Attached files
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EX-32 - EX-32 - RIVERSOURCE LIFE INSURANCE CO | a10-17472_1ex32.htm |
EX-31.1 - EX-31.1 - RIVERSOURCE LIFE INSURANCE CO | a10-17472_1ex31d1.htm |
EX-31.2 - EX-31.2 - RIVERSOURCE LIFE INSURANCE CO | a10-17472_1ex31d2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
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 No. 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) |
Registrants telephone number, including area code: (612) 671-3131
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o |
|
Accelerated Filer o |
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|
|
Non-Accelerated Filer x |
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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 issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at November 5, 2010 |
Common Stock (par value $30 per share) |
|
100,000 shares |
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
RIVERSOURCE LIFE INSURANCE COMPANY
FORM 10-Q
RIVERSOURCE LIFE INSURANCE COMPANY
(in millions, except share amounts)
|
|
September 30, |
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December 31, |
|
||
|
|
(unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
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Investments: |
|
|
|
|
|
||
Available-for-Sale: |
|
|
|
|
|
||
Fixed maturities, at fair value (amortized cost: 2010, $24,991; 2009, $25,142) |
|
$ |
27,313 |
|
$ |
25,999 |
|
Common and preferred stocks, at fair value (cost: 2010 and 2009, $30) |
|
29 |
|
23 |
|
||
Commercial mortgage loans, at cost (less allowance for loan losses: 2010, $36; 2009, $30) |
|
2,517 |
|
2,532 |
|
||
Policy loans |
|
728 |
|
715 |
|
||
Trading securities and other investments |
|
356 |
|
310 |
|
||
Total investments |
|
30,943 |
|
29,579 |
|
||
Cash and cash equivalents |
|
506 |
|
811 |
|
||
Restricted cash |
|
26 |
|
184 |
|
||
Reinsurance recoverables |
|
1,790 |
|
1,688 |
|
||
Deferred income taxes, net |
|
|
|
63 |
|
||
Other receivables |
|
178 |
|
332 |
|
||
Accrued investment income |
|
306 |
|
303 |
|
||
Deferred acquisition costs |
|
4,394 |
|
4,285 |
|
||
Deferred sales inducement costs |
|
531 |
|
524 |
|
||
Other assets |
|
1,954 |
|
936 |
|
||
Separate account assets |
|
59,657 |
|
54,267 |
|
||
|
|
|
|
|
|
||
Total assets |
|
$ |
100,285 |
|
$ |
92,972 |
|
Liabilities and Shareholders Equity |
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
||
Future policy benefits |
|
$ |
30,589 |
|
$ |
30,383 |
|
Policy claims and other policyholders funds |
|
146 |
|
123 |
|
||
Deferred income taxes, net |
|
683 |
|
|
|
||
Borrowings under repurchase agreements |
|
869 |
|
|
|
||
Line of credit with Ameriprise Financial, Inc. |
|
|
|
300 |
|
||
Other liabilities |
|
1,695 |
|
1,955 |
|
||
Separate account liabilities |
|
59,657 |
|
54,267 |
|
||
Total liabilities |
|
93,639 |
|
87,028 |
|
||
Shareholders equity: |
|
|
|
|
|
||
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding |
|
3 |
|
3 |
|
||
Additional paid-in capital |
|
2,446 |
|
2,445 |
|
||
Retained earnings |
|
3,241 |
|
3,114 |
|
||
Accumulated other comprehensive income, net of tax |
|
956 |
|
382 |
|
||
Total shareholders equity |
|
6,646 |
|
5,944 |
|
||
|
|
|
|
|
|
||
Total liabilities and shareholders equity |
|
$ |
100,285 |
|
$ |
92,972 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
||||
Premiums |
|
$ |
128 |
|
$ |
112 |
|
$ |
371 |
|
$ |
331 |
|
Net investment income |
|
411 |
|
415 |
|
1,220 |
|
1,123 |
|
||||
Policy and contract charges |
|
342 |
|
249 |
|
1,012 |
|
828 |
|
||||
Other revenues |
|
61 |
|
63 |
|
198 |
|
165 |
|
||||
Net realized investment gains |
|
1 |
|
7 |
|
12 |
|
42 |
|
||||
Total revenues |
|
943 |
|
846 |
|
2,813 |
|
2,489 |
|
||||
Benefits and expenses |
|
|
|
|
|
|
|
|
|
||||
Benefits, claims, losses and settlement expenses |
|
512 |
|
179 |
|
902 |
|
623 |
|
||||
Interest credited to fixed accounts |
|
227 |
|
232 |
|
686 |
|
674 |
|
||||
Amortization of deferred acquisition costs |
|
(265 |
) |
(81 |
) |
(12 |
) |
42 |
|
||||
Other insurance and operating expenses |
|
141 |
|
134 |
|
423 |
|
420 |
|
||||
Total benefits and expenses |
|
615 |
|
464 |
|
1,999 |
|
1,759 |
|
||||
Pretax income |
|
328 |
|
382 |
|
814 |
|
730 |
|
||||
Income tax provision |
|
81 |
|
96 |
|
187 |
|
176 |
|
||||
Net income |
|
$ |
247 |
|
$ |
286 |
|
$ |
627 |
|
$ |
554 |
|
|
|
|
|
|
|
|
|
|
|
||||
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
||||
Net realized investment gains: |
|
|
|
|
|
|
|
|
|
||||
Net realized investment gains before impairment losses on securities |
|
$ |
2 |
|
$ |
26 |
|
$ |
36 |
|
$ |
102 |
|
Total other-than-temporary impairment losses on securities |
|
(1 |
) |
(18 |
) |
(23 |
) |
(48 |
) |
||||
Portion of loss recognized in other comprehensive income |
|
|
|
(1 |
) |
(1 |
) |
(12 |
) |
||||
Net impairment losses recognized in net realized investment gains |
|
(1 |
) |
(19 |
) |
(24 |
) |
(60 |
) |
||||
Net realized investment gains |
|
$ |
1 |
|
$ |
7 |
|
$ |
12 |
|
$ |
42 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
|
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Nine Months Ended |
|
||||
|
|
2010 |
|
2009 |
|
||
Cash Flows from Operating Activities |
|
|
|
|
|
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Net income |
|
$ |
627 |
|
$ |
554 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
Capitalization of deferred acquisition and sales inducement costs |
|
(358 |
) |
(513 |
) |
||
Amortization of deferred acquisition and sales inducement costs |
|
(21 |
) |
40 |
|
||
Depreciation, amortization and accretion, net |
|
(59 |
) |
(47 |
) |
||
Deferred income tax expense |
|
434 |
|
22 |
|
||
Contractholder and policyholder charges, non-cash |
|
(194 |
) |
(194 |
) |
||
Net realized investment gains |
|
(38 |
) |
(112 |
) |
||
Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains |
|
26 |
|
70 |
|
||
Change in operating assets and liabilities: |
|
|
|
|
|
||
Trading securities and equity method investments, net |
|
11 |
|
131 |
|
||
Future policy benefits for traditional life, disability income and long term care insurance |
|
231 |
|
201 |
|
||
Policy claims and other policyholders funds |
|
24 |
|
(57 |
) |
||
Reinsurance recoverables |
|
(102 |
) |
(59 |
) |
||
Other receivables |
|
(59 |
) |
5 |
|
||
Accrued investment income |
|
(3 |
) |
(65 |
) |
||
Derivatives collateral, net |
|
490 |
|
(1,674 |
) |
||
Other assets and liabilities, net |
|
5 |
|
497 |
|
||
Net cash provided by (used in) operating activities |
|
1,014 |
|
(1,201 |
) |
||
Cash Flows from Investing Activities |
|
|
|
|
|
||
Available-for-Sale securities: |
|
|
|
|
|
||
Proceeds from sales |
|
1,828 |
|
3,550 |
|
||
Maturities, sinking fund payments and calls |
|
2,654 |
|
2,511 |
|
||
Purchases |
|
(4,678 |
) |
(10,535 |
) |
||
Proceeds from sales and maturities of commercial mortgage loans |
|
136 |
|
224 |
|
||
Funding of commercial mortgage loans |
|
(132 |
) |
(83 |
) |
||
Proceeds from sales of other investments |
|
63 |
|
26 |
|
||
Purchase of other investments |
|
(108 |
) |
(11 |
) |
||
Change in policy loans, net |
|
(13 |
) |
9 |
|
||
Net cash used in investing activities |
|
(250 |
) |
(4,309 |
) |
||
|
|
|
|
|
|
||
Cash Flows from Financing Activities |
|
|
|
|
|
||
Policyholder and contractholder account values: |
|
|
|
|
|
||
Considerations received |
|
1,248 |
|
4,386 |
|
||
Net transfers (to) from separate accounts |
|
(1,283 |
) |
174 |
|
||
Surrenders and other benefits |
|
(992 |
) |
(1,587 |
) |
||
Change in borrowings under repurchase agreements, net |
|
869 |
|
|
|
||
Proceeds (payments) on line of credit with Ameriprise Financial, Inc. |
|
(300 |
) |
500 |
|
||
Deferred premium options, net |
|
(111 |
) |
(38 |
) |
||
Cash dividend to Ameriprise Financial, Inc. |
|
(500 |
) |
|
|
||
Net cash (used in) provided by financing activities |
|
(1,069 |
) |
3,435 |
|
||
Net decrease in cash and cash equivalents |
|
(305 |
) |
(2,075 |
) |
||
Cash and cash equivalents at beginning of period |
|
811 |
|
3,307 |
|
||
Cash and cash equivalents at end of period |
|
$ |
506 |
|
$ |
1,232 |
|
Supplemental Disclosures: |
|
|
|
|
|
||
Income taxes paid, net |
|
$ |
76 |
|
$ |
9 |
|
Interest paid on borrowings |
|
2 |
|
|
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
Nine Months Ended September 30, 2010 and 2009
(in millions)
|
|
Common |
|
Additional |
|
Retained |
|
Accumulated |
|
Total |
|
|||||
Balances at January 1, 2009 |
|
$ |
3 |
|
$ |
2,116 |
|
$ |
2,336 |
|
$ |
(716 |
) |
$ |
3,739 |
|
Change in accounting principles, net of tax |
|
|
|
|
|
38 |
|
(38 |
) |
|
|
|||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
|
|
554 |
|
|
|
554 |
|
|||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Change in net unrealized securities losses |
|
|
|
|
|
|
|
1,146 |
|
1,146 |
|
|||||
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities |
|
|
|
|
|
|
|
26 |
|
26 |
|
|||||
Change in net unrealized derivatives losses |
|
|
|
|
|
|
|
3 |
|
3 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
1,729 |
|
|||||
Tax adjustment on share-based incentive compensation plan |
|
|
|
(1 |
) |
|
|
|
|
(1 |
) |
|||||
Balances at September 30, 2009 |
|
$ |
3 |
|
$ |
2,115 |
|
$ |
2,928 |
|
$ |
421 |
|
$ |
5,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balances at January 1, 2010 |
|
$ |
3 |
|
$ |
2,445 |
|
$ |
3,114 |
|
$ |
382 |
|
$ |
5,944 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
|
|
627 |
|
|
|
627 |
|
|||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Change in net unrealized securities gains |
|
|
|
|
|
|
|
569 |
|
569 |
|
|||||
Change in noncredit related impairments on securities and net unrealized securities losses on previously impaired securities |
|
|
|
|
|
|
|
2 |
|
2 |
|
|||||
Change in net unrealized derivatives losses |
|
|
|
|
|
|
|
3 |
|
3 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
1,201 |
|
|||||
Tax adjustment on share-based incentive compensation plan |
|
|
|
1 |
|
|
|
|
|
1 |
|
|||||
Cash dividend to Ameriprise Financial, Inc. |
|
|
|
|
|
(500 |
) |
|
|
(500 |
) |
|||||
Balances at September 30, 2010 |
|
$ |
3 |
|
$ |
2,446 |
|
$ |
3,241 |
|
$ |
956 |
|
$ |
6,646 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and its wholly owned subsidiaries, RiverSource Life Insurance Co. of New York and RiverSource Tax Advantaged Investments, Inc. (RTA). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). All significant intercompany accounts and transactions have been eliminated in consolidation.
RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-Q as RiverSource Life.
The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been made. Except for the adjustments described below, all adjustments made were of a normal recurring nature.
In the third quarter of 2010, RiverSource Life made adjustments for revisions to the valuations of reserves, deferred acquisition costs (DAC) and deferred sales inducement costs (DSIC) related to insurance and living benefit guarantees which resulted in a $32 million pretax charge ($21 million after tax). In the second quarter of 2010, RiverSource Life made an adjustment for revisions to certain calculations in its valuation of DAC and DSIC which resulted in a $33 million pretax benefit ($21 million after tax).
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain reclassifications of prior period amounts have been made to conform to the current presentation. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in RiverSource Lifes Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 24, 2010.
RiverSource Life evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued.
2. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Consolidation of Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (FASB) updated the accounting standards related to the consolidation of variable interest entities (VIEs). The standard amends the guidance on the determination of the primary beneficiary of a VIE from a quantitative model to a qualitative model and requires additional disclosures about an enterprises involvement in VIEs. In February 2010, the FASB amended this guidance to defer application of the consolidation requirements for certain investment funds. The standards are effective for interim and annual reporting periods beginning after November 15, 2009. RiverSource Life adopted the standards effective January 1, 2010 which did not impact its consolidated financial condition and results of operations.
Subsequent Events
In February 2010, the FASB amended the accounting standards related to the recognition and disclosure of subsequent events. The amendments remove the requirement to disclose the date through which subsequent events are evaluated for SEC filers. The standard is effective upon issuance and shall be applied prospectively. RiverSource Life adopted the standard in the first quarter of 2010 which did not have any effect on RiverSource Lifes consolidated financial condition and results of operations.
Fair Value
In January 2010, the FASB updated the accounting standards related to disclosures on 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 presents 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 on 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
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
to the Level 3 rollforward, which are effective for interim and annual periods beginning after December 15, 2010. RiverSource Life adopted 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 did not have any effect on RiverSource Lifes consolidated financial condition and results of operations.
Recognition and Presentation of Other-Than-Temporary Impairments (OTTI)
In April 2009, the FASB updated the accounting standards for the recognition and presentation of other-than-temporary impairments. The standard amends existing guidance on other-than-temporary impairments for debt securities and requires that the credit portion of other-than-temporary impairments be recorded in earnings and the noncredit portion of losses be recorded in other comprehensive income (loss) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery of its cost basis. The standard requires separate presentation of both the credit and noncredit portions of other-than-temporary impairments on the financial statements and additional disclosures. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At the date of adoption, the portion of previously recognized other-than-temporary impairments that represent the noncredit related loss component shall be recognized as a cumulative effect of adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income (loss). RiverSource 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 Lifes required disclosures.
Future Adoption of New Accounting Standards
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB updated the accounting standards regarding accounting for DAC. Under this new standard, only the following costs incurred in the acquisition of new and renewal insurance contracts would be capitalizable as DAC: (i) incremental direct costs of a successful contract acquisition, (ii) portions of employees salaries and benefits directly related to time spent performing specified acquisition activities (that is, underwriting, policy issuance and processing, medical and inspection, and sales force contract selling) for a contract that has actually been acquired, (iii) other costs related to the specified acquisition activities that would not have been incurred had the acquisition contract not occurred, and (iv) advertising costs that meet the capitalization criteria in other GAAP guidance for certain direct-response marketing. All other costs are to be expensed as incurred. The standard is effective for interim and annual periods beginning after December 15, 2011, with earlier adoption permitted if it is at the beginning of an entitys annual reporting period. The standard is to be applied prospectively; however, retrospective application to all prior periods presented is permitted but not required. RiverSource Life is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
Receivables
In July 2010, the FASB updated the accounting standards for disclosures about the credit quality of financing receivables and the allowance for credit losses. The standard requires additional disclosure related to the credit quality of financing receivables, troubled debt restructurings and significant purchases or sales of financing receivables during the period. The standard requires that these disclosures and existing disclosures be presented on a disaggregated basis, similar to the manner that the entity uses to evaluate its credit losses. Disclosures of information as of the end of a reporting period are effective for interim and annual periods ending after December 15, 2010 and disclosures of activity that occurred during a reporting period are effective for interim and annual periods beginning after December 15, 2010. RiverSource Lifes adoption of the standard will not impact its consolidated financial condition and results of operations.
How Investments Held through Separate Accounts Affect an Insurers Consolidation Analysis of Those Investments
In April 2010, the FASB updated the accounting standards regarding accounting for investment funds determined to be VIEs. Under this standard an insurance enterprise would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts. In addition, the enterprise would not consider the interests held through separate accounts in evaluating its economic interests in a VIE, unless the separate account contract holder is a related party. The standard is effective for financial statements issued for fiscal years and interim
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
periods beginning after December 15, 2010. The adoption of the standard is not expected to have a material impact on RiverSource Lifes consolidated financial condition and results of operations.
3. 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.
RTAs 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 $100 million and $28 million as of September 30, 2010 and December 31, 2009, respectively. RTA has no obligation to provide financial or other support to the affordable housing partnerships in addition to liabilities already recorded nor has it provided any additional support to the affordable housing partnerships. RiverSource Life had liabilities of $77 million and $1 million recorded as of September 30, 2010 and December 31, 2009, respectively, related to the affordable housing partnerships.
4. Investments
Available-for-Sale securities distributed by type were as follows:
|
|
September 30, 2010 |
|
|||||||||||||
Description of Securities |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
Noncredit |
|
|||||
|
|
(in millions) |
|
|||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate debt securities |
|
$ |
14,703 |
|
$ |
1,670 |
|
$ |
(16 |
) |
$ |
16,357 |
|
$ |
|
|
Residential mortgage backed securities |
|
4,591 |
|
372 |
|
(153 |
) |
4,810 |
|
(35 |
) |
|||||
Commercial mortgage backed securities |
|
3,899 |
|
352 |
|
|
|
4,251 |
|
|
|
|||||
Asset backed securities |
|
854 |
|
53 |
|
(17 |
) |
890 |
|
|
|
|||||
State and municipal obligations |
|
792 |
|
61 |
|
(36 |
) |
817 |
|
|
|
|||||
U.S. government and agencies obligations |
|
56 |
|
8 |
|
|
|
64 |
|
|
|
|||||
Foreign government bonds and obligations |
|
91 |
|
21 |
|
|
|
112 |
|
|
|
|||||
Other structured investments |
|
5 |
|
7 |
|
|
|
12 |
|
7 |
|
|||||
Total fixed maturities |
|
24,991 |
|
2,544 |
|
(222 |
) |
27,313 |
|
(28 |
) |
|||||
Common and preferred stocks |
|
30 |
|
|
|
(1 |
) |
29 |
|
|
|
|||||
Total |
|
$ |
25,021 |
|
$ |
2,544 |
|
$ |
(223 |
) |
$ |
27,342 |
|
$ |
(28 |
) |
|
|
December 31, 2009 |
|
|||||||||||||
Description of Securities |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
Noncredit |
|
|||||
|
|
(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. Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
At both September 30, 2010 and December 31, 2009, fixed maturity securities comprised approximately 88% of RiverSource Lifes total investments. Rating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), including Moodys Investors Service (Moodys), Standard & Poors Ratings Services (S&P) and Fitch Ratings Ltd. (Fitch). RiverSource Life uses the median of available ratings from Moodys, S&P and Fitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moodys, S&P and Fitch are unavailable, RiverSource Life may utilize ratings from other NRSROs or rate the securities internally. At both September 30, 2010 and December 31, 2009, approximately $1.1 billion of securities were internally rated by Columbia Management Investment Advisors, LLCs (formerly known as RiverSource Investments, LLC) using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
|
|
September 30, 2010 |
|
December 31, 2009 |
|
||||||||||||
Ratings |
|
Amortized |
|
Fair |
|
Percent of |
|
Amortized |
|
Fair |
|
Percent of |
|
||||
|
|
(in millions, except percentages) |
|
||||||||||||||
AAA |
|
$ |
8,394 |
|
$ |
9,121 |
|
34 |
% |
$ |
9,194 |
|
$ |
9,520 |
|
37 |
% |
AA |
|
1,346 |
|
1,461 |
|
5 |
|
1,081 |
|
1,084 |
|
4 |
|
||||
A |
|
4,072 |
|
4,436 |
|
16 |
|
4,182 |
|
4,326 |
|
17 |
|
||||
BBB |
|
9,815 |
|
11,027 |
|
40 |
|
9,276 |
|
9,826 |
|
38 |
|
||||
Below investment grade |
|
1,364 |
|
1,268 |
|
5 |
|
1,409 |
|
1,243 |
|
4 |
|
||||
Total fixed maturities |
|
$ |
24,991 |
|
$ |
27,313 |
|
100 |
% |
$ |
25,142 |
|
$ |
25,999 |
|
100 |
% |
At September 30, 2010 and December 31, 2009, approximately 29% and 33%, 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 shareholders equity.
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:
|
|
September 30, 2010 |
|
||||||||||||||||||||||
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
||||||||||||||||||
Description of Securities |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
||||||
|
|
(in millions, except number of securities) |
|
||||||||||||||||||||||
Corporate debt securities |
|
12 |
|
$ |
127 |
|
$ |
|
|
49 |
|
$ |
357 |
|
$ |
(16 |
) |
61 |
|
$ |
484 |
|
$ |
(16 |
) |
Residential mortgage backed securities |
|
17 |
|
176 |
|
(2 |
) |
57 |
|
283 |
|
(151 |
) |
74 |
|
459 |
|
(153 |
) |
||||||
Commercial mortgage backed securities |
|
2 |
|
9 |
|
|
|
|
|
|
|
|
|
2 |
|
9 |
|
|
|
||||||
Asset backed securities |
|
5 |
|
71 |
|
(2 |
) |
17 |
|
81 |
|
(15 |
) |
22 |
|
152 |
|
(17 |
) |
||||||
State and municipal obligations |
|
4 |
|
20 |
|
(1 |
) |
2 |
|
100 |
|
(35 |
) |
6 |
|
120 |
|
(36 |
) |
||||||
U.S. government and agencies obligations |
|
2 |
|
16 |
|
|
|
|
|
|
|
|
|
2 |
|
16 |
|
|
|
||||||
Other structured investments |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
2 |
|
|
|
|
|
||||||
Common and preferred stock |
|
|
|
|
|
|
|
2 |
|
29 |
|
(1 |
) |
2 |
|
29 |
|
(1 |
) |
||||||
Total |
|
42 |
|
$ |
419 |
|
$ |
(5 |
) |
129 |
|
$ |
850 |
|
$ |
(218 |
) |
171 |
|
$ |
1,269 |
|
$ |
(223 |
) |
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
December 31, 2009 |
|
||||||||||||||||||||||
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
||||||||||||||||||
Description of Securities |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
||||||
|
|
(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 |
) |
As part of RiverSource Lifes ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to credit spreads. The primary driver of lower unrealized losses at September 30, 2010 was the decline of interest rates during the period.
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:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
(in millions) |
|
(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 |
|
$ |
104 |
|
$ |
131 |
|
$ |
82 |
|
$ |
101 |
|
Additional amount related to credit losses for which an other-than-temporary impairment was not previously recognized |
|
|
|
|
|
14 |
|
8 |
|
||||
Reductions for securities sold during the period (realized) |
|
|
|
(15 |
) |
|
|
(18 |
) |
||||
Additional increases to the amount related to credit losses for which an other-than-temporary impairment was previously recognized |
|
|
|
3 |
|
8 |
|
28 |
|
||||
Ending balance of credit losses on securities held as of September 30 for which a portion of other-than-temporary impairment was recognized in other comprehensive income |
|
$ |
104 |
|
$ |
119 |
|
$ |
104 |
|
$ |
119 |
|
The change in net unrealized securities gains (losses) in other comprehensive income includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, DSIC, benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table presents a rollforward of the net unrealized securities gains (losses) on Available-for-Sale securities included in accumulated other comprehensive income (loss):
|
|
Net |
|
Deferred |
|
Accumulated Other |
|
|||
|
|
(in millions) |
|
|||||||
Balance at January 1, 2009 |
|
$ |
(1,043 |
) |
$ |
365 |
|
$ |
(678 |
) |
Cumulative effect of accounting change |
|
(58 |
)(1) |
20 |
|
(38 |
) |
|||
Net unrealized securities gains arising during the period(3) |
|
2,465 |
|
(862 |
) |
1,603 |
|
|||
Reclassification of gains included in net income |
|
(52 |
) |
18 |
|
(34 |
) |
|||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
|
(611 |
) |
214 |
|
(397 |
) |
|||
Balance at September 30, 2009 |
|
$ |
701 |
|
$ |
(245 |
) |
$ |
456 |
(2) |
|
|
|
|
|
|
|
|
|||
Balance at January 1, 2010 |
|
$ |
638 |
|
$ |
(222 |
) |
$ |
416 |
|
Net unrealized securities gains arising during the period(3) |
|
1,486 |
|
(520 |
) |
966 |
|
|||
Reclassification of gains included in net income |
|
(16 |
) |
5 |
|
(11 |
) |
|||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
|
(591 |
) |
206 |
|
(385 |
) |
|||
Balance at September 30, 2010 |
|
$ |
1,517 |
|
$ |
(531 |
) |
$ |
986 |
(2) |
(1) Amount represents the cumulative effect of adopting a new accounting standard on January 1, 2009. See Note 2 for additional information on the adoption impact.
(2) At September 30, 2010 and 2009, Accumulated Other Comprehensive Income Related to Net Unrealized Securities Gains included $(14) million and $(13) million, respectively, of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities.
(3) Net unrealized securities gains arising during the period include other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income during the period.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
(in millions) |
|
||||||||||
Gross realized investment gains from sales |
|
$ |
5 |
|
$ |
48 |
|
$ |
42 |
|
$ |
143 |
|
Gross realized investment losses from sales |
|
(1 |
) |
(21 |
) |
(2 |
) |
(31 |
) |
||||
Other-than-temporary impairments related to credit |
|
(1 |
) |
(19 |
) |
(24 |
) |
(60 |
) |
||||
The other-than-temporary impairments for the three months and nine months ended September 30, 2010 primarily related to credit losses on non-agency residential mortgage backed securities as well as corporate debt securities in the gaming industry. The other-than-temporary impairments for the three months and nine months ended September 30, 2009 related to credit losses on non-agency residential mortgage backed securities and corporate debt securities primarily in the gaming industry.
Available-for-Sale securities by contractual maturity at September 30, 2010 were as follows:
|
|
Amortized Cost |
|
Fair Value |
|
||
|
|
(in millions) |
|
||||
Due within one year |
|
$ |
1,012 |
|
$ |
1,028 |
|
Due after one year through five years |
|
5,675 |
|
6,084 |
|
||
Due after five years through 10 years |
|
5,335 |
|
6,062 |
|
||
Due after 10 years |
|
3,620 |
|
4,176 |
|
||
|
|
15,642 |
|
17,350 |
|
||
Residential mortgage backed securities |
|
4,591 |
|
4,810 |
|
||
Commercial mortgage backed securities |
|
3,899 |
|
4,251 |
|
||
Asset backed securities |
|
854 |
|
890 |
|
||
Other structured investments |
|
5 |
|
12 |
|
||
Common and preferred stocks |
|
30 |
|
29 |
|
||
Total |
|
$ |
25,021 |
|
$ |
27,342 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities, 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.
5. Deferred Acquisition Costs and Deferred Sales Inducement Costs
In the third quarter of 2010, management reviewed and updated RiverSource Lifes DAC and DSIC valuation assumptions. In this process, management extended the projection periods used for its annuity products and revised client asset value growth rates assumed for variable annuity and variable universal life contracts.
The total pretax impacts on RiverSource Lifes assets and liabilities attributable to the review of valuation assumptions during the third quarter of 2010 and 2009 were as follows:
Balance Sheet Impact |
|
Reinsurance |
|
DAC |
|
DSIC |
|
Future Policy |
|
Total |
|
|||||
|
|
(in millions) |
|
|||||||||||||
2010 period |
|
$ |
(21 |
) |
$ |
323 |
|
$ |
52 |
|
$ |
(266 |
) |
$ |
88 |
|
2009 period |
|
(65 |
) |
119 |
|
9 |
|
71 |
|
134 |
|
|||||
The total pretax impacts on RiverSource Lifes revenues and expenses attributable to the review of the valuation assumptions for the three months and nine months ended September 30, 2010 and 2009 were as follows:
Pretax |
|
Policy and |
|
Benefits, |
|
Amortization |
|
Total |
|
||||
|
|
(in millions) |
|
||||||||||
2010 period |
|
$ |
(21 |
) |
$ |
(214 |
) |
$ |
323 |
|
$ |
88 |
|
2009 period |
|
(65 |
) |
80 |
|
119 |
|
134 |
|
||||
The balances of and changes in DAC were as follows:
|
|
2010 |
|
2009 |
|
||
|
|
(in millions) |
|
||||
Balance at January 1 |
|
$ |
4,285 |
|
$ |
4,324 |
|
Capitalization of acquisition costs |
|
326 |
|
452 |
|
||
Amortization, excluding the impact of valuation assumptions review |
|
(311 |
) |
(161 |
) |
||
Amortization impact of valuation assumptions review |
|
323 |
|
119 |
|
||
Impact of change in net unrealized securities gains |
|
(229 |
) |
(462 |
) |
||
Balance at September 30 |
|
$ |
4,394 |
|
$ |
4,272 |
|
The balances of and changes in DSIC were as follows:
|
|
2010 |
|
2009 |
|
||
|
|
(in millions) |
|
||||
Balance at January 1 |
|
$ |
524 |
|
$ |
518 |
|
Capitalization of sales inducement costs |
|
32 |
|
61 |
|
||
Amortization, excluding the impact of valuation assumptions review |
|
(43 |
) |
(7 |
) |
||
Amortization impact of valuation assumptions review |
|
52 |
|
9 |
|
||
Impact of change in net unrealized securities gains |
|
(34 |
) |
(67 |
) |
||
Balance at September 30 |
|
$ |
531 |
|
$ |
514 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
6. 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:
|
|
September 30, 2010 |
|
December 31, 2009 |
|
||
|
|
(in millions) |
|
||||
Fixed annuities |
|
$ |
16,650 |
|
$ |
16,558 |
|
Equity indexed annuities (EIA) accumulated host values |
|
111 |
|
159 |
|
||
EIA embedded derivatives |
|
2 |
|
9 |
|
||
Variable annuity fixed sub-accounts |
|
4,933 |
|
6,127 |
|
||
Variable annuity guaranteed minimum withdrawal benefits (GMWB) |
|
940 |
|
204 |
|
||
Variable annuity guaranteed minimum accumulation benefits (GMAB) |
|
231 |
|
100 |
|
||
Other variable annuity guarantees |
|
15 |
|
12 |
|
||
Total annuities |
|
22,882 |
|
23,169 |
|
||
Variable universal life (VUL)/universal life (UL) insurance |
|
2,713 |
|
2,595 |
|
||
Other life, disability income and long term care insurance |
|
4,994 |
|
4,619 |
|
||
Total future policy benefits |
|
30,589 |
|
30,383 |
|
||
Policy claims and other policyholders funds |
|
146 |
|
123 |
|
||
Total future policy benefits and policy claims and other policyholders funds |
|
$ |
30,735 |
|
$ |
30,506 |
|
Separate account liabilities consisted of the following:
|
|
September 30, 2010 |
|
December 31, 2009 |
|
||
|
|
(in millions) |
|
||||
Variable annuity variable sub-accounts |
|
$ |
54,122 |
|
$ |
48,982 |
|
VUL insurance variable sub-accounts |
|
5,491 |
|
5,239 |
|
||
Other insurance variable sub-accounts |
|
44 |
|
46 |
|
||
Total separate account liabilities |
|
$ |
59,657 |
|
$ |
54,267 |
|
7. Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by RiverSource Life contain guaranteed minimum death benefit (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 gain gross-up (GGU) benefits. In addition, RiverSource Life offers contracts with GMWB and GMAB provisions. RiverSource Life previously offered contracts containing guaranteed minimum income benefit (GMIB) provisions.
Certain universal life 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table provides information related to variable annuity guarantees for which RiverSource Life has established additional liabilities:
|
|
September 30, 2010 |
|
December 31, 2009 |
|
||||||||||||||||||
Variable Annuity |
|
Total |
|
Contract |
|
Net |
|
Weighted |
|
Total |
|
Contract |
|
Net |
|
Weighted |
|
||||||
|
|
(in millions, except age) |
|
||||||||||||||||||||
GMDB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Return of premium |
|
$ |
34,899 |
|
$ |
33,195 |
|
$ |
442 |
|
62 |
|
$ |
30,938 |
|
$ |
28,415 |
|
$ |
974 |
|
61 |
|
Five/six-year reset |
|
13,393 |
|
10,833 |
|
560 |
|
62 |
|
13,919 |
|
11,223 |
|
929 |
|
61 |
|
||||||
One-year ratchet |
|
7,390 |
|
6,871 |
|
551 |
|
63 |
|
7,081 |
|
6,400 |
|
873 |
|
63 |
|
||||||
Five-year ratchet |
|
1,375 |
|
1,322 |
|
18 |
|
60 |
|
1,256 |
|
1,171 |
|
38 |
|
59 |
|
||||||
Other |
|
605 |
|
574 |
|
84 |
|
67 |
|
549 |
|
516 |
|
95 |
|
67 |
|
||||||
Total GMDB |
|
$ |
57,662 |
|
$ |
52,795 |
|
$ |
1,655 |
|
62 |
|
$ |
53,743 |
|
$ |
47,725 |
|
$ |
2,909 |
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GGU death benefit |
|
$ |
917 |
|
$ |
858 |
|
$ |
74 |
|
64 |
|
$ |
853 |
|
$ |
775 |
|
$ |
70 |
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMIB |
|
$ |
587 |
|
$ |
548 |
|
$ |
111 |
|
64 |
|
$ |
628 |
|
$ |
582 |
|
$ |
126 |
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMWB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMWB |
|
$ |
4,200 |
|
$ |
4,176 |
|
$ |
258 |
|
64 |
|
$ |
4,196 |
|
$ |
4,067 |
|
$ |
454 |
|
64 |
|
GMWB for life |
|
18,300 |
|
18,172 |
|
383 |
|
63 |
|
14,988 |
|
14,333 |
|
795 |
|
63 |
|
||||||
Total GMWB |
|
$ |
22,500 |
|
$ |
22,348 |
|
$ |
641 |
|
63 |
|
$ |
19,184 |
|
$ |
18,400 |
|
$ |
1,249 |
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMAB |
|
$ |
3,286 |
|
$ |
3,269 |
|
$ |
77 |
|
56 |
|
$ |
2,926 |
|
$ |
2,853 |
|
$ |
153 |
|
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 & |
|
GMIB |
|
GMWB |
|
GMAB |
|
UL |
|
|||||
|
|
(in millions) |
|
|||||||||||||
Liability balance at January 1, 2009 |
|
$ |
55 |
|
$ |
12 |
|
$ |
1,471 |
|
$ |
367 |
|
$ |
7 |
|
Incurred claims |
|
7 |
|
(5 |
) |
(1,003 |
) |
(216 |
) |
5 |
|
|||||
Paid claims |
|
(53 |
) |
|
|
|
|
|
|
|
|
|||||
Liability balance at September 30, 2009 |
|
$ |
9 |
|
$ |
7 |
|
$ |
468 |
|
$ |
151 |
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance at January 1, 2010 |
|
$ |
6 |
|
$ |
6 |
|
$ |
204 |
|
$ |
100 |
|
$ |
15 |
|
Incurred claims |
|
16 |
|
3 |
|
736 |
|
131 |
|
43 |
|
|||||
Paid claims |
|
(15 |
) |
(1 |
) |
|
|
|
|
(4 |
) |
|||||
Liability balance at September 30, 2010 |
|
$ |
7 |
|
$ |
8 |
|
$ |
940 |
|
$ |
231 |
|
$ |
54 |
|
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
|
|
September 30, |
|
December 31, |
|
||
|
|
2010 |
|
2009 |
|
||
|
|
(in millions) |
|
||||
Mutual funds: |
|
|
|
|
|
||
Equity |
|
$ |
30,379 |
|
$ |
29,379 |
|
Bond |
|
21,326 |
|
16,537 |
|
||
Other |
|
2,252 |
|
2,889 |
|
||
Total mutual funds |
|
$ |
53,957 |
|
$ |
48,805 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
8. Line of Credit
RiverSource Life Insurance Company, as the borrower, had an outstanding balance at December 31, 2009 of $300 million under a revolving credit agreement with Ameriprise Financial as the lender. The aggregate amount outstanding under the line of credit may not exceed $800 million at any time. The interest rate for any borrowing under the agreement is established by reference to LIBOR plus 28 basis points. Amounts borrowed may be repaid at any time with no prepayment penalty. The outstanding balance was paid in full during the first quarter of 2010.
9. Borrowings under Repurchase Agreements
During 2010, RiverSource Life entered into repurchase agreements in exchange for cash which it accounts for as a secured borrowing. RiverSource Life has pledged Available-for-Sale securities consisting of agency residential mortgage backed securities and corporate debt securities to collateralize its obligation under the repurchase agreements. The fair value of the securities pledged as collateral, which are recorded in investments, was $908 million at September 30, 2010. The amount of RiverSource Lifes liability as of September 30, 2010 was $869 million. The weighted average annualized interest rate on the repurchase agreements held as of September 30, 2010 was 0.38%.
10. 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 Lifes valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2 Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Determination of Fair Value
RiverSource Life uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. RiverSource Lifes market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. RiverSource Lifes income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, RiverSource Life maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (NAV) and classified as Level 1. RiverSource Lifes 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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. Level 1 securities include U.S. Treasuries. Level 2 securities include municipal and corporate bonds, agency mortgage backed securities, commercial mortgage backed securities, asset backed securities and U.S. and foreign government and agency securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from nationally-recognized pricing services. Observable inputs used to value these securities can include: reported trades, benchmark yields, issuer spreads and broker/dealer quotes. Level 3 securities include corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities. The fair value of these Level 3 securities is typically based on a single broker quote, except for the valuation of non-agency residential mortgage backed securities. Effective March 31, 2010, RiverSource Life returned to using prices from nationally-recognized pricing services to determine the fair value of non-agency residential mortgage backed securities because the difference between these prices and the results of RiverSource Lifes discounted cash flows was not significant. RiverSource Life continues to classify its non-agency residential mortgage backed securities as Level 3 because RiverSource Life believes the market for these securities is still inactive and their valuation includes significant unobservable inputs.
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.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchanged-traded are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and options. Derivatives that are valued using pricing models that have significant unobservable inputs are classified as Level 3 measurements.
Liabilities
Future Policy Benefits
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 (such as market implied equity volatility and the LIBOR swap curve) and incorporate significant unobservable inputs related to contractholder behavior assumptions (such as withdrawals and lapse rates) and margins for risk, profit and expenses that RiverSource Life believes an exit market participant would expect. The fair value of these embedded derivatives also reflects a current estimate of RiverSource Lifes 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. 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 and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as Level 2.
Other Liabilities
The fair value of derivatives that are traded in less active over-the-counter markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and options.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
|
|
September 30, 2010 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
|
(in millions) |
|
||||||||||
Assets |
|
|
|
|
|
|
|
|
|
||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
||||
Corporate debt securities |
|
$ |
|
|
$ |
15,052 |
|
$ |
1,305 |
|
$ |
16,357 |
|
Residential mortgage backed securities |
|
|
|
1,887 |
|
2,923 |
|
4,810 |
|
||||
Commercial mortgage backed securities |
|
|
|
4,251 |
|
|
|
4,251 |
|
||||
Asset backed securities |
|
|
|
682 |
|
208 |
|
890 |
|
||||
State and municipal obligations |
|
|
|
817 |
|
|
|
817 |
|
||||
U.S. government and agencies obligations |
|
11 |
|
53 |
|
|
|
64 |
|
||||
Foreign government bonds and obligations |
|
|
|
112 |
|
|
|
112 |
|
||||
Other structured investments |
|
|
|
|
|
12 |
|
12 |
|
||||
Total Available-for-Sale securities: Fixed maturities |
|
11 |
|
22,854 |
|
4,448 |
|
27,313 |
|
||||
Common and preferred stocks |
|
|
|
29 |
|
|
|
29 |
|
||||
Trading securities |
|
|
|
36 |
|
|
|
36 |
|
||||
Cash equivalents |
|
29 |
|
477 |
|
|
|
506 |
|
||||
Other assets: |
|
|
|
|
|
|
|
|
|
||||
Interest rate derivatives |
|
|
|
699 |
|
|
|
699 |
|
||||
Equity derivatives |
|
111 |
|
706 |
|
|
|
817 |
|
||||
Credit derivatives |
|
|
|
1 |
|
|
|
1 |
|
||||
Total Other assets |
|
111 |
|
1,406 |
|
|
|
1,517 |
|
||||
Separate account assets |
|
|
|
59,657 |
|
|
|
59,657 |
|
||||
Total assets at fair value |
|
$ |
151 |
|
$ |
84,459 |
|
$ |
4,448 |
|
$ |
89,058 |
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
||||
Future policy benefits: |
|
|
|
|
|
|
|
|
|
||||
EIA embedded derivatives |
|
$ |
|
|
$ |
2 |
|
$ |
|
|
$ |
2 |
|
GMWB and GMAB embedded derivatives |
|
|
|
|
|
1,153 |
|
1,153 |
|
||||
Total Future policy benefits |
|
|
|
2 |
|
1,153 |
|
1,155 |
|
||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
||||
Interest rate derivatives |
|
|
|
443 |
|
|
|
443 |
|
||||
Equity derivatives |
|
|
|
439 |
|
|
|
439 |
|
||||
Credit derivatives |
|
|
|
1 |
|
|
|
1 |
|
||||
Total Other liabilities |
|
|
|
883 |
|
|
|
883 |
|
||||
Total liabilities at fair value |
|
$ |
|
|
$ |
885 |
|
$ |
1,153 |
|
$ |
2,038 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
December 31, 2009 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
|
(in millions) |
|
||||||||||
Assets |
|
|
|
|
|
|
|
|
|
||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
||||
Corporate debt securities |
|
$ |
|
|
$ |
13,755 |
|
$ |
1,239 |
|
$ |
14,994 |
|
Residential mortgage backed securities |
|
|
|
2,424 |
|
2,772 |
|
5,196 |
|
||||
Commercial mortgage backed securities |
|
|
|
3,968 |
|
72 |
|
4,040 |
|
||||
Asset backed securities |
|
|
|
665 |
|
215 |
|
880 |
|
||||
State and municipal obligations |
|
|
|
613 |
|
|
|
613 |
|
||||
U.S. government and agencies obligations |
|
11 |
|
147 |
|
|
|
158 |
|
||||
Foreign government bonds and obligations |
|
|
|
107 |
|
|
|
107 |
|
||||
Other structured investments |
|
|
|
|
|
11 |
|
11 |
|
||||
Total Available-for-Sale securities: Fixed maturities |
|
11 |
|
21,679 |
|
4,309 |
|
25,999 |
|
||||
Common and preferred stocks |
|
|
|
23 |
|
|
|
23 |
|
||||
Trading securities |
|
|
|
36 |
|
|
|
36 |
|
||||
Cash equivalents |
|
2 |
|
801 |
|
|
|
803 |
|
||||
Other assets |
|
|
|
615 |
|
|
|
615 |
|
||||
Separate account assets |
|
|
|
54,267 |
|
|
|
54,267 |
|
||||
Total assets at fair value |
|
$ |
13 |
|
$ |
77,421 |
|
$ |
4,309 |
|
$ |
81,743 |
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
||||
Future policy benefits |
|
$ |
|
|
$ |
9 |
|
$ |
299 |
|
$ |
308 |
|
Other liabilities |
|
|
|
757 |
|
|
|
757 |
|
||||
Total liabilities at fair value |
|
$ |
|
|
$ |
766 |
|
$ |
299 |
|
$ |
1,065 |
|
The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
||||||||
|
|
|
|
Total Gains (Losses) |
|
Sales, |
|
|
|
|
|
||||||||
|
|
Balance, |
|
|
|
Other |
|
and |
|
Transfers |
|
Balance, |
|
||||||
|
|
July 1, |
|
Net |
|
Comprehensive |
|
Settlements, |
|
In/(Out) of |
|
September 30, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
1,235 |
|
$ |
|
|
$ |
15 |
|
$ |
30 |
|
$ |
25 |
|
$ |
1,305 |
|
Residential mortgage backed securities |
|
2,784 |
|
20 |
|
74 |
|
45 |
|
|
|
2,923 |
|
||||||
Commercial mortgage backed securities |
|
144 |
|
|
|
|
|
|
|
(144 |
) |
|
|
||||||
Asset backed securities |
|
226 |
|
1 |
|
2 |
|
(8 |
) |
(13 |
) |
208 |
|
||||||
Other structured investments |
|
12 |
|
1 |
|
|
|
(1 |
) |
|
|
12 |
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
4,401 |
|
22 |
(1) |
91 |
|
66 |
|
(132 |
)(3) |
4,448 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Future policy benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMWB and GMAB embedded derivatives |
|
(1,083 |
) |
(44 |
)(2) |
|
|
(26 |
) |
|
|
(1,153 |
) |
||||||
(1) Included in net investment income in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(3) Represents securities with a fair value of $157 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service and securities with a fair value of $25 million that were transferred to Level 3 as the fair value of the securities is now based on broker quotes.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
||||||||
|
|
|
|
Total Gains (Losses) |
|
Sales, |
|
|
|
|
|
||||||||
|
|
Balance, |
|
Net |
|
Other |
|
and |
|
Transfers |
|
Balance, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
1,147 |
|
$ |
|
|
$ |
94 |
|
$ |
12 |
|
$ |
(46 |
) |
$ |
1,207 |
|
Residential mortgage backed securities |
|
2,386 |
|
25 |
|
111 |
|
63 |
|
|
|
2,585 |
|
||||||
Commercial mortgage backed securities |
|
64 |
|
|
|
5 |
|
|
|
|
|
69 |
|
||||||
Asset backed securities |
|
161 |
|
2 |
|
9 |
|
(36 |
) |
(9 |
) |
127 |
|
||||||
Other structured investments |
|
9 |
|
1 |
|
|
|
|
|
|
|
10 |
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
3,767 |
|
28 |
(1) |
219 |
|
39 |
|
(55 |
)(3) |
3,998 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Future policy benefits |
|
(759 |
) |
166 |
(2) |
|
|
(17 |
) |
|
|
(610 |
) |
||||||
(1) 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 $64 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service and a security with a fair value of $9 million that was transferred to Level 3 as the fair value of the security is now based on broker quotes.
RiverSource Life recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred.
The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities held at September 30 for the three months then ended:
|
|
2010 |
|
2009 |
|
||||||||||||||
|
|
Net |
|
Net |
|
Benefits, |
|
Net |
|
Net |
|
Benefits, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Residential mortgage backed securities |
|
$ |
19 |
|
$ |
(1 |
) |
$ |
|
|
$ |
27 |
|
$ |
(3 |
) |
$ |
|
|
Asset backed securities |
|
1 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
20 |
|
(1 |
) |
|
|
27 |
|
(3 |
) |
|
|
||||||
Future policy benefits |
|
|
|
|
|
(49 |
) |
|
|
|
|
165 |
|
||||||
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
||||||||
|
|
|
|
Total Gains (Losses) |
|
Sales, |
|
|
|
|
|
||||||||
|
|
Balance, |
|
Net |
|
Other |
|
and |
|
Transfers |
|
Balance, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
1,239 |
|
$ |
1 |
|
$ |
58 |
|
$ |
(18 |
) |
$ |
25 |
|
$ |
1,305 |
|
Residential mortgage backed securities |
|
2,772 |
|
36 |
|
217 |
|
(102 |
) |
|
|
2,923 |
|
||||||
Commercial mortgage backed securities |
|
72 |
|
1 |
|
10 |
|
61 |
|
(144 |
) |
|
|
||||||
Asset backed securities |
|
215 |
|
5 |
|
21 |
|
(8 |
) |
(25 |
) |
208 |
|
||||||
Other structured investments |
|
11 |
|
2 |
|
|
|
(1 |
) |
|
|
12 |
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
4,309 |
|
45 |
(1) |
306 |
|
(68 |
) |
(144 |
)(3) |
4,448 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Future policy benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
GMWB and GMAB embedded derivatives |
|
(299 |
) |
(760 |
)(2) |
|
|
(94 |
) |
|
|
(1,153 |
) |
||||||
(1) Represents a $17 million loss included in net realized investment gains and a $62 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 $169 million that were transferred to Level 2 as the fair value of the securities is now obtained from a nationally-recognized pricing service and securities with a fair value of $25 million that were transferred to Level 3 as the fair value of the securities is now based on broker quotes.
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
||||||
|
|
|
|
Total Gains (Losses) |
|
Sales, |
|
|
|
|
|
||||||||
|
|
Balance, |
|
Net |
|
Other |
|
and |
|
Transfers |
|
Balance, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
1,086 |
|
$ |
|
|
$ |
172 |
|
$ |
10 |
|
$ |
(61 |
) |
$ |
1,207 |
|
Residential mortgage backed securities |
|
520 |
|
50 |
|
103 |
|
1,912 |
|
|
|
2,585 |
|
||||||
Commercial mortgage backed securities |
|
3 |
|
|
|
6 |
|
60 |
|
|
|
69 |
|
||||||
Asset backed securities |
|
95 |
|
7 |
|
7 |
|
27 |
|
(9 |
) |
127 |
|
||||||
Other structured investments |
|
9 |
|
1 |
|
|
|
|
|
|
|
10 |
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
1,713 |
|
58 |
(1) |
288 |
|
2,009 |
|
(70 |
)(3) |
3,998 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other assets |
|
200 |
|
(37 |
)(2) |
|
|
(163 |
) |
|
|
|
|
||||||
Future policy benefits |
|
(1,832 |
) |
1,268 |
(2) |
|
|
(46 |
) |
|
|
(610 |
) |
||||||
(1) Represents a $3 million loss included in net realized investment gains (losses) and a $61 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 and a security with a fair value of $9 million that was transferred to Level 3 as the fair value of the security is now based on broker quotes.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table presents the changes in unrealized gains (losses) included in net income related to Level 3 assets and liabilities held at September 30 for the nine months then ended:
|
|
2010 |
|
2009 |
|
||||||||||||||
|
|
Net |
|
Net |
|
Benefits, |
|
Net |
|
Net |
|
Benefits, |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Residential mortgage backed securities |
|
$ |
56 |
|
$ |
(22 |
) |
$ |
|
|
$ |
57 |
|
$ |
(30 |
) |
$ |
|
|
Asset backed securities |
|
4 |
|
|
|
|
|
1 |
|
|
|
|
|
||||||
Total Available-for-Sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed maturities |
|
60 |
|
(22 |
) |
|
|
58 |
|
(30 |
) |
|
|
||||||
Future policy benefits |
|
|
|
|
|
(769 |
) |
|
|
|
|
1,244 |
|
||||||
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following table provides the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.
|
|
September 30, 2010 |
|
December 31, 2009 |
|
||||||||
|
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
|
||||
|
|
(in millions) |
|
||||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage loans, net |
|
$ |
2,517 |
|
$ |
2,666 |
|
$ |
2,532 |
|
$ |
2,519 |
|
Policy loans |
|
728 |
|
833 |
|
715 |
|
790 |
|
||||
Other investments |
|
203 |
|
217 |
|
226 |
|
245 |
|
||||
Restricted cash |
|
26 |
|
26 |
|
184 |
|
184 |
|
||||
Financial Liabilities |
|
|
|
|
|
|
|
|
|
||||
Future policy benefits |
|
$ |
15,423 |
|
$ |
16,219 |
|
$ |
15,540 |
|
$ |
15,657 |
|
Separate account liabilities |
|
378 |
|
378 |
|
406 |
|
406 |
|
||||
Line of credit with Ameriprise Financial |
|
|
|
|
|
300 |
|
300 |
|
||||
Borrowings under repurchase agreements |
|
869 |
|
869 |
|
|
|
|
|
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 Lifes 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 and an investment in Federal Home Loan Bank (FHLB) of Des Moines. The fair value of syndicated loans is obtained from a nationally-recognized pricing service. The carrying value of the investment in FHLB is considered a reasonable estimate of the fair value, as this represents the stated exit price for this investment.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Restricted Cash
Restricted cash is generally set aside for specific business transactions and restrictions are specific to RiverSource Life and do 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 Lifes 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.
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 Lifes nonperformance risk specific to this liability; however, due to the short-term nature of the line of credit, the carrying value is used as an approximation of the fair value.
Borrowings under Repurchase Agreement
The fair value of borrowings under agreements to repurchase is determined by discounting cash flows. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk.
11. 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 Lifes 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:
|
|
|
|
Asset |
|
|
|
Liability |
|
||||||||
Derivatives not designated |
|
Balance Sheet |
|
September 30, |
|
December 31, |
|
Balance Sheet Location |
|
September 30, |
|
December 31, |
|
||||
|
|
|
|
(in millions) |
|
|
|
(in millions) |
|
||||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate contracts |
|
Other assets |
|
$ |
699 |
|
$ |
176 |
|
Other liabilities |
|
$ |
443 |
|
$ |
280 |
|
Equity contracts |
|
Other assets |
|
817 |
|
425 |
|
Other liabilities |
|
439 |
|
474 |
|
||||
Credit contracts |
|
Other assets |
|
1 |
|
12 |
|
Other liabilities |
|
1 |
|
|
|
||||
Embedded derivatives(1) |
|
N/A |
|
|
|
|
|
Future policy benefits |
|
1,153 |
|
299 |
|
||||
Total GMWB and GMAB |
|
|
|
1,517 |
|
613 |
|
|
|
2,036 |
|
1,053 |
|
||||
Other derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
GMDB |
|
Other assets |
|
|
|
|
|
Other liabilities |
|
|
|
2 |
|
||||
EIA |
|
Other assets |
|
|
|
2 |
|
Other liabilities |
|
|
|
|
|
||||
EIA embedded derivatives |
|
N/A |
|
|
|
|
|
Future policy benefits |
|
2 |
|
9 |
|
||||
Total other |
|
|
|
|
|
2 |
|
|
|
2 |
|
11 |
|
||||
Total derivatives |
|
|
|
$ |
1,517 |
|
$ |
615 |
|
|
|
$ |
2,038 |
|
$ |
1,064 |
|
N/A Not applicable
(1) The fair values of GMWB and GMAB embedded derivatives fluctuate primarily based on changes in equity, interest rate and credit markets.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
See Note 10 for additional information regarding RiverSource Lifes 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:
|
|
|
|
Amount of Gain (Loss) on Derivatives |
|
||||||||||
Derivatives not designated |
|
Location of Gain (Loss) on |
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
as hedging instruments |
|
Derivatives Recognized in Income |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
(in millions) |
|
||||||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate contracts |
|
Benefits, claims, losses and settlement expenses |
|
$ |
141 |
|
$ |
63 |
|
$ |
352 |
|
$ |
(322 |
) |
Equity contracts |
|
Benefits, claims, losses and settlement expenses |
|
(354 |
) |
(227 |
) |
220 |
|
(1,017 |
) |
||||
Credit contracts |
|
Benefits, claims, losses and settlement expenses |
|
(18 |
) |
(39 |
) |
(48 |
) |
(61 |
) |
||||
Embedded derivatives(1) |
|
Benefits, claims, losses and settlement expenses |
|
(70 |
) |
149 |
|
(854 |
) |
1,222 |
|
||||
Total GMWB and GMAB |
|
|
|
(301 |
) |
(54 |
) |
(330 |
) |
(178 |
) |
||||
Other derivatives: |
|
|
|
|
|
|
|
|
|
|
|
||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
||||
GMDB |
|
Benefits, claims, losses and settlement expenses |
|
(5 |
) |
(7 |
) |
|
|
(7 |
) |
||||
EIA |
|
Interest credited to fixed accounts |
|
1 |
|
3 |
|
1 |
|
1 |
|
||||
EIA embedded derivatives |
|
Interest credited to fixed accounts |
|
1 |
|
2 |
|
7 |
|
3 |
|
||||
Total other |
|
|
|
(3 |
) |
(2 |
) |
8 |
|
(3 |
) |
||||
Total derivatives |
|
|
|
$ |
(304 |
) |
$ |
(56 |
) |
$ |
(322 |
) |
$ |
(181 |
) |
(1) The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
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, interest rate and credit risk related to various RiverSource Life products and transactions.
The majority of RiverSource Lifes annuity contracts contain GMDB provisions, which may result in a death benefit payable that exceeds the contract accumulation value when market values of customers accounts decline. Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. 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, interest rate swaps, variance swaps and credit default swaps. In 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 September 30, 2010 and December 31, 2009, the gross notional amount of contracts for RiverSource Lifes GMWB and GMAB provisions was $48.4 billion and $38.7 billion, respectively. At both September 30, 2010 and December 31, 2009, the gross notional amount of contracts for RiverSource Lifes GMDB provisions was $77 million. 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 |
|
Premiums |
|
||
|
|
(in millions) |
|
||||
2010(1) |
|
$ |
72 |
|
$ |
2 |
|
2011 |
|
251 |
|
4 |
|
||
2012 |
|
231 |
|
3 |
|
||
2013 |
|
208 |
|
2 |
|
||
2014 |
|
181 |
|
1 |
|
||
2015-2025 |
|
625 |
|
4 |
|
||
(1) 2010 amounts represent the amounts payable and receivable for the period from October 1, 2010 to December 31, 2010.
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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 $92 million and $129 million at September 30, 2010 and December 31, 2009, respectively.
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. These embedded derivatives are bifurcated from their host contracts and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As discussed 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 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 nine months ended September 30, 2010, RiverSource Life held no derivatives that were designated as cash flow hedges.
At September 30, 2010, 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 are recognized in earnings immediately. No hedge relationships were discontinued during the nine months ended September 30, 2010 and 2009 due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the nine months ended September 30, 2010 and 2009, amounts recognized in earnings on derivative transactions that were ineffective were nil.
The following is a summary of unrealized derivatives losses included in accumulated other comprehensive income related to cash flow hedges:
|
|
2010 |
|
2009 |
|
||
|
|
(in millions) |
|
||||
Net unrealized derivatives losses at January 1 |
|
$ |
(34 |
) |
$ |
(38 |
) |
Reclassification of realized losses(1) |
|
5 |
|
5 |
|
||
Income tax benefit |
|
(2 |
) |
(2 |
) |
||
Net unrealized derivatives losses at September 30 |
|
$ |
(31 |
) |
$ |
35 |
|
(1) Loss reclassified from Accumulated Other Comprehensive Loss to Net Investment Income on Consolidated Statements of Income.
Currently, the longest period of time over which RiverSource Life is hedging exposure to the variability in future cash flows is 8 years and relates to interest credited on forecasted fixed premium product sales.
Credit Risk
Credit risk associated with RiverSource Lifes 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 whenever practical. As of September 30, 2010 and December 31, 2009, RiverSource Life held $420 million and $88 million, respectively, 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 September 30, 2010 and December 31, 2009, RiverSource Life had accepted additional collateral consisting of various securities with a fair value of $129 million and $22 million, respectively, which are not reflected on the Consolidated Balance Sheets. As of September 30, 2010 and December 31, 2009, RiverSource Lifes maximum credit exposure related to derivative assets after considering netting arrangements with counterparties and collateral arrangements was approximately $48 million and $53 million, respectively.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Certain of RiverSource Lifes derivative instruments contain provisions that adjust the level of collateral RiverSource Life is required to post based on RiverSource Lifes financial strength rating (or based on the debt rating of RiverSource Lifes parent, Ameriprise Financial). Additionally, certain of RiverSource Lifes 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 Financials debt does not maintain a specific credit rating (generally an investment grade rating). If these termination provisions were to be triggered, RiverSource Lifes counterparty could require immediate settlement of any net liability position. At September 30, 2010 and December 31, 2009, the aggregate fair value of all derivative instruments in a net liability position containing such credit risk features was $45 million and $296 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of September 30, 2010 and December 31, 2009 was $37 million and $269 million, respectively. If the credit risk features of derivative contracts that were in a net liability position at September 30, 2010 and December 31, 2009 were triggered, the additional fair value of assets needed to settle these derivative liabilities would have been $8 million and $27 million, respectively.
12. Income Taxes
RiverSource Lifes effective tax rates were 25% and 23% for the three months and nine months ended September 30, 2010, respectively. RiverSource Lifes effective tax rates were 25% and 24% for the three months and nine months ended September 30, 2009, respectively. The decrease in the effective tax rate primarily reflects benefits from tax planning and completion of certain audits which offset the impact of an increase in pretax income relative to tax advantaged items for the nine months ended September 30, 2010.
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 Lifes 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 Lifes 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 September 30, 2010 and December 31, 2009.
Additionally, RiverSource Life has foreign tax credit carryforwards of $2 million which will expire December 31, 2019.
As of September 30, 2010 and December 31, 2009, RiverSource Life had a $28 million gross unrecognized tax benefit and a $77 million gross unrecognized tax expense, respectively. If recognized, approximately $41 million and $49 million, net of federal tax benefits, of unrecognized tax benefits as of September 30, 2010 and December 31, 2009, 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 $9 million in interest and penalties for the nine months ended September 30, 2010. As of September 30, 2010 and December 31, 2009, RiverSource Life had a receivable of $25 million and $16 million, respectively, related to the accrual of interest and penalties.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of RiverSource Life, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $3 million to $5 million in the next 12 months.
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 RiverSource Lifes 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 Lifes U.S. income tax returns for 2005 through 2007 of which 2006 through 2007 was completed in the second quarter of 2010. The examination of 2005 is expected to be completed in the fourth quarter of 2010. In the fourth quarter of 2010, the IRS
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
commenced an examination of RiverSource Lifes income tax returns for 2008 and 2009. RiverSource Life or certain of its subsidiaries state income tax returns are currently under examination by various jurisdictions for years ranging from 1998 through 2008.
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.
Management believes that the IRS will concede this issue for open tax years and it is likely that any regulations that would result from a regulation project would apply prospectively only. 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.
13. Contingencies
The SEC, the Financial Industry Regulatory Authority, commonly referred to as FINRA, and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements. RiverSource Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries.
RiverSource Life is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. RiverSource Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
ITEM 2. MANAGEMENTS NARRATIVE ANALYSIS
The following information should be read in conjunction with RiverSource Life Insurance Companys Consolidated Financial Statements and Notes presented in Part I, Item 1. RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-Q as RiverSource Life. This narrative analysis may contain forward-looking statements that reflect RiverSource Lifes plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under Forward-Looking Statements. RiverSource Life believes it is useful to read this narrative analysis in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (SEC) on February 24, 2010 (2009 10-K), as well as its current reports on Form 8-K and other publicly available information.
RiverSource Life follows U.S. generally accepted accounting principles (GAAP), and the following discussion is presented on a consolidated basis consistent with GAAP. Prior period amounts were reclassified to conform to the current presentation.
Managements narrative analysis of the results of operations is presented in lieu of managements discussion and analysis of financial condition and results of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
Overview
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned operating subsidiary, RiverSource Life Insurance Co. of New York (RiverSource Life of NY). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial).
· RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
· RiverSource Life of NY is a stock life insurance company which is domiciled and holds a Certificate of Authority in New York. Effective in March and September 2010, RiverSource Life of NY withdrew its Certificates of Authority from North Dakota and Delaware, respectively, as it does not conduct business in these states. RiverSource Life of NY issues insurance and annuity products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. which is domiciled in Delaware and is a limited partner in affordable housing partnership investments.
Critical Accounting Policies
The accounting and reporting policies that RiverSource Life uses affect its Consolidated Financial Statements. Certain of RiverSource Lifes accounting and reporting policies are critical to an understanding of RiverSource Lifes 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. These accounting policies are discussed in detail in Managements Narrative Analysis Critical Accounting Policies in RiverSource Lifes 2009 10-K.
In the third quarter of 2010, management reviewed and updated RiverSource Lifes deferred acquisition costs (DAC) and deferred sales inducement costs (DSIC) valuation assumptions. In this process, management extended the projection periods used for its annuity products and revised client asset value growth rates assumed for variable annuity and variable universal life contracts.
The projection periods over which DAC and DSIC associated with annuity products are amortized are now 30 to 50 years compared to previous projection periods of 10 to 25 years. The long-term client asset value growth rates are now based on assumed gross annual returns of 9% for equity funds and 6% for fixed income funds compared to previous returns of 9% and 6.5%, respectively. The near-term equity fund growth rate was reset in the third quarter of 2010 to equal the 9% long-term rate. Assumed near-term fixed income fund growth rates are less than the 6% long-term rate. Going forward, management intends to continue assessing these rates on a quarterly basis, using a five-year mean reversion process as a guideline for setting near-term equity fund growth rates.
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 |
|
|
|
|
(in millions) |
|
|
Decrease in future near and long-term equity returns by 100 basis points |
|
$ |
(56 |
) |
Decrease in future near and long-term fixed income returns by 100 basis points |
|
(29 |
) |
|
Decrease in near-term equity asset growth rates by 100 basis points |
|
(33 |
) |
|
(1) An increase in the above assumptions by 100 basis points would result in an increase to pretax income of approximately the same amount.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.
Results of Operations for the Nine Months Ended September 30, 2010 compared to the Nine Months Ended September 30, 2009
The following table presents RiverSource Lifes consolidated results of operations:
|
|
Nine Months Ended |
|
|
|
|
|
|||||
|
|
2010 |
|
2009 |
|
Change |
|
|||||
|
|
(in millions, except percentages) |
|
|||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|||
Premiums |
|
$ |
371 |
|
$ |
331 |
|
$ |
40 |
|
12 |
% |
Net investment income |
|
1,220 |
|
1,123 |
|
97 |
|
9 |
|
|||
Policy and contract charges |
|
1,012 |
|
828 |
|
184 |
|
22 |
|
|||
Other revenue |
|
198 |
|
165 |
|
33 |
|
20 |
|
|||
Net realized investment gains |
|
12 |
|
42 |
|
(30 |
) |
(71 |
) |
|||
Total revenues |
|
2,813 |
|
2,489 |
|
324 |
|
13 |
|
|||
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|||
Benefits, claims, losses and settlement expenses |
|
902 |
|
623 |
|
279 |
|
45 |
|
|||
Interest credited to fixed accounts |
|
686 |
|
674 |
|
12 |
|
2 |
|
|||
Amortization of deferred acquisition costs |
|
(12 |
) |
42 |
|
(54 |
) |
NM |
|
|||
Other insurance and operating expenses |
|
423 |
|
420 |
|
3 |
|
1 |
|
|||
Total benefits and expenses |
|
1,999 |
|
1,759 |
|
240 |
|
14 |
|
|||
Pretax income |
|
814 |
|
730 |
|
84 |
|
12 |
|
|||
Income tax provision |
|
187 |
|
176 |
|
11 |
|
6 |
|
|||
Net income |
|
$ |
627 |
|
$ |
554 |
|
$ |
73 |
|
13 |
% |
NM Not Meaningful.
Overview
Consolidated net income was $627 million for the nine months ended September 30, 2010 compared to $554 million for the nine months ended September 30, 2009, an increase of $73 million or 13%. Pretax income increased $84 million to $814 million for the nine months ended September 30, 2010 from $730 million for the nine months ended September 30, 2009. The increase was primarily driven by an increase in net investment income, policy and contract charges and a decrease in amortization of DAC. These increases to net income were partially offset by a decrease in net realized investment gains and an increase in benefits, claims, losses and settlement expenses.
In the third quarter of 2010, the annual valuation assumptions review resulted in a net pretax benefit of $88 million. A third quarter expense of $32 million related to an adjustment for insurance and annuity model changes was more than offset by a second quarter benefit of $33 million related to an adjustment for revisions to certain calculations in the valuation of DAC and DSIC. The net benefit of $89 million from the above items reflect a $155 million benefit from persistency improvements, including a net benefit from extending annuity amortization periods and increased living benefits expense, an $85 million expense from resetting near-term equity return assumptions equal to the long-term assumptions and reducing both near- and long-term bond fund return assumptions, and $19 million in additional benefits from all other assumption and model changes.
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.
Results for the nine months ended September 30, 2010 and 2009 included an $8 million benefit from the markets impact on DAC and DSIC compared to a $26 million benefit in the prior year period. Results for the 2010 period also included a $12 million pretax variable annuity benefits expense, net of hedges, DAC and DSIC, related to market impacts compared to $30 million in the prior year period.
The total pretax impacts on RiverSource Lifes revenues and expenses for the nine months ended September 30, 2010 attributable to the review of valuation assumptions and model changes were as follows:
Pretax Benefit (Charge) |
|
Policy and |
|
Benefits, |
|
Amortization |
|
Total |
|
||||
|
|
(in millions) |
|
||||||||||
Valuation assumptions and model changes |
|
$ |
(20 |
) |
$ |
(249 |
) |
$ |
358 |
|
$ |
89 |
|
The total pretax impacts on RiverSource Lifes revenues and expenses for the nine months ended September 30, 2009 attributable to the review of valuation assumptions were as follows:
Pretax Benefit (Charge) |
|
Policy and |
|
Benefits, |
|
Amortization |
|
Total |
|
||||
|
|
(in millions) |
|
||||||||||
Valuation assumptions |
|
$ |
(65 |
) |
$ |
80 |
|
$ |
119 |
|
$ |
134 |
|
Revenues
Total revenues increased $324 million or 13% to $2.8 billion for the nine months ended September 30, 2010 compared to $2.5 billion for the prior year period.
Premiums increased $40 million or 12% to $371 million for the nine months ended September 30, 2010 compared to $331 million in the prior year period. The increase was primarily due to higher sales of immediate annuities with life contingencies.
Net investment income increased $97 million or 9% to $1.2 billion for the nine months ended September 30, 2010 compared to $1.1 billion in the prior year period. The increase is due to income on fixed maturity securities driven by higher fixed annuity account balances and higher investment yields on the general account portfolio. The yield on the general account portfolio increased as the percentage of the portfolio invested in cash and cash equivalents decreased significantly.
Policy and contract charges increased $184 million or 22% to $1.0 billion for the nine months ended September 30, 2010 compared to $828 million in the prior year period primarily due to increased separate account fee revenue as a result of the increase in average separate account assets. Average separate account assets increased $11.5 billion or 26% from the prior year period primarily due to market appreciation and net inflows. Policy and contract charges for the nine months ended September 30, 2010 included a charge of $20 million from updating valuation assumptions and model changes compared to $65 million in the prior year period.
Other revenue increased $33 million or 20% to $198 million for the nine months ended September 30, 2010 compared to $165 million in the prior year period reflecting higher marketing support and administrative fees due to higher average underlying separate account asset values.
Net realized investment gains decreased $30 million or 71% to $12 million for the nine months ended September 30, 2010 compared to $42 million in the prior year period. In the nine months ended September 30, 2010, net realized gains from sales of Available-for-Sale securities were $40 million and other-than-temporary impairments recognized in earnings were $24 million which primarily related to credit losses on non-agency residential mortgage backed securities as well as corporate debt securities in the gaming industry. For the nine months ended September 30, 2010, the reserves on commercial mortgage loans increased by $6 million offset by a $4 million decrease to the allowance for loan losses on below investment grade syndicated loans. In the nine months ended September 30, 2009, net realized gains from sales of Available-for-Sale securities were $112 million and other-than-temporary impairments recognized in earnings were $60 million which primarily related to credit losses on non-agency residential mortgage backed securities and corporate debt securities primarily in the gaming industry. In the nine months ended September 30, 2009, the reserves on commercial mortgage loans increased by $9 million.
Benefits and Expenses
Total benefits and expenses increased $240 million or 14% to $2.0 billion for the nine months ended September 30, 2010 compared to $1.8 billion in the prior year period. This increase is primarily due to increases in benefits, claims, losses and settlement expenses partially offset by a decrease in amortization of DAC.
Benefits, claims, losses and settlement expenses increased $279 million or 45% to $902 million for the nine months ended September 30, 2010 compared to $623 million for the nine months ended September 30, 2009 driven by updating valuation assumptions and model changes partially offset by market impacts. Benefits, claims, losses and settlement expenses for the nine months ended September 30, 2010 included an expense of $249 million from updating valuation assumptions and model changes compared to a benefit of $80 million in the prior year period. The market impact of variable annuity guaranteed benefits, net of hedges and DSIC, decreased benefits expense by $14 million for the nine months ended September 30, 2010 compared to an increase in benefits expense of $143 million in the prior year period. The market impact in both periods was primarily driven by the impact of nonperformance credit spread on the valuation of living benefit liabilities, which RiverSource Life does not hedge. In addition, an increase in benefits expense of $17 million, net of DSIC, is a result of the implementation of changes to the Portfolio Navigator program (PN program) offered in connection with RiverSource Lifes variable life and annuity products. With these changes, assets of clients participating in the PN program were reallocated, pursuant to their consent. This reallocation in part resulted in a shift of assets from interest bearing instruments in the general account into separate accounts. Benefits, claims, losses and settlement expenses related to immediate annuities with life contingencies increased compared to the prior period primarily due to higher business volumes.
Amortization of DAC decreased $54 million to a benefit of $12 million for the nine months ended September 30, 2010 compared to an expense of $42 million in the prior year period. Amortization of DAC for the nine months ended September 30, 2010 included a benefit of $358 million from updating valuation assumptions and model changes compared to a benefit of $119 million in the prior year period. DAC amortization for the nine months ended September 30, 2010 included an expense of $18 million due to market impacts, including $26 million offsetting higher variable annuity guaranteed benefit expenses. The decrease also includes a $17 million decrease as a result of the implementation of changes to the PN program. DAC amortization in 2009 included a benefit of $135 million due to market impacts, including a $113 million benefit offsetting higher variable annuity guaranteed living benefits.
Income Taxes
RiverSource Lifes effective tax rate was 23% for the nine months ended September 30, 2010, compared to 24% for the nine months ended September 30, 2009. The decrease in the effective tax rate primarily reflects benefits from tax planning and completion of certain audits which offset the impact of an increase in pretax income relative to tax advantaged items, including the dividends received deduction, for the nine months ended September 30, 2010.
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.
Management believes that the IRS will concede this issue for open tax years and it is likely that any regulations that would result from a regulation project would apply prospectively only. 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.
Market Risk
Equity price and interest rate fluctuations can have a significant impact on RiverSource Lifes results of operations, primarily due to the effects on 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 Lifes variable annuities are guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum accumulation benefits (GMAB), guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (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 risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities and the associated hedge assets, RiverSource Life assumed no change in implied market volatility despite the 10% drop in equity prices.
The numbers below show RiverSource Lifes estimate of the pretax impacts on income from these hypothetical market movements, net of hedging, as of September 30, 2010.
|
|
Equity Price Exposure to Pretax Income |
|
|||||||
Equity Price Decline 10% |
|
Before |
|
Hedge |
|
Net Impact |
|
|||
|
|
(in millions) |
|
|||||||
Asset-based fees and expenses |
|
$ |
(76 |
) |
$ |
|
|
$ |
(76 |
) |
DAC and DSIC amortization(1) (2) |
|
(123 |
) |
|
|
(123 |
) |
|||
Variable annuity riders: |
|
|
|
|
|
|
|
|||
GMDB and GMIB(2) |
|
(38 |
) |
3 |
|
(35 |
) |
|||
GMWB |
|
(58 |
) |
71 |
|
13 |
|
|||
GMAB |
|
(29 |
) |
21 |
|
(8 |
) |
|||
DAC and DSIC amortization(3) |
|
N/A |
|
N/A |
|
1 |
|
|||
Total variable annuity riders |
|
(125 |
) |
95 |
|
(29 |
) |
|||
Equity indexed annuities |
|
1 |
|
(1 |
) |
|
|
|||
Total |
|
$ |
(323 |
) |
$ |
94 |
|
$ |
(228 |
) |
|
|
Interest Rate Exposure to Pretax Income |
|
|||||||
Interest Rate Increase 100 Basis Points |
|
Before |
|
Hedge Impact |
|
Net |
|
|||
|
|
(in millions) |
|
|||||||
Asset-based fees and expenses |
|
$ |
(10 |
) |
$ |
|
|
$ |
(10 |
) |
Variable annuity riders: |
|
|
|
|
|
|
|
|||
GMWB |
|
344 |
|
(383 |
) |
(39 |
) |
|||
GMAB |
|
47 |
|
(64 |
) |
(17 |
) |
|||
DAC and DSIC amortization(3) |
|
N/A |
|
N/A |
|
20 |
|
|||
Total variable annuity riders |
|
391 |
|
(447 |
) |
(36 |
) |
|||
Fixed annuities, fixed portion of variable annuities and fixed insurance products |
|
6 |
|
|
|
6 |
|
|||
Total |
|
$ |
387 |
|
$ |
(447 |
) |
$ |
(40 |
) |
N/A Not Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected profits.
(2) In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, 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. RiverSource Life makes this same conservative assumption in estimating the impact from GMDB and GMIB riders.
(3) Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.
The above results compare to estimated negative net impacts to pretax income of $211 million related to a 10% equity price decline and $66 million related to a 100 basis point increase in interest rates as of December 31, 2009. The interest rate exposure decreased at September 30, 2010 due to the significant fall in rates from December 31, 2009.
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 Lifes 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 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.
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.
Non-Agency Residential Mortgage Backed Securities Backed by Sub-prime, Alt-A or Prime Collateral
Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. Alt-A mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime but may not conform to government-sponsored standards. Prime mortgage lending is the origination of residential mortgage loans to customers with good credit profiles. RiverSource Life has exposure to each of these types of loans predominantly through mortgage backed and asset backed securities. The slowdown in the U.S. housing market, combined with relaxed underwriting standards by some originators, has led to higher delinquency and loss rates for some of these investments. Market conditions have increased the likelihood of other-than-temporary impairments for certain non-agency residential mortgage backed securities. As a part of RiverSource Lifes 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, 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 September 30, 2010, RiverSource Lifes 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 |
|
Fair |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||||||||||||||
Sub-prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
2003 & prior |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
2004 |
|
2 |
|
2 |
|
7 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
6 |
|
||||||||||||
2005 |
|
11 |
|
10 |
|
17 |
|
14 |
|
23 |
|
23 |
|
7 |
|
6 |
|
17 |
|
13 |
|
75 |
|
66 |
|
||||||||||||
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
4 |
|
3 |
|
3 |
|
8 |
|
7 |
|
||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
2008 |
|
|
|
|
|
6 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
5 |
|
||||||||||||
Total Sub-prime |
|
$ |
13 |
|
$ |
12 |
|
$ |
30 |
|
$ |
23 |
|
$ |
23 |
|
$ |
23 |
|
$ |
12 |
|
$ |
10 |
|
$ |
20 |
|
$ |
16 |
|
$ |
98 |
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
2003 & prior |
|
$ |
13 |
|
$ |
15 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
13 |
|
$ |
15 |
|
2004 |
|
7 |
|
7 |
|
57 |
|
58 |
|
4 |
|
3 |
|
|
|
|
|
13 |
|
6 |
|
81 |
|
74 |
|
||||||||||||
2005 |
|
5 |
|
4 |
|
35 |
|
29 |
|
28 |
|
22 |
|
|
|
|
|
157 |
|
110 |
|
225 |
|
165 |
|
||||||||||||
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
6 |
|
10 |
|
6 |
|
||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
15 |
|
27 |
|
15 |
|
||||||||||||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Re-Remic(1) |
|
20 |
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
20 |
|
||||||||||||
Total Alt-A |
|
$ |
45 |
|
$ |
46 |
|
$ |
92 |
|
$ |
87 |
|
$ |
32 |
|
$ |
25 |
|
$ |
|
|
$ |
|
|
$ |
207 |
|
$ |
137 |
|
$ |
376 |
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
2003 & prior |
|
$ |
166 |
|
$ |
167 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
166 |
|
$ |
167 |
|
2004 |
|
22 |
|
24 |
|
|
|
|
|
24 |
|
25 |
|
10 |
|
11 |
|
|
|
|
|
56 |
|
60 |
|
||||||||||||
2005 |
|
12 |
|
16 |
|
21 |
|
26 |
|
34 |
|
38 |
|
27 |
|
29 |
|
114 |
|
66 |
|
208 |
|
175 |
|
||||||||||||
2006 |
|
|
|
|
|
18 |
|
19 |
|
|
|
|
|
|
|
|
|
36 |
|
35 |
|
54 |
|
54 |
|
||||||||||||
2007 |
|
37 |
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
11 |
|
51 |
|
52 |
|
||||||||||||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Re-Remic(1) |
|
1,707 |
|
1,904 |
|
72 |
|
89 |
|
|
|
|
|
|
|
|
|
13 |
|
24 |
|
1,792 |
|
2,017 |
|
||||||||||||
Total Prime |
|
$ |
1,944 |
|
$ |
2,152 |
|
$ |
111 |
|
$ |
134 |
|
$ |
58 |
|
$ |
63 |
|
$ |
37 |
|
$ |
40 |
|
$ |
177 |
|
$ |
136 |
|
$ |
2,327 |
|
$ |
2,525 |
|
Grand Total |
|
$ |
2,002 |
|
$ |
2,210 |
|
$ |
233 |
|
$ |
244 |
|
$ |
113 |
|
$ |
111 |
|
$ |
49 |
|
$ |
50 |
|
$ |
404 |
|
$ |
289 |
|
$ |
2,801 |
|
$ |
2,904 |
|
(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. RiverSource Life did not have any exposure to subordinate tranches as of September 30, 2010.
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 Lifes 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 Lifes 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 September 30, 2010. As RiverSource Lifes 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 $118 million, net of DAC and DSIC amortization and income taxes, based on September 30, 2010 credit spreads.
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 (FHLB) of Des Moines, which provides RiverSource Life Insurance Company access to collateralized borrowings. At September 30, 2010 and 2009, RiverSource Life had no borrowings from the FHLB. In 2010, RiverSource Life entered into repurchase agreements to reduce reinvestment risk from higher levels of expected annuity net cash flows. Repurchase agreements allow RiverSource Life to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements at September 30, 2010 was $869 million, which is collateralized with agency residential mortgage backed securities and corporate debt securities from RiverSource Lifes investment portfolio.
The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. RiverSource Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
On March 29, 2010 and September 27, 2010, RiverSource Life Insurance Company paid a cash dividend of $425 million and $75 million, respectively, to Ameriprise Financial. There were no dividends paid to Ameriprise Financial during the nine months ended September 30, 2009.
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements as follows:
|
|
Actual Capital (a) |
|
Regulatory Capital |
|
|||||
|
|
September 30, |
|
December 31, |
|
December 31, |
|
|||
|
|
(in millions) |
|
|||||||
RiverSource Life Insurance Company |
|
$ |
3,648 |
|
$ |
3,450 |
|
$ |
803 |
|
RiverSource Life Insurance Co. of New York |
|
297 |
|
286 |
|
44 |
|
|||
(a) Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the most recent statutory risk-based capital filing.
Contractual Commitments
There have been no material changes to RiverSource Lifes contractual obligations disclosed in RiverSource Lifes 2009 10-K.
Forward-Looking Statements
This report contains forward-looking statements that reflect RiverSource Lifes plans, estimates and beliefs. RiverSource Lifes actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:
· statements of RiverSource Lifes plans, intentions, expectations, objectives, or goals, including those related to the consolidated tax rate (including any expectations regarding the effectiveness or other terms of any regulatory change or interpretation applicable to the DRD);
· other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and
· statements of assumptions underlying such statements.
The words believe, expect, anticipate, optimistic, intend, plan, aim, will, may, should, could, would, likely, forecast, on pace, project and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements.
Such factors include, but are not limited to:
· changes in the valuations, liquidity and volatility in the interest rate, credit default equity market, and foreign exchange environments;
· changes in relevant accounting standards, as well as changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation, including the recent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
· RiverSource Lifes investment management performance and consumer acceptance of RiverSource Lifes products;
· effects of competition in the financial services industry and changes in RiverSource Lifes product distribution mix and distribution channels;
· changes to RiverSource Lifes reputation that may arise from employee or affiliated advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;
· RiverSource Lifes 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 Lifes 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 Lifes 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 Lifes regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
· experience deviations from RiverSource Lifes 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 Lifes valuation and hedging of guaranteed living benefit annuity riders;
· successfully cross-selling insurance and annuity products and services to Ameriprise Financials customer base;
· RiverSource Lifes 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 Financials ability to attract, recruit and retain qualified advisors and employees and its ability to distribute RiverSource Lifes 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 Financials efforts to improve distribution economics and of RiverSource Lifes 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 Lifes products less attractive to clients;
· RiverSource Lifes 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 or financial assets; and
· general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services RiverSource 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 foregoing 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.
The foregoing list of factors should be read in conjunction with the Risk Factors discussion as Part I, Item 1A in RiverSource Lifes 2009 10-K and in Part II, Item 1A of this report.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
RiverSource Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in and pursuant to Securities and Exchange Commission (SEC) regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to RiverSource Lifes 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 Lifes 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 Lifes management, under the supervision and with the participation of RiverSource Lifes 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 Lifes principal executive officer and chief financial officer have concluded that RiverSource Lifes disclosure controls and procedures were effective at a reasonable level of assurance as of September 30, 2010.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Lifes internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, RiverSource Lifes internal control over financial reporting.
The information set forth in Note 13 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
Part I, Item 1A of RiverSource Lifes 2009 10-K sets forth information relating to the material risks and uncertainties that affect its business. In addition, the following factors should be read in conjunction with and supplement and amend the risk factors set forth in RiverSource Lifes 2009 10-K that may affect its business, financial condition and results of operations.
Changes in accounting standards could have a material impact on RiverSource Lifes financial statements.
From time to time, the FASB, the SEC, and other regulators change the financial accounting and reporting standards governing the preparation of RiverSource Lifes financial statements. In some cases, RiverSource Life could be required to apply a new or revised standard retroactively, resulting in the restating of prior period financial statements. These changes are difficult to predict and can materially impact how RiverSource Life records and reports its financial condition and results of operations and other financial data, even in instances where they may not have an economic impact on its business.
In October 2010, the FASB updated the accounting standards regarding accounting for DAC. See Future Adoption of New Accounting Standards Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts in Note 2 to the Consolidated Financial Statements set forth in this report, which portion is incorporated herein by reference.
Further revisions to this standard, or proposed revisions to other standards, may have an additional impact on RiverSource Life, which cannot be predicted at this time.
Recent changes in the supervision and regulation of the financial industry, including those set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, could materially impact RiverSource Lifes business.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was enacted into law. The Act calls for sweeping changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures, and provide greater protections to individual consumers and investors. Certain elements of the Act became effective immediately, though the details of many provisions are subject to additional studies and will not be known until final rules are adopted by applicable regulatory agencies. The impact of the Act on RiverSource Life, the financial industry and the economy cannot be known until all such rules and regulations called for under the Act have been finalized, and, in some cases, implemented over time.
Insurance companies and the business of insurance are exempted from several major provisions of the Act. However, because the Act significantly changes the regulation of the financial services industry and financial markets generally, and because the Act will apply directly to certain key affiliates of RiverSource Life, implementation of the Act could nevertheless materially impact RiverSource Lifes business. For example, to the extent that RiverSource Life invests in debt securities issued by a financial company that becomes subject to the orderly liquidation authority under the Act, RiverSource Lifes rights as a creditor could be adversely affected. RiverSource Life could also be subject to assessments to repay federal funding advanced to liquidated financial companies. Further, RiverSource Life may be impacted by the creation of the Federal Insurance Office within the Department of the Treasury, which is required to monitor the insurance industry and gather relevant information, including issues or gaps in the current state-based solvency regulation system.
On July 21, 2010, the SEC proposed certain measures that would establish a new framework to replace the requirements of Rule 12b-1 under the Investment Company Act of 1940, with respect to how mutual funds and underlying funds of separate accounts collect and pay fees to cover the costs of selling and marketing their shares. The proposed changes are subject to public comment and, following any enactment, would be phased in over a number of years. As these measures are not final nor undergoing implementation throughout the financial services industry, the impact of changes such as those currently proposed cannot be predicted at this time.
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under Exhibit Index, which is incorporated herein by reference.
RIVERSOURCE LIFE INSURANCE COMPANY
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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RIVERSOURCE LIFE INSURANCE COMPANY |
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(Registrant) |
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Date: November 5, 2010 |
By |
/s/ John R. Woerner |
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John R. Woerner |
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President |
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Date: November 5, 2010 |
By |
/s/ Brian J. McGrane |
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Brian J. McGrane |
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Executive Vice President and |
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Chief Financial Officer |
RIVERSOURCE LIFE INSURANCE COMPANY
The following exhibits are filed as part of this Quarterly Report:
Exhibit |
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Description |
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3.1 |
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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. |
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3.1.1 |
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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. |
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3.2 |
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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. |
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* 31.1 |
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Certification of John R. Woerner, President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
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* 31.2 |
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Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
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* 32 |
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Certification of John R. Woerner, 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.