UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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| SECURITIES EXCHANGE ACT OF 1934 |
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| For the Quarterly Period Ended June 30, 2008 |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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| SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 333-114888
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-0823832 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
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1099 Ameriprise Financial Center, Minneapolis, Minnesota |
| 55474 |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code |
| (612) 671-3131 |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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.
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| Yes | x | No | o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
| Non-accelerated filer x |
| Smaller reporting company o |
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| reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| Yes | o | No | x |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at August 5, 2008 |
Common Stock (par value $30 per share) |
| 100,000 shares |
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
RIVERSOURCE LIFE INSURANCE COMPANY
FORM 10-Q
RIVERSOURCE LIFE INSURANCE COMPANY
(in millions, except share amounts)
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| June 30, |
| December 31, |
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| 2008 |
| 2007 |
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| (unaudited) |
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Assets |
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Investments: |
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Available-for-Sale: |
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Fixed maturities, at fair value (amortized cost: 2008, $20,156; 2007, $21,020) |
| $ | 19,553 |
| $ | 20,792 |
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Common and preferred stocks, at fair value (cost: 2008 and 2007, $30) |
| 26 |
| 29 |
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Commercial mortgage loans, at cost (less allowance for loan losses: 2008 and 2007, $16) |
| 2,855 |
| 2,892 |
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Policy loans |
| 718 |
| 697 |
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Trading securities and other investments |
| 196 |
| 67 |
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Total investments |
| 23,348 |
| 24,477 |
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Cash equivalents |
| 564 |
| 973 |
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Reinsurance recoverables |
| 1,417 |
| 1,290 |
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Amounts due from brokers |
| 147 |
| 123 |
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Other accounts receivable |
| 139 |
| 118 |
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Accrued investment income |
| 242 |
| 252 |
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Deferred acquisition costs |
| 4,547 |
| 4,429 |
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Deferred sales inducement costs |
| 538 |
| 511 |
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Deferred income taxes, net |
| 58 |
| — |
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Other assets |
| 222 |
| 491 |
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Separate account assets |
| 55,150 |
| 58,070 |
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Total assets |
| $ | 86,372 |
| $ | 90,734 |
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Liabilities and Shareholder’s Equity |
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Liabilities: |
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Future policy benefits |
| $ | 26,269 |
| $ | 26,977 |
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Policy claims and other policyholders’ funds |
| 95 |
| 91 |
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Amounts due to brokers |
| 178 |
| 361 |
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Deferred income taxes, net |
| — |
| 133 |
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Other liabilities |
| 341 |
| 382 |
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Separate account liabilities |
| 55,150 |
| 58,070 |
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Total liabilities |
| 82,033 |
| 86,014 |
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Shareholder’s equity: |
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Common shares, $30 par value; 100,000 shares authorized, issued and outstanding |
| 3 |
| 3 |
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Additional paid-in capital |
| 2,031 |
| 2,031 |
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Retained earnings |
| 2,664 |
| 2,842 |
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Accumulated other comprehensive loss, net of tax |
| (359 | ) | (156 | ) | ||
Total shareholder’s equity |
| 4,339 |
| 4,720 |
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Total liabilities and shareholder’s equity |
| $ | 86,372 |
| $ | 90,734 |
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See Notes to Consolidated Financial Statements.
1
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions)
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| Three Months Ended |
| Six Months Ended |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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Revenues |
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Premiums |
| $ | 117 |
| $ | 122 |
| $ | 233 |
| $ | 238 |
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Net investment income |
| 322 |
| 379 |
| 643 |
| 769 |
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Policy and contract charges |
| 324 |
| 299 |
| 640 |
| 585 |
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Other revenue |
| 73 |
| 63 |
| 139 |
| 121 |
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Net realized investment gains (losses) |
| (6 | ) | — |
| (29 | ) | 7 |
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Total revenues |
| 830 |
| 863 |
| 1,626 |
| 1,720 |
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Benefits and expenses |
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Benefits, claims, losses and settlement expenses |
| 181 |
| 176 |
| 372 |
| 331 |
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Interest credited to fixed accounts |
| 192 |
| 215 |
| 387 |
| 433 |
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Amortization of deferred acquisition costs |
| 127 |
| 104 |
| 261 |
| 217 |
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Separation costs |
| — |
| 26 |
| — |
| 64 |
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Other insurance and operating expenses |
| 166 |
| 193 |
| 347 |
| 377 |
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Total benefits and expenses |
| 666 |
| 714 |
| 1,367 |
| 1,422 |
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Pretax income |
| 164 |
| 149 |
| 259 |
| 298 |
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Income tax provision |
| 12 |
| 36 |
| 7 |
| 69 |
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Net income |
| $ | 152 |
| $ | 113 |
| $ | 252 |
| $ | 229 |
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See Notes to Consolidated Financial Statements.
2
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
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| Six Months Ended |
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| 2008 |
| 2007 |
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Cash Flows from Operating Activities |
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Net income |
| $ | 252 |
| $ | 229 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Capitalization of deferred acquisition costs and deferred sales inducement costs |
| (348 | ) | (431 | ) | ||
Amortization of deferred acquisition costs and deferred sales inducement costs |
| 297 |
| 247 |
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Premium and discount amortization on Available-for-Sale |
| 30 |
| 37 |
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Deferred income taxes |
| (66 | ) | 53 |
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Contractholder and policyholder charges, non-cash |
| (120 | ) | (101 | ) | ||
Net realized investment losses (gains) |
| 29 |
| (7 | ) | ||
Net realized gain on trading securities and equity method investments in hedge funds |
| — |
| (2 | ) | ||
Change in operating assets and liabilities: |
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Trading securities and equity method investments in hedge funds, net |
| 1 |
| 91 |
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Future policy benefits for traditional life, disability income and long term care insurance |
| 145 |
| 140 |
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Policy claims and other policyholders’ funds |
| 4 |
| 13 |
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Reinsurance recoverables |
| (127 | ) | (78 | ) | ||
Other accounts receivable |
| (21 | ) | (25 | ) | ||
Accrued investment income |
| 10 |
| 42 |
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Other assets and liabilities, net |
| (36 | ) | (95 | ) | ||
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Net cash provided by operating activities |
| 50 |
| 113 |
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Cash Flows from Investing Activities |
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Available-for-Sale securities: |
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Proceeds from sales |
| 100 |
| 2,296 |
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Maturities, sinking fund payments and calls |
| 1,306 |
| 955 |
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Purchases |
| (627 | ) | (296 | ) | ||
Other investments, excluding policy loans: |
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Proceeds from sales, maturities, sinking fund payments and calls |
| 146 |
| 291 |
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Purchases |
| (221 | ) | (189 | ) | ||
Change in policy loans, net |
| (21 | ) | (20 | ) | ||
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Net cash provided by investing activities |
| 683 |
| 3,037 |
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Cash Flows from Financing Activities |
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Activity related to investment contracts and universal life-type insurance: |
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Considerations received |
| 876 |
| 491 |
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Net transfers to separate accounts |
| (46 | ) | (201 | ) | ||
Surrenders and other benefits |
| (1,540 | ) | (1,984 | ) | ||
Other |
| (32 | ) | — |
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Cash dividends to Ameriprise Financial, Inc. |
| (400 | ) | (250 | ) | ||
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Net cash used in financing activities |
| (1,142 | ) | (1,944 | ) | ||
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Net increase (decrease) in cash equivalents |
| (409 | ) | 1,206 |
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Cash equivalents at beginning of period |
| 973 |
| 160 |
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Cash equivalents at end of period |
| $ | 564 |
| $ | 1,366 |
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Supplemental Disclosures: |
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Income taxes paid, net |
| $ | 100 |
| $ | 47 |
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See Notes to Consolidated Financial Statements.
3
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(in millions)
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| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
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Balances at December 31, 2006 |
| $ | 3 |
| $ | 2,021 |
| $ | 3,455 |
| $ | (209 | ) | $ | 5,270 |
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Change in accounting principles |
| — |
| — |
| (134 | ) | — |
| (134 | ) | |||||
Other comprehensive income: |
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Net income |
| — |
| — |
| 229 |
| — |
| 229 |
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Change in unrealized holding losses on securities, net |
| — |
| — |
| — |
| (125 | ) | (125 | ) | |||||
Total other comprehensive income |
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| 104 |
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Cash dividends to Ameriprise Financial, Inc. |
| — |
| — |
| (250 | ) | — |
| (250 | ) | |||||
Non-cash capital contribution from Ameriprise Financial, Inc. |
| — |
| 9 |
| — |
| — |
| 9 |
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Balances at June 30, 2007 |
| $ | 3 |
| $ | 2,030 |
| $ | 3,300 |
| $ | (334 | ) | $ | 4,999 |
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Balances at December 31, 2007 |
| $ | 3 |
| $ | 2,031 |
| $ | 2,842 |
| $ | (156 | ) | $ | 4,720 |
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Change in accounting principles |
| — |
| — |
| (30 | ) | — |
| (30 | ) | |||||
Other comprehensive income: |
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Net income |
| — |
| — |
| 252 |
| — |
| 252 |
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Change in unrealized holding losses on securities, net |
| — |
| — |
| — |
| (204 | ) | (204 | ) | |||||
Change in unrealized derivative losses, net |
| — |
| — |
| — |
| 1 |
| 1 |
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Total other comprehensive income |
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| 49 |
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Cash dividends to Ameriprise Financial, Inc. |
| — |
| — |
| (400 | ) | — |
| (400 | ) | |||||
Balances at June 30, 2008 |
| $ | 3 |
| $ | 2,031 |
| $ | 2,664 |
| $ | (359 | ) | $ | 4,339 |
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See Notes to Consolidated Financial Statements.
4
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York. RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”). All significant intercompany accounts and transactions have been eliminated in consolidation. RiverSource Life Insurance Company and its subsidiary are referred to collectively in this Form 10-Q as “RiverSource Life”.
The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been made. All adjustments made were of a normal recurring nature.
Reclassifications
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain reclassifications of prior period amounts have been made to conform to the current presentation, including new income statement captions which are described in Note 1 of RiverSource Life’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission (“SEC”) on February 29, 2008 (the “2007 10-K”). In the second quarter of 2008, RiverSource Life reclassified the mark-to-market adjustments on certain derivatives from net investment income to various expense lines where the mark-to-market adjustment on the related embedded derivative resides. The mark-to-market adjustment on derivatives hedging variable annuity living benefits and equity indexed annuities were reclassified to benefits, claims, losses and settlement expenses and interest credited to fixed accounts, respectively. As part of the December 31, 2007 reclassifications, portions of these mark-to-market adjustments were reclassified from other insurance and operating expenses to net investment income.
These reclassifications were made to enhance transparency and to better align the financial statement line captions with the key drivers of the business. The reclassifications did not result in any changes to consolidated net income or shareholder’s equity. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in RiverSource Life’s 2007 10-K.
Income Statement Reclassifications
The following table shows the impact of the new captions and the reclassifications made to RiverSource Life’s previously reported Consolidated Statements of Income.
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| Three Months Ended |
| Six Months Ended |
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| Previously |
| Reclassified |
| Previously |
| Reclassified |
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| (in millions) |
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Revenues |
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Premiums |
| $ | 97 |
| $ | 122 |
| $ | 190 |
| $ | 238 |
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Net investment income |
| 387 |
| 379 |
| 769 |
| 769 |
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Policy and contract charges |
| 169 |
| 299 |
| 333 |
| 585 |
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Other revenue |
| 206 |
| 63 |
| 394 |
| 121 |
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Net realized investment gains |
| — |
| — |
| 7 |
| 7 |
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Total revenues |
| 859 |
| 863 |
| 1,693 |
| 1,720 |
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Benefits and expenses |
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Benefits, claims, losses and settlement expenses |
| 116 |
| 176 |
| 232 |
| 331 |
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Interest credited to fixed accounts |
| 248 |
| 215 |
| 484 |
| 433 |
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Amortization of deferred acquisition costs |
| 104 |
| 104 |
| 217 |
| 217 |
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Separation costs |
| 26 |
| 26 |
| 64 |
| 64 |
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Other insurance and operating expenses |
| 216 |
| 193 |
| 398 |
| 377 |
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Total benefits and expenses |
| 710 |
| 714 |
| 1,395 |
| 1,422 |
| ||||
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Pretax income |
| 149 |
| 149 |
| 298 |
| 298 |
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Income tax provision |
| 36 |
| 36 |
| 69 |
| 69 |
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Net income |
| $ | 113 |
| $ | 113 |
| $ | 229 |
| $ | 229 |
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5
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
1. Basis of Presentation (Continued)
Statement of Cash Flows Reclassifications
The effect of reclassifications on prior period net cash flows related to operating, investing and financing activities is summarized below.
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| Six Months |
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| (in millions) |
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Net cash used in operating activities, previous presentation |
| $ | (62 | ) |
Reclassification for annuity transfers |
| 143 |
| |
Reclassification for policy loans |
| 1 |
| |
Other reclassifications |
| 31 |
| |
Net cash provided by operating activities, adjusted for these reclassifications |
| $ | 113 |
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| |
Net cash provided by investing activities, previous presentation |
| $ | 3,087 |
|
Reclassification for policy loans |
| (20 | ) | |
Other reclassifications |
| (30 | ) | |
Net cash provided by investing activities, adjusted for these reclassifications |
| $ | 3,037 |
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| |
Net cash used in financing activities, previous presentation |
| $ | (1,819 | ) |
Reclassification for annuity transfers |
| (143 | ) | |
Reclassification for policy loans |
| 19 |
| |
Other reclassifications |
| (1 | ) | |
Net cash used in financing activities, adjusted for these reclassifications |
| $ | (1,944 | ) |
2. Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161 “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about their impact on an entity’s financial position, financial performance and cash flows. SFAS 161 requires disclosures regarding the objectives for using derivative instruments, the fair value of derivative instruments and their related gains and losses, and the accounting for derivatives and related hedged items. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. RiverSource Life is currently evaluating the impact of SFAS 161 on its disclosures. RiverSource Life’s adoption of SFAS 161 will not impact its consolidated financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree, and goodwill acquired. SFAS 141(R) also requires an acquirer to disclose information about the financial effects of a business combination. SFAS 141(R) is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with early adoption prohibited. RiverSource Life will apply the standard to any business combinations within the scope of SFAS 141(R) occurring after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent. SFAS 160 requires that noncontrolling (minority) interests be classified as equity (instead of as a liability) within the Consolidated Balance Sheets, and net income attributable to both the parent and the noncontrolling interest be disclosed on the face of the Consolidated Statements of Income. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions of SFAS 160 are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Life will apply the provisions of SFAS 160 to any noncontrolling interests held after December 31, 2008.
6
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2. Recent Accounting Pronouncements (Continued)
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. The provisions of SFAS 157 are required to be applied prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except for certain financial instruments as defined in SFAS 157 that require retrospective application. Any retrospective application will be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year of adoption. RiverSource Life adopted SFAS 157 effective January 1, 2008 and recorded a cumulative effect reduction to the opening balance of retained earnings of $30 million, net of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) amortization and income taxes. This reduction to retained earnings was related to adjusting the fair value of certain derivatives RiverSource Life uses to hedge its exposure to market risk related to certain variable annuity riders. RiverSource Life initially recorded these derivatives in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF 02-3”). SFAS 157 nullifies the guidance in EITF 02-3 and requires these derivatives to be marked to the price RiverSource Life would receive to sell the derivatives to a market participant (an exit price). The adoption of SFAS 157 also resulted in adjustments to the fair value of RiverSource Life’s embedded derivative liabilities associated with certain variable annuity riders. Since there is no market for these liabilities, RiverSource Life considered the assumptions participants in a hypothetical market would make to determine an exit price. As a result, RiverSource Life adjusted the valuation of these liabilities by updating certain policyholder assumptions, adding explicit margins to provide for profit, risk and expenses and adjusting the rate used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s risk of nonperformance specific to these liabilities. These adjustments resulted in an adoption impact of a $4 million increase in earnings, net of DAC and DSIC amortization and income taxes, at January 1, 2008. The nonperformance risk component of the adjustment is specific to the risk of RiverSource Life not fulfilling these liabilities. As RiverSource Life’s estimate of this credit spread widens or tightens, the liability will decrease or increase.
In accordance with FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), RiverSource Life will defer the adoption of SFAS 157 until January 1, 2009 for all nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. In January 2008, the FASB published for comment Proposed FSP FAS 157-c “Measuring Liabilities under FASB Statement No. 157” (“FSP 157-c”). FSP 157-c would amend SFAS 157 to clarify the accounting principles on the fair value measurement of liabilities. RiverSource Life is monitoring the impact that this proposed FSP could have on its consolidated financial condition and results of operations. See Note 5 for additional information regarding the fair values of RiverSource Life’s assets and liabilities.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. RiverSource Life adopted FIN 48 as of January 1, 2007. The effect of adopting FIN 48 on RiverSource Life’s consolidated financial condition and results of operations was not material.
In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts,” (“SOP 05-1”). SOP 05-1 provides clarifying guidance on accounting for DAC associated with an insurance or annuity contract that is significantly modified or is internally replaced with another contract. Prior to adoption, RiverSource Life accounted for many of these transactions as contract continuations and continued amortizing existing DAC against revenue for the new or modified contract. Effective January 1, 2007, RiverSource Life adopted SOP 05-1 resulting in these transactions being prospectively accounted for as contract terminations. Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periods and other valuation assumptions. As a result of adopting SOP 05-1, RiverSource Life recorded as a cumulative change in accounting principle $206 million, reducing DAC by $204 million, DSIC by $11 million and liabilities for future policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134 million.
7
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
3. Separation and Distribution of Ameriprise Financial, Inc. from American Express
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express was completed in 2007.
4. Investments
The following is a summary of Available-for-Sale securities by type:
June 30, 2008 |
| Amortized |
| Gross |
| Gross |
| Fair |
|
|
| (in millions) |
| ||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
Corporate debt securities |
| $12,321 |
| $65 |
| $(472 | ) | $11,914 |
|
Mortgage and other asset-backed securities |
| 7,326 |
| 28 |
| (240 | ) | 7,114 |
|
U.S. government and agencies obligations |
| 247 |
| 7 |
| (1 | ) | 253 |
|
State and municipal obligations |
| 164 |
| 2 |
| (6 | ) | 160 |
|
Foreign government bonds and obligations |
| 96 |
| 14 |
| — |
| 110 |
|
Structured investments(a) |
| 2 |
| — |
| — |
| 2 |
|
Total fixed maturities |
| 20,156 |
| 116 |
| (719 | ) | 19,553 |
|
Common and preferred stocks |
| 30 |
| — |
| (4 | ) | 26 |
|
Total |
| $20,186 |
| $116 |
| $(723 | ) | $19,579 |
|
(a) Includes unconsolidated collateralized debt obligations.
December 31, 2007 |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (in millions) |
| ||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
| $ | 12,870 |
| $ | 112 |
| $ | (307 | ) | $ | 12,675 |
|
Mortgage and other asset-backed securities |
| 7,637 |
| 33 |
| (84 | ) | 7,586 |
| ||||
U.S. government and agencies obligations |
| 249 |
| 7 |
| (1 | ) | 255 |
| ||||
State and municipal obligations |
| 165 |
| 3 |
| (6 | ) | 162 |
| ||||
Foreign government bonds and obligations |
| 97 |
| 15 |
| — |
| 112 |
| ||||
Structured investments(a) |
| 2 |
| — |
| — |
| 2 |
| ||||
Total fixed maturities |
| 21,020 |
| 170 |
| (398 | ) | 20,792 |
| ||||
Common and preferred stocks |
| 30 |
| — |
| (1 | ) | 29 |
| ||||
Total |
| $ | 21,050 |
| $ | 170 |
| $ | (399 | ) | $ | 20,821 |
|
(a) Includes unconsolidated collateralized debt obligations.
8
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
4. Investments (Continued)
Net realized investment gains and losses on Available-for-Sale securities, determined using the specific identification method, were as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
| (in millions) |
| ||||||||||
Gross realized investment gains |
| $ | — |
| $ | 15 |
| $ | 9 |
| $ | 28 |
|
Gross realized investment losses |
| — |
| (13 | ) | (2 | ) | (19 | ) | ||||
Other-than-temporary impairments |
| (6 | ) | (2 | ) | (36 | ) | (2 | ) | ||||
RiverSource Life regularly reviews Available-for-Sale securities for impairments in value considered to be other-than-temporary. The cost basis of securities that are determined to be other-than-temporarily impaired is written down to current fair value with a corresponding charge to net income. A write-down for impairment can be recognized for both credit-related events and for changes in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery in value cannot be recognized in net income until the principal is returned.
Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: 1) the extent to which the market value is below amortized cost; 2) RiverSource Life’s ability and intent to hold the investment for a sufficient period of time for it to recover to an amount at least equal to its carrying value; 3) the duration of time in which there has been a significant decline in value; 4) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and 5) market events that could impact credit ratings, economic and business climate, litigation and government actions and similar external business factors. For structured investments (e.g., mortgage-backed securities), RiverSource Life also considers factors such as overall deal structure and its position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments, cumulative loss projections and discounted cash flows in assessing potential other-than-temporary impairment of these investments. Based upon these factors, securities that have indicators of potential other-than-temporary impairment are subject to detailed review by management. Securities for which declines are considered temporary continue to be carefully monitored by management.
For the three and six months ended June 30, 2008, other-than-temporary impairments of $6 million and $36 million, respectively, primarily relate to four Alt-A mortgage-backed securities.
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:
|
| June 30, 2008 |
| ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
Description of securities: |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt securities |
| $ | 5,100 |
| $ | (134 | ) | $ | 3,756 |
| $ | (338 | ) | $ | 8,856 |
| $ | (472 | ) |
Mortgage and other asset-backed securities |
| 2,756 |
| (107 | ) | 2,212 |
| (133 | ) | 4,968 |
| (240 | ) | ||||||
U.S. government and agencies obligations |
| 49 |
| — |
| 36 |
| (1 | ) | 85 |
| (1 | ) | ||||||
State and municipal obligations |
| 63 |
| (4 | ) | 45 |
| (2 | ) | 108 |
| (6 | ) | ||||||
Foreign government bonds and obligations |
| 8 |
| — |
| — |
| — |
| 8 |
| — |
| ||||||
Common and preferred stocks |
| 26 |
| (4 | ) | — |
| — |
| 26 |
| (4 | ) | ||||||
Total |
| $ | 8,002 |
| $ | (249 | ) | $ | 6,049 |
| $ | (474 | ) | $ | 14,051 |
| $ | (723 | ) |
9
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
4. Investments (Continued)
|
| December 31, 2007 |
| ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||
Description of securities: |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt securities |
| $ | 1,477 |
| $ | (45 | ) | $ | 7,083 |
| $ | (262 | ) | $ | 8,560 |
| $ | (307 | ) |
Mortgage and other asset-backed securities |
| 888 |
| (15 | ) | 4,219 |
| (69 | ) | 5,107 |
| (84 | ) | ||||||
U.S. government and agencies obligations |
| — |
| — |
| 154 |
| (1 | ) | 154 |
| (1 | ) | ||||||
State and municipal obligations |
| 47 |
| (4 | ) | 63 |
| (2 | ) | 110 |
| (6 | ) | ||||||
Foreign government bonds and obligations |
| — |
| — |
| 2 |
| — |
| 2 |
| — |
| ||||||
Common and preferred stocks |
| 29 |
| (1 | ) | — |
| — |
| 29 |
| (1 | ) | ||||||
Total |
| $ | 2,441 |
| $ | (65 | ) | $ | 11,521 |
| $ | (334 | ) | $ | 13,962 |
| $ | (399 | ) |
In evaluating potential other-than-temporary impairments, RiverSource Life considers the extent to which amortized cost exceeds fair value and the duration of that difference. A key metric in performing this evaluation is the ratio of fair value to amortized cost. The following tables summarize the unrealized losses by ratio of fair value to amortized cost:
|
| June 30, 2008 |
| ||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||
Ratio of Fair Value |
| Number |
| Fair |
| Gross |
| Number |
| Fair |
| Gross |
| Number |
| Fair |
| Gross |
| ||||||
|
| (in millions, except number of securities) |
| ||||||||||||||||||||||
95% - 100% |
| 388 |
| $ | 7,117 |
| $ | (120 | ) | 182 |
| $ | 3,344 |
| $ | (100 | ) | 570 |
| $ | 10,461 |
| $ | (220 | ) |
90% - 95% |
| 39 |
| 544 |
| (41 | ) | 85 |
| 1,702 |
| (130 | ) | 124 |
| 2,246 |
| (171 | ) | ||||||
80% - 90% |
| 15 |
| 175 |
| (29 | ) | 57 |
| 717 |
| (129 | ) | 72 |
| 892 |
| (158 | ) | ||||||
Less than 80% |
| 21 |
| 166 |
| (59 | ) | 31 |
| 286 |
| (115 | ) | 52 |
| 452 |
| (174 | ) | ||||||
Total |
| 463 |
| $ | 8,002 |
| $ | (249 | ) | 355 |
| $ | 6,049 |
| $ | (474 | ) | 818 |
| $ | 14,051 |
| $ | (723 | ) |
|
| December 31, 2007 |
| ||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| ||||||||||||||||||
Ratio of Fair Value |
| Number |
| Fair |
| Gross |
| Number |
| Fair |
| Gross |
| Number |
| Fair |
| Gross |
| ||||||
|
| (in millions, except number of securities) |
| ||||||||||||||||||||||
95% - 100% |
| 164 |
| $ | 2,015 |
| $ | (25 | ) | 486 |
| $ | 10,169 |
| $ | (180 | ) | 650 |
| $ | 12,184 |
| $ | (205 | ) |
90% - 95% |
| 31 |
| 305 |
| (22 | ) | 48 |
| 811 |
| (57 | ) | 79 |
| 1,116 |
| (79 | ) | ||||||
80% - 90% |
| 4 |
| 121 |
| (18 | ) | 32 |
| 461 |
| (66 | ) | 36 |
| 582 |
| (84 | ) | ||||||
Less than 80% |
| 1 |
| — |
| — |
| 10 |
| 80 |
| (31 | ) | 11 |
| 80 |
| (31 | ) | ||||||
Total |
| 200 |
| $ | 2,441 |
| $ | (65 | ) | 576 |
| $ | 11,521 |
| $ | (334 | ) | 776 |
| $ | 13,962 |
| $ | (399 | ) |
10
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
5. Fair Values of Assets and Liabilities
Effective January 1, 2008, RiverSource Life adopted SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
Under SFAS 157, RiverSource Life categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by RiverSource Life’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 |
| Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date. |
Level 2 |
| Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities. |
Level 3 |
| Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
Determination of Fair Value
RiverSource Life uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. RiverSource Life’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. RiverSource Life’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, RiverSource Life maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. RiverSource Life’s remaining cash equivalents are classified as Level 2 and are measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques such as the present value of cash flows. Level 1 securities include U.S. Treasuries. Level 2 securities include agency mortgage-backed securities; and certain non-agency mortgage-backed securities, asset-backed securities, municipal and corporate bonds, and U.S. and foreign government and agency securities. Level 3 securities include certain non-agency mortgage-backed securities, asset-backed securities, and corporate bonds.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. These assets are classified as Level 2.
11
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
5. Fair Values of Assets and Liabilities (Continued)
Derivatives
The fair value of derivatives that are traded in certain over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include interest rate swaps and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements. Structured derivatives that are used by RiverSource Life to hedge its exposure to market risk related to certain variable annuity riders are classified as Level 3.
Liabilities
Embedded Derivatives
Variable Annuity Riders – Guaranteed Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal Benefit
RiverSource Life values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk, and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to policyholder behavior assumptions and margins for risk, profit and expenses that RiverSource Life believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of RiverSource Life’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.
Equity Indexed Annuities
RiverSource Life uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its equity indexed annuities. The inputs to these calculations are primarily market observable. As a result, these measurements are classified as Level 2. The embedded derivative liability attributable to the provisions of RiverSource Life’s equity indexed annuities is recorded in future policy benefits.
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:
|
| June 30, 2008 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
|
| (in millions) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale: |
|
|
|
|
|
|
|
|
| ||||
Fixed maturities |
| $ | 19 |
| $ | 17,772 |
| $ | 1,762 |
| $ | 19,553 |
|
Common and preferred stocks |
| — |
| 26 |
| — |
| 26 |
| ||||
Cash equivalents |
| 10 |
| 554 |
| — |
| 564 |
| ||||
Other assets |
| — |
| (16 | ) | 74 |
| 58 |
| ||||
Separate account assets |
| — |
| 55,150 |
| — |
| 55,150 |
| ||||
Total assets at fair value |
| $ | 29 |
| $ | 73,486 |
| $ | 1,836 |
| $ | 75,351 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Future policy benefits |
| $ | — |
| $ | 31 |
| $ | 154 |
| $ | 185 |
|
Other liabilities |
| — |
| (3 | ) | 4 |
| 1 |
| ||||
Total liabilities at fair value |
| $ | — |
| $ | 28 |
| $ | 158 |
| $ | 186 |
|
12
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
5. Fair Values of Assets and Liabilities (Continued)
The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
|
| Three Months Ended June 30, 2008 |
| ||||||||||
|
| Available-for- |
| Other |
| Future |
| Other |
| ||||
|
| (in millions) |
| ||||||||||
Balance, March 31 |
| $ | 1,809 |
| $ | 332 |
| $ | (295 | ) | $ | — |
|
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| (6 | )(1) | (29 | )(2) | 158 | (2) | — |
| ||||
Other comprehensive income |
| (83 | ) | — |
| — |
| — |
| ||||
Purchases, sales, issuances and settlements, net |
| 42 |
| (229 | ) | (17 | ) | (4 | ) | ||||
Balance, June 30 |
| $ | 1,762 |
| $ | 74 |
| $ | (154 | ) | $ | (4 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at June 30 |
| $ | (6 | )(1) | $ | (11 | )(2) | $ | 159 | (2) | $ | — |
|
(1) 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.
|
| Six Months Ended June 30, 2008 |
| ||||||||||
|
| Available- |
| Other |
| Future |
| Other |
| ||||
|
| (in millions) |
| ||||||||||
Balance, January 1 |
| $ | 1,810 |
| $ | 280 |
| $ | (158 | ) | $ | — |
|
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| (33 | )(1) | 23 | (3) | 34 | (3) | — |
| ||||
Other comprehensive income |
| (121 | ) | — |
| — |
| — |
| ||||
Purchases, sales, issuances and settlements, net |
| 106 |
| (229 | ) | (30 | ) | (4 | ) | ||||
Balance, June 30 |
| $ | 1,762 |
| $ | 74 |
| $ | (154 | ) | $ | (4 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at June 30 |
| $ | (36 | )(2) | $ | 1 | (3) | $ | 35 | (3) | $ | — |
|
(1) |
| Represents a $34 million loss included in net realized investment gains (losses) and a $1 million gain included in net investment income in the Consolidated Statements of Income. |
(2) |
| Included in net realized investment gains (losses) in the Consolidated Statements of Income. |
(3) |
| Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income. |
During the reporting period, there were no material assets or liabilities measured at fair value on a non-recurring basis.
13
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
6. Deferred Acquisition Costs and Deferred Sales Inducement Costs
The balances of and changes in DAC were as follows:
|
| 2008 |
| 2007 |
| ||
|
| (in millions) |
| ||||
Balance at January 1 |
| $ | 4,429 |
| $ | 4,411 |
|
Cumulative effect of accounting change |
| 36 |
| (204 | ) | ||
Capitalization of acquisition costs |
| 301 |
| 365 |
| ||
Amortization |
| (261 | ) | (217 | ) | ||
Impact of change in net unrealized securities gains and losses |
| 42 |
| 27 |
| ||
Balance at June 30 |
| $ | 4,547 |
| $ | 4,382 |
|
The balances of and changes in DSIC were as follows:
|
| 2008 |
| 2007 |
| ||
|
| (in millions) |
| ||||
Balance at January 1 |
| $ | 511 |
| $ | 452 |
|
Cumulative effect of accounting change |
| 9 |
| (11 | ) | ||
Capitalization of sales inducements |
| 47 |
| 66 |
| ||
Amortization |
| (36 | ) | (30 | ) | ||
Impact of change in net unrealized securities gains and losses |
| 7 |
| 4 |
| ||
Balance at June 30 |
| $ | 538 |
| $ | 481 |
|
Effective January 1, 2008, RiverSource Life adopted SFAS 157 and recorded as a cumulative change in accounting principle a pretax increase of $36 million and $9 million to DAC and DSIC, respectively. See Note 2 and Note 5 for additional information regarding SFAS 157.
Effective January 1, 2007, RiverSource Life adopted SOP 05-1 and recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to DAC and DSIC, respectively.
7. Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities
Future policy benefits and policy claims and other policyholders’ funds consisted of the following:
|
| June 30, |
| December 31, |
| ||
|
| (in millions) |
| ||||
Fixed annuities |
| $ | 13,617 |
| $ | 14,382 |
|
Equity indexed annuities accumulated host values |
| 245 |
| 253 |
| ||
Equity indexed annuities embedded derivatives |
| 31 |
| 53 |
| ||
Variable annuities fixed sub-accounts |
| 5,366 |
| 5,419 |
| ||
Guaranteed minimum withdrawal benefits variable annuity guarantees |
| 101 |
| 136 |
| ||
Guaranteed minimum accumulation benefits variable annuity guarantees |
| 57 |
| 33 |
| ||
Other variable annuity guarantees |
| 29 |
| 27 |
| ||
Total annuities |
| 19,446 |
| 20,303 |
| ||
Variable universal life (“VUL”)/universal life insurance |
| 2,578 |
| 2,568 |
| ||
Other life, disability income and long term care insurance |
| 4,245 |
| 4,106 |
| ||
Total future policy benefits |
| 26,269 |
| 26,977 |
| ||
Policy claims and other policyholders’ funds |
| 95 |
| 91 |
| ||
Total future policy benefits and policy claims and other policyholders’ funds |
| $ | 26,364 |
| $ | 27,068 |
|
14
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
7. Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities (Continued)
Separate account liabilities consisted of the following:
|
| June 30, 2008 |
| December 31, 2007 |
| ||
|
| (in millions) |
| ||||
Variable annuity variable sub-accounts |
| $ | 49,376 |
| $ | 51,764 |
|
VUL insurance variable sub-accounts |
| 5,720 |
| 6,244 |
| ||
Other insurance variable sub-accounts |
| 54 |
| 62 |
| ||
Total separate account liabilities |
| $ | 55,150 |
| $ | 58,070 |
|
8. Income Taxes
RiverSource Life’s effective tax rates were 7% and 3% for the three and six months ended June 30, 2008, respectively, compared to 24% and 23% for the three and six months ended June 30, 2007, respectively. The decrease in the effective tax rates primarily reflects a $10 million and a $39 million tax benefit for the three and six months ended June 30, 2008, respectively, related to changes in the status of current audits as well as the level of pretax income relative to tax advantaged items, including the dividends received deduction for the three and six months ended June 30, 2008.
RiverSource Life is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in RiverSource Life’s deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Based on analysis of RiverSource Life’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable RiverSource Life to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of June 30, 2008 and December 31, 2007.
As of June 30, 2008 and December 31, 2007, RiverSource Life had $5 million and $97 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $15 million and $49 million of permanent items, net of federal tax benefits as of June 30, 2008 and December 31, 2007, respectively, would affect the effective tax rate.
RiverSource Life recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. RiverSource Life recognized a net reduction of interest and penalties of $14 million and $19 million for the three and six months ended June 30, 2008, respectively. RiverSource Life had a $20 million and a $1 million receivable related to interest and penalties accrued at June 30, 2008 and December 31, 2007, respectively.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. However, there are a number of open audits and quantification of a range cannot be made at this time.
RiverSource Life or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction as well as various state jurisdictions. With few exceptions, RiverSource Life is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 1997. The Internal Revenue Service (“IRS”), as part of the overall examination of the American Express Company consolidated return, commenced an examination of RiverSource Life’s U.S. income tax returns for 1997 through 2002 in the third quarter of 2005. In the first quarter of 2007, the IRS expanded the period of the examination to include 2003 through 2004. RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2005.
On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies and has added the project to the 2007-2008 Priority Guidance Plan. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only.
15
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
9. Contingencies
The SEC, the Financial Industry Regulatory Authority, commonly referred to as FINRA, and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements. RiverSource Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries.
RiverSource Life is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. RiverSource Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
16
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS
The following information should be read in conjunction with RiverSource Life Insurance Company’s Consolidated Financial Statements and Notes presented in Part I, Item 1. RiverSource Life Insurance Company and its subsidiary are referred to collectively in this Form 10-Q as “RiverSource Life”. This narrative analysis may contain forward-looking statements that reflect RiverSource Life’s plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under “Forward-Looking Statements.” RiverSource Life believes it is useful to read this narrative analysis in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission (“SEC”) on February 29, 2008 (“2007 10-K”), as well as its current reports on Form 8-K and other publicly available information.
RiverSource Life follows U.S. generally accepted accounting principles (“GAAP”), and the following discussion is presented on a consolidated basis consistent with GAAP. In the second quarter of 2008, RiverSource Life reclassified the mark-to-market adjustments on certain derivatives from net investment income to various expense lines where the mark-to-market adjustment on the related embedded derivative resides. The mark-to-market adjustment on derivatives hedging variable annuity living benefits and equity indexed annuities were reclassified to benefits, claims, losses and settlement expenses and interest credited to fixed accounts, respectively. Prior period amounts were reclassified to conform to the current presentation.
Management’s narrative analysis of the results of operations is presented in lieu of management’s discussion and analysis of financial condition and results of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
Overview
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.
Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”). On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. The separation from American Express was completed in 2007.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.
Results of Operations for the Six Months Ended June 30, 2008 compared to the Six Months Ended June 30, 2007
Overview
Consolidated net income was $252 million for the six months ended June 30, 2008 compared to $229 million for the six months ended June 30, 2007, an increase of $23 million. Pretax income decreased $39 million to $259 million for the six months ended June 30, 2008 from $298 million for the six months ended June 30, 2007. Financial markets drove the decrease through an increase in the cost of providing for variable annuity living benefit guarantees, after hedging, higher deferred acquisition cost (“DAC”) and deferred sales inducement cost (“DSIC”) amortization and net realized investment losses due to the other-than-temporary impairment of four Alt-A mortgage-backed securities offset partially by income from policy and contract charges.
17
Included in consolidated net income for the six months ended June 30, 2007 was $64 million in pretax non-recurring separation costs.
RiverSource Life also recognized $39 million of tax benefits in the six months ended June 30, 2008.
Revenues
Total revenues decreased $94 million or 5.5% to $1.6 billion for the six months ended June 30, 2008.
Net investment income decreased $126 million or 16.4% to $643 million for the six months ended June 30, 2008, primarily due to decreased assets driven by a reduction in fixed annuity balances as well as a decline in yield.
Policy and contract charges increased $55 million or 9.4% to $640 million for the six months ended June 30, 2008. The increase is driven by growth in guaranteed benefit rider fees on variable annuities and cost-of-insurance fees for variable universal life/universal life insurance.
Other revenue increased $18 million or 14.9% to $139 million for the six months ended June 30, 2008 reflecting higher marketing support and administrative fees due to higher average underlying separate account asset values.
Net realized investment losses were $29 million for the six months ended June 30, 2008 compared to net realized investment gains of $7 million for the six months ended June 30, 2007. Included in net realized investment losses for the six months ended June 30, 2008 was the other-than-temporary impairment of four Alt-A mortgage-backed securities of $36 million. For the six months ended June 30, 2008, $9 million of gross realized investment gains were offset by $2 million of gross realized losses, classified as Available-for-Sale. For the six months ended June 30, 2007, $28 million of gross realized investment gains were partially offset by $19 million of gross realized investment losses as well as $2 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale.
Benefits and Expenses
Total benefits and expenses for the six months ended June 30, 2008 were $1.37 billion, a decrease of $55 million from the six months ended June 30, 2007 total of $1.42 billion.
Benefits, claims, losses and settlement expenses increased $41 million or 12.4% to $372 million for the six months ended June 30, 2008 driven by an increase in the cost of providing for variable annuity guaranteed living benefits, net of hedges and after recognizing favorable valuation impacts related to Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). Also contributing to the increase in expense was an increase in life insurance claims, up 14%, an increase in long term care benefit claims and a higher cost of providing for variable annuity guaranteed death benefits. Expenses in the first half of 2007 included an unfavorable $12 million adjustment to reserves for disability income insurance claims.
Interest credited to fixed accounts decreased by $46 million or 10.6% to $387 million for the six months ended June 30, 2008 primarily due to a continued decline in fixed annuity account balances.
The amortization of DAC increased $44 million or 20.3% to $261 million. The increase was driven by the impact of the current period market decline on estimated gross profit in future periods offset in part by a decrease in amortization driven by the increased cost of providing for variable annuity guarantees, net of hedging. Amortization of DAC in the first six months of 2007 was reduced by favorable adjustments from recognizing increases in certain policyholder charges on select policies, as well as other model enhancements. The current period included additional DAC amortization of $34 million related to market impacts compared to an $11 million benefit in the prior year period.
Separation costs incurred in 2007 were primarily associated with separating and reestablishing technology platforms. All separation costs were incurred as of December 31, 2007.
Other insurance and operating expenses decreased $30 million or 8.0% to $347 million for the six months ended June 30, 2008 primarily due to decreased sales and marketing expenses and lower corporate overhead expenses.
Income Taxes
RiverSource Life’s effective tax rate was 3% for the six months ended June 30, 2008, compared to 23% for the six months ended June 30, 2007. The decrease in the effective tax rates primarily reflects a $39 million tax benefit, related to changes in the status of current audits as well as the level of pretax income relative to tax advantaged items, including the dividends received deduction for the six months ended June 30, 2008. RiverSource Life expects its effective tax rate for the full year 2008 to be in the 12% to 14% range.
18
On September 25, 2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies and has added the project to the 2007-2008 Priority Guidance Plan. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only.
Market Risk
Equity market and interest rate fluctuations can have a significant impact on RiverSource Life’s results of operations, primarily due to the “spread” income generated on its annuities and universal life (“UL”) insurance products, the value of DAC and DSIC, assets associated with variable annuity and variable UL products, the values of liabilities for guaranteed benefits associated with RiverSource Life’s variable annuities and the values of derivatives held to hedge these benefits.
There have been no material changes in RiverSource Life’s net risk exposure to pretax income based on its sources of market risk during the six months ended June 30, 2008, except for its interest rate risk exposure related to its variable annuity riders. The guaranteed benefits associated with RiverSource Life’s variable annuities are guaranteed minimum withdrawal benefit (“GMWB”), guaranteed minimum accumulation benefit (“GMAB”), guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) options. Each of the guaranteed benefits mentioned above guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.
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. Increases in interest rates reduce the fair value of the GMWB and GMAB liabilities. At June 30, 2008, if interest rates had hypothetically increased by 100 basis points, and remain at that level for 12 months, RiverSource Life estimates that the fair value of its GMWB and GMAB liabilities would decrease by $133 million and $28 million, respectively, with a favorable impact to pretax income. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives and interest rate swaps. During the six months ended June 30, 2008, RiverSource Life continued to adjust the hedge portfolio to reflect the sensitivity of the liabilities. At June 30, 2008, RiverSource Life estimates that for a hypothetical 100 basis point increase in interest rates sustained for a 12 month period, the negative impact of the derivatives on pretax income would be $147 million. Of the $147 million, $123 million is attributable to its GMWB and $24 million is attributable to its GMAB. At June 30, 2008, RiverSource Life estimates that the net impact on pretax income would be a favorable $4 million, which consists of a favorable impact of $10 million for GMWB and $4 million attributable to GMAB, and a $10 million negative impact related to DAC amortization. At December 31, 2007, RiverSource Life estimated that the net combined impact of these same items on pretax income would be a favorable $14 million.
Nonperformance Risk – Variable Annuity Riders
SFAS 157 requires companies to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for these liabilities, RiverSource Life considered the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, RiverSource Life adjusted the valuation of variable annuity riders by updating certain policyholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s nonperformance risk. The nonperformance risk adjustment is specific to the risk of RiverSource Life not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a significant spread over the LIBOR swap curve as of June 30, 2008. As RiverSource Life’s estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $23 million, net of DAC and DSIC amortization and income taxes, based on June 30, 2008 credit spreads.
Credit Risk
RiverSource Life is exposed to credit risk within its investment portfolio, which includes loans, and through derivative and reinsurance counterparties. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. RiverSource Life’s potential derivative credit exposure to each counterparty is aggregated with all of its other exposures to the counterparty to determine compliance with established
19
credit guidelines at the time it enters into a derivative transaction. RiverSource Life manages credit risk through fundamental credit analysis, issuer and industry concentration guidelines, and diversification requirements. These guidelines and oversight of credit risk are managed through its comprehensive enterprise risk management program that includes members of senior management.
RiverSource Life manages the risk of adverse default experience on these investments by applying disciplined fundamental credit analysis and underwriting standards, prudently limiting exposures to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity and its affiliates, RiverSource Life’s exposures from all types of transactions are aggregated and managed in relation to guidelines set by risk tolerance thresholds and external and internal rating quality. RiverSource Life remains exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long term historical average used in pricing.
Credit exposures on derivative contracts may take into account enforceable netting arrangements and collateral arrangements. Before executing a new type of structure of derivative contract, RiverSource Life determines the variability of the contract’s potential market and credit exposures and whether such variability might reasonably be expected to create exposure to a counterparty in excess of established limits.
Additionally, RiverSource Life reinsures a portion of the insurance risks associated with its life, disability income and long term care insurance products through reinsurance agreements with unaffiliated reinsurance companies. Reinsurance is used in order to limit losses, reduce exposure to large risks and provide additional capacity for future growth. To manage exposure to losses from reinsurer insolvencies, the financial condition of reinsurers is evaluated prior to entering into new reinsurance treaties and on a periodic basis during the terms of the treaties. RiverSource Life remains primarily liable as the direct insurer on all risks reinsured.
For additional information regarding our sensitivity to market and credit risk, see “Management’s Narrative Analysis—Risk Management” in RiverSource Life’s 2007 10-K.
Fair Value Measurements
SFAS 157 defines fair value, provides a framework for measuring fair value and expands disclosures about fair value measurements. Fair value assumes the exchange of assets or liabilities in orderly transactions. RiverSource Life includes actual market prices, or observable inputs in its fair value measurements to the extent available. SFAS 157 does not require the use of market prices that are the result of a forced liquidation or distressed sale. Recent market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage-backed and asset-backed securities.
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. RiverSource Life has exposure to these types of loans only through mortgage-backed and asset-backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting standards by some originators, has recently led to higher delinquency and loss rates for some of these investments. As a part of RiverSource Life’s risk management process, an internal rating system is used in conjunction with market data as the basis for analysis to assess the likelihood that RiverSource Life will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment, RiverSource Life performs its own assessment of projected cash flows incorporating assumptions about default rates, prepayment speeds, loss severity, and geographic concentrations to determine if an other-than-temporary impairment should be recognized. Based on this analysis, other than the four Alt-A mortgage-backed securities that had credit-related impairments recorded in the six months ended June 30, 2008, all contractual payments are expected to be received.
20
The following table presents, as of June 30, 2008, RiverSource Life’s residential mortgage-backed and asset-backed securities backed by sub-prime and Alt-A mortgage loans by credit rating and vintage year. For presentation in this table, other-than-temporarily impaired securities are shown at their internal rating of BB and below (amounts in millions):
|
| AAA |
| AA |
| A |
| BBB |
| BB & Below |
| Total |
| ||||||||||||||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||||||||||
Sub-prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
2004 & prior |
| $ | 6 |
| $ | 5 |
| $ | 8 |
| $ | 6 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 14 |
| $ | 11 |
|
2005 |
| 79 |
| 74 |
| 6 |
| 4 |
| — |
| — |
| — |
| — |
| — |
| — |
| 85 |
| 78 |
| ||||||||||||
2006 |
| 26 |
| 25 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 26 |
| 25 |
| ||||||||||||
2007 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||
2008 |
| 13 |
| 12 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 13 |
| 12 |
| ||||||||||||
Total |
| $ | 124 |
| $ | 116 |
| $ | 14 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 138 |
| $ | 126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & prior |
| $ | 46 |
| $ | 42 |
| $ | 15 |
| $ | 7 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 61 |
| $ | 49 |
|
2005 |
| 294 |
| 249 |
| 76 |
| 49 |
| — |
| — |
| — |
| — |
| 20 |
| 20 |
| 390 |
| 318 |
| ||||||||||||
2006 |
| 34 |
| 30 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 34 |
| 30 |
| ||||||||||||
2007 |
| 33 |
| 26 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 33 |
| 26 |
| ||||||||||||
2008 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||
Total Alt-A |
| $ | 407 |
| $ | 347 |
| $ | 91 |
| $ | 56 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 20 |
| $ | 20 |
| $ | 518 |
| $ | 423 |
|
Grand Total |
| $ | 531 |
| $ | 463 |
| $ | 105 |
| $ | 66 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 20 |
| $ | 20 |
| $ | 656 |
| $ | 549 |
|
Liquidity and Capital Resources
Liquidity Strategy
The liquidity requirements of RiverSource Life are generally met by funds provided by investment income, maturities and periodic repayments of investments, deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial. Other liquidity sources RiverSource Life has established are repurchase agreements and an available line of credit with Ameriprise Financial aggregating $200 million. The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. RiverSource Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
On March 26 and June 25, 2008, RiverSource Life paid cash dividends of $125 million and $275 million, respectively, to Ameriprise Financial. On June 25, 2008, RiverSource Life of NY paid cash dividends of $27 million to RiverSource Life Insurance Company. During 2007, RiverSource Life paid cash dividends of $900 million to Ameriprise Financial. Also during 2007, RiverSource Life of NY paid cash dividends of $83 million to RiverSource Life Insurance Company.
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements as follows:
|
| Actual Capital as of (a) |
| Regulatory |
| |||||
|
| June 30, |
| December 31, |
| December 31, |
| |||
|
| (in millions) |
| |||||||
RiverSource Life Insurance Company |
| $ | 2,579 |
| $ | 3,017 |
| $ | 442 |
|
RiverSource Life Insurance Co. of New York |
| 278 |
| 288 |
| 34 |
| |||
(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 most recent statutory risk-based capital filing. |
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Forward-Looking Statements
This report contains forward-looking statements that reflect RiverSource Life’s plans, estimates and beliefs. RiverSource Life’s actual results could differ materially from those described in these forward-looking statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements. RiverSource Life cautions the reader that the following list of factors is not exhaustive. There may also be other risks that RiverSource Life is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. RiverSource Life undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
· changes in the valuations, liquidity and volatility in the interest rate, equity market, and foreign exchange environments;
· changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation;
· RiverSource Life’s investment management performance and consumer acceptance of RiverSource Life’s products;
· effects of competition in the financial services industry and changes in RiverSource Life’s product distribution mix and distribution channels;
· RiverSource Life’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings;
· risks of default by issuers or guarantors of investments RiverSource Life owns or by counterparties to hedge derivative, insurance or reinsurance arrangements;
· experience deviations from RiverSource Life’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market volatility underlying RiverSource Life’s hedges on guaranteed benefit annuity riders;
· successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;
· RiverSource Life’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
· the impact of intercompany allocations to RiverSource Life from Ameriprise Financial and its affiliates;
· Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute RiverSource Life’s products through current and future distribution channels;
· the impact of Ameriprise Financial’s efforts to improve distribution economics and of RiverSource Life’s efforts to grow third party distribution and to realize benefits from reengineering and tax planning;
· changes in U.S. federal income or estate tax laws potentially making RiverSource Life’s products less attractive to clients;
· RiverSource Life’s ability to recover from catastrophes, both natural and man-made; and
· general economic and political factors, including consumer confidence in the economy as well as the ability and inclination of consumers generally to invest, the costs of products and services RiverSource Life consumes in the conduct of its business, and applicable legislation and regulation, including tax law, tax treaties, fiscal and central government treasury policy, and regulatory rulings and pronouncements.
The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion as Part I, Item 1A of RiverSource Life’s 2007 10-K.
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ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
RiverSource Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to SEC regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Life’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, RiverSource Life’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
RiverSource Life’s management, with the participation of RiverSource Life’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, RiverSource Life’s principal executive officer and chief financial officer have concluded that RiverSource Life’s disclosure controls and procedures were effective at a reasonable level of assurance as of June 30, 2008.
Changes in Internal Control Over Financial Reporting
During the second quarter of 2008, RiverSource Life made certain changes to internal controls over financial reporting related to the implementation of a new general ledger system. The system changes were not undertaken in response to any actual or perceived deficiencies in the internal control over financial reporting. There were no other changes in RiverSource Life’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Life’s internal control over financial reporting.
The information set forth in Note 9 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
There have been no material changes in the risk factors provided in Part I, Item 1A of RiverSource Life’s 2007 10-K.
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.
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Pursuant to the requirements 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.
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| RIVERSOURCE LIFE INSURANCE COMPANY | |
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| (Registrant) | |
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Date: August 5, 2008 |
| By | /s/ Timothy V. Bechtold |
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| Timothy V. Bechtold |
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| President |
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Date: August 5, 2008 |
| By | /s/ Brian J. McGrane |
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| Brian J. McGrane |
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| Executive Vice President and |
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| Chief Financial Officer |
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The following exhibits are filed as part of this Quarterly Report:
Exhibit |
| Description |
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*31.1 |
| Certification of Timothy V. Bechtold, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
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*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. |
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*32.1 |
| Certification of Timothy V. Bechtold, President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed electronically herewith.
E-1