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EX-32 - EXHIBIT 32 - AMERIPRISE CERTIFICATE COacc-ex32.htm
EX-31.2 - EXHIBIT 31.2 - AMERIPRISE CERTIFICATE COacc-ex312.htm
EX-31.1 - EXHIBIT 31.1 - AMERIPRISE CERTIFICATE COacc-ex311.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 March 31, 2017
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. 811-00002
AMERIPRISE CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
41-6009975
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1099 Ameriprise Financial Center, Minneapolis, Minnesota
55474
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:  (612) 671-3131
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 x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o
Smaller reporting company o
Non-Accelerated Filer x
Emerging growth company o
Accelerated Filer o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 3, 2017
Common Shares (par value $10 per share)
150,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
 



AMERIPRISE CERTIFICATE COMPANY

FORM 10-Q 
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
 
Consolidated Statements of Operations — Three months ended March 31, 2017 and 2016
Consolidated Statements of Comprehensive Income — Three months ended March 31, 2017 and 2016
Consolidated Balance Sheets — March 31, 2017 and December 31, 2016
Consolidated Statements of Shareholder's Equity — Three months ended March 31, 2017 and 2016
Consolidated Statements of Cash Flows — Three months ended March 31, 2017 and 2016
Notes to Consolidated Financial Statements
1. Basis of Presentation
2. Recent Accounting Pronouncements
3. Investments
4. Commercial Mortgage, Syndicated and Certificate Loans
5. Fair Values of Assets and Liabilities
6. Offsetting Assets and Liabilities
7. Derivatives and Hedging Activities
8. Contingencies
9. Shareholder’s Equity
10. Income Taxes
Item 2.  Management’s Narrative Analysis
Item 4.  Controls and Procedures
 
 
Part II.  Other Information
Item 1.  Legal Proceedings
Item 1A.  Risk Factors
Item 6.  Exhibits
Signatures
Exhibit Index


2


AMERIPRISE CERTIFICATE COMPANY

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended March 31,
2017
 
2016
(in thousands)
Investment income
$
33,024

 
$
27,619

Investment expenses
9,173

 
7,777

Net investment income before provision for certificate reserves and income taxes
23,851

 
19,842

Net provision for certificate reserves
10,160

 
8,487

Net investment income before income taxes
13,691

 
11,355

Income tax expense
5,243

 
4,165

Net investment income, after-tax
8,448

 
7,190

 
 
 
 
Net realized gain (loss) on investments before income taxes
1,705

 
(1,202
)
Income tax expense (benefit)
597

 
(421
)
Net realized gain (loss) on investments, after-tax
1,108

 
(781
)
Net income
$
9,556

 
$
6,409

 
 
 
 
Supplemental Disclosures:
 

 
 

Total other-than-temporary impairment losses on securities
$

 
$

Portion of loss recognized in other comprehensive income (loss) (before taxes)
(193
)
 
(70
)
Net impairment losses recognized in net realized gain (loss) on investments
$
(193
)
 
$
(70
)
 See Notes to Consolidated Financial Statements.


3


AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended March 31,
2017
 
2016
(in thousands)
Net income
$
9,556

 
$
6,409

Other comprehensive income, net of tax:
 

 
 

Net unrealized gains (losses) on securities:
 

 
 
Net unrealized securities gains arising during the period
4,956

 
6,890

Reclassification of net securities losses (gains) included in net income
(1,106
)
 
781

Total other comprehensive income, net of tax
3,850

 
7,671

Total comprehensive income
$
13,406

 
$
14,080

See Notes to Consolidated Financial Statements.


4


AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
March 31,
2017
 
December 31,
2016

(in thousands, except share amounts)
Assets
 
 
 
Qualified Assets
 

 
 

Cash and cash equivalents
$
223,321

 
$
134,189

Investments in unaffiliated issuers
6,273,799

 
6,134,674

Receivables
47,083

 
29,775

Derivative assets
46,626

 
45,098

Total qualified assets
6,590,829

 
6,343,736

Deferred taxes, net
326

 
492

Total assets
$
6,591,155

 
$
6,344,228

 
 
 
 
Liabilities and Shareholder's Equity
 

 
 

Liabilities
 

 
 

Certificate reserves
$
6,137,130

 
$
5,935,051

Taxes payable to parent
14,702

 
3,505

Derivative liabilities
39,760

 
38,319

Payable for investment securities purchased
15,527

 
6,969

Due to related party and other liabilities
39,838

 
34,592

Total liabilities
6,246,957

 
6,018,436

 
 
 
 
Shareholder's Equity
 

 
 

Common shares ($10 par value, 150,000 shares authorized and issued)
1,500

 
1,500

Additional paid-in capital
252,517

 
247,517

Total retained earnings
91,496

 
81,940

Accumulated other comprehensive loss, net of tax
(1,315
)
 
(5,165
)
Total shareholder's equity
344,198

 
325,792

Total liabilities and shareholder's equity
$
6,591,155

 
$
6,344,228

See Notes to Consolidated Financial Statements.



5


AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)
 
Number of Outstanding Shares
Common Shares
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss), Net of Tax
Total
Appropriated for
Pre-Declared Additional Credits and Interest
Appropriated for Additional Interest on Advance Payments
Unappropriated
 
(in thousands, except share data)
Balance at January 1, 2016
150,000
 
$
1,500
 
$
214,517
 
$
8
 
$
15
 
$
53,590
 
$
(18,808
)
$
250,822

Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
6,409
 
 
6,409

Other comprehensive income, net of tax
 
 
 
 
 
 
7,671
 
7,671

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,080

Transfer from appropriated to unappropriated
 
 
 
(7
)
 
7
 
 

Receipt of capital from parent
 
 
12,000
 
 
 
 
 
12,000

Balance at March 31, 2016
150,000
 
$
1,500
 
$
226,517
 
$
1
 
$
15
 
$
60,006
 
$
(11,137
)
$
276,902

 
Balance at January 1, 2017
150,000
 
$
1,500
 
$
247,517
 
$
 
$
15
 
$
81,925
 
$
(5,165
)
$
325,792

Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
9,556
 
 
9,556

Other comprehensive income, net of tax
 
 
 
 
 
 
3,850
 
3,850

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,406

Receipt of capital from parent
 
 
5,000
 
 
 
 
 
5,000

Balance at March 31, 2017
150,000
 
$
1,500
 
$
252,517
 
$
 
$
15
 
$
91,481
 
$
(1,315
)
$
344,198

See Notes to Consolidated Financial Statements.



6


AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three Months Ended March 31,
2017
 
2016
(in thousands)
Cash Flows from Operating Activities
 
 
 
Net income
$
9,556

 
$
6,409

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of premiums, accretion of discounts, net
5,776

 
6,378

Deferred income tax benefit
(19
)
 
(35
)
Net realized loss (gain) on Available-for-Sale securities
(1,895
)
 
1,132

Other net realized gain
(3
)
 

Other-than-temporary impairments and provision for loan loss
193

 
70

Changes in operating assets and liabilities:
 
 
 
Dividends and interest receivable
(3,877
)
 
(5,004
)
Certificate reserves, net
587

 
841

Deferred taxes, net
(2,072
)
 
(4,131
)
Taxes payable to/receivable from parent, net
11,197

 
9,105

Derivatives, net of collateral
(546
)
 
(164
)
Other liabilities
5,764

 
1,428

Other receivables
(11,179
)
 
(91
)
Other, net
69

 
237

Net cash provided by operating activities
13,551

 
16,175

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Available-for-Sale securities:
 
 
 
Sales
151

 
7,036

Maturities, redemptions and calls
441,253

 
314,522

Purchases
(570,706
)
 
(702,990
)
Syndicated loans, commercial mortgage loans and real estate owned:
 
 
 
Sales, maturities and repayments
14,826

 
5,674

Purchases and fundings
(16,449
)
 
(7,625
)
Certificate loans, net
14

 
54

Net cash used in investing activities
(130,911
)
 
(383,329
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Payments from certificate holders and other additions
1,284,003

 
1,159,077

Certificate maturities and cash surrenders
(1,082,511
)
 
(806,862
)
Capital contribution from parent
5,000

 
12,000

Net cash provided by financing activities
206,492

 
364,215

 
 
 
 
Net increase (decrease) in cash and cash equivalents
89,132

 
(2,939
)
Cash and cash equivalents at beginning of period
134,189

 
137,557

Cash and cash equivalents at end of period
$
223,321

 
$
134,618

 
 
 
 
Supplemental disclosures including non-cash transactions:
 
 
 
Cash paid (received) for income taxes
$
(3,492
)
 
$
132

Cash paid for interest
11,109

 
7,300

See Notes to Consolidated Financial Statements.

7


AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.  Basis of Presentation
Ameriprise Certificate Company (“ACC”), is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial” or the “Parent”). ACC is registered as an investment company under the Investment Company Act of 1940. The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). ACC uses the consolidation method of accounting for its wholly owned subsidiary, Investors Syndicate Development Corp. 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 results of operations and financial position for the interim periods have been made. All adjustments made were of a normal recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Annual Report on Form 10-K of ACC for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2017 (“2016 10-K”).
ACC evaluated events or transactions that occurred after the consolidated balance sheet date for potential recognition or disclosure through the date the consolidated financial statements were issued. No subsequent events or transactions were identified.
2.  Recent Accounting Pronouncements
Adoption of New Accounting Standards
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to classification of certain cash receipts and cash payments on the statement of cash flows because current standards lacked sufficient guidance to consistently classify cash payments and receipts. The update includes amendments addressing the classification of eight specific cash flow issues. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and all amendments must be adopted during the same period. ACC early adopted the standard for the interim period ended March 31, 2017 on a retrospective basis. The adoption of the standard did not have a material impact on the ACC’s consolidated statements of cash flows.
Future Adoption of New Accounting Standards
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB updated the accounting standards related to the recognition of income tax impacts on intra-entity transfers. The update requires entities to recognize the income tax consequences of intra-entity transfers, other than inventory, upon the transfer of the asset. The update requires the selling entity to recognize a current tax expense or benefit and the purchasing entity to recognize a deferred tax asset or liability when the transfer occurs. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. ACC is currently evaluating the impact of the standard on its consolidated results of operations and financial condition.
Financial Instruments - Measurement of Credit Losses
In June 2016, the FASB updated the accounting standards related to accounting for credit losses on certain types of financial instruments. The update replaces the current incurred loss model for estimating credit losses with a new model that requires an entity to estimate the credit losses expected over the life of the asset. Generally, the initial estimate of the expected credit losses and subsequent changes in the estimate will be reported in current period earnings and recorded through an allowance for credit losses on the balance sheet. The current credit loss model for Available-for-Sale debt securities does not change; however, the credit loss calculation and subsequent recoveries are required to be recorded through an allowance. The standard is effective for interim and annual periods beginning after December 15, 2019. Early adoption will be permitted for interim and annual periods beginning after December 15, 2018. A modified retrospective cumulative adjustment to retained earnings should be recorded as of the first reporting period in which the guidance is effective for loans, receivables, and other financial instruments subject to the new expected credit loss model. Prospective adoption is required for establishing an allowance related to Available-for-Sale debt securities, certain beneficial interests, and financial assets purchased with a more-than-insignificant amount of credit deterioration since origination. ACC is currently evaluating the impact of the standard on its consolidated results of operations and financial condition.
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB updated the accounting standards on the recognition and measurement of financial instruments. The update requires entities to carry marketable equity securities, excluding investments in securities that qualify for the equity method of accounting, at fair value with changes in fair value reflected in net income each reporting period. The update affects other aspects of accounting for equity instruments, as well as the accounting for financial liabilities utilizing the fair value option. The update eliminates the requirement to disclose the methods and assumptions used to estimate the fair value of financial assets or liabilities held at cost on the balance sheet and requires entities to use the exit price notion when measuring the fair value of financial instruments. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for certain

8


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

provisions. Generally, the update should be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity at the beginning of the period of adoption. The update is not expected to have a material impact on ACC’s consolidated statement of financial condition. During periods in which the market value of equity securities materially changes, ACC may experience volatility in investment income recognized in its consolidated results of operations.
Revenue from Contracts with Customers
In May 2014, the FASB updated the accounting standards for revenue from contracts with customers. The update provides a five step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other standards). The standard also updates the accounting for certain costs associated with obtaining and fulfilling a customer contract and requires disclosure of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. Subsequent related updates provide clarification on certain revenue recognition guidance in the new standard. The standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted for interim and annual periods beginning after December 15, 2016. The standard may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. ACC’s revenues consist of investment income including yield on investments and realized investment gains (losses), which are not in scope of the updated standard. Therefore, ACC does not expect the standard to impact its consolidated results of operations or financial condition.
3.  Investments
Investments in unaffiliated issuers were as follows:
 
March 31,
2017
 
December 31,
2016
(in thousands)
Available-for-Sale securities:
 
Fixed maturities, at fair value (amortized cost: 2017, $6,090,174; 2016, $5,966,057)
$
6,084,960

 
$
5,953,701

Common stocks, at fair value (cost: 2017, $2,238; 2016, $2,448)
5,365

 
6,609

Commercial mortgage loans and syndicated loans, at cost (less allowance for loan losses: 2017, $3,283; 2016, $3,283; fair value: 2017, $184,634; 2016, $176,211)
182,939

 
173,815

Certificate loans — secured by certificate reserves, at cost, which approximates fair value
535

 
549

Total
$
6,273,799

 
$
6,134,674

Available-for-Sale securities distributed by type were as follows:
Description of Securities
March 31, 2017
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Noncredit OTTI (1)
 
(in thousands)
Residential mortgage backed securities
$
3,231,042
 
$
14,357
 
$
(19,225
)
$
3,226,174
 
$
1,650

Corporate debt securities
1,591,576
 
3,316
 
(2,942
)
1,591,950
 
3

Commercial mortgage backed securities
512,851
 
1,712
 
(2,089
)
512,474
 

Asset backed securities
686,973
 
2,698
 
(3,393
)
686,278
 

State and municipal obligations
67,355
 
359
 
(51
)
67,663
 

U.S. government and agencies obligations
377
 
44
 
 
421
 

Common stocks
2,238
 
3,335
 
(208
)
5,365
 
2,954

Total
$
6,092,412
 
$
25,821
 
$
(27,908
)
$
6,090,325
 
$
4,607


9


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Description of Securities
December 31, 2016
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Noncredit OTTI (1)
 
(in thousands)
Residential mortgage backed securities
$
3,192,055
 
$
13,075
 
$
(21,731
)
$
3,183,399
 
$
209

Corporate debt securities
1,595,907
 
3,358
 
(4,188
)
1,595,077
 
3

Commercial mortgage backed securities
500,170
 
1,348
 
(1,646
)
499,872
 

Asset backed securities
629,277
 
1,357
 
(4,211
)
626,423
 

State and municipal obligations
48,272
 
345
 
(107
)
48,510
 

U.S. government and agencies obligations
376
 
44
 
 
420
 

Common stocks
2,448
 
4,384
 
(223
)
6,609
 
2,668

Total
$
5,968,505
 
$
23,911
 
$
(32,106
)
$
5,960,310
 
$
2,880

(1) Represents the amount of other-than-temporary impairment (“OTTI”) losses in accumulated other comprehensive income (loss). Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.
As of March 31, 2017 and December 31, 2016, investment securities with a fair value of $80 thousand and $75 thousand, respectively, were pledged to meet contractual obligations under derivative contracts.
As of March 31, 2017 and December 31, 2016, fixed maturity securities comprised approximately 94% and 95%, respectively, of ACC’s total investments. Rating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”), including Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”), and Fitch Ratings Ltd. (“Fitch”). ACC uses the median of available ratings from Moody’s, S&P and Fitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moody’s, S&P and Fitch are unavailable, as is the case for many private placement securities, ACC may utilize ratings from other NRSROs or rate the securities internally. As of March 31, 2017 and December 31, 2016, approximately $152.7 million and $148.4 million, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC (“CMIA”), an affiliate of ACC, using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
Ratings
March 31, 2017
 
December 31, 2016
Amortized Cost
Fair Value
Percent of 
Total Fair Value
Amortized Cost
Fair Value
Percent of 
Total Fair Value
 
(in thousands, except percentages)
AAA
$
3,285,911
 
$
3,283,473
 
54
%
 
$
3,084,275
 
$
3,080,096
 
52
%
AA
340,756
 
339,977
 
6

 
278,147
 
277,010
 
5

A
679,437
 
676,878
 
11

 
705,520
 
702,031
 
12

BBB
1,655,638
 
1,655,846
 
27

 
1,755,986
 
1,754,223
 
29

Below investment grade
128,432
 
128,786
 
2

 
142,129
 
140,341
 
2

Total fixed maturities
$
6,090,174
 
$
6,084,960
 
100
%
 
$
5,966,057
 
$
5,953,701
 
100
%
As of March 31, 2017 and December 31, 2016, approximately 53% and 57%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities.

10


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:
Description of Securities
March 31, 2017
Less than 12 months
12 months or more
Total
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
 
(in thousands, except number of securities)
Residential mortgage backed securities
70
 
$
1,098,951
 
$
(5,995
)
123
 
$
825,107
 
$
(13,230
)
193
 
$
1,924,058
 
$
(19,225
)
Corporate debt securities
52
 
570,997
 
(2,851
)
4
 
33,410
 
(91
)
56
 
604,407
 
(2,942
)
Commercial mortgage backed securities
27
 
198,272
 
(1,928
)
4
 
18,882
 
(161
)
31
 
217,154
 
(2,089
)
Asset backed securities
26
 
230,954
 
(1,774
)
10
 
85,865
 
(1,619
)
36
 
316,819
 
(3,393
)
State and municipal obligations
6
 
11,054
 
(51
)
 
 
 
6
 
11,054
 
(51
)
Common stocks
 
 
 
3
 
619
 
(208
)
3
 
619
 
(208
)
Total
181
 
$
2,110,228
 
$
(12,599
)
144
 
$
963,883
 
$
(15,309
)
325
 
$
3,074,111
 
$
(27,908
)
Description of Securities
December 31, 2016
Less than 12 months
12 months or more
Total
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
Number of Securities
Fair Value
Unrealized Losses
 
(in thousands, except number of securities)
Residential mortgage backed securities
74
 
$
1,116,318
 
$
(6,009
)
131
 
$
847,998
 
$
(15,722
)
205
 
$
1,964,316
 
$
(21,731
)
Corporate debt securities
59
 
676,198
 
(3,945
)
7
 
57,535
 
(243
)
66
 
733,733
 
(4,188
)
Commercial mortgage backed securities
24
 
205,284
 
(1,365
)
4
 
32,547
 
(281
)
28
 
237,831
 
(1,646
)
Asset backed securities
28
 
273,193
 
(2,312
)
16
 
174,793
 
(1,899
)
44
 
447,986
 
(4,211
)
State and municipal obligations
8
 
17,308
 
(107
)
 
 
 
8
 
17,308
 
(107
)
Common stocks
 
 
 
3
 
605
 
(223
)
3
 
605
 
(223
)
Total
193
 
$
2,288,301
 
$
(13,738
)
161
 
$
1,113,478
 
$
(18,368
)
354
 
$
3,401,779
 
$
(32,106
)
As part of ACC’s ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities is attributable to a tightening of credit spreads.
The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Operations for other-than-temporary impairments related to credit losses on available-for-sale securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss):
 
Three Months Ended March 31,
2017
 
2016
(in thousands)
Beginning balance
$
46,522

 
$
51,966

Reductions for securities sold during the period (realized)

 
(5,550
)
Credit losses for which an other-than-temporary impairment was previously recognized
193

 
70

Ending balance
$
46,715

 
$
46,486

The change in net unrealized securities gains (losses) in other comprehensive income (loss) includes two components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period and (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.

11


AMERIPRISE CERTIFICATE 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 Unrealized Investment Gains (Losses)
 
Deferred Income Tax
 
Accumulated Other
Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
(in thousands)
Balance at January 1, 2016
$
(29,858
)
 
$
11,050

 
$
(18,808
)
 
Net unrealized securities gains arising during the period (1)
10,977

 
(4,087
)
 
6,890

 
Reclassification of losses included in net income
1,202

 
(421
)
 
781

 
Balance at March 31, 2016
$
(17,679
)
 
$
6,542

 
$
(11,137
)
(2) 
 
Balance at January 1, 2017
$
(8,195
)
 
$
3,030

 
$
(5,165
)
 
Net unrealized securities gains arising during the period (1)
7,810

 
(2,854
)
 
4,956

 
Reclassification of gains included in net income
(1,702
)
 
596

 
(1,106
)
 
Balance at March 31, 2017
$
(2,087
)
 
$
772

 
$
(1,315
)
(2) 
(1) Net unrealized securities gains (losses) 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 (loss) during the period.
(2) Includes $3.0 million and $(1.3) million of noncredit related impairments on securities and net unrealized securities gains (losses) on previously impaired securities as of March 31, 2017 and 2016, respectively.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in earnings were as follows:
 
Three Months Ended March 31,
2017
 
2016
(in thousands)
Gross realized gains
$
1,895

 
$
25

Gross realized losses

 
(1,157
)
Other-than-temporary impairments
(193
)
 
(70
)
Total
$
1,702

 
$
(1,202
)
Other-than-temporary impairments for the three months ended March 31, 2017 and 2016 are related to credit losses on non-agency residential mortgage backed securities.
Available-for-Sale securities by contractual maturity as of March 31, 2017 were as follows:
 
Amortized Cost
 
Fair Value
(in thousands)
Due within one year
$
653,507

 
$
653,840

Due after one year through five years
1,000,603

 
1,000,961

Due after five years through 10 years
4,987

 
4,977

Due after 10 years
211

 
256

 
1,659,308

 
1,660,034

Residential mortgage backed securities
3,231,042

 
3,226,174

Commercial mortgage backed securities
512,851

 
512,474

Asset backed securities
686,973

 
686,278

Common stocks
2,238

 
5,365

Total
$
6,092,412

 
$
6,090,325

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

12


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

4.  Commercial Mortgage, Syndicated and Certificate Loans
ACC’s financing receivables include commercial mortgage loans, syndicated loans and certificate loans. Certificate loans do not exceed the cash surrender value of the certificate at origination. As there is minimal risk of loss related to certificate loans, ACC does not record an allowance for loan losses for certificate loans.
Allowance for Loan Losses
The following table presents a rollforward of the allowance for loan losses for commercial mortgage loans and syndicated loans for the three months ended and the ending balance of the allowance for loan losses by impairment method:
 
March 31,
 
2017
 
2016
 
(in thousands)
Beginning balance
$
3,283

 
$
3,964

Provisions

 

Ending balance
$
3,283

 
$
3,964

 
 
 
 
Individually evaluated for impairment
$

 
$

Collectively evaluated for impairment
3,283

 
3,964

The recorded investment in commercial mortgage loans and syndicated loans by impairment method was as follows:
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Individually evaluated for impairment
$

 
$
1,550

Collectively evaluated for impairment
186,222

 
175,548

Total
$
186,222

 
$
177,098

As of March 31, 2017 and December 31, 2016, ACC’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was nil and $1.6 million, respectively. Unearned income, unamortized premiums and discounts, and net unamortized deferred fees and costs are not material to ACC’s total loan balance.
ACC purchased $15.8 million and $1.3 million of syndicated loans during the three months ended March 31, 2017 and 2016, respectively. ACC sold $66 thousand and nil of syndicated loans during the three months ended March 31, 2017 and March 31, 2016, respectively.
ACC has not acquired any loans with deteriorated credit quality as of the acquisition date.
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were nil as of both March 31, 2017 and December 31, 2016. All loans were considered to be performing.
Commercial Mortgage Loans
ACC reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates as necessary. Commercial mortgage loans which management has assigned its highest risk rating were nil and 1.8% of total commercial mortgage loans as of March 31, 2017 and December 31, 2016, respectively. Loans with the highest risk rating represent distressed loans which ACC has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. In addition, ACC reviews the concentrations of credit risk by region and property type.

13


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:
 
Loans
 
Percentage
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
 
 
 
 
East North Central
$
2,970

 
$
3,043

 
3
%
 
4
%
East South Central
5,356

 
5,509

 
6

 
6

Middle Atlantic
10,635

 
10,881

 
11

 
12

Mountain
8,566

 
5,850

 
9

 
7

New England
7,378

 
7,424

 
8

 
9

Pacific
21,047

 
16,511

 
22

 
19

South Atlantic
23,715

 
23,846

 
26

 
27

West North Central
7,119

 
7,253

 
8

 
8

West South Central
6,971

 
7,174

 
7

 
8

 
93,757

 
87,491

 
100
%
 
100
%
Less: allowance for loan losses
2,341

 
2,341

 
 
Total
$
91,416

 
$
85,150

Concentrations of credit risk of commercial mortgage loans by property type were as follows:
 
Loans
 
Percentage
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
 
 
 
 
Apartments
$
16,345

 
$
16,527

 
17
%
 
19
%
Industrial
24,197

 
16,637

 
26

 
19

Mixed use
4,872

 
4,968

 
5

 
6

Office
6,462

 
6,551

 
7

 
7

Retail
30,961

 
31,500

 
33

 
36

Hotel
901

 
941

 
1

 
1

Other
10,019

 
10,367

 
11

 
12

 
93,757

 
87,491

 
100
%
 
100
%
Less: allowance for loan losses
2,341

 
2,341

 
 
Total
$
91,416

 
$
85,150

Syndicated Loans
The recorded investment in syndicated loans as of March 31, 2017 and December 31, 2016 was $92.5 million and $89.6 million, respectively. ACC’s syndicated loan portfolio is diversified across industries and issuers. The primary credit indicator for syndicated loans is whether the loans are performing in accordance with the contractual terms of the syndication. Total nonperforming syndicated loans as of both March 31, 2017 and December 31, 2016 were nil.
Troubled Debt Restructurings
There were no loans restructured by ACC during the three months ended March 31, 2017 and 2016. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.

14


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

5.  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
ACC categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by ACC’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2
Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
 
March 31, 2017
Level 1
 
Level 2
 
Level 3
 
Total
(in thousands)
Assets
 

 
 

 
 

 
 

Cash equivalents
$

 
$
214,794

 
$

 
$
214,794

Available-for-Sale securities:
 

 
 

 
 

 
 

Residential mortgage backed securities

 
3,067,452

 
158,722

 
3,226,174

Corporate debt securities

 
1,433,427

 
158,523

 
1,591,950

Commercial mortgage backed securities

 
512,474

 

 
512,474

Asset backed securities

 
686,278

 

 
686,278

State and municipal obligations

 
67,663

 

 
67,663

U.S. government and agencies obligations
421

 

 

 
421

Common stocks
1,080

 
472

 
3,813

 
5,365

Total Available-for-Sale securities
1,501

 
5,767,766

 
321,058

 
6,090,325

Equity derivative contracts

 
46,626

 

 
46,626

Total assets at fair value
$
1,501

 
$
6,029,186

 
$
321,058

 
$
6,351,745

 
Liabilities
 

 
 

 
 

 
 

Stock market certificate embedded derivatives
$

 
$
8,513

 
$

 
$
8,513

Equity derivative contracts
4

 
39,756

 

 
39,760

Total liabilities at fair value
$
4

 
$
48,269

 
$

 
$
48,273


15


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
December 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
(in thousands)
Assets
 

 
 

 
 

 
 

Cash equivalents
$

 
$
111,385

 
$

 
$
111,385

Available-for-Sale securities:
 
 
 
 
 
 
 

Residential mortgage backed securities

 
3,030,216

 
153,183

 
3,183,399

Corporate debt securities

 
1,440,921

 
154,156

 
1,595,077

Commercial mortgage backed securities

 
499,872

 

 
499,872

Asset backed securities

 
595,635

 
30,788

 
626,423

State and municipal obligations

 
48,510

 

 
48,510

U.S. government and agencies obligations
420

 

 

 
420

Common stocks
2,416

 
3,476

 
717

 
6,609

Total Available-for-Sale securities
2,836

 
5,618,630

 
338,844

 
5,960,310

Equity derivative contracts

 
45,098

 

 
45,098

Total assets at fair value
$
2,836

 
$
5,775,113

 
$
338,844

 
$
6,116,793

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Stock market certificate embedded derivatives
$

 
$
8,183

 
$

 
$
8,183

Equity derivative contracts
6

 
38,313

 

 
38,319

Total liabilities at fair value
$
6

 
$
46,496

 
$

 
$
46,502

The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
Available-for-Sale Securities
 
Residential Mortgage Backed Securities
 
Corporate Debt Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
(in thousands)
 
Balance, January 1, 2017
$
153,183

 
$
154,156

 
$
30,788

 
$
717

 
$
338,844

 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
Net income
16

 
(101
)
 

 
65

 
(20
)
(1) 
Other comprehensive income
(2
)
 
(199
)
 

 
218

 
17

 
Purchases
65,138

 
12,167

 

 

 
77,305

 
Sales

 

 

 
(151
)
 
(151
)
 
Settlements
(9,784
)
 
(7,500
)
 

 

 
(17,284
)
 
Transfers into Level 3

 

 

 
3,407

 
3,407

 
Transfers out of Level 3
(49,829
)
 

 
(30,788
)
 
(443
)
 
(81,060
)
 
Balance, March 31, 2017
$
158,722

 
$
158,523

 
$

 
$
3,813

 
$
321,058

 
Changes in unrealized gains (losses) relating to assets held as of March 31, 2017
$
16

 
$
(101
)
 
$

 
$

 
$
(85
)
(2) 

16


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
Available-for-Sale Securities
 
Residential Mortgage
Backed Securities
 
Corporate Debt Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
(in thousands)
Balance, January 1, 2016
$
196,334

 
$
190,304

 
$
29,515

 
$
229

 
$
416,382

 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
Net income
166

 
(1,342
)
 
14

 

 
(1,162
)
(3) 
Other comprehensive income
(3,052
)
 
1,728

 
1

 

 
(1,323
)
 
Purchases

 

 
789

 

 
789

 
Settlements
(13,839
)
 
(23,000
)
 

 

 
(36,839
)
 
Transfers out of Level 3
(24,599
)
 

 
(9,999
)
 
(155
)
 
(34,753
)
 
Balance, March 31, 2016
$
155,010

 
$
167,690

 
$
20,320

 
$
74

 
$
343,094

 
Changes in unrealized gains (losses) relating to assets held as of March 31, 2016
$
166

 
$
(195
)
 
$
14

 
$

 
$
(15
)
(2) 
(1) Represents an $85 thousand loss included in investment income and a $65 thousand gain included in net realized gain (loss) on investments in the Consolidated Statements of Operations.
(2) Included in investment income in the Consolidated Statements of Operations.
(3) Represents a $1.1 million loss included in realized gain (loss) on investments and a $26 thousand loss included in investment income in the Consolidated Statements of Operations.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third-party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair value that are now based on a single non-binding broker quote. ACC recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by ACC or reasonably available to ACC of Level 3 assets:
 
March 31, 2017
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
(in thousands)
 
Corporate debt securities
   (private placements)
$
158,520

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9% - 2.0%
 
1.0%
 
December 31, 2016
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
(in thousands)
 
Corporate debt securities
   (private placements)
$
154,153

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9% - 1.7%
 
1.1%
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to ACC.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.
Determination of Fair Value
ACC uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. ACC’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. ACC’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, ACC maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

17


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. ACC’s cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third-party pricing services, non-binding broker quotes, or other model-based valuation techniques. Level 1 securities primarily include U.S. Treasuries and common stocks. Level 2 securities primarily include residential mortgage backed securities, corporate bonds, commercial mortgage backed securities, asset backed securities, state and municipal obligations and common stock. The fair value of these Level 2 securities is based on a market approach with prices obtained from third-party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3 securities primarily include certain non-agency residential mortgage backed securities, corporate bonds, asset backed securities and common stocks. The fair value of corporate bonds, non-agency residential mortgage backed securities and certain asset backed securities classified as Level 3 is typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to ACC. ACC’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, ACC reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third-party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. ACC reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. ACC also performs subsequent transaction testing. ACC performs annual due diligence of third-party pricing services. ACC’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. ACC also considers the results of its exception reporting controls and any resulting price challenges that arise.
Derivatives
The variation margin on futures contracts is classified as Level 1. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is 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 options. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial as of March 31, 2017 and December 31, 2016. See Note 6 and Note 7 for further information on the credit risk of derivative instruments and related collateral.
Stock Market Certificate Embedded Derivatives
ACC uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its stock market certificates. The inputs to these calculations are primarily market observable and include interest rates, volatilities, and equity index levels. As a result, these measurements are classified as Level 2.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the tables with balances of assets and liabilities measured at fair value on a recurring basis.
Financial Assets
March 31, 2017
Carrying 
Value
 
Fair Value
Level 1
 
Level 2
 
Level 3
 
Total
(in thousands)
Syndicated loans
$
91,523

 
$

 
$
85,511

 
$
6,647

 
$
92,158

Commercial mortgage loans
91,416

 

 

 
92,476

 
92,476

Certificate loans
535

 

 
535

 

 
535

Financial Liabilities
 

 
 

 
 

 
 

 
 

Certificate reserves
$
6,128,617

 
$

 
$

 
$
6,113,697

 
$
6,113,697


18


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Financial Assets
December 31, 2016
Carrying 
Value
 
Fair Value
Level 1
 
Level 2
 
Level 3
 
Total
(in thousands)
Syndicated loans
$
88,665

 
$

 
$
85,368

 
$
4,516

 
$
89,884

Commercial mortgage loans
85,150

 

 

 
86,327

 
86,327

Certificate loans
549

 

 
549

 

 
549

Financial Liabilities
 

 
 

 
 

 
 

 
 

Certificate reserves
$
5,926,868

 
$

 
$

 
$
5,913,672

 
$
5,913,672

Syndicated Loans
The fair value of syndicated loans is obtained from a third-party pricing service or non-binding broker quotes. Syndicated loans that are priced using a market approach with observable inputs are classified as Level 2 and loans priced using a single non-binding broker quote are classified as Level 3.
Commercial Mortgage Loans
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities, liquidity and characteristics including loan-to-value ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for ACC’s estimate of the amount recoverable on the loan. Given the significant unobservable inputs to the valuation of commercial mortgage loans, these measurements are classified as Level 3.
Certificate Loans
Certificate loans represent loans made against and collateralized by the underlying certificate balance. These loans do not transfer to third parties separate from the underlying certificate. The outstanding balance of these loans is considered a reasonable estimate of fair value and is classified as Level 2.
Certificate Reserves
The fair value of investment certificate reserves is determined by discounting cash flows using discount rates that reflect current pricing for contracts with similar terms and characteristics, with adjustments for early withdrawal behavior, penalty fees, expense margin and ACC’s nonperformance risk specific to these liabilities. Given the use of significant unobservable inputs to this valuation, the measurement is classified as Level 3.
6. Offsetting Assets and Liabilities
Certain derivative instruments are eligible for offset in the Consolidated Balance Sheets. ACC’s derivative instruments are subject to master netting arrangements and collateral arrangements and qualify for offset. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. ACC’s policy is to recognize amounts subject to master netting arrangements on a gross basis in the Consolidated Balance Sheets.
The following tables present the gross and net information about ACC’s assets subject to master netting arrangements:
 
March 31, 2017
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Amounts of Assets Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the
Consolidated Balance Sheets
 
Net Amount
Financial Instruments (1)
 
Cash Collateral
(in thousands)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC
$
46,626

 
$

 
$
46,626

 
$
(39,756
)
 
$
(6,544
)
 
$
326

Total
$
46,626

 
$

 
$
46,626

 
$
(39,756
)
 
$
(6,544
)
 
$
326


19


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
December 31, 2016
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Amounts of Assets Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the 
Consolidated Balance Sheets
 
Net Amount
Financial Instruments (1)
 
Cash Collateral
(in thousands)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC
$
45,098

 
$

 
$
45,098

 
$
(38,313
)
 
$
(6,785
)
 
$

Total
$
45,098

 
$

 
$
45,098

 
$
(38,313
)
 
$
(6,785
)
 
$

 (1) Represents the amount of assets that could be offset by liabilities with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
The following tables present the gross and net information about ACC’s liabilities subject to master netting agreements:
 
March 31, 2017
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the 
Consolidated Balance Sheets
 
Net Amount
Financial Instruments (1)
 
Cash Collateral
(in thousands)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC
$
39,756

 
$

 
$
39,756

 
$
(39,756
)
 
$

 
$

Exchange-traded
4

 

 
4

 

 

 
4

Total
$
39,760

 
$

 
$
39,760

 
$
(39,756
)
 
$

 
$
4

 
December 31, 2016
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the 
Consolidated Balance Sheets
 
Net Amount
Financial Instruments (1)
 
Cash Collateral
(in thousands)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC
$
38,313

 
$

 
$
38,313

 
$
(38,313
)
 
$

 
$

Exchange-traded
6

 

 
6

 

 

 
6

Total
$
38,319

 
$

 
$
38,319

 
$
(38,313
)
 
$

 
$
6

 (1) Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
In the tables above, the amounts of assets or liabilities presented in the Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual amounts of collateral may be greater than amounts presented in the tables.
See Note 7 for additional disclosures related to ACC’s derivative instruments.
7.  Derivatives and Hedging Activities
Derivative instruments enable ACC to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity and interest rate indices or prices. ACC primarily enters into derivative agreements for risk management purposes related to ACC’s products.

20


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

ACC uses derivatives as economic hedges of equity risk related to stock market certificates (“SMC”). ACC does not designate any derivatives for hedge accounting. The following table presents the notional value and the gross fair value of derivative instruments, including embedded derivatives:
 
March 31, 2017
 
December 31, 2016
Notional
 
Gross Fair Value
Notional
 
Gross Fair Value
Assets
 
Liabilities
Assets
 
Liabilities
(in thousands)
Derivatives not designated as hedging instruments
  Equity contracts(1)
$
900,020

 
$
46,626

 
$
39,760

 
$
911,871

 
$
45,098

 
$
38,319

Embedded derivatives
  Stock market certificates(2)
N/A

 

 
8,513

 
N/A

 

 
8,183

Total derivatives
$
900,020

 
$
46,626

 
$
48,273

 
$
911,871

 
$
45,098

 
$
46,502

N/A Not applicable
(1) The gross fair value of equity contracts is included in Derivative assets and Derivative liabilities on the Consolidated Balance Sheets.
(2) The gross fair value of SMC embedded derivatives is included in Certificate reserves on the Consolidated Balance Sheets.
See Note 5 for additional information regarding ACC’s fair value measurement of derivative instruments.
The following tables present a summary of the impact of derivatives not designated as hedging instruments, including embedded derivatives, on the Consolidated Statements of Operations:
Derivatives not designated as hedging instruments
 
Location of Gain (Loss) on Derivatives Recognized in Income
 
Amount of Gain (Loss) on Derivatives Recognized in Income
Three Months Ended March 31,
2017
 
2016
Equity contracts
Stock market certificates
 
Net provision for certificate reserves
 
$
1,326

 
$
(534
)
Stock market certificates embedded derivatives
 
Net provision for certificate reserves
 
(1,264
)
 
490

Total
 
$
62

 
$
(44
)
Ameriprise SMC offers a return based upon the relative change in a major stock market index between the beginning and end of the certificate’s term. The SMC product contains an embedded derivative. The equity based return of the certificate must be separated from the host contract and accounted for as a derivative instrument. As a result of fluctuations in equity markets, and the corresponding changes in value of the embedded derivative, the amount of expenses incurred by ACC related to the SMC product will positively or negatively impact reported earnings. As a means of hedging its obligations under the provisions for these certificates, ACC purchases and writes call options on the S&P 500 Index®. ACC views this strategy as a prudent management of equity market sensitivity, such that earnings are not exposed to undue risk presented by changes in equity market levels. ACC also purchases futures on the S&P 500 Index to economically hedge its obligations. The futures are marked-to-market daily and exchange traded, exposing ACC to minimal counterparty risk.
Ameriprise Step-Up Rate Certificates (“SRC”) offer the ability to step up to a higher crediting rate based upon the then-current rate for a new SRC with the same term. ACC does not currently hedge the interest rate risk related to the SRC product. The SRC product contains an embedded derivative which was not material as of March 31, 2017 and December 31, 2016.
Credit Risk
Credit risk associated with ACC’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, ACC has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. See Note 6 for additional information on ACC’s credit exposure related to derivative assets.
8.  Contingencies
The level of regulatory activity and inquiry in the financial services industry remains elevated. From time to time, ACC receives requests for information from, and/or has been subject to examination by, both the SEC and the Minnesota Department of Commerce concerning its business activities and practices. In addition, a number of state and federal regulatory agencies have initiated

21


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

examinations and other inquiries related to unclaimed property and escheatment practices and procedures. The Ameriprise organization has cooperated and will continue to cooperate with applicable regulators regarding their inquiries.
ACC may in the normal course of business be a party to legal, regulatory or arbitration proceedings concerning matters arising in connection with the conduct of its business activities. The outcome of any such proceeding cannot be predicted with any certainty. ACC believes that it is not a party to, nor are any of its properties the subject of, any pending legal, regulatory or arbitration proceedings that are reasonably likely to have a material adverse effect on ACC’s financial condition, results of operations or liquidity. Notwithstanding the foregoing, it is possible that the outcome of any such legal, arbitration or regulatory proceedings could have a material impact on ACC’s results of operations in any particular reporting period as the proceedings are resolved.
9.  Shareholder’s Equity
The following table provides information related to amounts reclassified from accumulated other comprehensive loss:
Accumulated Other Comprehensive Loss Reclassification
Location of (Gain) Loss Recognized in Income
Three Months Ended March 31,
2017
 
2016
Unrealized net losses (gains) on Available-for-Sale securities
Net realized gain (loss) on investments
$
(1,702
)
 
$
1,202

Tax expense (benefit)
Income tax expense (benefit)
596

 
(421
)
Net of tax
$
(1,106
)
 
$
781

ACC received cash contributions of $5 million and $12 million from Ameriprise Financial during the three months ended March 31, 2017 and 2016, respectively, to maintain compliance with minimum capital requirements. These contributions were received outside of the Capital Support Agreement between Ameriprise Financial and ACC. See additional discussion on the Capital Support Agreement in ACC’s 2016 10-K.
10.  Income Taxes
The effective tax rate was 37.9% and 36.9% for the three months ended March 31, 2017 and 2016, respectively.
ACC is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. 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 ACC’s tax positions, management believes it is more likely than not that ACC’s results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable ACC to utilize all of the deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of both March 31, 2017 and December 31, 2016.
As of March 31, 2017 and December 31, 2016, ACC had $2.7 million and $2.5 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $1.7 million and $1.6 million, net of federal tax benefits, of the unrecognized tax benefits as of March 31, 2017 and December 31, 2016, respectively, would affect the effective tax rate.
It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. ACC estimates that the total amount of gross unrecognized tax benefits may decrease by $600 to $700 thousand in the next 12 months primarily due to resolution of audits and statute expirations.
ACC recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. ACC recognized a net increase of $16 thousand and a net decrease of $1.3 million in interest and penalties for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, ACC had a payable of $266 thousand and $250 thousand, respectively, related to accrued interest and penalties.
ACC files income tax returns, as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial, in the U.S. federal jurisdiction, and various states jurisdictions. The Internal Revenue Service (“IRS”) has completed its field examination of the 2006 through 2011 tax returns and those years are effectively settled. The IRS is currently auditing Ameriprise Financial’s U.S. income tax returns for 2012 through 2015. Ameriprise Financial’s or its subsidiaries’, including ACC’s, state income tax returns are currently under examination by various jurisdictions for years ranging from 2008 through 2015.

22


AMERIPRISE CERTIFICATE COMPANY

ITEM 2.  MANAGEMENT’S NARRATIVE ANALYSIS
The following information should be read in conjunction with Ameriprise Certificate Company’s (“ACC”) Financial Statements and related notes presented in Part I, Item 1. This discussion may contain forward-looking statements that reflect ACC’s plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under “Forward-Looking Statements.” ACC believes it is useful to read its management’s narrative analysis in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2017 (“2016 10-K”), as well as its current reports on Form 8-K and other publicly available information.
ACC is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”). ACC is registered as an investment company under the Investment Company Act of 1940 and is in the business of issuing face-amount investment certificates. Face-amount investment certificates issued by ACC entitle the certificate owner to receive at maturity a stated amount of money and interest or credits declared from time to time by ACC, at its discretion. The certificates issued by ACC are not insured by any government agency. ACC’s certificates are sold primarily by Ameriprise Financial Services, Inc., an affiliate of ACC. Ameriprise Financial Services, Inc. is registered as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico. ACC’s investment portfolio is managed by Columbia Management Investment Advisers, LLC (“CMIA”), a wholly owned subsidiary of Ameriprise Financial.
Management’s narrative analysis of the results of operations is presented in lieu of management’s discussion and analysis of financial condition and results of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
Critical Accounting Policies
ACC’s critical accounting policies are discussed in detail in “Management's Narrative Analysis — Critical Accounting Policies” in its 2016 10-K.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on ACC’s future results of operations or financial condition, see Note 2 to the consolidated financial statements.
Results of Operations for the Three Months Ended March 31, 2017 and 2016
ACC’s net income is derived primarily from the after-tax yield on investments and realized investment gains (losses), less investment expenses and interest credited on certificate reserve liabilities. Net income trends occur largely due to changes in returns on ACC’s investment portfolio, from realization of investment gains (losses) and from changes in interest credited to certificate products. ACC follows U.S. generally accepted accounting principles (“GAAP”).
Net income increased $3.2 million, or 50%, to $9.6 million for the three months ended March 31, 2017 compared to $6.4 million for the prior year period primarily due to higher investment income and net realized gains on investments in the current year period compared to net realized losses in the prior year period, partially offset by higher net provision for certificate reserves, investment expenses, and income tax expense.
Investment income increased $5.4 million, or 20%, to $33.0 million for the three months ended March 31, 2017 compared to $27.6 million for the prior year period reflecting higher average investment balances from certificate net inflows, partially offset by a decrease in the invested assets rate.
Investment expenses increased $1.4 million, or 18%, to $9.2 million for the three months ended March 31, 2017 compared to $7.8 million for the prior year period primarily due to higher investment advisory, distribution, and transfer agent fees.
Net provision for certificate reserves increased $1.7 million, or 20%, to $10.2 million for the three months ended March 31, 2017 compared to $8.5 million for the prior year period due to higher average certificate balances from certificate net inflows.
Net realized gain on investments before income taxes was $1.7 million for the three months ended March 31, 2017 compared to net realized loss on investments of $1.2 million for the prior year period. Net realized gain on investments for the three months ended March 31, 2017 included net realized gains from sales, tenders and calls of Available-for-Sale securities of $1.9 million, partially offset by other-than-temporary impairments of $0.2 million. Net realized loss on investments for the three months ended March 31, 2016 included net realized losses from sales, tenders and calls of Available-for-Sale securities of $1.1 million and other-than-temporary impairments of $0.1 million. The other-than-temporary impairments for both periods related to credit losses on non-agency residential mortgage backed securities.
The effective tax rate was 37.9% for the three months ended March 31, 2017 compared to 36.9% for the prior year period.

23


AMERIPRISE CERTIFICATE COMPANY

Fair Value Measurements
ACC reports certain assets and liabilities at fair value; specifically, derivatives, embedded derivatives, and 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. ACC includes actual market prices or observable inputs in its fair value measurements to the extent available. Non-binding broker quotes are obtained when quotes from third-party pricing services are not available. ACC validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 5 to the consolidated financial statements for additional information regarding ACC’s fair value measurements.
Forward-Looking Statements
This report contains forward-looking statements that reflect management’s plans, estimates and beliefs. Actual results could differ materially from those described in these forward-looking statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “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. 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. ACC undertakes no obligation to update or revise any forward-looking statements.
ITEM 4.  CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
ACC maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in and pursuant to SEC regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to ACC’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, ACC’s disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
ACC’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ACC’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, ACC’s Chief Executive Officer and Chief Financial Officer have concluded that ACC’s disclosure controls and procedures were effective at a reasonable level of assurance as of March 31, 2017.
Changes in Internal Control over Financial Reporting
There have not been any changes in ACC’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, ACC’s internal control over financial reporting.

24


AMERIPRISE CERTIFICATE COMPANY

PART II.  OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS
The information set forth in Note 8 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
ITEM 1A.  RISK FACTORS
There have been no material changes in the risk factors provided in Part I, Item 1A of ACC’s 2016 10-K.
ITEM 6.  EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

25


AMERIPRISE CERTIFICATE COMPANY

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
AMERIPRISE CERTIFICATE COMPANY
 
 
 
 
(Registrant)
 
 
 
 
 
 
Date:
May 3, 2017
By
/s/ Abu M. Arif
 
 
 
 
Abu M. Arif
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
Date:
May 3, 2017
By
/s/ Janet C. Langner
 
 
 
 
Janet C. Langner
 
 
 
 
Chief Financial Officer
 



26


AMERIPRISE CERTIFICATE COMPANY

EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
 
Exhibit
Description

3(a)
Amended and Restated Certificate of Incorporation of American Express Certificate Company, dated August 1, 2005, filed electronically on or about March 10, 2006 as Exhibit 3(a) to Registrant’s Form 10-K is incorporated by reference.
3(b)
By-Laws of Ameriprise Certificate Company, filed electronically on or about November 5, 2010 as Exhibit 3 (b) to Registrant’s Form 10-Q, are incorporated herein by reference.
31.1*
Certification of Abu M. Arif pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Janet C. Langner pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32*
Certification of Abu M. Arif and Janet C. Langner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
____________________________________________________
* Filed electronically herewithin.


E-1