SECURITIES AND EXCHANGE COMMISSION
Washington,
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2013
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For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
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For the Transition Period from to
Commission file number File No. 033-28976
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
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| 41-0823832
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| 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 codecode: (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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
(Check one): |
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| Large accelerated filerAccelerated Filer o | | Accelerated filerFiler o |
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Non-accelerated filerNon-Accelerated Filer x
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(Do not check if a smaller reporting company) | | Smaller reporting company o |
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
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| Class | | Outstanding at February 23, 201127, 2014 |
Common Stock (par value $30 per share) | | 100,000shares |
All outstanding shares of the registrant are directly owned by Ameriprise Financial, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) andAND (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
INDEX
ITEM 1.BUSINESS
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned stock 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”).
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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.
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RiverSource Life of NY is domiciled and holds a Certificate of Authority in New York.
Effective in March and September 2010, RiverSource Life of NY withdrew its Certificates of Authority from North Dakota and Delaware, respectively, as it does not conduct business in these states. RiverSource Life of NY issues insurance and annuity products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. (“RTA”). RTA is a stock company domiciled in Delaware and is a limited partner in affordable housing partnership investments.
RiverSource Life Insurance Company and RiverSource 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.
Annuities: Product Features and Risks
RiverSource Life offers both variable and fixed annuities to a broad range of consumers through its affiliated retail broker-dealer. AFSI. In 2013, cash sales for annuities sold through AFSI were $5.5 billion, of which $5.2 billion were for variable annuity sales and $300 million were for fixed annuity sales.
In the fourth quarter of 2010, RiverSource Life discontinued the
distributionsale of variable annuities through
third partythird-party banks and
broker dealersbroker-dealers in order to focus on the distribution of its variable product offerings and sales through
its affiliated retail broker dealer. As of December 31, 2010, RiverSource Life continued to distribute fixed annuities through more than 120 third party banks and broker dealers, such as Wachovia Securities, Inc., SunTrust Securities, Inc. and Wells Fargo Securities, Inc.AFSI. In
2010,2013, RiverSource Life had total cash sales for
variable and fixed annuities through
third partythird-party banks and
broker dealersbroker-dealers of
$1.0 billion, of which $760 million pertained to variable annuity sales and $265 million pertained to fixed annuity sales.& #160; Cash sales in 2010 for variable and fixed annuities through RiverSource Life’s affiliated retail broker dealer were $5.9 billion, of which $5.4 billion pertained to variable annuity sales and $497 million pertained to fixed annuity sales.$20 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. The relative proportion between fixed and variable annuity sales is generally driven by the relative performance of the equity and fixed income markets. Fixed sales are generally stronger 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 than in times of weak performance in equity markets. The relative proportion between fixed and
vari ablevariable 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. These 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 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,
2010.RiverSource Life’s Portfolio Navigator asset allocation program is available under its variable annuities. The Portfolio Navigator program allows clients2013.
Contract purchasers can choose to
allocate their contract value to one of five funds of funds, each of which invests in1
various underlying funds. The Portfolio Navigator program is designed to allow a contract purchaser to select investment options based on the purchaser’s investment time horizon, risk tolerance and investment goals. RiverSource Life believes the Portfolio Navigator program helps a contract purchaser to tailor the performance of annuities and life insurance policiesadd optional benefit provisions to their specificcontracts to meet their needs, including guaranteed minimum death benefit (“GMDB”), guaranteed minimum withdrawal benefit (“GMWB”) and to keep investment allocations on track over time. Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC), RiverSource Life’s investment manager, serves as investment adviser for the funds of funds and all of the underlying funds in which the funds of funds invest.
guaranteed minimum accumulation benefit (“GMAB”) provisions. Approximately 98% of RiverSource Life’s overall variable annuity assets include either an optional or a guaranteed minimum death benefit (“GMDB”)standard GMDB provision and approximately 45%56% of RiverSource Life’s overall variable annuity assets include a guaranteed minimum withdrawal benefit (“GMWB”)GMWB or guaranteed minimum accumulation benefit (“GMAB”)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.
In 2012, RiverSource Life introduced the SecureSource 3® living benefit rider, an optional GMWB rider that can be added to new purchases of variable annuities for a fee. The SecureSource 3 benefit ensures a specified withdrawal amount annually for life. Clients who purchase this benefit are invested in one or more of four Portfolio Stabilizer (managed volatility) funds of funds that are designed to pursue total return while seeking to mitigate exposure to market volatility. This rider provides clients
with the security of guaranteed lifetime income, an opportunity for a less volatile investment experience and an opportunity for guaranteed income growth. Clients purchasing a new variable annuity with the optional GMAB living benefit rider are also invested in one or more of four Portfolio Stabilizer (managed volatility) funds of funds. Columbia Management Investment Advisers, LLC (“CMIA”), RiverSource Life’s investment manager, serves as investment advisor for the funds of funds and all of the underlying funds in which the funds of funds invest.
RiverSource Life’s Portfolio Navigator asset allocation program is available for new sales under its variable annuities, but as of April 2012, is no longer available for sale with a living benefit rider. 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 allow a contract purchaser to select investment options based on the purchaser’s investment time horizon, risk tolerance and investment goals. Portfolio Navigator was designed to help a contract purchaser tailor the performance of annuities and life insurance policies to their specific needs and to keep investment allocations on track over time. CMIA serves as investment adviser for the funds of funds and all of the underlying funds in which the Portfolio Navigator funds of funds invest.
RiverSource Life’s largest-selling variable annuities are the RiverSource® RAVA 5 series of variable annuities, which include the RAVA 5 Advantage®SM variable annuity, RAVA 5 SelectSM variable annuity and RAVA 5 AccessSM variable annuity (collectively, the “RAVA 5 Variable Annuities”). Under the RAVA 5 Variable Annuities, the standard GMDB provides that if the contractholder is age 79 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 payments 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) the full surrender value. The following additional optional GMDBs are also available for an additional charge:
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A return of purchase payment death benefit for contractholders age 80 or older at contract issue. This rider, in effect, adds the return of purchase payments less adjusted partial surrenders to the standard death benefit.
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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.
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A 5% accumulation death benefit. This rider in effect, adds a 5% accumulation death benefit floor to the return of purchase payment death benefit.
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An enhanced death benefit. This rider, in effect, adds the maximum anniversary value death benefit to the 5% accumulation death benefit.
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Benefit protector and benefit protector plus death benefits. These riders are intended to provide an additional benefit to help offset expenses after the contractholder’s death.
Available features for annuity products for an additional charge also include the GMWB. The GMWB allows guaranteed periodic withdrawals for the life of the contractholder, regardless of the investment performance of the contract.
Variable annuity
contractholderscontractholders 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
contractholdercontractholder 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
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Form 10-K —- “Quantitative and Qualitative Disclosures About Market Risk” as well as Note 2, Note 9 Note 10 and Note 1610 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.balances.
The fixed annuity contracts in force provide guaranteed minimum interest crediting rates ranging from
1.25%1.0% to 5.0% as of December 31,
2010.2013. 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 (including indexed) 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). 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. While traditional life insurance typically pays a specified sum to a beneficiary upon death of the insured for a fixed premium, in 2010 RiverSource Life b egan offeringalso offers a term life insurance product that will generally pay the death benefit in the form of a monthly income stream to a date specified at issue. 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
2010,2013, as measured by scheduled annual premiums, lump sum and excess premiums
and single premiums, consisted of
35%25% variable universal life,
59%72% fixed universal life and
6%3% traditional life. RiverSource Life issues only non-participating life insurance policies that 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 utilized by RiverSource Life to mitigate this risk.
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 affiliated VST Funds as well as 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%2.0% to 4.5% as of December 31,
2010.2013. 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
uni versaluniversal 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,
2010. The majority2013. Approximately 10% of
the face amount of RiverSource Life’s in force life insurance is fixed universal life, which includes indexed universal life (“IUL”), as described below. Certain fixed universal life policies
issued in recent yearsoffered by RiverSource Life provide
a secondary guarantee
benefits. The secondary guarantee ensures 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
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deductions and charges. Approximately 7%32% of RiverSource Life’s in force life insurance policies are fixed universal life of which approximately 26% contains a secondary guarantee that generates an additional liability.
In 2009, RiverSource Life discontinued new sales of traditional whole life
insurance.insurance, however 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.
IUL provides lifetime insurance protection and efficient asset growth through index-linked interest crediting, without the impact of negative market returns. 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. In addition, as with 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 for funds allocated to the indexed account is linked to the performance of the S&P 500 Index® (subject to a cap and floor). The policyholder may allocate all or a portion of the policy value to a fixed or indexed account.
In 2013, RiverSource Life introduced TrioSourceSM universal life insurance with long term care benefits. TrioSource allows clients to allocate a policy’s cash value to a fixed account that begins to earn interest immediately. The base feature of TrioSource is a fixed universal life insurance policy that provides a guaranteed death benefit. The policy offers a guaranteed return of premium (“ROP”). ROP is 90% of the premium in years 1-2 and 100% of the premium in years 3 and later and is net of any partial surrenders, outstanding policy loans or long term care benefits paid. The Accelerated Benefit Rider (“ABR”) for Long-Term Care allows for the acceleration of the death benefit to help pay for covered long term care expenses. In addition, clients may purchase an optional rider which extends benefits for a specified time period after ABR benefits have been exhausted. Any long term care benefit paid reduces the death benefit, cash value and ROP. Additional riders, including an inflation protection option, are available for an additional charge.
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.
In 2010, RiverSource Life
began offeringalso offers a term
life insurance product
whichthat 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 securitySocial Security or similar benefit plans and to help them protect their DI insurance benefits from the risk of inflation.
Long Term Care Insurance
As of December 31, 2002, RiverSource Life discontinued underwriting long term care (“LTC”) insurance.
Although new product sales were discontinued, RiverSource Life generally
retained 50% of the risk on existing contracts and ceded the remaininghas continued ceding 50% of the risk on a coinsurance basis to subsidiaries of Genworth Financial, Inc. (“Genworth”)
. and retained the remaining risk. 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. Approvals have been received for some or all requested increases in the
4950 states where increases have been requested, with an average approved cumulative rate increase of
62.9%95.7% 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. Approvals have been received for some or all requested increases in
4748 states, with an average approved cumulative rate increase of
17.5%33.9% of premium on all such policies where an increase was requested.
RiverSource Life intends 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,
Columbia Management Investment Advisers, 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
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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
policyholders’ and contractholders’ accounts subject to each contract’s guaranteed minimum interest crediting rate. 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
policyholders’ and 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
policyholders’ and 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
policies or annuity contracts in force. This negative impact may be compounded by the fact that many of
the sethese 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.
SeparateAccounts
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,
Columbia Management Investment Advisers, LLC,CMIA, for providing certain sponsor and related servicing activity for the VST 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 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.
RiverSource Life competes with other insurers and product manufacturers including insurance companies,
such as Hartford Life, MetLife, Prudential, Lincoln National, AXA Equitable Life, Principal Financial 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:
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financial strength ratings from agencies such as A.M. Best;
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the breadth, quality, design and pricing of products and services offered;
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guaranteed benefit
features;·features and hedging capability;
the quality of underwriting;
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the effectiveness of advertising and promotion campaigns;
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·reputation and recognition in the marketplace;
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distribution capabilities and compensation; and
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the quality of customer service.
The Minnesota Department of Commerce regulates RiverSource Life Insurance Company, and the New York State
Insurance Department
of Financial Services regulates RiverSource Life of NY.
In addition to being regulated by the Minnesota Department of Commerce, RiverSource Life Insurance Company is regulated by each of the insurance regulators in the states where it is authorized to transact the business of insurance. 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.business. The primary purpose of such regulation and supervision is to protect the interests of contractholders and policyholders. In general, state insurance laws and regulations govern standards of solvency, capital requirements, the licensing of insurers and their agents, premium rates, policy forms, the nature of and limitations on investments, periodic reporting requirements and other matters. In addition, state regulators conduct periodic examinations into insurer market conduct and compliance with insurance and securities laws. 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 regulators.
Virtually all states require participation in insurance guaranty associations which assess
f eesfees to insurance companies in order to fund claims of policyholders and contractholders of insolvent insurance
companies.companies subject to statutory limits. These assessments are generally based on a member insurer’s proportionate share of all premiums written by member insurers in the state during a specified period prior to an insolvency. See Note 20 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding guaranty association assessments.
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 tradingprocedures. In addition, federal securities regulators have recently increased their focus on the adequacy of disclosure regarding complex investment products, including variable life insurance and variable annuities, and have announced that they will carefully review actions by life insurers to improve profitability and reduce risks under in
connectionforce insurance and annuity products with
insurance, annuityguaranteed benefits. In reviewing such actions, regulators are examining, among other factors, potential conflicts between an insurer’s financial interests and
mutual fund products.On July 21,the interests of contract owners in investment performance, as well as perceived inconsistencies between the insurer’s action and the expectations of investors at the time the products were sold.
The 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
for providing periodic reports to the President and Congress.
The scope and impact of the research and reports provided byIn December 2013, the FIO
released recommendations that outline near-term reforms that state insurance regulators should undertake regarding capital adequacy, safety and
soundness, reform of insurer resolution practices, and marketplace regulation. In addition, the
report outlines areas for direct federal involvement in insurance regulation and recommends that Congress consider other areas for federal involvement should states fail to accomplish necessary modernization in the near term. The extent to which
such work maythe report will impact state regulation of insurance companies and ultimately lead to a more prominent role of the federal government in the regulation of the insurance industry is uncertain.
In October 2012, RiverSource Life purchased a block of residential mortgage loans from an affiliate, Ameriprise Bank, FSB. As an owner and servicer of residential mortgages, RiverSource Life must comply with applicable federal and state lending and
foreclosure laws and is subject to the jurisdiction of the federal Consumer Finance Protection Bureau and certain state regulators relative to these mortgage loans.
The National Association of Insurance Commissioners (“NAIC”) has established risk-based capital (“RBC”) requirements that
virtually all state insurance departments have
adopted, with minor modifications.adopted. 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
fellfalls below
thedefined RBC
requirement.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
wil lwill be placed under regulatory control.
At December 31,
2010,2013, RiverSource Life Insurance Company’s company action level RBC was
$652$591 million, and the corresponding total adjusted capital was
$3.8$2.7 billion, which represents
585%465% of company action level RBC.
At December 31,
2010,2013, RiverSource Life of NY’s company action level RBC was
$38$49 million, and the corresponding total adjusted capital was
$291$251 million, which represents
761%507% of company action level RBC.
As described above, RiverSource Life Insurance Company and RiverSource Life of NY maintain capital levels well in excess of the company action level.
As part of its Solvency Modernization Initiative, the NAIC has adopted revisions to its Insurance Holding Company System Regulatory Act and created a new Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act. These model acts set forth specific requirements for enterprise risk management functions and annual risk reports and further requires domestic insurers to conduct an ORSA and to annually file an ORSA summary report. The primary purpose of these modifications is to foster an effective level
RBC requirement.6of enterprise risk management and to provide a group-level perspective on risk and capital. New York has adopted the holding company act revisions and a draft ORSA regulation. Accordingly, RiverSource Life of NY will be required to file its first enterprise risk report by April 30, 2014 and, assuming final adoption of the proposed regulation, its first ORSA report by December 1, 2015.
Certain aspects of RiverSource Life’s business are subject to comprehensive legal requirements by different functional regulators concerning the use and protection of personal information, including client information. This includes rules adopted pursuant to the Gramm-Leach-Bliley Act, the Fair and Accurate Credit Transactions Act, Health Insurance Portability and Accountability Act (“HIPAA”), Health Information Technology for Economic and Clinical Health (“HITECH”) Act, and an ever increasing number of state laws. RiverSource Life continues its efforts to safeguard the data entrusted to it in accordance with applicable laws and internal data protection policies, including taking steps to reduce the potential for identity theft or other improper use or disclosure of personal information, while seeking to collect only the data that is necessary to properly achieve its business objectives and to best serve its clients.
Financial Strength Ratings
RiverSource Life Insurance Company
receivesand RiverSource Life of NY receive ratings from independent rating organizations.
Generally, RiverSource Life of NY does not receive an individual rating but receives the same rating as RiverSource Life Insurance Company. Ratings are important to maintain public confidence in RiverSource Life. Lowering of RiverSource Life’s ratings could have a material adverse
affecteffect on its ability to market its products and could lead to increased surrenders of its products. Rating organizations
continually 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 can be found at ir.ameriprise.com. For the most current ratings information, please see the individual rating agency’s website.
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,
For most new life insurance policies, 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.liability. RiverSource Life began reinsuring risks at this level duringin 2001 (2002 for RiverSource(RiverSource Life of NY)NY began in 2002) 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.
However, for IUL policies issued after September 1, 2013, RiverSource Life generally reinsures 50% of the death benefit liability. Similarly, for variable universal life policies issued after January 1, 2014, 50% of the death benefit liability will generally be reinsured. Finally, RiverSource Life reinsures 50% of the death benefit and morbidity liabilities related to the TrioSource universal life product launched in 2013.
Generally, the maximum amount of life insurance risk retained by RiverSource Life is $1.5 million on a single life and $1.5 million on any flexible premium
surviv orshipsurvivorship 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 retainedceded 50% of the risk and ceded on a coinsurance basis to Genworth and retained the remaining 50% of the risk to Genworth.risk. For RiverSource Life of NY, this reinsurance arrangement applies for 1996 and later issues only. As of December 31, 2010,2013, RiverSource Life’s credit exposure to Genworth under this reinsurance arrangement was approximately $1.4 billion under U.S. generally accepted accounting principles (“GAAP”) and $1.9 billion under statutory accounting principles.$1.7 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(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.
RiverSource Life also has life insurance and fixed annuity risk previously assumed under reinsurance arrangements with unaffiliated insurance companies. As of December 31, 2010,2013, the amount related to assumed reinsurance arrangements was $657 million under GAAP and $667 million under statutory accounting principles.$597 million.
See Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on reinsurance.
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ITEM 1A. RISK FACTORS
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
and Operations
RiverSource Life’s financial condition and results of operations may be adversely affected by market fluctuations
interest rate fluctuations and by economic,
political and other factors.
RiverSource Life’s financial condition and results of operations may be materially affected by market fluctuations interest rate fluctuations and by economic and other factors. ManySuch factors, of awhich can be global, national or localizedlocal in 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; U.S. and foreign government fiscal and tax policies; U.S. and foreign government ability, real or perceived, to avoid defaulting on government securities; 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 46;sLife’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
Declines and
annuity products are sensitive to interest rate fluctuations, and its future costs associated with such variations may differ from its historical costs. In addition, interest rate fluctuations could result in fluctuations in the valuation of certain minimum guaranteed benefits contained in some of its variable annuity products. Although RiverSource Life typically hedges against such fluctuations, a significant change in interest rates could have a material adverse impact on RiverSource Life’s results of operations.Although U.S. and global capital markets demonstrated signs of recovery in 2010, current market conditions remain precarious and any declines or volatility in U.S. and global market conditions could impacthave impacted RiverSource Life’s business.business in the past and may do so again. 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 U.S. and global economies generally.
Significant downturns and volatility in equity markets may have, and 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 of RiverSource Life’s products to limit purchases of or 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 deferred acquisition costs (“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 as a result of low interest rates and 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, reinsure or sell GMIB provisions.
Changes in interest rates and prolonged periods of low interest rates may adversely affect RiverSource Life’s financial condition and results of operations.
RiverSource Life’s insurance and annuity products are sensitive to interest rate fluctuations, and future impacts associated with such variations may differ from historical 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 to mitigate some of the effect of such fluctuations, significant changes in interest rates could have a material adverse impact on RiverSource Life’s results of operations.
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 must increaseincreases 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, 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 outflowswithdrawals and asset maturity extensionssurrenders 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”),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.
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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, and 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 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.
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, 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 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 may 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’s liquidity needs are satisfied primarily through its reserves and the cash generated by its operations. 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
RiverSour ceRiverSource 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
rendered more costly or impaired if regulatory authorities or rating organizations take
negative actions against it. Also, transfers of cash or other assets from RiverSource Life’s parent or other affiliates must comply with applicable regulations and may be subject to the prior approval of state insurance regulators.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit RiverSource Life’s or its parent’s access to capital required to operate its business. Such market conditions may limit RiverSource Life’s ability to satisfy statutory capital requirements, generate fee income and market-related revenue to meet liquidity needs and access the capital necessary to grow its business. As such, RiverSource Life may be forced to use different types of capital than it
9
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.
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 in recent years by 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. 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, regulations or scrutiny governing ratings, which may in turn impact ratings assigned to insurance companies.
RiverSource Life cannot predict what actions ratings organizations may take, or what actions RiverSource Life may take in response to the actions of ratings 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.
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 offerings and 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 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 and as some of RiverSource Life’s competitors seek to increase market share by reducing prices.
The offerings available to Ameriprise Financial’s advisor network include not only annuity and insurance products issued almost exclusively (in the case of annuities) or predominantly (in the case of insurance products) by RiverSource Life, but also variable annuities issued by a limited number of unaffiliated insurance companies. As a result of this and further openings of Ameriprise Financial’s 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.
RiverSource Life and its affiliates face intense competition in attracting and retaining key talent.
RiverSource Life’s continued success depends to a substantial degree on its, and its affiliates’, ability to attract and retain qualified 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.
The impairment
or negative performance of other financial institutions could adversely affect
RiverSource Life.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.
While RiverSource Life regularly assesses its exposure to different industries and counterparties, the performance and financial strength of specific institutions are subject to rapid change, the timing and extent of which cannot be known.
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. With respect to secured transactions, RiverSource Life’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to it. RiverSource Life also has exposure to 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, repurchase 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& #146;sLife’s business and results of operations.
Downgrades in the credit or financial strength ratings assigned to the counterparties with whom RiverSource Life transacts
business or other adverse reputational impacts to such counterparties 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
or other adverse impact to the reputation of other financial institutions.
The failure
Poor investment performance in RiverSource Life’s variable products could adversely affect its financial condition and results of operations.
RiverSource Life believes that investment performance is an important factor in the growth of its variable annuity and variable life insurance business. Poor investment performance could impair revenues and earnings, as well as RiverSource Life’s prospects for growth, because RiverSource Life’s ability to attract funds from existing and new clients might diminish and existing clients might withdraw assets from RiverSource Life’s variable products in favor of better performing products of other insurers could require companies, which would result in lower revenues.
AFSI may be unable to attract and retain financial advisors.
RiverSource Life
is dependent on the financial advisors of AFSI for a significant portion of the sales of its annuity and insurance products. A significant number of the financial advisors operate as independent contractors under a franchise agreement with AFSI. There can be no assurance that AFSI will be successful in its efforts to
pay higher assessmentsmaintain its current network of financial advisors or to
staterecruit and retain new advisors to its network. If AFSI is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSource Life’s annuity and insurance
guaranty funds.RiverSource Life Insurance Companyproducts and RiverSource LifeLife’s financial condition and results 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 Lifeoperations could be materially adversely affected by the requirement to pay assessments to the guaranty fund associations. The financial crisis of 2008 and 2009 weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.
affected.
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.
Changes in the supervision and regulation of the financial industry, including those set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, could materially impact RiverSource Life’s business.
On July 21, 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 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 final rules are adopted by applicable regulatory agencies. The impact of the Dodd-Frank Act on RiverSource Life, the financial industry and the economy cannot be known until all such rules and regulations called for under the Dodd-Frank A ct 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.
10
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.
On July 21, 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 are subject to public comment 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.
Changes in 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.
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, 2010, 5%2013, 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, thatwhich 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 8 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 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 may be increased by capital market volatility.
The determination of the amount of allowances and impairments taken on certain investments is subject to management’s evaluation and judgment and could materially impact RiverSource Life’s financial position or results of operations.
The determination of the amount of allowances and impairments vary by investment type and is based upon RiverSource Life’s periodic evaluation and assessment of inherent and known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer and management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in
11
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,
industr yindustry sector of the issuer,
interest rates, credit spreads 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 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
r eportedreported 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.
The determination of the amount of allowances and impairments taken on certain investments is subject to management’s evaluation and judgment and could materially impact RiverSource Life’s financial position or results of operations.
The determination of the amount of allowances and impairments vary by investment type and is based upon RiverSource Life’s periodic evaluation and assessment of inherent and known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer or borrower, and management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security or loan and in assessing the prospects for recovery. Inherent in management’s evaluation of the security or loan are assumptions and estimates about the operations of the issuer and its future earnings potential.
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 and limited partnership interests, and collateralized debt obligations, among others, all of which are relatively illiquid. These asset classes represented 16%21% of the carrying value of RiverSource Life’s investment portfolio as of December 31, 2010.2013. 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
The failure of
changes in RiverSource Life’s product revenue mix and distribution channelsother insurers could
negatively impact RiverSource Life’s ability to maintain or increase its market share and profitability.RiverSource Life operates in an intensely competitive industry. RiverSource Life competes based on a number of factors including name recognition, service, investment performance, product features, price, perceived financial strength, and claims-paying ratings. RiverSource Life’s competitors include insurers, asset managers and other financial institutions. RiverSource Life may face competitors that have greater market share, offer a broader range of products, have greater financial resources or have higher claims-paying ratings than RiverSource Life does. Some of RiverSource Life’s competitors may possess or acquire intellectual property rights that could provide a competitive advantage to them in certain markets or for certain products, which could make it more difficult forrequire RiverSource Life to introduce new products and services. Some of pay higher assessments to state insurance guaranty funds.
RiverSource
Life’s competitors’ proprie tary 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 resourcesLife Insurance Company and RiverSource Life
may experience pressures on its pricing and market share asof NY are required by law to be a
resultmember of
these factors.Historically, Ameriprise Financial’s branded advisor network (both franchisee advisors and those employed by RiverSource Life’s affiliated broker-dealer selling firm) distributed annuity and insurance products issued almost exclusively (in the caseguaranty fund association in every state where they are licensed to do business. In the event of annuities)insolvency of one or predominantly (in the case of insurance products) by RiverSource Life. In 2010, Ameriprise Financial expanded the offerings available to its branded advisors to include variable annuities issued by a limited number of
12
more unaffiliated insurance companies. As a result of this and further openings of Ameriprise Financial’s branded advisor network to annuity and insurance products of other companies, RiverSource Life could experience lower salesbe adversely affected by the requirement to pay assessments to the guaranty fund associations. Uncertainty and volatility in the U.S. economy and financial markets in recent years have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments. For more information regarding assessments from guaranty fund associations, see Note 20 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
If the counterparties to RiverSource Life’s reinsurance arrangements or to the derivative instruments it uses to hedge its
products, higher surrenders or other developments,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.
In late 2010,
RiverSource Life
discontinued the distributionuses 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
variable annuities through third party banksdirect liability to its policyholders and
broker dealers. Thiscontractholders, 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
impact the persistency of business sold previously through these channels, possibly resulting in the acceleration of DAC amortization or otherhave a material adverse
effectseffect on RiverSource Life’s
financial condition and results of operations.
Poor investment performance See Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 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 productsannuity 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.
If RiverSource Life’s reserves for future policy benefits and claims are inadequate, it may be required to increase its reserve liabilities, which would adversely affect its financial condition and results of operations.
RiverSource Life believes that investment performance is an important factor in the growthestablishes reserves as estimates of its variableliabilities 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 would 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 variablecontractholders, including the morbidity and mortality rates. 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 retained. If mortality rates are higher than its pricing assumptions, RiverSource Life could be required to make greater payments under its life insurance business. Poor investment performance could impair revenuespolicies and earnings, as well asannuity contracts with GMDBs than it has projected.
The risk that RiverSource Life’s prospectsclaims experience may differ significantly from its pricing assumptions is particularly significant for growth, becauseits LTC insurance products, notwithstanding RiverSource Life’s ability to attract fundsimplement future price increases with 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 at the time the policies were underwritten, and 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 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, 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 morbidity experience than RiverSource Life had assumed, which led it to increase premium rates on certain policies.
Because RiverSource Life’s assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and claims may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of 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 represent the portion of costs which are incremental and direct to the acquisition of new or renewal business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life and DI insurance. For annuity and universal life products, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are 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 require the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. 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.”
Misconduct by RiverSource Life’s employees and agents and its affiliates’ employees, financial advisors and agents is difficult to detect and deter and could harm RiverSource Life’s business, financial condition or results of operations.
Misconduct by RiverSource Life’s employees and agents and its affiliates’ employees, financial advisors 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:
binding 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, including the misappropriation of funds;
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 affiliates’ employees, financial advisors 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 assure that misconduct by employees and agents and its affiliates’ employees, financial advisors and agents will not lead to a material adverse effect on its business, financial condition or results of operations.
Damage to the reputation of RiverSource Life or its affiliates could adversely affect the business of RiverSource Life.
The ability of RiverSource Life to market and sell its products is highly dependent upon external perceptions of its business practices and financial condition, as well as the business practices and financial condition of its affiliates. Damage to the reputation of RiverSource Life or its affiliates could cause significant harm to the business and prospects of RiverSource Life and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, any perceived or actual weakness in RiverSource Life’s financial strength or liquidity, technological, cyber-security, or other security breaches resulting in improper disclosure of client or employee personal information, unethical behavior and the misconduct of employees, AFSI’s advisors and counterparties. Negative perceptions or publicity regarding these matters could damage RiverSource Life’s reputation among existing and
newpotential clients,
might diminishemployees and
existing clients might withdraw assets fromdistributors. Adverse developments with respect to the financial industry may also, by association, negatively impact RiverSource Life’s
variable products in favor of better performing products of other companies, which wouldreputation or result in
lower revenues.greater regulatory or legislative scrutiny or litigation.
RiverSource Life’s reputation is also dependent on its continued identification of and mitigation 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 AFSI, the distributor of these products. RiverSource Life and its affiliated entities have procedures and controls that are designed to identify, address and appropriately disclose perceived conflicts of interest. However, identifying and appropriately addressing conflicts of interest is complex and
RiverSource Life’s reputation could be damaged if it fails, or appears to fail, to address conflicts of 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 will make RiverSource Life’s clients less willing to enter into transactions in which such a conflict may occur, and will adversely affect RiverSource Life’s business.
RiverSource Life’s operational systems and networks have been, and will continue to be, subject to evolving cyber-security or other technological risks, which could result in the disclosure of confidential client information, loss of proprietary information, damage to its reputation, additional costs, regulatory penalties and other adverse impacts.
The business of RiverSource Life and its affiliates is reliant upon internal and third part technology systems and networks to process, transmit and store information including sensitive client and proprietary information, and to conduct business activities and transactions with clients, distributors, vendors and other third parties. Maintaining the integrity of these systems and networks is critical to the success of RiverSource Life’s business operations, including the retention of clients, and to the protection of RiverSource Life’s proprietary information and RiverSource Life’s clients’ personal information. To date, neither RiverSource Life nor its affiliates have experienced material breaches of nor interference with these systems and networks, however, RiverSource Life and its affiliates routinely encounter and address such threats. For example, the cyber-security and technological threats experienced by RiverSource Life and its affiliates have included phishing scams, distributed denial of service attacks, introductions of malware, attempts at electronic break-ins and unauthorized payment requests. Any such breaches or interference by third parties or by RiverSource Life’s employees that may occur in the future could have a material adverse impact on RiverSource Life’s business, financial condition or results of operations.
RiverSource Life and its affiliates are subject to international, federal and state regulations, and, in some cases contractual obligations, that require it to establish and maintain policies and procedures designed to protect sensitive client, employee, contractor and vendor information. RiverSource Life and its affiliates have implemented and maintain 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. Changes in RiverSource Life’s technology platforms, such as an evolution to accommodate mobile computing, may also require corresponding changes in its systems, networks and data security measures. In addition, the increasing reliance on technology systems and networks and the occurrence and potential adverse impact of attacks on such systems and networks, both generally and in the financial services industry, have enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber-security threats. As these threats, and government and regulatory oversight of associated risks, continue to evolve, RiverSource Life may be unablerequired to attractexpend additional resources to enhance or expand upon the security measures RiverSource Life and retainits affiliates currently maintain.
Despite the measures RiverSource Life and its affiliates have taken and may in the future take to address and mitigate cyber-security and technology risks, 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. While RiverSource Life maintains cyber liability insurance that provides both third-party liability and first-party liability coverages, this insurance may not be sufficient to protect it against all losses. In addition, the trend toward broad consumer and general public notification of such incidents could exacerbate the harm to RiverSource Life’s business, financial advisors.condition, or results of operations. Even if RiverSource Life successfully protected its technology infrastructure and the confidentiality of sensitive data, RiverSource Life may incur significant expenses in connection with its responses to any such attacks as well as the adoption and maintenance of appropriate security measures. RiverSource Life could also 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.
Operating errors and 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 or report data properly, experience connectivity disruptions or otherwise 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, attacks by third parties, failures of internal or vendor software or systems and other events beyond its control.
RiverSource Life relies on third party service providers and vendors for certain communications, technology and business functions and faces the risk of operational failure (including, without limitation, failure caused by an inaccuracy, untimeliness or other deficiency in data reporting), termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other third party service providers 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 or investment or financial management strategies. Any such failure, termination or constraint could adversely impact its ability to effect transactions, service its clients, manage its exposure to risk or otherwise achieve desired outcomes.
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 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 dependent onsubject to the brandedrisks of errors and misconduct by its employees and AFSI’s 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 advisorscondition 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 affiliated broker-dealer selling firm forbusinesses. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a significant portion of the sales of its annuity and insurance products. A significantlarge number of its branded financial advisors operate as independent contractors under a franchise agreement with its affiliated selling firm. There cantransactions and events, and these policies and procedures may not be no assurance thatfully effective in mitigating RiverSource Life’s affiliated selling firm willrisk exposure in all market environments or against all types of risk. Insurance and other traditional risk-shifting tools may be successful in its efforts to maintain its current network of financial advisorsheld by or to recruit and retain new advisors to its network. If RiverSource Life’s affiliated selling firm is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSource Life’s annuityLife in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and insurance productspolicy exclusions, as well as risk of counterparty denial of coverage, default or insolvency.
The occurrence of natural or man-made disasters and RiverSource Life’scatastrophes 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, blackout, 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. These impacts could be
materially adversely affected.particularly severe to the extent they affect RiverSource Life’s computer-based data processing, transmission, storage and retrieval systems and destroy or release valuable data. Such disasters and catastrophes may also impact RiverSource Life indirectly by changing the condition and behaviors of its affiliates face intense competitioncustomers, business counterparties and regulators, as well as by causing declines or volatility in attractingthe economic and retaining key talent.financial markets.
The potential 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 could 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 or an overall economic stability and sustainability. 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.
Legal, Regulatory and Tax Risks
Legal and regulatory actions are inherent in RiverSource Life’s business and could result in financial losses or harm its business.
RiverSource Life is,
dependent on Ameriprise Financial’s network of branded advisors for a significant portion ofand in the
salesfuture may be, subject to legal and regulatory actions in the ordinary course of its
annuity products and substantially all of the sales of its insurance products.operations. Actions brought against RiverSource Life may result in awards, settlements, penalties, injunctions or other adverse results, including reputational damage. In addition, RiverSource
Life may incur significant expenses in connection with its defense against such actions regardless of their outcome. Various regulatory and governmental bodies have the authority to review RiverSource Life’s
continued success depends to a substantial degree onproducts and business practices and those of its
employees and agents and its affiliates’
, ability employees and agents and to
attract and retain qualified personnel. The market for qualified talent is extremely competitive. Ifbring regulatory or other legal actions against RiverSource Life
is unableif, 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
attractaspects of RiverSource Life’s business and
retain qualified individualsoperations that are specific to it and proceedings that are typical of the industries in which it operates. In or
its recruitingas a result of turbulent times such as those RiverSource Life experienced in recent years, the volume of claims and
retention costs increase significantly, its financial conditionamount of damages sought in litigation and
results of operations could be materially adversely impacted.regulatory proceedings generally increase.
RiverSource Life’s business is
regulated heavily,
regulated, 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 various federal and state laws and regulations, and is 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 its parent company and its subsidiaries, directors, officers, employees and affiliated employees and agents. Any
enforcement actions, investigations or other proceedings brought against RiverSource Life or its subsidiaries, directors, employees and affiliated employees and agents by its regulators may result in fines, injunctions or other disciplinary actions that could harm RiverSource Life’s reputation or impact its results of operations. Further, any changes to the laws and regulations applicable to RiverSource Life’s business, as well as changes to the interpretation and enforcement of such laws and regulations, may affect its
operationsfinancial condition and
financial condition.operations. Such changes may impact the operations and profitability of RiverSource Life, including with respect to the scope of products and services provided and the incurrence of additional costs of doing business. The
recent economic crisis
of recent years has resulted in numerous changes to regulation and oversight of the insurance industry, the full impact of which has yet to be realized. Any incremental requirements, costs and risks imposed on RiverSource Life in connection with such current or future legislative or regulatory changes, may constrain its ability to market its products to
its target demographic and potential customers, and could negatively impact its profitability and make it more difficult for RiverSource Life to pursue
itits 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, coupled 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.requirements, including preparing financial statements in accordance with statutory accounting principles. State regulators
are continually
reviewingreview and
updatingupdate these requirements and other requirements relating to the business operations of insurance companies, including their underwriting and sales practices.
TheIn December 2012, the NAIC
has adopted a
changenew reserve valuation manual that applies principles-based reserve standards to
require principles-based reserveslife insurance products. The valuation manual becomes the effective reserve valuation method when adopted by 42 jurisdictions that account for
variable annuities at
least 75% of U.S. insurance premiums combined. To date, seven states have adopted the
end of 2009, and continues to discuss moving to a principles-based reserving system for other insurance and annuity products.valuation manual. The requirement for principles-based
variable annuity13
life insurance 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 pricesinterest rates, policyholder behavior 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 or future initiatives of the FIO with the Department of the Treasury, may have on RiverSource Life or its competitors.
For additional discussion on the role and activities of the FIO, see the information provided under the heading “Regulation” contained in Part I, Item 1 of this Annual Report on Form 10-K.
RiverSource Life’s profit margins and earnings are dependent in part on its ability to maintain current fee levels for the products and services that it offers. Competition within the financial services industry could lead RiverSource Life to reduce the fees that it charges its clients for products and services. See the risk factor entitled “Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively 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
cha rgescharges for its products and services could reduce its revenues and earnings.
Damage
Changes in the supervision and regulation of the financial industry could materially impact RiverSource Life’s business.
The Dodd-Frank Act enacted into law in 2010, called 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 reputationDodd-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 full 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,
or its affiliatesimplementation of the Dodd-Frank Act could
adversely affect the business of RiverSource Life.The ability of RiverSource Life to market and sell its products is highly dependent upon external perceptions of its business practices and financial condition, as well as the business practices and financial condition of its affiliates. Damage to the reputation of RiverSource Life or its affiliates could cause significant harm to the business and prospects of RiverSource Life and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, unethical behavior and the misconduct of employees, financial advisors and counterparties. Adverse developments with respect to the financial industry may also, by association, negativelynevertheless materially impact RiverSource Life’s reputation or resultbusiness. For example, to the extent that RiverSource Life invests in greater regulatory or legislative scrutiny or litigation.
debt securities issued by a financial company that becomes subject to the orderly liquidation authority under the Dodd-Frank Act, RiverSource Life’s reputation is also dependent on its continued identification of and mitigation against conflicts of interest, including those relating to the activities of its affiliated entities. For example, conflicts may arise between RiverSource Life’s positionrights as a manufacturer of insurance and annuity products and the position of RiverSource Life’s affiliated broker-dealer, the distributor of these products.creditor could be adversely affected. RiverSource Life and its affiliated entities have procedures and controls that are designed to identify, address and appropriately disclose conflicts of interest. However, identifying and appropriately dealing with conflicts of interest is complex and RiverSource Life’s reputation could be damaged if it fails, or appears to fail, to deal appropriately with conflicts of interest. In addition, the SEC and other federal and state regulators have increased their scrutiny of pot ential 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 will make RiverSource Life’s clients less willing to enter into transactions in which such a conflict may occur, and will 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:
·binding RiverSource Life to transactions that exceed authorized limits;
·hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;
·improperly using, disclosing, or otherwise compromising confidential information;
·recommending transactions that are not suitable;
·engaging in fraudulent or otherwise improper activity;
·engaging in unauthorized or excessive trading to the detriment of customers; or
·otherwise not complying with laws, regulations or RiverSource Life’s control procedures.
RiverSource Life cannot always deter misconduct by employees and agents and its affiliate’s employees and agents and the precautions RiverSource Life takes to prevent and detect this activity may not be effective in all cases. RiverSource Life also cannot assure that misconduct by employees and agents and its affiliate’s employees and agents will not lead to a material adverse effect on its business, financial condition or results of operations.
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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 authorityassessments to review RiverSource Life’s products and business practices and those of its employees and agents and its affiliates’ employees and agents andrepay federal funding advanced 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 adverseliquidated 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 certain companies in the insurance industry, the ratings organizations have heightened the level of scrutiny that they apply and have requested additional information from companies that they rate. 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 ratings, which may in turn impact the ratings assigned to insurance companies.
RiverSource Life cannot predict what actions rating organizations may take, or what actions RiverSource Life may take in response to the actions of rating organizations, which could adversely affect its business. As with other companies in the insurance industry, RiverSource Life’s ratings could be changed at any time and without any notice by the ratings organizations.
If RiverSource Life’s reserves for future policy benefits and claims are inadequate, it may be required to increase its reserve liabilities, which would 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 co ver 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 would 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.
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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 it s 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 with 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 offeri ngs to policies underwritten fully by unaffiliated third party insurers, and RiverSource Life has also implemented rate increases on certain in force policies as described in Item 1 of this Annual Report on Form 10-K — “Business — Insurance: Product Features and Risks — Long Term Care Insurance.” Further, RiverSource Life may be impacted by the creation of the FIO within the Department of the Treasury, which is required to implement additional rate increasesmonitor the insurance industry and gather relevant information, including issues or gaps in the futurecurrent state-based solvency regulation system.
In the wake of the recent financial crisis, other national and may or may not receiveinternational authorities have also proposed measures intended to increase the intensity of regulation of financial institutions, requiring greater coordination among regulators and efforts to harmonize regulatory approvalregimes. These measures have included enhanced risk-based capital requirements, leverage limits, liquidity and transparency requirements, single counterparty exposure limits, governance requirements for risk management, stress-test requirements, debt-to-equity limits for certain companies, early remediation procedures, resolution and recovery planning and guidance for maintaining appropriate risk culture.
In July 2010, the
full extentSEC 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
timingunderlying 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
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 Lifeenactment, would be required to accelerate the amortizationphased in over a number of expenses it deferred in connection with the acquisition of the policy or contract.
For RiverSource Life’s LTC insurance and 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. Ifyears. As 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 morbidity 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 experiencemeasures 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 deviat ions 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 represent the cost of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life and DI insurance. For annuity and universal life
16
products, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are 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 require the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. 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 affectfinal nor undergoing implementation throughout 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 and military actions, could adversely affect the financial condition or results of operations of RiverSource Life. Such disasters and catastrophes may impact RiverSource Life directly by damaging its facilities, preventing its employees from performing their roles or otherwise disturbing its ordinary business operations, and could impact 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 predictservices industry, the impact that changing climate conditions may have on the frequency and severity of natural disasterschanges such as hurricanes. As such, RiverSource Lifethose currently proposed 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.
predicted at this time.
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, trade secret, license usage rights, or misappropriation of trade secret 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.
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BreachesChanges in and the adoption of security,accounting standards or the perception thatinaccurate estimates or assumptions in applying accounting policies could have a material impact on RiverSource Life’s technology infrastructure is not secure, could harm its business.
financial statements.
RiverSource Life’s business requires the appropriateaccounting policies and secure utilization of clientmethods are fundamental to how it records and other sensitive information. RiverSource Life’s operations require the secure transmission of confidential information over public networks. Security breaches in connection with the delivery ofreports its products and services, including products and services utilizing the Internet, as well as intrusions resulting from the efforts of “hackers” seeking the sensitive data RiverSource possesses and the trend toward broad consumer and general public notification of such incidents, could significantly harm RiverSource Life’s business, financial condition orand results of operations. Even ifSome of these policies require use of estimates and assumptions that may affect the reported value of RiverSource Life successfully protected its technology infrastructureLife’s assets or liabilities and the confidentialityresults of sensitive data,operations and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, RiverSource Life could suffer harmbe required to its businesscorrect and reputation if attempted security breache s are publicized. restate prior period financial statements.
RiverSource Life
cannot be certain that advancesprepares its financial statements in
criminal capabilities, discoveryaccordance with U.S. generally accepted accounting principles. From time to time, the Financial Accounting Standards Board, the SEC, and other regulators may change the financial accounting and reporting standards governing the preparation of
new vulnerabilities, attempts to exploit vulnerabilities in its systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks used in connection with its products and services.Protection from system interruptions and operating errors is important to RiverSource Life’s business. If RiverSource Life experienced a sustained interruption to its telecommunications or data processing systems or other failure in operational execution, it could harm its business.
System or network interruptions could delay and disrupt RiverSource Life’s ability to develop, deliver or maintain its products and services, causing harm to its business and reputation and resulting in loss of customers or revenue. Interruptions could be caused by operational failures arising from RiverSource Life’s implementation of new technology, as well as from maintenance of existing technology. RiverSource Life’s financial accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond its control, adversely affecting its ability to process transactions or provide products and services to customers. These interruptions can include fires, floods, earthquakes, power losses, equipment failures, failures of internal or vendor software or systems and other events be yond its control. Further,statements. In some cases, RiverSource Life faces the risk of operational failure, terminationcould be required to apply a new 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 evolutionrevised standard retroactively, resulting in the restating of prior period 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, 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.statements. These riskschanges are difficult to detect in advance and deter,predict and could harmimpose additional governance, internal control and disclosure demands. It is possible that such changes could have a material adverse effect on RiverSource Life’s business, financial condition orand 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 RiverSou rce Life’s risk exposure in all market environments or against all types of risk.
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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
reduce or eliminate the tax advantages of certain RiverSource Life’s products and thus make
some of itssuch products less attractive to clients.
RiverSource Life is subject to
Changes in corporate tax
contingencies thatlaws and regulations and in the interpretation of such laws and regulations, as well as adverse determinations regarding the application of such laws and regulations could adversely affect
the provision for income taxes.RiverSource Life’s earnings.
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.taxes and reduce its earnings.
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 income tax expense and the deferred tax balances of the company.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
None.
RiverSource Life Insurance Company
occupiesowns and leases office space in Minneapolis,
Minnesota, which it owns.Minnesota. RiverSource Life of NY rents office space in Albany, New York. RiverSource Life believes that the facilities
occupiedit occupies are suitable and adequate.
ITEM 3.LEGAL PROCEEDINGS
Insurance companies have been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced examinations and other inquiries of insurance companies regarding sales and marketing practices (including sales to older 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 conduct examinations and other inquiries (including inquiries from the State of Minnesota and a multistate insurance department examination). RiverSource Life has cooperated and will continue to cooperate with the 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.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES All of RiverSource Life Insurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc. There is no established public trading market for RiverSource Life Insurance Company’s common stock.
For discussion regarding RiverSource Life Insurance Company’s payment of dividends and restrictions on dividends, see Item 7 of this Annual Report on Form 10-K
—- “Management’s Narrative Analysis
—- Capital Activity” and Note 15 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 6.SELECTED FINANCIAL DATA Item omitted pursuant to General Instructions I(2)(a) of Form 10-K.
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ITEM 7.MANAGEMENT’S NARRATIVE ANALYSIS
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned stock 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 Certificate of Authority in New York.
Effective in March and September 2010, RiverSource Life of NY withdrew its Certificates of Authority from North Dakota and Delaware, respectively, as it does not conduct business in these states. RiverSource Life of NY issues insurance and annuity products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. (“RTA”). 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
“the Company”the “Company”.
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.
Critical Accounting Policies
The accounting and reporting policies that the Company uses affect its Consolidated Financial Statements. Certain of the Company’s accounting and reporting policies are critical to an understanding of the 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 the 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 the Company’s accounting policies.
The most significant component of the Company’s investments is its Available-for-Sale securities, which the Company carries at fair value within its Consolidated Balance Sheets. The fair value of the Company’s Available-for-Sale securities at December 31,
20102013 was primarily obtained from
third-partythird party pricing sources. The Company records unrealized securities gains (losses) in accumulated other comprehensive income,
(loss), net of impacts to deferred acquisition costs (“DAC”), deferred sales inducement costs (“DSIC”), certain benefit reserves,
reinsurance recoverables and income taxes. The Company recognizes gains and losses
on a trade date basis in results of operations upon disposition of the securities.
Effective January 1, 2009, the Company early adopted an accounting standard that significantly changed the Company’s accounting policy regarding the timing and amount
When the fair value of an investment is less than its amortized cost, the 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 the 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 the 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 the Company does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, the 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 impairment related to credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of impacts to DAC, DSIC, certain benefit reserves,
reinsurance recoverables and income taxes. For Available-for-Sale securities that have recognized an other-than-temporary impairment through earnings,
the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income, if through subsequent evaluation there is a sustained increase in the cash flow
expected, the difference between the amortized cost20
basis and the cash flows expected to be collected is accreted as interest income.expected. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive income (loss).
income.
For all securities that are considered temporarily impaired, the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The 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 the Company considers in determining whether declines in the fair value of fixed maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. In order to determine the amount of the credit loss component for corporate debt securities considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security. The
sig nificantsignificant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and the Company’s position in the debtor’s overall capital structure.
For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities
and asset backed
securities and other structured investments)securities), the 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.
Deferred Acquisition Costs and Deferred Sales Inducement Costs
The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of these costs which are incremental and direct to the acquisition of a new or renewal insurance policy or annuity contract are deferred. Significant costs capitalized include sales based compensation related to the acquisition of new and renewal insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation paid to Ameriprise Financial Services, Inc. (“AFSI”), a subsidiary of Ameriprise Financial, advisors and employees and third-party distributors is capitalized. Employee compensation and benefits costs which are capitalized relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct costs of acquiring an insurance policy or annuity contract are expensed as incurred.
For the 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 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
contractholder and policyholder behavior over periods extending well into the future.
In the third quarter of 2010, management extended the projectionProjection periods used for
itsthe Company’s annuity products
toare typically 30 to 50
years compared to previous projection periods of 10 to 25 years. Projection periods for
the Company’sits life and LTC insurance products are often 50 years or longer and projection periods for
the Company&# 146;sits DI products can be up to 45 years. Management regularly monitors financial market conditions and actual
contractholder and 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
othertraditional life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in the Consolidated Statements of Income.
For annuity,
and life, DI and LTC insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which
contractholders and policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about earned
21
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.
In the third quarter of 2010, management adjusted theThe long-term client asset value growth rates
toare based on assumed gross annual returns of 9% for equity funds and 6% for fixed income
funds compared to previous returns of 9% and 6.5%, respectively.funds. The Company typically uses a five-year mean reversion process as a guideline in setting near-term equity fund 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
consisten cyconsistency with management’s assessment of anticipated equity market performance.
In the third quarter of 2010, management reset the near-term equity fund growth rate to equal the 9% long-term rate. Assumed near-term fixed income fund growth rates are less than the 6% long-term rate.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
to Pretax Income(1) | |
| | (in millions) | |
Decrease in future near and long-term equity returns by 100 basis points | | $ | (60 | ) |
Decrease in future near and long-term fixed income returns by 100 basis points | | (32 | ) |
Decrease in near-term equity fund growth rates by 100 basis points | | (35 | ) |
| | | | |
(1)An increase in the above assumptions by 100 basis points would result in an increase to pretax income of approximately the same amount.
|
| | | | |
| | | Estimated Impact to Pretax Income(1) |
| | | (in millions) |
| Decrease in future near- and long-term fixed income returns by 100 basis points | | $ | (46 | ) |
| |
|
| Decrease in future near-term equity fund growth returns by 100 basis points | | $ | (34 | ) |
| Decrease in future long-term equity fund growth returns by 100 basis points | | (27 | ) |
| Decrease in future near- and long-term equity fund growth returns by 100 basis points | | $ | (61 | ) |
| |
| (1) | An increase in the above assumptions by 100 basis points would result in an increase to pretax income for 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 the 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.
Policyholder Account Balances, 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
Fixed annuities and variable annuity guarantees include
liabilitiesamounts 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 the 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. The 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, the Company offers contracts with guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions and, until May 2007, the 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, the Company projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios.
22
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
fair value of embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions
fluctuates based on equity, interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. These embedded derivatives are recorded
at fair value.in policyholder account balances, future policy benefits and claims. See Note 13 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. 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%3.05% to
9.5%9.38% at December 31,
2010,2013, depending on year of issue, with an average rate of approximately
5.6%4.83%.
Life, Disability Income and Long Term Care Insurance
Future policy benefits and policy claims and other policyholders’ funds related to life,
Life, DI and LTC insurance
includeincludes 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
contractspolicies 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.
23
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 the Company’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2010,2013, with an average rate of 4.6%4.4%. Interest rates used with LTC claims ranged from 4.0% to 7.0%6.0% at December ;31, 2010,31, 2013, with an average rate of 4.0%.
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 the 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%3.25% to 10.0% at December 31,
2010,2013, depending on policy form, issue year and policy duration. Anticipated interest rates for DI policies ranged from
4.0%3.25% to 7.5% at December 31,
2010,2013, depending on policy form, issue year and policy
d uration.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,
2010.2013.
Changes in policyholder account balances, future policy benefits and claims are reflected in earnings in the period adjustments are made.
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
The 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 theused as economic hedges of equity,
and interest rate,
exposure of derivatives embedded in certain annuity liabilities.credit and foreign currency exchange rate risk related to various products and transactions. All derivatives are recorded at fair value. The fair value of the 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. The Company primarily uses derivatives as economic hedges that are not designated as accounting hedges
or do not qualify for hedge accounting treatment. The 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”).
The Company’s
accounting 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 Changes in fair value are recognized in current period earnings for derivative instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings. The changes in fair value of derivatives hedging variable annuity living benefits and certain variable annuity death benefits, when applicable, are included within benefits, claims, losses and settlement expenses. The changes in fair value of derivatives hedging equity indexed annuities are included within 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.
hedges.
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 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 portion of the gain or loss on the derivative instruments is 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
24
reported 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 reclassified 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 the Company uses and how it accounts for them, see Note 2 and Note
1617 to the Consolidated Financial Statements.
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, 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. charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.Insurance liabilities are reported before the effects of reinsurance.
FuturePolicyholder account balances, future policy benefits and
policy claims
and other policyholders’ funds recoverable under reinsurance contracts are recorded as reinsurance recoverables.
Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The 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 the 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 the Company’s deferred tax assets are a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes and 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.The 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. Management may need to identify and implement appropriate planning strategies to ensure the Company’s ability to
realiz erealize 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
itscertain state deferred tax assets,
including its capital loss deferred tax asset;primarily state net operating losses, and therefore
no sucha valuation allowance
of $6 million has been
established.established at December 31, 2013.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on the Company’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.
25
Consolidated Results of Operations for the YearYears EndedDecember 31, 2010 compared to the Year Ended December 31, 20092013
and 2012
The following table presents the Company’s consolidated results of operations:
| | Year Ended December 31, | | | | | |
| | 2010 | | 2009 | | Change | |
| | (in millions, except percentages) | |
Revenues | | | | | | | | | |
Premiums | | $ | 489 | | $ | 450 | | $ | 39 | | 9 | % |
Net investment income | | 1,629 | | 1,526 | | 103 | | 7 | |
Policy and contract charges | | 1,389 | | 1,156 | | 233 | | 20 | |
Other revenue | | 272 | | 233 | | 39 | | 17 | |
Net realized investment gains | | 16 | | 59 | | (43 | ) | (73 | ) |
| | | | | | | | | |
Total revenues | | 3,795 | | 3,424 | | 371 | | 11 | |
| | | | | | | | | |
Benefits and expenses | | | | | | | | | |
Benefits, claims, losses and settlement expenses | | 1,203 | | 841 | | 362 | | 43 | |
Interest credited to fixed accounts | | 909 | | 903 | | 6 | | 1 | |
Amortization of deferred acquisition costs | | 53 | | 145 | | (92 | ) | (63 | ) |
Other insurance and operating expenses | | 582 | | 550 | | 32 | | 6 | |
| | | | | | | | | |
Total benefits and expenses | | 2,747 | | 2,439 | | 308 | | 13 | |
| | | | | | | | | |
Pretax income | | 1,048 | | 985 | | 63 | | 6 | |
Income tax provision | | 252 | | 245 | | 7 | | 3 | |
| | | | | | | | | |
Net income | | $ | 796 | | $ | 740 | | $ | 56 | | 8 | |
|
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | | |
| | | 2013 | | 2012 | | Change |
| | | | | (in millions) | | | | |
| Revenues | | |
| | |
| | |
| | |
|
| Premiums | | $ | 430 |
| | $ | 442 |
| | $ | (12 | ) | | (3 | )% |
| Net investment income | | 1,411 |
| | 1,480 |
| | (69 | ) | | (5 | ) |
| Policy and contract charges | | 1,725 |
| | 1,593 |
| | 132 |
| | 8 |
|
| Other revenues | | 359 |
| | 329 |
| | 30 |
| | 9 |
|
| Net realized investment gains (losses) | | 3 |
| | (3 | ) | | 6 |
| | NM |
|
| Total revenues | | 3,928 |
| | 3,841 |
| | 87 |
| | 2 |
|
| Benefits and expenses | | |
| | |
| | |
| | |
|
| Benefits, claims, losses and settlement expenses | | 1,172 |
| | 1,216 |
| | (44 | ) | | (4 | ) |
| Interest credited to fixed accounts | | 806 |
| | 831 |
| | (25 | ) | | (3 | ) |
| Amortization of deferred acquisition costs | | 141 |
| | 225 |
| | (84 | ) | | (37 | ) |
| Other insurance and operating expenses | | 746 |
| | 755 |
| | (9 | ) | | (1 | ) |
| Total benefits and expenses | | 2,865 |
| | 3,027 |
| | (162 | ) | | (5 | ) |
| Pretax income | | 1,063 |
| | 814 |
| | 249 |
| | 31 |
|
| Income tax provision | | 221 |
| | 164 |
| | 57 |
| | 35 |
|
| Net income | | $ | 842 |
| | $ | 650 |
| | $ | 192 |
| | 30 | % |
NM Not Meaningful.
Overview
OverviewIn the third quarter of the year, management conducts its annual review of insurance and annuity valuation assumptions, relative to current experience and management expectations. To the extent that expectations change as a result of this review, management updates valuation assumptions and the impact is reflected as part of its annual review of life insurance and annuity valuation assumptions and modeling changes (“unlocking”). The unlocking impact in the third quarter of Consolidated net2013 primarily reflected expected higher interest rates and changes in assumed policyholder behavior.
Net income was $796increased $192 million or 30% to $842 million for the year ended December 31, 20102013 compared to $740$650 million for the prior year. Pretax income increased $249 million or 31% to $1.1 billion for the year ended December 31, 2013 compared to $814 million for the prior year primarily reflecting the impact from unlocking and model changes, the impact of market appreciation and the market impact on variable annuity guaranteed benefits (net of hedges and the related DAC and DSIC amortization), net realized gains on securities for the year ended December 31, 2013 compared to net realized losses on securities in the prior year and a $24 million benefit from policyholder movement of investments in Portfolio Navigator funds under certain in-force variable annuities with living benefit guarantees into managed volatility funds, partially offset by the negative impact from spread compression in the Company’s fixed annuities, fixed insurance and the fixed portion of variable annuities and variable insurance contracts. The market impact on variable annuity guaranteed benefits (net of hedges and the related DAC and DSIC amortization) was an expense of $155 million for the year ended December 31, 2009,2013 which included a $17 million benefit associated with unlocking. This compares to an increaseexpense of $56 million. Pretax income increased $63 million to $1.0 billion for the year ended December 31, 2010 from $985$265 million for the prior year, endedwhich included a $14 million expense associated with unlocking and model changes.
The Company’s fixed annuity account balances declined 4% to $13.3 billion at December 31,
2009.2013 compared to the prior year due to ongoing net outflows resulting from low client demand given the interest rate environment. The
increase was primarily driven by an increase in net investment income, policy and contract charges and a decrease in amortization of DAC. These increases to net income were partially offset by a decrease in net realized investment gains and an increase in benefits, claims, losses and settlement expenses.The annual review of valuation assumptionsCompany is in the third quarterprocess of 2010 resulted insetting lower renewal interest rates for a net pretax benefitportion of $88 million. A third quarter 2010 expenseits fixed annuities that are currently above the guaranteed minimum, which should help relieve some of $32 million related to an adjustment for insurance and annuity model changes was more than offsetthe spread compression caused by a second quarter 2010 benefitlow rates. The majority of $33 million related to an adjustment for revisions to certain calculationsthe interest rate renewals will occur in the valuationfirst half of DAC and DSIC. 2014.
The
net benefit of $89 million fromfollowing table presents the
above items reflected a $155 million benefit from persistency improvements, including a net benefit from extending annuity amortization periods and increased living benefits expense, an $85 million expense from resetting near-term equity return assumptions equal to the long-term assumptions and reducing both near- and long-term bond fund return assumptions, and $19 million in additional benefits from all other assumption and model changes.The annual review of valuation assumptions in the third quarter of 2009 resulted in a net pretax benefit of $134 million, consisting of a decrease in expenses primarily from updating product mortality assumptions for certain life insurance products and from the impact of updating product spreads and expense assumptions, partially offset by a decrease in revenues related to the reinsurance impacts from updating product mortality assumptions.
The total pretax impacts on the Company’s revenues and expenses for 2010 attributable to the review of valuation assumptionsunlocking and model changes were as follows:
Pretax Benefit (Charge) | | Policy and
Contract
Charges | | Benefits, Claims,
Losses and
Settlement
Expenses | | Amortization
of DAC | | Total | |
| | (in millions) | |
Valuation assumptions and model changes | | $ | (20 | ) | $ | (249 | ) | $ | 358 | | $ | 89 | |
| | | | | | | | | | | | | |
26
for the years ended December 31:
|
| | | | | | | | |
| Pretax Increase (Decrease) | | 2013 | | 2012 |
| | | (in millions) |
| Policy and contract charges | | $ | (18 | ) | | $ | (41 | ) |
| | | | | |
| Benefits, claims, losses and settlement expenses | | (5 | ) | | (28 | ) |
| Interest credited to fixed accounts | | — |
| | 2 |
|
| Amortization of DAC | | (79 | ) | | 23 |
|
| Total benefits and expenses | | (84 | ) | | (3 | ) |
Total(1) | | $ | 66 |
| | $ | (38 | ) |
| |
| (1) | Includes a $17 million benefit and a $14 million expense related to the market impact on variable annuity guaranteed benefits for the years ended December 31, 2013 and 2012, respectively. |
The
total pretax impacts onimpact of unlocking and model changes for the
Company’s revenues and expenses for 2009 attributable to the review of valuation assumptions were as follows:Pretax Benefit (Charge) | | Policy and
Contract
Charges | | Benefits, Claims,
Losses and
Settlement
Expenses | | Amortization
of DAC | | Total | |
| | (in millions) | |
Valuation assumptions | | $ | (65 | ) | $ | 80 | | $ | 119 | | $ | 134 | |
| | | | | | | | | | | | | |
Results for 2010year ended December 31, 2012 included a $34$41 million pretax benefit, from the market’s impact onnet of DAC and DSIC comparedamortization, from an adjustment to $30 million in 2009. Results for 2010 also included a $55 million pretax variable annuity benefits expense, net of hedges, DAC and DSIC,the model which values the reserves related to market impacts comparedliving benefit guarantees primarily attributable to $35 million in the prior year.
periods.
Revenues
RevenuesTotal revenues increased $371$87 million or 11%2% to $3.8$3.9 billion for the year ended December 31, 20102013 compared to $3.4$3.8 billion in 2009 primarily due to an increase in net investment income and policy and contract charges.
Premiums increased $39 million or 9% to $489 million for the year ended December 31, 2010 compared to $450 million in the prior year. The increase was primarily due to higher sales of immediate annuities with life contingencies.
Net investment income
increased $103decreased $69 million or
7% to $1.6 billion for the year ended December 31, 2010 compared to $1.5 billion in the prior year. The increase is due to income on fixed maturity securities driven by higher fixed annuity account balances and higher investment yields on the general account portfolio. The yield on the general account portfolio increased as the percentage of the portfolio invested in cash and cash equivalents decreased significantly.Policy and contract charges increased $233 million or 20%5% to $1.4 billion for the year ended December 31, 20102013 compared to $1.2$1.5 billion infor the prior year reflecting a decrease in investment income on fixed maturities primarily due to increased separate account fee revenue as a result of the increase in average separate account assets. Average separate accountlower invested assets increased $11.0 billion or 24% from the prior year period primarily due to market appreciation and net inflows in variable annuities. continued low interest rates.
Policy and contract charges in 2010 included a charge of $20increased $132 million from updating valuation assumptions and model changes or 8% to $1.7 billion for the year ended December 31, 2013 compared to a charge of $65 million in$1.6 billion for the prior year. The increase is primarily due to higher separate account fees driven by higher average separate account balances due to positive market performance and higher fee rates.
Other revenuerevenues increased $39$30 million or 17%9% to $272$359 million for the year ended December 31, 20102013 compared to $233$329 million infor the prior year reflecting higher marketing support and administrative fees due to higher average underlying separate account asset values.balances driven by positive market performance.
Net realized investment gains
decreased $43 million or 73% to $16were $3 million for the year ended December 31,
20102013 compared to
$59net realized investment losses of $3 million for
the prior year. In the year ended December 31,
2009. For the year ended December 31, 2010,2013, net realized gains
from sales ofon Available-for-Sale securities
due to sales, calls and tenders were
$47$11 million
andpartially offset by other-than-temporary impairments recognized in earnings
were $28of $6 million which primarily related to credit losses on non-agency residential mortgage backed
securities as well as corporate debt securities in the gaming industry. For the year ended December 31, 2010, the allowance for loan losses on syndicated loans decreased by $7 million offset by a $6 million increase in the allowance for loan losses on commercial mortgage loans.securities. In the year ended December 31,
2009,2012, net realized gains
from sales ofon Available-for-Sale securities
due to sales, calls and tenders were
$135$15 million
andoffset by other-than-temporary impairments
re cognizedrecognized in earnings
were $62of $17 million which
were primarily related to credit losses on non-agency residential mortgage backed
securities and corporate debt securities primarily in the gaming industry and banking and finance industries. For the year ended December 31, 2009, the reserves on commercial mortgage loans increased by $13 million.securities.
Total benefits and expenses
decreased $162 million or 5% to $2.9 billion for the year ended December 31,
2010 were $2.72013 compared to $3.0 billion
an increase of $308 million or 13% from $2.4 billion in 2009. This increase isfor the prior year primarily due to
increasesa decrease in benefits, claims, losses and settlement expenses and
other insurance and operating expenses partially offset by a decrease in amortization of DAC.
Benefits,
Benefits, claims, losses and settlement expenses increased $362decreased $44 million, or 43%4% compared to $1.2 billionthe prior year primarily reflecting the following items:
The year ended December 31, 2013 included a $5 million benefit from unlocking and model changes which included a $22 million benefit related to the market impact on variable annuity guaranteed benefits, and the prior year included a $28 million benefit, which included an $18 million expense related to the market impact on variable annuity guaranteed benefits. The market impact on variable annuity guaranteed benefits is discussed below. The impact from unlocking and model changes for the year ended December 31, 2010 compared to $841 million2013 reflected expected higher interest rates and
changes in assumed policyholder behavior, partially offset by the impact of variable annuity model changes. The impact from unlocking and model changes for the prior year primarily reflected a $50 million benefit from an adjustment to the model which values the reserves related to living benefit guarantees primarily attributable to prior periods, partially offset by lower bond fund returns related to the life contingent benefits associated with GMWB.
An increase in expenses of approximately $40 million related to higher reserve funding driven by the impact of updating valuation assumptionshigher fees from prior year sales with variable annuity guarantees.
An $8 million increase in disability income reserves in the second quarter of 2013 related to prior periods and model changes, partially offset bya $9 million benefit from a life insurance reserve release in the prior year.
A $29 million decrease in expenses from policyholder movement of investments in Portfolio Navigator funds under certain in-force variable annuities with living benefit guarantees to the managed volatility funds. During the fourth quarter of 2013, the Company added managed volatility fund options (Portfolio Stabilizer) for its in-force variable annuities with living benefit guarantees.
A $141 million increase in expense compared to the prior year from the unhedged nonperformance credit spread risk adjustment on variable annuity guaranteed benefits.
A $290 million decrease in expense from other market
impact ofimpacts on variable annuity guaranteed benefits, net of hedges
in place to offset those risks and
DSIC. Benefits, claims, losses and settlement expenses in 2010 included an expensethe related DSIC amortization. The $290 million decrease was the result of
$249a favorable $916 million
from updating valuation assumptions and model changes compared to a benefit of $80 millionchange in the
prior year. The market impact of variable annuity27
guaranteed benefits, net of hedges and DSIC, increased benefits, claims, losses and settlement expense by $59 million in 2010 compared to an increase of $148 million in the prior year. The market impact on both periods was primarily drivenvariable annuity guaranteed living benefits reserves, partially offset by an unfavorable $616 million change in the market impact of nonperformance credit spreadon derivatives hedging the variable annuity guaranteed benefits and an unfavorable $10 million DSIC offset. The main market drivers contributing to these changes are summarized below:
Interest rates were up in 2013 and down in 2012 resulting in a favorable change in the variable annuity guaranteed benefits liability, partially offset by an unfavorable change in the related hedge assets.
Equity market and volatility impacts on the valuation of living benefit liabilities, which the Company does not hedge. The market impact to DSIC was a benefit of $3 millionhedge assets resulted in 2010lower expenses in 2013 compared to 2012. This benefit was partially offset by higher expenses in 2013 compared to 2012 due to equity market and volatility impacts on the corresponding variable annuity guaranteed living benefits liability.
Other unhedged items including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various behavioral items were a
benefit of $4 million in the prior year. In addition, an increase in benefits expense of $17 million, net
of DSIC, is a result of the implementation of changes in the second quarter of 2010 to the Portfolio Navigator program (“PN program”) offered in connection with the Company’s variable life and annuity products. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This real location in part resulted in a shift of assets from interest bearing investments in the general account into separate accounts. Benefits, claims, losses and settlement expenses related to immediate annuities with life contingencies increasedunfavorable impact compared to the prior
year primarily due to higher premiums. Also, benefits, claims, losses and settlement expenses increased due to higher DI and LTC insurance claims and higher reserves for universal life (“UL”) products with secondary guarantees compared to the prior year.
The Company increased ongoing reserve levels for the UL products with secondary guarantees beginning in the third quarter of 2010. Amortization of DAC decreased $92$84 million or 63%37% to $53$141 million for the year ended December 31, 20102013 compared to $145$225 million infor the prior year. Amortization of DAC in 2010year primarily reflecting the following items:
The year ended December 31, 2013 included a $79 million benefit of $358 million from updating valuation assumptionsunlocking and model changes, compared to a benefit of $119 million in the prior year. DAC amortization in 2010which included a benefit$5 million expense related to the DAC offset to the market impact on variable annuity guaranteed benefits (net of $35hedges and the related DSIC amortization), primarily driven by the impact of expected higher interest rates and changes in assumed policyholder behavior. The prior year included a $23 million due to market impacts, includingexpense from unlocking and model changes, which included a $4 million benefit offsetting higherrelated to the DAC offset to the market impact on variable annuity guaranteed benefit expenses. Thebenefits (net of hedges and the related DSIC amortization), primarily reflecting a decrease also includes a $17 million decrease as a result of the implementation of changesin income earned on assets due to the PN program.low interest rate environment compared to the interest credited to the contractholders, which in many instances are at their minimum guarantees, and lower bond fund growth rates, partially offset by a benefit from improved persistency and lowered mortality assumption. The impact of unlocking and model changes for the prior year included a $9 million expense for the DAC amortization in 2009 includedoffset to the adjustment to the model which values the reserves related to living benefit guarantees primarily attributable to prior periods.
The DAC offset to the market impact on variable annuity guaranteed benefits (net of hedges and the related DSIC amortization) was a benefit of
$139 million due to market impacts, including a $113 million benefit offsetting higher variable annuity guaranteed living benefit expenses.Other insurance and operating expenses increased $32 million or 6% to $582$31 million for the year ended December 31, 20102013 compared to $550a benefit of $69 million in the prior year.
The
increase is primarily duemarket impact on DAC was a benefit of $26 million for the year ended December 31, 2013 compared to a
decreasebenefit of $24 million in the
percentageprior year as a result of
deferral eligible costs relative to total costsfavorable equity market returns somewhat offset by unfavorable bond fund returns in
2010the year ended December 31, 2013 compared to
favorable equity and bond fund returns in the prior year.
This increase was partially offset by a decrease in sales and marketing expenses and lower corporate overhead expenses in 2010 compared to the prior year.
The Company’s effective tax rate was
24.1%21% for the year ended December 31,
20102013, compared to
24.9%20% for the prior year. The effective tax rate for both periods is lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing credits. The effective tax rate for the year ended December 31,
2009. The decrease in2012 was impacted by the
effectivecorrection of tax
rate primarily reflects benefits from tax planning and completion of certain audits which offset the impact of an increase in pretax income relative to tax advantaged items.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 contractssecurities lending activities partially offset by increased low income housing tax credits. See Note 1 to the Consolidated Financial Statements for additional information.
The 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 aretransactions and is not
permitted to use market prices that are the result of a forced liquidation or distressed sale. The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. The 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.
See Note 13 to the Consolidated Financial Statements for additional information on the Company’s fair value measurements.
Non-Agency Residential Mortgage Backed Securities Backed by 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. The Company has exposure to each of these types of loans predominantly through mortgage backed
and asset backed securities. The slowdown 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.
28
Market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of the 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 the Company will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment, the Company performs its own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds and loss severity to determine if an other-than-temporary impairment should be recognized.
The following table presents, as of December 31,
2010,2013, 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 | |
| | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | |
| | (in millions) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Sub-prime | | | | | | | | | | | | | | | | | | | | | | | | | |
2003 & prior | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
2004 | | 2 | | 2 | | 7 | | 4 | | — | | — | | — | | — | | — | | — | | 9 | | 6 | |
2005 | | 4 | | 3 | | 22 | | 20 | | 19 | | 19 | | 6 | | 6 | | 17 | | 13 | | 68 | | 61 | |
2006 | | — | | — | | — | | — | | — | | — | | 4 | | 4 | | 3 | | 3 | | 7 | | 7 | |
2007 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
2008 | | — | | — | | 6 | | 5 | | — | | — | | — | | — | | — | | — | | 6 | | 5 | |
Total Sub-prime | | $ | 6 | | $ | 5 | | $ | 35 | | $ | 29 | | $ | 19 | | $ | 19 | | $ | 10 | | $ | 10 | | $ | 20 | | $ | 16 | | $ | 90 | | $ | 79 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Alt-A | | | | | | | | | | | | | | | | | | | | | | | | | |
2003 & prior | | $ | 13 | | $ | 14 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 13 | | $ | 14 | |
2004 | | 7 | | 7 | | 56 | | 58 | | 4 | | 3 | | — | | — | | 11 | | 7 | | 78 | | 75 | |
2005 | | — | | — | | — | | — | | 2 | | 2 | | — | | — | | 216 | | 162 | | 218 | | 164 | |
2006 | | — | | — | | — | | — | | — | | — | | — | | — | | 10 | | 6 | | 10 | | 6 | |
2007 | | — | | — | | — | | — | | — | | — | | — | | — | | 26 | | 16 | | 26 | | 16 | |
2008 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Re-Remic(1) | | 18 | | 18 | | — | | — | | — | | — | | — | | — | | — | | — | | 18 | | 18 | |
Total Alt-A | | $ | 38 | | $ | 39 | | $ | 56 | | $ | 58 | | $ | 6 | | $ | 5 | | $ | — | | $ | — | | $ | 263 | | $ | 191 | | $ | 363 | | $ | 293 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Prime | | | | | | | | | | | | | | | | | | | | | | | | | |
2003 & prior | | $ | 150 | | $ | 149 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 150 | | $ | 149 | |
2004 | | 22 | | 23 | | — | | — | | 23 | | 25 | | 9 | | 10 | | — | | — | | 54 | | 58 | |
2005 | | 11 | | 16 | | 19 | | 24 | | 32 | | 36 | | 25 | | 26 | | 113 | | 71 | | 200 | | 173 | |
2006 | | — | | — | | 17 | | 18 | | — | | — | | — | | — | | 34 | | 33 | | 51 | | 51 | |
2007 | | 34 | | 37 | | — | | — | | — | | — | | — | | — | | 13 | | 11 | | 47 | | 48 | |
2008 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Re-Remic(1) | | 1,586 | | 1,746 | | 63 | | 78 | | — | | — | | — | | — | | 12 | | 22 | | 1,661 | | 1,846 | |
Total Prime | | $ | 1,803 | | $ | 1,971 | | $ | 99 | | $ | 120 | | $ | 55 | | $ | 61 | | $ | 34 | | $ | 36 | | $ | 172 | | $ | 137 | | $ | 2,163 | | $ | 2,325 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Grand Total | | $ | 1,847 | | $ | 2,015 | | $ | 190 | | $ | 207 | | $ | 80 | | $ | 85 | | $ | 44 | | $ | 46 | | $ | 455 | | $ | 344 | | $ | 2,616 | | $ | 2,697 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Investment Grade | | BB & Below | | Total |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in millions) |
| Sub-prime | | | | | | | | | | | |
| Original securitizations | $ | 28 |
| | $ | 29 |
| | $ | 23 |
| | $ | 21 |
| | $ | 51 |
| | $ | 50 |
|
| | | | | | | | | | | | |
| Alt-A | | | | | | | | | | | |
| Original securitizations | $ | 49 |
| | $ | 53 |
| | $ | 180 |
| | $ | 162 |
| | $ | 229 |
| | $ | 215 |
|
Re-Remic(1) | 102 |
| | 101 |
| | — |
| | — |
| | 102 |
| | 101 |
|
| Total Alt-A | $ | 151 |
| | $ | 154 |
| | $ | 180 |
| | $ | 162 |
| | $ | 331 |
| | $ | 316 |
|
| | | | | | | | | | | | |
| Prime | | | | | | | | | | | |
| Original securitizations | $ | 122 |
| | $ | 125 |
| | $ | 148 |
| | $ | 156 |
| | $ | 270 |
| | $ | 281 |
|
Re-Remic(1) | 794 |
| | 834 |
| | 21 |
| | 26 |
| | 815 |
| | 860 |
|
| Total Prime | $ | 916 |
| | $ | 959 |
| | $ | 169 |
| | $ | 182 |
| | $ | 1,085 |
| | $ | 1,141 |
|
| | | | | | | | | | | | |
| Grand Total | $ | 1,095 |
| | $ | 1,142 |
| | $ | 372 |
| | $ | 365 |
| | $ | 1,467 |
| | $ | 1,507 |
|
| |
| (1) | Re-Remics of mortgage backed securities are prior vintages with cash flows structured into senior and subordinated bonds. Credit enhancement has been increased through the Re-Remic process on the securities the Company owns. |
(1)Re-Remics
European Exposure
The Company did not have any exposure to subordinate tranchesfollowing table presents, as of December 31, 2010.2013, 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 Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | % of Invested Assets(1) |
| | (in millions, except percentages) | | |
| Greece | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| Italy | — |
| | — |
| | — |
| | — |
| | 48 |
| | 48 |
| | 48 |
| | 48 |
| | 0.2 |
|
| Ireland | — |
| | — |
| | — |
| | — |
| | 34 |
| | 31 |
| | 34 |
| | 31 |
| | 0.1 |
|
| Portugal | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Spain | — |
| | — |
| | — |
| | — |
| | 169 |
| | 176 |
| | 169 |
| | 176 |
| | 0.6 |
|
| Subtotal | — |
| | — |
| | — |
| | — |
| | 251 |
| | 255 |
| | 251 |
| | 255 |
| | 0.9 |
|
| Other European exposure | 43 |
| | 47 |
| | 197 |
| | 203 |
| | 1,141 |
| | 1,188 |
| | 1,381 |
| | 1,438 |
| | 4.8 |
|
| Total | $ | 43 |
| | $ | 47 |
| | $ | 197 |
| | $ | 203 |
| | $ | 1,392 |
| | $ | 1,443 |
| | $ | 1,632 |
| | $ | 1,693 |
| | 5.7 | % |
| |
| (1) | Invested assets include cash and cash equivalents and investments. |
The non-financial corporate debt holdings in Italy, Ireland 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, 2013.
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 the Company’s obligations of its variable annuity riders and indexed universal life insurance, the Company considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, the Company adjusts the valuation of variable annuity riders and indexed universal life insurance 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 the Company’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are adjusted to estimate the risk of the Company not fulfilling these liabilities. Consistent with general market conditions, thi sthis estimate resulted in a spread over the LIBOR swap curve as of December 31, 2010.2013. As the 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 $71$81 million, net of DAC, and DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on December 31, 20102013 credit spreads.29
Liquidity and Capital Resources
The liquidity requirements of the 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 the Company has established are
repurchase agreementsshort-term borrowings and available lines of credit with Ameriprise Financial aggregating $1 billion.
Also, in March 2009, RiverSource Life Insurance
The Company became a member of theenters into short-term borrowings, which may include repurchase agreements and Federal Home Loan Bank of Des Moines (“FHLB”), which provides RiverSource Life Insurance Company access to collateralized borrowings. At December 31, 2010 and 2009, the Company had no borrowings from the FHLB. In 2010, the Company entered into repurchase agreements advances to reduce reinvestment risk from higher levels of expected annuity net cash flows. Repurchase agreementsShort-term borrowings 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, 20102013 and 2012 was $397$50 million and $501 million, respectively, which is collateralized with agency residential mortgage backed securities and corporate debtcommercial mortgage backed securities from the Company’s investment portfolio.As RiverSource Life Insurance Company is a member of the FHLB of Des Moines, which provides RiverSource Life Insurance Company access to collateralized borrowings. At
December 31, 2013, the Company had borrowings of $450 million from the FHLB which is collateralized with commercial mortgage backed securities. The Company had no borrowings from the FHLB as of December 31, 2010, the2012. The outstanding balance under the lines of credit with Ameriprise Financial was $3$150 million which was repaid in full with a payment in January 2011. RiverSource Life Insurance Company borrowed $200 million in January 2011 and an additional $100 million in February 2011 under the line of credit.As of
at both December 31, 2009, the outstanding balance under the lines of credit with Ameriprise Financial was $300 million which was repaid in full with payments in January2013 and February 2010.2012.
See Note 11 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. The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
Dividends paid
and received by RiverSource Life Insurance Company were as follows:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Cash dividends paid to Ameriprise Financial | | $ | 500 | | $ | — | | $ | 775 | |
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY | | 28 | | — | | 77 | |
Cash dividends paid to RiverSource Life Insurance Company from RTA | | 63 | | 22 | | — | |
Non-cash dividend paid to Ameriprise Financial from RTA | | — | | — | | 118 | |
| | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Cash dividends paid to Ameriprise Financial | | $ | 800 |
| | $ | 865 |
| | $ | 750 |
|
| Non-cash dividend paid to Ameriprise Financial | | — |
| | — |
| | 850 |
|
| Cash dividends received from RiverSource Life of NY | | 25 |
| | 50 |
| | 79 |
|
| Cash dividends received from RTA | | — |
| | — |
| | 53 |
|
For dividends from the life insurance companies, notifications to state insurance regulators were made in advance of payments in excess of statutorily defined thresholds. See
Note15Note 15 to the Consolidated Financial Statements for additional information.
During
2010,2013, 2012 and 2011, RiverSource Life Insurance Company
received a non-cash capital contributionmade cash contributions to RTA of
$14$30 million,
comprised of$53 million and $111 million, respectively, for ongoing funding commitments related to affordable housing partnership
investments from Ameriprise Financial.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.
During 2008, RiverSource Life Insurance Company 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.
30investments.
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:
| | | | | | Regulatory Capital | |
| | Actual Capital(a) | | Requirement(b) | |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| | (in millions) | |
RiverSource Life Insurance Company | | $ | 3,813 | | $ | 3,450 | | $ | 652 | | $ | 803 | |
RiverSource Life of NY | | 291 | | 286 | | 38 | | 44 | |
| | | | | | | | | | | | | |
(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.
|
| | | | | | | | | | | | | | | | |
| | | Actual Capital(a) | | Regulatory Capital Requirement(b) |
| | | December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 |
| | | (in millions) |
| RiverSource Life Insurance Company | | $ | 2,747 |
| | $ | 3,257 |
| | $ | 591 |
| | $ | 620 |
|
| RiverSource Life Insurance Co. of New York | | 251 |
| | 256 |
| | 49 |
| | 44 |
|
| |
| (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. |
The contractual obligations identified in the table below include balance sheet transactions that represent material expected or contractually committed future obligations. Payments due by period as of December 31, 20102013 were as follows: | | | | | | | | | | | | | | | | |
| | Total | | 2011 | | 2012-
2013 | | 2014-
2015 | | 2016 and
Thereafter | |
| | (in millions) | |
Insurance and annuities (1) | | $ | 47,335 | | $ | 2,348 | | $ | 4,815 | | $ | 5,589 | | $ | 34,583 | |
Deferred premium options (2) | | 1,651 | | 266 | | 468 | | 371 | | 546 | |
Line of credit with Ameriprise Financial (3) | | 3 | | 3 | | — | | — | | — | |
Affordable housing partnerships(4) | | 188 | | 88 | | 98 | | 2 | | — | |
Total | | $ | 49,177 | | $ | 2,705 | | $ | 5,381 | | $ | 5,962 | | $ | 35,129 | |
(1) These scheduled payments are represented by reserves of approximately $29.7 billion at December 31, 2010 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 included on the Consolidated Balance Sheets was $1.5 billion as of December 31, 2010. See Note 16 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, 2010 was repaid in full with a payment in January 2011.
(4) Affordable housing partnerships commitments are primarily 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 | | 2014 | | 2015-2016 | | 2017-2018 | | 2019 and Thereafter |
| | (in millions) |
Insurance and annuities(1) | $ | 39,849 |
| | $ | 3,009 |
| | $ | 6,166 |
| | $ | 4,568 |
| | $ | 26,106 |
|
Deferred premium options(2) | 1,842 |
| | 359 |
| | 614 |
| | 397 |
| | 472 |
|
Line of credit with Ameriprise Financial(3) | 150 |
| | 150 |
| | — |
| | — |
| | — |
|
Affordable housing partnerships(4) | 137 |
| | 73 |
| | 59 |
| | 1 |
| | 4 |
|
| Total | $ | 41,978 |
| | $ | 3,591 |
| | $ | 6,839 |
| | $ | 4,966 |
| | $ | 26,582 |
|
| |
| (1) | These scheduled payments are represented by reserves of approximately $29.0 billion at December 31, 2013 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 these commitments included on the Consolidated Balance Sheets was $1.8 billion as of December 31, 2013. See Note 17 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. |
| |
| (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 specific amount on a stated date provided there are no defaults under the agreement. For event specific obligations, the Company is required to fund a specific 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 timing of future cash flows, were
$21$613 million at December 31,
2010.2013.
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.
The 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, the Company develops specific investment guidelines that are designed to optimize trade offs between risk and return and help ensure the 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.
31
The 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 the Company with a targeted margin between the yield earned on investments and the interest rate credited to clients’ accounts. The Company does not trade in securities to generate short-term profits for its own account.
As part of the 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.
The 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. The Company manages interest rate risk through the use of a variety of tools that include
modifyingmanaging the
maturitiesduration of investments supporting its fixed annuities and insurance products. Additionally, the 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 the Company enters into risk management strategies that may include the use of equity derivative instruments, such as equity options, to mitigate its
exposur eexposure to volatility in the equity markets.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposures are interest rate, equity price and credit risk. Equity price and interest rate fluctuations can have a significant impact on the Company’s results of operations, primarily due to the effects on asset-based fees and expenses, the
spread“spread” income generated on its
fixed annuities, fixed insurance and fixed portion of its variable annuities and
ULvariable insurance
products,contracts, the value of DAC and DSIC assets,
associated with variable annuity and variable UL products, the
valuesvalue of liabilities for guaranteed benefits associated with its variable annuities and the
valuesvalue of derivatives held to hedge these benefits.
The guaranteed benefits associated with the Company’s variable annuities are GMWB, GMAB, GMDB and
GMIB options.GMIB. Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.
The
Company continuesvariable annuity guarantees continue to
utilizebe managed by utilizing 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. The Company’s comprehensive hedging program focuses mainly on first order sensitivities of
the assets and
liabilities;liabilities: Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. The 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.
In 2013, the Company established a macro hedge program which uses a combination of options and/or swaps to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus. The program also covers some of the residual risks not covered by other hedging activities. The Company assesses this residual risk under a range of scenarios in creating and executing the macro hedge program. The macro hedge program could result in additional earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory capital volatility, may not be closely aligned to changes in the variable annuity guaranty embedded derivatives.
To evaluate interest rate and equity price risk, the Company performs sensitivity testing which measures the impact on pretax income from the sources listed below for a
12 month12-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 annuities,
indexed universal life insurance and the associated hedge assets, the Company assumed no change in implied market volatility despite the 10% drop in equity prices.
The following tables present the Company’s estimate of the impact on pretax income from these hypothetical market movements as of December 31, 2010:
| | Equity Price Exposure to Pretax Income | |
Equity Price Decline 10% | | Before
Hedge Impact | | Hedge
Impact | | Net
Impact | |
| | (in millions) | |
Asset-based fees and expenses | | $ | (60 | ) | $ | — | | $ | (60 | ) |
DAC and DSIC amortization(1) (2) | | (127 | ) | — | | (127 | ) |
Variable annuity riders: | | | | | | | |
GMDB and GMIB(2) | | (25 | ) | — | | (25 | ) |
GMWB | | (40 | ) | 42 | | 2 | |
GMAB | | (25 | ) | 28 | | 3 | |
DAC and DSIC amortization(3) | | N/A | | N/A | | (2 | ) |
Total variable annuity riders | | (90 | ) | 70 | | (22 | ) |
Equity indexed annuities | | 1 | | (1 | ) | — | |
Total | | $ | (276 | ) | $ | 69 | | $ | (209 | ) |
| | Interest Rate Exposure to Pretax Income | |
Interest Rate Increase 100 Basis Points | | Before
Hedge Impact | | Hedge
Impact | | Net
Impact | |
| | (in millions) | |
Asset-based fees and expenses | | $ | (18 | ) | $ | — | | $ | (18 | ) |
Variable annuity riders: | | | | | | | |
GMWB | | 253 | | (300 | ) | (47 | ) |
GMAB | | 34 | | (39 | ) | (5 | ) |
DAC and DSIC amortization(3) | | N/A | | N/A | | 18 | |
Total variable annuity riders | | 287 | | (339 | ) | (34 | ) |
Total | | $ | 269 | | $ | (339 | ) | $ | (52 | ) |
N/A Not Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected profits.
|
| | | | | | | | | | | | |
| | | Equity Price Exposure to Pretax Income |
| Equity Price Decline 10% | | Before
Hedge Impact | | Hedge
Impact | | Net Impact |
| | | (in millions) |
| Asset-based fees and expenses | | $ | (85 | ) | | $ | — |
| | $ | (85 | ) |
DAC and DSIC amortization(1) (2) | | (87 | ) | | — |
| | (87 | ) |
| Variable annuity riders: | | |
| | |
| | |
GMDB and GMIB(2) | | (78 | ) | | — |
| | (78 | ) |
| GMWB | | (145 | ) | | 135 |
| | (10 | ) |
| GMAB | | (34 | ) | | 31 |
| | (3 | ) |
DAC and DSIC amortization(3) | | N/A |
| | N/A |
| | 5 |
|
| Total variable annuity riders | | (257 | ) | | 166 |
| | (86 | ) |
Macro hedge program(4) | | (2 | ) | | 9 |
| | 7 |
|
| EIA | | 1 |
| | (1 | ) | | — |
|
| IUL insurance | | 8 |
| | (9 | ) | | (1 | ) |
| Total | | $ | (422 | ) | | $ | 165 |
| | $ | (252 | ) |
|
| | | | | | | | | | | | |
| | | Interest Rate Exposure to Pretax Income |
| Interest Rate Increase 100 Basis Points | | Before
Hedge Impact | | Hedge
Impact | | Net Impact |
| | | (in millions) |
| Asset-based fees and expenses | | $ | (22 | ) | | $ | — |
| | $ | (22 | ) |
| Variable annuity riders: | | |
| | |
| | |
|
| GMDB and GMIB | | — |
| | — |
| | — |
|
| GMWB | | 435 |
| | (502 | ) | | (67 | ) |
| GMAB | | 23 |
| | (26 | ) | | (3 | ) |
DAC and DSIC amortization(3) | | N/A |
| | N/A |
| | 14 |
|
| Total variable annuity riders | | 458 |
| | (528 | ) | | (56 | ) |
Macro hedge program(4) | | — |
| | (1 | ) | | (1 | ) |
| Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products | | 14 |
| | — |
| | 14 |
|
| IUL insurance | | 10 |
| | — |
| | 10 |
|
| Total | | $ | 460 |
| | $ | (529 | ) |
| $ | (55 | ) |
| |
| (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. |
| |
| (4) | The market impact of the macro hedge program is modeled net of any related impact to DAC and DSIC amortization. |
(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 net impactsimpact to pretax income of $211$203 million related to a 10% equity price decline and $66an estimated positive net impact to pretax income of $78 million related to a 100 basis point increase in interest rates as of December 31, 2009.2012. The change in equity price exposure is primarily due to assumption changes made as part of third quarter unlocking and higher account values year over year offset by changes in hedging strategy. The change in the
interest rate exposure
decreasedrelated to GMWB liabilities is from a refinement in
2010the Company’s hedging strategy. The change in interest rate exposure related to fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products is related primarily to model updates, namely enhanced assumptions related to DAC and benefit reserves. The underlying interest rate sensitivity to fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products has not materially changed due to
the significant fall in rates from December 31, 2009.market conditions.
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 policyholderrisk margins incorporated in contractholder behavior assumptions
loaded to provide risk margins and with discount rates increased to reflect a current market estimate of the Company’s risk of nonperformance specific to these liabilities.
For variable annuity riders introduced prior to mid-2009, management elected to hedge based on best estimate policyholder behavior 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 is not hedged.
Net impacts shown in the above table from GMDB and GMIB reflect the fact that these guaranteed benefits are primarily retained by the Company and are not hedged.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 prices 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, the Company has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has the Company tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.
33
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
The Company earns asset-based management fees on its owned separate account assets partially offset by certain expenses. At December 31,
2010,2013, the value of these assets was
$63.8$77.6 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. The Company does not currently hedge the interest rate or 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.
The total contract value of all variable annuities
has increased from $55.1at December 31, 2013 was $75.5 billion compared to $68.1 billion at December 31,
2009 to $62.6 billion at December 31, 2010.2012. These contract values include GMWB and GMAB contracts which
have increased from $19.2were $38.0 billion and
$2.9$4.2 billion, respectively, at December 31,
20092013, compared to
$24.7$32.5 billion and
$3.5$3.8 billion, respectively, at December 31,
2010.2012. At December 31,
2010,2013, reserves for GMWB and GMAB were
$337assets of $383 million and
$104$62 million, respectively,
which were reflected as contra liabilities in policyholder account balances, futures policy benefits and claims compared to
reservesliabilities of
$204$799 million and
$100$103 million, respectively, at December 31,
2009.2012. The
increase in reserves for GMWB and GMAB
reflectreserves include the
changes in economic factors impacting the mark-to-marketfair value of
the guaranteesembedded derivatives which fluctuates based on equity, interest rate and
increased volume of business.credit markets which can cause these embedded derivatives to be either an asset or a liability. At December 31,
2010,2013, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was
$13$10 million compared to
$12$13 million at December
&nb sp;31,
2009.2012.
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 the Company’s earnings.
The core derivative instruments with which the 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. See Note
1617 to the Consolidated Financial Statements for further information on the 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. The 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, the 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 the Company’s pretax income.
Fixed Annuities,
Fixed Insurance and Fixed Portion of Variable Annuities and
FixedVariable Insurance
ProductsInterest rate exposures arise primarily with respect toContracts
The Company’s earnings from fixed annuities, fixed insurance, and the fixed
account portion of
variable annuities and variable insurance contracts are based upon the
Company’s annuityspread between rates earned on assets held and
insurance products and its investment portfolio.the rates at which interest is credited to accounts. The Company primarily invests in fixed rate securities to fund the rate credited to clients. The Company guarantees an interest rate to the holders of these products.
PremiumsInvestment assets and
deposits collected from clients are primarily invested in fixed rate securities to fund the client
credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities
and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments.
34
Therefore, in an increasing interest rate environment, higher interest rates aremay be reflected in crediting rates to clients sooner than in rates earned on invested assets, resultingwhich could result in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. However, the current low interest rate environment is resulting in interest rates below the level of some of the Company's liability guaranteed minimum interest rates (“GMIRs”). Hence, a modest rise in interest rates would not necessarily result in changes to all the liability credited rates while projected asset purchases would capture the full increase in interest rates. This dynamic would result in widening spreads under a modestly rising rate scenario given the current relationship between the current level of interest rates and the underlying GMIRs on the business. Of the $29.7$29.2 billion in policyholder account balances, future policy benefits and claims on the Company’s Consolidated Balance SheetsSheet at December 31, 2010, $29.22013, $24.5 billion is related to liabilities created by these products. The Company diddoes not hedge this exposure.
As a result of the low interest rate environment, the Company’s current reinvestment yields are generally lower than the current portfolio yield. The Company expects its portfolio income yields to continue to decline in future periods if interest rates remain low. The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans that may generate proceeds to reinvest through 2015 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, was $2.4 billion and 4.9%, respectively, as of December 31, 2013. In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled $3.8 billion and had a weighted average yield of 4.3% as of December 31, 2013. While these amounts represent investments that could be subject to reinvestment risk, it is also possible that these investments will be used to fund liabilities or may not be prepaid and will remain invested at their current yields. In addition to the interest rate environment, the mix of benefit payments versus product sales as well as the timing and volumes associated with such mix may impact the Company’s investment yield. Furthermore, reinvestment activities and the associated investment yield may also be impacted by corporate strategies implemented at management discretion. The average yield for investment purchases during the year ended December 31, 2013 was approximately 3.4%.
The reinvestment of proceeds from maturities, calls and prepayments at rates below the current portfolio yield, which may be below the level of some liability guaranteed minimum interest rates, will have a negative impact to future operating results. To mitigate the unfavorable impact that the low interest rate environment has on the Company’s spread income, it assesses reinvestment risk in its investment portfolio and monitors this risk in accordance with its asset/liability management framework. In addition, the Company may reduce the crediting rates on its fixed products when warranted, subject to guaranteed minimums. The Company is in the process of setting lower renewal interest rates for a portion of its fixed annuities that are currently above the guaranteed minimum, which should help relieve some of the spread compression caused by low rates. The majority of the interest rate renewals will occur in the first half of 2014.
The following table presents the account values of fixed annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts by range of guaranteed minimum crediting rates and the range of the difference between rates credited to policyholders and contractholders as of December 31, 2013 and the respective guaranteed minimums, as well as the percentage of account values subject to rate reset in the time period indicated. Rates are reset at the Company’s discretion, subject to guaranteed minimums.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Account Values with Crediting Rates |
| | At Guaranteed Minimum | | 1-49 bps Above Guaranteed Minimum | | 50-99 bps Above Guaranteed Minimum | | 100-150 bps Above Guaranteed Minimum | | Greater than 150 bps Above Guaranteed Minimum | | Total |
| Range of Guaranteed Minimum Crediting Rates | (in billions, except percentages) |
| | | | | | | | | | | |
| 1% - 1.99% | $ | 0.4 |
| | $ | 0.4 |
| | $ | 0.4 |
| | $ | 0.4 |
| | $ | 3.0 |
| | $ | 4.6 |
|
| 2% - 2.99% | 0.5 |
| | 0.1 |
| | — |
| | — |
| | — |
| | 0.6 |
|
| 3% - 3.99% | 9.8 |
| | 0.1 |
| | — |
| | — |
| | — |
| | 9.9 |
|
| 4% - 5.00% | 5.7 |
| | — |
| | — |
| | — |
| | — |
| | 5.7 |
|
| Total | $ | 16.4 |
| | $ | 0.6 |
| | $ | 0.4 |
| | $ | 0.4 |
| | $ | 3.0 |
| | $ | 20.8 |
|
| | | | | | | | | | | | |
| Percentage of Account Values That Reset In: | | | | | | | | | | | |
Next 12 months (1) | 99 | % | | 72 | % | | 21 | % | | 45 | % | | 98 | % | | 96 | % |
> 12 months to 24 months (2) | — |
| | 4 |
| | 25 |
| | 26 |
| | 2 |
| | 1 |
|
> 24 months (2) | 1 |
| | 24 |
| | 54 |
| | 29 |
| | — |
| | 3 |
|
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| |
| (1) | Includes contracts with annual discretionary crediting rate resets and contracts with twelve or less months until the crediting rate becomes discretionary on an annual basis. |
| |
| (2) | Includes contracts with more than twelve months remaining until the crediting rate becomes an annual discretionary rate. |
The 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. 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, 2010,2013, the Company had $103$29 million in reserves related to equity indexed annuities. The Company discontinued new sales of equity indexed 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 the Company must credit to client accounts. In conjunction with purchasing puts, the Company also writes puts. Pairing purchased puts with written puts allows the 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. The 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.
This risk is not currently hedged and was immaterial at December 31, 2013.
Indexed Universal Life
IUL insurance is similar to UL in many regards, although the rate of credited interest above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the S&P 500 Index (subject to a cap and floor). The policyholder may allocate all or a portion of the policy value to a fixed or indexed account. At December 31, 2013, the Company had $267 million in reserves related to the index account of IUL.
Equity Price Risk - Indexed Universal Life
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. Most of the proceeds received from IUL insurance are invested in fixed income securities. To hedge the equity exposure, a portion of the investment earnings received from the fixed income securities is used to purchase call spreads which generate returns to replicate what the Company must credit to client accounts.
Interest Rate Risk - Indexed Universal Life
As mentioned above, most of the proceeds received from IUL insurance are invested in fixed income securities with the return on those investments intended to fund the purchase of call spreads. There are two risks relating to interest rates. First, the Company has the risk that investment returns are such that it does not have enough investment income to purchase the needed call spreads. Second, in the event the policy is surrendered, the Company pays out a book value surrender amount and there is a risk that it will incur a loss upon having to sell the fixed income securities backing the liability (if interest rates have risen).This risk is not currently hedged.
The 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. The 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 the 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.
The 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. The 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.
The 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, the 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.
The counterparty risk for centrally cleared over-the-counter derivatives is transferred to a central clearing party through contract novation. Because exchange-traded futuresthe central clearing party monitors open positions and adjusts collateral requirements daily, the Company has minimal credit exposure to such derivative instruments.
Exchange-traded derivatives are effected through regulated exchanges
that require contract standardization and
positionsinitial margin to transact through the exchange. Because exchange-traded futures are marked to market and generally cash settled on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.
Other exchange-traded derivatives would be exposed to nonperformance by counterparties for amounts in excess of initial margin requirements only if the exchange is unable to fulfill the contract.
The 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, the Company regularly evaluates their financial strength during the terms of the treaties. As of December 31,
2010,2013, 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 8 to the Consolidated Financial Statements for additional information on reinsurance.
35
Forward-Looking Statements
This report contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The 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 introduction, cessation, terms or pricing of new or existing products and services and 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 which 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
conditions in the interest rate, credit default, equity market and foreign exchange
environments;·environments, including changes in valuations, liquidity and volatility;
changes in and the adoption of relevant accounting standards
and securities rating agency standards and processes, 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, including the rules and regulations implemented or to be implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act;
·
the Company’s investment management performance and consumer acceptance of the Company’s products;
·
effects of competition in the financial services industry,
including pricing pressure, the introduction of new products and services and changes in
the Company’s product distribution mix and distribution channels;
·
changes to the Company’s reputation that may arise from employee or
affiliatedAFSI advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;
·
the 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 the Company’s regulators distributors or policyholders and contractholders in response to any change or prospect of change in any such opinion;
·
risks of default,
capacity constraints or repricing by issuers or guarantors of investments the Company owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from the 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 the Company’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
·
experience deviations from the 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 the 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;
·
the Company’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
·
the impact of intercompany allocations to the 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 the 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 impacts of Ameriprise Financial’s efforts to improve distribution economics
grow third party distribution and realize benefits from reengineering and tax planning;
·changes
interruptions or other failures in the
capital marketsCompany’s communications, technology and
competitive environments inducedother operating systems, including errors or
resulting fromfailures caused by third party service providers, interference or failures caused by third party attacks on the
partialCompany’s systems, or
total ownershipthe failure to safeguard the privacy or
other support by central governmentsconfidentiality of
certain financial services firms or financial assets;sensitive information and
· data on such systems; 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 the Company consumes in the
36
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.
The Company cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that the 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. The Company undertakes no obligation to update publicly or revise any forward-looking statements.
The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion as Part I, Item 1A in the Company’s 2013 10-K.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Items required under this section are included in Item 7 in this Annual Report on Form 10-K
—- “Management’s Narrative Analysis - Quantitative and Qualitative Disclosures about Market Risk.”
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All information on schedules to the Consolidated Financial Statements required by Rule 7-05 in Article 7 of Regulation
S-X is included in the Consolidated Financial Statements and Notes thereto or is not required. Therefore, all schedules have been omitted.
Report of Independent Registered Public Accounting Firm
The
To the Board of Directors
and Shareholder of RiverSource Life Insurance
CompanyCompany:
We have audited the accompanying consolidated balance sheets of RiverSource Life Insurance Company (a wholly owned subsidiary of Ameriprise Financial, Inc.)and its subsidiaries (the Company)“Company”) as of December 31, 20102013 and 2009,December 31, 2012 and the related consolidated statements of income, comprehensive income, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2010.2013. 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’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,statements. An audit also includes assessing the accounting
principl esprinciples used and significant estimates made by management,
andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RiverSource Life Insurance Company and its subsidiaries at December 31, 20102013 and 2009,2012, and the consolidated results of itstheir operations and itstheir cash flows for each of the three years in the period ended December 31, 2010,2013 in conformity with U.S.accounting principles 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 presentationUnited States of other-than-temporary impairments, and in 2008 the Company adopted new accounting guidance related to the measurementAmerica.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 25, 2014
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
| | December 31, | |
| | 2010 | | 2009 | |
| | (in millions, except share amounts) | |
Assets | | | | | |
Investments: | | | | | |
Available-for-Sale: | | | | | |
Fixed maturities, at fair value (amortized cost: 2010, $24,818; 2009, $25,142) | | $ | 26,442 | | $ | 25,999 | |
Common and preferred stocks, at fair value (cost: 2010, $1; 2009, $30) | | 2 | | 23 | |
Commercial mortgage loans, at cost (less allowance for loan losses: 2010, $36; 2009, $30) | | 2,470 | | 2,532 | |
Policy loans | | 729 | | 715 | |
Trading securities and other investments | | 496 | | 310 | |
Total investments | | 30,139 | | 29,579 | |
| | | | | |
Cash and cash equivalents | | 76 | | 811 | |
Restricted cash | | 66 | | 184 | |
Reinsurance recoverables | | 1,829 | | 1,688 | |
Deferred income taxes, net | | — | | 63 | |
Other receivables | | 166 | | 332 | |
Accrued investment income | | 309 | | 303 | |
Deferred acquisition costs | | 4,578 | | 4,285 | |
Deferred sales inducement costs | | 545 | | 524 | |
Other assets | | 1,123 | | 936 | |
Separate account assets | | 63,795 | | 54,267 | |
| | | | | |
Total assets | | $ | 102,626 | | $ | 92,972 | |
| | | | | |
Liabilities and Shareholder’s Equity | | | | | |
Liabilities: | | | | | |
Future policy benefits | | $ | 29,680 | | $ | 30,383 | |
Policy claims and other policyholders’ funds | | 134 | | 123 | |
Deferred income taxes, net | | 514 | | — | |
Borrowings under repurchase agreements | | 397 | | — | |
Line of credit with Ameriprise Financial, Inc. | | 3 | | 300 | |
Other liabilities | | 1,555 | | 1,955 | |
Separate account liabilities | | 63,795 | | 54,267 | |
Total liabilities | | 96,078 | | 87,028 | |
| | | | | |
Shareholder’s equity: | | | | | |
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding | | 3 | | 3 | |
Additional paid-in capital | | 2,460 | | 2,445 | |
Retained earnings | | 3,410 | | 3,114 | |
Accumulated other comprehensive income, net of tax | | 675 | | 382 | |
Total shareholder’s equity | | 6,548 | | 5,944 | |
| | | | | |
Total liabilities and shareholder’s equity | | $ | 102,626 | | $ | 92,972 | |
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (in millions, except share amounts) |
| Assets | |
| | |
|
| Investments: | |
| | |
|
| Available-for-Sale: | |
| | |
|
| Fixed maturities, at fair value (amortized cost: 2013, $22,902; 2012, $23,058) | $ | 24,387 |
| | $ | 25,932 |
|
| Common stocks, at fair value (cost: 2013 and 2012, $2) | 6 |
| | 4 |
|
| Mortgage loans, at amortized cost (less allowance for loan losses: 2013, $24; and 2012, $26) | 3,326 |
| | 3,389 |
|
| Policy loans | 773 |
| | 752 |
|
| Other investments | 915 |
| | 743 |
|
| Total investments | 29,407 |
| | 30,820 |
|
| Cash and cash equivalents | 344 |
| | 336 |
|
| Restricted cash | — |
| | 86 |
|
| Reinsurance recoverables | 2,177 |
| | 2,047 |
|
| Other receivables | 195 |
| | 203 |
|
| Accrued investment income | 275 |
| | 291 |
|
| Deferred acquisition costs | 2,633 |
| | 2,373 |
|
| Other assets | 4,357 |
| | 4,197 |
|
| Separate account assets | 77,616 |
| | 69,395 |
|
| Total assets | $ | 117,004 |
| | $ | 109,748 |
|
| | | | |
| Liabilities and Shareholder’s Equity | |
| | |
|
| Liabilities: | |
| | |
|
| Policyholder account balances, future policy benefits and claims | $ | 29,149 |
| | $ | 30,802 |
|
| Short-term borrowings | 500 |
| | 501 |
|
| Line of credit with Ameriprise Financial, Inc. | 150 |
| | 150 |
|
| Other liabilities | 5,431 |
| | 4,201 |
|
| Separate account liabilities | 77,616 |
| | 69,395 |
|
| Total liabilities | 112,846 |
| | 105,049 |
|
| | | | |
| Shareholder’s equity: | |
| | |
|
| Common stock, $30 par value; 100,000 shares authorized, issued and outstanding | 3 |
| | 3 |
|
| Additional paid-in capital | 2,463 |
| | 2,462 |
|
| Retained earnings | 1,042 |
| | 1,000 |
|
| Accumulated other comprehensive income, net of tax | 650 |
| | 1,234 |
|
| Total shareholder’s equity | 4,158 |
| | 4,699 |
|
| Total liabilities and shareholder’s equity | $ | 117,004 |
| | $ | 109,748 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Revenues | |
| | |
| | |
| Premiums | $ | 430 |
| | $ | 442 |
| | $ | 493 |
|
| Net investment income | 1,411 |
| | 1,480 |
| | 1,593 |
|
| Policy and contract charges | 1,725 |
| | 1,593 |
| | 1,540 |
|
| Other revenues | 359 |
| | 329 |
| | 303 |
|
| Net realized investment gains (losses) | 3 |
| | (3 | ) | | 5 |
|
| Total revenues | 3,928 |
| | 3,841 |
| | 3,934 |
|
| Benefits and expenses | |
| | |
| | |
| Benefits, claims, losses and settlement expenses | 1,172 |
| | 1,216 |
| | 950 |
|
| Interest credited to fixed accounts | 806 |
| | 831 |
| | 856 |
|
| Amortization of deferred acquisition costs | 141 |
| | 225 |
| | 336 |
|
| Other insurance and operating expenses | 746 |
| | 755 |
| | 781 |
|
| Total benefits and expenses | 2,865 |
| | 3,027 |
| | 2,923 |
|
| Pretax income | 1,063 |
| | 814 |
| | 1,011 |
|
| Income tax provision | 221 |
| | 164 |
| | 190 |
|
| Net income | $ | 842 |
| | $ | 650 |
| | $ | 821 |
|
| | | | | | |
| Supplemental Disclosures: | |
| | |
| | |
| Total other-than-temporary impairment losses on securities | $ | (11 | ) | | $ | (12 | ) | | $ | (47 | ) |
| Portion of loss recognized in other comprehensive income (loss) (before taxes) | 5 |
| | (5 | ) | | 23 |
|
| Net impairment losses recognized in net realized investment gains | $ | (6 | ) | | $ | (17 | ) | | $ | (24 | ) |
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Revenues | | | | | | | |
Premiums | | $ | 489 | | $ | 450 | | $ | 438 | |
Net investment income | | 1,629 | | 1,526 | | 1,252 | |
Policy and contract charges | | 1,389 | | 1,156 | | 1,352 | |
Other revenues | | 272 | | 233 | | 255 | |
Net realized investment gains (losses) | | 16 | | 59 | | (442 | ) |
Total revenues | | 3,795 | | 3,424 | | 2,855 | |
| | | | | | | |
Benefits and expenses | | | | | | | |
Benefits, claims, losses and settlement expenses | | 1,203 | | 841 | | 673 | |
Interest credited to fixed accounts | | 909 | | 903 | | 790 | |
Amortization of deferred acquisition costs | | 53 | | 145 | | 861 | |
Other insurance and operating expenses | | 582 | | 550 | | 649 | |
Total benefits and expenses | | 2,747 | | 2,439 | | 2,973 | |
| | | | | | | |
Pretax income (loss) | | 1,048 | | 985 | | (118 | ) |
Income tax provision (benefit) | | 252 | | 245 | | (189 | ) |
| | | | | | | |
Net income | | $ | 796 | | $ | 740 | | $ | 71 | |
| | | | | | | |
Supplemental Disclosures: | | | | | | | |
Net realized investment gains: | | | | | | | |
Net realized investment gains before impairment losses on securities | | $ | 44 | | $ | 121 | | | |
Total other-than-temporary impairment losses on securities | | (22 | ) | (53 | ) | | |
Portion of loss recognized in other comprehensive income | | (6 | ) | (9 | ) | | |
Net impairment losses recognized in net realized investment gains | | (28 | ) | (62 | ) | | |
Net realized investment gains | | $ | 16 | | $ | 59 | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Net income | $ | 842 |
| | $ | 650 |
| | $ | 821 |
|
| Other comprehensive income (loss), net of tax: | |
| | |
| | |
| Net unrealized gains (losses) on securities: | |
| | |
| | |
| Net unrealized securities gains (losses) arising during the period | (904 | ) | | 451 |
| | 364 |
|
| Reclassification of net securities (gains) losses included in net income | (3 | ) | | 1 |
| | (3 | ) |
| Impact of deferred acquisition costs, deferred sales inducement costs, benefit reserves and reinsurance recoverables | 319 |
| | (154 | ) | | (194 | ) |
| Total net unrealized gains (losses) on securities | (588 | ) | | 298 |
| | 167 |
|
| Net unrealized losses on derivatives: | |
| | |
| | |
| Reclassification of net derivative losses included in net income | 4 |
| | 5 |
| | 4 |
|
| Total net unrealized losses on derivatives | 4 |
| | 5 |
| | 4 |
|
| Total other comprehensive income (loss), net of tax | (584 | ) | | 303 |
| | 171 |
|
| Total comprehensive income | $ | 258 |
| | $ | 953 |
| | $ | 992 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF
CASH FLOWS | | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Cash Flows from Operating Activities | | | | | | | |
Net income | | $ | 796 | | $ | 740 | | $ | 71 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Capitalization of deferred acquisition and sales inducement costs | | (494 | ) | (640 | ) | (674 | ) |
Amortization of deferred acquisition and sales inducement costs | | 50 | | 155 | | 982 | |
Depreciation, amortization and accretion, net | | (79 | ) | (68 | ) | 61 | |
Deferred income tax expense (benefit) | | 416 | | (81 | ) | (234 | ) |
Contractholder and policyholder charges, non-cash | | (259 | ) | (259 | ) | (248 | ) |
Net realized investment gains | | (46 | ) | (135 | ) | (7 | ) |
Other-than-temporary impairments and provision for loan losses recognized in net realized investment (gains) losses | | 29 | | 76 | | 449 | |
Change in operating assets and liabilities: | | | | | | | |
Trading securities and equity method investments, net | | 29 | | 136 | | (110 | ) |
Future policy benefits for traditional life, disability income and long term care insurance | | 302 | | 282 | | 308 | |
Policy claims and other policyholders’ funds | | 11 | | (49 | ) | 81 | |
Reinsurance recoverables | | (141 | ) | (96 | ) | (302 | ) |
Other receivables | | (53 | ) | (5 | ) | 20 | |
Accrued investment income | | (6 | ) | (64 | ) | 14 | |
Derivatives collateral, net | | 55 | | (1,928 | ) | 1,591 | |
Other assets and liabilities, net | | 439 | | 684 | | 41 | |
| | | | | | | |
Net cash provided by (used in) operating activities | | 1,049 | | (1,252 | ) | 2,043 | |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Available-for-Sale securities: | | | | | | | |
Proceeds from sales | | 1,268 | | 5,215 | | 246 | |
Maturities, sinking fund payments and calls | | 3,719 | | 3,486 | | 2,510 | |
Purchases | | (4,970 | ) | (13,696 | ) | (1,684 | ) |
Proceeds from sales and maturities of commercial mortgage loans | | 207 | | 279 | | 263 | |
Funding of commercial mortgage loans | | (154 | ) | (104 | ) | (110 | ) |
Proceeds from sales of other investments | | 95 | | 43 | | 19 | |
Purchase of other investments | | (256 | ) | (11 | ) | (140 | ) |
Purchase of land, buildings, equipment and software | | (15 | ) | (14 | ) | (18 | ) |
Change in policy loans, net | | (14 | ) | 7 | | (25 | ) |
| | | | | | | |
Net cash (used in) provided by investing activities | | (120 | ) | (4,795 | ) | 1,061 | |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Policyholder and contractholder account values: | | | | | | | |
Considerations received | | 1,593 | | 4,863 | | 2,913 | |
Net transfers (to) from separate accounts | | (1,337 | ) | 195 | | 91 | |
Surrenders and other benefits | | (1,338 | ) | (1,923 | ) | (2,931 | ) |
Change in borrowings under repurchase agreements, net | | 397 | | — | | — | |
Proceeds from line of credit with Ameriprise Financial, Inc. | | 13 | | 500 | | — | |
Payments on line of credit with Ameriprise Financial, Inc. | | (310 | ) | — | | — | |
Deferred premium options, net | | (182 | ) | (82 | ) | (77 | ) |
Tax adjustment on share-based incentive compensation plan | | — | | (2 | ) | 2 | |
Cash dividend to Ameriprise Financial, Inc. | | (500 | ) | — | | (775 | ) |
| | | | | | | |
Net cash (used in) provided by financing activities | | (1,664 | ) | 3,551 | | (777 | ) |
| | | | | | | |
Net (decrease) increase in cash and cash equivalents | | (735 | ) | (2,496 | ) | 2,327 | |
Cash and cash equivalents at beginning of period | | 811 | | 3,307 | | 980 | |
| | | | | | | |
Cash and cash equivalents at end of period | | $ | 76 | | $ | 811 | | $ | 3,307 | |
| | | | | | | |
Supplemental Disclosures: | | | | | | | |
Income taxes paid, net | | $ | 112 | | $ | 72 | | $ | 168 | |
Interest paid on borrowings | | 3 | | 1 | | — | |
| | | | | | | |
Non-cash transactions: | | | | | | | |
Capital contributions from Ameriprise Financial, Inc. | | $ | 14 | | $ | 331 | | $ | 322 | |
SHAREHOLDER’S EQUITY
|
| | | | | | | | | | | | | | | | | | | |
| | Common
Shares | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income | | Total |
| | (in millions) |
| Balances at January 1, 2011 | $ | 3 |
| | $ | 2,460 |
| | $ | 1,994 |
| | $ | 760 |
| | $ | 5,217 |
|
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | — |
| | — |
| | 821 |
| | — |
| | 821 |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 171 |
| | 171 |
|
| Total comprehensive income | |
| | |
| | |
| | |
| | 992 |
|
| 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 |
| | 1,215 |
| | 931 |
| | 4,610 |
|
| | | | | | | | | | |
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | — |
| | — |
| | 650 |
| | — |
| | 650 |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 303 |
| | 303 |
|
| Total comprehensive income | |
| | |
| | |
| | |
| | 953 |
|
| Tax adjustment on share-based incentive compensation plan | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Cash dividends to Ameriprise Financial, Inc. | — |
| | — |
| | (865 | ) | | — |
| | (865 | ) |
| Balances at December 31, 2012 | 3 |
| | 2,462 |
| | 1,000 |
| | 1,234 |
| | 4,699 |
|
| | | | | | | | | | |
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | — |
| | — |
| | 842 |
| | — |
| | 842 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (584 | ) | | (584 | ) |
| Total comprehensive income | |
| | |
| | |
| | |
| | 258 |
|
| Tax adjustment on share-based incentive compensation plan | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Cash dividends to Ameriprise Financial, Inc. | — |
| | — |
| | (800 | ) | | — |
| | (800 | ) |
| Balances at December 31, 2013 | $ | 3 |
| | $ | 2,463 |
| | $ | 1,042 |
| | $ | 650 |
| | $ | 4,158 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF
SHAREHOLDER’S EQUITYThree Years Ended December 31, 2010
| | Common
Shares | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total | |
| | (in millions) |
Balances at January 1, 2008 | | $ | 3 | | $ | 2,031 | | $ | 3,188 | | $ | (156 | ) | $ | 5,066 | |
| | | | | | | | | | | |
Change in accounting principles, net of tax | | — | | — | | (30 | ) | — | | (30 | ) |
Comprehensive loss: | | | | | | | | | | | |
Net income | | — | | — | | 71 | | — | | 71 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Change in net unrealized securities losses | | — | | — | | — | | (562 | ) | (562 | ) |
Change in net unrealized derivatives losses | | — | | — | | — | | 2 | | 2 | |
Total comprehensive loss | | | | | | | | | | (489 | ) |
Tax adjustment on share-based incentive compensation plan | | — | | 2 | | — | | — | | 2 | |
Cash dividends to Ameriprise Financial, Inc. | | — | | — | | (775 | ) | — | | (775 | ) |
Non-cash capital contribution from Ameriprise Financial, Inc. | | — | | 83 | | — | | — | | 83 | |
Non-cash dividend to Ameriprise Financial, Inc. | | — | | — | | (118 | ) | — | | (118 | ) |
Balances at December 31, 2008 | | $ | 3 | | 2,116 | | 2,336 | | (716 | ) | 3,739 | |
| | | | | | | | | | | |
Change in accounting principles, net of tax | | — | | — | | 38 | | (38 | ) | — | |
Comprehensive income: | | | | | | | | | | | |
Net income | | — | | — | | 740 | | — | | 740 | |
Other comprehensive income, net of tax: | | | | | | | | | | | |
Change in net unrealized securities losses | | — | | — | | — | | 1,109 | | 1,109 | |
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities | | — | | — | | — | | 23 | | 23 | |
Change in net unrealized derivatives losses | | — | | — | | — | | 4 | | 4 | |
Total comprehensive income | | | | | | | | | | 1,876 | |
Tax adjustment on share-based incentive compensation plan | | — | | (2 | ) | — | | — | | (2 | ) |
Non-cash capital contribution from Ameriprise Financial, Inc. | | — | | 331 | | — | | — | | 331 | |
| | | | | | | | | | | |
Balances at December 31, 2009 | | $ | 3 | | $ | 2,445 | | $ | 3,114 | | $ | 382 | | $ | 5,944 | |
| | | | | | | | | | | |
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 derivatives 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 | |
CASH FLOWS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Cash Flows from Operating Activities | |
| | |
| | |
| Net income | $ | 842 |
| | $ | 650 |
| | $ | 821 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
| Depreciation, amortization and accretion, net | (20 | ) | | (16 | ) | | (73 | ) |
| Deferred income tax expense (benefit) | (76 | ) | | (40 | ) | | 50 |
|
| Contractholder and policyholder charges, non-cash | (322 | ) | | (273 | ) | | (264 | ) |
| Loss from equity method investments | 12 |
| | 26 |
| | 33 |
|
| Net realized investment gains | (9 | ) | | (14 | ) | | (26 | ) |
| Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains | 6 |
| | 17 |
| | 21 |
|
| Change in operating assets and liabilities: | |
| | | | |
|
| Deferred acquisition costs | (128 | ) | | (28 | ) | | 54 |
|
| Other investments, net | — |
| | 25 |
| | — |
|
| Policyholder account balances, future policy benefits and claims, net | (1,053 | ) | | (463 | ) | | 1,414 |
|
| Derivatives, net of collateral | 1,733 |
| | 671 |
| | (301 | ) |
| Reinsurance recoverables | (121 | ) | | (107 | ) | | (127 | ) |
| Other receivables | 4 |
| | (35 | ) | | 25 |
|
| Accrued investment income | 16 |
| | 16 |
| | 2 |
|
| Other, net | 132 |
| | 283 |
| | 39 |
|
| Net cash provided by operating activities | 1,016 |
| | 712 |
| | 1,668 |
|
| Cash Flows from Investing Activities | |
| | |
| | |
|
| Available-for-Sale securities: | |
| | |
| | |
|
| Proceeds from sales | 171 |
| | 156 |
| | 664 |
|
| Maturities, sinking fund payments and calls | 3,682 |
| | 3,292 |
| | 3,200 |
|
| Purchases | (3,672 | ) | | (2,271 | ) | | (4,084 | ) |
| Proceeds from sales, maturities and repayments of mortgage loans | 696 |
| | 310 |
| | 202 |
|
| Funding of mortgage loans | (619 | ) | | (277 | ) | | (207 | ) |
| Purchase of residential mortgage loans from affiliate | — |
| | (954 | ) | | — |
|
| Proceeds from sales and collections of other investments | 119 |
| | 117 |
| | 114 |
|
| Purchase of other investments | (235 | ) | | (286 | ) | | (296 | ) |
| Purchase of land, buildings, equipment and software | (8 | ) | | (8 | ) | | (6 | ) |
| Change in policy loans, net | (21 | ) | | (13 | ) | | (10 | ) |
| Other, net | 49 |
| | — |
| | — |
|
| Net cash provided by (used in) investing activities | 162 |
| | 66 |
| | (423 | ) |
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Cash Flows from Financing Activities | |
| | |
| | |
| Policyholder account balances: | |
| | |
| | |
| Deposits and other additions | $ | 2,158 |
| | $ | 2,198 |
| | $ | 2,221 |
|
| Net transfers from (to) separate accounts | (116 | ) | | (30 | ) | | 39 |
|
| Surrenders and other benefits | (1,994 | ) | | (2,063 | ) | | (2,154 | ) |
| Change in short-term borrowings, net | (2 | ) | | (5 | ) | | 107 |
|
| Proceeds from line of credit with Ameriprise Financial, Inc. | 94 |
| | 418 |
| | 415 |
|
| Payments on line of credit with Ameriprise Financial, Inc. | (94 | ) | | (568 | ) | | (118 | ) |
| Tax adjustment on share-based incentive compensation plan | 1 |
| | 1 |
| | 1 |
|
| Cash paid for purchased options with deferred premiums | (417 | ) | | (356 | ) | | (254 | ) |
| Cash dividends to Ameriprise Financial, Inc. | (800 | ) | | (865 | ) | | (750 | ) |
| Net cash used in financing activities | (1,170 | ) | | (1,270 | ) | | (493 | ) |
| Net increase (decrease) in cash and cash equivalents | 8 |
| | (492 | ) | | 752 |
|
| Cash and cash equivalents at beginning of period | 336 |
| | 828 |
| | 76 |
|
| Cash and cash equivalents at end of period | $ | 344 |
| | $ | 336 |
| | $ | 828 |
|
| | | | | | |
| Supplemental Disclosures: | |
| | |
| | |
|
| Income taxes paid, net | $ | 94 |
| | $ | 109 |
| | $ | 176 |
|
| Interest paid on borrowings | 4 |
| | 4 |
| | 5 |
|
| Non-cash investing activity: | |
| | |
| | |
|
| Dividend to Ameriprise Financial, Inc. | — |
| | — |
| | 850 |
|
| Affordable housing partnership commitments not yet remitted | 96 |
| | 13 |
| | 137 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| 1. | Nature of Business and Basis of Presentation |
1.Nature of Business and Basis of PresentationRiverSource Life Insurance Company is a stock life insurance company with one wholly owned stock 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 Certificate of Authority in New York.
Effective in March and September 2010, RiverSource Life of NY withdrew its Certificates of Authority from North Dakota and Delaware, respectively, as it does not conduct business in these states. RiverSource Life of NY issues insurance and annuity products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. (“RTA”). 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 companies in which it directly or indirectly has a controlling financial interest (collectively, the “Company”). All
material intercompany transactions and balances have been eliminated in consolidation.
In the third quarter of 2010, the Company made adjustments for revisions to the valuations of reserves, deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) related to insurance and living benefit guarantees which resulted in a $32 million pretax charge ($21 million after-tax). In the second quarter of 2010, the Company made an adjustment for revisions to certain calculations in its valuation of DAC and DSIC which resulted in a $33 million pretax benefit ($21 million after-tax).
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 15. Certain reclassifications
In the Consolidated Balance Sheets, the Company combined the balance of
“Deferred Sales Inducement Costs” with “Other assets” and the balance of “Policy claims and other policyholder funds” with “Policyholder account balances, future policy benefits and claims” for prior
period amounts have been madeyears to conform to the current presentation.
In addition, the Company reclassified certain prior year amounts in the Consolidated Statements of Cash Flows, as discussed below, to improve the transparency of its cash flows. Total cash flows provided by (used in) operating and financing activities did not change as a result of the reclassifications.
Within operating activities, the change in freestanding derivatives was reclassified from “Other, net” to “Derivatives, net of collateral”. The change in derivatives collateral was reclassified from “Derivatives collateral, net” to “Derivatives, net of collateral”. As a result of these reclassifications, changes in all freestanding derivatives and related collateral are included in one line within operating cash flows.
Within financing activities, the increase in policyholder account balances for interest credited was reclassified from “Policyholder account balances: Surrenders and other benefits” to “Policyholder account balances: Deposits and other additions”.
In the fourth quarter of 2012, the Company made an adjustment to the model which values the reserves related to living benefit guarantees primarily attributable to prior periods, which resulted in a $41 million pretax benefit, net of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) amortization of $11 million. In the second quarter of 2012, the Company made a correction for a tax item related to prior periods, which resulted in a $32 million decrease to net income. The Company discovered it had received incomplete data from a third party service provider for securities lending activities that resulted in the miscalculation of the Company’s dividend received deduction and foreign tax credit, which resulted in an understatement of taxes payable and an overstatement of reported earnings in prior periods. The Company resolved the data issue and stopped the securities lending that negatively impacted its tax position. Management determined that the effect of these corrections was not material to current and previously issued financial statements.
The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued.
The 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. The Company’s fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, the 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.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. products in addition to other benefit riders. Indexed universal life (“IUL”) insurance is similar to universal life in many regards, although the rate of credited interest above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the S&P 500 Index® (subject to a cap and floor). The policyholder may allocate all or a portion of the policy value to a fixed or indexed account.
In 2013, RiverSource Life introduced TrioSourceSM universal life insurance with long term care benefits. TrioSource allows clients to allocate a policy’s cash value to a fixed account that begins to earn interest immediately. The base feature of TrioSource is a fixed universal life insurance policy that provides a guaranteed death benefit. The policy offers a guaranteed return of premium (“ROP”). ROP is 90% of the premium in years 1-2 and 100% of the premium in years 3 and later and is net of any partial surrenders, outstanding policy loans or long term care benefits paid. The Accelerated Benefit Rider (“ABR”) for Long-Term Care allows for the acceleration of the death benefit to help pay for covered long term care expenses. In addition, clients may purchase an optional rider which extends benefits for a specified time period after ABR benefits have been exhausted. Any long term care benefit paid reduces the death benefit, cash value and ROP. Additional riders, including an inflation protection option, are available for an additional charge.
The Company issues only non-participating life insurance policies which do not pay dividends to policyholders from realized
p olicypolicy margins.
Under the Company’s variable life insurance and variable annuity products described above, the purchaser may choose a fixed account option that is part of the Company’s “general account”, as well as investment options from a variety of portfolios that include common stocks, bonds, managed assets and/or short-term securities.
The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued.
43
| |
| 2. | Summary of Significant Accounting Policies |
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2.Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates 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. Entities in which the Company exercises significant influence or holds a greater than 20% but less than 50% voting interest are accounted for under the equity method. All other investments that are not reported at fair value as trading or Available-for-Sale securities are accounted for under the cost method where the Company owns less than a 20% voting interest and does not exercise significant influence.
A VIE is an entity that either has equity investors that 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. A 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,
| |
| (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 previously 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 a 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.
| |
| (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 the Company stands to absorb the majority of a 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 the Company quantitatively determines whether its variable interests will absorb a majority of the VIE’s variability. If the Company
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, the Company consolidates the 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
s ignificant,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.
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, 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.
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, DSIC, certain benefit reserves,
reinsurance recoverables and income taxes. Gains and losses are recognized
on a trade date basis in the Consolidated Statements of Income upon disposition of the securities.
Effective January 1, 2009, the Company early adopted an accounting standard that significantly changed the Company’s accounting policy regarding the timing and amount of other-than-temporary impairments for Available-for-Sale securities as follows.
When the fair value of an investment is less than its amortized cost, the Company assesses whether or not: (i) it
44
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not that the 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 the 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 the Company does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, the 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 impairmentsimpairment related to credit loss is recognized in earni ngs. earnings.
The amount of the total other-than-temporary
impairmentsimpairment related to other factors is recognized in other comprehensive income,
(loss), net of impacts to DAC, DSIC, certain benefit reserves,
reinsurance recoverables 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 sustained 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.income, if through subsequent evaluation there is a sustained increase in the cash flow expected. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive
income (loss). The 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.income.
The 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).income. 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
presente dpresented 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, the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The 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 the Company considers in determining whether declines in the fair value of fixed maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. In order to determine the amount of the credit loss component for corporate debt securities considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security.
T heThe significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and the Company’s position in the debtor’s overall capital structure.
For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities
and asset backed
securities and other structured investments)securities), the 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.
Trading Securities and Other Investments
Trading securities and other investments include separate account and mutual fund seed money, equity method investments, trading bonds, interests in affordable housing partnerships and syndicated loans. Separate account and mutual fund seed money is carried at fair value with changes in value recognized within net investment income. Affordable housing partnerships are accounted for under the equity method.
45
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financing Receivables
Commercial Mortgage Loans, net
Mortgage loans, net reflect the Company’s interest in commercial and
Syndicated LoansCommercialresidential mortgage loans, are reflected at amortized cost less the related allowance for loan losses.
Syndicated loans represent the Company’s investment in below investment grade loan syndications. Syndicated loans are reflected in trading securities and 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.
Policy loans include life insurance policy and annuity loans and are reported at the unpaid principal balance, plus accrued interest.
Other Investments
Other investments primarily reflect the Company’s interests in affordable housing partnerships and syndicated loans which represent investments in below investment grade loan syndications. Affordable housing partnerships are accounted for under the equity method.
Financing Receivables
Mortgage Loans and Syndicated Loans
Mortgage loans and syndicated loans are stated at amortized cost, net of allowances for loan losses, if any.
In October 2012, the Company purchased residential mortgage loans at fair value from an affiliate, Ameriprise Bank, FSB. The purchase price took into account the credit quality of the loan portfolio resulting in no allowance for loan losses recorded at the acquisition date.
Interest income is accrued on the unpaid principal balances of the loans as earned.
Policy Loans
When originated,
thepolicy loan balances do not exceed the cash surrender value of the underlying products. As there is minimal risk of loss related to
policythese loans, the Company does not record an allowance for loan losses for policy 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
estimated selling costs. Residential mortgage loans are charged off when management determines the assets are uncollectible and commences foreclosure proceedings on the property, at which time the property is written down to fair value less selling costs. Foreclosed property is recorded as real estate owned in
trading securities and other investments. Syndicated loans are
charged offplaced on nonaccrual status when management determines
thatit will not collect all contractual principal and interest on the
loans are uncollectible.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,
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
loan-to-value
(“LTV”) ratios,
FICO scores of the borrower 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.
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.
Factors used by the Company to determine whether all amounts due on commercial mortgage loans will be collected, include but are not limited to, the financial condition of the borrower, performance of the underlying properties, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on property type and geographic location. The evaluation of impairment on residential mortgage loans is primarily driven by delinquency status of individual loans. 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.
A loan is classified as a restructured loan when the Company makes certain concessionary modifications to contractual
terms. Loans restructured at an interest rate equal to or greater than interest ratesterms for
new loans with comparable risk at the time the contract is modified are excluded from restructured loans.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
thea 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
46
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
returned to accrual status at the time of the restructurerestructuring 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. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less.
Total restricted cash at December 31, 20102013 and 20092012 was $66nil and $86 million and $184 million,, respectively, consisting of cash that has been pledged to counterparties.
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 premiums, 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
pr oportionproportion 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. charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.Insurance liabilities are reported before the effects of reinsurance.
FuturePolicyholder account balances, future policy benefits and
policy claims
and other policyholders’ funds recoverable under reinsurance contracts are recorded as reinsurance recoverables.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also assumes life insurance and fixed annuity
businessrisk 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
policyholder account balances, future policy
benefits.benefits and claims.
See Note 8 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. The Company generally uses the straight-line method of depreciation and amortization over periods ranging from three to 30 years.
During 2009, the Company received a non-cash capital contribution of $131 million comprised of two buildings and the related land from Ameriprise Financial.At December 31, 20102013 and 2009,2012, land, buildings, equipment and software were $191$166 million and $190$174 million, respectively, net of accumulated depreciation of $59$107 million and $52$91 million, respectively. Depreciation and amortization expense for the years ended December 31, 2010, 20092013, 2012 and 20082011 was $14$16 million $8, $17 million and $5$16 million, respectively.
Derivative Instruments and Hedging Activities
Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities. The 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. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any. The Company primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. The 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
re latedrelated to a recognized asset or liability (“cash flow hedges”).
Derivative 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
47
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, the Company will discontinue the 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 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 portion of the gain or loss on the derivative instruments is 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 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 reclassified to earnings over the period that the hedged item impacts earnings. For 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 16 for information regarding the Company’s fair value measurement of derivative instruments and the impact of derivatives on the Consolidated Statements of Income.
The equity componentcomponents of EIA and IUL obligations isare 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
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
See Note 13 for information regarding the Company’s fair value
measurement of
embeddedderivative instruments and Note 17 for the impact of derivatives
associated with annuities is included in future policy benefits. The change inon the
fair valueConsolidated Statements of
the EIA embedded derivatives is reflected in interest credited to fixed accounts. The changes in the fair value of the GMAB and GMWB embedded derivatives are reflected in benefits, claims, losses and settlement expenses.Income.
Deferred Acquisition Costs
DAC represent
The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of these costs which are incremental and direct to the
acquisition of a new or renewal insurance policy or annuity contract are deferred. Significant costs capitalized include sales based compensation related to the acquisition of new and renewal insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation paid to Ameriprise Financial Services, Inc. (“AFSI”), a subsidiary of Ameriprise Financial, advisors and employees and third-party distributors is capitalized. Employee compensation and benefits costs which are capitalized relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct costs of acquiring
new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale ofan insurance policy or annuity
and insurance products. These costscontract are
deferred to the extent they are recoverable from future profits or premiums.expensed as incurred. The DAC associated with insurance
policies 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
Costs deferred as DAC are amortized over time. For annuity and universal life (“UL”) contracts, DAC are amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.
For annuity and 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.
48
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For othertraditional life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in the Company’s Consolidated Statements of Income.
For annuity, life, DI and LTC insurance products, key assumptions underlying those long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which
contractholders and 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
the Company 46;sits 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. The Company typically uses a five-year mean reversion process as a guideline in setting near-term equity fund 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. DAC amortization expense recorded in a period when client asset value growth rates
exce edexceed management’s near-term estimate will typically be less than in a period when growth rates fall short of management’s near-term estimate.
The 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 the Company’s DAC balances.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.
Deferred Sales Inducement Costs
DSIC
Sales inducement costs 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.
TheDSIC is recorded in other assets and 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, who assume the related investment risk. Income and losses on separate account assets accrue directly to the contractholder andor 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.
Policyholder Account Balances, 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
Fixed annuities and variable annuity guarantees include
liabilitiesamounts for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, EIAs and fixed annuities in a payout status.
49
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the 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. The 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, the Company offers contracts containing GMWB and GMAB provisions, and until May 2007, the 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, the 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 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 fair value of embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions fluctuates based on equity, interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. These embedded derivatives are recorded at fair value.in policyholder account balances, future policy benefits and claims. See Note 13 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
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assumptions made in projecting future benefits and fees relate to persistency and benefit utilization. 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 EIAs 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.
Life, Disability Income and Long Term Care Insurance
Future policy benefits and policy claims and other policyholders’ funds related to life,
Life, DI and LTC insurance
includeincludes 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
contractspolicies 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
50
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 the Company’s experience.
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 the Company’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors.
Changes in policyholder account balances, future policy benefits and claims are reflected in earnings in the period adjustments are made.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.
The Company’s principal sources of revenue include
premium revenues,premiums, net investment income and policy and contract charges.
Premium Revenues
Premium revenues
Premiums
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
reported net of reinsurance ceded and are recognized as revenue when due.
Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial
and residential mortgage loans, 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 on the residential 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, which 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 the 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.assessed.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) primarily include realized gains and losses on the sale of securities and charges for the other-than-temporary impairments of investments related to credit losses. Realized gains and losses on the sale of securities,
other than equity method investments, 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.51
basis.
Other RevenuesOther revenues primarily include fees received under marketing support arrangements which are calculated as a percentage of the Company’s separate account assets.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Insurance and Operating Expenses
Other insurance and operatingexpenses include expenses allocated to the Company from its parent, Ameriprise Financial, for the 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. Also included are commissions, sales and marketing expenses and other operating expenses. These expenses are presented net of DAC.acquisition cost deferrals.
Income Taxes
Beginning in 2010,
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’s taxable income will beis included in the consolidated federal income tax return of Ameriprise Financial. 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.
The Company’s provision for income taxes represents the net amount of income taxes that the Company expects to pay or to receive from various taxing jurisdictions in connection with its operations. The Company provides for income taxes based on amounts that the Company 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.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the Company’s deferred tax assets are a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes and 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.The 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’sits ability to r ealize itsrealize 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 deferred tax assets, primarily state net operating losses and therefore a valuation allowance of $
3.6 millionRecent Accounting Pronouncementshas been established at December 31, 2013.
| |
| 3. | Recent AccountingPronouncements |
Adoption of New Accounting Standards
Receivables
Comprehensive Income
In
July 2010,February 2013, the Financial Accounting Standards Board (“FASB”) updated the accounting
standards for disclosures on the credit qualitystandard related to comprehensive income. The update requires entities to provide information about significant amounts reclassified out of
financing receivables and the allowance for credit losses.accumulated other comprehensive income (“AOCI”). The standard
requires additional disclosure related to the credit quality of financing receivables, troubled debt restructurings and significant purchases or sales of financing receivables during the period. The standard requires that these disclosures and existing disclosures be presented on a disaggregated basis, similar to the manner that the entity uses to evaluate its credit losses. Disclosures of information as of the end of a reporting period are effective for interim and annual periods ending after December 15, 2010 and disclosures of activity that occurred during a reporting period areis effective for interim and annual periods beginning after December 15,
2010. In January&n bsp;2011, the effective date of the disclosures related2012 and is required to
troubled debt restructurings was deferred until the FASB clarifies guidance for determining what constitutes a troubled debt restructuring. The adoption of the standard did not impact the Company’s consolidated financial condition and results of operations. See Note 2 and Note 6 for the required disclosures.Consolidation of Variable Interest Entities
In June 2009, the FASB updated the accounting standards related to the consolidation of VIEs. The standard amends the guidance on the determination of the 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 standards are effective for interim and
52
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
annual reporting periods beginning after November 15, 2009. The Company adopted the standard effective January 1, 2010 which did not impact its consolidated financial condition and results of operations.
Subsequent Events
In February 2010, the FASB amended the accounting standards related to the recognition and disclosure of subsequent events. The amendments remove the requirement to disclose the date through which subsequent events are evaluated for Securities and Exchange Commission (“SEC”) filers. The standard is effective upon issuance and shall be applied prospectively. The Company adopted the standard in the first quarter of 2010.2013. The adoption of the standard did not have any effect on the Company’s consolidated financial condition and results of operations.
Fair Value
See Note 18 for the required disclosures.
Balance Sheet
In
January 2010,December 2011, the FASB updated the accounting standards
related to
require new disclosures
on fair value measurements.about 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 1certain financial instruments and
2 within the fair value hierarchy and presents activitytransactions subject to master netting arrangements (or similar agreements) or eligible for offset in the
rollforwardstatement of
Level 3 activity on a gross basis. The standard also clarifies existing disclosure requirements related to the level of disaggregation to be used for assets and liabilities as well as disclosures on the inputs and valuation techniques used to measure fair value.financial position. The standard is effective for interim and annual
reporting periods beginning
on or after
December 15, 2009, except for the disclosure requirements related to the Level 3 rollforward, which are effective for interim and annual periods beginning after December 15, 2010.January 1, 2013 on a retrospective basis. The Company adopted the
standa rdstandard in the first quarter of
2010, except for2013. The adoption of the
additional disclosures related to the Level 3 rollforward, which the Company will adopt in the first quarter of 2011. The adoptionstandard did not have any effect on the Company’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. The Company 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 the Company uses to hedge its exposure to market risk related to certain variable annuity riders. Prior to January 1, 2008, the Company 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 der ivatives to be marked to the price the Company 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 the Company’s embedded derivative liabilities associated with certain variable annuity riders. Since there is no market for these liabilities, the Company considered the assumptions participants in a hypothetical market would make to determine an exit price. As a result, the Company 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 the Company’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 co mponent of the adjustment is specific to the risk of the Company not fulfilling these liabilities. As the Company’s estimate of this credit spread widens or tightens, the liability will decrease or increase.
Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”)
In April 2009, the FASB updated the accounting standards See Note 16 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 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. 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 5 for the Company’s required disclosures.
53
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future Adoption of New Accounting Standards
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB updated the accounting standardsstandard for DAC. Under this new standard, only the following costs incurred in the acquisition of new and renewal insurance contracts would beare capitalizable as DAC: (i) incremental direct costs of a successful contract acquisition, (ii) portions of employees’ salariescompensation 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 of the contract not occurred, and (iv) advertising costs that meet the capitalization criteria in other GAAP guidance for certain direct-response marketing. All other acquisition related costs are to be expensed as incurred. The Company retrospectively adopted the new standard on January 1, 2012. The cumulative effect of the adoption reduced retained earnings by $1.4 billion after-tax and increased AOCI by $112 million after-tax, totaling to a $1.3 billion after-tax reduction in total equity at January 1, 2012.
Future Adoption of New Accounting Standards
Receivables - Troubled Debt Restructuring by Creditors
In January 2014, the FASB updated the accounting standard related to recognizing residential real estate obtained through a repossession or foreclosure from a troubled debtor. The update clarifies the criteria for derecognition of the loan receivable and recognition of the real estate property. The standard is effective for interim and annual periods beginning after December 15,
2011, with earlier adoption permitted if it is at the beginning of an entity’s annual reporting period. The standard is to2014 and can be applied
prospectively; however,under a modified retrospective
application to all prior periods presentedtransition method or a prospective transition method. Early adoption is
permitted but not required. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments
In April 2010, the FASB updated the accounting standards regarding accounting for investment funds determined to be VIEs. Under this standard an insurance enterprise would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts. In addition, the enterprise would not consider the interests held through separate accounts in evaluating its economic interests in a VIE, unless the separate account contract holder is a related party. The standard is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2010.permitted. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.
4.57Variable Interest Entities
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments - Equity Method and Joint Ventures
In January 2014, the FASB updated the accounting standard related to investments in qualified affordable housing projects. The update allows for an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the investment in a qualified affordable housing project is amortized in proportion to the tax credits and other tax benefits received. The net investment performance is recognized as a component of income tax expense (benefit). The standard is effective for interim and annual periods beginning after December 15, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
Income Taxes
In July 2013, the FASB updated the accounting standard for income taxes. The update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard is effective for interim and annual periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.
| |
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 investmentinvestments in the affordable housing partnerships is limited to the carrying values.values of these investments. The carrying values are reflected in trading securities and other investments and were $244$495 million and $28$409 million as of December 31, 20102013 and 2009,2012, 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 $188$137 million and $1$144 million recorded in other liabilities as of December 31, 20102013 and 2009,2012, 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, 2010 | |
Description of Securities | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Noncredit
OTTI(1) | |
| | (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 | ) |
54
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| Description of Securities | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Noncredit
OTTI(1) |
| | | (in millions) |
| Fixed maturities: | | |
| | |
| | |
| | |
| | |
|
| Corporate debt securities | | $ | 14,658 |
| | $ | 1,311 |
| | $ | (96 | ) | | $ | 15,873 |
| | $ | 3 |
|
| Residential mortgage backed securities | | 3,773 |
| | 133 |
| | (95 | ) | | 3,811 |
| | (18 | ) |
| Commercial mortgage backed securities | | 2,309 |
| | 136 |
| | (11 | ) | | 2,434 |
| | — |
|
| State and municipal obligations | | 950 |
| | 87 |
| | (39 | ) | | 998 |
| | — |
|
| Asset backed securities | | 938 |
| | 48 |
| | (5 | ) | | 981 |
| | — |
|
| Foreign government bonds and obligations | | 234 |
| | 19 |
| | (8 | ) | | 245 |
| | — |
|
| U.S. government and agencies obligations | | 40 |
| | 5 |
| | — |
| | 45 |
| | — |
|
| Total fixed maturities | | 22,902 |
| | 1,739 |
| | (254 | ) | | 24,387 |
| | (15 | ) |
| Common stocks | | 2 |
| | 4 |
| | — |
| | 6 |
| | 2 |
|
| Total | | $ | 22,904 |
| | $ | 1,743 |
| | $ | (254 | ) | | $ | 24,393 |
| | $ | (13 | ) |
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued) | | December 31, 2009 | |
Description of Securities | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Noncredit
OTTI(1) | |
| | (in millions) | |
Fixed maturities: | | | | | | | | | | | |
Corporate debt securities | | $ | 14,245 | | $ | 855 | | $ | (106 | ) | $ | 14,994 | | $ | 1 | |
Residential mortgage backed securities | | 5,249 | | 185 | | (238 | ) | 5,196 | | (41 | ) |
Commercial mortgage backed securities | | 3,874 | | 182 | | (16 | ) | 4,040 | | — | |
Asset backed securities | | 877 | | 32 | | (29 | ) | 880 | | — | |
State and municipal obligations | | 647 | | 12 | | (46 | ) | 613 | | — | |
U.S. government and agencies obligations | | 152 | | 7 | | (1 | ) | 158 | | — | |
Foreign government bonds and obligations | | 94 | | 14 | | (1 | ) | 107 | | — | |
Other structured investments | | 4 | | 7 | | — | | 11 | | 7 | |
Total fixed maturities | | 25,142 | | 1,294 | | (437 | ) | 25,999 | | (33 | ) |
Common and preferred stocks | | 30 | | — | | (7 | ) | 23 | | — | |
Total | | $ | 25,172 | | $ | 1,294 | | $ | (444 | ) | $ | 26,022 | | $ | (33 | ) |
(1)
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| Description of Securities | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Noncredit
OTTI(1) |
| | | (in millions) |
| Fixed maturities: | | |
| | |
| | |
| | |
| | |
|
| Corporate debt securities | | $ | 14,881 |
| | $ | 2,167 |
| | $ | (7 | ) | | $ | 17,041 |
| | $ | — |
|
| Residential mortgage backed securities | | 3,446 |
| | 233 |
| | (58 | ) | | 3,621 |
| | (24 | ) |
| Commercial mortgage backed securities | | 2,717 |
| | 287 |
| | — |
| | 3,004 |
| | — |
|
| State and municipal obligations | | 976 |
| | 180 |
| | (34 | ) | | 1,122 |
| | — |
|
| Asset backed securities | | 808 |
| | 66 |
| | (3 | ) | | 871 |
| | — |
|
| Foreign government bonds and obligations | | 188 |
| | 36 |
| | — |
| | 224 |
| | — |
|
| U.S. government and agencies obligations | | 42 |
| | 7 |
| | — |
| | 49 |
| | — |
|
| Total fixed maturities | | 23,058 |
| | 2,976 |
| | (102 | ) | | 25,932 |
| | (24 | ) |
| Common stocks | | 2 |
| | 2 |
| | — |
| | 4 |
| | 1 |
|
| Total | | $ | 23,060 |
| | $ | 2,978 |
| | $ | (102 | ) | | $ | 25,936 |
| | $ | (23 | ) |
| |
(1) | Represents the amount of other-than-temporary impairment (“OTTI”) losses in 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 as of the end of the period. |
As of other-than-temporary impairment losses in 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 as of the end of the period.At both December 31, 20102013 and 2009,2012, investment securities with a fair value of $2.3 billion and $1.3 billion, respectively, were pledged to meet contractual obligations under derivative contracts and repurchase agreements.
At December 31, 2013 and 2012, fixed maturity securities comprised approximately 88%83% and 84%, respectively, of the Company’s total investments. Rating 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”). The Company uses the median of available ratings from Moody’s, S&P and Fitch, 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 December 31, 20102013 and 2009,2012, approximately $1.2$1.3 billion and $1.1$1.5 billion, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC)(“CMIA”) using criteria similar to those used by NRSROs. A summary of fixed maturity securities by rating was as follows:
| | December 31, 2010 | | December 31, 2009 | |
Ratings | | Amortized
Cost | | Fair
Value | | Percent of
Total Fair
Value | | Amortized
Cost | | Fair
Value | | Percent of
Total Fair
Value | |
| | (in millions, except percentages) | |
AAA | | $ | 8,067 | | $ | 8,647 | | 33 | % | $ | 9,194 | | $ | 9,520 | | 37 | % |
AA | | 1,360 | | 1,426 | | 5 | | 1,081 | | 1,084 | | 4 | |
A | | 4,025 | | 4,259 | | 16 | | 4,182 | | 4,326 | | 17 | |
BBB | | 9,831 | | 10,721 | | 41 | | 9,276 | | 9,826 | | 38 | |
Below investment grade | | 1,535 | | 1,389 | | 5 | | 1,409 | | 1,243 | | 4 | |
Total fixed maturities | | $ | 24,818 | | $ | 26,442 | | 100 | % | $ | 25,142 | | $ | 25,999 | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 | | December 31, 2012 |
| Ratings | | Amortized
Cost | | Fair
Value | | Percent of
Total Fair
Value | | Amortized
Cost | | Fair
Value | | Percent of
Total Fair
Value |
| | | (in millions, except percentages) |
| AAA | | $ | 5,557 |
| | $ | 5,738 |
| | 23 | % | | $ | 5,680 |
| | $ | 6,198 |
| | 24 | % |
| AA | | 1,055 |
| | 1,171 |
| | 5 |
| | 1,102 |
| | 1,273 |
| | 5 |
|
| A | | 4,687 |
| | 5,062 |
| | 21 |
| | 4,262 |
| | 4,849 |
| | 19 |
|
| BBB | | 10,062 |
| | 10,897 |
| | 45 |
| | 10,409 |
| | 12,019 |
| | 46 |
|
| Below investment grade | | 1,541 |
| | 1,519 |
| | 6 |
| | 1,605 |
| | 1,593 |
| | 6 |
|
| Total fixed maturities | | $ | 22,902 |
| | $ | 24,387 |
| | 100 | % | | $ | 23,058 |
| | $ | 25,932 |
| | 100 | % |
At December 31, 20102013 and 2009,2012, approximately 29%41% and 33%32%, 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 total equity.55
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)(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, 2010 | |
| | Less than 12 months | | 12 months or more | | Total | |
Description of Securities | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | |
| | (in millions, except number of securities) | |
Corporate debt securities | | 107 | | $ | 1,785 | | $ | (44 | ) | 13 | | $ | 153 | | $ | (12 | ) | 120 | | $ | 1,938 | | $ | (56 | ) |
Residential mortgage backed securities | | 71 | | 310 | | (7 | ) | 45 | | 282 | | (132 | ) | 116 | | 592 | | (139 | ) |
Commercial mortgage backed securities | | 10 | | 238 | | (4 | ) | — | | — | | — | | 10 | | 238 | | (4 | ) |
Asset backed securities | | 10 | | 186 | | (6 | ) | 15 | | 69 | | (12 | ) | 25 | | 255 | | (18 | ) |
State and municipal obligations | | 20 | | 256 | | (9 | ) | 2 | | 87 | | (48 | ) | 22 | | 343 | | (57 | ) |
U.S. government and agencies obligations | | 1 | | 15 | | — | | — | | — | | — | | 1 | | 15 | | — | |
Common stocks | | 2 | | 1 | | — | | 1 | | — | | — | | 3 | | 1 | | — | |
Total | | 221 | | $ | 2,791 | | $ | (70 | ) | 76 | | $ | 591 | | $ | (204 | ) | 297 | | $ | 3,382 | | $ | (274 | ) |
| | December 31, 2009 | |
| | Less than 12 months | | 12 months or more | | Total | |
Description of Securities | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | | Number
of
Securities | | Fair
Value | | Unrealized
Losses | |
| | (in millions, except number of securities) | |
Corporate debt securities | | 92 | | $ | 1,088 | | $ | (18 | ) | 85 | | $ | 1,313 | | $ | (88 | ) | 177 | | $ | 2,401 | | $ | (106 | ) |
Residential mortgage backed securities | | 34 | | 1,184 | | (34 | ) | 53 | | 363 | | (204 | ) | 87 | | 1,547 | | (238 | ) |
Commercial mortgage backed securities | | 24 | | 353 | | (4 | ) | 18 | | 297 | | (12 | ) | 42 | | 650 | | (16 | ) |
Asset backed securities | | 6 | | 70 | | (1 | ) | 16 | | 87 | | (28 | ) | 22 | | 157 | | (29 | ) |
State and municipal obligations | | 13 | | 232 | | (9 | ) | 2 | | 99 | | (37 | ) | 15 | | 331 | | (46 | ) |
U.S. government and agencies obligations | | 2 | | 89 | | (1 | ) | — | | — | | — | | 2 | | 89 | | (1 | ) |
Foreign government bonds and obligations | | — | | — | | — | | 1 | | 4 | | (1 | ) | 1 | | 4 | | (1 | ) |
Common and preferred stocks | | — | | — | | — | | 2 | | 23 | | (7 | ) | 2 | | 23 | | (7 | ) |
Total | | 171 | | $ | 3,016 | | $ | (67 | ) | 177 | | $ | 2,186 | | $ | (377 | ) | 348 | | $ | 5,202 | | $ | (444 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Less than 12 months | | 12 months or more | | Total |
| Description of Securities | | Number of
Securities | | Fair
Value | | Unrealized
Losses | | Number of
Securities | | Fair
Value | | Unrealized
Losses | | Number of
Securities | | Fair
Value | | Unrealized
Losses |
| | | (in millions, except number of securities) |
| Corporate debt securities | | 156 |
| | $ | 2,567 |
| | $ | (82 | ) | | 10 |
| | $ | 160 |
| | $ | (14 | ) | | 166 |
| | $ | 2,727 |
| | $ | (96 | ) |
| Residential mortgage backed securities | | 52 |
| | 1,411 |
| | (54 | ) | | 45 |
| | 295 |
| | (41 | ) | | 97 |
| | 1,706 |
| | (95 | ) |
| Commercial mortgage backed securities | | 27 |
| | 323 |
| | (9 | ) | | 3 |
| | 22 |
| | (2 | ) | | 30 |
| | 345 |
| | (11 | ) |
| State and municipal obligations | | 4 |
| | 38 |
| | (2 | ) | | 2 |
| | 92 |
| | (37 | ) | | 6 |
| | 130 |
| | (39 | ) |
| Asset backed securities | | 17 |
| | 219 |
| | (4 | ) | | 3 |
| | 26 |
| | (1 | ) | | 20 |
| | 245 |
| | (5 | ) |
| Foreign government bonds and obligations | | 23 |
| | 77 |
| | (8 | ) | | — |
| | — |
| | — |
| | 23 |
| | 77 |
| | (8 | ) |
| Total | | 279 |
| | $ | 4,635 |
| | $ | (159 | ) | | 63 |
| | $ | 595 |
| | $ | (95 | ) | | 342 |
| | $ | 5,230 |
| | $ | (254 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| | | Less than 12 months | | 12 months or more | | Total |
| Description of Securities | | Number of
Securities | | Fair
Value | | Unrealized
Losses | | Number of
Securities | | Fair
Value | | Unrealized
Losses | | Number of
Securities | | Fair
Value | | Unrealized
Losses |
| | | (in millions, except number of securities) |
| Corporate debt securities | | 50 |
| | $ | 477 |
| | $ | (4 | ) | | 6 |
| | $ | 70 |
| | $ | (3 | ) | | 56 |
| | $ | 547 |
| | $ | (7 | ) |
| Residential mortgage backed securities | | 6 |
| | 107 |
| | — |
| | 56 |
| | 293 |
| | (58 | ) | | 62 |
| | 400 |
| | (58 | ) |
| State and municipal obligations | | — |
| | — |
| | — |
| | 2 |
| | 100 |
| | (34 | ) | | 2 |
| | 100 |
| | (34 | ) |
| Asset backed securities | | 1 |
| | 10 |
| | — |
| | 5 |
| | 86 |
| | (3 | ) | | 6 |
| | 96 |
| | (3 | ) |
| Total | | 57 |
| | $ | 594 |
| | $ | (4 | ) | | 69 |
| | $ | 549 |
| | $ | (98 | ) | | 126 |
| | $ | 1,143 |
| | $ | (102 | ) |
As part of the Company’s ongoing monitoring process, management determined that a majority of the
change in gross unrealized losses on its Available-for-Sale securities
at December 31, 2010 areis attributable to
credit spreads. The primary driver of lower unrealized losses at December 31, 2010 was the decline ofmovement in interest
rates during the period.rates.
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: | | Years Ended
December 31, | |
| | 2010 | | 2009 | |
| | (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 | | $ | 82 | | $ | 102 | |
Additional amount related to credit losses for which an other-than-temporary impairment was not previously recognized | | 14 | | 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 | | 12 | | 31 | |
Ending balance of credit losses on securities held as of December 31 for which a portion of other-than-temporary impairment was recognized in other comprehensive income | | $ | 108 | | $ | 82 | |
56
income (loss):
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Beginning balance | | $ | 87 |
| | $ | 106 |
| | $ | 108 |
|
| Credit losses for which an other-than-temporary impairment was not previously recognized | | 2 |
| | 1 |
| | 13 |
|
| Credit losses for which an other-than-temporary impairment was previously recognized | | 4 |
| | 16 |
| | 11 |
|
| Reductions for securities sold during the period (realized) | | (39 | ) | | (36 | ) | | (26 | ) |
| Ending balance | | $ | 54 |
| | $ | 87 |
| | $ | 106 |
|
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 and due to the reclassification of noncredit other-than-temporary impairment losses to credit
losseslosses; 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.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a rollforward of the net unrealized securities
gains (losses)
gains on Available-for-Sale securities included in accumulated other comprehensive
income (loss): | | Net
Unrealized
Securities
(Losses) Gains | | Deferred
Income Tax | | Accumulated Other
Comprehensive
Income (Loss)
Related to Net
Unrealized Securities
(Losses) Gains | |
| | (in millions) | |
Balance at January 1, 2008 | | $ | (179 | ) | $ | 63 | | $ | (116 | ) |
Net unrealized securities 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 | ) | 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) |
(1)Amount represents the cumulative effect of adopting a new accounting standard on January 1, 2009. See Note 3 for additional information on the adoption impact.
(2)At December 31, 2010 and 2009, Accumulated Other Comprehensive Income Related to Net Unrealized Securities Gains included $(12) million and $(16) million, respectively, of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.
(3)In 2010 and 2009, net unrealized securities gains arising during the period include 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
Unrealized
Securities
Gains (Loss) | | Deferred
Income
Tax | | Accumulated Other
Comprehensive
Income (Loss) Related to
Net Unrealized
Securities Gains (Loss) | |
| | | (in millions) | |
| Balance at January 1, 2011 | | $ | 1,215 |
| | $ | (425 | ) | | $ | 790 |
| |
Net unrealized securities gains arising during the period(1) | | 560 |
| | (196 | ) | | 364 |
| |
| Reclassification of net securities gains included in net income | | (5 | ) | | 2 |
| | (3 | ) | |
| Impact of DAC, DSIC, benefit reserves and reinsurance recoverables | | (299 | ) | | 105 |
| | (194 | ) | |
| Balance at December 31, 2011 | | 1,471 |
| | (514 | ) | | 957 |
| (2) |
Net unrealized securities gains arising during the period(1) | | 694 |
| | (243 | ) | | 451 |
| |
| Reclassification of net securities losses included in net income | | 2 |
| | (1 | ) | | 1 |
| |
| Impact of DAC, DSIC, benefit reserves and reinsurance recoverables | | (237 | ) | | 83 |
| | (154 | ) | |
| Balance at December 31, 2012 | | 1,930 |
| | (675 | ) | | 1,255 |
| (2) |
Net unrealized securities losses arising during the period(1) | | (1,382 | ) | | 478 |
| | (904 | ) | |
| Reclassification of net securities gains included in net income | | (5 | ) | | 2 |
| | (3 | ) | |
| Impact of DAC, DSIC, benefit reserves and reinsurance recoverables | | 490 |
| | (171 | ) | | 319 |
| |
| Balance at December 31, 2013 | | $ | 1,033 |
| | $ | (366 | ) | | $ | 667 |
| (2) |
| |
| (1) | 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. |
| |
| (2) | Includes $7 million, $15 million and $20 million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at December 31, 2013, 2012 and 2011, respectively. |
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, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Gross realized investment gains from sales | | $ | 51 | | $ | 185 | | $ | 13 | |
Gross realized investment losses from sales | | (4 | ) | (50 | ) | (6 | ) |
Other-than-temporary impairments | | (28 | ) | (62 | ) | (440 | ) |
| | | | | | | | | | |
The other-than-temporary
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Gross realized investment gains | | $ | 11 |
| | $ | 16 |
| | $ | 48 |
|
| Gross realized investment losses | | — |
| | (1 | ) | | (20 | ) |
| Other-than-temporary impairments | | (6 | ) | | (17 | ) | | (24 | ) |
| Total | | $ | 5 |
| | $ | (2 | ) | | $ | 4 |
|
Other-than-temporary impairments for the yearyears endedDecember 31, 20102013, 2012 and 2011 primarily related to credit losses on non-agency residential mortgage backed securities as well as corporate debt securities in the gaming industry. The other-than-temporary impairments for the year ended December 31, 2009 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 other-than-temporary impairments for the year ended December 31, 2008 related to losses on non-agency residential mortgage backed securities, corporate debt securities primarily in the financial services industry and asset backed and other securities.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale securities by contractual maturity at December 31, 20102013 were as follows:
| | Amortized Cost | | Fair Value | |
| | (in millions) | |
Due within one year | | $ | 1,047 | | $ | 1,066 | |
Due after one year through five years | | 5,359 | | 5,671 | |
Due after five years through 10 years | | 5,615 | | 6,106 | |
Due after 10 years | | 3,726 | | 4,050 | |
| | 15,747 | | 16,893 | |
Residential mortgage backed securities | | 4,364 | | 4,533 | |
Commercial mortgage backed securities | | 3,817 | | 4,095 | |
Asset backed securities | | 883 | | 908 | |
Other structured investments | | 7 | | 13 | |
Common stocks | | 1 | | 2 | |
Total | | $ | 24,819 | | $ | 26,444 | |
|
| | | | | | | | |
| | | Amortized Cost | | Fair Value |
| | | (in millions) |
| Due within one year | | $ | 1,040 |
| | $ | 1,061 |
|
| Due after one year through five years | | 4,747 |
| | 5,130 |
|
| Due after five years through 10 years | | 6,558 |
| | 6,930 |
|
| Due after 10 years | | 3,537 |
| | 4,040 |
|
| | | 15,882 |
| | 17,161 |
|
| Residential mortgage backed securities | | 3,773 |
| | 3,811 |
|
| Commercial mortgage backed securities | | 2,309 |
| | 2,434 |
|
| Asset backed securities | | 938 |
| | 981 |
|
| Common stocks | | 2 |
| | 6 |
|
| Total | | $ | 22,904 |
| | $ | 24,393 |
|
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
and 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, 2010 and 2009, bonds carried at $7 million were on deposit with various states as required by law.
Trading Securities
Net recognized gains (losses) related to trading securities held at December 31, 2010, 2009 and 2008 were nil, nil and $9 million, respectively.
Sources of Investment Income and Net Realized Investment Gains (Losses)
Net investment income is summarized as follows:
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Income on fixed maturities | | $ | 1,482 | | $ | 1,371 | | $ | 1,043 | |
Income on commercial mortgage loans | | 152 | | 160 | | 173 | |
Trading securities and other investments | | 40 | | 35 | | 55 | |
| | 1,674 | | 1,566 | | 1,271 | |
Less: investment expenses | | (45 | ) | (40 | ) | (19 | ) |
Total | | $ | 1,629 | | $ | 1,526 | | $ | 1,252 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Income on fixed maturities | $ | 1,205 |
| | $ | 1,324 |
| | $ | 1,469 |
|
| Income on mortgage loans | 202 |
| | 158 |
| | 149 |
|
| Other investments | 37 |
| | 26 |
| | 18 |
|
| | 1,444 |
| | 1,508 |
| | 1,636 |
|
| Less: investment expenses | 33 |
| | 28 |
| | 43 |
|
| Total | $ | 1,411 |
| | $ | 1,480 |
| | $ | 1,593 |
|
Net realized investment gains (losses) are summarized as follows: | | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Fixed maturities | | $ | 19 | | $ | 73 | | $ | (433 | ) |
Commercial mortgage loans | | (6 | ) | (13 | ) | (1 | ) |
Trading securities and other investments | | 3 | | (1 | ) | (8 | ) |
Total | | $ | 16 | | $ | 59 | | $ | (442 | ) |
58
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Fixed maturities | $ | 5 |
| | $ | (2 | ) | | $ | 4 |
|
| Mortgage loans | (1 | ) | | — |
| | 2 |
|
| Other investments | (1 | ) | | (1 | ) | | (1 | ) |
| Total | $ | 3 |
| | $ | (3 | ) | | $ | 5 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6.Financing Receivables
The Company’s financing receivables include commercial and residential mortgage loans, syndicated loans and policy loans. Syndicated loans are reflected in other investments. Policy loans do not exceed the cash surrender 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. The Company does not hold any loans acquired with deteriorated credit quality. See Note 2 for information regarding the Company’s accounting policies related to loans and thecurrently have an allowance for loan losses.
losses for residential mortgage loans purchased in 2012.
Allowance for Loan Losses
The following table presentstables present a rollforward of the allowance for loan losses for the yearyears ended December 31, 2010 and the ending balance of the allowance for loan losses as of December 31, 2010 by impairment method and type of loan: | | Commercial
Mortgage
Loans | | Syndicated
Loans | | Total | |
| | (in millions) | |
Beginning balance | | $ | 30 | | $ | 12 | | $ | 42 | |
Charge-offs | | (1 | ) | (2 | ) | (3 | ) |
Provisions | | 7 | | (5 | ) | 2 | |
Ending balance | | $ | 36 | | $ | 5 | | $ | 41 | |
| | | | | | | |
Ending balance: Individually evaluated for impairment | | $ | 8 | | $ | — | | $ | 8 | |
Ending balance: Collectively evaluated for impairment | | 28 | | 5 | | 33 | |
|
| | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Commercial Mortgage Loans | | Syndicated
Loans | | Total |
| | | (in millions) |
| Beginning balance | | $ | 26 |
| | $ | 4 |
| | $ | 30 |
|
| Charge-offs | | (2 | ) | | — |
| | (2 | ) |
| Ending balance | | $ | 24 |
| | $ | 4 |
| | $ | 28 |
|
| | | | | | | |
| Individually evaluated for impairment | | $ | 8 |
| | $ | — |
| | $ | 8 |
|
| Collectively evaluated for impairment | | 16 |
| | 4 |
| | 20 |
|
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | December 31, 2012 |
| | Commercial Mortgage Loans | | Syndicated
Loans | | Total |
| | (in millions) |
| Beginning balance | $ | 32 |
| | $ | 5 |
| | $ | 37 |
|
| Charge-offs | (6 | ) | | (1 | ) | | (7 | ) |
| Ending balance | $ | 26 |
| | $ | 4 |
| | $ | 30 |
|
| | | | | | |
| Individually evaluated for impairment | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| Collectively evaluated for impairment | 21 |
| | 4 |
| | 25 |
|
|
| | | | | | | | | | | |
| | December 31, 2011 |
| | Commercial Mortgage Loans | | Syndicated Loans | | Total |
| | (in millions) |
| Beginning balance | $ | 36 |
| | $ | 5 |
| | $ | 41 |
|
| Charge-offs | (3 | ) | | — |
| | (3 | ) |
| Provisions | (1 | ) | | — |
| | (1 | ) |
| Ending balance | $ | 32 |
| | $ | 5 |
| | $ | 37 |
|
| | | | | | |
| Individually evaluated for impairment | $ | 9 |
| | $ | — |
| | $ | 9 |
|
| Collectively evaluated for impairment | 23 |
| | 5 |
| | 28 |
|
The recorded investment in financing receivables
as of December 31, 2010 by impairment method and type of loan was as follows:
| | Commercial
Mortgage
Loans | | Syndicated
Loans | | Total | |
| | (in millions) | |
Ending balance: Individually evaluated for impairment | | $ | 75 | | $ | — | | $ | 75 | |
Ending balance: Collectively evaluated for impairment | | 2,431 | | 205 | | 2,636 | |
Ending balance | | $ | 2,506 | | $ | 205 | | $ | 2,711 | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Commercial
Mortgage
Loans | | Residential
Mortgage
Loans | | Syndicated
Loans | | Total |
| | | (in millions) |
| Individually evaluated for impairment | | $ | 40 |
| | $ | — |
| | $ | 5 |
| | $ | 45 |
|
| Collectively evaluated for impairment | | 2,524 |
| | 786 |
| | 356 |
| | 3,666 |
|
| Total | | $ | 2,564 |
| | $ | 786 |
| | $ | 361 |
| | $ | 3,711 |
|
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| | | Commercial
Mortgage
Loans | | Residential
Mortgage
Loans | | Syndicated
Loans | | Total |
| | | (in millions) |
| Individually evaluated for impairment | | $ | 39 |
| | $ | — |
| | $ | — |
| | $ | 39 |
|
| Collectively evaluated for impairment | | 2,442 |
| | 934 |
| | 303 |
| | 3,679 |
|
| Total | | $ | 2,481 |
| | $ | 934 |
| | $ | 303 |
| | $ | 3,718 |
|
As of December 31, 2010,2013 and 2012, the Company’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $19 million.During the year ended
$12 million and $10 million, respectively. Residential mortgage loans are presented net of unamortized discount of $53 million and $80 million as of December 31, 2010,2013 and 2012, respectively.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchases and sales of loans were as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Purchases | | | | | | |
| Residential mortgage loans | | $ | — |
| | $ | 954 |
| | $ | — |
|
| Syndicated loans | | 158 |
| | 111 |
| | 194 |
|
| Total loans purchased | | $ | 158 |
| | $ | 1,065 |
| | $ | 194 |
|
| | | | | | | |
| Sales | | | | | | |
| Syndicated loans | | $ | 2 |
| | $ | 9 |
| | $ | 2 |
|
The Company has not acquired any loans with deteriorated credit quality as of the
Company purchased $59 million and sold $2 million of syndicated loans.acquisition date.
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were $8$20 million and $4 million as of December 31, 2010.2013 and 2012, respectively. All 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 assigned its highest risk rating were 3%2% of total commercial mortgage loans as of at both December 31, 2010.2013 and 2012. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure inwithin the next six months. In addition, the Company reviews the concentrations of credit risk by region and property type.59
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentrations of credit risk of commercial mortgage loans by U.S. region as of December 31, 2010 were as follows:
| | Loans | | Percent of
Loans | | Funding
Commitments | |
| | (in millions, except percentages) | |
South Atlantic | | $ | 590 | | 24 | % | $ | 4 | |
Pacific | | 530 | | 21 | | 15 | |
Mountain | | 286 | | 11 | | — | |
West North Central | | 251 | | 10 | | — | |
East North Central | | 240 | | 10 | | — | |
Middle Atlantic | | 212 | | 8 | | — | |
West South Central | | 183 | | 7 | | — | |
New England | | 148 | | 6 | | 2 | |
East South Central | | 66 | | 3 | | — | |
| | 2,506 | | 100 | % | 21 | |
Less: allowance for loan losses | | (36 | ) | | | — | |
Total | | $ | 2,470 | | | | $ | 21 | |
|
| | | | | | | | | | | | | | |
| | | Loans | | Percentage |
| | | December 31,
2013 | | December 31,
2012 | | December 31,
2013 | | December 31,
2012 |
| | | (in millions) | | | | |
| South Atlantic | | $ | 679 |
| | $ | 625 |
| | 26 | % | | 25 | % |
| Pacific | | 631 |
| | 565 |
| | 25 |
| | 23 |
|
| East North Central | | 248 |
| | 255 |
| | 10 |
| | 10 |
|
| Mountain | | 248 |
| | 262 |
| | 10 |
| | 11 |
|
| Middle Atlantic | | 202 |
| | 198 |
| | 8 |
| | 8 |
|
| West North Central | | 194 |
| | 216 |
| | 7 |
| | 9 |
|
| West South Central | | 153 |
| | 159 |
| | 6 |
| | 6 |
|
| New England | | 138 |
| | 135 |
| | 5 |
| | 5 |
|
| East South Central | | 71 |
| | 66 |
| | 3 |
| | 3 |
|
| | | 2,564 |
| | 2,481 |
| | 100 | % | | 100 | % |
| Less: allowance for loan losses | | 24 |
| | 26 |
| | |
| | |
|
| Total | | $ | 2,540 |
| | $ | 2,455 |
| | |
| | |
|
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentrations of credit risk of commercial mortgage loans by property type
as of December 31, 2010 were as follows:
| | Loans | | Percent of
Loans | | Funding
Commitments | |
| | (in millions, except percentages) | |
Retail | | $ | 820 | | 33 | % | $ | 10 | |
Office | | 717 | | 29 | | — | |
Industrial | | 456 | | 18 | | 6 | |
Apartments | | 326 | | 13 | | — | |
Hotel | | 57 | | 2 | | — | |
Mixed Use | | 43 | | 2 | | — | |
Other | | 87 | | 3 | | 5 | |
| | 2,506 | | 100 | % | 21 | |
Less: allowance for loan losses | | (36 | ) | | | — | |
Total | | $ | 2,470 | | | | $ | 21 | |
|
| | | | | | | | | | | | | | |
| | | Loans | | Percentage |
| | | December 31,
2013 | | December 31,
2012 | | December 31,
2013 | | December 31,
2012 |
| | | (in millions) | | | | |
| Retail | | $ | 917 |
| | $ | 822 |
| | 36 | % | | 33 | % |
| Office | | 548 |
| | 597 |
| | 21 |
| | 24 |
|
| Apartments | | 454 |
| | 415 |
| | 18 |
| | 17 |
|
| Industrial | | 431 |
| | 449 |
| | 17 |
| | 18 |
|
| Mixed use | | 36 |
| | 42 |
| | 1 |
| | 2 |
|
| Hotel | | 32 |
| | 36 |
| | 1 |
| | 1 |
|
| Other | | 146 |
| | 120 |
| | 6 |
| | 5 |
|
| | | 2,564 |
| | 2,481 |
| | 100 | % | | 100 | % |
| Less: allowance for loan losses | | 24 |
| | 26 |
| | |
| | |
|
| Total | | $ | 2,540 |
| | $ | 2,455 |
| | |
| | |
|
Residential Mortgage Loans
In October 2012, the Company purchased $954 million of residential mortgage loans at fair value from an affiliate, Ameriprise Bank, FSB. The purchase price took into account the credit quality of the loan portfolio resulting in no allowance for loan losses recorded at purchase. The Company considers the credit worthiness of borrowers (FICO score), collateral characteristics such as LTV and geographic concentration to determine when an amount for an allowance for loan losses for residential mortgage loans is appropriate. At a minimum, management updates FICO scores and LTV ratios semiannually. As of December 31, 2013 and 2012, no allowance for loan losses was recorded.
As of December 31, 2013 and 2012, approximately 4% and 3%, respectively, of residential mortgage loans had FICO scores below 640. At December 31, 2013 and 2012, approximately 1% and 7%, respectively, of the Company’s residential mortgage loans had LTV ratios greater than 90%. The Company’s most significant geographic concentration for residential mortgage loans is in California representing 38% of the portfolio as of both December 31, 2013 and 2012. No other state represents more than 10% of the total residential mortgage loan portfolio.
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 as of at December 31, 20102013 and 2012 were $1 million.
7.$3 millionDeferred Acquisition Costs and Deferred Sales Inducement CostsDuring$2 million, respectively.
Troubled Debt Restructurings
The following table presents the number of loans restructured by the Company during the period and their recorded investment at the end of the period:
|
| | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 |
| | | Number
of Loans | | Recorded
Investment | | Number
of Loans | | Recorded
Investment |
| | | (in millions, except number of loans) |
| Commercial mortgage loans | | 7 |
| | $ | 22 |
| | 4 |
| | $ | 13 |
|
| Residential mortgage loans | | 2 |
| | — |
| | — |
| | — |
|
| Syndicated loans | | — |
| | — |
| | 2 |
| | 1 |
|
| Total | | 9 |
| | $ | 22 |
| | 6 |
| | $ | 14 |
|
The troubled debt restructurings did not have a material impact to the Company’s allowance for loan losses or income recognized for the years endedDecember 31, 2013 and 2012. There are no commitments to lend additional funds to borrowers whose loans have been restructured.
| |
| 7. | DeferredAcquisitionCostsand Deferred Sales Inducement Costs |
In the third quarter of
2010, 2009the year, management conducts its annual review of insurance and
2008, management reviewed and updated the DAC and DSICannuity valuation assumptions
forrelative to current experience and management expectations. To the
Company’s products. As partextent that expectations change as a result of
its third quarter 2010 process,this review, management
extended the projection periods used for its annuity products and revised client asset value growth rates assumed for variable annuity and variable universal life contracts. Duringupdates valuation assumptions. The impact in the third quarter of
2008, the Company converted to a new industry standard valuation system that provided enhanced modeling capabilities.The total pretax impacts on the Company’s assets and liabilities attributable to the review2013 primarily reflected expected higher interest
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)(Continued)
rates and changes in assumed policyholder behavior. The
total pretax impacts on the Company’s revenues and expenses attributable to the review of the valuation assumptions for the years ended December 31, 2010, 2009 and 2008 and the valuation system conversion duringimpact in the third quarter of
2008 were as follows:Pretax Benefit (Charge) | | Premiums | | Policy and
Contract
Charges | | Benefits, Claims,
Losses and
Settlement
Expenses | | Amortization
of DAC | | Other
Insurance and
Operating
Expenses | | Total | |
| | (in millions) | |
2010 period | | $ | — | | $ | (21 | ) | $ | (214 | ) | $ | 323 | | $ | — | | $ | 88 | |
2009 period | | — | | (65 | ) | 80 | | 119 | | — | | 134 | |
2008 period | | 2 | | 95 | | 89 | | (81 | ) | 1 | | 106 | |
| | | | | | | | | | | | | | | | | | | |
2012 and 2011 primarily reflected the low interest rate environment and for 2012, the assumption of continued low interest rates over the near-term.
The balances of and changes in DAC were as follows:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Balance at January 1 | | $ | 4,285 | | $ | 4,324 | | $ | 4,334 | |
Cumulative effect of accounting change | | — | | — | | 36 | |
Capitalization of acquisition costs | | 459 | | 558 | | 587 | |
Amortization, excluding the impact of valuation assumptions review and valuation system conversion | | (376 | ) | (264 | ) | (780 | ) |
Amortization, impact of valuation assumptions review and valuation system conversion | | 323 | | 119 | | (81 | ) |
Impact of change in net unrealized securities (gains) losses | | (113 | ) | (452 | ) | 228 | |
Balance at December 31 | | $ | 4,578 | | $ | 4,285 | | $ | 4,324 | |
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Balance at January 1 | | $ | 2,373 |
| | $ | 2,413 |
| | $ | 2,521 |
|
| Capitalization of acquisition costs | | 269 |
| | 253 |
| | 282 |
|
| Amortization, excluding the impact of valuation assumptions review | | (219 | ) | | (214 | ) | | (305 | ) |
| Amortization, impact of valuation assumptions review | | 78 |
| | (11 | ) | | (31 | ) |
| Impact of change in net unrealized securities losses (gains) | | 132 |
| | (68 | ) | | (54 | ) |
| Balance at December 31 | | $ | 2,633 |
| | $ | 2,373 |
| | $ | 2,413 |
|
The balances of and changes in DSIC,
which is included in other assets, were as follows:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Balance at January 1 | | $ | 524 | | $ | 518 | | $ | 511 | |
Cumulative effect of accounting change | | — | | — | | 9 | |
Capitalization of sales inducement costs | | 35 | | 82 | | 87 | |
Amortization, excluding the impact of valuation assumptions review and valuation system conversion | | (49 | ) | (19 | ) | (115 | ) |
Amortization, impact of valuation assumptions review and valuation system conversion | | 52 | | 9 | | (6 | ) |
Impact of change in net unrealized securities (gains) losses | | (17 | ) | (66 | ) | 32 | |
Balance at December 31 | | $ | 545 | | $ | 524 | | $ | 518 | |
As described in Note 3,
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Balance at January 1 | | $ | 404 |
| | $ | 464 |
| | $ | 545 |
|
| Capitalization of sales inducement costs | | 5 |
| | 7 |
| | 9 |
|
| Amortization, excluding the impact of valuation assumptions review | | (48 | ) | | (45 | ) | | (70 | ) |
| Amortization, impact of valuation assumptions review | | 25 |
| | (13 | ) | | (11 | ) |
| Impact of change in net unrealized securities losses (gains) | | 23 |
| | (9 | ) | | (9 | ) |
| Balance at December 31 | | $ | 409 |
| | $ | 404 |
| | $ | 464 |
|
For most new life insurance policies, 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, the Company 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 the Company’s adoption of fair value accounting standards.
8.Reinsurance
Generally, the 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, the 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.liability. The Company began reinsuring risks at this level duringin 2001 (2002 for RiverSource(RiverSource Life of NY)NY began in 2002) 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.
However, for IUL policies issued after September 1, 2013, the Company generally reinsures 50% of the death benefit liability. Similarly, the Company reinsures 50% of the death benefit and morbidity liabilities related to the TrioSource universal life product launched in 2013.
Generally, the maximum amount of life insurance risk retained by the Company is $1.5 million on a single life and $1.5 million on any flexible premium survivorship life
po licy.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.
61
The Company also has life insurance and fixed annuity risk previously assumed under reinsurance arrangements with unaffiliated insurance companies.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For existing LTC policies, 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”). and retained the remaining risk. For RiverSource Life of NY, this reinsurance arrangement applies for 1996 and later issues only.
Generally, the 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(2010 for RiverSource Life of NY) and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. The Company retains all risk for new claims on DI contracts sold on other policy forms. The Company also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.
The Company also has life insurance and fixed annuity risk previously assumed under reinsurance arrangements with unaffiliated insurance companies.
At December 31,
20102013 and
2009,2012, traditional life and universal life insurance in force aggregated
$192.0$194.1 billion and
$192.8$191.4 billion, respectively, of which
$134.0$142.1 billion and
$131.2$138.6 billion were reinsured at the respective year ends. Life insurance in force is reported on a statutory basis.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effect of reinsurance on premiums was as follows:
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Direct premiums | | $ | 681 | | $ | 659 | | $ | 641 | |
Reinsurance ceded | | (192 | ) | (209 | ) | (203 | ) |
Net premiums | | $ | 489 | | $ | 450 | | $ | 438 | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Direct premiums | | $ | 650 |
| | $ | 661 |
| | $ | 707 |
|
| Reinsurance ceded | | (220 | ) | | (219 | ) | | (214 | ) |
| Net premiums | | $ | 430 |
| | $ | 442 |
| | $ | 493 |
|
Policy and contract charges are presented on the Consolidated Statements of Income net of
$67$87 million,
$62$79 million and
$61$71 million of reinsurance ceded for the years ended December 31,
2010, 20092013, 2012 and
2008,2011, respectively.
Reinsurance recovered from reinsurers was
$166$226 million,
$167$196 million and
$142$189 million for the years ended December 31,
2010, 20092013, 2012 and
2008,2011, respectively. Reinsurance contracts do not relieve the Company from its primary obligation to policyholders.
Reinsurance recoverables include
approximately $1.4$1.7 billion and $1.3$1.6 billion related to LTC risk ceded to Genworth as of December 31, 20102013 and 2009,2012, respectively. Included in policyholder account balances, future policy benefits and claims is $657$597 million and $667$615 million related to previously assumed reinsurance arrangements as of December 31, 20102013 and 2009,2012, respectively.9.Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities
| |
| 9. | Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities |
Policyholder account balances, future policy benefits and
policy claims
and other policyholders’ funds consisted of the following:
| | December 31, | |
| | 2010 | | 2009 | |
| | (in millions) | |
Fixed annuities | | $ | 16,520 | | $ | 16,558 | |
Equity indexed annuities accumulated host values | | 100 | | 159 | |
Equity indexed annuities embedded derivatives | | 3 | | 9 | |
Variable annuity fixed sub-accounts | | 4,868 | | 6,127 | |
Variable annuity GMWB | | 337 | | 204 | |
Variable annuity GMAB | | 104 | | 100 | |
Other variable annuity guarantees | | 13 | | 12 | |
Total annuities | | 21,945 | | 23,169 | |
VUL/UL insurance | | 2,588 | | 2,526 | |
VUL/UL insurance additional liabilities | | 143 | | 69 | |
Other life, DI and LTC insurance | | 5,004 | | 4,619 | |
Total future policy benefits | | 29,680 | | 30,383 | |
Policy claims and other policyholders’ funds | | 134 | | 123 | |
Total future policy benefits and policy claims and other policyholders’ funds | | $ | 29,814 | | $ | 30,506 | |
62
|
| | | | | | | | |
| | | December 31, |
| | | 2013 | | 2012 |
| | | (in millions) |
| Policyholder account balances | | | | |
| Fixed annuities | | $ | 13,826 |
| | $ | 14,420 |
|
| Variable annuity fixed sub-accounts | | 4,926 |
| | 4,833 |
|
| VUL/UL insurance | | 2,790 |
| | 2,725 |
|
| IUL insurance | | 315 |
| | 137 |
|
| Other life insurance | | 878 |
| | 909 |
|
| Total policyholder account balances | | 22,735 |
| | 23,024 |
|
| Future policy benefits | | | | |
| Variable annuity GMWB | | (383 | ) | (1) | 799 |
|
| Variable annuity GMAB | | (62 | ) | (1) | 103 |
|
| Other annuity liabilities | | 76 |
| | 158 |
|
| Fixed annuities life contingent liabilities | | 1,523 |
| | 1,520 |
|
| EIA | | 29 |
| | 33 |
|
| Life, DI and LTC insurance | | 4,739 |
| | 4,703 |
|
| VUL/UL and other life insurance additional liabilities | | 336 |
| | 330 |
|
| Total future policy benefits | | 6,258 |
| | 7,646 |
|
| Policy claims and other policyholders’ funds | | 156 |
| | 132 |
|
| Total policyholder account balances, future policy benefits and claims | | $ | 29,149 |
| | $ | 30,802 |
|
| |
| (1) | Includes the value of GMWB and GMAB embedded derivatives which was a net asset at December 31, 2013 and the amount is reported as a contra liability. |
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)(Continued)
Separate account liabilities consisted of the following:
| | December 31, | |
| | 2010 | | 2009 | |
| | (in millions) | |
Variable annuity variable sub-accounts | | $ | 57,862 | | $ | 48,982 | |
VUL insurance variable sub-accounts | | 5,887 | | 5,239 | |
Other insurance variable sub-accounts | | 46 | | 46 | |
Total | | $ | 63,795 | | $ | 54,267 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2013 | | 2012 |
| | | (in millions) |
| Variable annuity | | $ | 70,687 |
| | $ | 63,302 |
|
| VUL insurance | | 6,885 |
| | 6,051 |
|
| Other insurance | | 44 |
| | 42 |
|
| Total | | $ | 77,616 |
| | $ | 69,395 |
|
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. The Company generally invests the proceeds from the annuity payments in fixed rate securities.
The Company may hedge the interest rate risks related to fixed annuities with derivative instruments. As of December 31, 2010 and 2009, there were no outstanding derivatives to hedge these risks.
Equity Indexed AnnuitiesThe Index 500 Annuity, the 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 performance of the S&P 500 Index. Index®.This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders. The Company generally invests the proceeds from the annuity deposits in fixed rate securities and hedges the equity risk with derivative instruments. See Note 1617 for additional information regarding the Company’s derivative instruments. In 2007, the Company discontinued new sales of EIAs.
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
currently issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU provisions. The Company previously offered contracts with GMIB provisions. See Note 2 and Note 10 for additional information regarding the Company’s variable annuity guarantees. The Company does not currently hedge its risk under the
GMDB, GGU and GMIB provisions. See Note
1617 for additional information regarding derivative instruments used to hedge risks related to GMWB,
GMAB and
GMABGMDB provisions.
VUL/UL is the largest group of insurance policies written by 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 contractspolicies are held in separate accounts where the assets are held for the exclusive benefit of those policyholders.
IUL insurance is similar to UL in many regards, although the rate of credited interest above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the S&P 500 Index (subject to a cap and floor). The policyholder may allocate all or a portion of the policy value to a fixed or indexed account.
The Company also offers term
and whole life insurance as well as disability products. The Company no longer offers
standalone LTC products
and whole life insurance 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
contractspolicies have product features that result in profits followed by losses from the insurance component of the
contract.policy. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the
contract.policy. 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.
63
| |
| 10. | Variable Annuity and Insurance Guarantees |
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10.Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by the Company contain GMDB provisions. The Company also offers variable annuities with GGU, GMWB and GMAB provisions. The Company previously offered contracts containing GMIB provisions. See Note 2 and Note 9 for additional information regarding the Company’s variable annuity guarantees.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The 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
iswas often provided in combination with the return of premium
provision. This provision
and 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 fund performance. At issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance.
The Company has GMWB riders in force, which contain one or more of the following provisions:
·
Withdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.
·
Withdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).
·
Withdrawals at a specified rate per year for joint contractholders while either is alive.
·
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 least aggressive asset allocation
models (of the five that are available prior to withdrawal).·models.
Credits are applied annually for a 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 year10-year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
As of April 2012, clients who purchase a GMWB or GMAB rider are invested in one or more of four Portfolio Stabilizer (managed volatility) funds designed to pursue total return while seeking to mitigate exposure to market volatility.
Certain UL
contractspolicies offered by the 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.
64
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)(Continued)
The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:
| | December 31, 2010 | | December 31, 2009 | |
Variable Annuity
Guarantees by
Benefit Type (1) | | Total
Contract
Value | | Contract
Value in
Separate
Accounts | | Net
Amount
at Risk(2) | | Weighted
Average
Attained
Age | | Total
Contract
Value | | Contract
Value in
Separate
Accounts | | Net
Amount
at Risk(2) | | Weighted
Average
Attained
Age | |
| | (in millions, except age) | |
GMDB: | | | | | | | | | | | | | | | | | |
Return of premium | | $ | 37,714 | | $ | 36,028 | | $ | 173 | | 62 | | $ | 30,938 | | $ | 28,415 | | $ | 974 | | 61 | |
Five/six-year reset | | 13,689 | | 11,153 | | 312 | | 62 | | 13,919 | | 11,223 | | 929 | | 61 | |
One-year ratchet | | 7,741 | | 7,242 | | 287 | | 63 | | 7,081 | | 6,400 | | 873 | | 63 | |
Five-year ratchet | | 1,466 | | 1,414 | | 8 | | 60 | | 1,256 | | 1,171 | | 38 | | 59 | |
Other | | 680 | | 649 | | 61 | | 67 | | 549 | | 516 | | 95 | | 67 | |
Total — GMDB | | $ | 61,290 | | $ | 56,486 | | $ | 841 | | 62 | | $ | 53,743 | | $ | 47,725 | | $ | 2,909 | | 61 | |
| | | | | | | | | | | | | | | | | |
GGU death benefit | | $ | 970 | | $ | 912 | | $ | 79 | | 64 | | $ | 853 | | $ | 775 | | $ | 70 | | 63 | |
| | | | | | | | | | | | | | | | | |
GMIB | | $ | 597 | | $ | 561 | | $ | 76 | | 64 | | $ | 628 | | $ | 582 | | $ | 126 | | 63 | |
| | | | | | | | | | | | | | | | | |
GMWB: | | | | | | | | | | | | | | | | | |
GMWB | | $ | 4,341 | | $ | 4,317 | | $ | 106 | | 64 | | $ | 4,196 | | $ | 4,067 | | $ | 454 | | 64 | |
GMWB for life | | 20,374 | | 20,259 | | 129 | | 63 | | 14,988 | | 14,333 | | 795 | | 63 | |
Total — GMWB | | $ | 24,715 | | $ | 24,576 | | $ | 235 | | 63 | | $ | 19,184 | | $ | 18,400 | | $ | 1,249 | | 63 | |
| | | | | | | | | | | | | | | | | |
GMAB | | $ | 3,540 | | $ | 3,523 | | $ | 22 | | 56 | | $ | 2,926 | | $ | 2,853 | | $ | 153 | | 56 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 | | December 31, 2012 |
Variable Annuity Guarantees by Benefit Type (1) | | Total
Contract
Value | | Contract
Value in
Separate
Accounts | | Net
Amount
at Risk | | Weighted
Average
Attained
Age | | Total
Contract
Value | | Contract
Value in
Separate
Accounts | | Net
Amount
at Risk | | Weighted
Average
Attained
Age |
| | | (in millions, except age) |
| GMDB: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| Return of premium | | $ | 52,616 |
| | $ | 50,790 |
| | $ | 28 |
| | 64 | | $ | 45,697 |
| | $ | 43,942 |
| | $ | 61 |
| | 63 |
| Five/six-year reset | | 11,220 |
| | 8,663 |
| | 42 |
| | 64 | | 11,233 |
| | 8,722 |
| | 115 |
| | 63 |
| One-year ratchet | | 7,676 |
| | 7,261 |
| | 38 |
| | 65 | | 7,367 |
| | 6,933 |
| | 106 |
| | 65 |
| Five-year ratchet | | 1,781 |
| | 1,725 |
| | 1 |
| | 62 | | 1,616 |
| | 1,563 |
| | 3 |
| | 61 |
| Other | | 1,015 |
| | 996 |
| | 36 |
| | 69 | | 912 |
| | 885 |
| | 62 |
| | 68 |
| Total — GMDB | | $ | 74,308 |
| | $ | 69,435 |
| | $ | 145 |
| | 64 | | $ | 66,825 |
| | $ | 62,045 |
| | $ | 347 |
| | 63 |
| | | | | | | | | | | | | | | | | |
| GGU death benefit | | $ | 1,052 |
| | $ | 998 |
| | $ | 121 |
| | 64 | | $ | 958 |
| | $ | 907 |
| | $ | 93 |
| | 63 |
| | | | | | | | | | | | | | | | | |
| GMIB | | $ | 413 |
| | $ | 389 |
| | $ | 8 |
| | 66 | | $ | 425 |
| | $ | 399 |
| | $ | 15 |
| | 66 |
| | | | | | | | | | | | | | | | | |
| GMWB: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| GMWB | | $ | 3,936 |
| | $ | 3,921 |
| | $ | 1 |
| | 67 | | $ | 3,898 |
| | $ | 3,880 |
| | $ | 3 |
| | 66 |
| GMWB for life | | 34,069 |
| | 33,930 |
| | 77 |
| | 64 | | 28,588 |
| | 28,462 |
| | 104 |
| | 64 |
| Total — GMWB | | $ | 38,005 |
| | $ | 37,851 |
| | $ | 78 |
| | 64 | | $ | 32,486 |
| | $ | 32,342 |
| | $ | 107 |
| | 64 |
| | | | | | | | | | | | | | | | | |
| GMAB | | $ | 4,194 |
| | $ | 4,181 |
| | $ | 2 |
| | 58 | | $ | 3,773 |
| | $ | 3,762 |
| | $ | 5 |
| | 57 |
| |
| (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. |
The net amount at risk for GMDB, GGU 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) RepresentsGMAB guarantees is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB and GMWB and GMAB benefits are subject to waiting periods and payment periods specifiedguarantees is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero. The present value is calculated using a discount rate that is consistent with assumptions embedded in the contract.
Company’s annuity pricing models. The Company previously defined the net amount at risk for GMIB and GMWB guarantees as the guaranteed benefit amount in excess of the contract value. The previously disclosed net amount at risk for GMIB and GMWB guarantees was
$72 million and $297 million, respectively, as of December 31, 2012. The Company believes the revised definition of net amount at risk for GMIB and GMWB guarantees is more representative of the potential economic exposure of the guarantees. The following table provides information related to insurance guarantees for which the Company has established additional liabilities:
|
| | | | | | | | | | | | |
| | | December 31, 2013 | | December 31, 2012 |
| | | Net
Amount
at Risk | | Weighted
Average
Attained
Age | | Net
Amount
at Risk | | Weighted
Average
Attained
Age |
| | | (in millions, except age) |
| UL secondary guarantees | | $ | 5,674 |
| | 62 | | $ | 5,060 |
| | 61 |
The net amount at risk for UL secondary guarantees is defined as the current guaranteed death benefit amount in excess of the current policyholder value.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in
additional liabilitiesvariable annuity and insurance guarantees were as follows:
| | GMDB &
GGU | | GMIB | | GMWB | | GMAB | | UL | |
| | (in millions) | |
Liability balance at January 1, 2008 | | $ | 24 | | $ | 3 | | $ | 136 | | $ | 33 | | $ | 4 | |
Incurred claims | | 58 | | 10 | | 1,335 | | 334 | | 6 | |
Paid claims | | (27 | ) | (1 | ) | — | | — | | (3 | ) |
Liability balance at December 31, 2008 | | 55 | | 12 | | 1,471 | | 367 | | 7 | |
Incurred claims | | 12 | | (5 | ) | (1,267 | ) | (267 | ) | 8 | |
Paid claims | | (61 | ) | (1 | ) | — | | — | | — | |
Liability balance at December 31, 2009 | | 6 | | 6 | | 204 | | 100 | | 15 | |
Incurred claims | | 17 | | 3 | | 133 | | 4 | | 59 | |
Paid claims | | (18 | ) | (1 | ) | — | | — | | (6 | ) |
Liability balance at December 31, 2010 | | $ | 5 | | $ | 8 | | $ | 337 | | $ | 104 | | $ | 68 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | GMDB &
GGU | | GMIB | | GMWB(1) | | GMAB(1) | | UL |
| | | (in millions) |
| Balance at January 1, 2011 | | $ | 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 |
|
| Incurred claims | | 6 |
| | 1 |
| | (578 | ) | | (134 | ) | | 57 |
|
| Paid claims | | (7 | ) | | (1 | ) | | — |
| | — |
| | (13 | ) |
| Balance at December 31, 2012 | | 4 |
| | 9 |
|
| 799 |
|
| 103 |
|
| 155 |
|
| Incurred claims | | 4 |
| | (2 | ) | | (1,182 | ) | | (165 | ) | | 67 |
|
| Paid claims | | (4 | ) | | (1 | ) | | — |
| | — |
| | (16 | ) |
| Balance at December 31, 2013 | | $ | 4 |
| | $ | 6 |
|
| $ | (383 | ) |
| $ | (62 | ) |
| $ | 206 |
|
| |
| (1) | The incurred claims for GMWB and GMAB represent the total change in the liabilities. |
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, | |
| | 2010 | | 2009 | |
| | (in millions) | |
Mutual funds: | | | | | |
Equity | | $ | 32,665 | | $ | 29,379 | |
Bond | | 22,755 | | 16,537 | |
Other | | 2,253 | | 2,889 | |
Total mutual funds | | $ | 57,673 | | $ | 48,805 | |
|
| | | | | | | | |
|
| December 31, |
|
| 2013 |
| 2012 |
| |
| (in millions) |
| Mutual funds: |
| |
|
| |
|
| Equity |
| $ | 39,195 |
|
| $ | 33,037 |
|
| Bond |
| 26,519 |
|
| 26,849 |
|
| Other |
| 3,764 |
|
| 2,324 |
|
| Total mutual funds |
| $ | 69,478 |
|
| $ | 62,210 |
|
No gains or losses were recognized on assets transferred to separate accounts for the years ended December 31, 2010, 20092013, 2012 and 2008.652011.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11.Lines of Credit
RiverSource Life Insurance Company, as the borrower, had an outstanding balance of $3 million and $300 million as ofat both December 31, 20102013 and 2009, respectively,2012 of $150 million 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. The interest rate for any borrowing under the agreement wasis established by reference to LIBOR plus 2890 basis points.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.
The Company has a revolving credit agreement with Ameriprise Financial as the lender aggregating $200 million. Prior to August 1, 2012, the interest rate for any borrowings is established by reference to LIBOR. In
January 2011,August 2012, an amendment to this agreement increased the interest rate to LIBOR plus
11590 basis
points. Amounts borrowed may be repaid at any time with no prepayment penalty. The outstanding balance at December 31, 2010 was paid in full with a payment in January 2011. The outstanding balance at December 31, 2009 was paid in full duringpoints, subject to adjustment based on debt ratings of the
first quartersenior unsecured debt of
2010. RiverSource Life Insurance Compa ny borrowed $200 million in January 2011 and an additional $100 million in February 2011 under this line of credit.The Company has a revolving credit agreement with Ameriprise Financial aggregating $200 million. The interest rate for any borrowings is established by reference to LIBOR.Financial. There were no amounts outstanding on this line of credit at December 31, 20102013 and 2009.
In September 2008, 2012.
RiverSource Life Insurance Company, as the lender,
entered intohas a revolving credit agreement with Ameriprise Financial as the borrower. This line of credit is not to exceed 3% of RiverSource Life Insurance Company’s statutory admitted assets as of the prior year end. The interest rate for any borrowing
wasis established by reference to LIBOR plus
2890 basis
points. In January 2011, an amendmentpoints, subject to
this agreement increasedadjustment based on debt ratings of the
interest rate to LIBOR plus 115 basis points.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,
20102013 and
2009.12.Borrowings under Repurchase Agreements
During 2010, the2012.
The Company enteredenters 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
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pledged is recorded in investments and was $412$52 million and $518 million at December 31, 2010.2013 and 2012, respectively. The amount of the Company’s liability including accrued interest as of December 31, 20102013 and 2012 was $397 million.$50 million and $501 million, respectively. The weighted average annualized interest rate on the repurchase agreements held as of December 31, 20102013 and 2012 was 0.3% and 0.4%, respectively.
RiverSource Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines which provides access to collateralized borrowings. In 2013, the Company began to borrow short-term funds under these FHLB borrowings. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities to collateralize its obligation under these borrowings. The fair value of the securities pledged is recorded in investments and was $574 million at December 31, 2013. The amount of the Company’s liability including accrued interest was
13$450 million as of December 31, 2013. The weighted average annualized interest rate on the FHLB advances held as of December 31, 2013 was 0.3%.Fair Values of Assets and Liabilities | |
| 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.
The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the 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 1Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3
| |
| 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. |
RIVERSOURCELIFE 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, 2013 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (in millions) | |
| Assets | |
| | |
| | |
| | |
| |
| Available-for-Sale securities: Fixed maturities: | |
| | |
| | |
| | |
| |
| Corporate debt securities | $ | — |
| | $ | 14,357 |
| | $ | 1,516 |
| | $ | 15,873 |
| |
| Residential mortgage backed securities | — |
| | 3,753 |
| | 58 |
| | 3,811 |
| |
| Commercial mortgage backed securities | — |
| | 2,404 |
| | 30 |
| | 2,434 |
| |
| State and municipal obligations | — |
| | 998 |
| | — |
| | 998 |
| |
| Asset backed securities | — |
| | 763 |
| | 218 |
| | 981 |
| |
| Foreign government bonds and obligations | — |
| | 245 |
| | — |
| | 245 |
| |
| U.S. government and agencies obligations | 9 |
| | 36 |
| | — |
| | 45 |
| |
| Total Available-for-Sale securities: Fixed maturities | 9 |
| | 22,556 |
| | 1,822 |
| | 24,387 |
| |
| Common stocks | 3 |
| | 3 |
| | — |
| | 6 |
| |
| Cash equivalents | 1 |
| | 320 |
| | — |
| | 321 |
| |
| Other assets: | |
| | |
| | |
| | |
| |
| Interest rate derivative contracts | — |
| | 1,488 |
| | — |
| | 1,488 |
| |
| Equity derivative contracts | 265 |
| | 1,503 |
| | — |
| | 1,768 |
| |
| Credit derivative contracts | — |
| | 3 |
| | — |
| | 3 |
| |
| Foreign currency derivative contracts | — |
| | 2 |
| | — |
| | 2 |
| |
| Total other assets | 265 |
| | 2,996 |
| | — |
| | 3,261 |
| |
| Separate account assets | — |
| | 77,616 |
| | — |
| | 77,616 |
| |
| Total assets at fair value | $ | 278 |
| | $ | 103,491 |
| | $ | 1,822 |
| | $ | 105,591 |
| |
| | | | | | | | | |
| Liabilities | |
| | |
| | |
| | |
| |
| Policyholder account balances, future policy benefits and claims: | |
| | |
| | |
| | |
| |
| EIA embedded derivatives | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| |
| IUL embedded derivatives | — |
| | — |
| | 125 |
| | 125 |
| |
| GMWB and GMAB embedded derivatives | — |
| | — |
| | (575 | ) | | (575 | ) | (2) |
| Total policyholder account balances, future policy benefits and claims | — |
| | 5 |
| | (450 | ) | | (445 | ) | (1) |
| Other liabilities: | |
| | |
| | |
| | |
| |
| Interest rate derivative contracts | — |
| | 1,693 |
| | — |
| | 1,693 |
| |
| Equity derivative contracts | 549 |
| | 2,390 |
| | — |
| | 2,939 |
| |
| Total other liabilities | 549 |
| | 4,083 |
| | — |
| | 4,632 |
| |
| Total liabilities at fair value | $ | 549 |
| | $ | 4,088 |
| | $ | (450 | ) | | $ | 4,187 |
| |
| |
| (1) | The Company’s adjustment for nonperformance risk resulted in a $150 million cumulative decrease to the embedded derivatives. |
| |
| (2) | The fair value of the GMWB and GMAB embedded derivatives was a net asset at December 31, 2013 and the amount is reported as a contra liability. |
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | |
| | December 31, 2012 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (in millions) | |
| Assets | |
| | |
| | |
| | |
| |
| Available-for-Sale securities: Fixed maturities: | |
| | |
| | |
| | |
| |
| Corporate debt securities | $ | — |
| | $ | 15,387 |
| | $ | 1,654 |
| | $ | 17,041 |
| |
| Residential mortgage backed securities | — |
| | 3,598 |
| | 23 |
| | 3,621 |
| |
| Commercial mortgage backed securities | — |
| | 2,834 |
| | 170 |
| | 3,004 |
| |
| State and municipal obligations | — |
| | 1,122 |
| | — |
| | 1,122 |
| |
| Asset backed securities | — |
| | 715 |
| | 156 |
| | 871 |
| |
| Foreign government bonds and obligations | — |
| | 224 |
| | — |
| | 224 |
| |
| U.S. government and agencies obligations | 10 |
| | 39 |
| | — |
| | 49 |
| |
| Total Available-for-Sale securities: Fixed maturities | 10 |
| | 23,919 |
| | 2,003 |
| | 25,932 |
| |
| Common stocks | 2 |
| | 2 |
| | — |
| | 4 |
| |
| Cash equivalents | — |
| | 264 |
| | — |
| | 264 |
| |
| Other assets: | |
| | |
| | |
| | |
| |
| Interest rate derivative contracts | — |
| | 2,191 |
| | — |
| | 2,191 |
| |
| Equity derivative contracts | 285 |
| | 936 |
| | — |
| | 1,221 |
| |
| Foreign currency derivative contracts | — |
| | 6 |
| | — |
| | 6 |
| |
| Total other assets | 285 |
| | 3,133 |
| | — |
| | 3,418 |
| |
| Separate account assets | — |
| | 69,395 |
| | — |
| | 69,395 |
| |
| Total assets at fair value | $ | 297 |
| | $ | 96,713 |
| | $ | 2,003 |
| | $ | 99,013 |
| |
| | | | | | | | | |
| Liabilities | |
| | |
| | |
| | |
| |
| Policyholder account balances, future policy benefits and claims: | |
| | |
| | |
| | |
| |
| EIA embedded derivatives | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| |
| IUL embedded derivatives | — |
| | — |
| | 45 |
| | 45 |
| |
| GMWB and GMAB embedded derivatives | — |
| | — |
| | 833 |
| | 833 |
| |
| Total policyholder account balances, future policy benefits and claims | — |
| | 2 |
| | 878 |
| | 880 |
| (1) |
| Other liabilities: | |
| | |
| | |
| | |
| |
| Interest rate derivative contracts | — |
| | 1,486 |
| | — |
| | 1,486 |
| |
| Equity derivative contracts | 258 |
| | 1,535 |
| | — |
| | 1,793 |
| |
| Total other liabilities | 258 |
| | 3,021 |
| | — |
| | 3,279 |
| |
| Total liabilities at fair value | $ | 258 |
| | $ | 3,023 |
| | $ | 878 |
| | $ | 4,159 |
| |
| |
| (1) | The Company’s adjustment for nonperformance risk resulted in a $398 million cumulative decrease to the embedded derivatives. |
RIVERSOURCELIFE 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: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-for-Sale Securities: Fixed Maturities | | Policyholder Account Balances, Future Policy Benefits and Claims |
| | Corporate
Debt
Securities | | Residential
Mortgage
Backed
Securities | | Commercial
Mortgage
Backed
Securities | | Asset
Backed
Securities | | Total | | IUL
Embedded
Derivatives | | GMWB and
GMAB
Embedded
Derivatives | | Total |
| | (in millions) |
| Balance, January 1, 2013 | $ | 1,654 |
| | $ | 23 |
| | $ | 170 |
| | $ | 156 |
| | $ | 2,003 |
| | $ | (45 | ) | | $ | (833 | ) | | $ | (878 | ) |
| Total gains (losses) included in: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | (1 | ) | | — |
| | — |
| | 2 |
| | 1 |
| (1) | (19 | ) | (2) | 1,617 |
| (3) | 1,598 |
|
| Other comprehensive income | (41 | ) | | — |
| | (6 | ) | | 10 |
| | (37 | ) | | — |
| | — |
| | — |
|
| Purchases | 120 |
| | 87 |
| | 15 |
| | 68 |
| | 290 |
| | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issues | — |
| | — |
| | — |
| | — |
| | — |
| | (62 | ) | | (228 | ) | | (290 | ) |
| Settlements | (216 | ) | | (9 | ) | | — |
| | (2 | ) | | (227 | ) | | 1 |
| | 19 |
| | 20 |
|
| Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 | — |
| | (43 | ) | | (149 | ) | | (16 | ) | | (208 | ) | | — |
| | — |
| | — |
|
| Balance, December 31, 2013 | $ | 1,516 |
| | $ | 58 |
| | $ | 30 |
| | $ | 218 |
| | $ | 1,822 |
| | $ | (125 | ) | | $ | 575 |
| | $ | 450 |
|
| Changes in unrealized gains (losses) relating to assets and liabilities held at December 31, 2013 included in: |
| Net investment income | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Benefits, claims, losses and settlement expenses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,598 |
| | 1,598 |
|
| Interest credited to fixed accounts | — |
| | — |
| | — |
| | — |
| | — |
| | (19 | ) | | — |
| | (19 | ) |
| |
| (1) | Included in net investment income in the Consolidated Statements of Income. |
| |
| (2) | Included in interest credited to fixed accounts in the Consolidated Statements of Income. |
| |
| (3) | Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-for-Sale Securities: Fixed Maturities | | Policyholder Account Balances, Future Policy Benefits and Claims |
| | Corporate
Debt
Securities | | Residential
Mortgage
Backed
Securities | | Commercial
Mortgage
Backed
Securities | | Asset
Backed
Securities | | Other
Structured
Investment | | Total | | IUL Embedded
Derivatives | | GMWB and
GMAB
Embedded
Derivatives | | Total |
| | (in millions) | | |
| Balance, January 1, 2012 | $ | 1,342 |
| | $ | 58 |
| | $ | 16 |
| | $ | 133 |
| | $ | 14 |
| | $ | 1,563 |
| | $ | — |
| | $ | (1,585 | ) | | $ | (1,585 | ) |
| Total gains (losses) included in: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | (1 | ) | | (7 | ) | | 1 |
| | 1 |
| | — |
| | (6 | ) | (1) | 8 |
| (2) | 948 |
| (3) | 956 |
|
| Other comprehensive income | 12 |
| | 10 |
| | 7 |
| | 2 |
| | 1 |
| | 32 |
| | — |
| | — |
| | — |
|
| Purchases | 444 |
| | 31 |
| | 8 |
| | — |
| | — |
| | 483 |
| | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issues | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (188 | ) | | (219 | ) |
| Settlements | (153 | ) | | (12 | ) | | — |
| | (2 | ) | | — |
| | (167 | ) | | — |
| | (8 | ) | | (8 | ) |
| Transfers into Level 3 | 10 |
| | 25 |
| | 146 |
| | 22 |
| | — |
| | 203 |
| | (22 | ) | | — |
| | (22 | ) |
| Transfers out of Level 3 | — |
| | (82 | ) | | (8 | ) | | — |
| | (15 | ) | | (105 | ) | | — |
| | — |
| | — |
|
| Balance, December 31, 2012 | $ | 1,654 |
| | $ | 23 |
| | $ | 170 |
| | $ | 156 |
| | $ | — |
| | $ | 2,003 |
| | $ | (45 | ) | | $ | (833 | ) | | $ | (878 | ) |
| Changes in unrealized gains (losses) relating to assets and liabilities held at December 31, 2012 included in: |
| Net investment income | $ | (1 | ) | | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Benefits, claims, losses and settlement expenses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 908 |
| | 908 |
|
| Interest credited to fixed accounts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| |
| (1) | Represents a $1 million gain included in net investment income and a $7 million loss included in net realized investment gains (losses) in the Consolidated Statements of Income. |
| |
| (2) | Included in interest credited to fixed accounts in the Consolidated Statements of Income. |
| |
| (3) | Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income. |
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-for-Sale Securities: Fixed Maturities | | Policyholder Account Balances, Future Policy Benefits and Claims | |
| | Corporate
Debt
Securities | | Residential
Mortgage
Backed
Securities | | Commercial
Mortgage
Backed
Securities | | Asset
Backed
Securities | | Other
Structured
Investment | | Total | | GMWB and GMAB
Embedded Derivatives | |
| | (in millions) | |
| Balance, January 1, 2011 | $ | 1,317 |
| | $ | 2,697 |
| | $ | 30 |
| | $ | 148 |
| | $ | 13 |
| | $ | 4,205 |
| | $ | (421 | ) | |
| Total gains (losses) included in: | |
| | |
| | |
| | | | |
| | |
| | |
| |
| Net income | 7 |
| | 49 |
| | — |
| | 2 |
| | 1 |
| | 59 |
| (1) | (1,007 | ) | (2) |
| Other comprehensive income | 12 |
| | (75 | ) | | — |
| | (6 | ) | | (2 | ) | | (71 | ) | | — |
| |
| Purchases | 178 |
| | 26 |
| | 71 |
| | — |
| | 3 |
| | 278 |
| | — |
| |
| Sales | (50 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (53 | ) | | — |
| |
| Issues | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149 | ) | |
| Settlements | (117 | ) | | (471 | ) | | — |
| | (3 | ) | | (1 | ) | | (592 | ) | | (8 | ) | |
| Transfers into Level 3 | 7 |
| | — |
| | 1 |
| | — |
| | — |
| | 8 |
| | — |
| |
| Transfers out of Level 3 | (12 | ) | | (2,165 | ) | | (86 | ) | | (8 | ) | | — |
| | (2,271 | ) | | — |
| |
| Balance, December 31, 2011 | $ | 1,342 |
| | $ | 58 |
| | $ | 16 |
| | $ | 133 |
| | $ | 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 $85 million gain included in net investment income and a $26 million loss included in net realized investment gains (losses) in the Consolidated Statements of Income. |
| |
| (2) | Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income. |
The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(168) million, $(71) million and $216 million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the years ended December 31, 2013, 2012 and 2011, respectively.
During the years ended December 31, 2012 and 2011, transfers from Level 3 included certain non-agency residential mortgage backed securities with a fair value of approximately $58 million and $2.2 billion, respectively. The transfers reflect improved pricing transparency of these securities, a continuing trend of increased activity in the non-agency residential mortgage backed securities market and observability of significant inputs to the valuation methodology. All other securities transferred from Level 3 represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The transfer of the IUL embedded derivatives to Level 3 is due to the impact of the unobservable inputs to the valuation becoming more significant during 2012. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
| | (in millions) | | | | | | | | | | |
Corporate debt securities
(private placements) | $ | 1,487 |
| | Discounted cash flow | | Yield/spread to U.S. Treasuries | | 0.9 | % | - | 5.3% | | 1.6 | % |
| IUL embedded derivatives | $ | 125 |
| | Discounted cash flow | | Nonperformance risk(3) | | 74 |
| | bps | | |
| GMWB and GMAB embedded derivatives | $ | (575 | ) | | Discounted cash flow | | Utilization of guaranteed withdrawals(1) | | 0.0 | % | - | 51.1% | | |
| | |
| | | | Surrender rate | | 0.1 | % | - | 57.9% | | |
| | |
| | | | Market volatility(2) | | 4.9 | % | - | 18.8% | | |
| | |
| | | | Nonperformance risk(3) | | 74 |
| | bps | | |
| | | | | | Elective contractholder strategy allocations(4) | | 0.0 | % | - | 50.0% | | |
|
| | | | | | | | | | | | | | |
| | December 31, 2012 |
| | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
| | (in millions) | | | | | | | | | | |
Corporate debt securities
(private placements) | $ | 1,624 |
| | Discounted cash flow | | Yield/spread to U.S. Treasuries | | 1.1 | % | - | 8.5% | | 2.2% |
| IUL embedded derivatives | $ | 45 |
| | Discounted cash flow | | Nonperformance risk(3) | | 97 |
| | bps | | |
| GMWB and GMAB embedded derivatives | $ | 833 |
| | Discounted cash flow | | Utilization of guaranteed withdrawals(1) | | 0.0 | % | - | 56.4% | | |
| | |
| | | | Surrender rate | | 0.0 | % | - | 56.3% | | |
| | |
| | | | Market volatility(2) | | 5.6 | % | - | 21.2% | | |
| | |
| | | | Nonperformance risk(3) | | 97 |
| | bps | | |
| |
| (1) | The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year. |
| |
| (2) | Market volatility is implied volatility of fund of funds and managed volatility funds. |
| |
| (3) | The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives. |
| |
| (4) | The elective allocation represents the percentage of contractholders that are assumed to electively switch their investment allocation to a different allocation model. |
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to the Company.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in utilization, surrender rate and
unobservable.volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) asset value, possibly creating a liability. Significant increases (decreases) in nonperformance risk and elective investment allocation model used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) asset value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution system and whether the value of the guaranteed benefit exceeds the contract accumulation value.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
66
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. The 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. Level 1 securities include U.S. Treasuries. Level 2 securities include municipal and corporate bonds, agencyresidential mortgage backed securities, commercial mortgage backed securities, municipal bonds, asset backed securities and U.S. agency and foreign government and agency securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from nationally-recognizedthird party pricing services. Observable inputs used to value these securities can include:include, but are not limited to, reported trades, benchmark yields, issuer spreads and broker/dealernon-binding broker quotes. Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed sec uritiessecurities, commercial mortgage backed securities and asset backed securities. The fair value of thesecorporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as Level 3 securities is typically based on a single non-binding broker quote, exceptquote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, the Company reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.
In consideration of the above, management is responsible for the
valuation of non-agency residential mortgage backed securities. Effective March 31, 2010,fair values recorded on the
Company returned to using pricesfinancial statements. Prices received from
nationally-recognizedthird party pricing services
are subjected to
determineexception 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 the price or recording an appropriate fair value
estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of
non-agency residential mortgage backed securities becausethird party pricing services. The Company’s due diligence procedures include assessing the
difference between these pricesvendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and
understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of
the Company’s discounted cash flows was not significant. The Company continues to classify its
non-agency residential mortgage backed securities as Level 3 because it believes the market for these securities is still inactiveexception reporting controls and
their valuation includes significant unobservable inputs.any resulting price challenges that arise.
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
Derivatives that are measured using quoted prices in active markets, such as derivatives that are
exchanged-traded,exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter
(“OTC”) 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.
Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements. The
Company settled these Level 3 derivatives incounterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at December 31, 2013 and 2012. See Note 16 and Note 17 for further information on the
second quartercredit risk of
2009 and has not entered into any additional derivative instruments
that have significant unobservable inputs since then.and related collateral.
Policyholder Account Balances, Future Policy Benefits
and Claims
The Company values the embedded derivative liabilityderivatives 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
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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)implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of the Company’s nonperformance risk specific to these liabilities.embedded derivatives. Given the significant unobserva bleunobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liabilityderivatives attributable to these provisions isare recorded in policyholder account balances, future policy benefits. benefits and claims.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded
derivative liabilityderivatives associated with the provisions of its
EIAs. TheEIA and IUL products. Significant inputs to
these calculations are primarily marketthe EIA calculation include observable
and include interest rates, volatilities and equity index
levels. As a result, these measurementslevels and, therefore, are classified as Level 2.
67
The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior are reviewed quarterly along with other valuation assumptions.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 fair value of derivatives that are traded in less active over-the-counterOTC 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 following tables presentCompany’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at
December 31, 2013 and 2012. See Note 16 and Note 17 for further information on the balancescredit risk of assetsderivative instruments and liabilities measured at fair value on a recurring basis: | | 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 derivatives | | — | | 366 | | — | | 366 | |
Equity derivatives | | 32 | | 323 | | — | | 355 | |
Credit derivatives | | — | | 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 | |
Other liabilities: | | | | | | | | | |
Interest rate derivatives | | — | | 379 | | — | | 379 | |
Equity derivatives | | 18 | | 647 | | — | | 665 | |
Credit derivatives | | — | | 1 | | — | | 1 | |
Total other liabilities | | 18 | | 1,027 | | — | | 1,045 | |
Total liabilities at fair value | | $ | 18 | | $ | 1,030 | | $ | 421 | | $ | 1,469 | |
68
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | December 31, 2009 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (in millions) | |
Assets | | | | | | | | | |
Available-for-Sale securities: | | | | | | | | | |
Fixed maturities: | | | | | | | | | |
Corporate debt securities | | $ | — | | $ | 13,755 | | $ | 1,239 | | $ | 14,994 | |
Residential mortgage backed securities | | — | | 2,424 | | 2,772 | | 5,196 | |
Commercial mortgage backed securities | | — | | 3,968 | | 72 | | 4,040 | |
Asset backed securities | | — | | 665 | | 215 | | 880 | |
State and municipal obligations | | — | | 613 | | — | | 613 | |
U.S. government and agencies obligations | | 11 | | 147 | | — | | 158 | |
Foreign government bonds and obligations | | — | | 107 | | — | | 107 | |
Other structured investments | | — | | — | | 11 | | 11 | |
Total Available-for-Sale securities: Fixed maturities | | 11 | | 21,679 | | 4,309 | | 25,999 | |
Common and preferred stocks | | — | | 23 | | — | | 23 | |
Trading securities | | — | | 36 | | — | | 36 | |
Cash equivalents | | 2 | | 801 | | — | | 803 | |
Other assets | | — | | 615 | | — | | 615 | |
Separate account assets | | — | | 54,267 | | — | | 54,267 | |
Total assets at fair value | | $ | 13 | | $ | 77,421 | | $ | 4,309 | | $ | 81,743 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Future policy benefits | | $ | — | | $ | 9 | | $ | 299 | | $ | 308 | |
Other liabilities | | — | | 757 | | — | | 757 | |
Total liabilities at fair value | | $ | — | | $ | 766 | | $ | 299 | | $ | 1,065 | |
The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | Total Gains Included in | | Purchases,
Sales,
Issuances | | | | | |
| | Balance,
January 1,
2010 | | Net
Income | | Other
Comprehensive
Income | | and
Settlements,
Net | | Transfers
In/(Out) of
Level 3 | | Balance,
December 31,
2010 | |
| | (in millions) | |
Available-for-Sale securities: | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | |
Corporate debt securities | | $ | 1,239 | | $ | 1 | | $ | 30 | | $ | 22 | | $ | 25 | | $ | 1,317 | |
Residential mortgage backed securities | | 2,772 | | 54 | | 190 | | (398 | ) | — | | 2,618 | |
Commercial mortgage backed securities | | 72 | | 1 | | 10 | | 91 | | (144 | ) | 30 | |
Asset backed securities | | 215 | | 6 | | 22 | | (3 | ) | (13 | ) | 227 | |
Other structured investments | | 11 | | 2 | | — | | — | | — | | 13 | |
Total Available-for-Sale securities: | | | | | | | | | | | | | |
Fixed maturities | | 4,309 | | 64 | (1) | 252 | | (288 | ) | (132 | )(3) | 4,205 | |
| | | | | | | | | | | | | |
Future policy benefits: | | | | | | | | | | | | | |
GMWB and GMAB embedded derivatives | | (299 | ) | 4 | (2) | — | | (126 | ) | — | | (421 | ) |
| | | | | | | | | | | | | | | | | | | |
(1) Represents a $21 million loss included in net realized investment gains (losses) and an $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 $157 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service and securities with a fair value of $25 million that were transferred to Level 3 as the fair value of the securities is now based on broker quotes.
69
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | Total Gains | | Purchases,
Sales, | | | | | |
| | | | (Losses) Included in | | Issuances | | | | | |
| | Balance,
January 1,
2009 | | Net
Income | | Other
Comprehensive
Income | | and
Settlements,
Net | | Transfers
In/(Out) of
Level 3 | | Balance,
December 31,
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: | | | | | | | | | | | | | |
GMWB and GMAB embedded derivatives | | (1,832 | ) | 1,611 | (2) | — | | (78 | ) | — | | (299 | ) |
| | | | | | | | | | | | | | | | | | | |
(1)Represents a $7 million loss included in net realized investment gains (losses) and an $81 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 are now obtained from a nationally-recognized pricing service and 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.
The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred.
The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities held at December 31:
| | 2010 | | 2009 | |
| | Net
Investment Income | | Net
Realized
Investment
Gains (Losses) | | Benefits,
Claims,
Losses and
Settlement
Expenses | | Net
Investment
Income | | Net
Realized
Investment
Gains
(Losses) | | Benefits,
Claims, Losses and
Settlement
Expenses | |
| | (in millions) | |
Available-for-Sale securities: | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | |
Residential mortgage backed securities | | $ | 78 | | $ | (26 | ) | $ | — | | $ | 80 | | $ | (31 | ) | $ | — | |
Asset backed securities | | 5 | | — | | — | | 1 | | — | | — | |
Total Available-for-Sale securities: | | | | | | | | | | | | | |
Fixed maturities | | 83 | | (26 | ) | — | | 81 | | (31 | ) | — | |
| | | | | | | | | | | | | |
Future policy benefits | | — | | — | | (15 | ) | — | | — | | 1,582 | |
| | | | | | | | | | | | | | | | | | | |
collateral.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
70
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table providestables provide 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, | |
| | 2010 | | 2009 | |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value | |
| | (in millions) | |
Financial Assets | | | | | | | | | |
Commercial mortgage loans, net | | $ | 2,470 | | $ | 2,558 | | $ | 2,532 | | $ | 2,519 | |
Policy loans | | 729 | | 805 | | 715 | | 790 | |
Other investments | | 210 | | 224 | | 226 | | 245 | |
Restricted cash | | 66 | | 66 | | 184 | | 184 | |
Financial Liabilities | | | | | | | | | |
Future policy benefits | | $ | 15,328 | | $ | 15,768 | | $ | 15,540 | | $ | 15,657 | |
Separate account liabilities | | 395 | | 395 | | 406 | | 406 | |
Line of credit with Ameriprise Financial | | 3 | | 3 | | 300 | | 300 | |
Borrowings under repurchase agreements | | 397 | | 397 | | — | | — | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Carrying | | Fair Value |
| | | Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (in millions) |
| Financial Assets | | |
| | |
| | |
| | |
| | |
|
| Mortgage loans, net | | $ | 3,326 |
| | $ | — |
| | $ | — |
| | $ | 3,372 |
| | $ | 3,372 |
|
| Policy loans | | 773 |
| | — |
| | — |
| | 765 |
| | 765 |
|
| Other investments | | 385 |
| | — |
| | 346 |
| | 42 |
| | 388 |
|
| | | | | | | | | | | |
| Financial Liabilities | | |
| | |
| | |
| | |
| | |
|
| Policyholder account balances, future policy benefits and claims | | $ | 14,106 |
| | $ | — |
| | $ | — |
| | $ | 14,724 |
| | $ | 14,724 |
|
| Short-term borrowings | | 500 |
| | — |
| | 500 |
| | — |
| | 500 |
|
| Line of credit with Ameriprise Financial | | 150 |
| | — |
| | — |
| | 150 |
| | 150 |
|
| Other liabilities | | 137 |
| | — |
| | — |
| | 134 |
| | 134 |
|
| Separate account liabilities | | 400 |
| | — |
| | 400 |
| | — |
| | 400 |
|
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| | | Carrying | | Fair Value |
| | | Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (in millions) |
| Financial Assets | | |
| | |
| | |
| | |
| | |
|
| Mortgage loans, net | | $ | 3,389 |
| | $ | — |
| | $ | — |
| | $ | 3,568 |
| | $ | 3,568 |
|
| Policy loans | | 752 |
| | — |
| | — |
| | 725 |
| | 725 |
|
| Other investments | | 309 |
| | — |
| | 292 |
| | 24 |
| | 316 |
|
| Restricted cash | | 86 |
| | 86 |
| | — |
| | — |
| | 86 |
|
| | | | | | | | | | | |
| Financial Liabilities | | |
| | |
| | |
| | |
| | |
|
| Policyholder account balances, future policy benefits and claims | | $ | 14,701 |
| | $ | — |
| | $ | — |
| | $ | 15,982 |
| | $ | 15,982 |
|
| Short-term borrowings | | 501 |
| | — |
| | 500 |
| | — |
| | 500 |
|
| Line of credit with Ameriprise Financial | | 150 |
| | — |
| | — |
| | 150 |
| | 150 |
|
| Other liabilities | | 144 |
| | — |
| | — |
| | 142 |
| | 142 |
|
| Separate account liabilities | | 360 |
| | — |
| | 360 |
| | — |
| | 360 |
|
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,
liquidity and characteristics including
loan-to-valueLTV 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 the Company’s estimate of the amount recoverable on the loan.
The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.
Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.
Policy loans represent loans made against the cash surrender value of the underlying life insurance or annuity product. These loans and the related interest are usually realized at death of the policyholder or contractholder or at surrender of the contract and are not transferable without the underlying insurance or annuity contract. The fair value of policy loans is determined
usingby estimating expected cash flows discounted
cash flows.at rates based on the U.S. Treasury curve. Policy loans are classified as Level 3 as the discount rate used may be adjusted for the underlying performance of individual policies.
Other investments primarily consist of syndicated loans and an investment in
Federal Home Loan Bank of Des Moines (“FHLB”).FHLB. The fair value of syndicated loans is obtained from a
nationally-recognized pricing service.third party service or non-binding broker quotes. Syndicated loans that are priced by multiple non-binding broker quotes are classified as Level 2 and syndicated loans priced using a single non-binding broker quote are classified as Level 3. The
carryingfair value of the investment in FHLB is
considered a reasonable estimateapproximated by the carrying value and classified as Level 3 due to restrictions on transfer and lack of
liquidity in the
fair value, as this represents the stated exit priceprimary market for this
investment.asset.
Restricted cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value.
The fair value of restricted cash is classified as Level 1.
Policyholder Account Balances, Future Policy Benefits
and Claims
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 the Company’s nonperformance risk specific to these liabilities. The fair value of
other liabilities including non-life contingent fixed annuities in payout status, EIA host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner.
Separate Account Liabilities
Certain separate account liabilities Given the use of significant unobservable inputs to these valuations, the measurements are classified as investment contracts and are carried at an amount equal to the related separate account assets. Carrying value is a reasonable estimateLevel 3.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Short-term Borrowings
The fair value
as it represents the exit value as evidenced by withdrawal transactions between contractholders and the Company.of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as
the related separate account assets act as collateral
requirements for these
liabilities andborrowings minimize
the nonperformance risk.
71
The fair value of short-term borrowings is classified as Level 2.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Line of Credit with Ameriprise Financial
The fair value of the line of credit is determined by discounting cash flows with an adjustment for the Company’s nonperformance risk specific to this liability; however, due to the short-term natureliability. The fair value of the line of credit the carrying value is usedclassified as an approximationLevel 3.
Other Liabilities
Other liabilities consist of
the fair value.Borrowings under Repurchase Agreements
future funding commitments to affordable housing partnerships. The fair value of borrowings under agreements to repurchasethese future funding commitments is determined by discounting cash flows. The fair value of these commitments includes an adjustment for the Company’s nonperformance risk and is classified as Level 3 due to the use of the significant unobservable input.
Separate Account Liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. The NAV of the related separate account assets represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as
the related separate account assets act as collateral
requirements for these
borrowingsliabilities and minimize
the nonperformance risk.
| |
| 14. | Related Party Transactions |
14.Related Party TransactionsColumbia Management Investment Advisers, LLCCMIA is the investment manager for the proprietary mutual funds used as investment options by the Company’s variable annuity contractholders and variable life insurance policyholders. The 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, 2010, 20092013, 2012 and 2008,2011, the Company received $136$268 million, $87$244 million and $101$222 million, respectively, from Columbia Management Investment Advisers, LLCCMIA for these services.
The Company participates in the Ameriprise Financial Retirement Plan which covers all permanent employees age 21 and over who have met certain employment requirements. Employer 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”). The Company’s share of the total net periodic pension cost was $1 million in 2010, $2 million in 2009 and $1 million in 2008.
The Company 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 $1 million in 2010 and $3 million in both 2009 and 2008.
The Company also participates in the defined contribution pension plans of Ameriprise Financial which cover all employees who have met certain employment requirements. The Company 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 $1 million, $2 million and nil in 2010, 2009 and 2008, respectively.
The Company 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 was nil in both 2010 and 2009 and $1 million in 2008.
Charges by Ameriprise Financial and affiliated companies to the Company for use of joint facilities, technology support, marketing services and other services aggregated
$527$465 million,
$580$477 million and
$673$530 million for
2010, 20092013, 2012 and
2008,2011, respectively. Certain of these costs are included in DAC. Expenses allocated to the Company may not be reflective of expenses that would have been incurred by the Company on a stand-alone basis.
Dividends paid
and received by RiverSource Life Insurance Company were as follows:
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Cash dividends paid to Ameriprise Financial | | $ | 500 | | $ | — | | $ | 775 | |
Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY | | 28 | | — | | 77 | |
Cash dividend paid to RiverSource Life Insurance Company from RTA | | 63 | | 22 | | — | |
Non-cash dividend paid to Ameriprise Financial from RTA | | — | | — | | 118 | |
| | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Cash dividends paid to Ameriprise Financial | | $ | 800 |
| | $ | 865 |
| | $ | 750 |
|
| Non-cash dividend paid to Ameriprise Financial | | — |
| | — |
| | 850 |
|
| Cash dividends received from RiverSource Life of NY | | 25 |
| | 50 |
| | 79 |
|
| Cash dividends received from RTA | | — |
| | — |
| | 53 |
|
Notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds. See Note 15 for additional information.
During
2010, the Company received a non-cash capital contribution of $14 million comprised of affordable housing partnership investments from Ameriprise Financial.72
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2009,2013, 2012 and 2011, RiverSource Life Insurance Company receivedmade cash contributions to RTA of $30 million, $53 million and $111 million, respectively, for ongoing funding commitments related to affordable housing partnership investments.
In October 2012, the Company purchased $954 million of residential mortgage loans from an affiliate, Ameriprise Bank, FSB. The Company purchased the loans for investment purposes and as part of Ameriprise Financial’s transition of Ameriprise Bank, FSB from a non-cash capital contributionfederal savings bank to a limited powers national trust bank. The portfolio consists primarily of $131 million comprisedvariable rate revolving loans, and includes both first and second liens. The loans were purchased by the Company at fair value. See Note 6 for additional information.
The Company’s taxable income is included in the consolidated federal income tax return 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 balanceThe net amount due
to Ameriprise Financial under a line of credit. See Note 11 for more information on the Company’s lines of credit.During 2008, the Company 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.
There were no amounts included in other liabilities at December 31, 2010 and 2009 payable to Ameriprise Financial for federal income taxes.
During 2009,taxes was $200 million and $17 million at December 31, 2013 and 2012, respectively.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
| 15. | Regulatory Requirements |
The National Association of Insurance Commissioners (“NAIC”) defines Risk-Based Capital (“RBC”) requirements for insurance companies. The RBC requirements are used by the
NAIC and state insurance regulators to identify companies that merit regulatory actions designed to protect policyholders. These requirements apply to the Company. The Company
sold corporate bonds of $27 million to Ameriprise Financial and recognized a gain of $9 million.15.Statutory Capital and Surplus
has met its minimum RBC requirements.
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
(deficit) aggregated
$810$(7) million and
$433$421 million as of December 31,
20102013 and
2009,2012, 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.
Government debt securities of $6 million and $7 million at December 31, 2013 and 2012, respectively, were on deposit with various states as required by law.
Statutory net gain
(loss) from operations and net income
(loss) for the years ended December 31 and capital and surplus as of December 31 are summarized as follows:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
| | (unaudited) | | | | | |
Statutory net gain (loss) from operations(1) | | $ | 1,200 | | $ | 1,793 | | $ | (1,184 | ) |
Statutory net income (loss)(1) | | 1,112 | | 1,887 | | (1,407 | ) |
Statutory capital and surplus | | 3,735 | | 3,371 | | 2,529 | |
| | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
Statutory net gain (loss) from operations(1) | | $ | 1,633 |
| | $ | 2,189 |
| | $ | (475 | ) |
Statutory net income (loss)(1) | | 1,337 |
| | 1,976 |
| | (599 | ) |
| Statutory capital and surplus | | 2,686 |
| | 3,113 |
| | 2,681 |
|
| |
| (1) | Statutory net gain (loss) from operations and statutory net income (loss) are significantly impacted by changes in reserves for variable annuity guaranteed benefits, however these impacts are substantially offset by unrealized gains (losses) on derivatives which are not included in statutory income but are recorded directly to surplus. |
| |
| 16. | Offsetting Assets and Liabilities |
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets. The Company’s derivative instruments and repurchase agreements are subject to master netting arrangements and collateral arrangements and qualify for offset. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. The Company’s policy is to recognize amounts subject to master netting arrangements on a gross basis in the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company’s assets subject to master netting arrangements:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Assets Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset
in the Consolidated Balance Sheets | | |
| | | | | | Financial Instruments(1) | | Cash Collateral | | Securities Collateral | | Net Amount |
| | | | | | | | |
| | | (in millions) |
| Derivatives: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| OTC | | $ | 3,180 |
| | $ | — |
| | $ | 3,180 |
| | $ | (3,134 | ) | | $ | (17 | ) | | $ | (16 | ) | | $ | 13 |
|
| OTC cleared | | 21 |
| | — |
| | 21 |
| | (20 | ) | | (1 | ) | | — |
| | — |
|
| Exchange-traded | | 60 |
| | — |
| | 60 |
| | — |
| | — |
| | — |
| | 60 |
|
| Total derivatives | | $ | 3,261 |
| | $ | — |
| | $ | 3,261 |
| | $ | (3,154 | ) | | $ | (18 | ) | | $ | (16 | ) | | $ | 73 |
|
(1)RIVERSOURCE An increaseLIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Assets Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset
in the Consolidated Balance Sheets | | |
| | | | | | Financial Instruments(1) | | Cash Collateral | | Securities Collateral | | Net Amount |
| | | | | | | | |
| | | (in millions) |
| Derivatives: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| OTC | | $ | 3,322 |
| | $ | — |
| | $ | 3,322 |
| | $ | (2,676 | ) | | $ | (262 | ) | | $ | (355 | ) | | $ | 29 |
|
| Exchange-traded | | 96 |
| | — |
| | 96 |
| | — |
| | — |
| | — |
| | 96 |
|
| Total derivatives | | $ | 3,418 |
| | $ | — |
| | $ | 3,418 |
| | $ | (2,676 | ) | | $ | (262 | ) | | $ | (355 | ) | | $ | 125 |
|
| |
| (1) | Represents the amount of assets that could be offset by liabilities with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets. |
The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2013 |
| | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Liabilities Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| | | | | | Financial Instruments(1) | | Cash Collateral | | Securities Collateral | | Net Amount |
| | | (in millions) |
| Derivatives: | | | | | | | | | | | | | | |
| OTC | | $ | 4,610 |
| | $ | — |
| | $ | 4,610 |
| | $ | (3,134 | ) | | $ | — |
| | $ | (1,465 | ) | | $ | 11 |
|
| OTC cleared | | 22 |
| | — |
| | 22 |
| | (20 | ) | | (2 | ) | | — |
| | — |
|
| Total derivatives | | 4,632 |
| | — |
| | 4,632 |
| | (3,154 | ) | | (2 | ) | | (1,465 | ) | | 11 |
|
| Repurchase agreements | | 50 |
| | — |
| | 50 |
| | — |
| | — |
| | (50 | ) | | — |
|
| Total | | $ | 4,682 |
| | $ | — |
| | $ | 4,682 |
| | $ | (3,154 | ) | | $ | (2 | ) | | $ | (1,515 | ) | | $ | 11 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 |
| | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Liabilities Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| | | | | | Financial Instruments(1) | | Cash Collateral | | Securities Collateral | | Net Amount |
| | | (in millions) |
| OTC derivatives | | $ | 3,279 |
| | $ | — |
| | $ | 3,279 |
| | $ | (2,676 | ) | | $ | (67 | ) | | $ | (532 | ) | | $ | 4 |
|
| Repurchase agreements | | 501 |
| | — |
| | 501 |
| | — |
| | — |
| | (501 | ) | | — |
|
| Total | | $ | 3,780 |
| | $ | — |
| | $ | 3,780 |
| | $ | (2,676 | ) | | $ | (67 | ) | | $ | (1,033 | ) | | $ | 4 |
|
| |
| (1) | Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets. |
In the tables above, the amounts of assets or liabilities presented in statutory reservesthe Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual amounts of collateral may be greater than amounts presented in the tables.
The Company’s freestanding derivative instruments are reflected in other assets and other liabilities. Repurchase agreements are reflected in short-term borrowings. See Note 17 for
variable annuity guaranteed benefits contributed significantlyadditional disclosures related to the
loss in 2008, but was substantially offset by unrealized gains on derivatives which are not included inCompany’s derivative instruments and Note 12 for additional disclosures related to the
statutory income statement, but recorded directly to surplus. These impacts were substantially reversed in 2009 and 2010.16.Derivatives and Hedging Activities
Company’s repurchase agreements.
| |
| 17. | Derivatives and Hedging Activities |
Derivative instruments enable the 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. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.
73
The Company’s freestanding derivatives are recorded at fair value and are reflected in other assets or other liabilities. The Company’s freestanding derivative instruments are all subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 16 for
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)(Continued)
additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.
The Company
currently uses derivatives as economic hedges and accounting hedges. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives:
| | | | Asset | | | | Liability | |
Derivatives not designated
as hedging instruments | | Balance Sheet
Location | | December31,
2010 | | December 31,
2009 | | Balance Sheet Location | | December 31,
2010 | | December 31,
2009 | |
| | | | (in millions) | | | | (in millions) | |
GMWB and GMAB | | | | | | | | | | | | | |
Interest rate contracts | | Other assets | | $ | 366 | | $ | 176 | | Other liabilities | | $ | 379 | | $ | 280 | |
Equity contracts | | Other assets | | 354 | | 425 | | Other liabilities | | 665 | | 474 | |
Credit contracts | | Other assets | | 4 | | 12 | | Other liabilities | | 1 | | — | |
Embedded derivatives(1) | | N/A | | — | | — | | Future policy benefits | | 421 | | 299 | |
Total GMWB and GMAB | | | | 724 | | 613 | | | | 1,466 | | 1,053 | |
Other derivatives: | | | | | | | | | | | | | |
Equity | | | | | | | | | | | | | |
GMDB | | Other assets | | — | | — | | Other liabilities | | — | | 2 | |
EIA | | Other assets | | 1 | | 2 | | Other liabilities | | — | | — | |
EIA embedded derivatives | | N/A | | — | | — | | Future policy benefits | | 3 | | 9 | |
Total other | | | | 1 | | 2 | | | | 3 | | 11 | |
Total derivatives | | | | $ | 725 | | $ | 615 | | | | $ | 1,469 | | $ | 1,064 | |
N/ANot applicable
(1)The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Assets | | | | Liabilities |
| Derivatives not designated | | | | December 31, | | | | December 31, |
| as hedging instruments | | Balance Sheet Location | | 2013 | | 2012 | | Balance Sheet Location | | 2013 | | 2012 |
| | | | | (in millions) | | | | (in millions) |
| GMWB and GMAB | | | | |
| | |
| | | | |
| | |
|
| Interest rate contracts | | Other assets | | $ | 1,484 |
| | $ | 2,191 |
| | Other liabilities | | $ | 1,672 |
| | $ | 1,486 |
|
| Equity contracts | | Other assets | | 1,741 |
| | 1,215 |
| | Other liabilities | | 2,918 |
| | 1,792 |
|
| Credit contracts | | Other assets | | 3 |
| | — |
| | Other liabilities | | — |
| | — |
|
| Foreign currency contracts | | Other assets | | 2 |
| | 6 |
| | Other liabilities | | — |
| | — |
|
Embedded derivatives(1) | | N/A | | — |
| | — |
| | Policyholder account balances, future policy benefits and claims | | (575 | ) | (2) | 833 |
|
| Total GMWB and GMAB | | | | 3,230 |
| | 3,412 |
| | | | 4,015 |
| | 4,111 |
|
| Other derivatives: | | | | |
| | |
| | | | |
| | |
|
| Interest rate | | | | | | | | | | | | |
| Macro hedge program | | Other assets | | 4 |
| | — |
| | Other liabilities | | 21 |
| | — |
|
| Equity | | | | |
| | |
| | | | |
| | |
|
| Macro hedge program | | Other assets | | — |
| | — |
| | Other liabilities | | 8 |
| | — |
|
| EIA embedded derivatives | | N/A | | — |
| | — |
| | Policyholder account balances, future policy benefits and claims | | 5 |
| | 2 |
|
| IUL | | Other assets | | 27 |
| | 6 |
| | Other liabilities | | 13 |
| | 1 |
|
| IUL embedded derivatives | | N/A | | — |
| | — |
| | Policyholder account balances, future policy benefits and claims | | 125 |
| | 45 |
|
| Total other | | | | 31 |
| | 6 |
| | | | 172 |
| | 48 |
|
| Total derivatives | | | | $ | 3,261 |
| | $ | 3,418 |
| | | | $ | 4,187 |
| | $ | 4,159 |
|
| |
| (1) | The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets. |
| |
| (2) | The fair value of the GMWB and GMAB embedded derivatives was a net asset at December 31, 2013 and the amount is reported as a contra liability. |
See Note 13 for additional information regarding the Company’s fair value measurement of derivative instruments.
Derivatives Not Designated as Hedges84
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of
Income for the years ended December 31: | | | | | | | |
Derivatives not designated | | Location of Gain (Loss) on | | Amount of Gain (Loss) on
Derivatives Recognized in Income | |
as hedging instruments | | Derivatives Recognized in Income | | 2010 | | 2009 | |
| | | | (in millions) | |
GMWB and GMAB | | | | | | | |
Interest rate contracts | | Benefits, claims, losses and settlement expenses | | $ | 95 | | $ | (435 | ) |
Equity contracts | | Benefits, claims, losses and settlement expenses | | (370 | ) | (1,245 | ) |
Credit contracts | | Benefits, claims, losses and settlement expenses | | (44 | ) | (65 | ) |
Embedded derivatives(1) | | Benefits, claims, losses and settlement expenses | | (121 | ) | 1,533 | |
Total GMWB and GMAB | | | | (440 | ) | (212 | ) |
Other derivatives: | | | | | | | |
Equity | | | | | | | |
GMDB | | Benefits, claims, losses and settlement expenses | | (4 | ) | (10 | ) |
EIA | | Interest credited to fixed accounts | | 2 | | 4 | |
EIA embedded derivatives | | Interest credited to fixed accounts | | 7 | | 7 | |
Total other | | | | 5 | | 1 | |
Total derivatives | | | | $ | (435 | ) | $ | (211 | ) |
(1)The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
|
| | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | Location of Gain (Loss) on Derivatives Recognized in Income | | Amount of Gain (Loss) on Derivatives
Recognized in Income |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | | | (in millions) |
| GMWB and GMAB | | | | | | | | |
| Interest rate contracts | | Benefits, claims, losses and settlement expenses | | $ | (742 | ) | | $ | 17 |
| | $ | 709 |
|
| Equity contracts | | Benefits, claims, losses and settlement expenses | | (1,084 | ) | | (1,218 | ) | | 326 |
|
| Credit contracts | | Benefits, claims, losses and settlement expenses | | 6 |
| | (2 | ) | | (12 | ) |
| Foreign currency contracts | | Benefits, claims, losses and settlement expenses | | 26 |
| | (1 | ) | | (2 | ) |
Embedded derivatives(1) | | Benefits, claims, losses and settlement expenses | | 1,408 |
| | 752 |
| | (1,165 | ) |
| Total GMWB and GMAB | | | | (386 | ) | | (452 | ) | | (144 | ) |
| Other derivatives: | | | | | | | | |
| Interest rate | | | | | | | | |
| Macro hedge program | | Benefits, claims, losses and settlement expenses | | (15 | ) | | — |
| | — |
|
| Tax hedge | | Net investment income | | — |
| | 1 |
| | — |
|
| Equity | | | | | | | | |
| Macro hedge program | | Benefits, claims, losses and settlement expenses | | (8 | ) | | — |
| | — |
|
| EIA | | Interest credited to fixed accounts | | 3 |
| | 1 |
| | (1 | ) |
| EIA embedded derivatives | | Interest credited to fixed accounts | | (3 | ) | | 1 |
| | 1 |
|
| IUL | | Interest credited to fixed accounts | | 11 |
| | 1 |
| | 1 |
|
| IUL embedded derivatives | | Interest credited to fixed accounts | | 16 |
| | (4 | ) | | (3 | ) |
| Total other | | | | 4 |
| | — |
|
| (2 | ) |
| Total derivatives | | | | $ | (382 | ) | | $ | (452 | ) | | $ | (146 | ) |
| |
| (1) | The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets. |
The 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, interest rate,
credit and
creditforeign currency exchange rate risk related to various products and transactions of the Company.
The majority of the 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 value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The74
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, interest rate swaps, total return swaps, variance swaps and credit default swaps. At December 31, 20102013 and 2009,2012, the gross notional amount of derivative contracts for the Company’s GMWB and GMAB provisions was $55.5$142.4 billion and $38.7$142.1 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 in 2009. As of December 31, 2010, the Company did not have any outstanding hedges on its GMDB provisions. At December 31, 2009, the gross notional amount of derivative contracts for the Company’s GMDB provisions was $77 million.
The deferred premium associated with
certain of the above options is paid or received semi-annually over the life of the option
contract.contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options:
| | Premiums
Payable | | Premiums
Receivable | |
| | (in millions) | |
2011 | | $ | 266 | | $ | 10 | |
2012 | | 245 | | 9 | |
2013 | | 223 | | 8 | |
2014 | | 197 | | 7 | |
2015 | | 174 | | 6 | |
2016-2025 | | 546 | | 7 | |
| | | | | | | |
|
| | | | | | | | |
| | | Premiums
Payable | | Premiums
Receivable |
| | | (in millions) |
| 2014 | | $ | 359 |
| | $ | 84 |
|
| 2015 | | 329 |
| | 65 |
|
| 2016 | | 285 |
| | 49 |
|
| 2017 | | 221 |
| | 44 |
|
| 2018 | | 176 |
| | 54 |
|
| 2019-2027 | | 472 |
| | 73 |
|
| Total | | $ | 1,842 |
| | $ | 369 |
|
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.
EIAs
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2013, the Company transferred net derivative liabilities with a fair value of $94 million, consisting of long-dated options, along with cash payment of the same amount to Ameriprise Financial. The transaction improves the risk management profile of statutory tail scenario risk for the Company’s variable annuities.
Beginning in the fourth quarter of 2013, the Company established a macro hedge program which uses a combination of options and/or swaps to provide protection against the statutory tail scenario risk arising from variable annuity reserves on the Company’s statutory surplus. The program also covers some of the residual risks not covered by other hedging activities. The gross notional amount of these derivative contracts was $710 million at December 31, 2013.
EIA and IUL products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to EIA 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, the Company enters into index options and occasionally enters into futures contracts. The gross notional amount of these derivative contracts was $89$512 million and $129$210 million at December 31, 20102013 and 2009,2012, respectively.
Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the EIA
and IUL product obligations
isare also considered
an embedded
derivative.derivatives. These embedded derivatives are bifurcated from their host contracts
for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As discussed above, the Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.
The Company has amounts classified in accumulated other comprehensive income (loss)AOCI related to gains and losses associated with the effective portion of previously designated cash flow hedges. The Company reclassifies these amounts into income as the forecasted transactions impact earnings. During the yearsyear ended December 31, 2010 and 2009,2013, the Company held no derivatives that were designated as cash flow hedges. At December 31, 2010,2013, the Company expects to reclassify $6$6 million of deferred loss on derivative instruments from accumulated other comprehensive income (loss)AOCI 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. During the years ended December 31, 20102013 and 2009,2012, 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, 2010, 20092013, 2012 and 2008,2011, the amounts recognized in earnings on derivative transactions that were ineffective were not material.75was $1 million, $1 million and nil, respectively.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following istable presents a summaryrollforward of unrealized derivativesderivative losses related to cash flow hedges included in accumulated other comprehensive income (loss) related to cash flow hedges:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Net unrealized derivatives losses at January 1 | | $ | (34 | ) | $ | (38 | ) | $ | (40 | ) |
Unrealized derivative losses arising during the period | | — | | — | | (1 | ) |
Reclassification of realized losses(1) | | 6 | | 6 | | 5 | |
Income tax benefit | | (2 | ) | (2 | ) | (2 | ) |
Net unrealized derivatives losses at December 31 | | $ | (30 | ) | $ | (34 | ) | $ | (38 | ) |
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| | | (in millions) |
| Net unrealized derivative losses at January 1 | | $ | (21 | ) | | $ | (26 | ) | | $ | (30 | ) |
Reclassification of realized losses(1) | | 6 |
| | 7 |
| | 6 |
|
| Income tax benefit | | (2 | ) | | (2 | ) | | (2 | ) |
| Net unrealized derivative losses at December 31 | | $ | (17 | ) | | $ | (21 | ) | | $ | (26 | ) |
| |
| (1) | Loss reclassified from AOCI to net investment income on the Consolidated Statements of Income. |
(1)Loss reclassified from Accumulated Other Comprehensive Income (Loss) to Net Investment Income on Consolidated Statements of Income.Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 8five years and relates to interest credited on forecasted fixed premium product sales.
Credit risk associated with the 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, the 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 whenever practical.
As of December 31, 2010 and 2009, the Company held $25 million and $88 million, respectively, in cash and cash equivalents and recorded a corresponding liability in other liabilitiesSee Note 16 for
collateral the Company is obligated to return to counterparties. As of December 31, 2010 and 2009, the Company had accepted additional
collateral consisting of va rious securities with a fair value of $23 million and $22 million, respectively, which are not reflectedinformation on the
Consolidated Balance Sheets. As of December 31, 2010 and 2009, the Company’s
maximum credit exposure related to derivative
assets after considering netting arrangements with counterparties and collateral arrangements was approximately $25 million and $53 million, respectively.assets.
Certain of the Company’s derivative instrumentscontracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s financial strength rating (or based on the debt rating of the Company’s parent, Ameriprise Financial). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
terminate the contract if the 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, the Company’s counterparty could require immediate settlement of any net liability position. At December 31, 20102013 and 2009,2012, the aggregate fair value of all derivative instrumentscontracts in a net liability position containing such credit risk features w as $412contingent provisions was $950 million and $296$364 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 20102013 and 20092012 was $406$940 million and $269$360 million, respectively. If the credit risk featurescontingent provisions of derivative contracts that were in a net liability position at December 31, 20102013 and 20092012 were triggered, the additionalaggregate fair value of additional assets that would be required to be posted as collateral or needed to settle these derivative liabilitiesthe instruments immediately would have been $6$10 million and $27$4 million, respectively.
The following table provides information related to amounts reclassified from AOCI for the year ended:
|
| | | | | | |
| AOCI Reclassification | | Location of Loss (Gain) Recognized in Income | | December 31, 2013 |
| | | | | (in millions) |
| Net unrealized gains on Available-for-Sale securities | | Net investment income | | $ | (5 | ) |
| Tax expense | | Income tax provision | | 2 |
|
| Net of tax | | | | $ | (3 | ) |
| | | | | |
| Losses on cash flow hedges: | | | | |
|
| Swaptions | | Net investment income | | $ | 6 |
|
| Tax benefit | | Income tax provision | | (2 | ) |
| Net of tax | | | | $ | 4 |
|
17.Income TaxesThe Company qualifies as a life insurance companymade adjustments to AOCI for federal incomethe impact to DAC, DSIC, benefit reserves and reinsurance recoverable on net unrealized securities losses of $319 million, net of tax, purposes. As such,for the Company is subjectyear ended December 31, 2013. See Note 5 for additional information related to the Internal Revenue Code provisions applicable to life insurance companies. Beginningimpact of DAC, DSIC, benefit reserves and reinsurance recoverable on net unrealized securities gains/losses included in 2010,AOCI. See Note 17 for additional information regarding the Company’s taxable income will be included in the consolidated federal income tax return of Ameriprise Financial. 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 is will reimburse its subsidiaries for any tax benefits recorded.
76cash flow hedges.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income tax provision (benefit) were as follows:
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Current income tax: | | | | | | | |
Federal | | $ | (167 | ) | $ | 325 | | $ | 42 | |
State | | 3 | | 1 | | 3 | |
Total current income tax | | (164 | ) | 326 | | 45 | |
Deferred income tax | | | | | | | |
Federal | | 417 | | (80 | ) | (236 | ) |
State | | (1 | ) | (1 | ) | 2 | |
Total deferred income tax | | 416 | | (81 | ) | (234 | ) |
Total income tax provision (benefit) | | $ | 252 | | $ | 245 | | $ | (189 | ) |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Current income tax | | | | | |
| Federal | $ | 295 |
| | $ | 197 |
| | $ | 137 |
|
| State | 2 |
| | 7 |
| | 3 |
|
| Total current income tax | 297 |
| | 204 |
| | 140 |
|
| Deferred income tax | | | | | |
| Federal | (65 | ) | | (38 | ) | | 51 |
|
| State | (11 | ) | | (2 | ) | | (1 | ) |
| Total deferred income tax | (76 | ) | | (40 | ) | | 50 |
|
| Total income tax provision | $ | 221 |
| | $ | 164 |
| | $ | 190 |
|
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, | |
| | 2010 | | 2009 | | 2008 | |
Tax at U.S. statutory rate | | 35.0 | % | 35.0 | % | 35.0 | % |
Changes in taxes resulting from: | | | | | | | |
Tax-exempt interest and dividend income | | (6.6 | ) | (7.2 | ) | 56.6 | |
State taxes, net of federal benefit | | 0.1 | | — | | (3.7 | ) |
Low income housing credit | | (1.4 | ) | (2.0 | ) | 27.9 | |
Foreign tax credit, net of addback | | (1.1 | ) | (1.0 | ) | 15.3 | |
Taxes applicable to prior years | | (1.9 | ) | 0.1 | | 29.2 | |
Other, net | | — | | — | | (0.2 | ) |
Income tax provision | | 24.1 | % | 24.9 | % | 160.1 | % |
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Tax at U.S. statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Changes in taxes resulting from: | | | | | |
| Tax-exempt interest and dividend income | (9.6 | ) | | (9.7 | ) | | (12.6 | ) |
| Low income housing credit | (5.0 | ) | | (4.7 | ) | | (1.6 | ) |
| Foreign tax credit, net of addback | (0.9 | ) | | (0.5 | ) | | (1.6 | ) |
| State taxes, net of federal benefit | (0.5 | ) | | 0.4 |
| | 0.1 |
|
| Taxes applicable to prior years | — |
| | (2.5 | ) | | — |
|
| Other, net | 1.8 |
| | 2.1 |
| | (0.5 | ) |
| Income tax provision | 20.8 | % | | 20.1 | % | | 18.8 | % |
The Company’s effective tax rates are lower than the statutory rate was 24.1%as a result of tax preferred items including the dividends received deduction and 24.9% for the years ended December 31, 2010 and 2009, respectively.low income housing credits. The decreasechange in the effective tax rate for the year ended December 31, 2012 is primarily reflects benefits from tax planning and completion of certain audits which offsetdue to the impact of an increasea prior period correction described in pretaxNote 1 partially offset by increased low income relative tohousing tax advantaged items for 2010.credits.
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, which are reflectedincluded net within other assets or other liabilities on the Consolidated Balance Sheets, were as follows:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (in millions) |
| Deferred income tax assets | | | |
| Liabilities for policyholder account balances, future policy benefits and claims | $ | 887 |
| | $ | 1,295 |
|
| Investment related | 678 |
| | 161 |
|
| State net operating losses | 6 |
| | 5 |
|
| Other | 5 |
| | 5 |
|
| Gross deferred income tax assets | 1,576 |
| | 1,466 |
|
| Less: valuation allowance | (6 | ) | | (5 | ) |
| Total deferred income tax assets | 1,570 |
| | 1,461 |
|
| | | | |
| Deferred income tax liabilities | | | |
| Deferred acquisition costs | 730 |
| | 677 |
|
| Net unrealized gains on Available-for-Sale securities | 358 |
| | 676 |
|
| Deferred sales inducement costs | 145 |
| | 142 |
|
| Other | 17 |
| | 29 |
|
| Gross deferred income tax liabilities | 1,250 |
| | 1,524 |
|
| Net deferred income tax assets (liabilities) | $ | 320 |
| | $ | (63 | ) |
Included in the following table: | | December 31, | |
| | 2010 | | 2009 | |
| | (in millions) | |
Deferred income tax assets: | | | | | |
Liabilities for future policy benefits | | $ | 1,306 | | $ | 1,390 | |
Investment related | | 159 | | 163 | |
Net operating loss and tax credit carryforwards | | 31 | | 185 | |
Gross deferred income tax assets | | 1,496 | | 1,738 | |
| | | | | |
Deferred income tax liabilities: | | | | | |
DAC | | 1,429 | | 1,264 | |
Net unrealized gains on Available-for-Sale securities | | 364 | | 203 | |
DSIC | | 191 | | 193 | |
Other | | 26 | | 15 | |
Gross deferred income tax liabilities | | 2,010 | | 1,675 | |
Net deferred income tax assets (liabilities) | | $ | (514 | ) | $ | 63 | |
The Company is required to establish a valuation allowance for any portion of the deferred income tax assets that management believes will not be realized. Included inCompany’s deferred income tax assets are a significant deferred tax asset relatingbenefits related to capitalstate net operating losses that have been recognized for financial statement purposes but not yet for tax return purposes and future deductible capital losses realized for tax return purposes. Under current U.S.of
$6 million, net of federal income tax law, capital losses generally must be used against capital gain income within five years of the year inbenefit, which the capital losses are recognized for tax purposes. Significant judgment is required in determining if a valuation allowance should be established, and the77will expire beginning December 31, 2014.
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)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 generate sufficient taxable income to enable the Company to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of December 31, 2010 and 2009.
The Company has tax benefits related to capital loss carryforwards of $29 million which expire beginning December 31, 2015 as well as tax credit carryforwards of $2 million which expire beginning December 31, 2019.
(Continued)
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Balance at January 1 | | $ | (77 | ) | $ | (89 | ) | $ | 97 | |
Additions (reductions) based on tax positions related to the current year | | — | | 1 | | (165 | ) |
Additions for tax positions of prior years | | 322 | | 18 | | 38 | |
Reductions for tax positions of prior years | | (196 | ) | (7 | ) | (59 | ) |
Settlements | | 34 | | — | | — | |
Balance at December 31 | | $ | 83 | | $ | (77 | ) | $ | (89 | ) |
|
| | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Balance at January 1 | $ | 65 |
| | $ | 134 |
| | $ | 83 |
|
| Additions (reductions) based on tax positions related to the current year | 18 |
| | 1 |
| | (1 | ) |
| Additions for tax positions of prior years | 61 |
| | 19 |
| | 79 |
|
| Reductions for tax positions of prior years | — |
| | (77 | ) | | (7 | ) |
| Settlements | — |
| | (12 | ) | | (20 | ) |
| Balance at December 31 | $ | 144 |
| | $ | 65 |
| | $ | 134 |
|
If recognized, approximately $39$23 million $49, $8 million and $30$12 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2010, 20092013, 2012 and 2008,2011, respectively, would affect the effective tax rate. It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. It is estimated that the total amount of gross unrecognized tax benefits may decrease by $130 million to $140 million in the next 12 months due to resolution of Internal Revenue Service (“IRS”) examinations.
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 $6 million, a net reduction of $8$3 million $1, and a net increase of $57 million and $14 million in interest and penalties for the yearyears ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. At December 31, 20102013 and 2009,2012, the Company had a receivablepayable of $24$36 million and $16$30 million, respectively, related to the accrual ofaccrued 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 $25 million to $35 million in the next 12 months.
The Company or one or more of its subsidiaries files income tax returns
as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial, in the U.S. federal jurisdiction and various state jurisdictions.
With few exceptions, the Company 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”) completed its field examination of the Company’s income tax returns for 2005 through 2007 during the third and fourth quarters of 2010. The IRS
hadhas completed its field examination of the 1997 through
20042007 tax
returns in recent years.returns. However, for federal income tax purposes, these years
except for 2007, continue to remain open as a consequence of certain
issues under appeal. Inunagreed-upon issues. The IRS is in the
fourth quarterprocess of
2010,completing the
IRS commenced an examinationaudits of the Company’s income tax returns for 2008
and 2009.through 2011. These audits are expected to be completed in 2014. The Company or certain of its subsidiaries’ state income tax
retu rnsreturns are currently under examination by various jurisdictions for years ranging from
19981997 through
2009.On September 25, 2007,2010 and remain open for all years after 2010. The Company filed its 2012 tax return in the third quarter of 2013, but the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspectshas not yet begun its examination of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. 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 the Company receives.
78
2012.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The items comprising other comprehensive income (loss) are presented net of the following income tax provision (benefit) amounts:
| | Years Ended December 31, | |
| | 2010 | | 2009 | | 2008 | |
| | (in millions) | |
Net unrealized securities gains (losses) | | $ | 157 | | $ | 587 | | $ | (302 | ) |
Net unrealized derivative gains | | 2 | | 2 | | 2 | |
Net income tax provision (benefit) | | $ | 159 | | $ | 589 | | $ | (300 | ) |
18.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (in millions) |
| Net unrealized securities gains (losses) | $ | (309 | ) | | $ | 161 |
| | $ | 89 |
|
| Net unrealized derivative losses | (2 | ) | | (2 | ) | | (2 | ) |
| Net income tax provision (benefit) | $ | (311 | ) | | $ | 159 |
| | $ | 87 |
|
| |
| 20. | Commitments, Guarantees and Contingencies |
Commitments
and ContingenciesAt
The following table presents the Company’s funding commitments as of December
31, 2010 and 2009, the Company had no material commitments to purchase investments other than mortgage loan fundings. See Note 6 for additional information.31:
|
| | | | | | | | |
| | | 2013 | | 2012 |
| | | (in millions) |
| Commercial mortgage loans | | $ | 71 |
| | $ | 72 |
|
| Residential mortgage loans | | 542 |
| | 627 |
|
| Affordable housing partnerships | | 137 |
| | 144 |
|
| Total funding commitments | | $ | 750 |
| | $ | 843 |
|
Guarantees
The Company’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31, 2010,2013, these guarantees range up to 5.0%. To
The Company is required by law to be a member of the extentguaranty fund association in every state where it is licensed to do business. In the yieldevent of insolvency of one or more unaffiliated insurance companies, the Company could be adversely affected
RIVERSOURCELIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by the requirement to pay assessments to the guaranty fund associations. Uncertainty and volatility in the U.S. economy and financial markets in recent years have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.
The Company projects its cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the
Company’s invested assets portfolio declines belowNational Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) and the amount of its
target spread pluspremiums written relative to the
minimum guarantee,industry-wide premium in each state. The Company accrues the
Company’s profitability wouldestimated cost of future guaranty fund assessments when it is considered probable that an assessment will be
negatively affected.imposed, the event obligating the Company to pay the assessment has occurred and the amount of the assessment can be reasonably estimated.
Executive Life Insurance Company of New York (“ELNY”) was placed into rehabilitation by a New York state court in 1991. On April 16, 2012, the court issued an order converting the rehabilitation into a liquidation proceeding under a plan submitted by the New York insurance regulator with support from NOLHGA and the industry. Closing under the liquidation plan took place in August 2013.
During the second quarter of 2012, the Company established a liability for estimated guaranty fund assessments and a related premium tax asset, primarily associated with ELNY. At December 31, 2013 and 2012, the estimated liability was $14 million and $26 million, respectively, and the related premium tax asset was $11 million and $19 million, respectively. The Company has recently paid assessments related to ELNY from some of the state guaranty fund associations, however, the expected period over which all of the assessments will be made and the related tax credits recovered is not known.
Contingencies
Insurance companies have been the subject of increasing regulatory, legislative and judicial scrutiny.
The SEC, the Financial Industry Regulatory Authority, commonly referred to as FINRA,Numerous state and
several state authoritiesfederal regulatory agencies have commenced examinations and other inquiries of insurance companies regarding sales and marketing practices (including sales to older 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, the Company is responding to regulatory audits, market conduct examinations and other inquiries (including inquiries from the State of Minnesota and a multistate insurance department examination). The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.
The 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. The 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.
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.
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
ITEM 9A.CONTROLS AND PROCEDURES
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The 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 the 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, the 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.
The Company’s management, under the supervision and with the participation of the 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, the Company’s principal executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2010.2013
. Changes in Internal Control over Financial Reporting
There have not been any changes in the 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, the Company’s internal control over financial
reporting for the Company.reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed by or under the supervision of, the Company’s principal executive and principal financial officers and effected by the 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 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 the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the 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.
The Company’s management, with the participation of its principal executive officer and chief financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2013. In making this assessment, the Company’s management used the criteria set forth by the 1992 Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on management’s assessment and those criteria, the Company believes that, as of December 31,
2010,2013, the Company’s internal control over financial reporting is effective.
80
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s
independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
ITEM 9B.OTHER INFORMATION
None.
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 11.EXECUTIVE COMPENSATION Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES The Audit Committee of the Board of Directors of Ameriprise Financial has appointed
Ernst & YoungPricewaterhouse Coopers LLP (“
Ernst & Young”PwC’) as independent registered public accounting firm to audit the Consolidated Financial Statements of the Company for the years ended December 31,
20102013 and
2009.2012.
Fees Paid to the Registrant’s Independent Auditor
The following table presents fees for professional services rendered by Ernst & YoungPwC for the audit of the Company’s financial statements for the years ended December 31, 20102013 and 20092012 and other fees billed for other services rendered by Ernst & YoungPwC during those periods. | | 2010 | | 2009 | |
| | (in thousands) | |
Audit Fees(1) | | $ | 2,201 | | $ | 2,361 | |
Audit-related Fees | | 26 | | 26 | |
Tax Fees | | — | | — | |
All Other Fees | | 5 | | — | |
Total | | $ | 2,232 | | $ | 2,387 | |
(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.
|
| | | | | | | |
| | 2013 | | 2012 |
| | (in thousands) |
Audit Fees(1) | $ | 1,729 |
| | $ | 1,729 |
|
| Audit-related Fees | 16 |
| | 16 |
|
| Tax Fees | — |
| | — |
|
| All Other Fees | — |
| | — |
|
| Total | $ | 1,745 |
| | $ | 1,745 |
|
| |
| (1) | Audit fees included audit work performed in the review of the financial statements, as well as services that generally only the independent auditor can be expected to provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Securities and Exchange Commission. |
Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of
Ernst & YoungPwC are subject to the specific pre-approval of the Audit Committee of Ameriprise Financial. All audit and permitted non-audit services to be performed by
Ernst & YoungPwC for the 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
Ernst & YoungPwC for services to the 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 20102013 and 2009,2012, 100% of the services provided by Ernst & YoungPwC for the 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.
|
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
|
| | | |
| | | |
| Date: | February 23, 201127, 2014 | By | By
| /s/ John R. Woerner |
Date
| | | John R. Woerner |
| | | Chairman and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | |
| Date: | February 23, 201127, 2014 | By | /s/ John R. Woerner |
Date
| | | John R. Woerner, Director, Chairman and President |
| | | (Principal Executive Officer) |
| | | |
Date: | February 23, 201127, 2014 | | /s/ Brian J. McGrane |
Date
| | | Brian J. McGrane, Director, Executive Vice President |
| | | and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
Date: | February 23, 201127, 2014 | | /s/ Gumer C. Alvero |
Date
| | | Gumer C. Alvero, Director |
| | | |
Date: | February 23, 201127, 2014 | | /s/ David K. Stewart |
Date
| | | David K. Stewart, Senior Vice President and Controller |
| | | (Principal Accounting Officer) |
| | | |
Date: | February 23, 201127, 2014 | | /s/ Kevin E. Palmer Steve M. Gathje |
Date
| | Kevin E. Palmer,
| Steve M. Gathje, Director |
| | | |
| Date: | February 27, 2014 | | /s/ Bridget M. Sperl |
| | | Bridget M. Sperl, Director |
| | | |
| Date: | February 27, 2014 | | /s/ Jon Stenberg |
| | | Jon Stenberg, Director |
RIVERSOURCE LIFE INSURANCE COMPANY
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
| |
| 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 | | |
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 | | |
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 | | |
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 | | |
10.1
| | Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective Jan.January 1, 2007, filed as Exhibit 10.1 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
| |
| 10.2 | | |
10.2
| | Copy of Selling Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. effective Jan.January 1, 2007, filed as Exhibit 10.2 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
| |
| 10.3 | | |
10.3
| | Copy of Marketing Support Services Agreement between Ameriprise Financial Services, Inc. and RiverSource Life Insurance Company effective Jan.January 1, 2007, filed as Exhibit 10.3 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
| |
| 10.4 | | |
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 Jan.January 1, 2007, filed as Exhibit 10.4 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
| |
| 10.5 | | |
*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. 2010, filed as Exhibit 10.5 to Form 10-K filed on February 23, 2011, is incorporated by reference. |
| |
| 10.6 | | |
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 Jan.January 1, 2007, filed as Exhibit 10.6 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
| |
| 10.7 | | |
*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 Jan.January 1, 2011. 2011, filed as Exhibit 10.7 to Form 10-K filed on February 23, 2011, is incorporated by reference. |
| |
| 10.8 | | |
10.8
| | Copy of RiverSource Variable Portfolio Funds Service Agreement by and between RiverSource Distributors, Inc. and RiverSource Life Insurance Company effective Jan.January 1, 2007, filed as Exhibit 10.8 to Form 10-K filed on Feb.February 28, 2007, is incorporated by reference. |
EXHIBIT INDEX (Continued)
*31.1
| |
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* | | |
*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* | | |
*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, 2013, formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2013 and 2012; (ii) Consolidated Statements of Income for the years ended ended December 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the years ended ended December 31, 2013, 2012 and 2011; (iv) Consolidated Statements of Shareholder’s Equity for the years ended December 31, 2013, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and (vi) Notes to the Consolidated Financial Statements. |
* Filed electronically herewith.
| |
* | Filed electronically herewith. |