2010, respectively. RTA has no obligation to provide financial or other support to the affordable housing partnerships in addition to liabilities already recorded for future funding commitments nor has it provided any additional support to the affordable housing partnerships. The Company had liabilities of $267 million and $188 million recorded in other liabilities as of December 31, 2011 and 2010, respectively, related to the future funding commitments for affordable housing partnerships.
5. Investments
Available-for-Sale securities distributed by type were as follows:
|
| December 31, 2009 |
|
| December 31, 2011 |
| ||||||||||||||||||||||||||
Description of Securities |
| Amortized |
| Gross |
| Gross |
| Fair |
| Non-Credit |
|
| Amortized |
| Gross |
| Gross |
| Fair |
| Noncredit |
| ||||||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Corporate debt securities |
| $ | 14,245 |
| $ | 855 |
| $ | (106 | ) | $ | 14,994 |
| $ | 1 |
|
| $ | 14,770 |
| $ | 1,726 |
| $ | (78 | ) | $ | 16,418 |
| $ | — |
|
Residential mortgage backed securities |
| 5,249 |
| 185 |
| (238 | ) | 5,196 |
| (41 | ) |
| 4,193 |
| 242 |
| (126 | ) | 4,309 |
| (41 | ) | ||||||||||
Commercial mortgage backed securities |
| 3,874 |
| 182 |
| (16 | ) | 4,040 |
| — |
|
| 3,355 |
| 276 |
| — |
| 3,631 |
| — |
| ||||||||||
State and municipal obligations |
| 1,012 |
| 131 |
| (47 | ) | 1,096 |
| — |
| |||||||||||||||||||||
Asset backed securities |
| 877 |
| 32 |
| (29 | ) | 880 |
| — |
|
| 883 |
| 43 |
| (18 | ) | 908 |
| — |
| ||||||||||
State and municipal obligations |
| 647 |
| 12 |
| (46 | ) | 613 |
| — |
| |||||||||||||||||||||
Foreign government bonds and obligations |
| 126 |
| 19 |
| (1 | ) | 144 |
| — |
| |||||||||||||||||||||
U.S. government and agencies obligations |
| 152 |
| 7 |
| (1 | ) | 158 |
| — |
|
| 49 |
| 8 |
| — |
| 57 |
| — |
| ||||||||||
Foreign government bonds and obligations |
| 94 |
| 14 |
| (1 | ) | 107 |
| — |
| |||||||||||||||||||||
Other structured investments |
| 4 |
| 7 |
| — |
| 11 |
| 7 |
|
| 10 |
| 4 |
| — |
| 14 |
| 4 |
| ||||||||||
Total fixed maturities |
| 25,142 |
| 1,294 |
| (437 | ) | 25,999 |
| (33 | ) |
| 24,398 |
| 2,449 |
| (270 | ) | 26,577 |
| (37 | ) | ||||||||||
Common and preferred stocks |
| 30 |
| — |
| (7 | ) | 23 |
| — |
| |||||||||||||||||||||
Common stocks |
| 1 |
| 1 |
| — |
| 2 |
| — |
| |||||||||||||||||||||
Total |
| $ | 25,172 |
| $ | 1,294 |
| $ | (444 | ) | $ | 26,022 |
| $ | (33 | ) |
| $ | 24,399 |
| $ | 2,450 |
| $ | (270 | ) | $ | 26,579 |
| $ | (37 | ) |
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| December 31, 2010 |
| |||||||||||||
Description of Securities |
| Amortized |
| Gross |
| Gross |
| Fair |
| Noncredit |
| |||||
|
| (in millions) |
| |||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate debt securities |
| $ | 14,792 |
| $ | 1,218 |
| $ | (56 | ) | $ | 15,954 |
| $ | 1 |
|
Residential mortgage backed securities |
| 4,364 |
| 308 |
| (139 | ) | 4,533 |
| (30 | ) | |||||
Commercial mortgage backed securities |
| 3,817 |
| 282 |
| (4 | ) | 4,095 |
| — |
| |||||
Asset backed securities |
| 883 |
| 43 |
| (18 | ) | 908 |
| — |
| |||||
State and municipal obligations |
| 809 |
| 18 |
| (57 | ) | 770 |
| — |
| |||||
Foreign government bonds and obligations |
| 91 |
| 16 |
| — |
| 107 |
| — |
| |||||
U.S. government and agencies obligations |
| 55 |
| 7 |
| — |
| 62 |
| — |
| |||||
Other structured investments |
| 7 |
| 6 |
| — |
| 13 |
| 6 |
| |||||
Total fixed maturities |
| 24,818 |
| 1,898 |
| (274 | ) | 26,442 |
| (23 | ) | |||||
Common stocks |
| 1 |
| 1 |
| — |
| 2 |
| — |
| |||||
Total |
| $ | 24,819 |
| $ | 1,899 |
| $ | (274 | ) | $ | 26,444 |
| $ | (23 | ) |
(1) Represents the amount of other-than-temporary impairment losses in Accumulated Other Comprehensive Income, which starting January 1, 2009, were not included in earnings.accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses at December 31, 2009.as of the end of the period.
|
| 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, 20092011 and 2008,2010, fixed maturity securities comprised approximately 88%87% and 82%88%, respectively, of RiverSource Life’sthe Company’s total investments. These securities were rated byRating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”), including Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings Ltd. (“Fitch”), except for approximately $1.1 billion of securities at both December 31, 2009 and 2008, which were rated by RiverSource Investments, LLC’s internal analysts using criteria similar to Moody’s, S&P and Fitch. Ratings on fixed maturity securities are presented using. The Company uses the median of available ratings from Moody’s, S&P and Fitch. If only two of theFitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moody’s, S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. At both December 31, 2011 and 2010, approximately $1.2 billion of securities were internally rated by Columbia Management Investment Advisers, LLC using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
|
| December 31, 2009 |
| December 31, 2008 |
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||||||||||||||
Ratings |
| Amortized |
| Fair |
| Percent of |
| Amortized |
| Fair |
| Percent of |
|
| Amortized |
| Fair |
| Percent of |
| Amortized |
| Fair |
| Percent of |
| ||||||||
|
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||||||||||||||||||||
AAA |
| $ | 9,194 |
| $ | 9,520 |
| 37 | % | $ | 7,038 |
| $ | 6,779 |
| 38 | % |
| $ | 7,276 |
| $ | 7,811 |
| 30 | % | $ | 8,067 |
| $ | 8,647 |
| 33 | % |
AA |
| 1,081 |
| 1,084 |
| 4 |
| 1,071 |
| 1,017 |
| 6 |
|
| 1,161 |
| 1,291 |
| 5 |
| 1,360 |
| 1,426 |
| 5 |
| ||||||||
A |
| 4,182 |
| 4,326 |
| 17 |
| 4,132 |
| 3,883 |
| 21 |
|
| 4,148 |
| 4,578 |
| 17 |
| 4,025 |
| 4,259 |
| 16 |
| ||||||||
BBB |
| 9,276 |
| 9,826 |
| 38 |
| 5,901 |
| 5,388 |
| 30 |
|
| 10,211 |
| 11,446 |
| 43 |
| 9,831 |
| 10,721 |
| 41 |
| ||||||||
Below investment grade |
| 1,409 |
| 1,243 |
| 4 |
| 1,310 |
| 1,003 |
| 5 |
|
| 1,602 |
| 1,451 |
| 5 |
| 1,535 |
| 1,389 |
| 5 |
| ||||||||
Total fixed maturities |
| $ | 25,142 |
| $ | 25,999 |
| 100 | % | $ | 19,452 |
| $ | 18,070 |
| 100 | % |
| $ | 24,398 |
| $ | 26,577 |
| 100 | % | $ | 24,818 |
| $ | 26,442 |
| 100 | % |
At December 31, 20092011 and 2008,2010, approximately 19%33% and 44%29%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. No holdings of any other issuer were greater than 10% of shareholder’stotal equity.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:
|
| December 31, 2009 |
|
| December 31, 2011 |
| ||||||||||||||||||||||||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||||||||||||||||||||
Description of Securities |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
|
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| ||||||||||||
|
| (in millions, except number of securities) |
|
| (in millions, except number of securities) |
| ||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities |
| 133 |
| $ | 1,088 |
| $ | (18 | ) | 165 |
| $ | 1,313 |
| $ | (88 | ) | 298 |
| $ | 2,401 |
| $ | (106 | ) |
| 70 |
| $ | 1,004 |
| $ | (37 | ) | 9 |
| $ | 257 |
| $ | (41 | ) | 79 |
| $ | 1,261 |
| $ | (78 | ) |
Residential mortgage backed securities |
| 43 |
| 1,184 |
| (34 | ) | 68 |
| 363 |
| (204 | ) | 111 |
| 1,547 |
| (238 | ) |
| 30 |
| 338 |
| (8 | ) | 48 |
| 283 |
| (118 | ) | 78 |
| 621 |
| (126 | ) | ||||||||||||
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 | ) |
| 12 |
| 145 |
| (3 | ) | 18 |
| 96 |
| (15 | ) | 30 |
| 241 |
| (18 | ) | ||||||||||||
State and municipal obligations |
| 32 |
| 232 |
| (9 | ) | 2 |
| 99 |
| (37 | ) | 34 |
| 331 |
| (46 | ) |
| — |
| — |
| — |
| 2 |
| 87 |
| (47 | ) | 2 |
| 87 |
| (47 | ) | ||||||||||||
U.S. government and agencies obligations |
| 2 |
| 89 |
| (1 | ) | — |
| — |
| — |
| 2 |
| 89 |
| (1 | ) | |||||||||||||||||||||||||||||||
Foreign government bonds and obligations |
| — |
| — |
| — |
| 2 |
| 4 |
| (1 | ) | 2 |
| 4 |
| (1 | ) |
| 5 |
| 23 |
| (1 | ) | — |
| — |
| — |
| 5 |
| 23 |
| (1 | ) | ||||||||||||
Other structured investments |
| — |
| — |
| — |
| 2 |
| — |
| — |
| 2 |
| — |
| — |
| |||||||||||||||||||||||||||||||
Common and preferred stock |
| — |
| — |
| — |
| 2 |
| 23 |
| (7 | ) | 2 |
| 23 |
| (7 | ) | |||||||||||||||||||||||||||||||
Total |
| 250 |
| $ | 3,016 |
| $ | (67 | ) | 285 |
| $ | 2,186 |
| $ | (377 | ) | 535 |
| $ | 5,202 |
| $ | (444 | ) |
| 117 |
| $ | 1,510 |
| $ | (49 | ) | 77 |
| $ | 723 |
| $ | (221 | ) | 194 |
| $ | 2,233 |
| $ | (270 | ) |
|
| December 31, 2008 |
|
| December 31, 2010 |
| ||||||||||||||||||||||||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||||||||||||||||||||
Description of Securities |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
|
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| ||||||||||||
|
| (in millions, except number of securities) |
|
| (in millions, except number of securities) |
| ||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities |
| 312 |
| $ | 5,086 |
| $ | (372 | ) | 221 |
| $ | 3,309 |
| $ | (751 | ) | 533 |
| $ | 8,395 |
| $ | (1,123 | ) |
| 107 |
| $ | 1,785 |
| $ | (44 | ) | 13 |
| $ | 153 |
| $ | (12 | ) | 120 |
| $ | 1,938 |
| $ | (56 | ) |
Residential mortgage backed securities |
| 34 |
| 305 |
| (85 | ) | 52 |
| 466 |
| (135 | ) | 86 |
| 771 |
| (220 | ) |
| 71 |
| 310 |
| (7 | ) | 45 |
| 282 |
| (132 | ) | 116 |
| 592 |
| (139 | ) | ||||||||||||
Commercial mortgage backed securities |
| 26 |
| 387 |
| (23 | ) | 54 |
| 867 |
| (151 | ) | 80 |
| 1,254 |
| (174 | ) |
| 10 |
| 238 |
| (4 | ) | — |
| — |
| — |
| 10 |
| 238 |
| (4 | ) | ||||||||||||
Asset backed securities |
| 17 |
| 187 |
| (31 | ) | 15 |
| 124 |
| (29 | ) | 32 |
| 311 |
| (60 | ) |
| 10 |
| 186 |
| (6 | ) | 15 |
| 69 |
| (12 | ) | 25 |
| 255 |
| (18 | ) | ||||||||||||
State and municipal obligations |
| 2 |
| 17 |
| (1 | ) | 2 |
| 78 |
| (19 | ) | 4 |
| 95 |
| (20 | ) |
| 20 |
| 256 |
| (9 | ) | 2 |
| 87 |
| (48 | ) | 22 |
| 343 |
| (57 | ) | ||||||||||||
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 | ) |
| 218 |
| $ | 2,775 |
| $ | (70 | ) | 75 |
| $ | 591 |
| $ | (204 | ) | 293 |
| $ | 3,366 |
| $ | (274 | ) |
As part of RiverSource Life’sthe Company’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to changesmovement in credit spreads across sectors. The primary driver of lower unrealized losses in 2009 compared to 2008 was the tightening of credit spreads across sectors, partially offset by higher interest rates. In addition, a portion of the decrease in unrealized losses was offset by an increase due to the adoption of a new accounting standard effective January 1, 2009. RiverSource Life recorded a cumulative effect increase to the amortized cost of previously other-than-temporarily impaired investments that increased the gross unrealized losses on Available-for-Sale securities by $64 million. This impact is due to the impairment of Available-for-Sale securities recognized in other comprehensive income (loss) previously recognized through earnings for factors other than credit.spreads.
The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss):income:
|
| (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 |
|
|
| Years Ended December 31, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Beginning balance |
| $ | 108 |
| $ | 82 |
| $ | 102 |
|
Credit losses for which an other-than-temporary impairment was not previously recognized |
| 13 |
| 14 |
| 7 |
| |||
Credit losses for which an other-than-temporary impairment was previously recognized |
| 11 |
| 12 |
| 31 |
| |||
Reductions for securities sold during the period (realized) |
| (26 | ) | — |
| (58 | ) | |||
Ending balance |
| $ | 106 |
| $ | 108 |
| $ | 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; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities;securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC, benefit reserves and 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents a rollforward of the net unrealized securities gains (losses) on Available-for-Sale securities included in accumulated other comprehensive income (loss):income:
|
| 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) |
|
| Net |
| Deferred |
| Accumulated Other |
| |||
|
| (in millions) |
| |||||||
Balance at January 1, 2009 |
| $ | (1,043 | ) | $ | 365 |
| $ | (678 | ) |
Cumulative effect of accounting change |
| (58 | ) | 20 |
| (38 | )(1) | |||
Net unrealized securities gains arising during the period(3) |
| 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) | |||
|
|
|
|
|
|
|
| |||
Net unrealized securities gains arising during the period(3) |
| 794 |
| (278 | ) | 516 |
| |||
Reclassification of gains included in net income |
| (20 | ) | 7 |
| (13 | ) | |||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
| (328 | ) | 114 |
| (214 | ) | |||
Balance at December 31, 2010 |
| 1,084 |
| (379 | ) | 705 | (2) | |||
|
|
|
|
|
|
|
| |||
Net unrealized securities gains arising during the period(3) |
| 560 |
| (196 | ) | 364 |
| |||
Reclassification of gains included in net income |
| (5 | ) | 2 |
| (3 | ) | |||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
| (340 | ) | 119 |
| (221 | ) | |||
Balance at December 31, 2011 |
| $ | 1,299 |
| $ | (454 | ) | $ | 845 | (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.2009. 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 includedIncludes $(18) million, $(12) million and $(16) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.securities at December 31, 2011, 2010 and 2009, respectively.
59(3)Includes other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income during the period.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains (losses) were as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2009 |
| 2008 |
| 2007 |
| |||
|
| (in millions) |
| |||||||
Gross realized investment gains from sales |
| $ | 185 |
| $ | 13 |
| $ | 64 |
|
Gross realized investment losses from sales |
| (50 | ) | (6 | ) | (20 | ) | |||
Other-than-temporary impairments related to credit |
| (62 | ) | (440 | ) | (4 | ) | |||
|
| Years Ended December 31, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Gross realized investment gains |
| $ | 48 |
| $ | 51 |
| $ | 185 |
|
Gross realized investment losses |
| (20 | ) | (4 | ) | (50 | ) | |||
Other-than-temporary impairments |
| (24 | ) | (28 | ) | (62 | ) | |||
The $62 million of other-than-temporaryOther-than-temporary impairments recognizedfor the year ended December 31, 2011 primarily related to credit losses on non-agency residential mortgage backed securities. Other-than-temporary impairments for the year ended December 31, 2010 primarily related to credit losses on non-agency residential mortgage backed securities as well as corporate debt securities in net realized investment gains (losses) inthe gaming industry. Other-than-temporary impairments for the year ended December 31, 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale securities by contractual maturity at December 31, 20092011 were as follows:
|
| Amortized Cost |
| Fair Value |
|
| Amortized Cost |
| Fair Value |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Due within one year |
| $ | 738 |
| $ | 751 |
|
| $ | 911 |
| $ | 927 |
|
Due after one year through five years |
| 6,638 |
| 6,862 |
|
| 4,976 |
| 5,204 |
| ||||
Due after five years through 10 years |
| 4,786 |
| 5,062 |
|
| 6,377 |
| 7,093 |
| ||||
Due after 10 years |
| 2,976 |
| 3,197 |
|
| 3,693 |
| 4,491 |
| ||||
|
| 15,138 |
| 15,872 |
|
| 15,957 |
| 17,715 |
| ||||
Residential mortgage backed securities |
| 5,249 |
| 5,196 |
|
| 4,193 |
| 4,309 |
| ||||
Commercial mortgage backed securities |
| 3,874 |
| 4,040 |
|
| 3,355 |
| 3,631 |
| ||||
Asset backed securities |
| 877 |
| 880 |
|
| 883 |
| 908 |
| ||||
Other structured investments |
| 4 |
| 11 |
|
| 10 |
| 14 |
| ||||
Common and preferred stocks |
| 30 |
| 23 |
| |||||||||
Common stocks |
| 1 |
| 2 |
| |||||||||
Total |
| $ | 25,172 |
| $ | 26,022 |
|
| $ | 24,399 |
| $ | 26,579 |
|
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments are not due at a single maturity date. As such, these securities, as well as common and preferred stocks, were not included in the maturities distribution.
At both December 31, 20092011 and 2008,2010, bonds carried at $7 million and $6 million, respectively, were on deposit with various states as required by law.
Commercial Mortgage Loans, Net
The following is a summary of commercial mortgage loans:
|
| December 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
|
| (in millions) |
| ||||
Commercial mortgage loans |
| $ | 2,562 |
| $ | 2,754 |
|
Less: allowance for loan losses |
| (30 | ) | (17 | ) | ||
Commercial mortgage loans, net |
| $ | 2,532 |
| $ | 2,737 |
|
Commercial mortgage loans are first mortgages on real estate. RiverSource Life holds the mortgage documents, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements. Commercial mortgage loan fundings are restricted by state insurance regulatory authorities to 80% or less of the market value of the real estate at the time of origination of the loan.
The balances of and changes in the allowance for loan losses were as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2009 |
| 2008 |
| 2007 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 17 |
| $ | 16 |
| $ | 37 |
|
Provision for loan losses |
| 14 |
| 1 |
| (21 | ) | |||
Foreclosures, write-offs and loan sales |
| (1 | ) | — |
| — |
| |||
Balance at December 31 |
| $ | 30 |
| $ | 17 |
| $ | 16 |
|
Concentrations of credit risk of commercial mortgage loans by region were as follows:
|
| December 31, |
| ||||||||||
|
| 2009 |
| 2008 |
| ||||||||
|
| On-Balance |
| 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.
Trading Securities
Net recognized gains (losses) related to trading securities held at December 31, 2009, 2008 and 2007 were nil, $9 million and $(2) million, respectively.
Sources of Investment Income and Net Realized Investment Gains (Losses)
Net investment income is summarized as follows:
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||
Income on fixed maturities |
| $ | 1,371 |
| $ | 1,043 |
| $ | 1,187 |
|
| $ | 1,469 |
| $ | 1,482 |
| $ | 1,371 |
|
Income on commercial mortgage loans |
| 160 |
| 173 |
| 173 |
|
| 149 |
| 152 |
| 160 |
| ||||||
Trading securities and other investments |
| 35 |
| 55 |
| 82 |
| |||||||||||||
Other investments |
| 18 |
| 40 |
| 35 |
| |||||||||||||
|
| 1,566 |
| 1,271 |
| 1,442 |
|
| 1,636 |
| 1,674 |
| 1,566 |
| ||||||
Less: investment expenses |
| (40 | ) | (19 | ) | (18 | ) |
| 43 |
| 45 |
| 40 |
| ||||||
Total |
| $ | 1,526 |
| $ | 1,252 |
| $ | 1,424 |
|
| $ | 1,593 |
| $ | 1,629 |
| $ | 1,526 |
|
Net realized investment gains (losses) are summarized as follows:
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||
Fixed maturities |
| $ | 73 |
| $ | (433 | ) | $ | 40 |
|
| $ | 4 |
| $ | 19 |
| $ | 73 |
|
Commercial mortgage loans |
| (13 | ) | (1 | ) | — |
|
| 2 |
| (6 | ) | (13 | ) | ||||||
Trading securities and other investments |
| (1 | ) | (8 | ) | — |
| |||||||||||||
Reduction in the allowance for loan losses |
| — |
| — |
| 21 |
| |||||||||||||
Other investments |
| (1 | ) | 3 |
| (1 | ) | |||||||||||||
Total |
| $ | 59 |
| $ | (442 | ) | $ | 61 |
|
| $ | 5 |
| $ | 16 |
| $ | 59 |
|
5.6. Variable Interest EntitiesFinancing Receivables
RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiaryThe Company’s financing receivables include commercial mortgage loans, syndicated loans and therefore, does not consolidate.
RTA’s maximum exposure to loss as a result of its investment in the affordable housing partnerships is limited to the carrying values. The carrying valuespolicy loans. Syndicated loans are reflected in trading securitiesother investments. Policy loans do not exceed the cash value of the policy at origination. As there is minimal risk of loss related to policy loans, the Company does not record an allowance for loan losses for policy loans.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for Loan Losses
The following table presents a rollforward of the allowance for loan losses for the years ended and other investmentsthe ending balance of the allowance for loan losses by impairment method and were $28type of loan:
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||||
|
| Commercial |
| Syndicated |
| Total |
| Commercial |
| Syndicated |
| Total |
| ||||||
|
| (in millions) |
| ||||||||||||||||
Beginning balance |
| $ | 36 |
| $ | 5 |
| $ | 41 |
| $ | 30 |
| $ | 12 |
| $ | 42 |
|
Charge-offs |
| (3 | ) | — |
| (3 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||
Provisions |
| (1 | ) | — |
| (1 | ) | 7 |
| (5 | ) | 2 |
| ||||||
Ending balance |
| $ | 32 |
| $ | 5 |
| $ | 37 |
| $ | 36 |
| $ | 5 |
| $ | 41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Individually evaluated for impairment |
| $ | 9 |
| $ | — |
| $ | 9 |
| $ | 8 |
| $ | — |
| $ | 8 |
|
Collectively evaluated for impairment |
| 23 |
| 5 |
| 28 |
| 28 |
| 5 |
| 33 |
|
The recorded investment in financing receivables by impairment method and type of loan was as follows:
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||||
|
| Commercial |
| Syndicated |
| Total |
| Commercial |
| Syndicated |
| Total |
| ||||||
|
| (in millions) |
| ||||||||||||||||
Individually evaluated for impairment |
| $ | 64 |
| $ | 1 |
| $ | 65 |
| $ | 75 |
| $ | 3 |
| $ | 78 |
|
Collectively evaluated for impairment |
| 2,441 |
| 301 |
| 2,742 |
| 2,431 |
| 202 |
| 2,633 |
| ||||||
Total |
| $ | 2,505 |
| $ | 302 |
| $ | 2,807 |
| $ | 2,506 |
| $ | 205 |
| $ | 2,711 |
|
As of December 31, 2011 and 2010, the Company’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $4 million and $54$20 million, respectively.
During the year ended December 31, 2011, the Company purchased $194 million and sold $2 million of syndicated loans. During the year ended December 31, 2010, the Company purchased $59 million and sold $2 million of syndicated loans.
The Company has not acquired any loans with deteriorated credit quality as of the acquisition date.
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were $12 million and $8 million as of December 31, 20092011 and 2008,2010, respectively. RTAAll other loans were considered to be performing.
Commercial Mortgage Loans
The Company reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates as necessary. Commercial mortgage loans which management has no obligationassigned its highest risk rating were 3% of total commercial mortgage loans at both December 31, 2011 and 2010. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to provide further financialbecome delinquent or other support toenter into foreclosure within the affordable housing partnerships nor has it provided any additional support tonext six months. In addition, the affordable housing partnerships. RiverSource Life had no liabilitiesCompany reviews the concentrations of credit risk by region and property type.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||
|
| Loans |
| Percent of |
| Funding |
| Loans |
| Percent of |
| Funding |
| ||||
|
| (in millions, except percentages) |
| ||||||||||||||
South Atlantic |
| $ | 618 |
| 25 | % | $ | — |
| $ | 590 |
| 24 | % | $ | 4 |
|
Pacific |
| 556 |
| 22 |
| 1 |
| 530 |
| 21 |
| 15 |
| ||||
Mountain |
| 275 |
| 11 |
| 11 |
| 286 |
| 11 |
| — |
| ||||
East North Central |
| 247 |
| 10 |
| — |
| 240 |
| 10 |
| — |
| ||||
West North Central |
| 224 |
| 9 |
| 1 |
| 251 |
| 10 |
| — |
| ||||
Middle Atlantic |
| 217 |
| 9 |
| — |
| 212 |
| 8 |
| — |
| ||||
West South Central |
| 173 |
| 7 |
| 2 |
| 183 |
| 7 |
| — |
| ||||
New England |
| 130 |
| 5 |
| — |
| 148 |
| 6 |
| 2 |
| ||||
East South Central |
| 65 |
| 2 |
| — |
| 66 |
| 3 |
| — |
| ||||
|
| 2,505 |
| 100 | % | $ | 15 |
| 2,506 |
| 100 | % | $ | 21 |
| ||
Less: allowance for loan losses |
| 32 |
|
|
|
|
| 36 |
|
|
|
|
| ||||
Total |
| $ | 2,473 |
|
|
|
|
| $ | 2,470 |
|
|
|
|
|
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||
|
| Loans |
| Percent of |
| Funding |
| Loans |
| Percent of |
| Funding |
| ||||
|
| (in millions, except percentages) |
| ||||||||||||||
Retail |
| $ | 825 |
| 33 | % | $ | 2 |
| $ | 820 |
| 33 | % | $ | 10 |
|
Office |
| 669 |
| 27 |
| 2 |
| 717 |
| 29 |
| — |
| ||||
Industrial |
| 455 |
| 18 |
| 1 |
| 456 |
| 18 |
| 6 |
| ||||
Apartments |
| 358 |
| 14 |
| — |
| 326 |
| 13 |
| — |
| ||||
Hotel |
| 51 |
| 2 |
| — |
| 57 |
| 2 |
| — |
| ||||
Mixed Use |
| 42 |
| 2 |
| — |
| 43 |
| 2 |
| — |
| ||||
Other |
| 105 |
| 4 |
| 10 |
| 87 |
| 3 |
| 5 |
| ||||
|
| 2,505 |
| 100 | % | $ | 15 |
| 2,506 |
| 100 | % | $ | 21 |
| ||
Less: allowance for loan losses |
| 32 |
|
|
|
|
| 36 |
|
|
|
|
| ||||
Total |
| $ | 2,473 |
|
|
|
|
| $ | 2,470 |
|
|
|
|
|
Syndicated Loans
The Company’s syndicated loan portfolio is diversified across industries and issuers. The primary credit indicator for syndicated loans is whether the loans are performing in accordance with the contractual terms of the syndication. Total nonperforming syndicated loans at both December 31, 2011 and 2010 were $1 million.
Troubled Debt Restructurings
During the year ended December 31, 2011, the Company restructured 10 loans with a recorded investment of $49 million as of December 31, 2009 and 2008 related2011. The recorded investment in restructured loans primarily consists of commercial mortgage loans. The troubled debt restructurings did not have a material impact to the affordable housing partnerships.Company’s allowance for loan losses or income recognized for the year ended December 31, 2011. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.
6.7. Deferred Acquisition Costs and Deferred Sales Inducement Costs
During the third quarter of 2011, 2010 and 2009, 2008management reviewed and 2007, RiverSource Life completedupdated the annual detailed review ofDAC and DSIC valuation assumptions for the Company’s products. As part 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.2010 process, management extended the projection periods used for its annuity products and revised client asset value growth rates assumed for variable annuity and VUL contracts.
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:RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
|
| 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 |
|
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 4,578 |
| $ | 4,285 |
| $ | 4,324 |
|
Capitalization of acquisition costs |
| 419 |
| 459 |
| 558 |
| |||
Amortization, excluding the impact of valuation assumptions review |
| (488 | ) | (376 | ) | (264 | ) | |||
Amortization, impact of valuation assumptions review |
| (51 | ) | 323 |
| 119 |
| |||
Impact of change in net unrealized securities gains |
| (91 | ) | (113 | ) | (452 | ) | |||
Balance at December 31 |
| $ | 4,367 |
| $ | 4,578 |
| $ | 4,285 |
|
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 |
|
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 545 |
| $ | 524 |
| $ | 518 |
|
Capitalization of sales inducement costs |
| 9 |
| 35 |
| 82 |
| |||
Amortization, excluding the impact of valuation assumptions review |
| (70 | ) | (49 | ) | (19 | ) | |||
Amortization, impact of valuation assumptions review |
| (11 | ) | 52 |
| 9 |
| |||
Impact of change in net unrealized securities gains |
| (9 | ) | (17 | ) | (66 | ) | |||
Balance at December 31 |
| $ | 464 |
| $ | 545 |
| $ | 524 |
|
RiverSource LifeAs described in Note 3, the Company 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
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.
7.8. Reinsurance
Generally, RiverSource Lifethe Company currently reinsures 90% of the death benefit liability related to almost all individual fixed and variable universal life and term life insurance products. As a result, RiverSource Lifethe Company typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations. RiverSource LifeThe Company 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 Lifethe Company is $1.5 million (increased from $750,000 during 2008) on a single life and $1.5 million on any flexible premium survivorship life policy. Risk on fixed and variable universal life policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 (2002 for RiverSource Life of NY) is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.
For existing LTC policies, RiverSource Life (and RiverSource Life of NY for 1996 and later issues)the Company retained 50% of the risk and ceded the remaining 50% of the risk on a coinsurance basis to subsidiaries of Genworth Financial, Inc. (“Genworth”). For RiverSource Life of NY, this reinsurance arrangement applies for 1996 and later issues only.
The Company also has life insurance and fixed annuity risk previously assumed under reinsurance arrangements with unaffiliated insurance companies.
Generally, RiverSource Lifethe Company 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 (August 2010 for RiverSource Life of NY) and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. RiverSource LifeThe Company retains all risk for new claims on DI contracts sold on other policy forms. RiverSource LifeThe Company 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, 20092011 and 2008,2010, traditional life and universal life insurance in force aggregated $192.8$191.2 billion and $192.3$192.0 billion, respectively, of which $131.2$136.2 billion and $127.6$134.0 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effect of reinsurance on premiums was as follows:
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
|
| (in millions) |
| (in millions) |
| |||||||||||||||
Direct premiums |
| $ | 721 |
| $ | 641 |
| $ | 628 |
|
| $ | 707 |
| $ | 681 |
| $ | 659 |
|
Reinsurance ceded |
| (271 | ) | (203 | ) | (189 | ) |
| (214 | ) | (192 | ) | (209 | ) | ||||||
Net premiums |
| $ | 450 |
| $ | 438 |
| $ | 439 |
|
| $ | 493 |
| $ | 489 |
| $ | 450 |
|
Policy and contract charges are presented on the Consolidated Statements of Income net of $62$71 million, $61$67 million and $57$62 million of reinsurance ceded for the years ended December 31, 2009, 20082011, 2010 and 2007,2009, respectively.
Reinsurance recovered from reinsurers was $167$189 million, $142$166 million and $126$167 million for the years ended December 31, 2009, 20082011, 2010 and 2007,2009, respectively. Reinsurance contracts do not relieve RiverSource Lifethe Company from its primary obligation to policyholders.
Included in reinsuranceReinsurance recoverables isinclude approximately $1.3$1.5 billion and $1.2$1.4 billion related to LTC risk ceded to Genworth as of December 31, 20092011 and 2008,2010, respectively. Included in future policy benefits is $667$629 million and $689$657 million related to assumed reinsurance arrangements as of December 31, 20092011 and 2008,2010, respectively.
8.9. Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities
Future policy benefits and policy claims and other policyholders’ funds consisted of the following:
|
| December 31, |
|
| December 31, |
| ||||||||
|
| 2009 |
| 2008 |
|
| 2011 |
| 2010 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Fixed annuities |
| $ | 16,558 |
| $ | 14,058 |
|
| $ | 16,401 |
| $ | 16,520 |
|
Equity indexed annuities accumulated host values |
| 159 |
| 228 |
| |||||||||
Equity indexed annuities embedded derivatives |
| 9 |
| 16 |
| |||||||||
Variable annuities fixed sub-accounts |
| 6,127 |
| 5,623 |
| |||||||||
EIA accumulated host values |
| 58 |
| 100 |
| |||||||||
EIA embedded derivatives |
| 2 |
| 3 |
| |||||||||
Variable annuity fixed sub-accounts |
| 4,852 |
| 4,868 |
| |||||||||
Variable annuity GMWB |
| 204 |
| 1,471 |
|
| 1,377 |
| 337 |
| ||||
Variable annuity GMAB |
| 100 |
| 367 |
|
| 237 |
| 104 |
| ||||
Other variable annuity guarantees |
| 12 |
| 67 |
|
| 14 |
| 13 |
| ||||
Total annuities |
| 23,169 |
| 21,830 |
|
| 22,941 |
| 21,945 |
| ||||
VUL/ UL insurance |
| 2,595 |
| 2,526 |
| |||||||||
VUL/UL insurance |
| 2,662 |
| 2,588 |
| |||||||||
IUL accumulated host values |
| 4 |
| — |
| |||||||||
IUL embedded derivatives |
| 3 |
| — |
| |||||||||
VUL/UL insurance additional liabilities |
| 220 |
| 143 |
| |||||||||
Other life, DI and LTC insurance |
| 4,619 |
| 4,397 |
|
| 5,352 |
| 5,004 |
| ||||
Total future policy benefits |
| 30,383 |
| 28,753 |
|
| 31,182 |
| 29,680 |
| ||||
Policy claims and other policyholders’ funds |
| 123 |
| 172 |
|
| 121 |
| 134 |
| ||||
Total future policy benefits and policy claims and other policyholders’ funds |
| $ | 30,506 |
| $ | 28,925 |
|
| $ | 31,303 |
| $ | 29,814 |
|
Separate account liabilities consisted of the following:
|
| December 31, |
|
| December 31, |
| ||||||||
|
| 2009 |
| 2008 |
|
| 2011 |
| 2010 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Variable annuity variable sub-accounts |
| $ | 48,982 |
| $ | 37,657 |
|
| $ | 57,556 |
| $ | 57,862 |
|
VUL insurance variable sub-accounts |
| 5,239 |
| 4,091 |
|
| 5,575 |
| 5,887 |
| ||||
Other insurance variable sub-accounts |
| 46 |
| 39 |
|
| 43 |
| 46 |
| ||||
Total separate account liabilities |
| $ | 54,267 |
| $ | 41,787 |
| |||||||
Total |
| $ | 63,174 |
| $ | 63,795 |
|
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 LifeThe Company generally invests the proceeds from the annuity payments in fixed rate securities. RiverSource LifeThe Company may hedge the interest rate risks related to fixed annuities with derivative instruments. As of December 31, 20092011 and 2008,2010, there were no outstanding derivatives to hedge these risks.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Equity Indexed Annuities
The Index 500 Annuity, RiverSource Life’s equity indexed annuitythe Company’s EIA 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 LifeThe Company generally invests the proceeds from the annuity deposits in fixed rate securities and hedges the equity risk with derivative instruments. See Note 1516 for additional information regarding RiverSource Life’sthe Company’s derivative instruments. In 2007, RiverSource Lifethe Company discontinued new sales of equity indexed annuities.EIAs.
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 Lifethe Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU provisions. RiverSource LifeThe Company previously offered contracts with GMIB provisions. See Note 2 and Note 910 for additional information regarding RiverSource Life’sthe Company’s variable annuity guarantees. RiverSource LifeThe Company 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 $12.7 billion at December 31, 2008 to $19.2 billion at December 31, 2009. The total value of variable annuity contracts with GMAB riders increased from $2.0 billion at December 31, 2008 to $2.9 billion at December 31, 2009. The total value of variable annuity contracts with GMDB riders increased from $42.2 billion at December 31, 2008 to $53.7 billion at December 31, 2009, of which $5.2 billion have corresponding hedges. See Note 1516 for additional information regarding derivative instruments used to hedge risks related to GMWB GMAB and GMDBGMAB provisions.
Insurance Liabilities
VUL/UL is the largest group of insurance policies written by RiverSource Life.the Company. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account or a separate account. A vast majority of the premiums received for VUL contracts are held in separate accounts where the assets are held for the exclusive benefit of those policyholders. RiverSource LifeIn 2011, the Company began offering IUL insurance. The Company also offers term and whole life insurance as well as disability products. RiverSource LifeThe Company no longer offers LTC products but has in force policies from prior years. Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims and obligations for anticipated future claims.
Portions of the Company’s fixed and variable universal life contracts have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. 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.
9.10. Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by RiverSource Lifethe Company contain GMDB provisions. RiverSource LifeThe Company 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 LifeThe Company previously offered contracts containing GMIB provisions. See Note 2 and Note 89 for additional information regarding the liabilities related toCompany’s 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 and less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract. RiverSource LifeThe Company 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 marketfund 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 INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has GMWB riders in force, withwhich contain one or more of the following provisions:
· withdrawalsWithdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.
· withdrawalsWithdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).
· withdrawalsWithdrawals at a specified rate per year for joint contractholders while either is alive.
·Withdrawals based on performance of the contract.
·Withdrawals based on the age withdrawals begin.
·Once withdrawals begin, the contractholder’s funds are moved to one of the three lessleast 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, creditsCredits are applied annually for the first tena specified number of years to increase the guaranteed amount as long as withdrawals have not been taken.
Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or
80% of the highest anniversary value, adjusted for withdrawals. If the contract value is less than the guarantee at the end of the 10 year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
Certain UL contracts offered by RiverSource Lifethe Company 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 Lifethe Company has established additional liabilities:
|
| December 31, 2009 |
| December 31, 2008 |
|
| December 31, 2011 |
| December 31, 2010 |
| ||||||||||||||||||||||||||||||||||||
Variable annuity |
| Total |
| Contract |
| Net |
| Weighted |
| Total |
| Contract |
| Net |
| Weighted |
| |||||||||||||||||||||||||||||
Variable Annuity |
| Total |
| Contract |
| Net |
| Weighted |
| Total |
| Contract |
| Net |
| Weighted |
| |||||||||||||||||||||||||||||
|
| (in millions, except age) |
|
| (in millions, except age) |
| ||||||||||||||||||||||||||||||||||||||||
GMDB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Return of Premium |
| $ | 30,938 |
| $ | 28,415 |
| $ | 974 |
| 61 |
| $ | 22,249 |
| $ | 20,153 |
| $ | 4,873 |
| 61 |
| |||||||||||||||||||||||
Six-Year Reset |
| 13,886 |
| 11,197 |
| 926 |
| 61 |
| 12,719 |
| 10,063 |
| 2,802 |
| 61 |
| |||||||||||||||||||||||||||||
One-Year Ratchet |
| 7,081 |
| 6,400 |
| 873 |
| 63 |
| 5,770 |
| 5,061 |
| 2,163 |
| 62 |
| |||||||||||||||||||||||||||||
Five-Year Ratchet |
| 1,256 |
| 1,171 |
| 38 |
| 59 |
| 951 |
| 888 |
| 199 |
| 59 |
| |||||||||||||||||||||||||||||
Return of premium |
| $ | 40,011 |
| $ | 38,275 |
| $ | 382 |
| 63 |
| $ | 37,714 |
| $ | 36,028 |
| $ | 173 |
| 62 |
| |||||||||||||||||||||||
Five/six-year reset |
| 11,631 |
| 9,118 |
| 350 |
| 63 |
| 13,689 |
| 11,153 |
| 312 |
| 62 |
| |||||||||||||||||||||||||||||
One-year ratchet |
| 7,233 |
| 6,777 |
| 479 |
| 64 |
| 7,741 |
| 7,242 |
| 287 |
| 63 |
| |||||||||||||||||||||||||||||
Five-year ratchet |
| 1,472 |
| 1,418 |
| 25 |
| 61 |
| 1,466 |
| 1,414 |
| 8 |
| 60 |
| |||||||||||||||||||||||||||||
Other |
| 582 |
| 542 |
| 98 |
| 67 |
| 471 |
| 429 |
| 192 |
| 66 |
|
| 759 |
| 732 |
| 93 |
| 68 |
| 680 |
| 649 |
| 61 |
| 67 |
| ||||||||||||
Total — GMDB |
| $ | 53,743 |
| $ | 47,725 |
| $ | 2,909 |
| 61 |
| $ | 42,160 |
| $ | 36,594 |
| $ | 10,229 |
| 61 |
|
| $ | 61,106 |
| $ | 56,320 |
| $ | 1,329 |
| 63 |
| $ | 61,290 |
| $ | 56,486 |
| $ | 841 |
| 62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GGU death benefit |
| $ | 853 |
| $ | 775 |
| $ | 70 |
| 63 |
| $ | 699 |
| $ | 619 |
| $ | 65 |
| 63 |
|
| $ | 920 |
| $ | 868 |
| $ | 78 |
| 63 |
| $ | 970 |
| $ | 912 |
| $ | 79 |
| 64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GMIB |
| $ | 628 |
| $ | 582 |
| $ | 126 |
| 63 |
| $ | 567 |
| $ | 511 |
| $ | 245 |
| 63 |
|
| $ | 463 |
| $ | 433 |
| $ | 106 |
| 65 |
| $ | 597 |
| $ | 561 |
| $ | 76 |
| 64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GMWB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GMWB |
| $ | 4,196 |
| $ | 4,067 |
| $ | 454 |
| 64 |
| $ | 3,513 |
| $ | 3,409 |
| $ | 1,312 |
| 63 |
|
| $ | 3,887 |
| $ | 3,868 |
| $ | 236 |
| 65 |
| $ | 4,341 |
| $ | 4,317 |
| $ | 106 |
| 64 |
|
GMWB for life |
| 14,988 |
| 14,333 |
| 795 |
| 63 |
| 9,194 |
| 8,764 |
| 2,704 |
| 63 |
|
| 23,756 |
| 23,625 |
| 863 |
| 64 |
| 20,374 |
| 20,259 |
| 129 |
| 63 |
| ||||||||||||
Total — GMWB |
| $ | 19,184 |
| $ | 18,400 |
| $ | 1,249 |
| 63 |
| $ | 12,707 |
| $ | 12,173 |
| $ | 4,016 |
| 63 |
|
| $ | 27,643 |
| $ | 27,493 |
| $ | 1,099 |
| 64 |
| $ | 24,715 |
| $ | 24,576 |
| $ | 235 |
| 63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GMAB |
| $ | 2,926 |
| $ | 2,853 |
| $ | 153 |
| 56 |
| $ | 2,006 |
| $ | 1,937 |
| $ | 608 |
| 56 |
|
| $ | 3,516 |
| $ | 3,509 |
| $ | 63 |
| 56 |
| $ | 3,540 |
| $ | 3,523 |
| $ | 22 |
| 56 |
|
(1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.
(2) Represents the current guaranteed benefit amount in excess of the current contract value. GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in additional liabilities for variable annuity and insurance guarantees were as follows:
|
| GMDB & |
| GMIB |
| GMWB |
| GMAB |
| UL |
|
| GMDB & |
| GMIB |
| GMWB |
| GMAB |
| UL |
| ||||||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Liability balance at January 1, 2008 |
| $ | 24 |
| $ | 3 |
| $ | 136 |
| $ | 33 |
| $ | 4 |
| ||||||||||||||||
Balance at January 1, 2009 |
| $ | 55 |
| $ | 12 |
| $ | 1,471 |
| $ | 367 |
| $ | 7 |
| ||||||||||||||||
Incurred claims |
| 58 |
| 10 |
| 1,335 |
| 334 |
| 6 |
|
| 12 |
| (5 | ) | (1,267 | ) | (267 | ) | 8 |
| ||||||||||
Paid claims |
| (27 | ) | (1 | ) | — |
| — |
| (3 | ) |
| (61 | ) | (1 | ) | — |
| — |
| — |
| ||||||||||
Liability balance at December 31, 2008 |
| 55 |
| 12 |
| 1,471 |
| 367 |
| 7 |
| |||||||||||||||||||||
Balance at December 31, 2009 |
| 6 |
| 6 |
| 204 |
| 100 |
| 15 |
| |||||||||||||||||||||
Incurred claims |
| 12 |
| (5 | ) | (1,267 | ) | (267 | ) | 8 |
|
| 17 |
| 3 |
| 133 |
| 4 |
| 59 |
| ||||||||||
Paid claims |
| (61 | ) | (1 | ) | — |
| — |
| — |
|
| (18 | ) | (1 | ) | — |
| — |
| (6 | ) | ||||||||||
Liability balance at December 31, 2009 |
| $ | 6 |
| $ | 6 |
| $ | 204 |
| $ | 100 |
| $ | 15 |
| ||||||||||||||||
Balance at December 31, 2010 |
| 5 |
| 8 |
| 337 |
| 104 |
| 68 |
| |||||||||||||||||||||
Incurred claims |
| 10 |
| 2 |
| 1,040 |
| 133 |
| 53 |
| |||||||||||||||||||||
Paid claims |
| (10 | ) | (1 | ) | — |
| — |
| (10 | ) | |||||||||||||||||||||
Balance at December 31, 2011 |
| $ | 5 |
| $ | 9 |
| $ | 1,377 |
| $ | 237 |
| $ | 111 |
|
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, |
|
| December 31, |
| ||||||||
|
| 2009 |
| 2008 |
|
| 2011 |
| 2010 |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
Mutual funds: |
|
|
|
|
|
|
|
|
|
| ||||
Equity |
| $ | 29,379 |
| $ | 21,899 |
|
| $ | 30,738 |
| $ | 32,310 |
|
Bond |
| 16,537 |
| 12,135 |
|
| 23,862 |
| 22,319 |
| ||||
Other |
| 2,889 |
| 3,463 |
|
| 1,969 |
| 2,208 |
| ||||
Total mutual funds |
| $ | 48,805 |
| $ | 37,497 |
|
| $ | 56,569 |
| $ | 56,837 |
|
No gains or losses were recognized on assets transferred to separate accounts for the periods presented.years ended December 31, 2011, 2010 and 2009.
10.11. Lines of Credit
In July 2009, RiverSource Life Insurance Company, as the borrower, entered intohad an outstanding balance of $300 million and $3 million as of December 31, 2011 and 2010, respectively, under 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. TheAs of December 31, 2011, the interest rate for any borrowing under the new agreement iswas established by reference to LIBOR plus 28115 basis points. In January 2012, an amendment to this agreement decreased the interest rate to LIBOR plus 90 basis points, subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. 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 February 2010.
RiverSource LifeThe Company has available a committed line ofrevolving credit agreement with Ameriprise Financial as the lender 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, 20092011 and 2008.2010.
In September 2008,December 2009, RiverSource Life Insurance Company, as the lender, entered into a revolving credit agreement with Ameriprise Financial as the borrower. This line of credit is not to exceed 3% of RiverSource Life’sLife Insurance Company’s statutory admitted assets as of the prior year end. TheAs of December 31, 2011, the interest rate for any borrowing iswas established by reference to LIBOR plus 28115 basis points. In January 2012, an amendment to this agreement decreased the interest rate to LIBOR plus 90 basis points, subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. 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, 20092011 and 2008.
RiverSource Life had a collateral loan agreement with Ameriprise Financial aggregating up to $75 million which expired on October 31, 2008.2010.
1112.Borrowings under Repurchase Agreements
The Company enters into repurchase agreements in exchange for cash which it accounts for as secured borrowings. The Company has pledged Available-for-Sale securities consisting of agency residential mortgage backed securities and commercial mortgage backed securities to collateralize its obligation under the repurchase agreements. The fair value of the securities pledged is recorded in investments and was $521 million and $412 million at December 31, 2011 and 2010, respectively. The amount of the Company’s liability including accrued interest as of December 31, 2011 and 2010 was
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
$504 million and $397 million, respectively. The weighted average annualized interest rate on the repurchase agreements held as of both December 31, 2011 and 2010 was 0.3%.
13. Fair Values of Assets and Liabilities
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
RiverSource LifeThe Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by RiverSource Life’sthe Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2 Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Determination of Fair Value
RiverSource LifeThe Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. RiverSource Life’sThe Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. RiverSource Life’sThe Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, RiverSource Lifethe Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their NAVnet asset value (“NAV”) and classified as Level 1. RiverSource Life’sThe Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognizedthird-party pricing services, non-binding broker quotes, or other model-based valuation techniques such as the present value of cash flows.techniques. Level 1 securities include U.S. Treasuries. Level 2 securities include municipal and corporate and municipal bonds, agencyresidential mortgage backed securities, commercial mortgage backed securities, asset backed securities and U.S. agency and foreign government securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from third-party pricing services. Observable inputs used to value these securities can include, but are not limited to reported trades, benchmark yields, issuer spreads and agency securities.non-binding broker quotes. Level 3 securities primarily include corporate bonds, certain non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities.
Through RiverSource Life’s own experience transacting in the marketplace The fair value of corporate bonds and through discussions with its pricing vendors, RiverSource Life believes that the market forcertain asset backed securities classified as Level 3 is typically based on a single non-binding broker quote. The fair value of certain asset backed securities and non-agency residential mortgage backed securities is inactive. Indicatorsobtained from third-party pricing services who use significant unobservable inputs to estimate the fair value.
Prices received from third-party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of inactive markets include:the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third-party pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increaseservices. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the disparity between prices provided by different pricing services forvaluation methodology. The Company also considers the same security, unreasonably large bid-offer spreadsresults of its exception reporting controls 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 techniquesany resulting price challenges 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.arise.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
DerivativesOther Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in certainless active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include interest rate swaps and the majority of options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements. Structured derivatives that are used by RiverSource Life to hedge its exposure to marketThe counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at December 31, 2011 and 2010. See Note 16 for further information on the credit risk of derivative instruments and related to certain variable annuity riders are classified as Level 3. RiverSource Life settled these derivatives in the second quarter of 2009 and has not entered into any additional structured derivatives since then.collateral.
Liabilities
Embedded DerivativesFuture Policy Benefits
Variable Annuity Riders — GMAB and GMWB
RiverSource LifeThe Company values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions (such as, market implied equity volatility and the LIBOR swap curve) and incorporate significant unobservable inputs related to contractholder behavior assumptions (such as withdrawals and lapse rates) and margins for risk, profit and expenses that RiverSource Lifethe Company believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of RiverSource Life’sthe Company’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.
Equity Indexed Annuities
RiverSource Life The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its equity indexed annuities.EIA and IUL products. The inputs to these calculations are primarily market observable.observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as Level 2.
Other Liabilities
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The embeddedfair value of derivatives that are traded in less active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The Company’s nonperformance risk associated with uncollateralized derivative liability attributable toliabilities was immaterial at December 31, 2011 and 2010. See Note 16 for further information on the provisionscredit risk of RiverSource Life’s equity indexed annuities is recorded in future policy benefits.derivative instruments and related collateral.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
|
| December 31, 2009 |
|
| December 31, 2011 |
| ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Corporate debt securities |
| $ | — |
| $ | 13,755 |
| $ | 1,239 |
| $ | 14,994 |
|
| $ | — |
| $ | 15,076 |
| $ | 1,342 |
| $ | 16,418 |
|
Residential mortgage backed securities |
| — |
| 2,424 |
| 2,772 |
| 5,196 |
|
| — |
| 4,255 |
| 54 |
| 4,309 |
| ||||||||
Commercial mortgage backed securities |
| — |
| 3,968 |
| 72 |
| 4,040 |
|
| — |
| 3,615 |
| 16 |
| 3,631 |
| ||||||||
State and municipal obligations |
| — |
| 1,096 |
| — |
| 1,096 |
| |||||||||||||||||
Asset backed securities |
| — |
| 665 |
| 215 |
| 880 |
|
| — |
| 771 |
| 137 |
| 908 |
| ||||||||
State and municipal obligations |
| — |
| 613 |
| — |
| 613 |
| |||||||||||||||||
Foreign government bonds and obligations |
| — |
| 144 |
| — |
| 144 |
| |||||||||||||||||
U.S. government and agencies obligations |
| 11 |
| 147 |
| — |
| 158 |
|
| 10 |
| 47 |
| — |
| 57 |
| ||||||||
Foreign government bonds and obligations |
| — |
| 107 |
| — |
| 107 |
| |||||||||||||||||
Other structured investments |
| — |
| — |
| 11 |
| 11 |
|
| — |
| — |
| 14 |
| 14 |
| ||||||||
Total Available-for-Sale securities: Fixed maturities |
| 11 |
| 21,679 |
| 4,309 |
| 25,999 |
|
| 10 |
| 25,004 |
| 1,563 |
| 26,577 |
| ||||||||
Common and preferred stocks |
| — |
| 23 |
| — |
| 23 |
| |||||||||||||||||
Common stocks |
| 1 |
| 1 |
| — |
| 2 |
| |||||||||||||||||
Trading securities |
| — |
| 36 |
| — |
| 36 |
|
| — |
| 25 |
| — |
| 25 |
| ||||||||
Cash equivalents |
| 2 |
| 801 |
| — |
| 803 |
|
| — |
| 809 |
| — |
| 809 |
| ||||||||
Other assets |
| — |
| 615 |
| — |
| 615 |
| |||||||||||||||||
Other assets: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Interest rate derivative contracts |
| — |
| 1,801 |
| — |
| 1,801 |
| |||||||||||||||||
Equity derivative contracts |
| 274 |
| 1,041 |
| — |
| 1,315 |
| |||||||||||||||||
Credit derivative contracts |
| — |
| 1 |
| — |
| 1 |
| |||||||||||||||||
Foreign currency derivative contracts |
| — |
| 7 |
| — |
| 7 |
| |||||||||||||||||
Total other assets |
| 274 |
| 2,850 |
| — |
| 3,124 |
| |||||||||||||||||
Separate account assets |
| — |
| 54,267 |
| — |
| 54,267 |
|
| — |
| 63,174 |
| — |
| 63,174 |
| ||||||||
Total assets at fair value |
| $ | 13 |
| $ | 77,421 |
| $ | 4,309 |
| $ | 81,743 |
|
| $ | 285 |
| $ | 91,863 |
| $ | 1,563 |
| $ | 93,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Future policy benefits |
| $ | — |
| $ | 9 |
| $ | 299 |
| $ | 308 |
| |||||||||||||
Other liabilities |
| — |
| 757 |
| — |
| 757 |
| |||||||||||||||||
Future policy benefits: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
EIA embedded derivatives |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
| |||||||||||||
IUL embedded derivatives |
| — |
| 3 |
| — |
| 3 |
| |||||||||||||||||
GMWB and GMAB embedded derivatives |
| — |
| — |
| 1,585 |
| 1,585 |
| |||||||||||||||||
Total future policy benefits |
| — |
| 5 |
| 1,585 |
| 1,590 | (1) | |||||||||||||||||
Other liabilities: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Interest rate derivative contracts |
| — |
| 1,198 |
| — |
| 1,198 |
| |||||||||||||||||
Equity derivative contracts |
| 297 |
| 734 |
| — |
| 1,031 |
| |||||||||||||||||
Foreign currency derivative contracts |
| — |
| 10 |
| — |
| 10 |
| |||||||||||||||||
Total other liabilities |
| 297 |
| 1,942 |
| — |
| 2,239 |
| |||||||||||||||||
Total liabilities at fair value |
| $ | — |
| $ | 766 |
| $ | 299 |
| $ | 1,065 |
|
| $ | 297 |
| $ | 1,947 |
| $ | 1,585 |
| $ | 3,829 |
|
(1)The Company’s adjustment for nonperformance risk resulted in a $506 million cumulative decrease to the embedded derivative liability.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| December 31, 2010 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
|
| (in millions) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
| $ | — |
| $ | 14,637 |
| $ | 1,317 |
| $ | 15,954 |
|
Residential mortgage backed securities |
| — |
| 1,915 |
| 2,618 |
| 4,533 |
| ||||
Commercial mortgage backed securities |
| — |
| 4,065 |
| 30 |
| 4,095 |
| ||||
Asset backed securities |
| — |
| 681 |
| 227 |
| 908 |
| ||||
State and municipal obligations |
| — |
| 770 |
| — |
| 770 |
| ||||
U.S. government and agencies obligations |
| 11 |
| 51 |
| — |
| 62 |
| ||||
Foreign government bonds and obligations |
| — |
| 107 |
| — |
| 107 |
| ||||
Other structured investments |
| — |
| — |
| 13 |
| 13 |
| ||||
Total Available-for-Sale securities: Fixed maturities |
| 11 |
| 22,226 |
| 4,205 |
| 26,442 |
| ||||
Common stocks |
| 1 |
| 1 |
| — |
| 2 |
| ||||
Trading securities |
| — |
| 26 |
| — |
| 26 |
| ||||
Cash equivalents |
| — |
| 76 |
| — |
| 76 |
| ||||
Other assets: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
| — |
| 366 |
| — |
| 366 |
| ||||
Equity derivative contracts |
| 32 |
| 323 |
| — |
| 355 |
| ||||
Credit derivative contracts |
| — |
| 4 |
| — |
| 4 |
| ||||
Total other assets |
| 32 |
| 693 |
| — |
| 725 |
| ||||
Separate account assets |
| — |
| 63,795 |
| — |
| 63,795 |
| ||||
Total assets at fair value |
| $ | 44 |
| $ | 86,817 |
| $ | 4,205 |
| $ | 91,066 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Future policy benefits: |
|
|
|
|
|
|
|
|
| ||||
EIA embedded derivatives |
| $ | — |
| $ | 3 |
| $ | — |
| $ | 3 |
|
GMWB and GMAB embedded derivatives |
| — |
| — |
| 421 |
| 421 |
| ||||
Total future policy benefits |
| — |
| 3 |
| 421 |
| 424 | (1) | ||||
Other liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
| — |
| 379 |
| — |
| 379 |
| ||||
Equity derivative contracts |
| 18 |
| 647 |
| — |
| 665 |
| ||||
Credit derivative contracts |
| — |
| 1 |
| — |
| 1 |
| ||||
Total other liabilities |
| 18 |
| 1,027 |
| — |
| 1,045 |
| ||||
Total liabilities at fair value |
| $ | 18 |
| $ | 1,030 |
| $ | 421 |
| $ | 1,469 |
|
(1)The Company’s adjustment for nonperformance risk resulted in a $197 million cumulative decrease to the embedded derivative liability.
|
| 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 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 | ) | ||||||
|
| Available-for-Sale Securities: Fixed Maturities |
| Future Policy |
| |||||||||||||||||
|
| Corporate |
| Residential |
| Commercial |
| Asset |
| Other |
| Total |
| GMWB and |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
Balance, January 1, 2011 |
| $ | 1,317 |
| $ | 2,618 |
| $ | 30 |
| $ | 227 |
| $ | 13 |
| $ | 4,205 |
| $ | (421 | ) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| 7 |
| 48 |
| — |
| 3 |
| 1 |
| 59 | (1) | (1,007 | )(2) | |||||||
Other comprehensive income |
| 12 |
| (73 | ) | — |
| (8 | ) | (2 | ) | (71 | ) | — |
| |||||||
Purchases |
| 178 |
| 26 |
| 71 |
| — |
| 3 |
| 278 |
| — |
| |||||||
Sales |
| (50 | ) | (3 | ) | — |
| — |
| — |
| (53 | ) | — |
| |||||||
Issues |
| — |
| — |
| — |
| — |
| — |
| — |
| (149 | ) | |||||||
Settlements |
| (117 | ) | (456 | ) | — |
| (18 | ) | (1 | ) | (592 | ) | (8 | ) | |||||||
Transfers into Level 3 |
| 7 |
| — |
| 1 |
| — |
| — |
| 8 |
| — |
| |||||||
Transfers out of Level 3 |
| (12 | ) | (2,106 | ) | (86 | ) | (67 | ) | — |
| (2,271 | ) | — |
| |||||||
Balance, December 31, 2011 |
| $ | 1,342 |
| $ | 54 |
| $ | 16 |
| $ | 137 |
| $ | 14 |
| $ | 1,563 |
| $ | (1,585 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Changes in unrealized gains (losses) relating to assets and liabilities held at December 31, 2011 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net investment income |
| $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | — |
|
Net realized investment gains (losses) |
| — |
| (23 | ) | — |
| — |
| 1 |
| (22 | ) | — |
| |||||||
Benefits, claims, losses and settlement expenses |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,035 | ) |
(1) Represents a $7$26 million loss included in net realized investment gains (losses) and a $81an $85 million gain included in net investment income in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(3)Represents securities with a fair value of $79 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service net of a security with a fair value of $9 million that was transferred to Level 3 as the fair value of the security is now based on broker quotes.
|
|
|
|
|
|
|
| Purchases, |
|
|
|
|
| ||||||
|
|
|
| Total Gains |
| Sales, |
|
|
|
|
| ||||||||
|
|
|
| (Losses) Included in |
| Issuances |
| Transfers |
|
|
| ||||||||
|
| Balance, |
|
|
| Other |
| and |
| In/(Out) |
| Balance, |
| ||||||
|
| January 1, |
| Net |
| Comprehensive |
| Settlements, |
| of |
| December 31, |
| ||||||
|
| 2008 |
| Income |
| Loss |
| Net |
| Level 3 |
| 2008 |
| ||||||
|
| (in millions) |
| ||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt securities |
| $ | 1,271 |
| $ | (30 | ) | $ | (152 | ) | $ | (3 | ) | $ | — |
| $ | 1,086 |
|
Residential mortgage backed securities |
| 417 |
| (144 | ) | (134 | ) | 162 |
| 219 |
| 520 |
| ||||||
Commercial mortgage backed securities |
| 5 |
| — |
| — |
| (2 | ) | — |
| 3 |
| ||||||
Asset backed securities |
| 115 |
| 1 |
| (24 | ) | 3 |
| — |
| 95 |
| ||||||
Other structured investments |
| 2 |
| 4 |
| 6 |
| (3 | ) | — |
| 9 |
| ||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities |
| 1,810 |
| (169 | )(1) | (304 | ) | 157 |
| 219 | (3) | 1,713 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other assets |
| 280 |
| 149 | (2) | — |
| (229 | ) | — |
| 200 |
| ||||||
Future policy benefits |
| (158 | ) | (1,611 | )(2) | — |
| (63 | ) | — |
| (1,832 | ) | ||||||
Other liabilities |
| — |
| (9) | (2) | — |
| 9 |
| — |
| — |
| ||||||
|
| Available-for-Sale Securities: Fixed Maturities |
| Future Policy |
| |||||||||||||||||
|
| Corporate |
| Residential |
| Commercial |
| Asset |
| Other |
| Total |
| GMWB and |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
Balance, January 1, 2010 |
| $ | 1,239 |
| $ | 2,772 |
| $ | 72 |
| $ | 215 |
| $ | 11 |
| $ | 4,309 |
| $ | (299 | ) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| 1 |
| 54 |
| 1 |
| 6 |
| 2 |
| 64 | (1) | 4 | (2) | |||||||
Other comprehensive income |
| 30 |
| 190 |
| 10 |
| 22 |
| — |
| 252 |
| — |
| |||||||
Purchases, sales, issues and settlements, net |
| 22 |
| (398 | ) | 91 |
| (3 | ) | — |
| (288 | ) | (126 | ) | |||||||
Transfers into Level 3 |
| 25 |
| — |
| — |
| — |
| — |
| 25 |
| — |
| |||||||
Transfers out of Level 3 |
| — |
| — |
| (144 | ) | (13 | ) | — |
| (157 | ) | — |
| |||||||
Balance, December 31, 2010 |
| $ | 1,317 |
| $ | 2,618 |
| $ | 30 |
| $ | 227 |
| $ | 13 |
| $ | 4,205 |
| $ | (421 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Changes in unrealized gains (losses) relating to assets and liabilities held at December 31, 2010 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net investment income |
| $ | — |
| $ | 78 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | 83 |
| $ | — |
|
Net realized investment gains (losses) |
| — |
| (26 | ) | — |
| — |
| — |
| (26 | ) | — |
| |||||||
Benefits, claims, losses and settlement expenses |
| — |
| — |
| — |
| — |
| — |
| — |
| (15 | ) |
(1) Represents a $176$21 million loss included in net realized investment gains (losses) and a $7an $85 million gain included in net investment income in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
Represents primeRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its GMWB and GMAB embedded derivatives was an increase of $168 million and $28 million, net of DAC and DSIC amortization, for the years ended December 31, 2011 and 2010, respectively.
During the year ended December 31, 2011, transfers out of Level 3 to Level 2 included certain non-agency residential mortgage backed securities previouslyand sub-prime non-agency residential mortgage backed securities classified as asset backed securities with a fair value of $2.2 billion. The transfers reflect improved pricing transparency of these securities, a continuing trend of increased activity in the non-agency residential mortgage backed security market and increased observability of significant inputs to the valuation methodology. All other securities transferred from Level 3 to Level 2 for which management believes the market for these prime quality assets isrepresent securities with fair values that are now inactive.obtained from a third-party pricing service with observable inputs. Securities transferred from Level 2 to Level 3 represent securities with fair values that are now based on a single non-binding broker quote.
The following table presentsCompany recognizes transfers between levels of the changesfair value hierarchy as of the beginning of the quarter in unrealized gains (losses) included in net income related to Level 3 assets and liabilities held at December 31 for the year then ended:which each transfer occurred.
|
| 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,periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following table provides the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.
|
| December 31, |
| |||||||||||||||||||||||
|
| 2009 |
| 2008 |
|
| December 31, |
| ||||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
|
| 2011 |
| 2010 |
| ||||||||||||
|
| (in millions) |
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (in millions) |
| ||||||||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial mortgage loans, net |
| $ | 2,532 |
| $ | 2,519 |
| $ | 2,737 |
| $ | 2,506 |
|
| $ | 2,473 |
| $ | 2,650 |
| $ | 2,470 |
| $ | 2,558 |
|
Policy loans |
| 715 |
| 790 |
| 722 |
| 779 |
|
| 739 |
| 713 |
| 729 |
| 805 |
| ||||||||
Other investments |
| 226 |
| 245 |
| 248 |
| 202 |
|
| 308 |
| 311 |
| 210 |
| 224 |
| ||||||||
Restricted cash |
| 184 |
| 184 |
| — |
| — |
|
| 26 |
| 26 |
| 66 |
| 66 |
| ||||||||
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Future policy benefits |
| $ | 15,540 |
| $ | 15,657 |
| $ | 13,116 |
| $ | 12,418 |
|
| $ | 15,064 |
| $ | 16,116 |
| $ | 15,328 |
| $ | 15,768 |
|
Separate account liabilities |
| 406 |
| 406 |
| 386 |
| 386 |
|
| 345 |
| 345 |
| 395 |
| 395 |
| ||||||||
Line of credit with Ameriprise Financial |
| 300 |
| 300 |
| — |
| — |
|
| 300 |
| 300 |
| 3 |
| 3 |
| ||||||||
Borrowings under repurchase agreements |
| 504 |
| 502 |
| 397 |
| 397 |
| |||||||||||||||||
Other liabilities |
| 267 |
| 263 |
| 188 |
| 182 |
|
Commercial mortgage loans, netMortgage Loans, Net
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics, including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for RiverSource Life’sthe Company’s estimate of the amount recoverable on the loan.
Policy loansLoans
The fair value of policy loans is determined using discounted cash flows.
Other investmentsInvestments
Other investments primarily consist of syndicated loans.loans and an investment in Federal Home Loan Bank of Des Moines (“FHLB”). The fair value of syndicated loans is obtained from a nationally-recognizedthird-party pricing service. The carrying value of the investment in FHLB is considered a reasonable estimate of the fair value, as this represents the stated exit price for this investment.
Restricted Cash
Restricted cash is generally set aside for specific business transactions and restrictions are specific to RiverSource Lifethe Company and does not transfer to third partythird-party market participants,participants; therefore, the carrying value amount is a reasonable estimate of fair value.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future policy benefitsPolicy Benefits
The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior and RiverSource Life’sthe Company’s nonperformance risk specific to these liabilities. The fair value of other liabilities including non-life contingent fixed annuities in payout status, equity indexed annuityEIA 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 liabilitiesAccount Liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. Carrying value is a reasonable estimate of the fair value as it represents the exit value as evidenced by withdrawal transactions between contractholders and RiverSource Life.the Company. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.
Line of creditCredit with Ameriprise Financial
The fair value of the line of credit is determined by discounting cash flows with an adjustment for RiverSource Life’sthe Company’s nonperformance risk specific to this liability. Due
Borrowings under Repurchase Agreements
The fair value of borrowings under agreements to repurchase is obtained from a third-party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the short-term naturenonperformance risk.
Other Liabilities
Other liabilities consisted of future funding commitments to affordable housing partnerships. The fair value of the line of credit, the carrying valuefuture funding commitments is an approximation of the fair value.determined by discounting cash flows.
12.14. Related Party Transactions
RiverSource Investments,Columbia Management Investment Advisers, LLC is the investment manager for the proprietary mutual funds used as investment options by RiverSource Life’sthe Company’s variable annuity contractholders and variable life insurance policyholders. RiverSource LifeThe Company provides all fund management services, other than investment management, and is compensated for the administrative services it provides. For the years ended December 31, 2011, 2010 and 2009, 2008 and 2007, RiverSource Lifethe Company received $87$222 million, $101$136 million and $97$87 million, respectively, from RiverSource Investments,Columbia Management Investment Advisers, LLC for these services.
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 the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). RiverSource Life’s share of the total 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 $2 million, nil and $3 million in 2009, 2008 and 2007, respectively.
RiverSource Life participates in the defined benefit health care plans of Ameriprise Financial that provide health care and life insurance benefits to retired employees and retired financial advisors. The plans include participant contributions and service related eligibility requirements. Upon retirement, such employees are considered to have been employees of Ameriprise Financial. Ameriprise Financial expenses these benefits and allocates the expenses to its subsidiaries. The cost of these plans charged to operations in 2009, 2008 and 2007 was nil, $1 million and $2 million, respectively.
Charges by Ameriprise Financial and affiliated companies to RiverSource Lifethe Company for use of joint facilities, technology support, marketing services and other services aggregated $530 million, $527 million and $580 million $673 millionfor 2011, 2010 and $909 million for 2009, 2008 and 2007, respectively. Certain of these costs are included in DAC. Expenses allocated to RiverSource Lifethe Company may not be reflective of expenses that would have been incurred by RiverSource Lifethe Company on a stand-alone basis.
Dividends paid and received by RiverSource Life Insurance Company 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 |
| — |
| |||
|
| Years Ended December 31, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Cash dividends paid to Ameriprise Financial |
| $ | 750 |
| $ | 500 |
| $ | — |
|
Non-cash dividends paid to Ameriprise Financial |
| 850 |
| — |
| — |
| |||
Cash dividends received from RiverSource Life of NY |
| 79 |
| 28 |
| — |
| |||
Cash dividends received from RTA |
| 53 |
| 63 |
| 22 |
| |||
Cash dividends received from RiverSource REO 1, LLC |
| 3 |
| — |
| — |
| |||
Notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds. See Note 1315 for additional information.
During 2011, RiverSource Life Insurance Company made cash contributions to RTA of $111 million for ongoing funding commitments related to affordable housing partnership investments.
During 2010, the Company received a non-cash capital contribution of $14 million comprised of affordable housing partnership investments from Ameriprise Financial.
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.RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 1011 for more information on RiverSource Life’sthe Company’s lines of credit.
There were no amountsBeginning in 2010, the Company’s taxable income was included in other liabilities at December 31, 2009 and 2008 payable tothe consolidated federal income tax return of Ameriprise Financial. Amounts due from Ameriprise Financial for federal income taxes.taxes were $86 million and $31 million at December 31, 2011 and 2010, respectively.
During 2009, RiverSource Lifethe Company sold corporate bonds of $27 million to Ameriprise Financial and recognized a gain of $9 million.
13.15. 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 $433$(296) million and $173$810 million as of December 31, 20092011 and 2008,2010, respectively.
In addition, dividends or distributions, whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceed the 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:
|
| 2009 |
| 2008 |
| 2007 |
|
| 2011 |
| 2010 |
| 2009 |
| ||||||
|
| (in millions) |
|
| (in millions) |
| ||||||||||||||
|
| (unaudited) |
|
|
|
|
|
| (unaudited) |
|
|
|
|
| ||||||
Statutory net gain (loss) from operations(1) |
| $ | 1,793 |
| $ | (1,184 | ) | $ | 523 |
|
| $ | (475 | ) | $ | 1,200 |
| $ | 1,793 |
|
Statutory net income (loss)(1) |
| 1,887 |
| (1,407 | ) | 555 |
|
| (599 | ) | 1,112 |
| 1,887 |
| ||||||
Statutory capital and surplus |
| 3,371 |
| 2,529 |
| 2,820 |
|
| 2,681 |
| 3,735 |
| 3,371 |
|
(1) An increaseStatutory net gain (loss) from operations and statutory net income (loss) are significantly impacted by changes in statutory reserves for variable annuity guaranteed benefits, contributed significantly to the loss in 2008, but washowever these impacts are substantially offset by unrealized gains (losses) on derivatives which are not included in the statutory income statement, but are 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 penalties related to unrecognized tax benefits as a component of the income tax provision. RiverSource Life recognized a net reduction of $1 million, $14 million and $11 million in interest and penalties for the year ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009 and 2008, RiverSource Life had a receivable of $16 million and $15 million, respectively, related to accrued interest and penalties.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. However, there are a number of open audits and quantification of a range cannot be made at this time.
RiverSource Life or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, RiverSource Life is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 1997. The Internal Revenue Service (“IRS”), as part of the overall examination of the American Express Company consolidated return completed its field examination of the RiverSource Life’s income tax returns for 1997 through 2002 during 2008 and completed its field examination of 2003 through 2004 in the third quarter of 2009. However, for federal income tax purposes, these years continue to remain open as a consequence of certain issues under appeal. In the fourth quarter of 2008, the IRS commenced an examination of RiverSource Life’s U.S. income tax returns for 2005 through 2007, which is expected to be completed in 2010. RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 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 DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only. Additionally, included in the Administration’s 2011 Revenue Proposals is a provision to modify the DRD for life insurance companies’ separate accounts, which if enacted could significantly reduce the DRD tax benefits RiverSource Life receives, prospectively, beginning in 2011. For the year ended December 31, 2009, RiverSource Life recorded a benefit of approximately $62 million related to the current year’s separate account DRD.
As a result of the separation of Ameriprise Financial from American Express, RiverSource Life and subsidiaries will not be able to file a consolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010.
The items comprising other comprehensive income (loss) are presented net of the following income tax provision (benefit) amounts:
|
| Years Ended December 31, |
| |||||||
|
| 2009 |
| 2008 |
| 2007 |
| |||
|
|
|
| (in millions) |
|
|
| |||
Net unrealized securities gains (losses) |
| $ | 166 |
| $ | (302 | ) | $ | 28 |
|
Net unrealized derivative gains |
| 2 |
| 2 |
| — |
| |||
Net income tax provision (benefit) |
| $ | 168 |
| $ | (300 | ) | $ | 28 |
|
15.16. Derivatives and Hedging Activities
Derivative instruments enable RiverSource Lifethe Company 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 LifeThe Company primarily enters into derivative agreements for risk management purposes related to RiverSource Life’sthe Company’s products and operations.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company currently uses derivatives as economic hedges and occasionally holds derivatives designated for hedge accounting.accounting hedges. 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:
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 |
|
|
|
|
| Asset |
|
|
| Liability |
| ||||||||
Derivatives not designated |
| Balance Sheet |
| December 31, |
| December 31, |
| Balance Sheet Location |
| December 31, |
| December 31, |
| ||||
|
|
|
| (in millions) |
|
|
| (in millions) |
| ||||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| Other assets |
| $ | 1,801 |
| $ | 366 |
| Other liabilities |
| $ | 1,198 |
| $ | 379 |
|
Equity contracts |
| Other assets |
| 1,314 |
| 354 |
| Other liabilities |
| 1,031 |
| 665 |
| ||||
Credit contracts |
| Other assets |
| 1 |
| 4 |
| Other liabilities |
| — |
| 1 |
| ||||
Foreign currency contracts |
| Other assets |
| 7 |
| — |
| Other liabilities |
| 10 |
| — |
| ||||
Embedded derivatives(1) |
| Not applicable |
| — |
| — |
| Future policy benefits |
| 1,585 |
| 421 |
| ||||
Total GMWB and GMAB |
|
|
| 3,123 |
| 724 |
|
|
| 3,824 |
| 1,466 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
EIA |
| Other assets |
| — |
| 1 |
| Other liabilities |
| — |
| — |
| ||||
EIA embedded derivatives |
| Not applicable |
| — |
| — |
| Future policy benefits |
| 2 |
| 3 |
| ||||
IUL |
| Other assets |
| 1 |
| — |
| Other liabilities |
| — |
| — |
| ||||
IUL embedded derivatives |
| Not applicable |
| — |
| — |
| Future policy benefits |
| 3 |
| — |
| ||||
Total other |
|
|
| 1 |
| 1 |
|
|
| 5 |
| 3 |
| ||||
Total derivatives |
|
|
| $ | 3,124 |
| $ | 725 |
|
|
| $ | 3,829 |
| $ | 1,469 |
|
(1)The fair values of GMWB and GMAB embedded derivatives fluctuate primarily based on changes in equity, interest rate and credit markets.
See Note 1113 for additional information regarding RiverSource Life’sthe Company’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 yearyears ended December 31, 2009:31:
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 | ) |
Derivatives not designated |
| Location of Gain (Loss) on |
| Amount of Gain (Loss) on |
| |||||||
as hedging instruments |
| Derivatives Recognized in Income |
| 2011 |
| 2010 |
| 2009 |
| |||
|
|
|
| (in millions) |
| |||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
| |||
Interest rate contracts |
| Benefits, claims, losses and settlement expenses |
| $ | 709 |
| $ | 95 |
| $ | (435 | ) |
Equity contracts |
| Benefits, claims, losses and settlement expenses |
| 326 |
| (370 | ) | (1,245 | ) | |||
Credit contracts |
| Benefits, claims, losses and settlement expenses |
| (12 | ) | (44 | ) | (65 | ) | |||
Foreign currency contracts |
| Benefits, claims, losses and settlement expenses |
| (2 | ) | — |
| — |
| |||
Embedded derivatives(1) |
| Benefits, claims, losses and settlement expenses |
| (1,165 | ) | (121 | ) | 1,533 |
| |||
Total GMWB and GMAB |
|
|
| (144 | ) | (440 | ) | (212 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Other derivatives: |
|
|
|
|
|
|
|
|
| |||
Equity |
|
|
|
|
|
|
|
|
| |||
GMDB |
| Benefits, claims, losses and settlement expenses |
| — |
| (4 | ) | (10 | ) | |||
EIA |
| Interest credited to fixed accounts |
| (1 | ) | 2 |
| 4 |
| |||
EIA embedded derivatives |
| Interest credited to fixed accounts |
| 1 |
| 7 |
| 7 |
| |||
IUL |
| Interest credited to fixed accounts |
| 1 |
| — |
| — |
| |||
IUL embedded derivatives |
| Interest credited to fixed accounts |
| (3 | ) | — |
| — |
| |||
Total other |
|
|
| (2 | ) | 5 |
| 1 |
| |||
Total derivatives |
|
|
| $ | (146 | ) | $ | (435 | ) | $ | (211 | ) |
(1)The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
RiverSource LifeThe Company 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 and credit risk related to various RiverSource Life products and transactions.transactions of the Company.
The majority of RiverSource Life’sthe Company’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
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
value of considerationsconsideration received at the beginning of the contract period, after a specified holding period, respectively. RiverSource LifeThe Company economically hedges the exposure related to non-life contingent GMWB and GMAB provisions primarily using various equity futures, equity options, total return swaps, interest rate swaptions, and interest rate swaps, variance swaps and credit default swaps. InAt December 31, 2011 and 2010, the third quartergross notional amount of 2009, RiverSource Lifederivative contracts for the Company’s GMWB and GMAB provisions was $104.7 billion and $55.5 billion, respectively. The Company had previously 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. AtAs of both December 31, 2009,2011 and 2010, the gross notional amount of these contracts was $38.7 billion and $77 million for RiverSource Life’s GMWB and GMAB provisions andCompany did not have any outstanding hedges on its GMDB provisions, respectively.provisions. The deferred premium associated with certainsome 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 Lifethe Company is scheduled to make and receive for these options:
|
| Premiums |
| Premiums |
|
| Premiums |
| Premiums |
| ||||
|
| (in millions) |
|
| (in millions) |
| ||||||||
2010 |
| $ | 189 |
| $ | 5 |
| |||||||
2011 |
| 181 |
| 4 |
| |||||||||
2012 |
| 160 |
| 3 |
|
| $ | 372 |
| $ | 41 |
| ||
2013 |
| 143 |
| 2 |
|
| 349 |
| 26 |
| ||||
2014 |
| 118 |
| 1 |
|
| 324 |
| 24 |
| ||||
2015-2024 |
| 410 |
| 4 |
| |||||||||
2015 |
| 296 |
| 22 |
| |||||||||
2016 |
| 265 |
| 15 |
| |||||||||
2017-2026 |
| 925 |
| 34 |
|
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 annuitiesEIA and IUL products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by RiverSource Lifethe Company related to equity indexed annuitiesEIA and IUL 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 Lifethe Company enters into index options and occasionally enters into futures contracts. The gross notional amount of theseEIA derivative contracts was $129$25 million and $89 million at December 31, 2009.2011 and 2010, respectively. The gross notional amount of IUL derivative contracts was $12 million at December 31, 2011.
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 annuityEIA and IUL product obligations isare also considered an embedded derivative. As captured in the tables above,derivatives. These 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 noteddiscussed above, RiverSource Lifethe Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.
Cash Flow Hedges
RiverSource LifeThe Company 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 LifeThe Company reclassifies these amounts into income as the forecasted transactions impact earnings. During the yearyears ended December 31, 2009, RiverSource Life2011 and 2010, the Company 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 Life2011, the Company 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 duringDuring the years ended December 31, 2009, 20082011 and 20072010, no hedge relationships were discontinued due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the years ended December 31, 20092011, 2010 and 2008, there were no2009, amounts recognized in earnings on derivative transactions that were ineffective. For the year ended December 31, 2007, RiverSource Life recognized $2 millionineffective were not material.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of unrealized derivative losses included in accumulated other comprehensive income related to cash flow hedges:
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Net unrealized derivative losses at January 1 |
| $ | (30 | ) | $ | (34 | ) | $ | (38 | ) |
Reclassification of realized losses(1) |
| 6 |
| 6 |
| 6 |
| |||
Income tax benefit |
| (2 | ) | (2 | ) | (2 | ) | |||
Net unrealized derivative losses at December 31 |
| $ | (26 | ) | $ | (30 | ) | $ | (34 | ) |
(1)Loss reclassified from accumulated other comprehensive income to net investment income related to ineffectiveness on its swaptions.the Consolidated Statements of Income.
Currently, the longest period of time over which RiverSource Lifethe Company is hedging exposure to the variability in future cash flows is 9seven years and relates to interest credited on forecasted fixed premium product sales.
Credit Risk
Credit risk associated with RiverSource Life’sthe Company’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 Lifethe Company 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 whereverwhenever practical. As of December 31, 2009, RiverSource Life2011 and 2010, the Company held $88$635 million and $25 million, respectively, in cash and cash equivalents and recorded a corresponding liability in other liabilities for collateral RiverSource Lifethe Company is obligated to return to counterparties. As of December 31, 2009, RiverSource Life2011 and 2010, the Company had accepted additional collateral consisting of various securities with a fair market value of $22$186 million and $23 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of December 31, 2009, RiverSource Life’s2011 and 2010, the Company’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $53 million.$61 million and $25 million, respectively.
Certain of RiverSource Life’sthe Company’s derivative instruments contain provisions that adjust the level of collateral RiverSource Lifethe Company is required to post based on RiverSource Life’sthe Company’s financial strength rating (or based on the debt rating of RiverSource Life’sthe Company’s parent, Ameriprise Financial). Additionally, certain of RiverSource Life’sthe Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if RiverSource Lifethe Company 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’sthe Company’s counterparty could require immediate settlement of any net liability position. At December 31, 2009,2011 and 2010, the aggregate fair value of all derivative instruments in a net liability position containing such credit risk features was $296 million.$106 million and $412 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 20092011 and 2010 was $269 million.$98 million and $406 million, respectively. If the credit risk features of derivative contracts that were in a net liability position at December 31, 20092011 and 2010 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $27 million.$8 million and $6 million, respectively.
17.Income Taxes
The Company qualifies as a life insurance company for federal income tax purposes. As such, the Company is subject to the Internal Revenue Code provisions applicable to life insurance companies. The Company provides for income taxes on a separate return basis, except that, under an agreement between Ameriprise Financial and the Company, tax benefits are recognized for losses to the extent they can be used in the consolidated return. It is the policy of Ameriprise Financial that it will reimburse its subsidiaries for any tax benefits recorded.
16.RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income tax provision were as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Current income tax: |
|
|
|
|
|
|
| |||
Federal |
| $ | 137 |
| $ | (167 | ) | $ | 325 |
|
State |
| 3 |
| 3 |
| 1 |
| |||
Total current income tax |
| 140 |
| (164 | ) | 326 |
| |||
Deferred income tax: |
|
|
|
|
|
|
| |||
Federal |
| 29 |
| 417 |
| (80 | ) | |||
State |
| (1 | ) | (1 | ) | (1 | ) | |||
Total deferred income tax |
| 28 |
| 416 |
| (81 | ) | |||
Total income tax provision |
| $ | 168 |
| $ | 252 |
| $ | 245 |
|
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, |
| ||||
|
| 2011 |
| 2010 |
| 2009 |
|
Tax at U.S. statutory rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
Changes in taxes resulting from: |
|
|
|
|
|
|
|
Tax-exempt interest and dividend income |
| (13.5 | ) | (6.6 | ) | (7.2 | ) |
State taxes, net of federal benefit |
| 0.1 |
| 0.1 |
| — |
|
Low income housing credit |
| (1.6 | ) | (1.4 | ) | (2.0 | ) |
Foreign tax credit, net of addback |
| (1.6 | ) | (1.1 | ) | (1.0 | ) |
Taxes applicable to prior years |
| — |
| (1.9 | ) | 0.1 |
|
Other, net |
| (0.6 | ) | — |
| — |
|
Income tax provision |
| 17.8 | % | 24.1 | % | 24.9 | % |
The Company’s effective tax rate was 17.8%, 24.1% and 24.9% for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in the effective tax rate compared to the prior year primarily reflects a favorable audit settlement related to the dividends received deduction as well as lower pretax income relative to tax advantaged items.
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 the Company’s deferred income tax assets and liabilities are reflected in the following table:
|
| December 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in millions) |
| ||||
Deferred income tax assets: |
|
|
|
|
| ||
Liabilities for future policy benefits |
| $ | 1,589 |
| $ | 1,306 |
|
Investment related |
| — |
| 159 |
| ||
Capital loss and tax credit carryforwards |
| 30 |
| 31 |
| ||
Gross deferred income tax assets |
| 1,619 |
| 1,496 |
| ||
|
|
|
|
|
| ||
Deferred income tax liabilities: |
|
|
|
|
| ||
DAC |
| 1,379 |
| 1,429 |
| ||
Net unrealized gains on Available-for-Sale securities |
| 441 |
| 364 |
| ||
Investment related |
| 190 |
| — |
| ||
DSIC |
| 180 |
| 191 |
| ||
Other |
| 49 |
| 26 |
| ||
Gross deferred income tax liabilities |
| 2,239 |
| 2,010 |
| ||
Net deferred income tax liabilities |
| $ | (620 | ) | $ | (514 | ) |
The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in 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 as well as future deductible capital losses realized 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 INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will not allow the Company to realize all of certain state NOLs and therefore a valuation allowance of $4 million was established as of December 31, 2011.
The Company has tax benefits related to capital loss carryforwards of $30 million which expire beginning December 31, 2015.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Balance at January 1 |
| $ | 83 |
| $ | (77 | ) | $ | (89 | ) |
Additions (reductions) based on tax positions related to the current year |
| (1 | ) | — |
| 1 |
| |||
Additions for tax positions of prior years |
| 79 |
| 322 |
| 18 |
| |||
Reductions for tax positions of prior years |
| (7 | ) | (196 | ) | (7 | ) | |||
Settlements |
| (20 | ) | 34 |
| — |
| |||
Balance at December 31 |
| $ | 134 |
| $ | 83 |
| $ | (77 | ) |
If recognized, approximately $12 million, $39 million and $49 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2011, 2010 and 2009, respectively, would affect the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $57 million and reductions of $8 million and $1 million in interest and penalties for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011 and 2010, the Company had a payable of $33 million and a receivable of $24 million, respectively, related to accrued interest and penalties.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $133 million in the next 12 months.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Internal Revenue Service (“IRS”) had completed its field examination of the 1997 through 2007 tax returns in recent years. However, for federal income tax purposes, these years except for 2007, continue to remain open as a consequence of certain issues under appeal. The IRS is currently auditing the Company’s income tax returns for 2008 and 2009. The Company or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1999 through 2009. The Company’s federal and state income tax returns remain open for years after 2009.
It is possible there will be corporate tax reform in the next few years. While impossible to predict, corporate tax reform is likely to include a reduction in the corporate tax rate coupled with reductions in tax preferred items. Any changes could have a material impact on the Company’s income tax expense and deferred tax balances.
The items comprising other comprehensive income (loss) are presented net of the following income tax provision amounts:
|
| Years Ended December 31, |
| |||||||
|
| 2011 |
| 2010 |
| 2009 |
| |||
|
| (in millions) |
| |||||||
Net unrealized securities gains |
| $ | 75 |
| $ | 157 |
| $ | 587 |
|
Net unrealized derivative losses |
| (2 | ) | (2 | ) | (2 | ) | |||
Net income tax provision |
| $ | 73 |
| $ | 155 |
| $ | 585 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Commitments and Contingencies
At December 31, 20092011 and 2008, RiverSource Life2010, the Company had no material commitments to purchase investments other than mortgage loan fundings. See Note 46 for additional information.
RiverSource Life’sThe Company’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31, 2009,2011, these guarantees range up to 5.0%. To the extent the yield on RiverSource Life’sthe Company’s invested assets portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’sthe Company’s profitability would be negatively affected.
The SecuritiesInsurance companies have 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 examinations and other inquiries of insurance companies regarding sales and marketing practices (including sales 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, compensationolder consumers and disclosure of revenue sharing arrangements. RiverSource Life has received requests for informationpractices), claims handling, and has been contacted by regulatory authorities concerning itsunclaimed property and escheatment practices and procedures. With regard to an industry-wide investigation of unclaimed property and escheatment practices and procedures, the Company is cooperating fullyresponding to regulatory audits, market conduct examinations and other inquires (including inquiries from the States of Minnesota and New York). The Company has cooperated and will continue to cooperate with thesethe applicable regulators regarding their inquiries.
RiverSource LifeThe Company 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 LifeThe Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedingsinvestigation or proceeding that wouldis likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However,Notwithstanding the foregoing, it is possible that the outcome of any such proceedingscurrent or future legal, arbitration or regulatory proceeding could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
The Company is 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, the Company could be adversely affected by the requirement to pay assessments to the guaranty fund associations. The financial crisis of 2008 and 2009 and subsequent uncertainty and volatility in the U.S. economy and financial markets have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.
Uncertain economic conditions, heightened and sustained volatility in the financial markets and significant financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the insurance industry generally.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Disclosure Controls and Procedures
RiverSource LifeThe Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in and pursuant to Securities and Exchange Commission (“SEC”) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Life’sthe Company’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’sthe Company’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’sThe Company’s management, under the supervision and with the participation of RiverSource Life’sthe Company’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’sthe Company’s principal executive officer and chief financial officer have concluded that RiverSource Life’sthe Company’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2009.2011.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life’sthe Company’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’sthe Company’s internal control over financial reporting for RiverSource Life.the Company.
Management’s Report on Internal Control Over Financial Reporting
The management of RiverSource Lifethe Company is responsible for establishing and maintaining adequate internal control over financial reporting.
RiverSource Life’sThe Company’s internal control over financial reporting is a process designed by or under the supervision of, RiverSource Life’sthe Company’s principal executive and principal financial officers and effected by RiverSource Life’sthe Company’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;the Company;
· 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 Lifethe Company are being made only in accordance with authorizations of management and directors of RiverSource Life;the Company; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of RiverSource Life’sthe Company’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’sThe Company’s management, with the participation of its principal executive officer and chief financial officer, assessed the effectiveness of RiverSource Life’sthe Company’s internal control over financial reporting as of December 31, 2009.2011. In making this assessment, RiverSource Life’sthe Company’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 Lifethe Company believes that, as of December 31, 2009, RiverSource Life’s2011, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of RiverSource Life’sthe Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by RiverSource Life’sthe Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit RiverSource Lifethe Company to provide only management’s report in this annual report.
None.
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
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.
The Audit Committee of the Board of Directors of Ameriprise Financial has appointed Ernst & YoungPricewaterhouse Coopers LLP (“Ernst & Young”PwC’) as independent registered public accounting firm to audit the Consolidated Financial Statements of RiverSource Lifethe Company for the year ended December 31, 2011. Ernst & Young LLP (“Ernst & Young”), an independent registered public accounting firm, audited the Consolidated Financial Statements of the Company for the years ended December 31, 20092010 and 2008.2009.
Fees Paid to the Registrant’s Independent Auditor
The following table presents fees for professional services rendered by PwC and Ernst & Young for the audit of RiverSource Life’sthe Company’s financial statements for the years ended December 31, 20092011 and 20082010 and other fees billed for other services rendered by PwC and Ernst & Young during those periods.
|
| 2009 |
| 2008 |
|
| PwC |
| Ernst & |
| ||||
|
| (in thousands) |
|
| 2011 |
| 2010 |
| ||||||
Audit Fees (1) |
| $ | 2,361 |
| $ | 2,183 |
| |||||||
|
| (in thousands) |
| |||||||||||
Audit Fees(1) |
| $ | 1,729 |
| $ | 2,201 |
| |||||||
Audit-related Fees |
| 26 |
| 25 |
|
| 16 |
| 26 |
| ||||
Tax Fees |
| — |
| — |
|
| — |
| — |
| ||||
All Other Fees |
| — |
| — |
|
| — |
| 5 |
| ||||
Total |
| $ | 2,387 |
| $ | 2,208 |
|
| $ | 1,745 |
| $ | 2,232 |
|
(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 PwC and 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 PwC and Ernst & Young for RiverSource Lifethe Company 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 PwC and Ernst & Young for services to RiverSource Lifethe Company 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 20092011 and 2008,2010, 100% of the services provided by PwC and Ernst & Young for RiverSource Lifethe Company were pre-approved by the Audit Committee of Ameriprise Financial.
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | (1) and (2) | Consolidated Financial Statements and Financial Statement Schedules |
|
|
|
|
| The information required herein has been provided in Item 8. |
|
|
|
| (3) | Exhibits |
|
See Exhibit Index on pages E-1 through E-2 hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RIVERSOURCE LIFE INSURANCE COMPANY
Registrant
February |
| By | /s/ |
Date |
|
|
|
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 |
|
| /s/ |
Date |
|
|
|
|
|
| (Principal Executive Officer) |
|
|
|
|
February |
|
| /s/ Brian J. McGrane |
Date |
|
| Brian J. McGrane, Director, Executive Vice President |
|
|
| and Chief Financial Officer |
|
|
| (Principal Financial Officer) |
|
|
|
|
February |
|
| /s/ Gumer C. Alvero |
Date |
|
| Gumer C. Alvero, Director |
|
|
|
|
February |
|
| /s/ David K. Stewart |
Date |
|
| David K. Stewart, Vice President and Controller |
|
|
| (Principal Accounting Officer) |
|
|
|
|
February |
|
| /s/ |
Date |
|
|
|
February 24, 2012 | /s/ William F. Truscott | ||
Date | William F. Truscott, Director | ||
February 24, 2012 | /s/ Bridget M. Sperl | ||
Date | Bridget M. Sperl, Director | ||
February 24, 2012 | /s/ Jon Stenberg | ||
Date | Jon Stenberg, Director |
The following exhibits are filed as part of this Annual Report or, where indicated, were already filed and are hereby incorporated by reference.
3.1
| Copy of Certificate of Incorporation of IDS Life Insurance Company filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated by reference. | |
3.1.1 | Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference. | |
3.2 | Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference. | |
4.1 | Instruments defining the rights of security holders, including indentures, are incorporated by reference to Registration Statement Nos. 333-92297, 333-139763, 333-73958, 333-139759, 333-74865, 333-139760, 333-82149, 333-139761, 333-85567, 333-139762, 33-47302, 333-79311, 333-114888 and 33-28976. | |
10.1 | Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective January 1, 2007, filed as Exhibit 10.1 to Form 10-K filed on February 28, 2007, is incorporated by reference. | |
10.2 | Copy of Selling Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. effective January 1, 2007, filed as Exhibit 10.2 to Form 10-K filed on February 28, 2007, is incorporated by reference. | |
10.3 | Copy of Marketing Support Services Agreement between Ameriprise Financial Services, Inc. and RiverSource Life Insurance Company effective January 1, 2007, filed as Exhibit 10.3 to Form 10-K filed on February 28, 2007, is incorporated by reference. | |
10.4 | Copy of Investment Management and Services Agreement between RiverSource Investments, LLC (n/k/a Columbia Management Investment Advisers, LLC) and RiverSource Life Insurance Company effective January 1, 2007, filed as Exhibit 10.4 to Form 10-K filed on February 28, 2007, is incorporated by reference. | |
10.5 | Copy of Federal Income Tax Sharing Agreement between or among Ameriprise Financial, Inc. and certain subsidiaries, including RiverSource Life Insurance Company and RiverSource Life Insurance Co. of New York effective December 1, 2010, filed as Exhibit 10.5 to Form 10-K filed on February 23, 2011, is incorporated by reference. | |
10.6 | Copy of Amended and Restated Agreement by and among RiverSource Life Insurance Company, Ameriprise India Private Limited, and Ameriprise Financial, Inc. (a/k/a/ Supplementary Agreement No. 1) effective January 1, 2007, filed as Exhibit 10.6 to Form 10-K filed on February 28, 2007, is incorporated by reference. | |
10.7 | Copy of Management, Service & Marketing Support Agreement by and among Columbia Management Investments Advisers, LLC, Columbia Management Investment Services Corp. and RiverSource Life Insurance Company effective January 1, 2011, filed as Exhibit 10.7 to Form 10-K filed on February 23, 2011, is incorporated by reference. | |
10.8 | Copy of RiverSource Variable Portfolio Funds Service Agreement by and between RiverSource Distributors, Inc. and RiverSource Life Insurance Company effective January 1, 2007, filed as Exhibit 10.8 to Form 10-K filed on February 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.
*31.1 Certification of John R. Woerner, Chairman and President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *31.2 Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *32.1 Certification of John R. Woerner, Chairman and 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. *101 The following materials from RiverSource Life Insurance Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2011 and 2010; (ii) Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009; (iv) Consolidated Statements of Shareholder’s Equity for the years ended December 31, 2011, 2010 and 2009; and (v) Notes to the Consolidated Financial Statements, tagged as blocks of text. * Filed electronically herewith. *32.1Certification of Timothy V. Bechtold,