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EX-31.2 - EX-31.2 - RIVERSOURCE LIFE INSURANCE COa09-36102_1ex31d2.htm
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EX-31.1 - EX-31.1 - RIVERSOURCE LIFE INSURANCE COa09-36102_1ex31d1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                 

 

Commission file number 033-28976

 

RIVERSOURCE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0823832

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1099 Ameriprise Financial Center, Minneapolis, Minnesota

 

55474

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (612) 671-3131

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [Not Applicable]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at February 23, 2010

Common Stock (par value $30 per share)

 

100,000 shares

 

All outstanding shares of the registrant are directly owned by Ameriprise Financial, Inc.

 

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

 



 

TABLE OF CONTENTS

 

Form 10-K

Item Number

 

 

 

Page

PART I

 

 

1.

Business

1

1A.

Risk Factors

8

1B.

Unresolved Staff Comments

19

2.

Properties

19

3.

Legal Proceedings

19

4.

Submission of Matters to a Vote of Security Holders

20

PART II

 

 

5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

6.

Selected Financial Data

20

7.

Management’s Narrative Analysis

20

7A.

Quantitative and Qualitative Disclosures About Market Risk

38

8.

Financial Statements and Supplementary Data

38

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

83

9A(T).

Controls and Procedures

83

9B.

Other Information

84

PART III

 

 

10.

Directors, Executive Officers and Corporate Governance

84

11.

Executive Compensation

84

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

84

13.

Certain Relationships and Related Transactions, and Director Independence

84

14.

Principal Accountant Fees and Services

84

PART IV

 

 

15.

Exhibits and Financial Statement Schedules

85

 

Signatures

86

 

Exhibit Index

E-1

 



 

PART I

 

ITEM 1.

BUSINESS

 

Introduction

 

RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).

 

·                  RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York.  RiverSource Life Insurance Company issues insurance and annuity products.

 

·                  RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware.  RiverSource Life of NY issues insurance and annuity products.

 

On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.  RTA is a stock company domiciled in Delaware and is a limited partner in affordable housing partnership investments.

 

RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-K as “RiverSource Life”.

 

A majority of RiverSource Life’s business is sold through the retail distribution channel of Ameriprise Financial Services, Inc., a subsidiary of Ameriprise Financial.  RiverSource Distributors, Inc., a subsidiary of Ameriprise Financial, serves as the principal underwriter and distributor of variable annuity and life insurance products issued by RiverSource Life.

 

Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”).  On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders.  Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees.  Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.  The separation from American Express was completed in 2007.

 

Annuities: Product Features and Risks

 

RiverSource Life offers both deferred variable and fixed annuities to a broad range of consumers through its affiliated retail broker-dealer and through third party banks and broker dealers, such as Wachovia Securities, Inc., SunTrust Securities, Inc. and Wells Fargo Securities, Inc.  As of December 31, 2009, RiverSource Life had distribution agreements for annuity products in place with more than 120 third party distributors, with annual cash sales of $2.1 billion in 2009.  Deferred variable and fixed annuities are products where assets accumulate until the contract is surrendered, the contractholder (or in some contracts, the annuitant) dies, or the contractholder or annuitant begins receiving benefits under an annuity payout option. RiverSource Life also offers immediate annuities in which payments begin within one year of issue and continue for life or for a fixed period of time.

 

RiverSource Life is one of the largest issuers of annuities in the United States.  RiverSource Life ranked ninth in variable annuity sales (according to the LIMRA International® survey dated September 30, 2009, the most recent report available).  RiverSource Life had annuity cash sales in 2009 of $9.3 billion compared to $9.2 billion for 2008.  The relative proportion between fixed and variable annuity sales is generally driven by the relative performance of the equity and fixed income markets.  In times of weak performance in equity markets, fixed sales are generally stronger.  In times of superior performance in equity markets, variable sales are generally stronger.  The relative proportion between fixed and variable annuity sales is also influenced by product design and other factors.

 

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Variable Annuities

A variable annuity provides a contractholder with investment returns linked to underlying investment accounts of the contractholder’s choice.  Investment options may include RiverSource Variable Series Trust funds as well as variable product funds of other companies.  Most variable annuity products in force offer a fixed account investment option with guaranteed minimum interest crediting rates ranging up to 4.0% as of December 31, 2009.

 

RiverSource Life’s Portfolio Navigator asset allocation program is available under its variable annuities. The Portfolio Navigator program is designed to help a contract purchaser select an asset allocation model portfolio from the choices available under the program, based on the purchaser’s stated investment time horizon, risk tolerance and investment goals. RiverSource Life believes the benefits of the Portfolio Navigator asset allocation program include a well-diversified annuity portfolio, disciplined, professionally created asset allocation models, simplicity and ease of use, access to multiple well-known money managers within each model portfolio and automatic rebalancing of the client’s contract value on a quarterly basis. RiverSource Investments, LLC, RiverSource Life’s investment manager, designs and periodically updates the model portfolios based on recommendations from Morningstar Associates, an unaffiliated investment advisor.

 

The majority of the variable annuity contracts RiverSource Life issues include guaranteed minimum death benefit (“GMDB”) provisions. Contract purchasers can choose to add optional benefit provisions to their contracts to meet their needs, including guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions.  Approximately 98% of RiverSource Life’s overall variable annuity assets include a GMDB provision and approximately 40% of RiverSource Life’s overall variable annuity assets include a GMWB or GMAB provision.  In general, these features can help protect contractholders and beneficiaries from a shortfall in death or living benefits due to a decline in the value of their underlying investment accounts.

 

RiverSource Life’s largest-selling variable annuities are the RiverSource® Retirement Advisor Plus 4 series of variable annuities, which include the RiverSource Retirement Advisor 4 Advantage® variable annuity and the RiverSource Retirement Advisor 4 Select® variable annuity (collectively, the “Retirement Advisor 4 Variable Annuities”).  Under the Retirement Advisor 4 Variable Annuities, the standard GMDB provides that if the contractholder is age 75 or younger on the date the contract is issued, the beneficiary will receive the greater of (i) contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) purchase payments minus adjusted partial surrenders.  If the contractholder is age 76 or older at contract issue, the beneficiary will receive the contract value, less any purchase payment credits subject to recapture and less a pro-rata portion of any rider fees.

 

The following additional optional GMDBs are also available for an additional charge:

 

·                  A return of purchase payment death benefit for RiverSource Retirement Advisor 4 Advantage variable annuity contractholders age 76 or older at contract issue.  This rider adds the return of purchase payments less adjusted partial surrenders to the standard death benefit.

 

·                  A maximum anniversary value death benefit or a five-year maximum anniversary value death benefit.  These death benefit riders guarantee to pay the beneficiary the maximum account value on any contract anniversary or any fifth contract anniversary, plus subsequent purchase payments less adjusted partial surrenders.

 

·                  An enhanced earnings death benefit or an enhanced earnings plus death benefit.  These riders are intended to provide additional benefits to offset expenses after the contractholder’s death.

 

Available features for annuity products also include the GMWB and GMWB for life.  The GMWB is designed to protect the contractholder’s principal by allowing the client to withdraw the principal over a period of time, regardless of the investment performance of the contract.  The GMWB for life is an enhanced benefit that also allows periodic withdrawals for the life of the contractholder, regardless of the investment performance of the contract.

 

Variable annuity contractholders can also obtain a lump sum principal-back guarantee by purchasing the optional GMAB rider for an additional charge.  The GMAB provides a guaranteed contract value at the end of a ten-year waiting period regardless of the investment performance of the contract.  The guarantee is equal to the greater of the total amount of purchase payments made or 80% of the highest anniversary value, adjusted for any withdrawals.

 

Certain variable annuity contracts contain a guaranteed minimum income benefit (“GMIB”) feature which, after a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates.  In 2007, RiverSource Life ceased offering contracts with GMIB provisions.

 

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RiverSource Life earns fee-based revenue in the form of mortality and expense risk fees, marketing support and administrative fees, fees charged for optional features elected by the contractholder and any surrender or withdrawal charges.

 

The general account assets of RiverSource Life support the contractual obligations under the guaranteed benefit provisions (see “General and Separate Account Assets — General Account” below).  As a result, RiverSource Life bears the risk that protracted under-performance of the financial markets could result in guaranteed benefit payments being higher than what current account values would support.  RiverSource Life’s exposure to risk from guaranteed benefits generally will increase when equity markets decline, as evidenced by the significant decline experienced in 2008 and early 2009.  For a discussion of liabilities related to RiverSource Life’s annuity products, see Note 2 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

Fixed Annuities

RiverSource Life’s fixed annuity products provide a contractholder with cash value that increases by a fixed or indexed interest rate.  RiverSource Life periodically resets rates at its discretion subject to certain policy terms establishing minimum guaranteed interest crediting rates.  RiverSource Life’s earnings from fixed annuities are based upon the spread between rates earned on assets purchased with fixed annuity deposits and the rates at which interest is credited to its fixed annuity contracts.

 

In 2007, RiverSource Life discontinued new sales of equity indexed annuities.

 

Revenues for RiverSource Life’s fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.

 

The fixed annuity contracts in force provide guaranteed minimum interest crediting rates ranging from 1.5% to 5.0% as of December 31, 2009.  New contracts issued provide guaranteed minimum interest rates in compliance with state laws providing for indexed guaranteed rates.

 

Insurance: Product Features and Risks

 

RiverSource Life issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance.  Universal life insurance is a form of permanent life insurance characterized by flexible premiums, flexible death benefits and unbundled pricing factors (i.e., mortality, interest and expenses).  Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium.  Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith.  RiverSource Life also offers a chronic care rider, AdvanceSource, on its new permanent insurance products.  This rider allows its policyholder to accelerate a portion of the life insurance death benefit in the event of a qualified chronic care need.

 

RiverSource Life’s sales of individual life insurance in 2009, as measured by scheduled annual premiums, lump sum and excess premiums, consisted of 39% variable universal life, 53% fixed universal life and 8% traditional life.  RiverSource Life issues only non-participating life insurance policies, which do not pay dividends to policyholders from the insurers’ earnings. One of the major risks inherent in life insurance is the risk that mortality will be greater than anticipated. As discussed below, reinsurance is critical for RiverSource Life to mitigate this risk.

 

Variable Universal Life Insurance

RiverSource Life is a leader in variable universal life insurance.  Variable universal life insurance provides life insurance coverage along with investment returns linked to underlying investment accounts of the policyholder’s choice.  Investment options may include RiverSource Variable Series Trust funds as well as variable product funds of other companies.  Most variable universal life insurance products in force offered a fixed account investment option with guaranteed minimum interest crediting rates ranging from 3.0% to 4.5% as of December 31, 2009.  RiverSource Life Insurance Company ranked fifth in sales of variable universal life based on total premiums (according to the Tillinghast-Towers Perrin’s Value Survey, dated September 30, 2009, the most recent report available).  RiverSource Life’s major source of revenue from variable universal life insurance is cost of insurance and other charges.

 

Fixed Universal Life Insurance and Traditional Whole Life Insurance

Fixed universal life and traditional whole life insurance policies do not subject the policyholder to the investment risks associated with variable universal life insurance.

 

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RiverSource Life’s fixed universal life insurance products provide life insurance coverage and cash value that increases by a fixed interest rate.  The rate is periodically reset at the discretion of RiverSource Life subject to certain policy terms relative to minimum interest crediting rates.  Fixed universal life insurance products in force provided guaranteed minimum interest crediting rates ranging from 3.0% to 5.0% as of December 31, 2009.

 

RiverSource Life also offers traditional whole life insurance, which combines a death benefit with a cash value that generally increases gradually over a period of years.  RiverSource Life has sold very little traditional whole life insurance in recent years.

 

Term Life Insurance

Term life insurance provides a death benefit but it does not build up cash value.  The policyholder chooses the term of coverage with guaranteed premiums at the time of issue.  During the chosen term, RiverSource Life cannot raise premium rates even if claims experience deteriorates.  At the end of the chosen term, coverage may continue with higher premiums until the maximum age is attained, or the policy expires with no value.

 

Disability Income Insurance

DI insurance provides monthly benefits to individuals who are unable to earn income either at their occupation at time of disability (“own occupation”) or at any suitable occupation (“any occupation”) for premium payments that are guaranteed not to change.  Depending upon occupational and medical underwriting criteria, applicants for DI insurance can choose “own occupation” and “any occupation” coverage for varying benefit periods.  In some states, applicants may also choose various benefit provisions to help them integrate individual DI insurance benefits with social security or similar benefit plans and to help them protect their DI insurance benefits from the risk of inflation.  RiverSource Life was ranked as the eighth largest provider of individual (non-cancelable) DI insurance based on premiums (according to the LIMRA International® survey dated September 30, 2009, the most recent report available).

 

Long Term Care Insurance

As of December 31, 2002, RiverSource Life discontinued underwriting long term care (“LTC”) insurance.  Although new product sales were discontinued in the fourth quarter of 2002, RiverSource Life generally retained 50% of the risk on existing contracts and ceded the remaining 50% of the risk on a coinsurance basis to subsidiaries of Genworth Financial, Inc. (“Genworth”).

 

In 2004, RiverSource Life Insurance Company and RiverSource Life of NY began to file for approval to implement rate increases on most of their existing blocks of nursing home-only indemnity LTC insurance policies.  Implementation of these rate increases began in early 2005 and continues.  So far, approvals have been received for some or all requested increases in 50 states, with an average approved cumulative rate increase of 62.2% of premium on all such policies where an increase was requested.

 

In 2007, RiverSource Life Insurance Company and RiverSource Life of NY began to file for approval to implement rate increases on most of their existing blocks of comprehensive reimbursement LTC insurance policies.  Implementation of these rate increases began in late 2007 and continues. So far, approvals have been received for some or all requested increases in 46 states, with an average approved cumulative rate increase of 15.4% of premium on all such policies where an increase was requested.

 

RiverSource Life may seek additional rate increases with respect to these and other existing blocks of LTC insurance policies, subject to regulatory approval.

 

General and Separate Account Assets

 

Depending on the life insurance and annuity product purchased, the assets of RiverSource Life’s policyholders and contractholders may be placed in the general account of RiverSource Life (the “general account”) for fixed products and for the fixed account options under certain variable products or, in the case of variable life insurance and variable annuity products, in separate accounts that invest in underlying investment options (the “separate accounts”).

 

General Account

Assets in the general account support all obligations of RiverSource Life other than those supported by the separate accounts. RiverSource Life bears the investment risk of the general account assets.

 

In the general account, RiverSource Life, through its investment manager, RiverSource Investments, LLC, primarily invests in fixed maturity securities over a broad range of maturities for the purpose of providing a targeted rate of return on its

 

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investments while controlling risk.  The majority of these fixed maturity securities are interest-bearing investments such as government obligations, mortgage backed obligations and various corporate debt instruments.  RiverSource Life does not invest in securities to generate trading profits.

 

In accordance with regulatory investment guidelines, RiverSource Life Insurance Company and RiverSource Life of NY, through their respective boards of directors or board of directors’ investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures and their effect on profitability in order to guide the management of the general account assets.  They also review the distribution of assets in the portfolio by type and credit risk sector.  The objective is to structure the investment securities portfolio in the general account to meet contractual obligations under the insurance and annuity products and achieve targeted levels of profitability within defined risk parameters.

 

RiverSource Life has the discretion to set the rate of interest credited to contractholders’ accounts subject to each contract’s guaranteed minimum interest crediting rate.  As of December 31, 2009, this rate varied among fixed accounts and was as low as 1.5% and as high as 8.4%.  To the extent the yield on RiverSource Life’s invested general account asset portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’s profitability would be negatively affected.

 

The interest rates credited to contractholders’ fixed accounts generally reset towards new business rates; therefore, margins may be negatively impacted by increases in the general level of interest rates.  Part of RiverSource Life’s strategy includes the use of derivatives, such as interest rate swaptions, for risk management purposes.  These derivatives help protect margins by increasing investment returns if there is a sudden and severe rise in interest rates, thereby lessening the impact of an increase in rates credited to contractholders’ fixed accounts.  Conversely, in a low interest rate environment, margins may be negatively impacted as the interest rates available on RiverSource Life’s invested assets approach guaranteed minimum interest rates on the insurance or annuity contracts in force.  This negative impact may be compounded by the fact that many of these interest-bearing investments are callable or pre-payable by the issuer and calls and prepayments are more likely to occur in a low interest rate environment.

 

Separate Accounts

Variable annuity and insurance products offer separate account investment options. In addition, many of these products offer fixed account options.  Under the separate account option, contractholders and policyholders bear the investment risk.  The separate accounts are registered as unit investment trusts under the Investment Company Act of 1940.  State insurance law prescribes that separate accounts constitute a distinct operation from the general account and as such assets in the separate accounts are only available to fund the liabilities of the separate accounts. Under the subaccounts of each separate account, RiverSource Life credits or charges income, capital gains and losses only to that subaccount.

 

Generally, the separate accounts consist of a number of subaccounts, each of which invests in shares of a particular fund.  Contractholders and policyholders can allocate their payments among these separate subaccounts.  The underlying funds are managed both by affiliated and unaffiliated third-party money managers.  These funds invest in portfolios containing a variety of securities including common stocks, bonds, managed assets and/or short-term securities.  The value of the subaccounts fluctuates with the investment return of the underlying funds in which the subaccounts invest.

 

RiverSource Life receives payments from its affiliate, RiverSource Investments, LLC, for providing certain sponsor and related servicing activity for the RiverSource Variable Series Trust funds which are available as investment options under the variable annuity and life insurance products.  RiverSource Life also receives revenues from assets allocated to subaccounts investing in RiverSource Variable Series Trust funds.  These revenues include shareholder services payments as well as payments for marketing, administrative services, training and other services provided by RiverSource Life.

 

In addition to the revenues described above, RiverSource Life receives shareholder servicing payments from other companies’ funds included as investment options under its variable annuity and life insurance products.  It also receives marketing and administrative support payments from the affiliates of other companies’ funds which are included as investment options in its variable annuity and life insurance products. These fees are generally based on the level of separate account assets held in a particular fund and accordingly will vary based on market conditions.

 

Competition

 

RiverSource Life competes with other insurers and product manufacturers including insurance companies, such as Hartford Life, MetLife, Lincoln National Life and Nationwide Life, as well as certain banks, securities brokerage firms, independent financial advisors and other financial intermediaries that market insurance, annuities, mutual funds, retirement accounts and other financial products.

 

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Competitive factors affecting the sale of RiverSource Life’s annuity and/or insurance products include:

 

·                  financial strength ratings from agencies such as A.M. Best;

·                  the breadth, quality, design and pricing of products and services offered;

·                  guaranteed benefit features;

·                  the quality of underwriting;

·                  the effectiveness of advertising and promotion campaigns;

·                  reputation and recognition in the marketplace;

·                  distribution capabilities and compensation; and

·                  the quality of customer service.

 

Regulation

 

The Minnesota Department of Commerce regulates RiverSource Life Insurance Company, and the New York State Insurance Department (together with the Minnesota Department of Commerce, the “Domiciliary Regulators”) regulates RiverSource Life of NY.

 

In addition to being regulated by their Domiciliary Regulators, RiverSource Life Insurance Company and RiverSource Life of NY are regulated by each of the insurance regulators in the states where each is authorized to transact the business of insurance.  These other states also regulate such matters as the licensing of sales personnel and, in some cases, the underwriting, marketing and contents of insurance policies and annuity contracts.  The primary purpose of such regulation and supervision is to protect the interests of contractholders and policyholders.  Financial regulation of RiverSource Life is extensive and its financial and intercompany transactions (such as intercompany dividends, capital contributions and investment activities) are often subject to pre-notification and continuing evaluation by the Domiciliary Regulators.  Virtually all states require participation in insurance guaranty associations which assess fees to insurance companies in order to fund claims of policyholders and contractholders of insolvent insurance companies.

 

Because RiverSource Life issues variable annuity and life insurance products required to be registered under federal and state securities laws, many aspects of its business are subject to extensive regulation and examination by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority, commonly referred to as FINRA, and other federal and state regulatory bodies.

 

Insurance companies have recently been the subject of increasing regulatory, legislative and judicial scrutiny.  Numerous state and federal regulatory agencies have commenced investigations regarding sales and marketing practices (including sales to older consumers), compensation arrangements and anticompetitive activities, and market timing and late trading in connection with insurance, annuity and mutual fund products.  RiverSource Life has been contacted by regulatory agencies for information relating to some of these investigations and is cooperating with those inquiries.

 

At the federal level, there is periodic interest in enacting new regulations relating to various aspects of the insurance industry, including taxation of annuities and life insurance policies, accounting procedures, the use of travel in underwriting, and the treatment of persons differently because of gender with respect to terms, conditions, rates or benefits of an insurance policy.  Adoption of any new federal regulation in any of these or other areas could materially affect RiverSource Life’s financial condition and results of operations.

 

The instability and decline in global financial markets experienced during 2008 and 2009 and through the present time have resulted in an unprecedented amount of government intervention in financial markets, including direct investment in financial institutions.  Governments and regulators in the U.S. and abroad are considering or have implemented new and more expansive laws and regulations which may directly impact RiverSource Life’s businesses.  Additional discussion of potential risks arising from enactment of new regulations can be found in Item 1A of this Annual Report on Form 10-K — “Risk Factors.”

 

Financial Strength Ratings

 

RiverSource Life Insurance Company receives ratings from independent rating agencies.  Ratings are important to maintain public confidence in RiverSource Life.  Lowering of RiverSource Life’s ratings could have a material adverse affect on its ability to market its products and could lead to increased surrenders of its products.  Rating agencies evaluate the financial

 

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soundness and claims-paying ability of insurance companies continually, and base their ratings on a number of different factors, including market position in core products and market segments, risk-adjusted capitalization and the quality of investment portfolios.

 

More specifically, the ratings assigned are developed from an evaluation of a company’s balance sheet strength, operating performance and business profile.  Balance sheet strength reflects a company’s ability to meet its current and ongoing obligations to its contractholders and policyholders and includes analysis of a company’s capital adequacy.  The evaluation of operating performance centers on the stability and sustainability of a company’s source of earnings.  The business profile component of the rating considers a company’s mix of business, market position and depth and experience of management.

 

RiverSource Life Insurance Company’s claims-paying ability is currently rated “A+” (Superior) by A.M. Best Company, Inc. and its claims-paying ability/financial strength was rated “Aa3” (Excellent) by Moody’s Investors Service, “AA-” (Very Strong) by Fitch Ratings Ltd., and “AA-” (Very Strong) by Standard & Poor’s Ratings Services.

 

Generally, RiverSource Life of NY does not receive an individual rating, but receives the same rating as RiverSource Life Insurance Company.

 

Reinsurance

 

RiverSource Life reinsures a portion of the insurance risks associated with its life, DI and LTC insurance products through reinsurance agreements with unaffiliated reinsurance companies.  RiverSource Life uses reinsurance in order to limit losses, reduce exposure to large risks and provide additional capacity for future growth.  To manage exposure to losses from reinsurer insolvencies, RiverSource Life evaluates the financial condition of its reinsurers prior to entering into new reinsurance treaties and on a periodic basis during the terms of the treaties.  RiverSource Life remains primarily liable as the direct insurer on all risks reinsured.

 

Generally, RiverSource Life reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products.  As a result, RiverSource Life typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations.  RiverSource Life began reinsuring risks at this level during 2001 (2002 for RiverSource Life of NY) for term life insurance and 2002 (2003 for RiverSource Life of NY) for individual fixed and variable universal life insurance.  Policies issued prior to these dates are not subject to these same reinsurance levels.  Generally, the maximum amount of life insurance risk retained by RiverSource Life is $1.5 million (increased from $750,000 during 2008) on a single life and $1.5 million on any flexible premium survivorship life policy.  As a result of the increase in single life retention during 2008, RiverSource Life is in the process of recapturing some older blocks of business representing less than 1% of current reinsured life insurance risk.  Risk on fixed and variable universal life policies is reinsured on a yearly renewable term basis.  Risk on most term life policies starting in 2001 (2002 for RiverSource Life of NY) is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.

 

For existing LTC policies, RiverSource Life (and RiverSource Life of NY for 1996 and later issues) retained 50% of the risk and ceded on a coinsurance basis the remaining 50% of the risk to Genworth. As of December 31, 2009, RiverSource Life’s credit exposure to Genworth under this reinsurance arrangement was approximately $1.3 billion under U.S. generally accepted accounting principles (“GAAP”) and $1.8 billion under statutory accounting principles. Genworth also serves as claims administrator for RiverSource Life’s LTC policies.

 

Generally, RiverSource Life retains at most $5,000 per month of risk per life on DI policies sold on policy forms introduced in most states in October 2007 and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies.  RiverSource Life retains all risk for new claims on DI contracts sold on other policy forms.  RiverSource Life also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.

 

In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies.  As of December 31, 2009, the amount related to assumed reinsurance arrangements was $667 million under GAAP and $678 million under statutory accounting principles.

 

See Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on reinsurance.

 

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Risk-Based Capital

 

The National Association of Insurance Commissioners (“NAIC”) defines risk-based capital (“RBC”) requirements for life insurance companies.  The RBC requirements are used by the NAIC and state insurance regulators to identify companies that merit regulatory action designed to protect policyholders.  The NAIC RBC report is completed as of December 31 and filed annually, along with the statutory financial statements.

 

RiverSource Life Insurance Company would be subject to various levels of regulatory intervention if its total adjusted statutory capital fell below the RBC requirement.  At the “company action level,” defined as total adjusted capital level between 100% and 75% of the RBC requirement, an insurer must submit a plan for corrective action with its primary state regulator.  The “regulatory action level,” which is between 75% and 50% of the RBC requirement, subjects an insurer to examination, analysis and specific corrective action prescribed by the primary state regulator.  If a company’s total adjusted capital falls between 50% and 35% of its RBC requirement, referred to as “authorized control level,” the insurer’s primary state regulator may place the insurer under regulatory control.  Insurers with total adjusted capital below 35% of the requirement will be placed under regulatory control.

 

At December 31, 2009, RiverSource Life Insurance Company’s company action level RBC was $803 million, and the corresponding total adjusted capital was $3.5 billion, which represents 430% of company action level RBC.

 

At December 31, 2009, RiverSource Life of NY’s company action level RBC was $44 million, and the corresponding total adjusted capital was $286 million, which represents 653% of company action level RBC.

 

As described above, RiverSource Life Insurance Company and RiverSource Life of NY maintain capital well in excess of the company action level RBC requirement.

 

ITEM 1A.

RISK FACTORS

 

RiverSource Life’s operations and financial results are subject to various risks and uncertainties, including those described below, that could have a material adverse effect on RiverSource Life’s business, financial condition or results of operations.  Based on the information currently known, RiverSource Life believes that the following information identifies the most material factors affecting RiverSource Life. However, the risks and uncertainties RiverSource Life faces are not limited to those described below. Additional risks and uncertainties not presently known to RiverSource Life or which are currently believed to be immaterial may also adversely affect RiverSource Life’s business.

 

Risks Relating to RiverSource Life’s Business

 

RiverSource Life’s financial condition and results of operations may be adversely affected by market fluctuations, interest rate fluctuations and by economic and other factors.

 

RiverSource Life’s financial condition and results of operations may be materially affected by market fluctuations, interest rate fluctuations and economic and other factors.  Many factors of a global or localized nature include: political, economic and market conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates, currency values and other market indices; technological changes and events; the availability and cost of credit; inflation; investor sentiment and confidence in the financial markets; terrorism events and armed conflicts; and natural disasters such as weather catastrophes and widespread health emergencies.  In addition, during periods of unfavorable market or economic conditions, the level of consumer investing and insuring activity may also decrease, which may negatively impact the results of RiverSource Life’s businesses.  Moreover, fluctuations in economic and market activity could impact the way then-existing customers allocate their available resources, which could affect RiverSource Life’s persistency, surrender and product cash value loan experience and could negatively impact its business. RiverSource Life’s insurance and annuity products are sensitive to interest rate fluctuations, and its future costs associated with such variations may differ from its historical costs.  In addition, interest rate fluctuations could result in fluctuations in the valuation of certain minimum guaranteed benefits contained in some of its variable annuity products.  Although RiverSource Life typically hedges against such fluctuations, a significant change in interest rates could have a material adverse impact on RiverSource Life’s results of operations.

 

Although U.S. and global capital markets demonstrated signs of improvement and stabilization in the second half of 2009, current market conditions remain precarious and any further declines or volatility in U.S. and global market conditions could impact RiverSource Life’s business.  RiverSource Life’s business has been and in the future may be adversely affected by U.S. and global capital market and credit crises, the repricing of credit risk, equity market volatility and decline,

 

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and stress or recession in the United States and global economies generally. In addition, since the second half of 2007, difficulties in the mortgage and broader capital markets in the U.S. and elsewhere, coupled with the repricing of credit risk, have created extremely difficult and uncertain market conditions.

 

During periods of increasing market interest rates, RiverSource Life must offer higher crediting rates on interest-sensitive products, such as fixed universal life insurance and fixed annuities to keep these products competitive. Because returns on invested assets may not increase as quickly as current interest rates and RiverSource Life must increase crediting rates on in force products, RiverSource Life may have to accept a lower “spread,” or the difference between the returns it earns on the investments that support its obligations under these products and the amounts that it must pay policyholders and contractholders, and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets.  In addition, increases in market interest rates may cause increased policy surrenders, withdrawals from life insurance policies and annuity contracts and requests for policy loans, as policyholders and contractholders seek to shift assets to products with perceived higher returns. This process may lead to an earlier than expected outflow of cash from the business.  Also, increases in market interest rates may result in extension of the maturity of some of RiverSource Life’s investment assets.  These earlier outflows and asset maturity extensions may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses.  Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on RiverSource Life’s financial condition and results of operations.  An increase in policy surrenders and withdrawals also may require RiverSource Life to accelerate amortization of deferred acquisition costs (“DAC”), which would increase its expenses and reduce its net income.

 

During periods of falling interest rates, RiverSource Life’s spread may be reduced or could become negative, primarily because some of these products have guaranteed minimum crediting rates.  Due to the long-term nature of the liabilities associated with RiverSource Life’s fixed annuities and guaranteed benefits on variable annuities, sustained declines in long-term interest rates may subject RiverSource Life to reinvestment risks and increased hedging costs.

 

Interest rate fluctuations also could have an adverse effect on the results of RiverSource Life’s investment portfolio. During periods of declining market interest rates, the interest RiverSource Life receives on variable interest rate investments decreases. In addition, during those periods, RiverSource Life is forced to reinvest the cash it receives as interest or return of principal on its investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of certain callable fixed income securities also may decide to prepay their obligations in order to borrow at lower market rates, which increases the risk that RiverSource Life may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments.

 

Significant downturns and volatility in equity markets have had and could continue to have an adverse effect on RiverSource Life’s financial condition and results of operations. Market downturns and volatility may cause, and have caused, potential new purchasers to refrain from purchasing RiverSource Life’s variable annuities and variable universal life insurance products that have returns linked to the performance of the equity markets. Downturns may also cause contractholders in annuity products and policyholders in insurance products to withdraw cash values from those products.

 

Additionally, downturns and volatility in equity markets can have, and have had, an adverse effect on RiverSource Life’s asset-based revenues because the value of equity-based separate account assets will be reduced.

 

The GMAB and the non-life contingent benefits associated with GMWB provisions offered with certain RiverSource Life variable annuities create obligations which are carried at fair value separately from the underlying host variable annuity contract.  Changes in the fair value of these GMAB and GMWB obligations are recorded through earnings with fair value calculated by estimating the present value of future benefits less applicable fees using actuarial models, which simulate various economic scenarios.  Changes in interest rates, equity prices and/or equity market volatility may impact the fair value of the GMAB and GMWB liabilities.  Although RiverSource Life typically hedges against such changes, a significant change in either equity price levels or equity market volatility may result in a net adverse impact to current period financial statements.  Further, RiverSource Life’s cost of hedging these guarantees has increased significantly in recent periods as a result of low interest rates and continuing volatility in the equity markets.  In addition, continued heightened volatility creates greater uncertainty for the accuracy of RiverSource Life’s future hedging effectiveness.

 

A significant market decline in equity price levels could also result in guaranteed minimum benefits under GMDB and GMIB provisions being higher than current account values, which could have an adverse effect on RiverSource Life’s financial condition and results of operations.  RiverSource Life does not currently hedge or reinsure GMIB or a significant portion of GMDB provisions.

 

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Adverse capital and credit market conditions may significantly affect RiverSource Life’s ability to meet liquidity needs, access to capital and cost of capital.

 

The capital and credit markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.  RiverSource Life needs liquidity to pay contractholder and policyholder claims and benefits as well as operating expenses.  Without sufficient liquidity, RiverSource Life could be required to curtail its operations, and its business would suffer.

 

RiverSource Life maintains a level of cash and securities which, combined with expected cash inflows from investments and operations, is believed adequate to meet anticipated short-term and long-term benefit and claims payment obligations. In the event current resources are insufficient to satisfy RiverSource Life’s needs, it may need to rely on financing sources from its parent holding company, its other affiliates or third parties. The availability of additional financing will depend on a variety of factors such as market conditions, the availability of liquidity from RiverSource Life’s parent or other affiliates, the general availability of credit, the overall availability of credit to the financial services industry, RiverSource Life’s credit ratings and credit capacity, as well as the possibility that customers or potential third party lenders could develop a negative perception of RiverSource Life’s long- or short-term financial prospects if it incurs large investment losses or if the level of its business activity decreases due to a market downturn. Similarly, RiverSource Life’s access to funds may be impaired if regulatory authorities or rating agencies take negative actions against it.  Also, transfers of cash or other assets from RiverSource Life’s parent or other affiliates must comply with applicable regulations and may be subject to the prior approval of state insurance regulators.

 

Disruptions, uncertainty or volatility in the capital and credit markets may also limit RiverSource Life’s or its parent’s access to capital required to operate its business.  Such market conditions may limit RiverSource Life’s ability to satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow its business. As such, RiverSource Life may be forced to use different types of capital than it would otherwise use, less effectively deploy such capital, or bear an unattractive cost of capital which could decrease RiverSource Life’s profitability and significantly reduce its financial flexibility.

 

The impairment of other financial institutions could adversely affect RiverSource Life.

 

RiverSource Life has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds, insurers, reinsurers and other investment funds and other institutions. The operations of U.S. and global financial services institutions are highly interconnected and a decline in the financial condition of one or more financial services institutions may expose RiverSource Life to credit losses or defaults, limit access to liquidity or otherwise disrupt the operations of RiverSource Life’s business.

 

Many transactions with and investments in the products and securities of other financial institutions expose RiverSource Life to credit risk in the event of default of its counterparty. In addition, with respect to secured transactions, RiverSource Life’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to it. RiverSource Life also has exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions, (including with respect to derivatives hedging its exposure on variable annuity contracts with guaranteed benefits), reinsurance and underwriting arrangements and equity investments.  There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely impact RiverSource Life’s business and results of operations. Downgrades in the credit or financial strength ratings assigned to the counterparties with whom RiverSource Life transacts could create the perception that its financial condition will be adversely impacted as a result of potential future defaults by such counterparties.  Additionally, RiverSource Life could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions.

 

The failure of other insurers could require RiverSource Life to pay higher assessments to state insurance guaranty funds.

 

RiverSource Life Insurance Company and RiverSource Life of NY are required by law to be a member of the guaranty fund association in every state where they are licensed to do business.  In the event of insolvency of one or more unaffiliated insurance companies, RiverSource Life could be adversely affected by the requirement to pay assessments to the guaranty fund associations.

 

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Third-party defaults, bankruptcy filings, legal actions and other events may limit the value of or restrict RiverSource Life’s access to cash and investments.

 

Capital and credit market volatility can exacerbate, and has exacerbated the risk of third-party defaults, bankruptcy filings, foreclosures, legal actions and other events that may limit the value of or restrict RiverSource Life’s access to cash and investments.

 

Governmental initiatives intended to address capital market and general economic conditions may not be effective and may give rise to additional requirements for RiverSource Life’s business, including enhanced oversight, new capital requirements, additional fees and taxes or other regulations, that could materially impact its financial condition, results of operations and liquidity in ways that it cannot predict.

 

Recent economic conditions have caused the U.S. federal government, Federal Reserve and other U.S. governmental and regulatory bodies to take or to consider taking legislative and regulatory actions designed to address the financial crisis and to mitigate against the risk of similar crises going forward.  In 2009, the U.S. Senate and House of Representatives passed various forms of legislation setting forth a comprehensive plan for regulatory reform in the financial industry. While such legislation has not been finalized, these plans contemplate significant structural reforms, including heightened governmental powers to regulate risk across the financial system and the creation of a new consumer financial protection agency. The legislation also calls for increased substantive regulation of the financial industry, including heightened regulation of large financial institutions whose combination of size, leverage, and interconnectedness could, upon the failure of such an institution, pose a threat to financial stability, expanded regulation over credit ratings agencies and derivatives and securitization markets, effective increases in regulatory capital requirements, and various corporate governance initiatives. In addition, specific taxes targeted at larger financial institutions have been proposed that could increase RiverSource Life’s costs and reduce its earnings. There can be no assurance as to whether or when any of the parts of the proposed financial reform plans will be enacted into legislation, and if adopted, what the final provisions of such legislation will be.

 

This legislation or similar proposals may fail to stabilize the financial markets or the economy generally. Any new legislation or regulatory changes could require RiverSource Life to change certain of its business practices, impose additional costs on RiverSource Life, or otherwise adversely affect RiverSource Life’s business operations, regulatory reporting relationships, financial condition or results of operations.  Consequences may include substantially higher compliance costs as well as material effects on interest rates, which could materially impact RiverSource Life’s investments, results of operations and liquidity in ways that it cannot predict.  In addition, prolonged government support for, and intervention in the management of, private institutions could distort customary and expected commercial behavior on the part of those institutions, adversely impacting RiverSource Life.

 

In addition, RiverSource Life is subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory organizations, including state securities and insurance regulators, the SEC, FINRA, the U.S. Department of Justice and state attorneys general.  Financial conditions may prompt, and have prompted, some of these authorities to consider additional regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their authority in new or more expansive ways and the U.S. government may create additional regulators or materially change the authorities of existing regulators. All of these possibilities, if they occurred, could impact the way RiverSource Life conducts its business and manages its capital, and may require RiverSource Life to satisfy increased capital requirements, which in turn could materially impact its financial condition, results of operations and liquidity.

 

Defaults in RiverSource Life’s fixed maturity securities portfolio could adversely affect its earnings.

 

Issuers of the fixed maturity securities that RiverSource Life owns may default on principal and interest payments. As of December 31, 2009, 5% of RiverSource Life’s invested assets had ratings below investment-grade.  Moreover, economic downturns and corporate malfeasance can increase the number of companies, including those with investment-grade ratings, that default on their debt obligations.  Default-related declines in the value of RiverSource Life’s fixed maturity securities portfolio could cause its net earnings to decline and could weaken its capital position.

 

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If the counterparties to RiverSource Life’s reinsurance arrangements or to the derivative instruments it uses to hedge its business risks default, RiverSource Life may be exposed to risks it had sought to mitigate, which could adversely affect its financial condition and results of operations.

 

RiverSource Life uses reinsurance to mitigate its risks in various circumstances as described in Item 1 of this Annual Report on Form 10-K — “Business — Reinsurance.”  Reinsurance does not relieve RiverSource Life of its direct liability to its policyholders, even when the reinsurer is liable to RiverSource Life. Accordingly, RiverSource Life bears credit and performance risk with respect to its reinsurers. A reinsurer’s insolvency or its inability or unwillingness to make payments under the terms of its reinsurance agreement could have a material adverse effect on RiverSource Life’s financial condition and results of operations.  See Note 2 and Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

In addition, RiverSource Life uses a variety of derivative instruments (including options, forwards and interest rate swaps) with a number of counterparties to hedge business risks.  The amount and breadth of exposure to derivative counterparties, as well as the cost of derivative instruments, have increased significantly in connection with RiverSource Life’s strategies to hedge guaranteed benefit obligations under its variable annuity products.  If RiverSource Life’s counterparties fail to honor their obligations under the derivative instruments in a timely manner, RiverSource Life’s hedges of the related risk will be ineffective. That failure could have a material adverse effect on RiverSource Life’s financial condition and results of operations.  This risk of failure of RiverSource Life’s hedge transactions may be increased by capital market volatility.

 

The determination of the amount of allowances and impairments taken on certain investments is subject to managements evaluation and judgment and could materially impact RiverSource Life’s financial position or results of operations.

 

The determination of the amount of allowances and impairments vary by investment type and is based upon RiverSource Life’s periodic evaluation and assessment of inherent and known risks associated with the respective asset class.  Such evaluations and assessments are revised as conditions change and new information becomes available.  Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised.  Historical trends may not be indicative of future impairments or allowances.

 

The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value that considers a wide range of factors about the security issuer and management uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential, which assumptions and estimates are more difficult to make with certainty under current market conditions.

 

RiverSource Life’s valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely impact its financial condition or results of operations.

 

Fixed maturity, equity, trading securities and short-term investments which are reported at fair value on the Consolidated Balance Sheets, represent the majority of RiverSource Life’s total cash and invested assets. The determination of fair values by management in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities RiverSource Life deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.

 

During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of RiverSource Life’s securities. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain securities may require additional subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation thereby resulting in values which may be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could

 

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materially impact the valuation of securities as reported within RiverSource Life’s consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on RiverSource Life’s financial condition or results of operations.

 

Some of RiverSource Life’s investments are relatively illiquid.

 

RiverSource Life invests a portion of its general account assets in certain privately placed fixed income securities, mortgage loans, policy loans, limited partnership interests, and collateralized debt obligations, among others, all of which are relatively illiquid. These asset classes represented 15% of the carrying value of RiverSource Life’s investment portfolio as of December 31, 2009.  If RiverSource Life requires significant amounts of cash on short notice in excess of its normal cash requirements, it may have difficulty selling these investments in a timely manner, or be forced to sell them for an amount less than it would otherwise have been able to realize, or both, which could have an adverse effect on RiverSource Life’s financial condition and results of operations.

 

Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively impact RiverSource Life’s ability to maintain or increase its market share and profitability.

 

RiverSource Life operates in an intensely competitive industry. RiverSource Life competes based on a number of factors including name recognition, service, investment performance, product features, price, perceived financial strength, and claims-paying ratings. RiverSource Life’s competitors include insurers, asset managers and other financial institutions. RiverSource Life may face competitors that have greater market share, offer a broader range of products, have greater financial resources or have higher claims-paying ratings than RiverSource Life does.  Some of RiverSource Life’s competitors may possess or acquire intellectual property rights that could provide a competitive advantage to them in certain markets or for certain products, which could make it more difficult for RiverSource Life to introduce new products and services.  Some of RiverSource Life’s competitors’ proprietary products or technology could be similar to its own, and this could result in disputes that could impact RiverSource Life’s financial condition or results of operations.  In addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms.  This convergence could result in RiverSource Life’s competitors gaining greater resources and RiverSource Life may experience pressures on its pricing and market share as a result of these factors.

 

Historically, Ameriprise Financial’s branded advisor network (both franchisee advisors and those employed by RiverSource Life’s affiliated broker-dealer selling firm) distributed annuity and insurance products issued almost exclusively (in the case of annuities) or predominantly (in the case of insurance products) by RiverSource Life. The primary exception to this general practice is that the branded advisors who joined Ameriprise Financial in connection with an acquisition continued to offer annuities from competitors as they did prior to the acquisition.  Ameriprise Financial expects they will continue to do so until it harmonizes the competitive products offered by all of its branded advisors, as described below, at which point some of these advisors will offer a more limited number of competitors’ products.  In 2010, Ameriprise Financial plans to begin expanding the offerings available to its branded advisors to include variable annuities issued by a limited number of unaffiliated insurance companies.  As a result of this and further openings of Ameriprise Financial’s branded advisor network to annuity and insurance products of other companies, RiverSource Life could experience lower sales of its products, higher surrenders or other developments, which could adversely affect its financial condition and results of operations.

 

Poor investment performance in RiverSource Life’s variable products could adversely affect its financial condition and results of operations.

 

RiverSource Life believes that investment performance is an important factor in the growth of its variable annuity and variable life insurance business. Poor investment performance could impair revenues and earnings, as well as RiverSource Life’s prospects for growth, because:

 

·                    RiverSource Life’s ability to attract funds from existing and new clients might diminish; and

 

·                    existing clients might withdraw assets from RiverSource Life’s variable products in favor of better performing products of other companies, which would result in lower revenues.

 

RiverSource Life’s affiliated distributor may be unable to attract and retain financial advisors.

 

RiverSource Life is dependent on the branded financial advisors of its affiliated broker-dealer selling firm for a significant portion of the sales of its annuity and insurance products. A significant number of its branded financial advisors operate as

 

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independent contractors under a franchise agreement with its affiliated selling firm. There can be no assurance that RiverSource Life’s affiliated selling firm will be successful in its efforts to recruit and retain new advisors to its network. If RiverSource Life’s affiliated selling firm is unable to attract and retain quality financial advisors, fewer advisors would be available to sell RiverSource Life’s annuity and insurance products and RiverSource Life’s financial condition and results of operations could be materially adversely affected.

 

RiverSource Life and its affiliates face intense competition in attracting and retaining key talent.

 

RiverSource Life is dependent on Ameriprise Financial’s network of branded advisors for a significant portion of the sales of its annuity products and substantially all of the sales of its insurance products.  In addition, RiverSource Life’s continued success depends to a substantial degree on its, and its affiliates’, ability to attract and retain qualified personnel. The market for qualified talent is extremely competitive. If RiverSource Life is unable to attract and retain qualified individuals or its recruiting and retention costs increase significantly, its financial condition and results of operations could be materially adversely impacted.

 

RiverSource Life’s business is heavily regulated, and changes in legislation or regulation may reduce its profitability and limit its growth.

 

RiverSource Life operates in a highly regulated industry, and is required to obtain and maintain licenses for its business in addition to being subject to regulatory oversight. Insurance regulators have significantly increased the level of regulation in recent years and have several outstanding proposals for additional regulation. Market conditions and recent events could result in increases or changes in current regulations and regulatory structures including higher licensing fees and assessments.  Significant discussion and activity by regulators concerns the sale and suitability of financial products and services to persons planning for retirement, as well as to older investors.  In addition, RiverSource Life is subject to heightened requirements and associated costs and risks relating to privacy and the protection of customer data.  These requirements, costs and risks, as well as possible legislative or regulatory changes, may constrain RiverSource Life’s ability to market its products and services to its target demographic and potential customers, and could negatively impact RiverSource Life’s profitability and make it more difficult for RiverSource Life to pursue its growth strategy.

 

RiverSource Life is subject to state regulation and must comply with statutory reserve and capital requirements.  State regulators are continually reviewing and updating these requirements and other requirements relating to the business operations of insurance companies, including their underwriting and sales practices.  The NAIC has adopted a change to require principles-based reserves for variable annuities at the end of 2009, and continues to discuss moving to a principles-based reserving system for other insurance and annuity products.  The requirement for principles-based variable annuity reserves, along with a similar risk-based capital requirement adopted previously, may result in statutory reserves and risk-based capital for variable annuities being more sensitive to changes in equity prices and other market factors. It is not possible at this time to estimate the potential impact of future changes in statutory reserve and capital requirements.  Further, RiverSource Life cannot predict the effect that proposed federal legislation, such as the option of federally chartered insurers or a mandated federal systemic risk regulator, may have on RiverSource Life or its competitors.

 

Compliance with applicable laws and regulations is time consuming and personnel-intensive.  Moreover, the evaluation of RiverSource Life’s compliance with these laws and regulations by state insurance regulators, the SEC, and other regulatory organizations is an ongoing feature of RiverSource Life’s business, the outcomes of which may not be foreseeable. Changes in these laws and regulations may materially increase RiverSource Life’s direct and indirect compliance and other expenses of doing business.  Ameriprise Financial’s financial advisors may decide that the direct cost of compliance and the indirect cost of time spent on compliance matters outweigh the benefits of a career as a financial advisor, which could lead to financial advisor attrition. The costs of the compliance requirements RiverSource Life faces, and the constraints they impose on its operations, could have a material adverse effect on RiverSource Life’s financial condition and results of operations.

 

RiverSource Life’s profit margins and earnings are dependent in part on its ability to maintain current fee levels for the products and services that it offers.  Competition within the financial services industry could lead RiverSource Life to reduce the fees that it charges its clients for products and services.  See the risk factor entitled “Intense competition and the economics of changes in RiverSource Life’s product revenue mix and distribution channels could negatively impact RiverSource Life’s ability to maintain or increase its market share and profitability.”  In addition, RiverSource Life may be required to reduce its fee levels, or restructure the fees it charges, as a result of regulatory initiatives or proceedings that are either industry-wide or specifically targeted at RiverSource Life.  Reductions or other changes in the fees that RiverSource Life charges for its products and services could reduce its revenues and earnings.

 

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A failure to properly manage conflicts of interest could adversely affect RiverSource Life’s business.

 

RiverSource Life has to address potential conflicts of interest, including those relating to the activities of its affiliated entities. For example, conflicts may arise between RiverSource Life’s position as a manufacturer of insurance and annuity products and the position of RiverSource Life’s affiliated broker-dealer, the distributor of these products. RiverSource Life and its affiliated entities have procedures and controls in place that are designed to address conflicts of interest. Appropriately dealing with conflicts of interest, however, is complex and difficult and RiverSource Life’s reputation could be damaged if it fails, or appears to fail, to deal appropriately with conflicts of interest. In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. It is possible that potential or perceived conflicts could give rise to litigation or enforcement actions. Also, it is possible that the regulatory scrutiny of, and litigation in connection with, conflicts of interest could make RiverSource Life’s clients less willing to enter into transactions in which such a conflict may occur, and could adversely affect RiverSource Life’s business.

 

Misconduct by RiverSource Life’s employees and agents and its affiliates’ employees and agents is difficult to detect and deter and could harm RiverSource Life’s business, results of operations or financial condition.

 

Misconduct by RiverSource Life’s employees and agents and its affiliates’ employees and agents could result in violations of law, regulatory sanctions and/or serious reputational or financial harm. Misconduct can occur in each of RiverSource Life’s businesses and could include:

 

·                    attempting to bind RiverSource Life to transactions that exceed authorized limits;

·                    hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses;

·                    improperly using, disclosing, or otherwise compromising confidential information;

·                    recommending transactions that are not suitable;

·                    engaging in fraudulent or otherwise improper activity;

·                    engaging in unauthorized or excessive trading to the detriment of customers; or

·                    otherwise not complying with laws, regulations or RiverSource Life’s control procedures.

 

RiverSource Life cannot always deter misconduct by employees and agents and its affiliate’s employees and agents and the precautions RiverSource Life takes to prevent and detect this activity may not be effective in all cases.  RiverSource Life also cannot assure that misconduct by employees and agents and its affiliate’s employees and agents will not lead to a material adverse effect on its business, financial condition or results of operations.

 

Legal and regulatory actions are inherent in RiverSource Life’s business and could result in financial losses or harm its business.

 

RiverSource Life is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its operations.  Various regulatory and governmental bodies have the authority to review RiverSource Life’s products and business practices and those of its employees and agents and its affiliates’ employees and agents and to bring regulatory or other legal actions against RiverSource Life if, in their view, RiverSource Life’s practices, or those of its employees and agents and its affiliates’ employees and agents, are improper.  Pending legal and regulatory actions include proceedings relating to aspects of RiverSource Life’s business and operations that are specific to it and proceedings that are typical of the industries which it operates.  In or as a result of turbulent times such as those RiverSource Life has experienced, the volume of claims and amount of damages sought in litigation and regulatory proceedings generally increase. Substantial legal liability in legal or regulatory actions could have a material financial effect or cause significant reputational harm, which in turn could seriously harm its business prospects.

 

A downgrade or a potential downgrade in RiverSource Life’s financial strength ratings could result in a loss of business and adversely affect its financial condition and results of operations.

 

Financial strength ratings, which various ratings organizations publish as a measure of an insurance company’s ability to meet contractholder and policyholder obligations, are important to maintain public confidence in RiverSource Life’s products, the ability to market its products and its competitive position. A downgrade in RiverSource Life’s financial strength ratings, or the announced potential for a downgrade, could have a significant adverse effect on its financial

 

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condition and results of operations in many ways, including:

 

·                  reducing new sales of insurance and annuity products;

·                  adversely affecting RiverSource Life’s relationships with distributors of its products;

·                materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders;

·                  requiring RiverSource Life to reduce prices for many of its products to remain competitive; and

·                adversely affecting RiverSource Life’s ability to obtain reinsurance or obtain reasonable pricing on reinsurance.

 

In view of the difficulties experienced recently by RiverSource Life’s competitors, the ratings organizations have heightened the level of scrutiny that they apply and have requested additional information from companies that they rate, and may increase the frequency and scope of their reviews or adjust upward the capital and other requirements employed in the ratings organizations’ models for maintenance of ratings levels.  Ratings organizations may also become subject to tighter laws and regulations governing the rating, which may in turn impact the ratings assigned to insurance companies.

 

RiverSource Life cannot predict what actions rating organizations may take, or what actions RiverSource Life may take in response to the actions of rating organizations, which could adversely affect its business. As with other companies in the insurance industry, RiverSource Life’s ratings could be changed at any time and without any notice by the ratings organizations.

 

If RiverSource Life’s reserves for future policy benefits and claims are inadequate, it may be required to increase its reserve liabilities, which could adversely affect its financial condition and results of operations.

 

RiverSource Life establishes reserves as estimates of its liabilities to provide for future obligations under its insurance policies and annuities contracts.  Reserves do not represent an exact calculation of liability, but rather are estimates of contract benefits and related expenses RiverSource Life expects to incur over time. The assumptions and estimates RiverSource Life makes in establishing reserves require certain judgments about future experience and, therefore, are inherently uncertain.  RiverSource Life cannot determine with precision the actual amounts that it will pay for contract benefits, the timing of payments, or whether the assets supporting its stated reserves will increase to the levels it estimates before payment of benefits or claims.  RiverSource Life monitors its reserve levels continually.  If RiverSource Life were to conclude that its reserves are insufficient to cover actual or expected contract benefits, it would be required to increase its reserves and incur income statement charges for the period in which it makes the determination, which could adversely affect its financial condition and results of operations. For more information on how RiverSource Life sets its reserves, see Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

Morbidity rates or mortality rates that differ significantly from RiverSource Life’s pricing expectations would negatively affect profitability.

 

RiverSource Life sets prices for its life, DI and LTC insurance and some annuity products based upon expected claim payment patterns, derived from assumptions RiverSource Life makes about its policyholders and contractholders, the morbidity rates, or likelihood of sickness, and the mortality rates, or likelihood of death. The long-term profitability of these products depends upon how RiverSource Life’s actual experience compares with its pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than its pricing assumptions, RiverSource Life could be required to make greater payments under DI insurance policies, chronic care riders and immediate annuity contracts than it had projected.  The same holds true for LTC policies RiverSource Life previously underwrote to the extent of the risks that RiverSource Life has retained.  If mortality rates are higher than its pricing assumptions, RiverSource Life could be required to make greater payments under its life insurance policies and annuity contracts with GMDBs than it has projected.

 

The risk that RiverSource Life’s claims experience may differ significantly from its pricing assumptions is particularly significant for its LTC insurance products, notwithstanding RiverSource Life’s ability to implement future price increases subject to regulatory approvals.  As with life insurance, LTC insurance policies provide for long-duration coverage and, therefore, its actual claims experience will emerge over many years. However, as a relatively new product in the market, LTC insurance does not have the extensive claims experience history of life insurance, and, as a result, RiverSource Life’s ability to forecast future claim rates for LTC insurance is more limited than for life insurance.  RiverSource Life has sought to moderate these uncertainties to some extent by partially reinsuring LTC policies that it had previously underwritten and by limiting its present LTC insurance offerings to policies underwritten fully by unaffiliated third party insurers, and RiverSource Life has also implemented rate increases on certain in force policies as described in Item 1 of this Annual

 

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Report on Form 10-K — “Business — Insurance: Product Features and Risks — Long Term Care Insurance.”  RiverSource Life may be required to implement additional rate increases in the future and may or may not receive regulatory approval for the full extent and timing of any rate increases that RiverSource Life may seek.

 

RiverSource Life may face losses if there are significant deviations from its assumptions regarding the future persistency of its insurance policies and annuity contracts.

 

The prices and expected future profitability of RiverSource Life’s insurance and deferred annuity products are based in part upon assumptions related to persistency, which is the probability that a policy or contract will remain in force from one period to the next. Given the ongoing economic and market dislocations, future consumer persistency behaviors could vary materially from the past.  The effect of persistency on profitability varies for different products. For most of its life insurance and deferred annuity products, actual persistency that is lower than its persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily because RiverSource Life would be required to accelerate the amortization of expenses it deferred in connection with the acquisition of the policy or contract.

 

For RiverSource Life’s LTC insurance and certain universal life insurance policies, actual persistency that is higher than its persistency assumptions could have a negative impact on profitability. If these policies remain in force longer than RiverSource Life assumed, then RiverSource Life could be required to make greater benefit payments than it had anticipated when it priced or partially reinsured these products.  Some of its LTC insurance policies have experienced higher persistency and poorer loss experience than RiverSource Life had assumed, which led it to increase premium rates on certain of these policies.

 

Because RiverSource Life’s assumptions regarding persistency experience are inherently uncertain, reserves for future policy benefits and policy claims and other policyholders’ funds may prove to be inadequate if actual persistency experience is different from those assumptions. Although some of its products permit RiverSource Life to increase premiums during the life of the policy or contract, RiverSource Life cannot guarantee that these increases would be sufficient to maintain profitability. Additionally, some of these pricing changes require regulatory approval, which may not be forthcoming. Moreover, many of RiverSource Life’s products do not permit RiverSource Life to increase premiums or limit those increases during the life of the policy or contract while premiums on certain other products (primarily LTC insurance) may not be increased without prior regulatory approval. Significant deviations in experience from pricing expectations regarding persistency could have an adverse effect on the profitability of RiverSource Life’s products.

 

RiverSource Life may be required to accelerate the amortization of DAC, which would increase its expenses and reduce profitability.

 

DAC represents the cost of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity, life, DI and LTC insurance. For annuity and universal life products, DAC is amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business.  For other insurance products, DAC is generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.

 

RiverSource Life’s projections underlying the amortization of DAC requires the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. RiverSource Life periodically reviews and, where appropriate, adjusts its assumptions. When RiverSource Life changes its assumptions, it may be required to accelerate the amortization of DAC or to record a charge to increase benefit reserves.

 

For more information regarding DAC, see Item 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis — Critical Accounting Policies — Deferred Acquisition Costs and Deferred Sales Inducement Costs” and “— Recent Accounting Pronouncements.”

 

RiverSource Life may not be able to protect its intellectual property and may be subject to infringement claims.

 

RiverSource Life relies on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect its intellectual property.  Although RiverSource Life uses a broad range of measures to protect its intellectual property rights, third parties may infringe or misappropriate its intellectual property. RiverSource Life may have to litigate to enforce and protect its copyrights, trademarks, patents, trade secrets and know-how or to determine their scope,

 

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validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of RiverSource Life’s intellectual property assets could have a material adverse effect on its business and its ability to compete.

 

RiverSource Life also may be subject to costly litigation in the event that another party alleges its operations or activities infringe upon such other party’s intellectual property rights. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by RiverSource Life’s products, methods, processes or services or could otherwise limit its ability to offer certain product features. Any party that holds such a patent could make a claim of infringement against RiverSource Life. RiverSource Life may also be subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any resulting litigation could result in significant liability for damages. If RiverSource Life were found to have infringed a third-party patent or other intellectual property rights, it could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to its customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on RiverSource Life’s business, financial condition and results of operations.

 

Breaches of security, or the perception that RiverSource Life’s technology infrastructure is not secure, could harm its business.

 

RiverSource Life’s business requires the appropriate and secure utilization of client and other sensitive information.  RiverSource Life’s operations require the secure transmission of confidential information over public networks. Security breaches in connection with the delivery of its products and services, including products and services utilizing the Internet, as well as intrusions resulting from the efforts of “hackers” seeking the sensitive data RiverSource possesses and the trend toward broad consumer and general public notification of such incidents, could significantly harm RiverSource Life’s business, financial condition or results of operations.   Even if RiverSource Life successfully protected its technology infrastructure and the confidentiality of sensitive data, RiverSource Life could suffer harm to its business and reputation if attempted security breaches are publicized. RiverSource Life cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in its systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks used in connection with its products and services.

 

Protection from system interruptions and operating errors is important to RiverSource Life’s business. If RiverSource Life experienced a sustained interruption to its telecommunications or data processing systems or other failure in operational execution, it could harm its business.

 

System or network interruptions could delay and disrupt RiverSource Life’s ability to develop, deliver or maintain its products and services, causing harm to its business and reputation and resulting in loss of customers or revenue.  Interruptions could be caused by operational failures arising from RiverSource Life’s implementation of new technology, as well as from maintenance of existing technology.  RiverSource Life’s financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond its control, adversely affecting its ability to process transactions or provide products and services to customers.  These interruptions can include fires, floods, earthquakes, power losses, equipment failures, failures of internal or vendor software or systems and other events beyond its control. Further, RiverSource Life faces the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries that RiverSource Life uses to facilitate or are component providers to its securities transactions and other product manufacturing and distribution activities. These risks are heightened by RiverSource Life’s deployment in response to both client interest and evolution in the financial markets of increasingly sophisticated products, such as those which incorporate automatic asset re-allocation, multiple portfolios or funds and business-driven hedging, compliance and other risk management strategies. Any such failure, termination or constraint could adversely impact its ability to effect transactions, service its clients and manage its exposure to risk.

 

RiverSource Life’s risk management policies and procedures may not be fully effective in identifying or mitigating its risk exposure in all market environments or against all types of risk, including employee and financial advisor misconduct.

 

RiverSource Life has devoted significant resources to develop its risk management policies and procedures and will continue to do so. Nonetheless, RiverSource Life’s policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating its risk exposure in all market environments or against all types of risk. Many of its methods

 

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of managing risk and exposures are based upon its use of observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid.  As a result, these methods may not accurately predict future exposures, which could be significantly greater than what its models indicate. This could cause RiverSource Life to incur investment losses or cause its hedging and other risk management strategies to be ineffective.  Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to RiverSource Life, which may not always be accurate, complete, up-to-date or properly evaluated.

 

Moreover, RiverSource Life is subject to the risks of errors and misconduct by its employees and affiliated financial advisors — such as fraud, non-compliance with policies, recommending transactions that are not suitable, and improperly using or disclosing confidential information.  These risks are difficult to detect in advance and deter, and could harm RiverSource Life’s business, financial condition or results of operations.  RiverSource Life is further subject to the risk of nonperformance or inadequate performance of contractual obligations by third-party vendors of products and services that are used in its businesses.  Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating RiverSource Life’s risk exposure in all market environments or against all types of risk.  Insurance and other traditional risk-shifting tools may be held by or available to RiverSource Life in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency.

 

Changes in U.S. federal income or estate tax law could make some of RiverSource Life’s products less attractive to clients.

 

Many of the products RiverSource Life issues or on which its business is based (including both insurance products and non-insurance products) enjoy favorable treatment under current U.S. federal income or estate tax law. Changes in U.S. federal income or estate tax law could make some of its products less attractive to clients.

 

RiverSource Life is subject to tax contingencies that could adversely affect the provision for income taxes.

 

RiverSource Life is subject to the income tax laws of the U.S., its states and municipalities. These tax laws are complex and may be subject to different interpretations.  RiverSource Life must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions.  Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. In addition, changes to the Internal Revenue Code, administrative rulings or court decisions could increase RiverSource Life’s provision for income taxes.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

RiverSource Life Insurance Company occupies office space in Minneapolis, Minnesota, which it either owns or leases from Ameriprise Financial.  RiverSource Life Insurance Company reimburses Ameriprise Financial for rent based on direct and indirect allocation methods.  RiverSource Life of NY rents office space in Albany, New York.  RiverSource Life believes that the facilities occupied are suitable and adequate.

 

ITEM 3.

LEGAL PROCEEDINGS

 

Insurance companies have recently been the subject of increasing regulatory, legislative and judicial scrutiny.  Numerous state and federal regulatory agencies have commenced investigations regarding sales and marketing practices (including sales to older consumers), compensation arrangements and anticompetitive activities, and market timing and late trading in connection with insurance, annuity and mutual fund products.  RiverSource Life has been contacted by regulatory agencies for information relating to some of these investigations and is cooperating with those inquiries.

 

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

 

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have a material adverse effect on its consolidated financial condition, results of operations or liquidity.  However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

All of RiverSource Life Insurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc.  There is no established public trading market for RiverSource Life Insurance Company’s common stock.

 

For discussion regarding RiverSource Life Insurance Company’s payment of dividends and restrictions on dividends, see Item 7 of this Annual Report on Form 10-K — “Management’s Narrative Analysis — Liquidity and Capital Resources — Capital Activity” and Note 13 to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.

 

 

ITEM 7.

MANAGEMENT’S NARRATIVE ANALYSIS

 

Overview

 

RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).

 

·      RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York.  RiverSource Life Insurance Company issues insurance and annuity products.

 

·      RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware.  RiverSource Life of NY issues insurance and annuity products.

 

On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.  RTA is domiciled in Delaware and is a limited partner in affordable housing partnership investments.

 

RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-K as “RiverSource Life”.

 

The accompanying financial information has been presented as if RTA had been a wholly owned subsidiary prior to January 1, 2006 and is accounted for as a pooling of interests for entities under common control.

 

The following discussion and management’s narrative analysis of the financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements,” “Item 1A - Risk Factors” and the Consolidated Financial Statements and Notes.  Management’s narrative analysis is presented pursuant to General Instructions I(2) (a) of Form 10-K in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations.  Certain reclassifications of prior year amounts have been made to conform to the current presentation.

 

Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”).  On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders.

 

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Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees.  Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.  The separation from American Express was completed in 2007.

 

Critical Accounting Policies

 

The accounting and reporting policies that RiverSource Life uses affect its Consolidated Financial Statements.  Certain of RiverSource Life’s accounting and reporting policies are critical to an understanding of RiverSource Life’s financial condition and results of operations and, in some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of the Consolidated Financial Statements.  The accounting and reporting policies RiverSource Life has identified as fundamental to a full understanding of its financial condition and results of operations are described below.  See Note 2 to the Consolidated Financial Statements for further information about RiverSource Life’s accounting policies.

 

Valuation of Investments

 

The most significant component of RiverSource Life’s investments is its Available-for-Sale securities, which RiverSource Life carries at fair value within its Consolidated Balance Sheets. The fair value of RiverSource Life’s Available-for-Sale securities at December 31, 2009 was primarily obtained from third-party pricing sources.  RiverSource Life records unrealized securities gains (losses) in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as deferred acquisition costs (“DAC”), to reflect the expected impact on their carrying values had the unrealized securities gains (losses) been realized as of the respective balance sheet dates.  RiverSource Life recognizes gains and losses in results of operations upon disposition of the securities.

 

Effective January 1, 2009, RiverSource Life early adopted an accounting standard that significantly changed RiverSource Life’s accounting policy regarding the timing and amount of other-than-temporary impairments for Available-for-Sale securities. When the fair value of an investment is less than its amortized cost, RiverSource Life assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not RiverSource Life will be required to sell the security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment is considered to have occurred and RiverSource Life must recognize an other-than-temporary impairment for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria and RiverSource Life does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Life separates the total impairment into the credit loss component and the amount of the loss related to other factors. The amount of the total other-than-temporary impairments related to credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”), certain benefit reserves and income taxes. For Available-for-Sale securities that have recognized an other-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive income (loss).

 

For all securities that are considered temporarily impaired, RiverSource Life does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Life will be required to sell the security before recovery of its amortized cost basis. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.

 

Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors.  In order to determine the amount of the credit loss component for corporate debt securities considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost

 

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basis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and RiverSource Life’s position in the debtor’s overall capital structure.

 

For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments), RiverSource Life also considers factors such as overall deal structure and its position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections in assessing potential other-than-temporary impairments of these investments. Based upon these factors, securities that have indicators of potential other-than-temporary impairment are subject to detailed review by management.  Securities for which declines are considered temporary continue to be carefully monitored by management.  Generally, the credit loss component for the non-agency residential mortgage backed securities is determined as the amount the amortized cost basis exceeds the present value of the projected cash flows expected to be collected. Significant inputs considered in these projections are consistent with the factors considered in assessing potential other-than-temporary impairment for these investments. Current contractual interest rates considered in these cash flow projections are used to calculate the discount rate used to determine the present value of the expected cash flows.

 

Deferred Acquisition Costs and Deferred Sales Inducement Costs

 

For RiverSource Life’s annuity and life, disability income (“DI”) and long term care (“LTC”) insurance products, the DAC and DSIC balances at any reporting date are supported by projections that show that management expects there to be adequate premiums or estimated gross profits after that date to amortize the remaining DAC and DSIC balances. These projections are inherently uncertain because they require management to make assumptions about financial markets, anticipated mortality and morbidity levels and policyholder behavior over periods extending well into the future. Projection periods used for RiverSource Life’s annuity products are typically 10 to 25 years, while projection periods for RiverSource Life’s life, DI and LTC insurance products are often 50 years or longer. Management regularly monitors financial market conditions and actual policyholder behavior experience and compares them to its assumptions.

 

For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.  For products with associated DSIC, the same policy applies in calculating the DSIC balance and periodic DSIC amortization.

 

For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and, therefore, are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC is not recoverable. If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in the Consolidated Statements of Income.

 

For annuity and life, DI and LTC insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts. Assumptions about earned and credited interest rates are the primary factors used to project interest margins, while assumptions about equity and bond market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates. Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance businesses during the DAC amortization period.

 

The client asset value growth rates are the rates at which variable annuity and variable universal life insurance contract values invested in separate accounts are assumed to appreciate in the future. The rates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. RiverSource Life typically uses a five-year mean reversion process as a guideline in setting near-

 

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term equity asset growth rates based on a long-term view of financial market performance as well as recent actual performance.  The suggested near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance.  In 2009, management continued to follow the mean reversion process, decreasing near-term equity asset growth rates to reflect the positive market.  The long-term client asset value growth rates are based on assumed gross annual total returns of 9% for equities and 6.5% for fixed income securities.

 

A decrease of 100 basis points in various rate assumptions is likely to result in an increase in DAC and DSIC amortization and an increase in benefits and claims expense from variable annuity guarantees.  The following table presents the estimated impact to pretax income:

 

 

 

Estimated Impact
to Pretax Income(1)

 

 

 

(in millions)

 

Decrease in future near and long-term equity returns by 100 basis points

 

$

(44

)

Decrease in future near and long-term fixed income returns by 100 basis points

 

(18

)

Decrease in near-term equity asset growth rates by 100 basis points

 

(28

)

 


(1)   An increase in the above assumptions by 100 basis points would result in an increase to pretax income of approximately the same amount.

 

Management monitors other principal DAC and DSIC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, each could impact RiverSource Life’s DAC and DSIC balances.

 

The analysis of DAC and DSIC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless management identifies a significant deviation over the course of the quarterly monitoring, management reviews and updates these DAC and DSIC amortization assumptions annually in the third quarter of each year.  An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results.

 

Liabilities for Future Policy Benefits and Policy Claims and Other Policyholders’ Funds

 

Fixed Annuities and Variable Annuity Guarantees

 

Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.

 

Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.

 

The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (“GMDB”) provisions.  When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value.  RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings which are referred to as gain gross-up benefits.  In addition, RiverSource Life offers contracts with guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.

 

In determining the liabilities for GMDB, GMIB and the life contingent benefits associated with GMWB, RiverSource Life projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management reviews, and where appropriate, adjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.  The amounts in the table above in “Deferred Acquisition Costs and Deferred Sales Inducement Costs” include the estimated impact to benefits and claims expense related to variable annuity guarantees resulting from a decrease of 100 basis points in various rate assumptions.

 

23



 

The GMDB liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).

 

If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates.  The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.

 

The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value. See Note 11 to the Consolidated Financial Statements for information regarding the fair value measurement of embedded derivatives.  The liability for the life contingent benefits associated with GMWB provisions is determined in the same way as the GMDB liability.  The changes in both the fair values of the GMWB and GMAB embedded derivatives and the liability for life contingent benefits are reflected in benefits, claims, losses and settlement expenses.

 

Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.

 

Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2009, depending on year of issue, with an average rate of approximately 5.7%.

 

Life, Disability Income and Long Term Care Insurance

 

Future policy benefits and policy claims and other policyholders’ funds related to life, DI and LTC insurance include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI and LTC policies as claims are incurred in the future.

 

Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values.   Accumulation values are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts withdrawn by policyholders.

 

Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported DI and LTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits.  Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for RiverSource Life’s experience.  Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2009, with an average rate of 4.7%.  Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2009, with an average rate of 4.1%.

 

Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported.

 

Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, DI and LTC policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Anticipated mortality and morbidity rates are based on established industry mortality and morbidity tables, with modifications based on RiverSource Life’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life ranged from 4.0% to 10.0% at December 31, 2009, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively. Anticipated interest rates for LTC policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31, 2009.

 

Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.

 

24



 

Derivative Instruments and Hedging Activities

 

RiverSource Life uses derivative instruments to manage its exposure to various market risks.  All derivatives are recorded at fair value.  The fair value of RiverSource Life’s derivative instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available.

 

The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any.  RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment.  RiverSource Life occasionally designates derivatives as (i) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (ii) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”).

 

RiverSource Life’s policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement.

 

For derivative instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings.  The changes in fair value of derivatives hedging variable annuity living benefits and certain variable annuity death benefits are included within benefits, claims, losses and settlement expenses.  The changes in fair value of derivatives hedging equity indexed annuities are included in interest credited to fixed accounts. The changes in fair value of all other derivatives are a component of net investment income. These derivatives primarily provide economic hedges to equity market and interest rate exposures.  Examples include structured derivatives, options, futures, equity and interest rate swaps and swaptions that economically hedge the equity and interest rate exposure of derivatives embedded in certain annuity liabilities.

 

For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of the hedged risk within the corresponding hedged assets, liabilities or firm commitments, are recognized in current earnings.  If a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings over the remaining life of the hedged item.

 

For derivative instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings.   Any ineffective portion of the gain or loss is reported currently in earnings.  If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is recognized into earnings over the period that the hedged item impacts earnings.  For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.

 

For further details on the types of derivatives RiverSource Life uses and how it accounts for them, see Note 2 and Note 15 to the Consolidated Financial Statements.

 

Income Tax Accounting

 

Income taxes, as reported in the Consolidated Financial Statements, represent the net amount of income taxes that RiverSource Life expects to pay to or receive from various taxing jurisdictions in connection with its operations. RiverSource Life provides for income taxes based on amounts that it believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions.  Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.  In the event that the ultimate tax treatment of items differs from RiverSource Life’s estimates, it may be required to significantly change the provision for income taxes recorded in its Consolidated Financial Statements.

 

In connection with the provision for income taxes, the Consolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among RiverSource Life’s deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes.  Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes.

 

25



 

RiverSource Life will not be able to file a consolidated U.S. federal income tax return with the other members of the Ameriprise Financial affiliated group until 2010 which will result in net operating and capital losses, credits and other tax attributes generated by one group not being available to offset income earned or taxes owed by the other group during the period of non-consolidation. This lack of consolidation could affect RiverSource Life’s ability to fully realize certain deferred tax assets, including the capital losses.

 

RiverSource Life is required to establish a valuation allowance for any portion of deferred tax assets that management believes will not be realized.  Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required.  Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains.  Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies.  It is likely that management will need to identify and implement appropriate planning strategies to ensure its ability to realize deferred tax assets and avoid the establishment of a valuation allowance with respect to such assets.  In the opinion of management, it is currently more likely than not that RiverSource Life will realize the benefit of its deferred tax assets, including its capital loss deferred tax assets; therefore, no such valuation allowance has been established.

 

Recent Accounting Pronouncements

 

For information regarding recent accounting pronouncements and their expected impact on RiverSource Life’s future consolidated financial condition or results of operations, see Note 3 to the Consolidated Financial Statements.

 

Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008

 

The following table presents RiverSource Life’s consolidated results of operations:

 

 

 

Year Ended
December 31,

 

 

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

(in millions, except percentages)

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

450

 

$

438

 

$

12

 

3

%

Net investment income

 

1,526

 

1,252

 

274

 

22

 

Policy and contract charges

 

1,156

 

1,352

 

(196

)

(14

)

Other revenue

 

233

 

255

 

(22

)

(9

)

Net realized investment gains (losses)

 

59

 

(442

)

501

 

NM

 

Total revenues

 

3,424

 

2,855

 

569

 

20

 

 

 

 

 

 

 

 

 

 

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

Benefits, claims, losses and settlement expenses

 

841

 

673

 

168

 

25

 

Interest credited to fixed accounts

 

903

 

790

 

113

 

14

 

Amortization of deferred acquisition costs

 

145

 

861

 

(716

)

(83

)

Other insurance and operating expenses

 

550

 

649

 

(99

)

(15

)

Total benefits and expenses

 

2,439

 

2,973

 

(534

)

(18

)

Pretax income

 

985

 

(118

)

1,103

 

NM

 

Income tax provision (benefit)

 

245

 

(189

)

434

 

NM

 

Net income

 

$

740

 

$

71

 

$

669

 

NM

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

 

Net realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Net realized investment gains before impairment losses on securities

 

$

121

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(50

)

 

 

 

 

 

 

Portion of loss recognized in other comprehensive income

 

(12

)

 

 

 

 

 

 

Net impairment losses recognized in net realized investment gains (losses)

 

(62

)

 

 

 

 

 

 

Net realized investment gains (losses)

 

$

59

 

 

 

 

 

 

 

 

NM Not Meaningful.

 

26



 

Overview

 

Consolidated net income was $740 million for the year ended December 31, 2009 compared to $71 million for the year ended December 31, 2008, an increase of $669 million. Pretax income increased $1.1 billion to $985 million for the year ended December 31, 2009 from a pretax loss of $118 million for the year ended December 31, 2008. The increase was primarily driven by an increase in net investment income and net realized investment gains compared to net realized investment losses in the prior year period and a decrease in amortization of DAC.  These increases to net income were partially offset by a decrease in policy and contract charges and an increase in benefits, claims, losses and settlement expenses.

 

In the third quarter of 2009, the annual valuation assumptions review resulted in a net pretax benefit of $134 million consisting of a decrease in expenses primarily from updating product mortality assumptions for certain life insurance products and from the impact of updating product spreads and expense assumptions partially offset by a decrease in revenues related to the reinsurance impacts from updating product mortality assumptions.  In the third quarter of 2008, the valuation assumptions review and the valuation system conversion resulted in a net pretax benefit of $106 million consisting of a decrease in expenses primarily from updating product mortality and expense assumptions for certain life insurance products and from updating fund mix and policyholder behavior assumptions for variable annuities with guaranteed benefits.  The valuation system conversion also resulted in an increase in revenue primarily from improved modeling of the expected value of existing reinsurance agreements and a decrease in expense from modeling annuity amortization periods at the individual policy level.

 

The total pretax impacts on RiverSource Life’s revenues and expenses for the year ended December 31, 2009 attributable to the review of valuation assumptions and the impact of markets on DAC and DSIC amortization, GMDB and GMIB riders, and variable annuity living benefit riders, net of hedges and DAC and DSIC amortization were as follows:

 

Pretax Benefit (Charge)

 

Premiums

 

Policy and
Contract
Charges

 

Benefits,
Claims, Losses
and Settlement
Expenses

 

Amortization
of DAC

 

Other
Insurance and
Operating
Expenses

 

Total

 

 

 

(in millions)

 

Review of valuation assumptions

 

$

 

$

(65

)

$

80

 

$

119

 

$

 

$

134

 

Market impacts

 

 

 

(144

)

139

 

 

(5

)

Total

 

$

 

$

(65

)

$

(64

)

$

258

 

$

 

$

129

 

 

The total pretax impacts on RiverSource Life’s revenues and expenses for the year ended December 31, 2008 attributable to the review of valuation assumptions, the valuation system conversion and the impact of markets on DAC and DSIC amortization, GMDB and GMIB riders, and variable annuity living benefit riders, net of hedges and DAC amortization were as follows:

 

Pretax Benefit (Charge)

 

Premiums

 

Policy and
Contract
Charges

 

Benefits,
Claims, Losses
and Settlement
Expenses

 

Amortization
of DAC

 

Other
Insurance
and Operating
Expenses

 

Total

 

 

 

(in millions)

 

Review of valuation assumptions and valuation system conversion

 

$

2

 

$

95

 

$

89

 

$

(81

)

$

1

 

$

106

 

Market impacts

 

 

 

(9

)

(404

)

 

(413

)

Total

 

$

2

 

$

95

 

$

80

 

$

(485

)

$

1

 

$

(307

)

 

Revenues

 

Total revenues for the year ended December 31, 2009 were $3.4 billion, an increase of $569 million or 20% from $2.9 billion in 2008.  The increase is primarily due to net realized investment gains in 2009 compared to net realized investment losses in 2008 and an increase in net investment income offset partially by a decrease in policy and contract charges.

 

Net investment income increased $274 million or 22% to $1.5 billion for the year ended December 31, 2009 compared to $1.3 billion in the prior year.  The increase is due to higher invested asset levels due to fixed annuity net inflows as well as higher yields on longer term investments.

 

27



 

Policy and contract charges decreased $196 million or 14% to $1.2 billion for the year ended December 31, 2009 compared to $1.4 billion in the prior year primarily due to a $65 million expense from updating valuation assumptions in the third quarter of 2009 compared to a benefit of $95 million from updating valuation assumptions and converting to a new valuation system in the third quarter of 2008.  The decrease also reflects decreased separate account fee revenue as a result of the decrease in average separate account assets. Average separate account assets decreased $5.9 billion or 11% from the prior year period primarily due to equity market declines partially offset by net inflows.

 

Other revenue decreased $22 million or 9% to $233 million for the year ended December 31, 2009 compared to $255 million in the prior year reflecting lower marketing support and administrative fees due to lower average underlying separate account asset values.

 

Net realized investment gains were $59 million for the year ended December 31, 2009 compared to net realized investment losses of $442 million for the year ended December 31, 2008.  For the year ended December 31, 2009, net realized gains from sales of Available-for-Sale securities were $135 million and other-than-temporary impairments recognized in earnings were $62 million related to credit losses on non-agency residential mortgage backed securities and corporate debt securities in the gaming industry and banking and finance industries. For the year ended December 31, 2009, the reserves on commercial mortgage loans increased by $13 million.  Included in net realized investment losses for the year ended December 31, 2008 is $440 million of other-than-temporary impairments on Available-for-Sale securities primarily related to non-agency residential mortgage backed securities, corporate debt securities primarily in the financial services industry and asset backed and other securities, an increase of $1 million to the allowance for loan losses on commercial mortgage loans and an increase of $8 million to the allowance for loan losses on below investment grade syndicated bank loans.  For the year ended December 31, 2008, $13 million of gross realized investment gains were offset by $6 million of gross realized losses on Available-for-Sale securities.

 

Benefits and Expenses

 

Total benefits and expenses for the year ended December 31, 2009 were $2.4 billion, a decrease of $534 million or 18% from $3.0 billion in 2008.   This decrease is primarily due to a decrease in DAC amortization, partially offset by increases in benefits, claims, losses and settlement expenses and interest credited to fixed accounts.

 

Benefits, claims, losses and settlement expenses increased $168 million or 25% to $841 million for the year ended December 31, 2009 compared to $673 million in the prior year driven by an increase in expenses from variable annuity living benefit guarantees.  Benefits, claims, losses and settlement expenses in 2009 were impacted by $148 million of market impacts on variable annuity benefit expenses, net of hedges and DSIC, compared to a benefit of $32 million in 2008.  The non-cash impact of the nonperformance spread on the fair value of living benefit liabilities increased benefits, claims, losses and settlement expenses in 2009 compared to a decrease in 2008.  Benefits, claims, losses and settlement expenses in 2009 included a benefit of $80 million from updating valuation assumptions compared to a benefit of $89 million in the prior year from updating valuation assumptions and converting to a new valuation system.  The impact of market performance in 2009 decreased DSIC amortization by $4 million compared to an expense of $41 million in the prior year.

 

Interest credited to fixed accounts increased $113 million or 14% to $903 million for the year ended December 31, 2009 compared to $790 million for the year ended December 31, 2008, primarily due to higher average fixed annuity account balances and higher average fixed annuity crediting rates compared to the prior year.  Average fixed annuities contract accumulation values increased $1.9 billion, or 16% compared to the prior year. The average fixed annuity crediting rate excluding capitalized interest increased to 3.9% in 2009 compared to 3.7% in the prior year.

 

Amortization of DAC decreased $716 million or 83% to $145 million for the year ended December 31, 2009 compared to $861 million in the prior year. DAC amortization in 2009 included a $119 million benefit from updating valuation assumptions in the third quarter of 2009 compared to an expense of $81 million from updating valuation assumptions and converting to a new valuation system in the prior year.  DAC amortization in 2009 was reduced by $139 million due to market impacts, including $113 million offsetting higher variable annuity benefits expenses, net of hedges.  DAC amortization in 2008 was increased by $404 million due to market impacts, including a $111 million expense offsetting gains on variable annuity benefits, net of hedges.

 

Other insurance and operating expenses decreased $99 million or 15% to $550 million for the year ended December 31, 2009 primarily due to decreased sales and marketing expenses and lower corporate overhead expenses.

 

28



 

Income Taxes

 

RiverSource Life’s effective tax rate was 24.9% and 160.1% for the years ended December 31, 2009 and 2008, respectively.   The decrease in the effective tax rate is primarily due to pretax income for 2009 compared to a pretax loss in relation to a net tax benefit for 2008.  RiverSource Life’s effective tax rate for 2008 included a $39 million tax benefit related to changes in the status of current audits.

 

On September 25, 2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only.  Additionally, included in the Administration’s 2011 Revenue Proposals is a provision to modify the DRD for life insurance companies’ separate accounts which if enacted could significantly reduce the DRD tax benefits RiverSource Life receives, prospectively, beginning in 2011. For the year ended December 31, 2009, RiverSource Life recorded a benefit of approximately $62 million related to the current year’s separate account DRD.

 

Fair Value Measurements

 

RiverSource Life reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents.  Fair value assumes the exchange of assets or liabilities occurs in orderly transactions.  Companies are not permitted to use market prices that are the result of a forced liquidation or distressed sale.  RiverSource Life includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available.  RiverSource Life validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors.

 

Inactive Markets

 

Through RiverSource Life’s own experience transacting in the marketplace and through discussions with its pricing vendors, RiverSource Life believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services).  RiverSource Life considers market observable yields for other asset classes of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities. The discount rates used for the fair value of these securities at December 31, 2009 ranged from 11% to 22%.

 

Non-agency Residential Mortgage Backed Securities Backed by Subprime, Alt-A or Prime Collateral

 

Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. Alt-A mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime but may not conform to government-sponsored standards. Prime mortgage lending is the origination of residential mortgage loans to customers with good credit profiles.  RiverSource Life has exposure to these types of loans predominantly through mortgage backed and asset backed securities. The slow down in the U.S. housing market, combined with relaxed underwriting standards by some originators, has led to higher delinquency and loss rates for some of these investments. Market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities.  As a part of RiverSource Life’s risk management process, an internal rating system is used in conjunction with market data as the basis of analysis to assess the likelihood that RiverSource Life will not receive all contractual principal and interest payments for these investments. For the investments that are more at risk for impairment,

 

29



 

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.

 

The following table presents, as of December 31, 2009, RiverSource Life’s non-agency residential mortgage backed and asset backed securities backed by sub-prime, Alt-A or prime mortgage loans by credit rating and vintage year:

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB & Below

 

Total

 

 

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

 

 

(in millions)

 

Sub-prime

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

2004

 

3

 

3

 

7

 

2

 

 

 

 

 

 

 

10

 

5

 

2005

 

42

 

40

 

11

 

6

 

12

 

12

 

7

 

7

 

19

 

11

 

91

 

76

 

2006

 

 

 

6

 

5

 

 

 

5

 

5

 

 

 

11

 

10

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

7

 

6

 

 

 

 

 

 

 

7

 

6

 

Total Sub-prime

 

$

45

 

$

43

 

$

31

 

$

19

 

$

12

 

$

12

 

$

12

 

$

12

 

$

19

 

$

11

 

$

119

 

$

97

 

Alt-A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

15

 

$

16

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

15

 

$

16

 

2004

 

7

 

7

 

60

 

53

 

5

 

3

 

 

 

17

 

8

 

89

 

71

 

2005

 

5

 

3

 

38

 

21

 

32

 

17

 

5

 

3

 

172

 

115

 

252

 

159

 

2006

 

 

 

 

 

 

 

 

 

13

 

7

 

13

 

7

 

2007

 

 

 

 

 

 

 

 

 

29

 

16

 

29

 

16

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Alt-A

 

$

27

 

$

26

 

$

98

 

$

74

 

$

37

 

$

20

 

$

5

 

$

3

 

$

231

 

$

146

 

$

398

 

$

269

 

Prime

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 & prior

 

$

206

 

$

198

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

206

 

$

198

 

2004

 

22

 

23

 

 

 

28

 

26

 

13

 

13

 

 

 

63

 

62

 

2005

 

13

 

16

 

36

 

41

 

69

 

68

 

31

 

26

 

93

 

43

 

242

 

194

 

2006

 

21

 

21

 

 

 

6

 

2

 

35

 

34

 

 

 

62

 

57

 

2007

 

43

 

44

 

 

 

 

 

 

 

15

 

12

 

58

 

56

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Re-Remic(1)

 

1,842

 

1,935

 

 

 

 

 

 

 

 

 

1,842

 

1,935

 

Total Prime

 

$

2,147

 

$

2,237

 

$

36

 

$

41

 

$

103

 

$

96

 

$

79

 

$

73

 

$

108

 

$

55

 

$

2,473

 

$

2,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

$

2,219

 

$

2,306

 

$

165

 

$

134

 

$

152

 

$

128

 

$

96

 

$

88

 

$

358

 

$

212

 

$

2,990

 

$

2,868

 

 


(1)    Re-Remics of mortgage backed securities are prior vintages with cash flows structured into senior and subordinated bonds. Credit enhancement on senior bonds is increased through the Re-Remic process. All senior bonds are rated AAA by Moody’s Investors Service, Standard & Poor’s Rating Services or Fitch Ratings Ltd. RiverSource Life did not have any exposure to subordinate tranches as of December 31, 2009.

 

Fair Value of Liabilities and Nonperformance Risk

 

Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for RiverSource Life’s obligations of its variable annuity riders, RiverSource Life considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, RiverSource Life adjusts the valuation of variable annuity riders by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are adjusted to estimate the risk of RiverSource Life not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of December 31, 2009. As RiverSource Life’s estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $28 million, net of DAC and DSIC amortization and income taxes, based on December 31, 2009 credit spreads.

 

30



 

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 available lines of credit with Ameriprise Financial aggregating $1 billion.  Also, in March 2009, RiverSource Life Insurance Company became a member of the Federal Home Loan Bank of Des Moines (“FHLB of Des Moines”), which provides RiverSource Life Insurance Company access to collateralized borrowings.  At December 31, 2009 and 2008, RiverSource Life had no securities sold under repurchase agreements and there were no borrowings from the FHLB of Des Moines.

 

As of December 31, 2009, the outstanding balance under the lines of credit with Ameriprise Financial was $300 million which was repaid in full with payments in January and February 2010.

 

See Note 10 to the Consolidated Financial Statements for additional information on the lines of credit.

 

The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases.  RiverSource Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations.

 

Capital Activity

 

Dividends paid and received were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Cash dividends paid to Ameriprise Financial

 

$

 

$

775

 

$

900

 

Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY

 

 

77

 

83

 

Cash dividends paid to RiverSource Life Insurance Company from RTA

 

22

 

 

 

Non-cash dividend paid to Ameriprise Financial from RTA

 

 

118

 

 

 

Notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds.  See Note 13 to the Consolidated Financial Statements for additional information.

 

During 2008, RiverSource Life Insurance Company received a non-cash capital contribution of $83 million comprised of below investment grade syndicated bank loans from Ameriprise Financial.  In addition, RiverSource Life Insurance Company received a $239 million contribution from Ameriprise Financial, consisting of all the issued and outstanding shares of RTA.

 

During 2009, RiverSource Life Insurance Company received a non-cash capital contribution of $131 million comprised of two buildings and the related land from Ameriprise Financial.  As part of the transaction, RiverSource Life Insurance Company entered into an agreement to lease the buildings to Ameriprise Financial. In addition, RiverSource Life Insurance Company received a non-cash capital contribution of $200 million consisting of a reduction of the outstanding balance due to Ameriprise Financial under a line of credit agreement.

 

Regulatory Capital

 

RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements.  Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities are as follows:

 

 

 

December 31,

 

 

 

Actual Capital(a)

 

Regulatory Capital
Requirement(b)

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

RiverSource Life Insurance Company

 

$

3,450

 

$

2,722

 

$

803

 

$

551

 

RiverSource Life Insurance Co. of New York

 

286

 

229

 

44

 

58

 

 


(a)          Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.

(b)         Regulatory capital requirement is based on the statutory risk-based capital filing.

 

31



 

Contractual Commitments

 

The contractual obligations identified in the table below include balance sheet transactions that represent material expected or contractually committed future obligations of RiverSource Life.  Payments due by period as of December 31, 2009 are as follows:

 

 

 

Total

 

2010

 

2011-
2012

 

2013-
2014

 

2015 and
thereafter

 

 

 

(in millions)

 

Insurance and annuities (1)

 

$

47,922

 

$

3,025

 

$

5,668

 

$

6,138

 

$

33,091

 

Deferred premium options (2)

 

1,201

 

189

 

341

 

261

 

410

 

Line of credit with Ameriprise Financial (3)

 

300

 

300

 

 

 

 

Total

 

$

49,423

 

$

3,514

 

$

6,009

 

$

6,399

 

$

33,501

 

 


(1)    These scheduled payments are represented by reserves of approximately $30.4 billion at December 31, 2009 and are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions.  Actual payment obligations may differ if experience varies from these assumptions.  Separate account liabilities have been excluded as associated contractual obligations would be met by separate account assets.

(2)    The fair value of the deferred premium options recorded on the Consolidated Balance Sheets was $1.1 billion as of December 31, 2009.  See Note 15 to the Consolidated Financial Statements for more information about deferred premium options.

(3)    The line of credit agreement with Ameriprise Financial does not include a repayment schedule. The outstanding balance at December 31, 2009 was repaid in full with payments in January and February 2010.

 

Due to the uncertainty with respect to the timing of future cash flows associated with RiverSource Life’s unrecognized tax benefits at December 31, 2009, RiverSource Life is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $77 million of unrecognized tax benefits and its associated interest have been excluded from the contractual obligations table above. See Note 14 for additional information.

 

Risk Management

 

In accordance with regulatory investment guidelines, RiverSource Life Insurance Company and RiverSource Life of NY, through their respective boards of directors or board of directors’ investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures, and their effect on profitability in order to guide the management of the general account assets.  They also review the distribution of assets in the portfolio by type and credit risk sector.  The objective is to structure the investment securities portfolio in the general account to meet contractual obligations under the insurance and annuity products and achieve targeted levels of profitability within defined risk parameters.

 

RiverSource Life has developed an asset/liability management approach with separate investment objectives to support specific product liabilities, such as insurance and annuities.  As part of this approach, RiverSource Life develops specific investment guidelines that are designed to optimize trade offs between risk and return and help ensure RiverSource Life is able to support future benefit payments under its insurance and annuity obligations.  These same objectives must be consistent with management’s overall investment objectives for the general account investment portfolio.

 

RiverSource Life’s owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to provide clients with a competitive rate of return on their investments while managing risk. Investment in fixed maturity securities is designed to provide RiverSource Life with a targeted margin between the yield earned on investments and the interest rate credited to clients’ accounts. RiverSource Life does not trade in securities to generate short-term profits for its own account.

 

As part of RiverSource Life’s investment process, management, with the assistance of its investment advisors, conducts a quarterly review of investment performance.  The review process involves the review of certain invested assets which the committee evaluates to determine whether or not any investments are other-than-temporarily impaired and/or which specific interest earning investments should be put on an interest non-accrual basis.

 

RiverSource Life has interest rate risk and equity market risk. Interest rate risk results from investing in assets that are somewhat longer and reset less frequently than the liabilities they support.  RiverSource Life manages interest rate risk through the use of a variety of tools that include modifying the maturities of investments supporting its fixed annuities and insurance products.  Additionally, RiverSource Life enters into derivative instruments, such as structured derivatives, options, futures, interest rate swaps and swaptions, which change the interest rate characteristics of client liabilities or investment assets.  Because certain of its investment activities are impacted by the value of its managed equity-based portfolios, from time to time RiverSource Life enters into risk management strategies that may include the use of equity derivative instruments, such as equity options, to mitigate its exposure to volatility in the equity markets.

 

32



 

Quantitative and Qualitative Disclosures About Market Risk

 

Interest rate, equity price and credit risk are the market risks to which RiverSource Life has material exposure. Equity price and interest rate fluctuations can have a significant impact on RiverSource Life’s results of operations, primarily due to the asset-based fees and expenses, the “spread” income generated on its annuities and universal life (“UL”) insurance products, the value of DAC and DSIC, assets associated with variable annuity and variable UL products, the values of liabilities for guaranteed benefits associated with its variable annuities and the values of derivatives held to hedge these benefits.

 

The guaranteed benefits associated with RiverSource Life’s variable annuities are GMWB, GMAB, GMDB and GMIB options. Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.

 

RiverSource Life continues to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities.  This approach works with the premise that matched sensitivities will produce a highly effective hedging result.  This program can generally be described as a “Static 3-Greek” hedging program.  This style of hedging focuses mainly on first order sensitivities of the assets and liabilities; Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega).  Additionally, various second order sensitivities are managed.  RiverSource Life uses various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to manage the risk exposures.  The exposures are measured and monitored daily and adjustments to the hedge portfolio are made as necessary.

 

To evaluate interest rate and equity price risk, RiverSource Life performs sensitivity testing which measures the impact on pretax income from the sources listed below for a 12 month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities and the associated hedge assets, RiverSource Life assumed no change in implied market volatility despite the 10% drop in equity prices.

 

The tables below present RiverSource Life’s estimate of the pretax impacts of these hypothetical market moves, net of hedging as, of December 31, 2009.

 

 

 

Equity Price Exposure to Pretax Income

 

Equity Price Decline 10%

 

Before
Hedge Impact

 

Hedge
Impact

 

Net
Impact

 

 

 

(in millions)

 

Asset-based fees and expenses

 

$

(54

)

$

 

$

(54

)

DAC and DSIC amortization(1)

 

(136

)

 

(136

)

Variable annuity riders:

 

 

 

 

 

 

 

GMDB and GMIB

 

(34

)

3

 

(31

)

GMWB

 

(62

)

76

 

14

 

GMAB

 

(20

)

26

 

6

 

DAC and DSIC amortization(2)

 

N/A

 

N/A

 

(10

)

Total variable annuity riders

 

(116

)

105

 

(21

)

Equity indexed annuities

 

1

 

(1

)

 

Total

 

$

(305

)

$

104

 

$

(211

)

 

33



 

 

 

Interest Rate Exposure to Pretax Income

 

Interest Rate Increase 100 Basis Points

 

Before
Hedge Impact

 

Hedge
Impact

 

Net
Impact

 

 

 

(in millions)

 

Asset-based fees and expenses

 

$

(14

)

$

 

$

(14

)

Variable annuity riders:

 

 

 

 

 

 

 

GMWB

 

166

 

(230

)

(64

)

GMAB

 

33

 

(46

)

(13

)

DAC and DSIC amortization(2)

 

N/A

 

N/A

 

30

 

Total variable annuity riders

 

199

 

(276

)

(47

)

Fixed annuities, fixed portion of variable annuities and fixed insurance products

 

(5

)

 

(5

)

Total

 

$

180

 

$

(276

)

$

(66

)

 


N/A    Not Applicable.

(1)     Market impact on DAC and DSIC amortization resulting from lower projected profits.

(2)   Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.

 

The above results compare to estimated negative impacts to pretax income of $258 million related to a 10% equity price decline and $45 million related to a 100 basis point increase in interest rates as of December 31, 2008.  The reduced equity impact in 2009 is a result of market dislocation in 2008 and changes to RiverSource Life’s valuation models. The discount rates and credit spreads RiverSource Life used in 2008 to value certain of its investments were negatively impacted by the market, which led to greater pretax loss projections related to RiverSource Life’s variable annuity riders partially offset by a lower impact to fees and expenses primarily as a result of lower asset values.

 

In evaluating equity price risk, the estimated impact on DAC and DSIC amortization resulting from lower projected profits as a result of the equity price decline is shown separately from the estimated impact on DAC and DSIC amortization resulting from changes in the values of GMWB and GMAB riders net of hedges. In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, RiverSource Life has not changed its assumed equity asset growth rates. This is a significantly more conservative estimate than if RiverSource Life assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. See Critical Accounting Policies for additional discussion on RiverSource Life’s DAC and DSIC accounting policies. RiverSource Life makes this same conservative assumption in estimating the impact from GMDB and GMIB riders.

 

Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins and with discount rates increased to reflect a current market estimate of RiverSource Life’s risk of nonperformance specific to these liabilities. Management has elected to hedge based on best estimate policyholder assumptions and explicitly does not hedge nonperformance spread risk. Net impacts shown in the above table from GMDB and GMIB reflect the fact that these guaranteed benefits are primarily retained by RiverSource Life and not hedged.  In the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.

 

Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming that implied market volatility does not change when equity values fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, RiverSource Life has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has RiverSource Life tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.

 

The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.

 

Asset-Based Fees and Expenses

 

RiverSource Life earns asset-based management fees on its owned separate account assets partially offset by certain expenses.  At December 31, 2009, the value of these assets was $54.3 billion. This source of revenue is subject to both interest rate and

 

34



 

equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. RiverSource Life does not currently hedge the interest rate or the equity price risk of this exposure.

 

DAC and DSIC Amortization

 

For annuity and universal life products, DAC and DSIC are amortized on the basis of estimated gross profits. Estimated gross profits are a proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase current period estimated gross profits, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income.

 

Variable Annuity Riders

 

The total value of all variable annuity contracts has increased from $43.3 billion at December 31, 2008 to $55.1 billion at December 31, 2009. These contract values include GMWB and GMAB contracts which have increased from $12.7 billion and $2.0 billion, respectively, at December 31, 2008 to $19.2 billion and $2.9 billion at December 31, 2009, respectively.  At December 31, 2009, reserves for GMWB and GMAB were $204 million and $100 million, respectively, compared to reserves of $1.5 billion and $367 million at December 31, 2008, respectively. The decrease in reserves for GMWB and GMAB reflect the changes in economic factors impacting the mark-to-market value of the guarantees.  At December 31, 2009, the reserve for the other variable annuity guaranteed benefits, GMDB and GMIB, was $12 million compared to $67 million at December 31, 2008.

 

Equity Price Risk — Variable Annuity Riders

 

The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions regardless of the performance of the investment assets. For this reason, when equity prices decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to RiverSource Life’s earnings.

 

The core derivative instruments with which RiverSource Life hedges the equity price risk of its GMWB and GMAB provisions are longer dated put and call derivatives; these core instruments are supplemented with equity futures and total return swaps. In the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.  See Note 15 to the Consolidated Financial Statements for further information on RiverSource Life’s derivative instruments.

 

Interest Rate Risk — Variable Annuity Riders

 

The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at fair value separately from the underlying host variable annuity contract. Changes in the fair value of the GMWB and GMAB liabilities are recorded through earnings with fair value calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB and GMAB liabilities. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call derivatives, interest rate swaps and swaptions. These derivatives are an alternative to the more customized equity puts that were previously used. RiverSource Life entered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to increase, RiverSource Life would have to pay more to the swap counterparty and the fair value of its equity puts would decrease, resulting in a negative impact to RiverSource Life’s pretax income.

 

Fixed Annuities, Fixed Portion of Variable Annuities and Fixed Insurance Products

 

Interest rate exposures arise primarily with respect to the fixed account portion of RiverSource Life’s annuity and insurance products and its investment portfolio. RiverSource Life guarantees an interest rate to the holders of these products. Premiums and deposits collected from clients are primarily invested in fixed rate securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments.

 

Therefore, in an increasing rate environment, higher interest rates are reflected in crediting rates to clients sooner than in rates earned on invested assets resulting in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income.  Of the $30.4 billion in future policy benefits on RiverSource Life’s Consolidated Balance Sheets

 

35



 

at December 31, 2009, $30.1 billion related to liabilities created by these products. RiverSource Life did not hedge this exposure.

 

Equity Indexed Annuities

 

RiverSource Life’s equity indexed annuity product is a single premium annuity issued with an initial term of seven years. The annuity guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation value upon renewal plus a return that is linked to the performance of the S&P 500 Index.  The equity-linked return is based on a participation rate initially set at between 50% and 90% of the S&P 500 Index which is guaranteed for the initial seven-year term when the contract is held to full term. At December 31, 2009, RiverSource Life had $168 million in reserves related to equity indexed annuities.  In 2007, RiverSource Life discontinued new sales of equity indexed annuities.

 

Equity Price Risk — Equity Indexed Annuities

 

The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. To hedge this exposure, a portion of the proceeds from the sale of equity indexed annuities is used to purchase futures, calls and puts which generate returns to replicate what RiverSource Life must credit to client accounts. In conjunction with purchasing puts, RiverSource Life also writes puts. Pairing purchased puts with written puts allows RiverSource Life to better match the characteristics of the liability.

 

Interest Rate Risk — Equity Indexed Annuities

 

Most of the proceeds from the sale of equity indexed annuities are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. RiverSource Life earns income from the difference between the return earned on invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount credited is affected by changes in interest rates.

 

Credit Risk

 

RiverSource Life is exposed to credit risk within its investment portfolio, including its loan portfolio, and through its derivative and reinsurance activities. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the financial instrument or contract. RiverSource Life considers its total potential credit exposure to each counterparty and its affiliates to ensure compliance with pre-established credit guidelines at the time it enters into a transaction which would potentially increase RiverSource Life’s credit risk. These guidelines and oversight of credit risk are managed through a comprehensive enterprise risk management program that includes members of senior management.

 

RiverSource Life manages the risk of credit-related losses in the event of nonperformance by counterparties by applying disciplined fundamental credit analysis and underwriting standards, prudently limiting exposures to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and underlying investment type. RiverSource Life remains exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing.

 

RiverSource Life manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting arrangements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Generally, RiverSource Life’s current credit exposure on over-the-counter derivative contracts is limited to a derivative counterparty’s net positive fair value of derivative contracts after taking into consideration the existence of netting arrangements and any collateral received. This exposure is monitored and managed to an acceptable threshold level.

 

Because exchange-traded futures are effected through regulated exchanges and positions are marked to market and generally cash settled on a daily basis, RiverSource Life has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.

 

RiverSource Life manages its credit risk related to reinsurance treaties by evaluating the financial condition of reinsurance counterparties prior to entering into new reinsurance treaties. In addition, RiverSource Life regularly evaluates their financial strength during the terms of the treaties. As of December 31, 2009, RiverSource Life’s largest reinsurance credit risk is related to a long term care coinsurance treaty with life insurance subsidiaries of Genworth Financial, Inc.  See Note 7 to the Consolidated Financial Statements for additional information on reinsurance.

 

36



 

Forward-Looking Statements

 

This report contains forward-looking statements that reflect RiverSource Life’s plans, estimates and beliefs.  RiverSource Life’s actual results could differ materially from those described in these forward-looking statements.  Examples of such forward-looking statements include:

 

·                  statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and

·                  statements of assumptions underlying such statements.

 

The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on pace,” “project” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements.

 

Such factors include, but are not limited to:

 

·                  changes in the valuations, liquidity and volatility in the interest rate, credit default equity market, and foreign exchange environments;

·                  changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation;

·                  RiverSource Life’s investment management performance and consumer acceptance of RiverSource Life’s products;

·                  effects of competition in the financial services industry and changes in RiverSource Life’s product distribution mix and distribution channels;

·                  changes to RiverSource Life’s reputation that may arise from employee or affiliated advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;

·                  RiverSource Life’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings, as well as the opinions of rating agencies and other analysts or RiverSource Life’s regulators, distributors or policyholders and contractholders in response to any change or prospect of change in any such opinion;

·                  risks of default by issuers or guarantors of investments RiverSource Life owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from RiverSource Life’s assumptions regarding such risks and the evaluations or the prospect of changes in evaluations of any such third parties published by rating agencies or other analysts and the reactions of other market participants or RiverSource Life’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;

·                  experience deviations from RiverSource Life’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing DAC and DSIC or market volatility underlying RiverSource Life’s valuation and hedging of guaranteed living benefit annuity riders;

·                  successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;

·                  RiverSource Life’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;

·                  the impact of intercompany allocations to RiverSource Life from Ameriprise Financial and its affiliates;

·                  Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute RiverSource Life’s products through current and future distribution channels;

·                  changes in capital requirements that may be indicated, required or advised by regulators or rating agencies;

·                  the impact of Ameriprise Financial’s efforts to improve distribution economics and of RiverSource Life’s efforts to grow third party distribution and to realize benefits from reengineering and tax planning;

·                  changes in U.S. federal income or estate tax laws potentially making RiverSource Life’s products less attractive to clients;

·                  RiverSource Life’s ability to recover from catastrophes, both natural and man-made;

·                  changes in the capital markets and competitive environments induced or resulting from the partial or total ownership or other support by central governments of certain financial services firms for financial assets; and

 

37



 

·                  general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services RiverSource Life consumes in the conduct of its business, and applicable legislation and regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding the financial services industry and regulatory rulings and pronouncements.

 

RiverSource Life cautions the reader that the above 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.

 

A further description of these and other risks and uncertainties can be found under “Item 1A - Risk Factors” in this Annual Report on Form 10-K.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Items required under this section are included in Item 7 in this Annual Report on Form 10-K — “Management’s Narrative Analysis - Quantitative and Qualitative Disclosures about Market Risk.”

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated Financial Statements:

 

Report of Independent Registered Public Accounting Firm

39

 

 

Consolidated Balance Sheets — December 31, 2009 and 2008

40

 

 

Consolidated Statements of Income — Years ended December 31, 2009, 2008 and 2007

41

 

 

Consolidated Statements of Cash Flows — Years ended December 31, 2009, 2008 and 2007

42

 

 

Consolidated Statements of Shareholder’s Equity — Years ended December 31, 2009, 2008 and 2007

43

 

 

Notes to Consolidated Financial Statements

44

 

Schedules:

All information on schedules to the Consolidated Financial Statements required by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated Financial Statements and Notes thereto or is not required.  Therefore, all schedules have been omitted.

 

38



 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors
RiverSource Life Insurance Company

 

We have audited the accompanying consolidated balance sheets of RiverSource Life Insurance Company, (a wholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of RiverSource Life Insurance Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RiverSource Life Insurance Company at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 3 to the consolidated financial statements, in 2009 the Company adopted new accounting guidance related to the recognition and presentation of other-than-temporary impairments.  Also, in 2008, the Company adopted new accounting guidance related to the measurement of fair value and in 2007, the Company adopted new guidance related to the accounting for uncertainty in income taxes as well as new guidance related to accounting for deferred acquisition costs in connection with modifications or exchanges of insurance and annuity contracts.

 

/s/ Ernst & Young LLP

 

Minneapolis, Minnesota

February 23, 2010

 

39



 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

 

 

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2009, $25,142; 2008, $19,452)

 

$

25,999

 

$

18,070

 

Common and preferred stocks, at fair value (cost: 2009 and 2008, $30)

 

23

 

16

 

Commercial mortgage loans, at cost (less allowance for loan losses: 2009, $30; 2008, $17)

 

2,532

 

2,737

 

Policy loans

 

715

 

722

 

Trading securities and other investments

 

310

 

452

 

Total investments

 

29,579

 

21,997

 

 

 

 

 

 

 

Cash and cash equivalents

 

811

 

3,307

 

Restricted cash

 

184

 

 

Reinsurance recoverables

 

1,688

 

1,592

 

Deferred income taxes, net

 

63

 

599

 

Other receivables

 

332

 

102

 

Accrued investment income

 

303

 

239

 

Deferred acquisition costs

 

4,285

 

4,324

 

Deferred sales inducement costs

 

524

 

518

 

Other assets

 

936

 

2,658

 

Separate account assets

 

54,267

 

41,787

 

 

 

 

 

 

 

Total assets

 

$

92,972

 

$

77,123

 

 

 

 

 

 

 

Liabilities and Shareholder’s Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Future policy benefits

 

$

30,383

 

$

28,753

 

Policy claims and other policyholders’ funds

 

123

 

172

 

Line of credit with Ameriprise Financial, Inc.

 

300

 

 

Other liabilities

 

1,955

 

2,672

 

Separate account liabilities

 

54,267

 

41,787

 

Total liabilities

 

87,028

 

73,384

 

 

 

 

 

 

 

Shareholder’s equity:

 

 

 

 

 

Common stock, $30 par value; 100,000 shares authorized, issued and outstanding

 

3

 

3

 

Additional paid-in capital

 

2,445

 

2,116

 

Retained earnings

 

3,114

 

2,336

 

Accumulated other comprehensive income (loss), net of tax

 

382

 

(716

)

Total shareholder’s equity

 

5,944

 

3,739

 

 

 

 

 

 

 

Total liabilities and shareholder’s equity

 

$

92,972

 

$

77,123

 

 

See Notes to Consolidated Financial Statements.

 

40



 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF INCOME

(in millions)

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Revenues

 

 

 

 

 

 

 

Premiums

 

$

450

 

$

438

 

$

439

 

Net investment income

 

1,526

 

1,252

 

1,424

 

Policy and contract charges

 

1,156

 

1,352

 

1,217

 

Other revenues

 

233

 

255

 

255

 

Net realized investment gains (losses)

 

59

 

(442

)

61

 

 

 

 

 

 

 

 

 

Total revenues

 

3,424

 

2,855

 

3,396

 

 

 

 

 

 

 

 

 

Benefits and expenses

 

 

 

 

 

 

 

Benefits, claims, losses and settlement expenses

 

841

 

673

 

760

 

Interest credited to fixed accounts

 

903

 

790

 

847

 

Amortization of deferred acquisition costs

 

145

 

861

 

470

 

Separation costs

 

 

 

97

 

Other insurance and operating expenses

 

550

 

649

 

735

 

 

 

 

 

 

 

 

 

Total benefits and expenses

 

2,439

 

2,973

 

2,909

 

 

 

 

 

 

 

 

 

Pretax income (loss)

 

985

 

(118

)

487

 

Income tax provision (benefit)

 

245

 

(189

)

53

 

 

 

 

 

 

 

 

 

Net income

 

$

740

 

$

71

 

$

434

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

Net realized investment gains (losses):

 

 

 

 

 

 

 

Net realized investment gains before impairment losses on securities

 

$

121

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(53

)

 

 

 

 

Portion of loss recognized in other comprehensive income

 

(9

)

 

 

 

 

Net impairment losses recognized in net realized investment gains (losses)

 

(62

)

 

 

 

 

Net realized investment gains (losses)

 

$

59

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

41



 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income

 

$

740

 

$

71

 

$

434

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Capitalization of deferred acquisition and deferred sales inducement costs

 

(640

)

(674

)

(823

)

Amortization of deferred acquisition and deferred sales inducement costs

 

155

 

982

 

523

 

Depreciation, amortization and accretion, net

 

(68

)

61

 

71

 

Deferred income tax (benefit) expense

 

(81

)

(234

)

83

 

Contractholder and policyholder charges, non-cash

 

(259

)

(248

)

(206

)

Net realized investment gains

 

(135

)

(7

)

(44

)

Other-than-temporary impairments and provision for loan losses recognized in net realized investment (gains) losses

 

76

 

449

 

(17

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Trading securities and equity method investments, net

 

136

 

(110

)

166

 

Future policy benefits for traditional life, disability income and long term care insurance

 

282

 

308

 

275

 

Policy claims and other policyholders’ funds

 

(49

)

81

 

2

 

Reinsurance recoverables

 

(96

)

(302

)

(153

)

Other receivables

 

(5

)

20

 

(28

)

Accrued investment income

 

(64

)

14

 

49

 

Derivatives collateral, net

 

(1,928

)

1,591

 

242

 

Other assets and liabilities, net

 

670

 

23

 

(226

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(1,266

)

2,025

 

348

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

 

 

Proceeds from sales

 

5,215

 

246

 

3,020

 

Maturities, sinking fund payments and calls

 

3,486

 

2,510

 

1,908

 

Purchases

 

(13,696

)

(1,684

)

(677

)

Proceeds from sales and maturities of commercial mortgage loans

 

279

 

263

 

424

 

Funding of commercial mortgage loans

 

(104

)

(110

)

(504

)

Proceeds from sales of other investments

 

43

 

19

 

49

 

Purchases of other investments

 

(11

)

(140

)

 

Change in policy loans, net

 

7

 

(25

)

(47

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(4,781

)

1,079

 

4,173

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Policyholder and contractholder account values:

 

 

 

 

 

 

 

Considerations received

 

4,863

 

2,913

 

1,093

 

Net transfers from (to) separate accounts

 

195

 

91

 

(50

)

Surrenders and other benefits

 

(1,923

)

(2,931

)

(3,838

)

Proceeds from line of credit with Ameriprise Financial, Inc.

 

500

 

 

 

Deferred premium options, net

 

(82

)

(77

)

(8

)

Tax adjustment on share-based incentive compensation plan

 

(2

)

2

 

2

 

Cash dividend to Ameriprise Financial, Inc.

 

 

(775

)

(900

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

3,551

 

(777

)

(3,701

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(2,496

)

2,327

 

820

 

Cash and cash equivalents at beginning of year

 

3,307

 

980

 

160

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

811

 

$

3,307

 

$

980

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

Income taxes paid (received), net

 

$

72

 

$

168

 

$

(4

)

Interest paid on borrowings

 

1

 

 

 

 

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

 

 

Capital contributions from Ameriprise Financial, Inc.

 

$

331

 

$

322

 

$

8

 

 

See Notes to Consolidated Financial Statements.

 

42



 

RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

THREE YEARS ENDED DECEMBER 31, 2009

(in millions)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2007

 

$

3

 

$

2,021

 

$

3,788

 

$

(209

)

$

5,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accounting principles, net of tax

 

 

 

(134

)

 

(134

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

434

 

 

434

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized securities losses

 

 

 

 

52

 

52

 

Change in net unrealized derivative losses

 

 

 

 

1

 

1

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

487

 

Tax adjustment on share-based incentive compensation plan

 

 

2

 

 

 

2

 

Cash dividends to Ameriprise Financial, Inc.

 

 

 

(900

)

 

(900

)

Non-cash capital contribution from Ameriprise Financial, Inc.

 

 

8

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2007

 

$

3

 

$

2,031

 

$

3,188

 

$

(156

)

$

5,066

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accounting principles, net of tax

 

 

 

(30

)

 

(30

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

71

 

 

71

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized securities losses

 

 

 

 

(562

)

(562

)

Change in net unrealized derivative losses

 

 

 

 

2

 

2

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

(489

)

Tax adjustment on share-based incentive compensation plan

 

 

2

 

 

 

2

 

Cash dividends to Ameriprise Financial, Inc.

 

 

 

(775

)

 

(775

)

Non-cash capital contribution from Ameriprise Financial, Inc.

 

 

83

 

 

 

83

 

Non-cash dividend to Ameriprise Financial, Inc.

 

 

 

(118

)

 

(118

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2008

 

$

3

 

$

2,116

 

$

2,336

 

$

(716

)

$

3,739

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accounting principles, net of tax

 

 

 

38

 

(38

)

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

740

 

 

740

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized securities losses

 

 

 

 

1,109

 

1,109

 

Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities

 

 

 

 

23

 

23

 

Change in net unrealized derivative losses

 

 

 

 

4

 

4

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

1,876

 

Tax adjustment on share-based incentive compensation plan

 

 

(2

)

 

 

(2

)

Non-cash capital contribution from Ameriprise Financial, Inc.

 

 

331

 

 

 

331

 

Balances at December 31, 2009

 

$

3

 

$

2,445

 

$

3,114

 

$

382

 

$

5,944

 

 

See Notes to Consolidated Financial Statements.

 

43



 

RIVERSOURCE LIFE INSURANCE COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Nature of Business and Basis of Presentation

 

Nature of Business

 

RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).

 

·                  RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York.  RiverSource Life Insurance Company issues insurance and annuity products.

·                  RiverSource Life of NY is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, North Dakota and Delaware.  RiverSource Life of NY issues insurance and annuity products.

 

On December 31, 2008, Ameriprise Financial contributed all of the issued and outstanding shares of RiverSource Tax Advantaged Investments, Inc. (“RTA”) to RiverSource Life Insurance Company.  RTA is domiciled in Delaware and is a limited partner in affordable housing partnership investments.

 

RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-K as “RiverSource Life”.

 

Ameriprise Financial was formerly a wholly owned subsidiary of American Express Company (“American Express”).  On February 1, 2005, the American Express Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”) through a tax-free distribution to American Express shareholders.  Effective as of the close of business on September 30, 2005, American Express completed the Separation and the distribution of Ameriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the Separation and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees.  Through 2007, RiverSource Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company.  The separation from American Express was completed in 2007.

 

RiverSource Life’s principal products are variable deferred annuities and variable universal life insurance which are issued primarily to individuals.  It also offers fixed annuities where assets accumulate until the contract is surrendered, the contractholder (or in some contracts, the annuitant) dies, or the contractholder or annuitant begins receiving benefits under an annuity payout option. It also offers immediate annuities in which payments begin within one year of issue and continue for life or for a fixed period of time.  RiverSource Life’s fixed deferred annuities guarantee a relatively low annual interest rate during the accumulation period (the time before annuity payments begin). However, RiverSource Life has the option of paying a higher rate set at its discretion.  In addition, persons owning an equity indexed annuity may have their interest calculated based on an increase in a broad-based stock market index.  RiverSource Life issues both variable and fixed universal life insurance, traditional life insurance and disability income (“DI”) insurance.  Universal life insurance is a form of permanent life insurance characterized by flexible premiums, flexible death benefit amounts and unbundled pricing factors (i.e., mortality, interest and expenses).  Traditional life insurance refers to whole and term life insurance policies that pay a specified sum to a beneficiary upon death of the insured for a fixed premium.  Variable universal life insurance combines the premium and death benefit flexibility of universal life with underlying fund investment flexibility and the risks associated therewith.  Waiver of premium and accidental death benefit riders are generally available with these life insurance products.  RiverSource Life issues only non-participating life insurance policies which do not pay dividends to policyholders from realized policy margins.

 

Under RiverSource Life’s variable life insurance and variable annuity products described above, the purchaser may choose among investment options that include RiverSource Life’s “general account” as well as from a variety of portfolios including common stocks, bonds, managed assets and/or short-term securities.

 

44



 

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its wholly owned subsidiaries, RiverSource Life of NY and RTA.

 

RiverSource Life evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through February 23, 2010, the date the financial statements were issued.

 

Reclassifications

 

The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities as described in Note 13.  Certain reclassifications of prior year amounts have been made to conform to the current presentation.  In the first quarter of 2009, RiverSource Life reclassified reinsurance allowances for coinsurance contracts for traditional life and long term care insurance from premiums to other insurance and operating expenses to net with the associated expenses.

 

The following table shows the impact of the reclassification of the reinsurance allowances made to RiverSource Life’s previously reported Consolidated Statements of Income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2008

 

Year Ended December 31, 2007

 

 

 

Previously
Reported

 

Reclassified

 

Previously
Reported

 

Reclassified

 

 

 

(in millions)

 

(in millions)

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

481

 

$

438

 

$

485

 

$

439

 

Net investment income

 

1,252

 

1,252

 

1,424

 

1,424

 

Policy and contract charges

 

1,352

 

1,352

 

1,217

 

1,217

 

Other revenue

 

255

 

255

 

255

 

255

 

Net realized investment gain

 

(442

)

(442

)

61

 

61

 

Total revenues

 

2,898

 

2,855

 

3,442

 

3,396

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

Benefits, claims, losses and settlement expenses

 

673

 

673

 

760

 

760

 

Interest credited to fixed accounts

 

790

 

790

 

847

 

847

 

Amortization of deferred acquisition costs

 

861

 

861

 

470

 

470

 

Separation costs

 

 

 

97

 

97

 

Other insurance and operating expenses

 

692

 

649

 

781

 

735

 

Total benefits and expenses

 

3,016

 

2,973

 

2,955

 

2,909

 

Pretax income

 

(118

)

(118

)

487

 

487

 

Income tax provision

 

(189

)

(189

)

53

 

53

 

Net income

 

$

71

 

$

71

 

$

434

 

$

434

 

 

2.              Summary of Significant Accounting Policies

 

Principles of Consolidation

RiverSource Life consolidates all entities in which it holds a greater than 50% voting interest or when certain conditions are met for variable interest entities (“VIEs”) and limited partnerships, except for immaterial seed money investments in separate accounts, which are accounted for as trading securities.  Entities in which RiverSource Life holds a greater than 20% but less than 50% voting interest are accounted for under the equity method.  Additionally, other investments in which RiverSource Life holds an interest that is less than 50% are accounted for under the equity method.  All other investments that are not reported at fair value as Available-for-Sale or trading securities are accounted for under the cost method where RiverSource Life owns less than a 20% voting interest and does not exercise significant influence.

 

Generally, a VIE is a corporation, partnership, trust or any other legal structure that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.  To determine whether RiverSource Life must consolidate a VIE, it analyzes the

 

45



 

design of the VIE to identify the variable interests it holds.  Then RiverSource Life quantitatively determines whether its variable interests will absorb a majority of the VIE’s variability.  If RiverSource Life determines it will absorb a majority of the VIE’s expected variability, RiverSource Life consolidates the VIE and is referred to as the primary beneficiary.  The calculation of variability is based on an analysis of projected probability-weighted cash flows based on the design of the particular VIE.

 

All material intercompany transactions and balances between and among RiverSource Life and its subsidiaries have been eliminated in consolidation.

 

Amounts Based on Estimates and Assumptions

Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other-than-temporary impairments, valuation of deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, derivative instruments and hedging activities, claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.

 

Investments

 

Investments consist of the following:

 

Available-for-Sale Securities

Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss), net of income tax provision (benefit) and net of adjustments in other asset and liability balances, such as DAC, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet date.  Gains and losses are recognized in the Consolidated Statements of Income upon disposition of the securities.

 

Effective January 1, 2009, RiverSource Life early adopted an accounting standard that significantly changed RiverSource Life’s accounting policy regarding the timing and amount of other-than-temporary impairments for Available-for-Sale securities. When the fair value of an investment is less than its amortized cost, RiverSource Life assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not RiverSource Life will be required to sell the security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment is considered to have occurred and RiverSource Life must recognize an other-than-temporary impairment for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria and RiverSource Life does not expect to recover a security’s amortized cost basis, the security is also considered other-than-temporarily impaired. For these securities, RiverSource Life separates the total impairment into the credit loss component and the amount of the loss related to other factors. The amount of the total other-than-temporary impairments related to credit loss is recognized in earnings. The amount of the total other-than-temporary impairments related to other factors is recognized in other comprehensive income (loss), net of impacts to DAC, deferred sales inducement costs (“DSIC”), certain benefit reserves and income taxes. For Available-for-Sale securities that have recognized an other-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. Subsequent increases and decreases in the fair value of Available-for-Sale securities are included in other comprehensive income (loss).  RiverSource Life’s Consolidated Statements of Shareholder’s Equity present all changes in other comprehensive income (loss) associated with Available-for-Sale debt securities that have been other-than-temporarily impaired on a separate line from fair value changes recorded in other comprehensive income (loss) from all other securities.

 

RiverSource Life provides a supplemental disclosure on the face of its Consolidated Statements of Income that presents: (i) total other-than-temporary impairment losses recognized during the period and (ii) the portion of other-than-temporary impairment losses recognized in other comprehensive income (loss). The sum of these amounts represents the credit-related portion of other-than-temporary impairments that were recognized in earnings during the period. The portion of other-than-temporary losses recognized in other comprehensive income (loss) includes: (i) the portion of other-than-temporary impairment losses related to factors other than credit recognized during the period and (ii) reclassifications of other-than-temporary impairment losses previously determined to be related to factors other than

 

46



 

credit that are determined to be credit-related in the current period. The amount presented on the Consolidated Statements of Income as the portion of other-than-temporary losses recognized in other comprehensive income (loss) excludes subsequent increases and decreases in the fair value of these securities.

 

For all securities that are considered temporarily impaired, RiverSource Life does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that RiverSource Life will be required to sell the security before recovery of its amortized cost basis. RiverSource Life believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.

 

Factors RiverSource Life considers in determining whether declines in the fair value of fixed-maturity securities are other-than-temporary include: (i) the extent to which the market value is below amortized cost; (ii) the duration of time in which there has been a significant decline in value; (iii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iv) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. In order to determine the amount of the credit loss component for corporate debt securities considered other-than-temporarily impaired, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security.  The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and RiverSource Life’s position in the debtor’s overall capital structure.

 

For structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments), RiverSource Life also considers factors such as overall deal structure and its position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections in assessing potential other-than-temporary impairments of these investments. Based upon these factors, securities that have indicators of potential other-than-temporary impairment are subject to detailed review by management. Securities for which declines are considered temporary continue to be carefully monitored by management. For the year ended December 31, 2009, certain non-agency residential mortgage backed securities were deemed other-than-temporarily impaired. Generally, the credit loss component for the non-agency residential mortgage backed securities is determined as the amount the amortized cost basis exceeds the present value of the projected cash flows expected to be collected. Significant inputs considered in these projections are consistent with the factors considered in assessing potential other-than-temporary impairment for these investments.  Current contractual interest rates considered in these cash flow projections are used to calculate the discount rate used to determine the present value of the expected cash flows.

 

Commercial Mortgage Loans, Net

Commercial mortgage loans, net, reflect principal amounts outstanding less the allowance for loan losses.  The allowance for loan losses is primarily based on RiverSource Life’s past loan loss experience, known and inherent risks in the portfolio, composition of the loan portfolio, current economic conditions, and other relevant factors.  Loans in this portfolio are generally smaller balance and homogeneous in nature and accordingly RiverSource Life follows accounting guidance on contingencies when establishing necessary reserves for losses inherent in the portfolio.  For larger balance or restructured loans that are collateral dependent, the allowance is based on the fair value of collateral.  Management regularly evaluates the adequacy of the allowance for loan losses and believes it is adequate to absorb estimated losses in the portfolio.

 

RiverSource Life generally stops accruing interest on commercial mortgage loans for which interest payments are delinquent more than three months.  Based on management’s judgment as to the ultimate collectability of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan.

 

Policy Loans

Policy loans include life insurance policy and annuity loans.  These loans are carried at the aggregate of the unpaid loan balances, which do not exceed the cash surrender values of underlying products, plus accrued interest.

 

Trading Securities and Other Investments

Included in trading securities and other investments are separate account and mutual fund seed money, equity method investments, trading bonds, interests in affordable housing partnerships and below investment grade syndicated bank loans. Separate account and mutual fund seed money is carried at fair value with changes in value

 

47



 

recognized within net investment income.  Affordable housing partnerships are accounted for under the equity method. Below investment grade syndicated bank loans reflect amortized cost less allowance for losses.

 

Cash and Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less.

 

Restricted Cash

Total restricted cash at December 31, 2009 and 2008 was $184 million and nil, respectively, consisting of cash that is pledged to counterparties.

 

Reinsurance

RiverSource Life cedes significant amounts of insurance risk to other insurers under reinsurance agreements. Reinsurance premiums paid and benefits received are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Traditional life, long term care (“LTC”) and DI reinsurance premium, net of the change in any prepaid reinsurance asset, is reported as a reduction of premiums. Fixed and variable universal life reinsurance premium is reported as a reduction of policy and contract charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.

 

Insurance liabilities are reported before the effects of reinsurance. Future policy benefits and policy claims and other policyholders’ funds recoverable under reinsurance contracts are recorded as reinsurance recoverables.

 

RiverSource Life also assumes life insurance and fixed annuity business from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts.  Liabilities for assumed business are recorded within future policy benefits.

 

See Note 7 for additional information on reinsurance.

 

Land, Buildings, Equipment and Software

Land, buildings, equipment and internally developed or purchased software are carried at cost less accumulated depreciation or amortization and are reflected within other assets. RiverSource Life generally uses the straight-line method of depreciation and amortization over periods ranging from three to 30 years. During 2009, RiverSource Life received a non-cash capital contribution of $131 million comprised of two buildings and the related land from Ameriprise Financial.

 

At December 31, 2009 and 2008, land, buildings, equipment and software were $190 million and $43 million, respectively, net of accumulated depreciation of $52 million and $9 million, respectively. Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $8 million, $5 million and $1 million, respectively.

 

Derivative Instruments and Hedging Activities

Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities.  See Note 11 for information regarding RiverSource Life’s fair value measurement of derivative instruments.  The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any.  RiverSource Life primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment.  RiverSource Life occasionally designates derivatives as (i) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”) or (ii) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”).

 

RiverSource Life’s policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement.

 

For derivative instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are recognized in current period earnings.  Changes in fair value of derivatives are presented in the Consolidated Statements of Income based on the nature and use of the instrument.  Changes in derivatives used as economic hedges are presented in the Consolidated Statements of Income with the corresponding change in the hedged asset or liability.

 

48



 

For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of the hedged risk within the corresponding hedged assets, liabilities or firm commitments, are recognized in current earnings. If a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings over the remaining life of the hedged item.

 

For derivative instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instruments are reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged item or transaction impacts earnings.  The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact.  Any ineffective portion of the gain or loss is reported currently in earnings as a component of net investment income.  If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is recognized into earnings over the period that the hedged item impacts earnings.  For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.

 

See Note 15 for information regarding the impact of derivatives on the Consolidated Statements of Income.

 

Derivative instruments that are entered into for hedging purposes are designated as such at the time RiverSource Life enters into the contract.  For all derivative instruments that are designated for hedging activities, RiverSource Life formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships.  Management also formally documents its risk management objectives and strategies for entering into the hedge transactions.  RiverSource Life formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items.  If it is determined that a derivative is no longer highly effective as a hedge, RiverSource Life will discontinue the application of hedge accounting.

 

The equity component of equity indexed annuity obligations is considered an embedded derivative.  Additionally, certain annuities contain guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”) provisions.  The GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives.  The fair value of embedded derivatives associated with annuities is included in future policy benefits.  The change in the fair value of the equity indexed annuity embedded derivatives is reflected in the interest credited to fixed accounts.  The changes in the fair value of the GMWB and GMAB embedded derivatives are reflected in benefits, claims, losses and settlement expenses.

 

Deferred Acquisition Costs

DAC represents the cost of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity and insurance products. These costs are deferred to the extent they are recoverable from future profits or premiums.  The DAC associated with insurance or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations.  These transactions are anticipated in establishing amortization periods and other valuation assumptions.

 

Direct sales commissions and other costs deferred as DAC is amortized over time.  For annuity and universal life (“UL”) contracts, DAC is amortized based on projections of estimated gross profits over amortization periods equal to the approximate life of the business.  For other insurance products, DAC is generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.

 

For annuity and UL insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management’s best estimates.  Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised.  When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change.  A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense.  The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.

 

49



 

For other life, DI and LTC insurance products, the assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities and therefore are intended to provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC is not recoverable.  If management concludes that DAC is not recoverable, DAC is reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in RiverSource Life’s Consolidated Statements of Income.

 

For annuity, life, DI and LTC insurance products, key assumptions underlying these long-term projections include interest rates (both earning rates on invested assets and rates credited to contractholder and policyholder accounts), equity market performance, mortality and morbidity rates and the rates at which policyholders are expected to surrender their contracts, make withdrawals from their contracts and make additional deposits to their contracts.  Assumptions about earned and credited interest rates are the primary factors used to project interest margins, while assumptions about equity and bond market performance are the primary factors used to project client asset value growth rates, and assumptions about surrenders, withdrawals and deposits comprise projected persistency rates.  Management must also make assumptions to project maintenance expenses associated with servicing its annuity and insurance businesses during the DAC amortization period.

 

The client asset value growth rates are the rates at which variable annuity and variable universal life (“VUL”) insurance contract values invested in separate accounts are assumed to appreciate in the future.  The rates used vary by equity and fixed income investments.  Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis.  RiverSource Life typically uses a five-year mean reversion process as a guideline in setting near-term equity asset growth rates based on a long-term view of financial market performance as well as recent actual performance.  The suggested near-term growth rate is reviewed to ensure consistency with management’s assessment of anticipated equity market performance.  In 2009, management continued to follow the mean reversion process, decreasing near-term equity asset growth rates to reflect the positive market.  DAC amortization expense recorded in a period when client asset value growth rates exceed management’s near-term estimate will typically be less than in a period when growth rates fall short of management’s near-term estimate.

 

RiverSource Life monitors other principal DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin and maintenance expense levels each quarter and, when assessed independently, each could impact RiverSource Life’s DAC balances.

 

The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously.  Unless management identifies a significant deviation over the course of its quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.

 

Deferred Sales Inducement Costs

DSIC consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values.  These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature.  The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC.  The amortization of DSIC is recorded in benefits, claims, losses and settlement expenses.

 

Separate Account Assets and Liabilities

Separate account assets and liabilities are primarily funds held for the exclusive benefit of variable annuity contractholders and variable life insurance policyholders.  RiverSource Life receives mortality and expense risk and other fees, guarantee fees and cost of insurance charges from the related accounts.

 

Future Policy Benefits and Policy Claims and Other Policyholders’ Funds

 

Fixed Annuities and Variable Annuity Guarantees

Future policy benefits and policy claims and other policyholders’ funds related to fixed annuities and variable annuity guarantees include liabilities for fixed account values on fixed and variable deferred annuities, guaranteed benefits associated with variable annuities, equity indexed annuities and fixed annuities in a payout status.

 

Liabilities for fixed account values on fixed and variable deferred annuities are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.

 

50



 

The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (“GMDB”) provisions.  When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value.  RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits.  In addition, RiverSource Life offers contracts containing GMWB and GMAB provisions and, until May 2007, RiverSource Life offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.

 

In determining the liabilities for GMDB, GMIB and the life contingent benefits associated with GMWB, RiverSource Life projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management reviews, and where appropriate, adjusts its assumptions each quarter.   Unless management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.

 

The GMDB liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).

 

If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments.

 

The embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions are recorded at fair value.  See Note 11 for information regarding the fair value measurement of embedded derivatives.  The liability for the life contingent benefits associated with GMWB provisions is determined in the same way as the GMDB liability.  The changes in both the fair values of the GMWB and GMAB embedded derivatives and the liability for life contingent benefits are reflected in benefits, claims, losses and settlement expenses.

 

Liabilities for equity indexed annuities are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.

 

Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 4.6% to 9.5% at December 31, 2009, depending on year of issue, with an average rate of approximately 5.7%.

 

Life, Disability Income and Long Term Care Insurance

Future policy benefits and policy claims and other policyholders’ funds related to life, DI and LTC insurance include liabilities for fixed account values on fixed and variable universal life policies, liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI and LTC policies as claims are incurred in the future.

 

Liabilities for fixed account values on fixed and variable universal life insurance are equal to accumulation values.  Accumulation values are the cumulative gross deposits and credited interest less various contractual expense and mortality charges and less amounts withdrawn by policyholders.

 

Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies. Liabilities for unpaid amounts on reported DI and LTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These amounts are calculated based on claim continuance tables which estimate the likelihood an individual will continue to be eligible for benefits. Present values are calculated at interest rates established when claims are incurred. Anticipated claim continuance rates are based on established industry tables, adjusted as appropriate for RiverSource Life’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31, 2009, with an average rate of 4.7%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31, 2009, with an average rate of 4.1%.

 

51



 

Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported.

 

Liabilities for estimates of benefits that will become payable on future claims on term life, whole life, DI and LTC policies are based on the net level premium method, using anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Anticipated mortality and morbidity rates are based on established industry mortality and morbidity tables, with modifications based on RiverSource Life’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors. Anticipated interest rates for term and whole life ranged from 4.0% to 10.0% at December 31, 2009, depending on policy form, issue year and policy duration. Anticipated interest rates for DI vary by plan and were 7.5% and 6.0% at policy issue grading to 5.0% over five years and 4.5% over 20 years, respectively. Anticipated interest rates for LTC policy reserves can vary by plan and year and ranged from 5.8% to 9.4% at December 31, 2009.

 

Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverables.

 

Sources of Revenue

RiverSource Life’s principal sources of revenue include premium revenues, net investment income and policy and contract charges.

 

Premium Revenues

Premium revenues include premiums on traditional life, DI and LTC insurance products and immediate annuities with a life contingent feature.  Premiums on traditional life, DI and LTC insurance are net of reinsurance ceded and are recognized as revenue when due.

 

Net Investment Income

Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial mortgage loans and policy loans, other investments and cash and cash equivalents; the changes in fair value of trading securities and certain derivatives; and the pro-rata share of net income or loss on equity method investments.  Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale and commercial mortgage loans so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term.

 

Policy and Contract Charges

Policy and contract charges include mortality and expense risk fees and certain charges assessed on annuities and fixed and variable universal life insurance, such as cost of insurance, net of reinsurance premiums for universal life insurance products, and administrative and surrender charges.  Mortality and expense risk fees include risk, management and administration fees, which are generated directly and indirectly from RiverSource Life’s separate account assets.  Cost of insurance charges on fixed and variable universal life insurance and contract charges and surrender charges on annuities and universal and variable universal life insurance are recognized as revenue when collected.

 

Net Realized Investment Gains (Losses)

Realized gains and losses on the sale of securities are recognized using the specific identification method, on a trade date basis, and charges for investments determined to be other-than-temporarily impaired and related to credit losses.

 

Other Insurance and Operating Expenses

Other insurance and operating expenses primarily include expenses allocated to RiverSource Life from its parent, Ameriprise Financial, for RiverSource Life’s share of compensation, professional and consultant fees and expenses associated with information technology and communications, facilities and equipment, advertising and promotion and legal and regulatory costs.

 

Income Taxes

As a result of the Separation of Ameriprise Financial from American Express, RiverSource Life will not be able to file a consolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010. RiverSource Life’s provision for income taxes represents the net amount of income taxes that it expects

 

52



 

to pay or to receive from various taxing jurisdictions in connection with its operations.  RiverSource Life provides for income taxes based on amounts that it believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions.  Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.

 

In connection with the provision for income taxes, the consolidated financial statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes. Among RiverSource Life’s deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes.  Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes.

 

RiverSource Life is required to establish a valuation allowance for any portion of its deferred tax assets that management believes will not be realized.  Significant judgment is required in determining if a valuation allowance should be established and the amount of such allowance if required.  Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains.  Consideration is given to, among other things in making this determination: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies.

 

3.              Recent Accounting Pronouncements

 

Adoption of New Accounting Standards

 

Accounting and Reporting for Decreases in Ownership of a Subsidiary

 

In January 2010, the Financial Accounting Standards Board (“FASB”) updated the accounting standards to clarify the accounting and disclosure requirements for changes in the ownership percentage of a subsidiary. The additional disclosures primarily relate to instances when a subsidiary is deconsolidated or a group of assets is derecognized. The additional disclosures primarily relate to fair value considerations, the parent’s involvement with the deconsolidated entity and related party considerations. The standard is effective for the first interim or annual reporting period ending after December 15, 2009. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have any effect on RiverSource Life’s consolidated financial condition and results of operations.

 

Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

 

In September 2009, the FASB updated the accounting standards to allow for net asset value (“NAV”) to be used as a practical expedient in estimating the fair value of alternative investments without readily determinable fair values. The standard also requires additional disclosure by major category of investment related to restrictions on the investor’s ability to redeem the investment as of the measurement date, unfunded commitments and the investment strategies of the investees. The disclosures are required for all investments within the scope of the standard regardless of whether the fair value of the investment is measured using the NAV or another method.  The standard is effective for interim and annual periods ending after December 15, 2009, with early adoption permitted. RiverSource Life adopted the standard in the fourth quarter of 2009.  The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.

 

Measuring Liabilities at Fair Value

 

In August 2009, the FASB updated the accounting standards to provide additional guidance on estimating the fair value of a liability. The standard is effective for the first reporting period, including interim periods, beginning after issuance. RiverSource Life adopted the standard in the fourth quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.

 

The Hierarchy of GAAP

 

In June 2009, the FASB established the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in

 

53



 

conformity with GAAP. The Codification supersedes existing nongrandfathered, non-SEC accounting and reporting standards. The Codification did not change GAAP but rather organized it into a hierarchy where all guidance within the Codification carries an equal level of authority. The Codification became effective on July 1, 2009. The Codification did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.

 

Subsequent Events

 

In May 2009, the FASB updated the accounting standards on the recognition and disclosure of subsequent events. The standard also requires the disclosure of the date through which subsequent events were evaluated. The standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. RiverSource Life adopted the standard in the second quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.

 

Fair Value

 

In April 2009, the FASB updated the accounting standards to provide guidance on estimating the fair value of a financial asset or liability when the trade volume and level of activity for the asset or liability have significantly decreased relative to historical levels. The standard requires entities to disclose the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, debt and equity securities as defined by GAAP shall be disclosed by major category. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. RiverSource Life early adopted the standard in the first quarter of 2009. The adoption did not have a material effect on RiverSource Life’s consolidated financial condition and results of operations.

 

In September 2006, the FASB updated the accounting standards to define fair value, establish a framework for measuring fair value and expand disclosures about fair value measurements. RiverSource Life adopted the standard effective January 1, 2008 and recorded a cumulative effect reduction to the opening balance of retained earnings of $30 million, net of DAC and DSIC amortization and income taxes. This reduction to retained earnings was related to adjusting the fair value of certain derivatives RiverSource Life uses to hedge its exposure to market risk related to certain variable annuity riders. Prior to January 1, 2008, RiverSource Life recorded these derivatives in accordance with accounting guidance for derivative contracts held for trading purposes and contracts involved in energy trading and risk management activities. The new standard nullifies the previous guidance and requires these derivatives to be marked to the price RiverSource Life would receive to sell the derivatives to a market participant (an exit price). The adoption of the standard also resulted in adjustments to the fair value of RiverSource Life’s embedded derivative liabilities associated with certain variable annuity riders. Since there is no market for these liabilities, RiverSource Life considered the assumptions participants in a hypothetical market would make to determine an exit price. As a result, RiverSource Life adjusted the valuation of these liabilities by updating certain policyholder assumptions, adding explicit margins to provide for profit, risk, and expenses, and adjusting the rate used to discount expected cash flows to reflect a current market estimate of RiverSource Life’s risk of nonperformance specific to these liabilities. These adjustments resulted in an adoption impact of a $4 million increase in earnings, net of DAC and DSIC amortization and income taxes, at January 1, 2008. The nonperformance risk component of the adjustment is specific to the risk of RiverSource Life not fulfilling these liabilities. As RiverSource Life’s estimate of this credit spread widens or tightens, the liability will decrease or increase.

 

Recognition and Presentation of Other-Than-Temporary Impairments

 

In April 2009, the FASB updated the accounting standards for the recognition and presentation of other-than-temporary impairments. The standard amends existing guidance on other-than-temporary impairments for debt securities and requires that the credit portion of other-than-temporary impairments be recorded in earnings and the noncredit portion of losses be recorded in other comprehensive income (loss) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery of its cost basis. The standard requires separate presentation of both the credit and noncredit portions of other-than-temporary impairments on the financial statements and additional disclosures. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At the date of adoption, the portion of previously recognized other-than-temporary impairments that represent the noncredit related loss component shall be recognized as a cumulative effect of adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other

 

54



 

comprehensive income (loss). RiverSource Life adopted the standard in the first quarter of 2009 and recorded a cumulative effect increase to the opening balance of retained earnings of $38 million, net of DAC and DSIC amortization, certain benefit reserves and income taxes, and a corresponding increase to accumulated other comprehensive loss, net of impacts to DAC and DSIC amortization, certain benefit reserves and income taxes. See Note 4 for RiverSource Life’s required disclosures.

 

Disclosures about Derivative Instruments and Hedging Activities

 

In March 2008, the FASB updated the accounting standards for disclosures about derivative instruments and hedging activities. The standard intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about their impact on an entity’s financial position, financial performance, and cash flows.  The standard requires disclosures regarding the objectives for using derivative instruments, the fair value of derivative instruments and their related gains and losses, and the accounting for derivatives and related hedged items. The standard is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. RiverSource Life applied the new disclosure requirements in the first quarter of 2009. See Note 15 for the required disclosures.

 

Noncontrolling Interests in Consolidated Financial Statements

 

In December 2007, the FASB updated the accounting standards for noncontrolling interests in consolidated financial statements to establish the accounting and reporting for ownership interest in subsidiaries not attributable, directly or indirectly, to a parent.  The standard requires noncontrolling (minority) interests to be classified as equity (instead of as a liability) within the Consolidated Balance Sheets, and net income (loss) attributable to both the parent and the noncontrolling interests to be disclosed on the face of the Consolidated Statements of Income. The standard is effective for fiscal years beginning after December 15, 2008, and interim periods within those years with early adoption prohibited. The provisions of the standard are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively to all periods presented. RiverSource Life adopted the new standard as of January 1, 2009 and there was no impact on its consolidated financial condition and results of operations.

 

Uncertainty in Income Taxes

 

In June 2006, the FASB updated the accounting standards related to uncertainty in income taxes.  The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  RiverSource Life adopted the standard as of January 1, 2007.  The effect of adopting the standard on RiverSource Life’s consolidated financial condition and results of operations was not material.

 

DAC Costs in Connection With Modifications or Exchanges of Insurance Contracts

 

In September 2005, the accounting standards related to DAC in connection with modifications or exchanges of insurance contracts were updated.  The standard provides clarifying guidance on accounting for DAC associated with an insurance or annuity contract that is significantly modified or is internally replaced with another contract.  Prior to adoption, RiverSource Life accounted for many of these transactions as contract continuations and continued amortizing existing DAC against revenue for the new or modified contract.  Effective January 1, 2007, RiverSource Life adopted the standard resulting in these transactions being prospectively accounted for as contract terminations.  Consistent with this, RiverSource Life now anticipates these transactions in establishing amortization periods and other valuation assumptions.  As a result of adopting the standard, RiverSource Life recorded as a cumulative change in accounting principle $206 million, reducing DAC by $204 million, DSIC by $11 million and liabilities for future policy benefits by $9 million.  The after-tax decrease to retained earnings for these changes was $134 million.

 

55



 

Future Adoption of New Accounting Standards

 

Fair Value

 

In January 2010, the FASB updated the accounting standards related to disclosure about fair value measurements. The standard expands the current disclosure requirements to include additional detail about significant transfers between Levels 1 and 2 within the fair value hierarchy and presenting activity in the rollforward of Level 3 activity on a gross basis. The standard also clarifies existing disclosure requirements related to the level of disaggregation to be used for assets and liabilities as well as disclosures about the inputs and valuation techniques used to measure fair value. The standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements related to the Level 3 rollforward, which are effective for interim and annual periods beginning after December 15, 2010. RiverSource Life will adopt the standard in the first quarter of 2010 except for the additional disclosures related to the Level 3 rollforward, which RiverSource Life will adopt in the first quarter of 2011. The adoption of the standard will not impact RiverSource Life’s consolidated financial condition and results of operations.

 

Consolidation of Variable Interest Entities

 

In June 2009, the FASB updated the accounting standards related to the consolidation of variable interest entities. The standard amends current consolidation guidance and requires additional disclosures about an enterprise’s involvement in VIEs. The standard is effective for interim and annual reporting periods beginning after November 15, 2009, with early adoption prohibited. RiverSource Life does not expect the adoption to have a material effect on its consolidated financial condition and results of operations.

 

4.              Investments

 

Available-for-Sale securities distributed by type were as follows:

 

 

 

December 31, 2009

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Non-Credit
OTTI(1)

 

 

 

(in millions)

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

14,245

 

$

855

 

$

(106

)

$

14,994

 

$

1

 

Residential mortgage backed securities

 

5,249

 

185

 

(238

)

5,196

 

(41

)

Commercial mortgage backed securities

 

3,874

 

182

 

(16

)

4,040

 

 

Asset backed securities

 

877

 

32

 

(29

)

880

 

 

State and municipal obligations

 

647

 

12

 

(46

)

613

 

 

U.S. government and agencies obligations

 

152

 

7

 

(1

)

158

 

 

Foreign government bonds and obligations

 

94

 

14

 

(1

)

107

 

 

Other structured investments

 

4

 

7

 

 

11

 

7

 

Total fixed maturities

 

25,142

 

1,294

 

(437

)

25,999

 

(33

)

Common and preferred stocks

 

30

 

 

(7

)

23

 

 

Total

 

$

25,172

 

$

1,294

 

$

(444

)

$

26,022

 

$

(33

)

 


(1)          Represents the amount of other-than-temporary impairment losses in Accumulated Other Comprehensive Income, which starting January 1, 2009, were not included in earnings.  Amount includes unrealized gains and losses on impaired securities subsequent to the impairment date.  These amounts are included in gross unrealized gains and losses at December 31, 2009.

 

56



 

 

 

December 31, 2008

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

(in millions)

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

12,030

 

$

86

 

$

(1,123

)

$

10,993

 

Residential mortgage backed securities

 

3,697

 

59

 

(220

)

3,536

 

Commercial mortgage backed securities

 

2,582

 

35

 

(174

)

2,443

 

Asset backed securities

 

682

 

4

 

(60

)

626

 

State and municipal obligations

 

164

 

1

 

(20

)

145

 

U.S. government and agencies obligations

 

200

 

11

 

 

211

 

Foreign government bonds and obligations

 

95

 

16

 

(4

)

107

 

Other structured investments

 

2

 

7

 

 

9

 

Total fixed maturities

 

19,452

 

219

 

(1,601

)

18,070

 

Common and preferred stocks

 

30

 

 

(14

)

16

 

Total

 

$

19,482

 

$

219

 

$

(1,615

)

$

18,086

 

 

At December 31, 2009 and 2008, fixed maturity securities comprised approximately 88% and 82%, respectively, of RiverSource Life’s total investments.  These securities were rated by Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings Ltd. (“Fitch”), except for approximately $1.1 billion of securities at both December 31, 2009 and 2008, which were rated by RiverSource Investments, LLC’s internal analysts using criteria similar to Moody’s, S&P and Fitch.  Ratings on fixed maturity securities are presented using the median of ratings from Moody’s, S&P and Fitch. If only two of the ratings are available, the lower rating is used.  A summary of fixed maturity securities by rating was as follows:

 

 

 

December 31, 2009

 

December 31, 2008

 

Ratings

 

Amortized
Cost

 

Fair
Value

 

Percent of
Total Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Percent of
Total Fair
Value

 

 

 

(in millions, except percentages)

 

AAA

 

$

9,194

 

$

9,520

 

37

%

$

7,038

 

$

6,779

 

38

%

AA

 

1,081

 

1,084

 

4

 

1,071

 

1,017

 

6

 

A

 

4,182

 

4,326

 

17

 

4,132

 

3,883

 

21

 

BBB

 

9,276

 

9,826

 

38

 

5,901

 

5,388

 

30

 

Below investment grade

 

1,409

 

1,243

 

4

 

1,310

 

1,003

 

5

 

Total fixed maturities

 

$

25,142

 

$

25,999

 

100

%

$

19,452

 

$

18,070

 

100

%

 

At December 31, 2009 and 2008, approximately 19% and 44%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities.  No holdings of any other issuer were greater than 10% of shareholder’s equity.

 

57



 

The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

December 31, 2009

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

133

 

$

1,088

 

$

(18

)

165

 

$

1,313

 

$

(88

)

298

 

$

2,401

 

$

(106

)

Residential mortgage backed securities

 

43

 

1,184

 

(34

)

68

 

363

 

(204

)

111

 

1,547

 

(238

)

Commercial mortgage backed securities

 

33

 

353

 

(4

)

26

 

297

 

(12

)

59

 

650

 

(16

)

Asset backed securities

 

7

 

70

 

(1

)

18

 

87

 

(28

)

25

 

157

 

(29

)

State and municipal obligations

 

32

 

232

 

(9

)

2

 

99

 

(37

)

34

 

331

 

(46

)

U.S. government and agencies obligations

 

2

 

89

 

(1

)

 

 

 

2

 

89

 

(1

)

Foreign government bonds and obligations

 

 

 

 

2

 

4

 

(1

)

2

 

4

 

(1

)

Other structured investments

 

 

 

 

2

 

 

 

2

 

 

 

Common and preferred stock

 

 

 

 

2

 

23

 

(7

)

2

 

23

 

(7

)

Total

 

250

 

$

3,016

 

$

(67

)

285

 

$

2,186

 

$

(377

)

535

 

$

5,202

 

$

(444

)

 

 

 

December 31, 2008

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number
of
Securities

 

Fair
Value

 

Unrealized
Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

312

 

$

5,086

 

$

(372

)

221

 

$

3,309

 

$

(751

)

533

 

$

8,395

 

$

(1,123

)

Residential mortgage backed securities

 

34

 

305

 

(85

)

52

 

466

 

(135

)

86

 

771

 

(220

)

Commercial mortgage backed securities

 

26

 

387

 

(23

)

54

 

867

 

(151

)

80

 

1,254

 

(174

)

Asset backed securities

 

17

 

187

 

(31

)

15

 

124

 

(29

)

32

 

311

 

(60

)

State and municipal obligations

 

2

 

17

 

(1

)

2

 

78

 

(19

)

4

 

95

 

(20

)

U.S. government and agencies obligations

 

 

 

 

1

 

11

 

 

1

 

11

 

 

Foreign government bonds and obligations

 

7

 

20

 

(4

)

 

 

 

7

 

20

 

(4

)

Other structured investments

 

 

 

 

2

 

 

 

2

 

 

 

Common and preferred stock

 

 

 

 

2

 

16

 

(14

)

2

 

16

 

(14

)

Total

 

398

 

$

6,002

 

$

(516

)

349

 

$

4,871

 

$

(1,099

)

747

 

$

10,873

 

$

(1,615

)

 

As part of RiverSource Life’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to changes in credit spreads across sectors. The primary driver of lower unrealized losses in 2009 compared to 2008 was the tightening of credit spreads across sectors, partially offset by higher interest rates.  In addition, a portion of the decrease in unrealized losses was offset by an increase due to the adoption of a new accounting standard effective January 1, 2009. RiverSource Life recorded a cumulative effect increase to the amortized cost of previously other-than-temporarily impaired investments that increased the gross unrealized losses on Available-for-Sale securities by $64 million. This impact is due to the impairment of Available-for-Sale securities recognized in other comprehensive income (loss) previously recognized through earnings for factors other than credit.

 

58



 

The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss):

 

 

 

(in millions)

 

Beginning balance of credit losses on securities held for which a portion of other-than-temporary impairment was recognized in other comprehensive income

 

$

102

 

Additional amount related to credit losses for which an other-than-temporary impairment was not previously recognized

 

7

 

Reductions for securities sold during the period (realized)

 

(58

)

Additional increases to the amount related to credit losses for which an other-than-temporary impairment was previously recognized

 

31

 

Ending balance of credit losses on securities held as of December 31, 2009 for which a portion of other-than-temporary impairment was recognized in other comprehensive income

 

$

82

 

 

The change in net unrealized securities gains (losses) in other comprehensive income (loss) includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities; and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC, benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.  As a result of the adoption of a new accounting standard effective January 1, 2009, net unrealized investment gains (losses) arising during the period also includes other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income (loss) during the period. Additionally, reclassification of (gains) losses included in net income contains noncredit other-than-temporary impairment losses that were previously unrealized, but have been recognized in current period net income due to their reclassification as credit losses.

 

The following table presents a rollforward of the net unrealized securities gains (losses) on Available-for-Sale securities included in accumulated other comprehensive income (loss):

 

 

 

Net
Unrealized
Investment
Gains (Losses)

 

Deferred
Income Tax

 

Accumulated Other
Comprehensive Income
(Loss) Related to Net
Unrealized Investment
Gains (Losses)

 

 

 

(in millions)

 

Balance at January 1, 2007

 

$

(258

)

$

90

 

$

(168

)

Net unrealized investment gains arising during the period

 

103

 

(36

)

67

 

Reclassification of gains included in net income

 

(39

)

14

 

(25

)

Impact on DAC, DSIC and benefit reserves

 

15

 

(5

)

10

 

Balance at December 31, 2007

 

$

(179

)

$

63

 

$

(116

)

Net unrealized investment losses arising during the period

 

(1,598

)

559

 

(1,039

)

Reclassification of losses included in net income

 

431

 

(151

)

280

 

Impact on DAC, DSIC and benefit reserves

 

303

 

(106

)

197

 

Balance at December 31, 2008

 

$

(1,043

)

$

365

 

$

(678

)

Cumulative effect of accounting change

 

(58)

(1)

20

 

(38

)

Net unrealized investment gains arising during the period

 

2,378

 

(832

)

1,546

 

Reclassification of gains included in net income

 

(73

)

26

 

(47

)

Impact on DAC, DSIC, benefit reserves and reinsurance recoverables

 

(566

)

199

 

(367

)

Balance at December 31, 2009

 

$

638

 

$

(222

)

$

416

(2)

 


(1)   Amount represents the cumulative effect of adopting a new accounting standard on January 1, 2009, net of DAC and DSIC amortization and certain benefit reserves.  See Note 3 for additional information on the adoption impact.

(2)   At December 31, 2009, Accumulated Other Comprehensive Income Related to Net Unrealized Investment Gains included $(16) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.

 

59



 

Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains (losses) were as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Gross realized investment gains from sales

 

$

185

 

$

13

 

$

64

 

Gross realized investment losses from sales

 

(50

)

(6

)

(20

)

Other-than-temporary impairments related to credit

 

(62

)

(440

)

(4

)

 

The $62 million of other-than-temporary impairments recognized in net realized investment gains (losses) in 2009 were related to credit losses on non-agency residential mortgage backed securities and corporate debt securities in the gaming industry and banking and finance industries.  The $440 million of other-than-temporary impairments recognized in net realized investment gains (losses) in 2008 primarily to credit losses on non-agency residential mortgage backed securities, corporate debt securities primarily in the financial services industry and asset backed and other securities. The $4 million of other-than-temporary impairments recognized in net realized investment gains (losses) in 2007 related to corporate debt securities in the publishing and home building industries.

 

Available-for-Sale securities by contractual maturity at December 31, 2009 were as follows:

 

 

 

Amortized Cost

 

Fair Value

 

 

 

(in millions)

 

Due within one year

 

$

738

 

$

751

 

Due after one year through five years

 

6,638

 

6,862

 

Due after five years through 10 years

 

4,786

 

5,062

 

Due after 10 years

 

2,976

 

3,197

 

 

 

15,138

 

15,872

 

Residential mortgage backed securities

 

5,249

 

5,196

 

Commercial mortgage backed securities

 

3,874

 

4,040

 

Asset backed securities

 

877

 

880

 

Other structured investments

 

4

 

11

 

Common and preferred stocks

 

30

 

23

 

Total

 

$

25,172

 

$

26,022

 

 

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments are not due at a single maturity date.  As such, these securities, as well as common and preferred stocks, were not included in the maturities distribution.

 

At December 31, 2009 and 2008, bonds carried at $7 million and $6 million, respectively, were on deposit with various states as required by law.

 

Commercial Mortgage Loans, Net

 

The following is a summary of commercial mortgage loans:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Commercial mortgage loans

 

$

2,562

 

$

2,754

 

Less: allowance for loan losses

 

(30

)

(17

)

Commercial mortgage loans, net

 

$

2,532

 

$

2,737

 

 

Commercial mortgage loans are first mortgages on real estate.  RiverSource Life holds the mortgage documents, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements.  Commercial mortgage loan fundings are restricted by state insurance regulatory authorities to 80% or less of the market value of the real estate at the time of origination of the loan.

 

60



 

The balances of and changes in the allowance for loan losses were as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Balance at January 1

 

$

17

 

$

16

 

$

37

 

Provision for loan losses

 

14

 

1

 

(21

)

Foreclosures, write-offs and loan sales

 

(1

)

 

 

Balance at December 31

 

$

30

 

$

17

 

$

16

 

 

Concentrations of credit risk of commercial mortgage loans by region were as follows:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

On-Balance
Sheet

 

Funding
Commitments

 

On-Balance
Sheet

 

Funding
Commitments

 

 

 

(in millions)

 

Commercial mortgage loans by U.S. region:

 

 

 

 

 

 

 

 

 

Atlantic

 

$

835

 

$

13

 

$

880

 

$

3

 

North Central

 

538

 

16

 

629

 

10

 

Pacific

 

487

 

13

 

463

 

20

 

Mountain

 

296

 

 

319

 

10

 

South Central

 

248

 

8

 

287

 

 

New England

 

158

 

 

176

 

 

 

 

2,562

 

50

 

2,754

 

43

 

Less: allowance for loan losses

 

(30

)

 

(17

)

 

Total

 

$

2,532

 

$

50

 

$

2,737

 

$

43

 

 

Concentrations of credit risk of commercial mortgage loans by property type were as follows:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

On-Balance
Sheet

 

Funding
Commitments

 

On-Balance
Sheet

 

Funding
Commitments

 

 

 

(in millions)

 

Commercial mortgage loans by U.S. property type:

 

 

 

 

 

 

 

 

 

Shopping centers and retail

 

$

842

 

$

16

 

$

869

 

$

23

 

Office buildings

 

702

 

6

 

777

 

18

 

Industrial buildings

 

468

 

12

 

485

 

2

 

Apartments

 

340

 

 

383

 

 

Hotels and motels

 

61

 

 

76

 

 

Mixed use

 

46

 

 

50

 

 

Medical buildings

 

28

 

16

 

32

 

 

Other

 

75

 

 

82

 

 

 

 

2,562

 

50

 

2,754

 

43

 

Less: allowance for loan losses

 

(30

)

 

(17

)

 

Total

 

$

2,532

 

$

50

 

$

2,737

 

$

43

 

 

Commitments to fund commercial mortgages were made in the ordinary course of business.  The funding commitments at December 31, 2009 and 2008 approximate fair value.

 

Below Investment Grade Syndicated Bank Loans, Net

 

The following is a summary of below investment grade syndicated bank loans:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Below investment grade syndicated bank loans

 

$

228

 

$

260

 

Less: allowance for loan losses

 

(12

)

(12

)

Net below investment grade syndicated bank loans

 

$

216

 

$

248

 

 

61



 

Below investment grade syndicated bank loans, which are included as a component of other investments, represent loans in which a group of lenders provide funds to borrowers. There is usually one originating lender which retains a small percentage and syndicates the remainder.

 

Trading Securities

 

Net recognized gains (losses) related to trading securities held at December 31, 2009, 2008 and 2007 were nil, $9 million and $(2) million, respectively.

 

Sources of Investment Income and Net Realized Investment Gains (Losses)

 

Net investment income is summarized as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Income on fixed maturities

 

$

1,371

 

$

1,043

 

$

1,187

 

Income on commercial mortgage loans

 

160

 

173

 

173

 

Trading securities and other investments

 

35

 

55

 

82

 

 

 

1,566

 

1,271

 

1,442

 

Less: investment expenses

 

(40

)

(19

)

(18

)

Total

 

$

1,526

 

$

1,252

 

$

1,424

 

 

Net realized investment gains (losses) are summarized as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Fixed maturities

 

$

73

 

$

(433

)

$

40

 

Commercial mortgage loans

 

(13

)

(1

)

 

Trading securities and other investments

 

(1

)

(8

)

 

Reduction in the allowance for loan losses

 

 

 

21

 

Total

 

$

59

 

$

(442

)

$

61

 

 

5.     Variable Interest Entities

 

RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.

 

RTA’s maximum exposure to loss as a result of its investment in the affordable housing partnerships is limited to the carrying values. The carrying values are reflected in trading securities and other investments and were $28 million and $54 million as of December 31, 2009 and 2008, respectively. RTA has no obligation to provide further financial or other support to the affordable housing partnerships nor has it provided any additional support to the affordable housing partnerships. RiverSource Life had no liabilities recorded as of December 31, 2009 and 2008 related to the affordable housing partnerships.

 

6.     Deferred Acquisition Costs and Deferred Sales Inducement Costs

 

During the third quarter of 2009, 2008 and 2007, RiverSource Life completed the annual detailed review of valuation assumptions of its products.  In addition, during the third quarter of 2008, RiverSource Life converted to a new industry standard valuation system that provides enhanced modeling capabilities.

 

62



 

The total pretax impacts on RiverSource Life’s assets and liabilities attributable to the review of valuation assumptions during the third quarter of 2009, 2008 and 2007 and the valuation system conversion during the third quarter of 2008 were as follows:

 

Balance Sheet Impact
Debit (Credit)

 

Reinsurance
Recoverables

 

DAC

 

DSIC

 

Other
Assets

 

Future
Policy
Benefits

 

Other
Liabilities

 

Total

 

 

 

(in millions)

 

2009 period

 

$

(65

)

$

119

 

$

9

 

$

 

$

71

 

$

 

$

134

 

2008 period

 

92

 

(81

)

(6

)

1

 

95

 

5

 

106

 

2007 period

 

(2

)

(16

)

3

 

 

(15

)

 

(30

)

 

The total pretax impacts on RiverSource Life’s revenues and expenses attributable to the review of the valuation assumptions for the years ended December 31, 2009, 2008 and 2007 and the valuation system conversion for the year ended December 31, 2008 were as follows:

 

Pretax Benefit (Charge)

 

Premiums

 

Policy and
Contract
Charges

 

Benefits,
Claims,
Losses and
Settlement
Expenses

 

Amortization
of DAC

 

Other
Insurance
and
Operating
Expenses

 

Total

 

 

 

(in millions)

 

2009 period

 

$

 

$

(65

)

$

80

 

$

119

 

$

 

$

134

 

2008 period

 

2

 

95

 

89

 

(81

)

1

 

106

 

2007 period

 

 

(2

)

(12

)

(16

)

 

(30

)

 

The balances of and changes in DAC were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Balance at January 1

 

$

4,324

 

$

4,334

 

$

4,321

 

Cumulative effect of accounting change

 

 

36

 

(204

)

Capitalization of acquisition costs

 

558

 

587

 

699

 

Amortization, excluding impacts of valuation assumptions review and valuation system conversion

 

(264

)

(780

)

(454

)

Amortization, impact of valuation assumptions review and valuation system conversion

 

119

 

(81

)

(16

)

Impact of change in net unrealized securities losses (gains)

 

(452

)

228

 

(12

)

Balance at December 31

 

$

4,285

 

$

4,324

 

$

4,334

 

 

The balances of and changes in DSIC were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

Balance at January 1

 

$

518

 

$

511

 

$

452

 

Cumulative effect of accounting change

 

 

9

 

(11

)

Capitalization of sales inducements costs

 

82

 

87

 

124

 

Amortization, excluding impacts of valuation assumptions review and valuation system conversion

 

(19

)

(115

)

(56

)

Amortization, impact of valuation assumptions review and valuation system conversion

 

9

 

(6

)

3

 

Impact of change in net unrealized securities losses (gains)

 

(66

)

32

 

(1

)

Balance at December 31

 

$

524

 

$

518

 

$

511

 

 

RiverSource Life adopted a new accounting standard on the recognition and presentation of other-than-temporary impairments in the first quarter of 2009.  The adoption had no net impact to DAC and DSIC.

 

Effective January 1, 2008, RiverSource Life adopted a new accounting standard on fair value measurements and recorded as a cumulative change in accounting principle a pretax increase of $36 million and $9 million to DAC and

 

63



 

DSIC, respectively.  See Note 3 for additional information regarding RiverSource Life’s adoption of fair value accounting standards.

 

Effective January 1, 2007, RiverSource Life adopted a new accounting standard related to DAC in connection with modifications or exchanges of insurance contracts and recorded as a cumulative change in accounting principle a pretax reduction of $204 million and $11 million to DAC and DSIC, respectively.

 

7.     Reinsurance

 

Generally, RiverSource Life reinsures 90% of the death benefit liability related to individual fixed and variable universal life and term life insurance products.  As a result, RiverSource Life typically retains and is at risk for, at most, 10% of each policy’s death benefit from the first dollar of coverage for new sales of these policies, subject to the reinsurers fulfilling their obligations.  RiverSource Life began reinsuring risks at this level during 2001 (2002 for RiverSource Life of NY) for term life insurance and 2002 (2003 for RiverSource Life of NY) for individual fixed and variable universal life insurance.  Policies issued prior to these dates are not subject to these same reinsurance levels.  Generally, the maximum amount of life insurance risk retained by RiverSource Life is $1.5 million (increased from $750,000 during 2008) on a single life and $1.5 million on any flexible premium survivorship life policy.  Risk on fixed and variable universal life policies is reinsured on a yearly renewable term basis.  Risk on most term life policies starting in 2001 (2002 for RiverSource Life of NY) is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.

 

For existing LTC policies, RiverSource Life (and RiverSource Life of NY for 1996 and later issues) retained 50% of the risk and ceded the remaining 50% of the risk on a coinsurance basis to subsidiaries of Genworth Financial, Inc. (“Genworth”).

 

Generally, RiverSource Life retains at most $5,000 per month of risk per life on DI policies sold on policy forms introduced in most states in October 2007 and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies.  RiverSource Life retains all risk for new claims on DI contracts sold on other policy forms.  RiverSource Life also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.

 

In addition, RiverSource Life assumes life insurance and fixed annuity risk under reinsurance arrangements with unaffiliated insurance companies.

 

At December 31, 2009 and 2008, traditional life and universal life insurance in force aggregated $192.8 billion and $192.3 billion, respectively, of which $131.2 billion and $127.6 billion were reinsured at the respective year ends.  Life insurance in force is reported on a statutory basis.  RiverSource Life also reinsures a portion of the risks assumed under its DI and LTC policies.

 

The effect of reinsurance on premiums was as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

Direct premiums

 

$

721

 

$

641

 

$

628

 

Reinsurance ceded

 

(271

)

(203

)

(189

)

Net premiums

 

$

450

 

$

438

 

$

439

 

 

Policy and contract charges are presented on the Consolidated Statements of Income net of $62 million, $61 million and $57 million of reinsurance ceded for the years ended December 31, 2009, 2008 and 2007, respectively.

 

Reinsurance recovered from reinsurers was $167 million, $142 million and $126 million for the years ended December 31, 2009, 2008 and 2007, respectively.  Reinsurance contracts do not relieve RiverSource Life from its primary obligation to policyholders.

 

Included in reinsurance recoverables is approximately $1.3 billion and $1.2 billion related to LTC risk ceded to Genworth as of December 31, 2009 and 2008, respectively.  Included in future policy benefits is $667 million and $689 million related to assumed reinsurance arrangements as of December 31, 2009 and 2008, respectively.

 

64



 

8.     Future Policy Benefits, Policy Claims and Other Policyholders’ Funds and Separate Account Liabilities

 

Future policy benefits and policy claims and other policyholders’ funds consisted of the following:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Fixed annuities

 

$

16,558

 

$

14,058

 

Equity indexed annuities accumulated host values

 

159

 

228

 

Equity indexed annuities embedded derivatives

 

9

 

16

 

Variable annuities fixed sub-accounts

 

6,127

 

5,623

 

Variable annuity GMWB

 

204

 

1,471

 

Variable annuity GMAB

 

100

 

367

 

Other variable annuity guarantees

 

12

 

67

 

Total annuities

 

23,169

 

21,830

 

VUL/ UL insurance

 

2,595

 

2,526

 

Other life, DI and LTC insurance

 

4,619

 

4,397

 

Total future policy benefits

 

30,383

 

28,753

 

Policy claims and other policyholders’ funds

 

123

 

172

 

Total future policy benefits and policy claims and other policyholders’ funds

 

$

30,506

 

$

28,925

 

 

Separate account liabilities consisted of the following:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Variable annuity variable sub-accounts

 

$

48,982

 

$

37,657

 

VUL insurance variable sub-accounts

 

5,239

 

4,091

 

Other insurance variable sub-accounts

 

46

 

39

 

Total separate account liabilities

 

$

54,267

 

$

41,787

 

 

Fixed Annuities

 

Fixed annuities include both deferred and payout contracts.  Deferred contracts offer a guaranteed minimum rate of interest and security of the principal invested.  Payout contracts guarantee a fixed income payment for life or the term of the contract.  RiverSource Life generally invests the proceeds from the annuity payments in fixed rate securities.   RiverSource Life may hedge the interest rate risks related to fixed annuities with derivative instruments. As of December 31, 2009 and 2008, there were no outstanding derivatives to hedge these risks.

 

Equity Indexed Annuities

 

The Index 500 Annuity, RiverSource Life’s equity indexed annuity product, is a single premium deferred fixed annuity.  The contract is issued with an initial term of seven years and interest earnings are linked to the S&P 500 Index.  This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders.  RiverSource Life generally invests the proceeds from the annuity deposits in fixed rate securities and hedges the equity risk with derivative instruments. See Note 15 for additional information regarding RiverSource Life’s derivative instruments.  In 2007, RiverSource Life discontinued new sales of equity indexed annuities.

 

Variable Annuities

 

Purchasers of variable annuities can select from a variety of investment options and can elect to allocate a portion to a fixed account.  A vast majority of the premiums received for variable annuity contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders.

 

Most of the variable annuity contracts issued by RiverSource Life contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU provisions.  RiverSource Life previously offered contracts with GMIB provisions. See Note 2 and Note 9 for additional information regarding RiverSource Life’s variable annuity guarantees. RiverSource Life does not currently hedge its risk under the GGU and GMIB provisions.  During the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.  The total

 

65



 

value of variable annuity contracts with GMWB riders increased from $12.7 billion at December 31, 2008 to $19.2 billion at December 31, 2009.  The total value of variable annuity contracts with GMAB riders increased from $2.0 billion at December 31, 2008 to $2.9 billion at December 31, 2009.  The total value of variable annuity contracts with GMDB riders increased from $42.2 billion at December 31, 2008 to $53.7 billion at December 31, 2009, of which $5.2 billion have corresponding hedges.  See Note 15 for additional information regarding derivative instruments used to hedge risks related to GMWB, GMAB and GMDB provisions.

 

Insurance Liabilities

 

VUL/UL is the largest group of insurance policies written by RiverSource Life.  Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account.  A vast majority of the premiums received for VUL contracts are held in separate accounts where the assets are held for the exclusive benefit of those policyholders.  RiverSource Life also offers term and whole life insurance as well as disability products.  RiverSource Life no longer offers LTC products but has in force policies from prior years.  Insurance liabilities include accumulation values, unpaid reported claims, incurred but not reported claims, and obligations for anticipated future claims.

 

9.     Variable Annuity and Insurance Guarantees

 

The majority of the variable annuity contracts offered by RiverSource Life contain GMDB provisions.  RiverSource Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as GGU benefits.  In addition, RiverSource Life offers contracts with GMWB and GMAB provisions.  RiverSource Life previously offered contracts containing GMIB provisions.  See Note 2 and Note 8 for additional information regarding the liabilities related to variable annuity guarantees.

 

The GMDB provisions provide a specified minimum return upon death of the contractholder.  The death benefit payable is the greater of (i) the contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract.  RiverSource Life has three primary GMDB provisions:

 

·      Return of premium — provides purchase payments minus adjusted partial surrenders.

·      Reset — provides that the value resets to the account value every sixth contract anniversary minus adjusted partial surrenders.  This provision is often provided in combination with the return of premium provision.  This provision is no longer offered.

·      Ratchet — provides that the value ratchets up to the maximum account value at specified anniversary intervals, plus subsequent purchase payments less adjusted partial surrenders.

 

The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on equity market performance.  At issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance.

 

RiverSource Life has GMWB riders in force with the following provisions:

 

·      withdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.

·      withdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).

·      withdrawals at a specified rate per year for joint contractholders while either is alive.  Once withdrawals begin, the contractholder’s funds are moved to one of three less aggressive asset allocation models (of the five that are available prior to withdrawal).

·      withdrawals based on performance of the contract or issue age.  On some contracts, credits are applied annually for the first ten years to increase the guaranteed amount as long as withdrawals have not been taken.

 

Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge.  The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or

 

66



 

80% of the highest anniversary value, adjusted for withdrawals.  If the contract value is less than the guarantee at the end of the 10 year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.

 

Certain UL contracts offered by RiverSource Life provide secondary guarantee benefits.  The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.

 

The following table provides information related to variable annuity guarantees for which RiverSource Life has established additional liabilities:

 

 

 

December 31, 2009

 

December 31, 2008

 

Variable annuity
guarantees by

benefit type (1)

 

Total
contract
value

 

Contract
value in
separate
accounts

 

Net
amount
at risk(2)

 

Weighted
average
attained
age

 

Total
contract
value

 

Contract
value in
separate
accounts

 

Net
amount
at risk(2)

 

Weighted
average
attained
age

 

 

 

(in millions, except age)

 

GMDB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return of Premium

 

$

30,938

 

$

28,415

 

$

974

 

61

 

$

22,249

 

$

20,153

 

$

4,873

 

61

 

Six-Year Reset

 

13,886

 

11,197

 

926

 

61

 

12,719

 

10,063

 

2,802

 

61

 

One-Year Ratchet

 

7,081

 

6,400

 

873

 

63

 

5,770

 

5,061

 

2,163

 

62

 

Five-Year Ratchet

 

1,256

 

1,171

 

38

 

59

 

951

 

888

 

199

 

59

 

Other

 

582

 

542

 

98

 

67

 

471

 

429

 

192

 

66

 

Total — GMDB

 

$

53,743

 

$

47,725

 

$

2,909

 

61

 

$

42,160

 

$

36,594

 

$

10,229

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GGU death benefit

 

$

853

 

$

775

 

$

70

 

63

 

$

699

 

$

619

 

$

65

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMIB

 

$

628

 

$

582

 

$

126

 

63

 

$

567

 

$

511

 

$

245

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB

 

$

4,196

 

$

4,067

 

$

454

 

64

 

$

3,513

 

$

3,409

 

$

1,312

 

63

 

GMWB for life

 

14,988

 

14,333

 

795

 

63

 

9,194

 

8,764

 

2,704

 

63

 

Total — GMWB

 

$

19,184

 

$

18,400

 

$

1,249

 

63

 

$

12,707

 

$

12,173

 

$

4,016

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMAB

 

$

2,926

 

$

2,853

 

$

153

 

56

 

$

2,006

 

$

1,937

 

$

608

 

56

 

 


(1)   Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type.  Variable annuity contracts for which the death benefit equals the account value are not shown in this table.

(2)   Represents the current guaranteed benefit amount in excess of the current contract value.  GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract.

 

Changes in additional liabilities were as follows:

 

 

 

GMDB &
GGU

 

GMIB

 

GMWB

 

GMAB

 

UL

 

 

 

(in millions)

 

Liability balance at January 1, 2008

 

$

24

 

$

3

 

$

136

 

$

33

 

$

4

 

Incurred claims

 

58

 

10

 

1,335

 

334

 

6

 

Paid claims

 

(27

)

(1

)

 

 

(3

)

Liability balance at December 31, 2008

 

55

 

12

 

1,471

 

367

 

7

 

Incurred claims

 

12

 

(5

)

(1,267

)

(267

)

8

 

Paid claims

 

(61

)

(1

)

 

 

 

Liability balance at December 31, 2009

 

$

6

 

$

6

 

$

204

 

$

100

 

$

15

 

 

The liabilities for guaranteed benefits are supported by general account assets.

 

67



 

The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Mutual funds:

 

 

 

 

 

Equity

 

$

29,379

 

$

21,899

 

Bond

 

16,537

 

12,135

 

Other

 

2,889

 

3,463

 

Total mutual funds

 

$

48,805

 

$

37,497

 

 

No gains or losses were recognized on assets transferred to separate accounts for the periods presented.

 

10.  Lines of Credit

 

In July 2009, RiverSource Life Insurance Company, as the borrower, entered into a revolving credit agreement with Ameriprise Financial as the lender.  The aggregate amount outstanding under the line of credit may not exceed $800 million at any time.   The interest rate for any borrowing under the new agreement is established by reference to LIBOR plus 28 basis points.  Amounts borrowed may be repaid at any time with no prepayment penalty.  As of December 31, 2009, the outstanding balance under this credit line was $300 million which was repaid in full with payments in January and February 2010.

 

RiverSource Life has available a committed line of credit with Ameriprise Financial aggregating $200 million.  The interest rate for any borrowings is established by reference to LIBOR.  There were no amounts outstanding on this line of credit at December 31, 2009 and 2008.

 

In September 2008, RiverSource Life, as the lender, entered into a revolving credit agreement with Ameriprise Financial as the borrower.  This line of credit is not to exceed 3% of RiverSource Life’s statutory admitted assets as of the prior year end.  The interest rate for any borrowing is established by reference to LIBOR plus 28 basis points.  In the event of default, an additional 1% interest will accrue during such period of default.  There were no amounts outstanding on this revolving credit agreement as of December 31, 2009 and 2008.

 

RiverSource Life had a collateral loan agreement with Ameriprise Financial aggregating up to $75 million which expired on October 31, 2008.

 

11.  Fair Values of Assets and Liabilities

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.

 

Valuation Hierarchy

 

RiverSource 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.

 

68



 

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 NAV and classified as Level 1. RiverSource Life’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a 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 corporate and municipal bonds, agency mortgage backed securities, commercial mortgage backed securities, asset backed securities and U.S. and foreign government and agency securities. Level 3 securities include corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities.

 

Through RiverSource Life’s own experience transacting in the marketplace and through discussions with its pricing vendors, RiverSource Life believes that the market for non-agency residential mortgage backed securities is inactive. Indicators of inactive markets include: pricing services’ reliance on brokers or discounted cash flow analyses to provide prices, an increase in the disparity between prices provided by different pricing services for the same security, unreasonably large bid-offer spreads and a significant decrease in the volume of trades relative to historical levels. In certain cases, this market inactivity has resulted in RiverSource Life applying valuation techniques that rely more on an income approach (discounted cash flows using market rates) than on a market approach (prices from pricing services).  RiverSource Life considers market observable yields for other asset classes it considers to be of similar risk which includes nonperformance and liquidity for individual securities to set the discount rate for applying the income approach to certain non-agency residential mortgage backed securities.

 

Separate Account Assets

 

The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.

 

Derivatives

 

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. RiverSource Life settled these derivatives in the second quarter of 2009 and has not entered into any additional structured derivatives since then.

 

69



 

Liabilities

 

Embedded Derivatives

 

Variable Annuity Riders — GMAB and GMWB

 

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 contractholder behavior assumptions and margins for risk, profit and expenses that RiverSource Life believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of RiverSource Life’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are 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 tables present the balances of assets and liabilities measured at fair value on a recurring basis:

 

 

 

December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

13,755

 

$

1,239

 

$

14,994

 

Residential mortgage backed securities

 

 

2,424

 

2,772

 

5,196

 

Commercial mortgage backed securities

 

 

3,968

 

72

 

4,040

 

Asset backed securities

 

 

665

 

215

 

880

 

State and municipal obligations

 

 

613

 

 

613

 

U.S. government and agencies obligations

 

11

 

147

 

 

158

 

Foreign government bonds and obligations

 

 

107

 

 

107

 

Other structured investments

 

 

 

11

 

11

 

Total Available-for-Sale securities: Fixed maturities

 

11

 

21,679

 

4,309

 

25,999

 

Common and preferred stocks

 

 

23

 

 

23

 

Trading securities

 

 

36

 

 

36

 

Cash equivalents

 

2

 

801

 

 

803

 

Other assets

 

 

615

 

 

615

 

Separate account assets

 

 

54,267

 

 

54,267

 

Total assets at fair value

 

$

13

 

$

77,421

 

$

4,309

 

$

81,743

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits

 

$

 

$

9

 

$

299

 

$

308

 

Other liabilities

 

 

757

 

 

757

 

Total liabilities at fair value

 

$

 

$

766

 

$

299

 

$

1,065

 

 

70



 

 

 

December 31, 2008

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

9,907

 

$

1,086

 

$

10,993

 

Residential mortgage backed securities

 

 

3,016

 

520

 

3,536

 

Commercial mortgage backed securities

 

 

2,440

 

3

 

2,443

 

Asset backed securities

 

 

531

 

95

 

626

 

State and municipal obligations

 

 

145

 

 

145

 

U.S. government and agencies obligations

 

21

 

190

 

 

211

 

Foreign government bonds and obligations

 

 

107

 

 

107

 

Other structured investments

 

 

 

9

 

9

 

Total Available-for-Sale securities: Fixed maturities

 

21

 

16,336

 

1,713

 

18,070

 

Common and preferred stocks

 

 

16

 

 

16

 

Trading securities

 

70

 

77

 

 

147

 

Cash equivalents

 

432

 

2,861

 

 

3,293

 

Other assets

 

 

2,238

 

200

 

2,438

 

Separate account assets

 

 

41,787

 

 

41,787

 

Total assets at fair value

 

$

523

 

$

63,315

 

$

1,913

 

$

65,751

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Future policy benefits

 

$

 

$

16

 

$

1,832

 

$

1,848

 

Other liabilities

 

 

645

 

 

645

 

Total liabilities at fair value

 

$

 

$

661

 

$

1,832

 

$

2,493

 

 

The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Total Gains

 

Sales,

 

 

 

 

 

 

 

 

 

(Losses) Included in

 

Issuances

 

Transfers

 

 

 

 

 

Balance,

 

 

 

Other

 

and

 

In/(Out)

 

Balance,

 

 

 

January 1,

 

Net

 

Comprehensive

 

Settlements,

 

of

 

December 31,

 

 

 

2009

 

Income

 

Income

 

Net

 

Level 3

 

2009

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,086

 

$

 

$

194

 

$

20

 

$

(61

)

$

1,239

 

Residential mortgage backed securities

 

520

 

65

 

156

 

2,031

 

 

2,772

 

Commercial mortgage backed securities

 

3

 

 

8

 

61

 

 

72

 

Asset backed securities

 

95

 

7

 

10

 

112

 

(9

)

215

 

Other structured investments

 

9

 

2

 

 

 

 

11

 

Total Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

1,713

 

74

(1)

368

 

2,224

 

(70

)(3)

4,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

200

 

(37

)(2)

 

(163

)

 

 

Future policy benefits

 

(1,832

)

1,611

(2)

 

(78

)

 

(299

)

 


(1)   Represents a $7 million loss included in net realized investment gains (losses) and a $81 million gain included in net investment income in the Consolidated Statements of Income.

(2)   Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

(3)   Represents securities with a fair value of $79 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service net of a security with a fair value of $9 million that was transferred to Level 3 as the fair value of the security is now based on broker quotes.

 

71



 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Total Gains

 

Sales,

 

 

 

 

 

 

 

 

 

(Losses) Included in

 

Issuances

 

Transfers

 

 

 

 

 

Balance,

 

 

 

Other

 

and

 

In/(Out)

 

Balance,

 

 

 

January 1,

 

Net

 

Comprehensive

 

Settlements,

 

of

 

December 31,

 

 

 

2008

 

Income

 

Loss

 

 Net

 

Level 3

 

2008

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,271

 

$

(30

)

$

(152

)

$

(3

)

$

 

$

1,086

 

Residential mortgage backed securities

 

417

 

(144

)

(134

)

162

 

219

 

520

 

Commercial mortgage backed securities

 

5

 

 

 

(2

)

 

3

 

Asset backed securities

 

115

 

1

 

(24

)

3

 

 

95

 

Other structured investments

 

2

 

4

 

6

 

(3

)

 

9

 

Total Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

1,810

 

(169

)(1)

(304

)

157

 

219

(3)

1,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

280

 

149

(2)

 

(229

)

 

200

 

Future policy benefits

 

(158

)

(1,611

)(2)

 

(63

)

 

(1,832

)

Other liabilities

 

 

(9)

(2)

 

9

 

 

 

 


(1)   Represents a $176 million loss included in net realized investment gains (losses) and a $7 million gain included in net investment income in the Consolidated Statements of Income.

(2)   Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

(3)   Represents prime non-agency residential mortgage backed securities previously classified as Level 2 for which management believes the market for these prime quality assets is now inactive.

 

The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities held at December 31 for the year then ended:

 

 

 

2009

 

2008

 

 

 

Net
Investment
Income

 

Net
Realized
Investment
Gains
(Losses)

 

Benefits,
Claims,
Losses and
Settlement
Expenses

 

Net
Investment
Income

 

Net
Realized
Investment
Gains
(Losses)

 

Benefits, Claims,
Losses and
Settlement
Expenses

 

 

 

(in millions)

 

Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

 

$

 

$

 

$

(29

)

$

 

Residential mortgage backed securities

 

80

 

(31

)

 

2

 

(146

)

 

Asset backed securities

 

1

 

 

 

1

 

 

 

Total Available-for-Sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

81

 

(31

)

 

3

 

(175

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

126

 

Future policy benefits

 

 

 

1,582

 

 

 

(1,608

)

 

During the reporting period, there were no material assets or liabilities measured at fair value on a nonrecurring basis.

 

72



 

The following table provides the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

Commercial mortgage loans, net

 

$

2,532

 

$

2,519

 

$

2,737

 

$

2,506

 

Policy loans

 

715

 

790

 

722

 

779

 

Other investments

 

226

 

245

 

248

 

202

 

Restricted cash

 

184

 

184

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

Future policy benefits

 

$

15,540

 

$

15,657

 

$

13,116

 

$

12,418

 

Separate account liabilities

 

406

 

406

 

386

 

386

 

Line of credit with Ameriprise Financial

 

300

 

300

 

 

 

 

Commercial mortgage loans, net

 

The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for RiverSource Life’s estimate of the amount recoverable on the loan.

 

Policy loans

 

The fair value of policy loans is determined using discounted cash flows.

 

Other investments

 

Other investments primarily consist of syndicated loans. The fair value of syndicated loans is obtained from a nationally-recognized pricing service.

 

Restricted Cash

 

Restricted cash is generally set aside for specific business transactions and restrictions are specific to RiverSource Life and does not transfer to third party market participants, therefore, the carrying value amount is a reasonable estimate of fair value.

 

Future policy benefits

 

The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior and RiverSource Life’s nonperformance risk specific to these liabilities. The fair value of other liabilities including non-life contingent fixed annuities in payout status, equity indexed annuity host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner.

 

Separate account liabilities

 

Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets.  Carrying value is a reasonable estimate of the fair value as it represents the exit value as evidenced by withdrawal transactions between contractholders and RiverSource Life. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.

 

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Line of credit with Ameriprise Financial

 

The fair value of the line of credit is determined by discounting cash flows with an adjustment for RiverSource Life’s nonperformance risk specific to this liability.  Due to the short-term nature of the line of credit, the carrying value is an approximation of the fair value.

 

12.  Related Party Transactions

 

RiverSource Investments, LLC is the investment manager for the proprietary mutual funds used as investment options by RiverSource Life’s variable annuity contractholders and variable life insurance policyholders.  RiverSource Life provides all fund management services, other than investment management, and is compensated for the administrative services it provides.  For the years ended December 31, 2009, 2008 and 2007, RiverSource Life received $87 million, $101 million and $97 million, respectively, from RiverSource Investments, LLC for these services.

 

RiverSource Life participates in the Ameriprise Financial Retirement Plan which covers all permanent employees age 21 and over who have met certain employment requirements.  RiverSource Life contributions to the plan are based on participants’ age, years of service and total compensation for the year.  Funding of retirement costs for this plan complies with the applicable minimum funding requirements specified by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  RiverSource Life’s share of the total net periodic pension cost was $2 million in 2009, and $1 million in both 2008 and 2007.

 

RiverSource Life participates in the Ameriprise Financial 2005 Incentive Compensation Plan.  Employees, directors and independent contractors are eligible to receive incentive awards including stock options, restricted stock awards, restricted stock units, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction.  The expense for incentive awards was $3 million in 2009, 2008 and 2007.

 

RiverSource Life also participates in the defined contribution pension plans of Ameriprise Financial which cover all employees who have met certain employment requirements.  RiverSource Life contributions to the plans are a percent of either each employee’s eligible compensation or basic contributions.  Costs of these plans charged to operations were $2 million, nil and $3 million in 2009, 2008 and 2007, respectively.

 

RiverSource Life participates in the defined benefit health care plans of Ameriprise Financial that provide health care and life insurance benefits to retired employees and retired financial advisors.  The plans include participant contributions and service related eligibility requirements.  Upon retirement, such employees are considered to have been employees of Ameriprise Financial.  Ameriprise Financial expenses these benefits and allocates the expenses to its subsidiaries.  The cost of these plans charged to operations in 2009, 2008 and 2007 was nil, $1 million and $2 million, respectively.

 

Charges by Ameriprise Financial and affiliated companies to RiverSource Life for use of joint facilities, technology support, marketing services and other services aggregated $580 million, $673 million and $909 million for 2009, 2008 and 2007, respectively.  Certain of these costs are included in DAC.  Expenses allocated to RiverSource Life may not be reflective of expenses that would have been incurred by RiverSource Life on a stand-alone basis.

 

Dividends paid and received were as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Cash dividends paid to Ameriprise Financial

 

$

 

$

775

 

$

900

 

Cash dividends paid to RiverSource Life Insurance Company from RiverSource Life of NY

 

 

77

 

83

 

Cash dividend paid to RiverSource Life Insurance Company from RTA

 

22

 

 

 

Non-cash dividend paid to Ameriprise Financial from RTA

 

 

118

 

 

 

Notifications to state insurance regulators were made in advance of payments of dividends for amounts in excess of statutorily defined thresholds.  See Note 13 for additional information.

 

74



 

During 2008, RiverSource Life received a non-cash capital contribution of $83 million comprised of below investment grade syndicated bank loans from Ameriprise Financial. In addition, RiverSource Life Insurance Company received a $239 million contribution from Ameriprise Financial, consisting of all the issued and outstanding shares of RTA.

 

During 2009, RiverSource Life Insurance Company received a non-cash capital contribution of $131 million comprised of two buildings and the related land from Ameriprise Financial.  As part of the transaction, RiverSource Life Insurance Company entered into an agreement to lease the buildings to Ameriprise Financial.  In addition, RiverSource Life Insurance Company received a non-cash capital contribution of $200 million consisting of a reduction of the outstanding balance due to Ameriprise Financial under a line of credit.  See Note 10 for more information on RiverSource Life’s lines of credit.

 

There were no amounts included in other liabilities at December 31, 2009 and 2008 payable to Ameriprise Financial for federal income taxes.

 

During 2009, RiverSource Life sold corporate bonds of $27 million to Ameriprise Financial and recognized a gain of $9 million.

 

13.  Statutory Capital and Surplus

 

State insurance statutes contain limitations as to the amount of dividends or distributions that insurers may make without providing prior notification to state regulators.  For RiverSource Life Insurance Company, dividends or distributions in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by the State of Minnesota, require advance notice to the Minnesota Department of Commerce, RiverSource Life Insurance Company’s primary regulator, and are subject to potential disapproval.  RiverSource Life Insurance Company’s statutory unassigned surplus aggregated $433 million and $173 million as of December 31, 2009 and 2008, respectively.

 

In addition, dividends or distributions, whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceed the greater of the previous year’s statutory net gain from operations or 10% of the previous year-end statutory capital and surplus are referred to as “extraordinary dividends.” Extraordinary dividends also require advance notice to the Minnesota Department of Commerce, and are subject to potential disapproval.

 

Statutory net gain from operations and net income for the years ended December 31 and capital and surplus as of December 31 are summarized as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

 

 

(unaudited)

 

 

 

 

 

Statutory net gain (loss) from operations(1)

 

$

1,793

 

$

(1,184

)

$

523

 

Statutory net income (loss)(1)

 

1,887

 

(1,407

)

555

 

Statutory capital and surplus

 

3,371

 

2,529

 

2,820

 

 


(1)   An increase in statutory reserves for variable annuity guaranteed benefits contributed significantly to the loss in 2008, but was substantially offset by unrealized gains on derivatives which are not included in the statutory income statement, but recorded directly to surplus. These impacts were substantially reversed in 2009.

 

75



 

14.  Income Taxes

 

RiverSource Life qualifies as a life insurance company for federal income tax purposes.  As such, RiverSource Life is subject to the Internal Revenue Code provisions applicable to life insurance companies.

 

The components of income tax provision (benefit) were as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Current income tax:

 

 

 

 

 

 

 

Federal

 

$

325

 

$

42

 

$

(30

)

State

 

1

 

3

 

 

Total current income tax

 

326

 

45

 

(30

)

Deferred income tax

 

 

 

 

 

 

 

Federal

 

(80

)

(236

)

83

 

State

 

(1

)

2

 

 

Total deferred income tax

 

(81

)

(234

)

83

 

Total income tax provision (benefit)

 

$

245

 

$

(189

)

$

53

 

 

The principal reasons that the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35% are as follows:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Tax at U.S. statutory rate

 

35.0

%

35.0

%

35.0

%

Changes in taxes resulting from:

 

 

 

 

 

 

 

Tax-exempt interest and dividend income

 

(7.2

)

56.6

 

(10.9

)

State taxes, net of federal benefit

 

 

(3.7

)

 

Low income housing credit

 

(2.0

)

27.9

 

(7.0

)

Foreign tax credit, net of addback

 

(1.0

)

15.3

 

(2.3

)

Taxes applicable to prior years

 

0.1

 

29.2

 

(4.0

)

Other, net

 

 

(0.2

)

 

Income tax provision

 

24.9

%

160.1

%

10.8

%

 

RiverSource Life’s effective tax rate was 24.9% and 160.1% for the years ended December 31, 2009 and 2008, respectively.   The decrease in the effective tax rate is primarily due to pretax income for 2009 compared to a pretax loss in relation to a net tax benefit for 2008. RiverSource Life’s effective tax rate for 2008 included a $39 million tax benefit related to changes in the status of current audits.

 

76



 

Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes.  The significant components of RiverSource Life’s deferred income tax assets and liabilities are reflected in the following table:

 

 

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Deferred income tax assets:

 

 

 

 

 

Liabilities for future policy benefits

 

$

1,390

 

$

1,744

 

Investment related

 

163

 

 

Net unrealized losses on Available-for-Sale securities and derivatives

 

 

399

 

Net operating loss and tax credit carryforwards

 

185

 

159

 

Other

 

 

44

 

Gross deferred income tax assets

 

1,738

 

2,346

 

 

 

 

 

 

 

Deferred income tax liabilities:

 

 

 

 

 

DAC

 

1,264

 

1,168

 

Investment related

 

 

398

 

Net unrealized gains on Available-for-Sale securities

 

203

 

 

DSIC

 

193

 

181

 

Other

 

15

 

 

Gross deferred income tax liabilities

 

1,675

 

1,747

 

Net deferred income tax assets

 

$

63

 

$

599

 

 

RiverSource Life is required to establish a valuation allowance for any portion of the deferred income tax assets that management believes will not be realized.  Included in RiverSource Life’s deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required.  Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains.  Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies.

 

Based on analysis of RiverSource Life’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable RiverSource Life to utilize all of its deferred tax assets.  Accordingly, no valuation allowance for deferred tax assets has been established as of December 31, 2009 and 2008.

 

Additionally, RiverSource Life has tax benefits related to net operating loss carryforwards of $16 million which expire beginning December 31, 2025 as well as tax credit carryforwards of $149 million which expire beginning December 31, 2025.

 

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(in millions)

 

Balance at January 1

 

$

(89

)

$

97

 

$

73

 

Additions (reductions) based on tax positions related to the current year

 

1

 

(165

)

34

 

Additions for tax positions of prior years

 

18

 

38

 

16

 

Reductions for tax positions of prior years

 

(7

)

(59

)

(26

)

Balance at December 31

 

$

(77

)

$

(89

)

$

97

 

 

77



 

If recognized, approximately $49 million, $30 million and $49 million, net of federal tax benefits, of the unrecognized tax benefits as of December 31, 2009, 2008 and 2007, respectively, would affect the effective tax rate.

 

RiverSource Life recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision.  RiverSource Life recognized a net reduction of $1 million, $14 million and $11 million in interest and penalties for the year ended December 31, 2009, 2008 and 2007, respectively.  At December 31, 2009 and 2008, RiverSource Life had a receivable of $16 million and $15 million, respectively, related to accrued interest and penalties.

 

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months.  However, there are a number of open audits and quantification of a range cannot be made at this time.

 

RiverSource Life or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, RiverSource Life is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 1997. The Internal Revenue Service (“IRS”), as part of the overall examination of the American Express Company consolidated return completed its field examination of the RiverSource Life’s income tax returns for 1997 through 2002 during 2008 and completed its field examination of 2003 through 2004 in the third quarter of 2009.  However, for federal income tax purposes, these years continue to remain open as a consequence of certain issues under appeal.  In the fourth quarter of 2008, the IRS commenced an examination of RiverSource Life’s U.S. income tax returns for 2005 through 2007, which is expected to be completed in 2010.  RiverSource Life or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2006.

 

On September 25, 2007, the IRS issued Revenue Ruling 2007-61 in which it announced that it intends to issue regulations with respect to certain computational aspects of the Dividends Received Deduction (“DRD”) related to separate account assets held in connection with variable contracts of life insurance companies. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time, but they may result in the elimination of some or all of the separate account DRD tax benefit that RiverSource Life receives. Management believes that it is likely that any such regulations would apply prospectively only.   Additionally, included in the Administration’s 2011 Revenue Proposals is a provision to modify the DRD for life insurance companies’ separate accounts, which if enacted could significantly reduce the DRD tax benefits RiverSource Life receives, prospectively, beginning in 2011.  For the year ended December 31, 2009, RiverSource Life recorded a benefit of approximately $62 million related to the current year’s separate account DRD.

 

As a result of the separation of Ameriprise Financial from American Express, RiverSource Life and subsidiaries will not be able to file a consolidated U.S. federal income tax return with other members of Ameriprise Financial’s affiliated group until 2010.

 

The items comprising other comprehensive income (loss) are presented net of the following income tax provision (benefit) amounts:

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

(in millions)

 

 

 

Net unrealized securities gains (losses)

 

$

166

 

$

(302

)

$

28

 

Net unrealized derivative gains

 

2

 

2

 

 

Net income tax provision (benefit)

 

$

168

 

$

(300

)

$

28

 

 

78



 

15.  Derivatives and Hedging Activities

 

Derivative instruments enable RiverSource Life to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity and interest rate indices or prices. RiverSource Life primarily enters into derivative agreements for risk management purposes related to RiverSource Life’s products and operations.

 

RiverSource Life uses derivatives as economic hedges and occasionally holds derivatives designated for hedge accounting. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives, by type of derivative and product at December 31, 2009:

 

Derivatives not designated as hedging instruments

 

Balance Sheet
Location

 

Asset

 

Balance Sheet
Location

 

Liability

 

 

 

 

 

(in millions)

 

 

 

(in millions)

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Other assets

 

$

176

 

Other liabilities

 

$

280

 

 

 

 

 

 

 

 

 

 

 

Equity contracts

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

Other assets

 

437

 

Other liabilities

 

474

 

GMDB

 

 

 

 

Other liabilities

 

2

 

Equity indexed annuities

 

Other assets

 

2

 

 

 

 

Equity indexed annuities embedded derivatives

 

 

 

 

Future policy benefits

 

9

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

GMWB and GMAB embedded derivatives(1)

 

 

 

 

Future policy benefits

 

299

 

Total

 

 

 

$

615

 

 

 

$

1,064

 

 


(1)   The fair values of GMWB and GMAB embedded derivatives fluctuate primarily based on changes in equity, interest rate and credit markets.

 

See Note 11 for additional information regarding RiverSource Life’s fair value measurement of derivative instruments.

 

Derivatives Not Designated as Hedges

 

The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Income for the year ended December 31, 2009:

 

Derivatives not designated as
hedging instruments

 

Location of Gain (Loss)
on Derivatives Recognized in Income

 

Amount of Gain (Loss)
on Derivatives
Recognized in Income

 

 

 

 

 

(in millions)

 

Interest rate contracts

 

 

 

 

 

GMWB and GMAB

 

Benefits, claims, losses and settlement expenses

 

$

(435

)

 

 

 

 

 

 

Equity contracts

 

 

 

 

 

GMWB and GMAB

 

Benefits, claims, losses and settlement expenses

 

(1,310

)

GMDB

 

Benefits, claims, losses and settlement expenses

 

(10

)

Equity indexed annuities

 

Interest credited to fixed accounts

 

4

 

Equity indexed annuities embedded derivatives

 

Interest credited to fixed accounts

 

7

 

 

 

 

 

 

 

Other

 

 

 

 

 

GMWB and GMAB embedded derivatives

 

Benefits, claims, losses and settlement expenses

 

1,533

 

Total

 

 

 

$

(211

)

 

79



 

RiverSource Life holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity and interest rate risk related to various RiverSource Life products and transactions.

 

The majority of RiverSource Life’s annuity contracts contain GMDB provisions, which may result in a death benefit payable that exceeds the contract accumulation value when market values of customers’ accounts decline. Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of considerations received at the beginning of the contract period, after a specified holding period, respectively. RiverSource Life economically hedges the exposure related to non-life contingent GMWB and GMAB provisions using various equity futures, equity options, total return swaps, interest rate swaptions and interest rate swaps. In the third quarter of 2009, RiverSource Life entered into a limited number of derivative contracts to economically hedge equity exposure related to GMDB provisions on variable annuity contracts written previously in 2009.  At December 31, 2009, the gross notional amount of these contracts was $38.7 billion and $77 million for RiverSource Life’s GMWB and GMAB provisions and GMDB provisions, respectively. The premium associated with certain of the above options is paid or received semi-annually over the life of the option contract.

 

The following is a summary of the payments RiverSource Life is scheduled to make and receive for these options:

 

 

 

Premiums
Payable

 

Premiums
Receivable

 

 

 

(in millions)

 

2010

 

$

189

 

$

5

 

2011

 

181

 

4

 

2012

 

160

 

3

 

2013

 

143

 

2

 

2014

 

118

 

1

 

2015-2024

 

410

 

4

 

 

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.

 

Equity indexed annuities have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by RiverSource Life related to equity indexed annuities products will positively or negatively impact earnings over the life of these products. As a means of economically hedging its obligations under the provisions of these products, RiverSource Life enters into index options and occasionally enters into futures contracts. The gross notional amount of these derivative contracts was $129 million at December 31, 2009.

 

Embedded Derivatives

 

Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives.  In addition, the equity component of the equity indexed annuity product obligations is also considered an embedded derivative.  As captured in the tables above, embedded derivatives are bifurcated from their host contracts and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings.  As noted above, RiverSource Life uses derivatives to mitigate the financial statement impact of these embedded derivatives.

 

Cash Flow Hedges

 

RiverSource Life has amounts classified in accumulated other comprehensive income (loss) related to gains and losses associated with the effective portion of previously designated cash flow hedges. RiverSource Life reclassifies these amounts into income as the forecasted transactions impact earnings. During the year ended December 31, 2009, RiverSource Life held no derivatives that were designated as cash flow hedges.

 

80



 

The following is a summary of unrealized derivatives gains (losses) included in accumulated other comprehensive income (loss) related to cash flow hedges:

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

(in millions)

 

 

 

Net unrealized derivatives losses at January 1

 

$

(38

)

$

(40

)

$

(41

)

Unrealized derivative losses arising during the period

 

 

(1

)

(1

)

Reclassification of realized gains(1)

 

6

 

5

 

2

 

Income tax provision (benefit)

 

(2

)

(2

)

 

Net unrealized derivatives losses at December 31

 

$

(34

)

$

(38

)

$

(40

)

 


(1)   Gain reclassified from Accumulated Other Comprehensive to Net Investment Income on Consolidated Statements of Income.

 

At December 31, 2009, RiverSource Life expects to reclassify $6 million of deferred loss on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months that will be recorded in net investment income. These were originally losses on derivative instruments related to interest rate swaptions. For any hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately. No hedge relationships were discontinued during the years ended December 31, 2009, 2008 and 2007 due to forecasted transactions no longer being expected to occur according to the original hedge strategy.  For the years ended December 31, 2009 and 2008, there were no amounts recognized in earnings on derivative transactions that were ineffective. For the year ended December 31, 2007, RiverSource Life recognized $2 million in net investment income related to ineffectiveness on its swaptions.

 

Currently, the longest period of time over which RiverSource Life is hedging exposure to the variability in future cash flows is 9 years and relates to interest credited on forecasted fixed premium product sales.

 

Credit Risk

 

Credit risk associated with RiverSource Life’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, RiverSource Life has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements wherever practical. As of December 31, 2009, RiverSource Life held $88 million in cash and cash equivalents and recorded a corresponding liability in other liabilities for collateral RiverSource Life is obligated to return to counterparties.  As of December 31, 2009, RiverSource Life had accepted additional collateral consisting of various securities with a fair market value of $22 million, which are not reflected on the Consolidated Balance Sheets.  As of December 31, 2009, RiverSource Life’s maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $53 million.

 

Certain of RiverSource Life’s derivative instruments contain provisions that adjust the level of collateral RiverSource Life is required to post based on RiverSource Life’s financial strength rating (or based on the debt rating of RiverSource Life’s parent, Ameriprise Financial). Additionally, certain of RiverSource Life’s derivative contracts contain provisions that allow the counterparty to terminate the contract if RiverSource Life does not maintain a specific financial strength rating or Ameriprise Financial’s debt does not maintain a specific credit rating (generally an investment grade rating).  If these termination provisions were to be triggered, RiverSource Life’s counterparty could require immediate settlement of any net liability position. At December 31, 2009, the aggregate fair value of all derivative instruments containing such credit risk features was $296 million. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 2009 was $269 million. If the credit risk features of derivative contracts that were in a net liability position at December 31, 2009 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $27 million.

 

81



 

16.  Commitments and Contingencies

 

At December 31, 2009 and 2008, RiverSource Life had no material commitments to purchase investments other than mortgage loan fundings. See Note 4 for additional information.

 

RiverSource Life’s annuity and life products all have minimum interest rate guarantees in their fixed accounts.  As of December 31, 2009, these guarantees range up to 5.0%.  To the extent the yield on RiverSource Life’s invested assets portfolio declines below its target spread plus the minimum guarantee, RiverSource Life’s profitability would be negatively affected.

 

The Securities and Exchange Commission, the Financial Industry Regulatory Authority, commonly referred to as FINRA, and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements.  RiverSource Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries.

 

RiverSource Life is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities.  RiverSource Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity.  However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.

 

82



 

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A(T).

 

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

RiverSource Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to Securities and Exchange Commission (“SEC”) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Life’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure.  It should be noted that, because of inherent limitations, RiverSource Life’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.

 

RiverSource Life’s management, under the supervision and with the participation of RiverSource Life’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report.  Based upon that evaluation, RiverSource Life’s principal executive officer and chief financial officer have concluded that RiverSource Life’s disclosure controls and procedures were effective at a reasonable level of assurance as of December 31, 2009.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in RiverSource Life’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Life’s internal control over financial reporting for RiverSource Life.

 

Management’s Report on Internal Control Over Financial Reporting

 

The management of RiverSource Life is responsible for establishing and maintaining adequate internal control over financial reporting.

 

RiverSource Life’s internal control over financial reporting is a process designed by or under the supervision of, RiverSource Life’s principal executive and principal financial officers and effected by RiverSource Life’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:

 

·                  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of RiverSource Life;

 

·                  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of RiverSource Life are being made only in accordance with authorizations of management and directors of RiverSource Life; and

 

·                  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of RiverSource Life’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

83



 

RiverSource Life’s management, with the participation of its principal executive officer and chief financial officer, assessed the effectiveness of RiverSource Life’s internal control over financial reporting as of December 31, 2009. In making this assessment, RiverSource Life’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.

 

Based on management’s assessment and those criteria, RiverSource Life believes that, as of December 31, 2009, RiverSource Life’s internal control over financial reporting is effective.

 

This annual report does not include an attestation report of RiverSource Life’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by RiverSource Life’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit RiverSource Life to provide only management’s report in this annual report.

 

ITEM 9B.

 

OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.

 

ITEM 11.

 

EXECUTIVE COMPENSATION

 

Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.

 

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.

 

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.

 

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The Audit Committee of the Board of Directors of Ameriprise Financial has appointed Ernst & Young LLP (“Ernst & Young”) as independent registered public accounting firm to audit the Consolidated Financial Statements of RiverSource Life for the years ended December 31, 2009 and 2008.

 

Fees Paid to the Registrant’s Independent Auditor

 

The following table presents fees for professional services rendered by Ernst & Young for the audit of RiverSource Life’s financial statements for the years ended December 31, 2009 and 2008 and other fees billed for other services rendered by Ernst & Young during those periods.

 

 

 

2009

 

2008

 

 

 

(in thousands)

 

Audit Fees (1)

 

$

2,361

 

$

2,183

 

Audit-related Fees

 

26

 

25

 

Tax Fees

 

 

 

All Other Fees

 

 

 

Total

 

$

2,387

 

$

2,208

 

 


(1)    Audit fees included audit work performed in the review of the financial statements, as well as services that generally only the independent auditor can be expected to provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Securities and Exchange Commission.

 

84



 

Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm

 

Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of Ernst & Young are subject to the specific pre-approval of the Audit Committee of Ameriprise Financial.  All audit and permitted non-audit services to be performed by Ernst & Young for RiverSource Life require pre-approval by the Audit Committee of Ameriprise Financial in accordance with pre-approval procedures established by the Audit Committee of Ameriprise Financial.  The procedures require all proposed engagements of Ernst & Young for services to RiverSource Life of any kind to be directed to the General Auditor of Ameriprise Financial, and then submitted for approval to the Audit Committee of Ameriprise Financial prior to the beginning of any services.

 

In 2009 and 2008, 100% of the services provided by Ernst & Young for RiverSource Life were pre-approved by the Audit Committee of Ameriprise Financial.

 

PART IV

 

ITEM 15.               EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)  

(1) and (2)

Financial Statements and Financial Statement Schedules

 

 

 

 

 

The information required herein has been provided in Item 8.

 

 

 

 

(3)

Exhibits

 

 

 

See Exhibit Index on pages E-1 through E-2 hereof.

 

85



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RIVERSOURCE LIFE INSURANCE COMPANY

Registrant

 

 

February 23, 2010

 

By

/s/ Timothy V. Bechtold

Date

 

 

Timothy V. Bechtold, President

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

February 23, 2010

 

 

/s/ Timothy V. Bechtold

Date

 

 

Timothy V. Bechtold, Director and President

 

 

 

(Principal Executive Officer)

 

 

 

 

February 23, 2010

 

 

/s/ Brian J. McGrane

Date

 

 

Brian J. McGrane, Director, Executive Vice President

 

 

 

and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

February 23, 2010

 

 

/s/ Gumer C. Alvero

Date

 

 

Gumer C. Alvero, Director

 

 

 

 

February 23, 2010

 

 

/s/ David K. Stewart

Date

 

 

David K. Stewart, Vice President and Controller

 

 

 

(Principal Accounting Officer)

 

 

 

 

February 23, 2010

 

 

/s/ Kevin E. Palmer

Date

 

 

Kevin E. Palmer, Director

 

86



 

EXHIBIT INDEX

 

The following exhibits are filed as part of this Annual Report or, where indicated, were already filed and are hereby incorporated by reference.

 

3.1                                 Copy of Certificate of Incorporation of IDS Life Insurance Company filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated by reference.

 

3.1.1                        Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on Jan. 5, 2007 is incorporated by reference.

 

3.2                                 Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference.

 

4.1                                 Instruments defining the rights of security holders, including indentures, are incorporated by reference to Registration Statement Nos. 333-92297, 333-139763, 333-73958, 333-139759, 333-74865, 333-139760, 333-82149, 333-139761, 333-85567, 333-139762, 33-47302, 333-79311, 333-114888 and 33-28976.

 

10.1                           Copy of Principal Underwriter Agreement for Variable Annuities and Variable Life Insurance between RiverSource Life Insurance Company and RiverSource Distributors, Inc. effective Jan. 1, 2007, filed as Exhibit 10.1 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.2                           Copy of Selling Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. effective Jan. 1, 2007, filed as Exhibit 10.2 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.3                           Copy of Marketing Support Services Agreement between Ameriprise Financial Services, Inc. and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.3 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.4                           Copy of Investment Management and Services Agreement between RiverSource Investments, LLC and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.4 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.5                           Form of Federal Income Tax Sharing Agreement by and among RiverSource Life Insurance Company, RiverSource Life Insurance Co. of New York and Ameriprise Financial, Inc. effective Jan. 1, 2007, filed as Exhibit 10.5 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.6                           Copy of Agreement by and among RiverSource Life Insurance Company, Ameriprise India Private Limited, and Ameriprise Financial, Inc. (a/k/a/ Supplementary Agreement No. 1) effective Jan. 1, 2007, filed as Exhibit 10.6 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.7                           Copy of Management, Service & Marketing Support Agreement by and between RiverSource Investments, LLC, RiverSource Service Corporation and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.7 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

10.8                           Copy of RiverSource Variable Portfolio Funds Service Agreement by and between RiverSource Distributors, Inc. and RiverSource Life Insurance Company effective Jan. 1, 2007, filed as Exhibit 10.8 to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.

 

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EXHIBIT INDEX (Continued)

 

*31.1              Certification of Timothy V. Bechtold, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

*31.2              Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

*32.1              Certification of 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.

 

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