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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 811-00002
AMERIPRISE CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-6009975
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1099 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
Former name, former address and former fiscal year, if changed since last
report: NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [ ] No [ ]
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 "accelerated filer," "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] 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 MAY 6, 2009
----- --------------------------
Common Shares (par value $10 per share) 150,000 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.
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AMERIPRISE CERTIFICATE COMPANY
FORM 10-Q
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Statements of Operations - Three months ended March 31, 2009 and 2008........... 3
Balance Sheets - March 31, 2009 and December 31, 2008........................... 4
Statements of Cash Flows - Three months ended March 31, 2009 and 2008........... 5
Statements of Shareholder's Equity - Three months ended March 31, 2009
and 2008..................................................................... 6
Notes to Financial Statements................................................... 7
Item 2. Management's Narrative Analysis............................................ 18
Item 4T. Controls and Procedures................................................... 22
Part II. Other Information:
Item 1. Legal Proceedings.......................................................... 23
Item 1A. Risk Factors.............................................................. 23
Item 6. Exhibits................................................................... 23
Signatures ........................................................................ 24
Exhibit Index .................................................................... E-1
2
AMERIPRISE CERTIFICATE COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
THREE MONTHS
ENDED MARCH 31,
-----------------
2009 2008
------- -------
Investment income $51,484 $44,900
Investment expenses 10,448 8,406
------- -------
Net investment income before provision for certificate reserves
and income taxes 41,036 36,494
Net provision for certificate reserves 38,657 39,064
------- -------
Net investment income (loss) before income taxes 2,379 (2,570)
Income tax expense (benefit) 887 (844)
------- -------
Net investment income (loss) 1,492 (1,726)
Net realized investment (losses) gains before income taxes (1,719) 484
Income tax (benefit) expense (602) 170
------- -------
Net realized (loss) gain on investments (1,117) 314
------- -------
Net income (loss) $ 375 $(1,412)
======= =======
Supplemental Disclosures:
Net realized investment losses before income taxes:
Net realized investment gains before income taxes and
impairment losses on securities $ 2,717
-------
Total other-than-temporary impairment losses on securities (4,453)
Portion of loss recognized in other comprehensive
income 17
-------
Net impairment losses recognized in net realized investment
losses before income taxes (4,436)
-------
Total net realized investment losses before income taxes $(1,719)
=======
See Notes to Financial Statements.
3
AMERIPRISE CERTIFICATE COMPANY
BALANCE SHEETS
(in thousands, except share data)
MARCH 31, 2009 DECEMBER 31, 2008
-------------- -----------------
(UNAUDITED)
ASSETS
Qualified Assets
Cash and cash equivalents $ 441,513 $1,164,484
Investments in unaffiliated issuers 4,734,487 3,667,485
Receivables 36,821 39,479
Equity index options, purchased 30,881 23,693
---------- ----------
Total qualified assets 5,243,702 4,895,141
---------- ----------
Other Assets
Deferred taxes, net 121,749 136,172
Current taxes receivable 1,046 9,578
Due from related party 4,668 2,848
---------- ----------
Total other assets 127,463 148,598
---------- ----------
Total assets $5,371,165 $5,043,739
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $4,985,894 $4,885,589
Current taxes payable to parent 374 3,205
Payable for investment securities purchased 198,591 26,332
Equity index options, written 24,268 18,681
Accounts payable and accrued liabilities 11,058 19,427
---------- ----------
Total liabilities 5,220,185 4,953,234
---------- ----------
SHAREHOLDER'S EQUITY:
Common shares ($10 par value; 150,000 shares authorized and
issued) 1,500 1,500
Additional paid-in capital 352,964 322,964
Accumulated deficit (49,436) (81,505)
Accumulated other comprehensive loss, net of tax:
Net unrealized securities losses (122,343) (152,454)
Noncredit related impairments on securities (31,705) --
---------- ----------
Total accumulated other comprehensive loss, net of tax (154,048) (152,454)
---------- ----------
Total shareholder's equity 150,980 90,505
---------- ----------
Total liabilities and shareholder's equity $5,371,165 $5,043,739
========== ==========
See Notes to Financial Statements.
4
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2009 2008
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 375 $ (1,412)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Interest added to certificate loans (50) (51)
Amortization of premiums, accretion of discounts, net (284) 1,950
Deferred taxes, net (1,953) 1,141
Net realized loss (gain) on investments 942 (484)
Provision for loan loss 1,000 --
Changes in other operating assets and liabilities:
Trading securities, net (137,334) --
Dividends and interest receivable 237 2,154
Due to parent for income taxes 5,701 6,686
Other, net (7,918) (5,792)
----------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (139,284) 4,192
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 124,157 2,809
Maturities and redemptions 274,540 226,805
Purchases (1,119,926) (3,024)
Below investment grade syndicated bank loans and
first mortgage loans on real estate:
Sales 933 933
Maturities and redemptions 7,685 8,665
Purchases (116) (5,242)
Certificate loans:
Payments 258 242
Fundings (115) (101)
----------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (712,584) 231,087
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments from certificate owners 962,628 326,384
Certificate maturities and cash surrenders (863,731) (246,356)
Capital contribution from parent 30,000 --
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 128,897 80,028
----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (722,971) 315,307
Cash and cash equivalents at beginning of period 1,164,484 76,079
----------- ---------
Cash and cash equivalents at end of period $ 441,513 $ 391,386
=========== =========
SUPPLEMENTAL DISCLOSURES INCLUDING NON-CASH TRANSACTIONS:
Cash received for income taxes $ (6,377) $ (11,044)
Certificate maturities and surrenders through loan reductions 449 613
See Notes to Financial Statements.
5
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
Three Months Ended March 31, 2009 and 2008
RETAINED EARNINGS
-------------------------------------
APPROPRIATED APPROPRI-
FOR PRE- ATED FOR ACCUMULATED
NUMBER DECLARED ADDITIONAL OTHER
OF OUT- ADDITIONAL ADDITIONAL INTEREST ON COMPREHEN-
STANDING COMMON PAID-IN CREDITS AND ADVANCE UNAPPRO- SIVE LOSS -
SHARES SHARES CAPITAL INTEREST PAYMENTS PRIATED NET OF TAX TOTAL
-------- ------ ---------- ------------ ----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCES AT JANUARY 1, 2008 150,000 $1,500 $207,964 $ 949 $15 $ -- $ (33,804) $176,624
Comprehensive income:
Net loss -- -- -- -- -- (1,412) -- (1,412)
Other comprehensive
loss, net of tax:
Change in net unrealized
securities losses -- -- -- -- -- -- (30,346) (30,346)
-------
Total comprehensive loss (31,758)
Transfer to unappropriated/
from appropriated -- -- -- (379) -- 379 -- --
Receipt of capital from parent -- -- -- -- -- -- -- --
------- ------ -------- ----- --- -------- --------- --------
BALANCES AT MARCH 31, 2008 150,000 $1,500 $207,964 $ 570 $15 $ (1,033) $ (64,150) $144,866
======= ====== ======== ===== === ======== ========= ========
BALANCES AT JANUARY 1, 2009 150,000 $1,500 $322,964 $ 50 $15 $(81,570) $(152,454) $ 90,505
Change in accounting
principle, net of tax -- -- -- -- -- 31,694 (31,694) --
Comprehensive income:
Net income -- -- -- -- -- 375 -- 375
Other comprehensive
income, net of tax:
Change in net unrealized
securities losses -- -- -- -- -- -- 30,111 30,111
Change in noncredit related
impairments on securities -- -- -- -- -- -- (11) (11)
-------
Total comprehensive income 30,475
Transfer to unappropriated/
from appropriated -- -- -- (41) -- 41 -- --
Receipt of capital from parent -- -- 30,000 -- -- -- -- 30,000
------- ------ -------- ----- --- -------- --------- --------
BALANCES AT MARCH 31, 2009 150,000 $1,500 $352,964 $ 9 $15 $(49,460) $(154,048) $150,980
======= ====== ======== ===== === ======== ========= ========
See Notes to Consolidated Financial Statements.
6
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Ameriprise Certificate Company ("ACC" or the "Company"), is a wholly owned
subsidiary of Ameriprise Financial, Inc. The accompanying Financial Statements
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). 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 results of operations and financial position for the interim
periods have been made. All adjustments made were of a normal, recurring nature.
Results of operations reported for interim periods are not necessarily
indicative of results for the entire year. These Financial Statements and Notes
should be read in conjunction with the Financial Statements and Notes in the
Annual Report on Form 10-K of ACC for the year ended December 31, 2008, filed
with the Securities and Exchange Commission ("SEC") on March 3, 2009.
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform to
the current presentation. In the second quarter of 2008, ACC reclassified the
mark-to-market adjustment on certain derivatives from investment income to
provision for certificate reserves.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") FAS 157-4 "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 provides
guidance on estimating the fair value of a financial asset or liability when the
trade volume and level of activity for the asset or liability has significantly
decreased relative to historical levels. FSP 157-4 requires entities to disclose
in interim and annual periods the inputs and valuation techniques used to
measure fair value and any changes in valuation inputs or techniques. In
addition, debt and equity securities as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" shall be disclosed by major category. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009, and is to
be applied prospectively. ACC adopted FSP 157-4 in the first quarter of 2009.
The adoption did not have a material effect on ACC's results of operations and
financial condition.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments" ("FSP 115-2"). FSP 115-2
amends existing guidance on other-than-temporary impairments for debt securities
and requires that the credit portion of other-than-temporary impairments be
recorded in earnings and the noncredit portion of losses be recorded in other
comprehensive income. FSP 115-2 requires presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures in interim and annual periods. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. At the
date of adoption, the portion of previously recognized other-than-temporary
impairments that represent the noncredit related loss component shall be
recognized as a cumulative effect of adoption with an adjustment to the opening
balance of accumulated deficit with a corresponding adjustment to accumulated
other comprehensive loss. ACC adopted FSP 115-2 in the first quarter of 2009 and
recorded a cumulative effect decrease to the opening balance of accumulated
deficit of $32 million, net of income taxes, and a corresponding increase to
accumulated other comprehensive loss, net of income taxes. See Note 3 for
accounting policy and disclosures required by this FSP.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 "Interim Disclosures
about Fair Value of Financial Instruments" ("FSP 107-1"). FSP 107-1 requires
interim disclosure on the fair value of financial instruments within the scope
of SFAS No. 107 "Disclosures about Fair Value of Financial Instruments." This
FSP is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. ACC
applied the disclosure requirements of FSP 107-1 in the first quarter of 2009.
See Note 4 for disclosures required by this FSP.
In March 2008, the FASB issued 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. ACC applied the disclosure requirements
of SFAS 161 in the first quarter of 2009. See Note 5 for disclosures required by
SFAS 161.
7
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160")
which 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 balance sheet, and net income (loss)
attributable to both the parent and the noncontrolling interests be disclosed on
the face of the statement of operations. 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. ACC adopted SFAS 160 as
of January 1, 2009. The adoption did not have a material effect on ACC's results
of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS
157"), which 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
accumulated deficit for the fiscal year of adoption. ACC adopted SFAS 157
effective January 1, 2008 and this adoption did not have a material effect on
ACC's results of operations and financial condition.
In accordance with FSP FAS 157-2, "Effective Date of FASB Statement No. 157"
("FSP 157-2"), ACC deferred 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. See Note 4 for additional information regarding the fair values of ACC's
assets and liabilities.
3. INVESTMENTS
Investments in unaffiliated issuers were as follows:
MARCH 31, 2009 DECEMBER 31, 2008
-------------- -----------------
(IN THOUSANDS)
Available-for-Sale securities, at fair value
(amortized cost: 2009, $4,463,304; 2008, $3,521,116 $4,224,408 $3,286,403
Below investment grade syndicated bank loans and first
mortgage loans on real estate, at cost (fair
value: 2009, $303,955; 2008, $289,401) 350,068 357,863
Trading securities, at fair value (amortized cost:
2009, $153,723; 2008, $16,611) 153,952 16,618
Certificate loans - secured by certificate reserves,
at cost, which approximates fair value 6,059 6,601
---------- ----------
Total $4,734,487 $3,667,485
========== ==========
Available-for-Sale Securities
Effective January 1, 2009, ACC early adopted FSP 115-2. This interpretation
significantly changed ACC's accounting policy regarding the timing and amount of
other-than temporary impairments for Available-for-Sale securities as follows.
When the fair value of an investment is less than its amortized cost, ACC
assesses whether or not it has i.) the intent to sell the security (made a
decision to sell) or ii.) it more likely than not will be required to sell the
security before its anticipated recovery. If either of these conditions are met,
ACC must recognize an other-than-temporary impairment for the difference between
the investment's amortized cost basis and its fair value through earnings. In
addition, for investments that do not meet the above criteria, and ACC does not
expect to recover a security's amortized cost basis, the security is considered
other-than temporarily impaired. For these securities, ACC separates the total
impairment into the credit loss component and the amount of the loss related to
other factors. The amount of the total other-than-temporary impairment related
to credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to other factors is recognized in
accumulated other comprehensive loss, net of income taxes. For
Available-for-Sale securities that have recognized an other-than-temporary
impairment through earnings, if through subsequent evaluation there is a
significant increase in the cash flow expected, the difference between the
amortized cost basis and the cash flows expected to be collected is accreted as
interest income. Subsequent increases and decreases in the fair value of
Available-for-Sale securities are included in accumulated other comprehensive
loss.
8
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
For all securities that are considered temporarily impaired, ACC does not intend
to sell these securities (has not made a decision to sell) and it is not more
likely than not that ACC will be required to sell the security before recovery
of its amortized cost basis. ACC believes that it will collect all principal and
interest due on all investments that have amortized cost in excess of fair
value that are considered only temporarily impaired.
Corporate debt securities
Factors ACC 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) the duration of time in which
there has been a significant decline in value; 3) fundamental analysis of the
liquidity, business prospects and overall financial condition of the issuer; and
4) market events that could impact credit ratings, economic and business
climate, litigation and government actions, and similar external business
factors. In order to determine the amount of the credit loss component for
corporate debt securities considered other-than-temporarily impaired, a best
estimate of the present value of cash flows expected to be collected discounted
at the security's effective interest rate is compared to the amortized cost
basis of the security.
Structured investments
For structured investments (e.g., residential mortgage backed securities,
commercial mortgage backed securities, asset backed securities and other
structured investments), ACC also considers factors such as overall deal
structure and its position within the structure, quality of underlying
collateral, delinquencies and defaults, loss severities, recoveries, prepayments
and cumulative loss projections in assessing potential other-than-temporary
impairments of these investments. Based upon these factors, securities that have
indicators of potential other-than-temporary impairment are subject to detailed
review by management. Securities for which declines are considered temporary
continue to be carefully monitored by management. For the three months ended
March 31, 2009, certain non-agency mortgage backed securities are deemed
other-than temporarily impaired. Generally, the credit loss component for the
non-agency mortgage backed securities is determined as the amount the amortized
cost basis exceeds the present value of the projected cash flows expected to be
collected. Forward interest rates are considered in the cash flow projections
and are used to calculate the discount rate used to determine the present value
of the expected cash flows when structures are supported by variable rate
securities. Current effective interest rates are used to discount cash flows
supported by fixed rate securities.
Available-for-Sale securities distributed by type were as follows:
MARCH 31, 2009
-----------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
DESCRIPTION OF SECURITIES AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------- -------------- ---------------- ---------------- ----------
(IN THOUSANDS)
Corporate debt securities $1,793,113 $ 8,104 $ (26,089) $1,775,128
Residential mortgage backed securities 1,653,774 16,193 (187,309) 1,482,658
Commercial mortgage backed securities 535,464 2,330 (10,392) 527,402
Asset backed securities 400,228 1,940 (29,885) 372,283
U.S. government and agencies obligations 61,113 361 -- 61,474
Common and preferred stocks 19,612 -- (14,149) 5,463
---------- ------- --------- ----------
Total $4,463,304 $28,928 $(267,824) $4,224,408
========== ======= ========= ==========
DECEMBER 31, 2008
-----------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
DESCRIPTION OF SECURITIES AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------- -------------- ---------------- ---------------- ----------
(IN THOUSANDS)
Corporate debt securities $1,623,978 $ 637 $ (49,426) $1,575,189
Residential mortgage backed securities 1,348,369 11,434 (156,220) 1,203,583
Commercial mortgage backed securities 273,099 590 (7,077) 266,612
Asset backed securities 247,159 376 (26,506) 221,029
U.S. government and agencies obligations 4,899 168 -- 5,067
Common and preferred stocks 19,612 -- (8,689) 10,923
State and municipal obligations 4,000 -- -- 4,000
---------- ------- --------- ----------
Total $3,521,116 $13,205 $(247,918) $3,286,403
========== ======= ========= ==========
9
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
At March 31, 2009 and December 31, 2008, fixed maturity securities comprised
approximately 82% and 70%, respectively, of ACC's total investments. These
securities were rated by either Moody's Investors Service ("Moody's"), Standard
& Poor's Ratings Services ("S&P"), or by RiverSource Investments, LLC, using
criteria similar to Moody's and S&P, when a public rating does not exist.
Ratings on investment grade securities are presented using S&P's convention and,
if the two agencies' ratings differ, the lower rating is used. A summary of
fixed maturity securities was as follows:
MARCH 31, 2009 DECEMBER 31, 2008
------------------------------------------ ------------------------------------------
AMORTIZED PERCENT OF TOTAL AMORTIZED PERCENT OF TOTAL
RATINGS COST FAIR VALUE FAIR VALUE COST FAIR VALUE FAIR VALUE
- ------- ---------- ---------- ---------------- ---------- ---------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
AAA $2,089,026 $2,002,834 47% $1,627,746 $1,495,970 46%
AA 262,999 240,324 6 246,614 223,318 7
A 348,706 343,793 8 339,662 327,926 10
BBB 1,417,817 1,395,088 33 1,176,153 1,140,420 34
Below investment grade 325,144 236,906 6 111,329 87,846 3
---------- ---------- --- ---------- ---------- ---
Total fixed maturities $4,443,692 $4,218,945 100% $3,501,504 $3,275,480 100%
========== ========== === ========== ========== ===
Of the securities rated AAA, 39% and 50% at March 31, 2009 and December 31,
2008, respectively, were U.S. Government Agency mortgage backed securities. At
March 31, 2009 and December 31, 2008, approximately 1.5% and 2.0%, respectively,
of securities with fixed maturities, other than GNMA, FNMA and FHLMC, were rated
by RiverSource Investments, LLC.
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:
MARCH 31, 2009
---------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
DESCRIPTION OF SECURITIES FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Corporate debt securities $ 430,492 $ (7,500) $222,068 $ (18,589) $ 652,560 $ (26,089)
Residential mortgage backed securities 353,688 (76,966) 248,723 (110,343) 602,411 (187,309)
Commercial mortgage backed securities 272,737 (8,089) 111,319 (2,303) 384,056 (10,392)
Asset backed securities 212,572 (17,488) 60,457 (12,397) 273,029 (29,885)
Common and preferred stocks -- -- 5,463 (14,149) 5,463 (14,149)
---------- --------- -------- --------- ---------- ---------
Total $1,269,489 $(110,043) $648,030 $(157,781) $1,917,519 $(267,824)
========== ========= ======== ========= ========== =========
DECEMBER 31, 2008
---------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
DESCRIPTION OF SECURITIES FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Corporate debt securities $1,211,101 $ (24,142) $171,502 $ (25,284) $1,382,603 $ (49,426)
Residential mortgage backed securities 250,733 (64,652) 224,942 (91,568) 475,675 (156,220)
Commercial mortgage backed securities 70,870 (2,424) 121,918 (4,653) 192,788 (7,077)
Asset backed securities 165,128 (22,772) 32,421 (3,734) 197,549 (26,506)
Common and preferred stocks -- -- 10,922 (8,689) 10,922 (8,689)
---------- --------- -------- --------- ---------- ---------
Total $1,697,832 $(113,990) $561,705 $(133,928) $2,259,537 $(247,918)
========== ========= ======== ========= ========== =========
10
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following tables summarize the unrealized losses by ratio of fair value to
amortized cost:
MARCH 31, 2009
-------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------------ ------------------------------------ -------------------------------------
RATIO OF NUMBER GROSS NUMBER GROSS NUMBER GROSS
FAIR VALUE TO OF UNREALIZED OF UNREALIZED OF UNREALIZED
AMORTIZED COST SECURITIES FAIR VALUE LOSSES SECURITIES FAIR VALUE LOSSES SECURITIES FAIR VALUE LOSSES
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
95% - 100% 99 $ 965,684 $ (10,771) 56 $311,973 $ (5,998) 155 $1,277,657 $ (16,769)
90% - 95% 14 79,701 (5,981) 17 58,588 (3,996) 31 138,289 (9,977)
80% - 90% 9 45,420 (8,229) 29 74,868 (12,871) 38 120,288 (21,100)
Less than 80% 30 178,684 (85,062) 72 202,601 (134,916) 102 381,285 (219,978)
--- ---------- --------- --- -------- --------- --- ---------- ---------
Total 152 $1,269,489 $(110,043) 174 $648,030 $(157,781) 326 $1,917,519 $(267,824)
=== ========== ========= === ======== ========= === ========== =========
DECEMBER 31, 2008
-------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------------ ------------------------------------ -------------------------------------
RATIO OF NUMBER GROSS NUMBER GROSS NUMBER GROSS
FAIR VALUE TO OF UNREALIZED OF UNREALIZED OF UNREALIZED
AMORTIZED COST SECURITIES FAIR VALUE LOSSES SECURITIES FAIR VALUE LOSSES SECURITIES FAIR VALUE LOSSES
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
95% - 100% 140 $1,313,461 $ (18,621) 45 $245,247 $ (5,339) 185 $1,558,708 $ (23,960)
90% - 95% 20 161,149 (11,401) 18 74,460 (5,809) 38 235,609 (17,210)
80% - 90% 15 74,866 (11,174) 26 91,374 (16,561) 41 166,240 (27,735)
Less than 80% 31 148,356 (72,794) 70 150,624 (106,219) 101 298,980 (179,013)
--- ---------- --------- --- -------- --------- --- ---------- ---------
Total 206 $1,697,832 $(113,990) 159 $561,705 $(133,928) 365 $2,259,537 $(247,918)
=== ========== ========= === ======== ========= === ========== =========
As part of ACC's ongoing monitoring process, management determined that a
majority of the gross unrealized losses on its Available-for-Sale securities are
attributable to changes in credit spreads across sectors. The primary driver of
increased unrealized losses during the first quarter of 2009 was related to the
adoption of FSP 115-2. ACC recorded a cumulative effect increase to the
amortized cost of previously other-than-temporarily impaired investments that
increased the gross unrealized losses on Available-for-Sale securities by $48.8
million. This impact is due to impairment of Available-for-Sale securities
previously recognized through earnings for factors other than credit.
The following table presents the rollforward of the net unrealized securities
losses, net of tax, included in accumulated other comprehensive loss:
2009 2008
--------- --------
(IN THOUSANDS)
Net unrealized securities losses at January 1 $(152,454) $(33,804)
Change in accounting principles, net of tax of $17,066 and nil,
respectively (31,694) --
Holding gains (losses), net of tax of $15,875 and $16,169, respectively 29,482 (30,029)
Reclassification of realized losses (gains), net of tax of $333 and
$171, respectively 618 (317)
--------- --------
Net unrealized securities losses at March 31 $(154,048) $(64,150)
========= ========
11
AMERIPRISE CERTIFICATE COMPANY
The following table presents the amounts recognized in the Statements of
Operations for other-than-temporary impairments related to credit losses:
2009
--------------
(IN THOUSANDS)
Beginning balance of credit losses on securities held as of
January 1 for which a portion of other-than-temporary
impairment was recognized in other comprehensive income $50,866
Additional increases to the amount related to credit losses for
which an other-than-temporary impairment was previously
recognized 3,297
-------
Ending balance of credit losses on securities held as of
March 31 for which a portion of other-than-temporary
impairment was recognized in other comprehensive income $54,163
=======
Net realized gains and losses on Available-for-Sale securities, determined
using the specific identification method, recognized in earnings were as
follows:
THREE MONTHS
ENDED MARCH 31,
--------------
2009 2008
------- ----
(IN THOUSANDS)
Gross realized gains from sales $ 3,498 $583
Gross realized losses from sales (12) (95)
Impairment losses (4,436) --
For the three months ended March 31, 2009, the $4.4 million of
other-than-temporary impairments recognized in earnings primarily related to
credit losses in non-agency residential mortgage backed securities and corporate
debt securities primarily in the gaming industry.
The following is a distribution of Available-for-Sale securities by maturity as
of March 31, 2009. Cash flows may differ from original maturities because
issuers may call or prepay obligations:
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
Due within one year $ 918,244 $ 915,578
Due after one year through five years 876,168 866,159
Due after five years through 10 years 25,184 20,137
Due after 10 years 34,630 34,728
---------- ----------
1,854,226 1,836,602
Residential mortgage backed securities 1,653,774 1,482,658
Commercial mortgage backed securities 535,464 527,402
Asset backed securities 400,228 372,283
Common and preferred stocks 19,612 5,463
---------- ----------
Total $4,463,304 $4,224,408
========== ==========
The expected payments on residential mortgage backed securities, commercial
mortgage backed securities, and asset backed securities may not coincide with
their contractual maturities. As such, these securities, as well as common and
preferred stocks, were not included in the maturities distribution.
12
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. FAIR VALUES OF ASSETS AND LIABILITIES
Effective January 1, 2008, ACC 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. As a result of adopting SFAS
157, ACC did not record any transition adjustments.
VALUATION HIERARCHY
Under SFAS 157, ACC categorizes its fair value measurements according to a
three-level hierarchy. The hierarchy prioritizes the inputs used by ACC'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
ACC uses valuation techniques consistent with the market and income approaches
to measure the fair value of its assets and liabilities. ACC's market approach
uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. ACC's income approach
uses valuation techniques to convert future projected cash flows to a single
discounted present value amount. When applying either approach, ACC 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. ACC's 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.
Investments in Unaffiliated Issuers (Available-for-Sale Securities and Trading
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. 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. agency securities. Level 3 securities
include certain non-agency mortgage backed securities and corporate bonds.
Through ACC's own experience transacting in the marketplace and through
discussions with its pricing vendors, ACC believes that the market for certain
non-agency residential mortgage backed securities is inactive. Indicators of
inactive markets include: pricing services' reliance on brokers or discounted
cash flow analyses to provide prices, an increase in the disparity between
prices provided by different pricing services for the same security,
unreasonably large bid-offer spreads and a significant decrease in the volume of
trades relative to historical levels. In certain cases, this market inactivity
has resulted in ACC applying valuation techniques that rely more on an income
approach (discounted cash flows using market rates) than on a market approach
(prices from pricing services). ACC considers market observable yields for other
asset classes it considers to be of similar risk which includes nonperformance
and liquidity for individual securities to set the discount rate for applying
the income approach to certain non-agency residential mortgage backed
securities.
Derivatives (Equity Index Options, Purchased and Written)
The fair values of derivatives that are traded in certain over-the-counter
markets are 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.
13
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
LIABILITIES
Certificate Reserves
ACC uses various Black-Scholes calculations to determine the fair value of the
embedded derivative liability associated with the provisions of its stock market
certificates. The inputs to these calculations are primarily market observable.
As a result, these measurements are classified as Level 2.
The following table presents the balances of assets and liabilities measured at
fair value on a recurring basis:
MARCH 31, 2009
--------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------- ---------- -------- ----------
(IN THOUSANDS)
Assets
Cash equivalents $ -- $ 358,887 $ -- $ 358,887
Available-for-Sale securities:
Corporate debt securities -- 1,744,149 30,979 1,775,128
Residential mortgage backed securities -- 782,502 700,156 1,482,658
Commercial mortgage backed securities -- 527,402 -- 527,402
Asset backed securities -- 257,683 114,600 327,283
U.S. government and agencies obligations 437 61,037 -- 61,474
Common and preferred stocks -- 5,463 -- 5,463
---- ---------- -------- ----------
Total Available-for-Sale securities 437 3,378,236 845,735 4,224,408
Trading securities -- 153,952 -- 153,952
Equity index options, purchased -- 30,881 -- 30,881
---- ---------- -------- ----------
Total assets at fair value $437 $3,921,956 $845,735 $4,768,128
==== ========== ======== ==========
Liabilities
Certificate reserves $ -- $ 7,131 $ -- $ 7,131
Equity index options, written -- 24,268 -- 24,268
---- ---------- -------- ----------
Total liabilities at fair value $ -- $ 31,399 $ -- $ 31,399
==== ========== ======== ==========
DECEMBER 31, 2008
--------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------- ---------- -------- ----------
(IN THOUSANDS)
Assets
Cash equivalents $ -- $1,164,484 $ -- $1,164,484
Available-for-Sale securities:
Corporate debt securities -- 1,541,536 33,653 1,575,189
Residential mortgage backed securities -- 738,349 465,234 1,203,583
Commercial mortgage backed securities -- 266,612 -- 266,612
Asset backed securities -- 153,477 67,552 221,029
U.S. government and agencies obligations 458 4,609 -- 5,067
Common and preferred stocks -- 10,923 -- 10,923
State and municipal obligations -- 4,000 -- 4,000
---- ---------- -------- ----------
Total Available-for-Sale securities 458 2,719,506 566,439 3,286,403
Trading securities -- 16,618 -- 16,618
Equity index options, purchased -- 23,693 -- 23,693
---- ---------- -------- ----------
Total assets at fair value $458 $3,924,301 $566,439 $4,491,198
==== ========== ======== ==========
Liabilities
Certificate reserves $ -- $ 5,007 $ -- $ 5,007
Equity index options, written -- 18,681 -- 18,681
---- ---------- -------- ----------
Total liabilities at fair value $ -- $ 23,688 $ -- $ 23,688
==== ========== ======== ==========
14
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following table provides a summary of changes in Level 3 assets and
liabilities measured at fair value on a recurring basis:
RESIDENTIAL
CORPORATE MORTGAGE OTHER
DEBT BACKED ASSET BACKED STRUCTURED
AVAILABLE-FOR-SALE SECURITIES SECURITIES SECURITIES SECURITIES INVESTMENTS TOTAL
- ----------------------------- ---------- ----------- ------------ ----------- --------
(IN THOUSANDS)
Balance, January 1, 2009 $33,653 $465,234 $ 67,552 $-- $566,439
Total gains (losses) included in:
Net income -- (2,866)(1) 1,504(2) 8(3) (1,354)
Other comprehensive loss 604 17,912 (2,760) -- 15,756
Purchases, sales, issuances
and settlements, net (3,278) 219,876 48,304 (8) 264,894
------- -------- -------- --- --------
Balance, March 31, 2009 $30,979 $700,156 $114,600 $-- $845,735
======= ======== ======== === ========
Change in unrealized (losses) gains
included in net income relating
to assets held at March 31, 2009 $ -- $ (2,911)(4) $ 1,504(2) $-- $ (1,407)
======= ======== ======== === ========
(1) Represents a $(3,079) loss included in net realized (loss) gain on
investments and $213 included in investment income in the Statements of
Operations.
(2) Included in investment income in the Statements of Operations.
(3) Represents a gain included in net realized (loss) gain on investments
in the Statements of Operations.
(4) Represents a $(3,297) loss included in net realized (loss) gain
on investments and $386 included in investment income in the Statements of
Operations.
RESIDENTIAL
CORPORATE MORTGAGE OTHER
DEBT BACKED ASSET BACKED STRUCTURED
AVAILABLE-FOR-SALE SECURITIES SECURITIES SECURITIES SECURITIES INVESTMENTS TOTAL
- ----------------------------- ---------- ----------- ------------ ----------- --------
(IN THOUSANDS)
Balance, January 1, 2008 $67,797 $359,316 $42,927 $ -- $470,040
Total gains (losses) included in:
Net loss -- (111)(1) -- 485(1) 374
Other comprehensive loss 1,259 (45,380) (1,673) -- (45,794)
Purchases, sales, issuances
and settlements, net (3,039) (14,838) (1,214) (485) (19,576)
------- -------- ------- ----- --------
Balance, March 31, 2008 $66,017 $298,987 $40,040 $ -- $405,044
======= ======== ======= ===== ========
Change in unrealized losses
included in net loss relating
to assets held at March 31, 2008 $ -- $ (111) $ -- $ -- $ (111)
======= ======== ======= ===== ========
(1) Included in investment income in the Statements of Operations.
During the reporting period, there were no material assets or liabilities
measured at fair value on a nonrecurring basis.
The following table provides the carrying value and the estimated fair value of
financial instruments that are not reported at fair value as of March 31, 2009
and December 31, 2008. All other financial instruments that are reported at fair
value have been included in the table above with balances of assets and
liabilities measured at fair value on a recurring basis.
MARCH 31, 2009 DECEMBER 31, 2008
--------------------------- ---------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS
Investments in unaffiliated issuers $ 356,127 $ 310,014 $ 364,464 $ 296,002
FINANCIAL LIABILITIES
Certificate reserves $4,978,763 $4,806,455 $4,880,582 $5,009,677
15
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Investments in unaffiliated issuers
The fair value of commercial mortgage loans, except those with significant
credit deterioration, has been determined by discounting contractual cash flows
using discount rates that reflect current pricing for loans with similar
remaining maturities and characteristics including loan-to-value ratio,
occupancy rate, refinance risk, debt-service coverage, location, and property
condition. For commercial mortgage loans with significant credit deterioration,
fair value is determined using the same adjustments as above with an additional
adjustment for ACC's estimate of the amount recoverable on the loan.
Below investment grade syndicated bank loans fair value is determined using
broker quotes from dealers or if broker quotes are not available, fair value is
based on assumptions including rating, industry and amortization schedule.
Certificate reserves
The fair value of investment certificate reserves is determined by discounting
cash flows using discount rates that reflect current pricing for assets with
similar terms and characteristics, with adjustments for early withdrawal
behavior, penalty fees, expense margin and ACC's non-performance risk specific
to these liabilities.
5. DERIVATIVES AND HEDGING ACTIVITIES
Derivative instruments enable ACC to manage its exposure to various market
risks. The value of such instruments is derived from an underlying variable or
multiple variables, including equity and interest rate indices or prices. ACC
primarily enters into derivative agreements for risk management purposes related
to ACC's products and operations.
ACC uses derivatives as economic hedges and currently does not designate any
derivatives for hedge accounting. The following table presents the balance sheet
location and the gross fair value of derivative instruments at March 31, 2009:
FAIR VALUE
DERIVATIVES NOT DESIGNATED AS -------------------------------------------------------------------------------------
HEDGING INSTRUMENTS BALANCE SHEET LOCATION ASSET BALANCE SHEET LOCATION LIABILITY
- ------------------------------ ------------------------------- ------- ----------------------------- ---------
(IN THOUSANDS)
EQUITY CONTRACTS
Stock market certificates Equity index options, purchased $30,881 Equity index options, written $(24,268)
Stock market certificates
embedded derivatives -- Certificate reserves (7,131)
------- --------
Total $30,881 $(31,399)
======= ========
See note 4 for additional information regarding ACC's fair value measurement of
derivative instruments.
DERIVATIVES NOT DESIGNATED AS HEDGES
The following table presents a summary of the impact of derivatives not
designated as hedging instruments under SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") on the Statement of Operations
for the three months ended March 31, 2009:
AMOUNT OF LOSS
DERIVATIVES NOT DESIGNATED AS HEDGING LOCATION OF LOSS RECOGNIZED IN RECOGNIZED IN
INSTRUMENTS UNDER SFAS 133 INCOME ON DERIVATIVES INCOME ON DERIVATIVES
- ------------------------------------- -------------------------------------- ---------------------
(IN THOUSANDS)
EQUITY CONTRACTS
Stock market certificates Net provision for certificate reserves $(2,838)
Stock market certificates embedded derivatives Net provision for certificate reserves (2,123)
-------
Total $(4,961)
=======
ACC holds derivative instruments that either do not qualify or are not
designated for hedge accounting treatment. These derivative instruments are used
as economic hedges of equity and interest rate risk related to various products
and transactions of ACC.
16
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Ameriprise Stock Market Certificates ("SMC") offer a return based upon the
relative change in a major stock market index between the beginning and end of
the SMC's term. The SMC product contains an embedded derivative, essentially the
equity based return of the certificate that must be separated from the host
contract and accounted for as a derivative instrument. As a result of
fluctuations in equity markets, and the corresponding changes in value of the
embedded derivative, the amount of expenses incurred by ACC related to SMC will
positively or negatively impact reported earnings. As a means of hedging its
obligations under the provisions for these certificates, ACC purchases and
writes call options on the S&P 500 Index. ACC views this strategy as a prudent
management of equity market sensitivity, such that earnings are not exposed to
undue risk presented by changes in equity market levels. The gross notional
amount of these derivative contracts was $1.5 million at March 31, 2009. ACC
also purchases futures on the S&P 500 Index to economically hedge its
obligations. The futures are marked-to-market daily and exchange traded,
exposing ACC to no counterparty risk. The gross notional amount of these
contracts was $0.2 million at March 31, 2009.
EMBEDDED DERIVATIVES
The equity component of the stock market investment certificate product
obligations is considered an embedded derivative.
CREDIT RISK
Credit risk associated with ACC's derivatives is the risk that a derivative
counterparty will not perform in accordance with the terms of the applicable
derivative contract. To mitigate such risk, ACC has established guidelines and
oversight of credit risk through a comprehensive enterprise risk management
program that includes members of senior management. Key components of this
program are to require preapproval of counterparties and the use of master
netting arrangements and collateral arrangements wherever practical. ACC does
not currently hold any contracts that contain credit contingent features, which
would allow counterparties to call for additional collateral or settlement of a
contract based on a change in ACC's financial strength. At March 31, 2009, ACC's
credit exposure was immaterial.
6. COMMITMENTS AND CONTINGENCIES
At March 31, 2009 and December 31, 2008, ACC had no commitments to fund first
mortgage loans on real estate. ACC holds the mortgage document, which gives ACC
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreements. ACC employs policies and procedures to
ensure the creditworthiness of the borrowers and that funds will be available on
the funding date. ACC's first mortgage loans on commercial real estate are
restricted to 80% or less of the market value of the real estate at the time of
the loan funding.
ACC is not aware that it is a party to any pending legal, arbitration, or
regulatory proceedings that would have a material adverse effect on its
financial condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material adverse effect on
results of operations in any particular reporting period as the proceedings are
resolved.
7. INCOME TAXES
The effective tax rate was 43.2% for the three months ended March 31, 2009
compared to 32.3% for the three months ended March 31, 2008. The effective tax
rates for both three month periods reflected the level of current period tax
advantaged items relative to the level of pretax income (loss).
As of March 31, 2009 and December 31, 2008, ACC had $4.4 million of gross
unrecognized tax benefits. If recognized, approximately $1.2 million, net of
federal tax benefits, of the unrecognized tax benefits as of March 31, 2009 and
December 31, 2008, would affect the effective tax rate.
ACC recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. ACC recognized interest and penalties of
$0.1 million for the three months ended March 31, 2009. ACC had $1.3 million and
$1.2 million for the payment of interest and penalties accrued at March 31, 2009
and December 31, 2008, respectively.
It is not expected that the total amounts of unrecognized tax benefits will
change materially in the next 12 months.
ACC files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. With few exceptions, ACC is no longer subject to U.S. federal or
state and local income tax examinations by tax authorities for years before
1997. In the fourth quarter of 2008, the Internal Revenue Service ("IRS"),
commenced an examination of ACC's U.S. income tax returns for 2005 through 2007.
The IRS, as part of the overall examination of the American Express Company
consolidated return, completed its field examination of ACC's U.S. income tax
returns for 1997 through 2002 during 2008. However, for federal income tax
purposes these years continue to remain open as a consequence of certain issues
under appeal. The IRS continued its examination of 2003 through 2004 which is
expected to be completed during 2009. ACC's state income tax returns are
currently under examination by various jurisdictions for years ranging from 1998
through 2006.
17
AMERIPRISE CERTIFICATE COMPANY
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
The following information should be read in conjunction with Ameriprise
Certificate Company's ("ACC") Financial Statements and related notes presented
in Part I, Item 1. This discussion may contain forward-looking statements that
reflect ACC'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." ACC believes it is
useful to read its management's narrative analysis in conjunction with its
Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
Securities and Exchange Commission ("SEC") on March 3, 2009 ("2008 10-K"), as
well as its current reports on Form 8-K and other publicly available
information.
ACC is a wholly owned subsidiary of Ameriprise Financial, Inc. ACC is registered
as an investment company under the Investment Company Act of 1940 (the "1940
Act") and is in the business of issuing face-amount investment certificates.
Face-amount investment certificates issued by ACC entitle the certificate owner
to receive at maturity a stated amount of money and interest or credits declared
from time to time by ACC, at its discretion. The certificates issued by ACC are
not insured by any government agency. ACC's certificates are sold primarily by
Ameriprise Financial Services, Inc., an affiliate of ACC. Ameriprise Financial
Services, Inc. is registered as a broker-dealer in all 50 states, the District
of Columbia and Puerto Rico.
ACC's profitability has benefited recently from the negative economic credit and
equity market trends as clients have increased their preference for fixed income
investment products as well as the opportunity to reduce crediting rates due to
declining competitor benchmarks. ACC's future profitability is dependent upon
changes in both the economic, credit and equity environments and the competitive
environment. Affiliates of Ameriprise Financial, Inc. and unaffiliated third
parties offer certain competing products which have demonstrated strong appeal
to investors.
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.
MARKET RISK
Equity market and interest rate fluctuations can have a significant impact on
ACC's results of operations, primarily due to the effects they have on the
spread income generated on ACC's face amount certificate products.
There have been no material changes in ACC's net risk exposure to pretax income
based on its sources of market risk during the three months ended March 31,
2009.
CREDIT RISK
ACC is exposed to credit risk within its investment portfolio, which includes
loans, and through derivative 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. ACC's
potential derivative credit exposure to each counterparty is aggregated with all
of its other exposures to the counterparty to determine compliance with
established credit and market risk limits at the time it enters into a
derivative transaction. ACC 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
ACC's comprehensive enterprise risk management program that includes members of
senior management.
ACC 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, ACC'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. ACC
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.
18
AMERIPRISE CERTIFICATE COMPANY
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, ACC 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. As of March 31, 2009, any deterioration in our derivative
counterparties' credit would not materially impact our financial statements.
For additional information regarding ACC's sensitivity to market and credit
risk, see "Management's Narrative Analysis" in ACC's 2008 10-K.
FAIR VALUE MEASUREMENTS
ACC reports certain assets and liabilities at fair value; specifically
derivatives, embedded derivatives, and most investments and cash equivalents.
Statement of Financial Accounting Standards No. 157, "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. SFAS 157 does not
require the use of market prices that are the result of a forced liquidation or
distressed sale. ACC includes actual market price, or observable inputs in its
fair value measurements to the extent available. Broker quotes are obtained when
quotes from pricing services are not available. ACC validates prices obtained
from third parties through a variety of means such as: price variance analysis,
subsequent sales testing, stale price review, price comparison across pricing
vendors and due diligence reviews of vendors. Recent market conditions have
increased the likelihood of other-than-temporary impairments for certain
non-agency residential mortgage backed and asset backed securities.
Inactive Markets
Through ACC's own experience transacting in the marketplace and through
discussions with its pricing vendors, ACC believes that the market for certain
non-agency residential mortgage backed securities is inactive. Indicators of
inactive markets include: pricing services' reliance on brokers or discounted
cash flow analysis to provide prices, an increase in the disparity between
prices provided by different pricing services for the same security,
unreasonably large bid-offer spreads and a significant decrease in the volume of
trades relative to historical levels. In certain cases, this market inactivity
has resulted in ACC applying valuation techniques that rely more on an income
approach (discounted cash flows using market rates) than on a market approach
(prices from pricing services). ACC considers market observable yields for other
asset classes it considers to be of similar risk which includes nonperformance
and liquidity for individual securities to set the discount rate for applying
the income approach to certain non-agency residential mortgage backed
securities. The discount rates used for these securities at March 31, 2009
ranged from 12% to 22%.
Non-agency Residential Mortgage Backed Securities Backed by Subprime, Alt-A or
Prime Collateral
Subprime 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
subprime but may not conform to government-sponsored standards. Prime mortgage
lending is the origination of residential mortgage loans to customers with good
credit profiles. ACC has exposure to these types of loans predominantly through
mortgage backed and asset backed securities. The slowdown in the U.S. housing
market, combined with relaxed underwriting standards by some originators, has
recently led to higher delinquency and loss rates for some of these investments.
Recent market conditions have increased the likelihood of other-than-temporary
impairments for certain non-agency residential mortgage backed securities. As a
part of ACC'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 ACC will not receive all contractual principal and interest payments for
these investments. For the investments that are more at risk for impairment, ACC
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. Other than non-agency mortgage backed securities that had credit
related impairments recorded in the first quarter of 2009, all contractual
payments are expected to be received.
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AMERIPRISE CERTIFICATE COMPANY
The following table presents as of March 31, 2009, ACC's non-agency residential
mortgage backed and asset backed securities backed by subprime, Alt-A or prime
mortgage loans by credit rating and vintage year (in thousands):
AAA AA A BBB BB & BELOW TOTAL
------------------ ----------------- ----------------- ----------------- ------------------ -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- ------- --------- ------- --------- ------- --------- -------- ---------- --------
SUBPRIME
2003 & prior $ 1,698 $ 1,004 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,698 $ 1,004
2004 11,763 10,081 -- -- -- -- 10,652 6,296 -- -- 22,415 16,377
2005 30,960 30,077 32,351 29,384 15,173 14,081 1,780 1,382 -- -- 80,264 74,924
2006 -- -- 3,384 3,090 -- -- 19,787 18,070 -- -- 23,171 21,160
2007 -- -- -- -- -- -- -- -- -- -- -- --
2008 -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ---------- --------
Total Subprime $ 44,421 $ 41,162 $35,735 $32,474 $15,173 $14,081 $32,219 $25,748 $ -- $ -- $ 127,548 $113,465
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ========== ========
ALT-A
2003 & prior $ 7,466 $ 6,603 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 7,466 $ 6,603
2004 35,717 25,142 10,240 5,669 -- -- 2,483 1,167 -- -- 48,440 31,978
2005 8,922 5,416 7,026 4,094 468 235 12,434 6,633 83,095 51,974 111,945 68,352
2006 -- -- -- -- 11,824 11,049 -- -- 44,021 30,373 55,845 41,422
2007 -- -- -- -- -- -- -- -- 67,578 43,737 67,578 43,737
2008 -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ---------- --------
Total Alt-A $ 52,105 $ 37,161 $17,266 $ 9,763 $12,292 $11,284 $14,917 $ 7,800 $194,694 $126,084 $ 291,274 $192,092
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ========== ========
PRIME
2003 & prior $ 45,383 $ 43,852 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 45,383 $ 43,852
2004 121,332 96,760 18,178 9,437 -- -- 3,667 2,337 -- -- 143,177 108,534
2005 143,615 95,655 -- -- -- -- -- -- 6,348 4,607 149,963 100,262
2006 -- -- -- -- 5,216 4,060 -- -- -- -- 5,216 4,060
2007 -- -- -- -- -- -- -- -- 15,307 15,042 15,307 15,042
2008 -- -- -- -- -- -- -- -- -- -- -- --
2009 236,045 236,304 -- -- -- -- -- -- -- -- 236,045 236,304
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ---------- --------
Total Prime(1) $546,375 $472,571 $18,178 $ 9,437 $ 5,216 $ 4,060 $ 3,667 $ 2,337 $ 21,655 $ 19,649 $ 595,091 $508,054
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ========== ========
GRAND TOTAL $642,901 $550,894 $71,179 $51,674 $32,681 $29,425 $50,803 $35,885 $216,349 $145,733 $1,013,913 $813,611
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ========== ========
(1) Prime 2009 vintages are re-remics of mortgage backed securities. These were
originally 2003-2007 vintage prime securities with cash flows structured
into senior and subordinated bonds. Credit enhancement on senior bonds is
increased through the re-remic process with an average incremental
enhancement of 30%. All senior bonds are AAA-rated by Moody's, S&P, or
Fitch and the company does not have any exposure to subordinate tranches.
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AMERIPRISE CERTIFICATE COMPANY
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Net income for the three months ended March 31, 2009 was $0.4 million compared
to a net loss of $1.4 million for the three months ended March 31, 2008, an
increase of $1.8 million, due to clients' increased preference for fixed income
securities and decreased interest crediting rates. Cash sales of investment
certificates increased significantly from the first quarter of 2008.
For the three months ended March 31, 2009, investment income increased $6.6
million, or 14.7%, to $51.5 million compared to the prior year period. This
increase is primarily the result of higher asset balances due to client inflows
period over period, partially offset by lower invested asset rates.
Investment expenses for the three months ended March 31, 2009 increased $2.0
million, or 24.3%, to $10.4 million compared to the same period in 2008. This
increase is due to higher contractual fees, due to larger client volumes on
average, compared to the first quarter of 2008.
The provision for certificate reserves decreased $0.4 million, or 1.0%, to $38.7
million for the three months ended March 31, 2009 compared to the same period in
2008. This decrease is due to lower client interest rates, partially offset by
an increase in client volumes due to net inflows.
Net realized investment losses before income taxes for the three months ended
March 31, 2009 were $1.7 million compared to net realized investment gains
before income taxes of $0.5 million for the three months ended March 31, 2008.
Included in the investment losses for the three months ended March 31, 2009 was
$4.4 million of other-than-temporary impairment losses on investments. These
other-than-temporary impairment charges primarily related to credit losses on
non-agency residential mortgage backed securities and corporate debt securities
primarily in the gaming industry. The majority of the realized investment gains
and losses were from securities classified as Available-for-Sale.
The effective tax rate was 43.2% for the three months ended March 31, 2009
compared to 32.3% for the three months ended March 31, 2008. The effective tax
rates for both three month periods reflected the level of current year tax
advantaged items relative to the level of pretax income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their expected
impact on ACC's future results of operations or financial condition, see Note 2
to the financial statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are subject to risks and
uncertainties. 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.
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. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors, which could cause actual results, performance or
achievements to differ materially from future results, performance or
achievements. These statements are not guarantees or indicative of future
performance. Important assumptions and other important factors that could cause
actual results to differ materially from those forward-looking statements
include, but are not limited to, those factors, risks and uncertainties
described in "Item 1A. Risk Factors" and elsewhere in ACC's 2008 10-K. Any
forward-looking statements contained in this report are made only as of the date
hereof. ACC undertakes no obligation to update or revise any forward-looking
statements.
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AMERIPRISE CERTIFICATE COMPANY
ITEM 4T. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
ACC maintains disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) designed to provide reasonable assurance that the information required to
be reported in the Exchange Act filings is recorded, processed, summarized and
reported within the time periods specified in and pursuant to SEC regulations,
including controls and procedures designed to ensure that this information is
accumulated and communicated to ACC's management, including its Chief 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, ACC'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.
ACC's management, with the participation of its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of ACC's disclosure
controls and procedures as of March 31, 2009. Based upon that evaluation, ACC's
Chief Executive Officer and Chief Financial Officer have concluded that ACC's
disclosure controls and procedures were effective at a reasonable level of
assurance as of March 31, 2009.
In the fourth quarter of 2008, ACC's management determined that ACC's disclosure
controls and procedures were ineffective. ACC determined that it did not have
sufficient controls in place to prevent or detect errors created through the
usage of an end-user computing application, which is used to perform
valuation/impairment analysis of certain investment instruments. This control
deficiency could result in a material misstatement of significant accounts or
disclosures that would result in a material misstatement to ACC's interim or
annual financial statements that would not be prevented or detected.
Steps have been taken during the period ended March 31, 2009 to remediate the
above-referenced material weakness that first was identified in December 2008.
New controls over financial reporting were implemented and operating effectively
at March 31, 2009. ACC's management will not consider the material weakness to
be fully remediated until the controls have operated effectively for two
consecutive quarters. Until ACC's management has concluded that it has
remediated this material weakness, ACC will perform additional analysis and
procedures to ensure that its financial statements contained in subsequent SEC
filings are prepared in accordance with generally accepted accounting
principles.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described above, there have not been any other changes in ACC'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 first fiscal quarter
of the year to which this report relates that have materially affected, or are
reasonably likely to materially affect, ACC's internal control over financial
reporting.
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AMERIPRISE CERTIFICATE COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 6 to the Financial Statements in Part 1, Item
1 is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors provided in Part I, Item
1A of ACC's Annual Report on Form 10-K for the year ended December 31, 2008
filed with the SEC on March 3, 2009.
ITEM 6. EXHIBITS
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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AMERIPRISE CERTIFICATE COMPANY
SIGNATURES
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.
AMERIPRISE CERTIFICATE COMPANY
(Registrant)
Date: May 6, 2009 By /s/ William F. Truscott
-------------------------------------
William F. Truscott
Chief Executive Officer
Date: May 6, 2009 By /s/ Ross P. Palacios
-------------------------------------
Ross P. Palacios
Chief Financial Officer
24
AMERIPRISE CERTIFICATE COMPANY
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
EXHIBIT DESCRIPTION
- ------- -----------
* 31.1 Certification of William F. Truscott pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 31.2 Certification of Ross P. Palacios pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 32.1 Certification of William F. Truscott and Ross P. Palacios pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
* Filed electronically herewithin.
E-1