AMERIPRISE CERTIFICATE CO - FORM 10-Q

Attached files

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EX-32 - EX-32 - AMERIPRISE CERTIFICATE CO	accexhibit3206302020.htm
EX-31.2 - EX-31.2 - AMERIPRISE CERTIFICATE CO	accexhibit31206302020.htm
EX-31.1 - EX-31.1 - AMERIPRISE CERTIFICATE CO	accexhibit31106302020.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

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

For the Quarterly Period Ended

June 30, 2020

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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

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☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes

☒

☐

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 the 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

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Accelerated Filer

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Non-accelerated Filer

☒

Smaller reporting company

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Emerging growth company

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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.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

☒

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

Class

Outstanding at August 10, 2020

Common Stock (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)					3
	Consolidated Statements of Operations — Three months and six months ended June 30, 2020 and 2019			3
	Consolidated Statements of Comprehensive Income — Three months and six months ended June 30, 2020 and 2019			4
	Consolidated Balance Sheets — June 30, 2020 and December 31, 2019			5
	Consolidated Statements of Shareholder's Equity — Three months and six months ended June 30, 2020 and 2019			6
	Consolidated Statements of Cash Flows — Six months ended June 30, 2020 and 2019			7
	Notes to Consolidated Financial Statements			8
	1.	Basis of Presentation	8
	2.	Summary of Significant Accounting Policies	8
	3.	Recent Accounting Pronouncements	10
	4.	Investments	12
	5.	Financing Receivables	15
	6.	Fair Values of Assets and Liabilities	18
	7.	Offsetting Assets and Liabilities	23
	8.	Derivatives and Hedging Activities	24
	9.	Contingencies	25
	10.	Shareholder’s Equity	25
	11.	Income Taxes	26
Item 2. Management’s Narrative Analysis					27
Item 4. Controls and Procedures					28

Part II. Other Information					29
Item 1. Legal Proceedings					29
Item 1A. Risk Factors					29
Item 6. Exhibits					29
Signatures					30

AMERIPRISE CERTIFICATE COMPANY

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020				2019
	(in thousands)
Investment income	$	35,846	$	62,280	$	83,237	$	123,990
Investment expenses	10,810		12,261		21,726		24,468
Net investment income before provision for certificate reserves and income taxes	25,036		50,019		61,511		99,522
Net provision for certificate reserves	17,618		33,718		40,869		67,776
Net investment income before income taxes	7,418		16,301		20,642		31,746
Income tax expense	1,742		4,195		4,997		8,003
Net investment income, after-tax	5,676		12,106		15,645		23,743

Net realized gain (loss) on investments before income taxes	379		116		(360)		37
Income tax expense (benefit)	79		25		(76)		8
Net realized gain (loss) on investments, after-tax	300		91		(284)		29
Net income	$	5,976	$	12,197	$	15,361	$	23,772
See Notes to Consolidated Financial Statements.

AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020				2019
	(in thousands)
Net income	$	5,976	$	12,197	$	15,361	$	23,772
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the period	105,777		29,720		2,894		52,191
Reclassification of net (gains) losses on securities included in net income	(310)		(96)		(500)		(70)
Total other comprehensive income (loss), net of tax	105,467		29,624		2,394		52,121
Total comprehensive income (loss)	$	111,443	$	41,821	$	17,755	$	75,893
See Notes to Consolidated Financial Statements.

AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30, 2020			December 31, 2019
			(in thousands, except share data)
Assets
Qualified Assets
Cash and cash equivalents	$	629,375		$	384,194
Investments in unaffiliated issuers (net of allowance for credit losses: 2020, $3,228; 2019, $3,022 ⁽¹⁾)	7,430,495			7,647,035
Receivables	18,351			24,014
Derivative assets	34,628			56,044
Total qualified assets	8,112,849			8,111,287
Deferred taxes, net	—			988
Taxes receivable from parent	—			602
Due from related party	25			30
Total assets	$	8,112,874		$	8,112,907

Liabilities and Shareholder’s Equity
Liabilities
Certificate reserves	$	7,451,079		$	7,522,323
Deferred taxes, net	2,211			—
Taxes payable to parent	2,032			135
Derivative liabilities	27,117			43,598
Payables to brokers, dealers and clearing organizations	143,809			52,575
Due to related party and other liabilities	48,020			52,010
Total liabilities	7,674,268			7,670,641

Shareholder’s Equity
Common shares ($10 par value, 150,000 shares authorized and issued)	1,500			1,500
Additional paid-in capital	341,700			331,700
Total retained earnings	80,749			96,803
Accumulated other comprehensive income (loss), net of tax	14,657			12,263
Total shareholder’s equity	438,606			442,266
Total liabilities and shareholder’s equity	$	8,112,874		$	8,112,907

⁽¹⁾Prior to January 1, 2020, the allowance for credit losses is not applicable to Available-for-Sale securities. See Notes 2, 3, 4 and 5 for more information.
See Notes to Consolidated Financial Statements.

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, April 1, 2019	150,000		$	1,500		$	289,517	$	800	$	15		$	166,829	$	(11,334)		$	447,327
Comprehensive income (loss):
Net income	—		—			—		—		—			12,197		—			12,197
Other comprehensive income (loss), net of tax	—		—			—		—		—			—		29,624			29,624
Total comprehensive income (loss)																		41,821
Transfer to unappropriated from appropriated	—		—			—		(180)		—			180		—			—
Balance, June 30, 2019	150,000		$	1,500		$	289,517	$	620	$	15		$	179,206	$	18,290		$	489,148

Balance, April 1, 2020	150,000		$	1,500		$	341,700	$	197	$	15		$	74,561	$	(90,810)		$	327,163
Comprehensive income (loss):
Net income	—		—			—		—		—			5,976		—			5,976
Other comprehensive income (loss), net of tax	—		—			—		—		—			—		105,467			105,467
Total comprehensive income (loss)																		111,443
Transfer to unappropriated from appropriated	—		—			—		(84)		—			84		—			—

Balance, June 30, 2020	150,000		$	1,500		$	341,700	$	113	$	15		$	80,621	$	14,657		$	438,606

Balance, January 1, 2019	150,000		$	1,500		$	285,017	$	910	$	15		$	155,251	$	(33,831)		$	408,862
Cumulative effect of adoption of premium amortization on purchased callable debt securities guidance	—		—			—		—		—			(107)		—			(107)
Comprehensive income (loss):
Net income	—		—			—		—		—			23,772		—			23,772
Other comprehensive income (loss), net of tax	—		—			—		—		—			—		52,121			52,121
Total comprehensive income (loss)																		75,893
Transfer to unappropriated from appropriated	—		—			—		(290)		—			290		—			—
Receipt of capital from parent	—		—			4,500		—		—			—		—			4,500
Balance, June 30, 2019	150,000		$	1,500		$	289,517	$	620	$	15		$	179,206	$	18,290		$	489,148

Balance, January 1, 2020	150,000		$	1,500		$	331,700	$	321	$	15		$	96,467	$	12,263		$	442,266
Cumulative effect of adoption of current expected credit losses guidance	—		—			—		—		—			585		—			585
Comprehensive income (loss):
Net income	—		—			—		—		—			15,361		—			15,361
Other comprehensive income (loss), net of tax	—		—			—		—		—			—		2,394			2,394
Total comprehensive income (loss)																		17,755
Transfer to unappropriated from appropriated	—		—			—		(208)		—			208		—			—
Dividend to parent	—		—			—		—		—			(32,000)		—			(32,000)
Receipt of capital from parent	—		—			10,000		—		—			—		—			10,000
Balance, June 30, 2020	150,000		$	1,500		$	341,700	$	113	$	15		$	80,621	$	14,657		$	438,606

See Notes to Consolidated Financial Statements.

AMERIPRISE CERTIFICATE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended June 30,
			2020			2019
			(in thousands)
Cash Flows from Operating Activities
Net income	$	15,361		$	23,772
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of premiums, accretion of discounts, net	(8,559)			(18,207)
Deferred income tax expense (benefit)	2,253			(746)
Net realized (gain) loss on Available-for-Sale securities	(633)			(88)
Other net realized (gain) loss	16			51
Provision for credit losses	977			—
Changes in operating assets and liabilities:
Dividends and interest receivable	17,092			20,548
Certificate reserves, net	(5,295)			7,384
Deferred taxes, net	—			(12,490)
Taxes payable to/receivable from parent, net	2,499			(689)
Derivatives, net of collateral	(625)			34
Other liabilities	1,824			8,102
Other receivables	(280)			27
Payables to brokers, dealers and clearing organizations	—			(21,451)
Other, net	64			303
Net cash provided by (used in) operating activities	24,694			6,550

Cash Flows from Investing Activities
Available-for-Sale securities:
Sales	—			9,689
Maturities, redemptions and calls	2,410,527			2,532,096
Purchases	(2,099,453)			(2,535,037)
Syndicated loans and commercial mortgage loans:
Sales, maturities and repayments	21,730			24,433
Purchases and fundings	(24,351)			(32,414)


Certificate loans, net	(17)			39
Net cash provided by (used in) investing activities	308,436			(1,194)

Cash Flows from Financing Activities
Payments from certificate holders and other additions	2,533,506			2,924,418
Certificate maturities and cash surrenders	(2,599,455)			(2,872,901)
Capital contribution from parent	10,000			4,500
Dividend to parent	(32,000)			—
Net cash provided by (used in) financing activities	(87,949)			56,017

Net increase (decrease) in cash and cash equivalents	245,181			61,373
Cash and cash equivalents at beginning of period	384,194			405,279
Cash and cash equivalents at end of period	$	629,375		$	466,652

Supplemental disclosures including non-cash transactions:
Cash paid (received) for income taxes	$	403		$	8,756
Cash paid for interest	44,323			68,311
See Notes to Consolidated Financial Statements.

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. Except for the out-of-period correction described below, 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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 (“2019 10-K”).

In the second quarter of 2019, ACC recorded a $1.2 million decrease to net provision for certificate reserves for an out-of-period correction related to Stock Market Certificate (“SMC”) embedded derivatives. The impact to prior period financial statements was not material.

ACC evaluated events or transactions that occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. No subsequent events or transactions were identified.

2. Summary of Significant Accounting Policies

ACC adopted accounting standard, Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The significant accounting policies for Available-for-Sale securities and financing receivables were updated as a result of adopting the new accounting standard. Refer to Note 3 for further details of the adoption.

Available-for-Sale Securities

Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in accumulated other comprehensive income (loss) (“AOCI”), net of income taxes. Available-for-Sale securities are recorded within investments in unaffiliated issuers on the Consolidated Balance Sheets. Gains and losses are recognized on a trade date basis in the Consolidated Statements of Operations upon disposition of the securities.

Available-for-Sale securities are impaired when the fair value of an investment is less than its amortized cost. When an Available-for-Sale security is impaired, ACC first assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not that ACC will be required to sell the security before its anticipated recovery. If either of these conditions exist, ACC recognizes an impairment by reducing the book value of the security for the difference between the investment’s amortized cost and its fair value with a corresponding charge to earnings. Subsequent increases in the fair value of Available-for-Sale securities that occur in periods after a write-down has occurred are recorded as unrealized gains in other comprehensive income (loss) (“OCI”), while subsequent decreases in fair value would continue to be recorded as reductions of book value with a charge to earnings.

For securities that do not meet the above criteria, ACC determines whether the decrease in fair value is due to a credit loss or due to other factors. The amount of impairment due to credit-related factors, if any, is recognized as an allowance for credit losses with a related charge to net realized gain (loss) on investments. The allowance for credit losses is limited to the amount by which the security’s amortized cost basis exceeds its fair value. The amount of the impairment related to other factors is recognized in OCI. Factors ACC considers in determining whether declines in the fair value of fixed maturity securities are due to credit-related factors include: (i) the extent to which the market value is below amortized cost; (ii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iii) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors.

If through subsequent evaluation there is a sustained increase in cash flows expected, both the allowance and related charge to earnings may be reversed to reflect the increase in expected principal and interest payments. However, for Available-for-Sale securities that recognized an impairment prior to January 1, 2020 by reducing the book value of the security, the difference between the new amortized cost basis and the improved cash flows expected to be collected is accreted as interest income.

In order to determine the amount of the credit loss component for corporate debt securities, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and ACC’s position in the debtor’s overall capital structure. When assessing potential credit-related impairments for structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities and asset backed securities), ACC also considers credit-related factors such as overall deal structure and its position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for Available-for-Sale securities. Accrued interest on Available-for-Sale securities is recorded as earned in receivables on the Consolidated Balance Sheets. Available-for-Sale securities are placed on nonaccrual status when the accrued balance becomes 90 days past due or earlier based on management’s evaluation of the facts and circumstances of each security under review. At this time, all previously accrued interest is reversed through investment income on the Consolidated Statements of Operations.

Financing Receivables

Financing receivables are comprised of commercial loans and certificate loans.

Commercial Loans

Commercial loans include commercial mortgage loans and syndicated loans and are recorded at amortized cost less the allowance for credit losses. Commercial mortgage loans and syndicated loans are recorded within investments in unaffiliated issuers on the Consolidated Balance Sheets. Commercial mortgage loans are loans on commercial properties that are originated by ACC. Syndicated loans represent ACC’s investment in loan syndications originated by unrelated third parties.

Interest income is accrued as earned on the unpaid principal balances of the loans. Interest income recognized on commercial mortgage loans and syndicated loans is recorded in investment income on the Consolidated Statements of Operations.

Certificate Loans

Certificate loans are recorded within investments in unaffiliated issuers on the Consolidated Balance Sheets. When originated, the loan balances do not exceed the cash surrender value of the underlying products. As there is minimal risk of loss related to certificate loans, ACC does not record an allowance for credit losses.

Interest income is accrued as earned on the unpaid principal balances of the loans. Interest income recognized on certificate loans is recorded in investment income on the Consolidated Statements of Operations.

See Note 5 for additional information on financing receivables.

Allowance for Credit Losses

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected over the asset’s expected life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Prior to January 1, 2020, the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset. Estimates of expected credit losses consider both historical charge-off and recovery experience as well as management’s expectation of future charge-off and recovery levels. Expected losses related to risks other than credit risk are excluded from the allowance for credit losses. The allowance for credit losses is measured and recorded upon initial recognition of the loan, regardless of whether it is originated or purchased.

The allowance for credit losses for commercial mortgage loans and syndicated loans utilizes a probability of default and loss severity approach to estimate lifetime expected credit losses. Actual historical default and loss severity data for each type of commercial loan is adjusted for current conditions and reasonable and supportable forecasts of future economic conditions to develop the probability of default and loss severity assumptions that are applied to the amortized cost basis of the loans over the expected life of each portfolio. The allowance for credit losses on commercial mortgage loans and syndicated loans is recorded through provisions charged to net realized gain (loss) on investments and is reduced/increased by net charge-offs/recoveries.

Management determines the adequacy of the allowance for credit losses based on the overall loan portfolio composition, recent and historical loss experience, and other pertinent factors, including when applicable, internal risk ratings, loan-to-value (“LTV”) ratios, and occupancy rates, along with reasonable and supportable forecasts of economic and market conditions. This evaluation is inherently subjective as it requires estimates, which may be susceptible to significant change. While ACC may attribute portions of the allowance to specific loan pools as part of the allowance estimation process, the entire allowance is available to absorb losses expected over the life of the loan portfolio.

Nonaccrual Loans

Commercial mortgage loans and syndicated loans are placed on nonaccrual status when either the collection of interest or principal has become 90 days past due or is otherwise considered doubtful of collection. Interest payments received on loans on nonaccrual status are generally applied to principal unless the remaining principal balance has been determined to be fully collectible. Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for commercial mortgage loans and syndicated loans.

Restructured Loans

A loan is classified as a restructured loan when ACC makes certain concessionary modifications to contractual terms for borrowers experiencing financial difficulties. When the interest rate, minimum payments, and/or due dates have been modified in an attempt to

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

make the loan more affordable to a borrower experiencing financial difficulties, the modification is considered a troubled debt restructuring. Modifications to loan terms do not automatically result in troubled debt restructurings (“TDRs”). Per the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, modifications made on a good faith basis in response to the coronavirus disease 2019 (“COVID-19”) pandemic to borrowers who were not more than 30 days past due as of December 31, 2019, such as payment deferrals, extensions of repayment terms, fee waivers, or delays in payment that are not significant to the unpaid principal value of the loan, are not considered TDRs. Generally, performance prior to the restructuring or significant events that coincide with the restructuring are considered in assessing whether the borrower can meet the new terms which may result in the loan being returned to accrual status at the time of the restructuring or after a performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status.

Charge-off and Foreclosure

Charge-offs are recorded when ACC concludes that all or a portion of the commercial mortgage loan or syndicated loan is uncollectible. Factors used by ACC to determine whether all amounts due on commercial mortgage loans will be collected, include but are not limited to, the financial condition of the borrower, performance of the underlying properties, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on property type and geographic location. Factors used by ACC to determine whether all amounts due on syndicated loans will be collected, include but are not limited to, the borrower’s financial condition, industry outlook, and internal risk ratings based on rating agency data and internal analyst expectations.

If it is determined that foreclosure on a commercial mortgage loan is probable and the fair value is less than the current loan balance, expected credit losses are measured as the difference between the amortized cost basis of the asset and fair value less estimated selling costs. Upon foreclosure, the commercial mortgage loan and related allowance are reversed, and the foreclosed property is recorded as real estate owned.

3. Recent Accounting Pronouncements

Adoption of New Accounting Standards

Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to disclosures for fair value measurements. The update eliminates the following disclosures: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy of timing of transfers between levels of the fair value hierarchy, and 3) the valuation processes for Level 3 fair value measurements. The new disclosures include changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated. The new disclosures are required on a prospective basis; all other provisions should be applied retrospectively. The update is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for the entire standard or only the provisions to eliminate or modify disclosure requirements. ACC early adopted the provisions of the standard to eliminate or modify disclosure requirements in the fourth quarter of 2018. ACC adopted the provisions of the standard to include new disclosures on January 1, 2020. The update does not have an impact on the ACC’s consolidated results of operations or financial condition. See Note 6 for additional disclosures on fair value measurements.

Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments

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. At adoption, the initial estimate of the expected credit losses will be recorded through retained earnings 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 credit loss model for Available-for-Sale debt securities did 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. 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 adopted the standard on January 1, 2020. The adoption of this update did not have a material impact on ACC’s consolidated results of operations or financial condition.

Income Statement – Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB updated the accounting standards related to the presentation of tax effects stranded in AOCI. The update allows a reclassification from AOCI to retained earnings for tax effects stranded in AOCI resulting from the legislation commonly

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

referred to as the Tax Cuts and Jobs Act (“Tax Act”). The election of the update was optional. The update was effective for fiscal years beginning after December 15, 2018. Entities could record the impacts either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. ACC adopted the standard on January 1, 2019 and elected not to reclassify the stranded tax effects in AOCI.

Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB updated the accounting standards to amend the hedge accounting recognition and presentation requirements. The objectives of the update are to better align the financial reporting of hedging relationships to the economic results of an entity’s risk management activities and simplify the application of the hedge accounting guidance. The update also adds new disclosures and amends existing disclosure requirements. The standard was effective for interim and annual periods beginning after December 15, 2018, and was required to be applied on a modified retrospective basis. ACC adopted the standard on January 1, 2019. The adoption did not have a material impact on ACC’s consolidated results of operations or financial condition.

Receivables – Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB updated the accounting standards to shorten the amortization period for certain purchased callable debt securities held at a premium. Under previous guidance, premiums were generally amortized over the contractual life of the security. The amendments require the premium to be amortized to the earliest call date. The update applies to securities with explicit, non-contingent call features that are callable at fixed prices and on preset dates. The standard was effective for interim and annual periods beginning after December 15, 2018, and was required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ACC adopted the standard on January 1, 2019. The adoption did not have a material impact on ACC’s consolidated results of operations or financial condition.

Future Adoption of New Accounting Standards

Reference Rate Reform – Expedients for Contract Modifications

In March 2020, the FASB updated the accounting standards to provide optional expedients and exceptions for applying GAAP to contracts, hedging or other transactions that are affected by reference rate reform (i.e., the elimination of LIBOR). The following expedients are provided for modified contracts whose reference rate is changed: 1) receivables and debt contracts are accounted for prospectively by adjusting the effective interest rate, 2) leases are accounted for as a continuation of the existing contracts with no reassessments of the lease classification and discount rate or remeasurements of lease payments that otherwise would be required, and 3) an entity is not required to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract. When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions. ACC is currently evaluating the impact of electing to adopt the standard on its consolidated results of operations and financial condition.

Income Taxes – Simplifying the Accounting for Income Taxes

In December 2019, the FASB updated the accounting standards to simplify the accounting for income taxes. The update eliminates certain exceptions to accounting principles related to intraperiod tax allocation (prospective basis), deferred tax liabilities related to outside basis differences (modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption) and year-to-date losses in interim periods (prospective basis). The update also amends existing guidance related to situations when an entity receives a step-up in the tax basis of goodwill (prospective basis), allocation of income tax expense when members of a consolidated tax filing group issue separate financial statements (retrospective basis for all periods presented), interim recognition of enactment of tax laws or rate changes (prospective basis) and franchise taxes and other taxes partially based on income (retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption). The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The method of adoption is noted parenthetically after each amendment above. ACC is currently evaluating the impact of the standard on its consolidated results of operations and financial condition.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

4. Investments

Investments in unaffiliated issuers were as follows:


	June 30, 2020			December 31, 2019
			(in thousands)
Available-for-Sale securities:
Fixed maturities, at fair value (net of allowance for credit losses: 2020, nil; amortized cost: 2020, $7,140,406; 2019, $7,362,814)	$	7,157,517		$	7,376,772
Commercial mortgage loans and syndicated loans, at cost (net of allowance for credit losses: 2020, $3,228; 2019, $3,022; fair value: 2020, $267,165; 2019, $272,454)	272,556			269,859
Equity securities, at fair value (cost: 2020, $299; 2019, $299)	189			188
Certificate loans — secured by certificate reserves, at cost, which approximates fair value	233			216
Total	$	7,430,495		$	7,647,035

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


Description of Securities	June 30, 2020
			Amortized Cost			Gross Unrealized Gains				Gross Unrealized Losses			Allowance for Credit Losses	Fair Value
	(in thousands)
Residential mortgage backed securities	$	2,968,565		$	38,800	$	(6,572)	$	—		$	3,000,793
Corporate debt securities	490,792			10,939		—		—			501,731
Commercial mortgage backed securities	1,474,104			6,695		(27,926)		—			1,452,873
Asset backed securities	723,719			2,348		(8,303)		—			717,764
State and municipal obligations	19,495			299		—		—			19,794
U.S. government and agency obligations	1,463,731			833		(2)		—			1,464,562
Total	$	7,140,406		$	59,914	$	(42,803)	$	—		$	7,157,517


Description of Securities	December 31, 2019
			Amortized Cost			Gross Unrealized Gains				Gross Unrealized Losses	Fair Value
	(in thousands)
Residential mortgage backed securities	$	3,052,502		$	16,238	$	(9,022)	$	3,059,718
Corporate debt securities	519,365			5,580		(108)		524,837
Commercial mortgage backed securities	1,452,823			1,017		(2,949)		1,450,891
Asset backed securities	627,380			3,485		(1,162)		629,703
State and municipal obligations	32,622			223		(105)		32,740
U.S. government and agency obligations	1,678,122			762		(1)		1,678,883
Total	$	7,362,814		$	27,305	$	(13,347)	$	7,376,772

As of June 30, 2020 and December 31, 2019, accrued interest of $10.5 million and $12.9 million, respectively, is excluded from the amortized cost basis of Available-for-Sale securities in the tables above and is recorded in receivables on the Consolidated Balance Sheets.

As of June 30, 2020 and December 31, 2019, investment securities with a fair value of $310 thousand and $133 thousand, respectively, were pledged to meet contractual obligations under derivative contracts.

As of June 30, 2020 and December 31, 2019, fixed maturity securities comprised approximately 89% and 92%, 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 June 30, 2020 and December 31, 2019, approximately $7.0 million and $8.3 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.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

A summary of fixed maturity securities by rating was as follows:


Ratings	June 30, 2020												December 31, 2019
			Amortized Cost			Fair Value				Percent of Total Fair Value			Amortized Cost		Fair Value	Percent of Total Fair Value
	(in thousands, except percentages)
AAA	$	6,215,198		$	6,218,102	87	%	$	6,551,393		$	6,554,916	89	%
AA	273,967			274,774		4		127,621			128,753		2
A	302,779			307,750		4		289,553			293,204		4
BBB	326,884			335,473		5		381,044			386,791		5
Below investment grade	21,578			21,418		—		13,203			13,108		—
Total fixed maturities	$	7,140,406		$	7,157,517	100	%	$	7,362,814		$	7,376,772	100	%

As of June 30, 2020 and December 31, 2019, approximately 35% and 32%, respectively, of securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities.

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


Description of Securities	June 30, 2020
		Less than 12 months										12 months or more										Total
		Number of Securities			Fair Value		Unrealized Losses⁽¹⁾	Number of Securities				Fair Value		Unrealized Losses ⁽¹⁾			Number of Securities			Fair Value	Unrealized Losses⁽¹⁾
	(in thousands, except number of securities)
Residential mortgage backed securities	74		$	562,343	$	(3,584)	64	$	531,932	$	(2,988)		138		$	1,094,275		$	(6,572)
Commercial mortgage backed securities	29		681,156		(26,016)		7	136,931		(1,910)			36		818,087			(27,926)
Asset backed securities	33		339,391		(4,463)		9	147,029		(3,840)			42		486,420			(8,303)

U.S. government and agency obligations	2		124,907		(2)		—	—		—			2		124,907			(2)
Total	138		$	1,707,797	$	(34,065)	80	$	815,892	$	(8,738)		218		$	2,523,689		$	(42,803)

⁽¹⁾Unrealized losses of nil due to credit-related factors is recorded in the allowance for credit losses as of June 30, 2020.


Description of Securities	December 31, 2019
		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	64		$	987,968	$	(3,731)	90	$	776,834	$	(5,291)		154		$	1,764,802		$	(9,022)
Corporate debt securities	1		1,201		—		8	52,348		(108)			9		53,549			(108)
Commercial mortgage backed securities	33		891,414		(1,662)		24	232,184		(1,287)			57		1,123,598			(2,949)
Asset backed securities	8		59,048		(95)		14	183,116		(1,067)			22		242,164			(1,162)
State and municipal obligations	—		—		—		1	2,705		(105)			1		2,705			(105)
U.S. government and agency obligations	2		99,606		(1)		—	—		—			2		99,606			(1)
Total	108		$	2,039,237	$	(5,489)	137	$	1,247,187	$	(7,858)		245		$	3,286,424		$	(13,347)

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

As part of ACC’s ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities during the six months ended June 30, 2020 is attributable to wider credit spreads, partially offset by lower interest rates. Consistent with the accounting policy described in Note 2, ACC did not recognize these unrealized losses in earnings because it was determined that such losses were due to non-credit factors. ACC does not intend to sell these securities and does not believe that it is more likely than not that ACC will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. As of June 30, 2020, 96% of the total of Available-for-Sale securities with gross unrealized losses were considered investment grade.

There were no amounts recognized in the allowance for credit losses on Available-for-Sale securities during the three months and six months ended June 30, 2020. Prior to January 1, 2020, credit losses on Available-for-Sale securities were not recorded in an allowance but were recorded as a reduction of the book value of the security if the security was other-than-temporarily impaired.

The change in net unrealized gains (losses) on securities in OCI 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 impairments to credit losses.

The following table presents a rollforward of the net unrealized gains (losses) on Available-for-Sale securities included in AOCI:


	Net Unrealized Gains (Losses) on Securities		Deferred Income Tax		Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Gains (Losses) on Securities
	(in thousands)
Balance at January 1, 2019	$	(46,958)	$	13,127	$	(33,831)
Net unrealized gains (losses) on securities arising during the period⁽¹⁾	68,922		(16,731)		52,191
Reclassification of net (gains) losses on securities included in net income	(88)		18		(70)
Balance at June 30, 2019	$	21,876	$	(3,586)	$	18,290	(2)

Balance at January 1, 2020	$	13,958	$	(1,695)	$	12,263
Net unrealized gains (losses) on securities arising during the period⁽¹⁾	3,786		(892)		2,894
Reclassification of net (gains) losses on securities included in net income	(633)		133		(500)
Balance at June 30, 2020	$	17,111	$	(2,454)	$	14,657

⁽¹⁾Net unrealized gains (losses) on securities arising during the period include impairments on Available-for-Sale securities related to factors other than credit that were recognized in OCI during the period.

⁽²⁾Includes $2 thousand of noncredit related impairments on securities and net unrealized gains (losses) on previously impaired securities as of June 30, 2019.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020				2019
	(in thousands)
Gross realized gains	$	392	$	159	$	633	$	159
Gross realized losses	—		(38)		—		(71)
Total	$	392	$	121	$	633	$	88

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Available-for-Sale securities by contractual maturity as of June 30, 2020 were as follows:


	Amortized Cost			Fair Value
			(in thousands)
Due within one year	$	1,706,473		$	1,709,991
Due after one year through five years	266,737			275,208
Due after five years through 10 years	808			888
Due after 10 years	—			—
	1,974,018			1,986,087
Residential mortgage backed securities	2,968,565			3,000,793
Commercial mortgage backed securities	1,474,104			1,452,873
Asset backed securities	723,719			717,764
Total	$	7,140,406		$	7,157,517

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 were not included in the maturities distribution.

5. Financing Receivables

Financing receivables are comprised of commercial loans and certificate loans. See Note 2 for information regarding ACC’s accounting policies related to financing receivables and the allowance for credit losses.

Allowance for Credit Losses

The following tables present a rollforward of the allowance for credit losses for the six months ended June 30:


	Commercial Loans
			(in thousands)
Balance, December 31, 2019 ⁽¹⁾	$	3,022
Cumulative effect of adoption of current expected credit losses guidance	(771)
Balance, January 1, 2020	2,251
Provisions	977


Balance, June 30, 2020	$	3,228

⁽¹⁾Prior to January 1, 2020, the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset.


	Commercial Loans
			(in thousands)
Balance, January 1, 2019	$	3,120

Charge-offs	(98)

Balance, June 30, 2019	$	3,022

As of June 30, 2020 and December 31, 2019, accrued interest on commercial loans was $1.1 million and $1.2 million, respectively, and is recorded in receivables on the Consolidated Balance Sheets and excluded from the amortized cost basis of commercial loans.

Purchases and Sales

During the three months ended June 30, 2020 and 2019, ACC purchased $3.6 million and $10.7 million, respectively, of syndicated loans and sold nil and $2.1 million, respectively, of syndicated loans. During the six months ended June 30, 2020 and 2019, ACC purchased $19.0 million and $19.1 million, respectively, of syndicated loans and sold $0.7 million and $6.0 million, respectively, of syndicated loans.

ACC has not acquired any loans with deteriorated credit quality as of the acquisition date.

Credit Quality Information

Nonperforming loans were $4.2 million and $2.3 million as of June 30, 2020 and December 31, 2019, respectively. All other loans were considered to be performing.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Commercial Loans

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. Loan-to-value ratio is the primary credit quality indicator included in this review. Total commercial mortgage loans past due were nil as of both June 30, 2020 and December 31, 2019.

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 as of both June 30, 2020 and December 31, 2019. 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. As of June 30, 2020, commercial mortgage loan modifications due to the COVID-19 pandemic consisted of five loans with a total unpaid balance of $8.9 million. Modifications primarily consisted of short-term forbearance and interest only payments.

The table below presents the amortized cost basis of commercial mortgage loans as of June 30, 2020 by year of origination and loan-to-value ratio:


Loan-to-Value Ratio	2020			2019		2018		2017		2016		Prior		Total
			(in thousands)
> 100%	$	—		$	—	$	—	$	—	$	—	$	—	$	—
80% - 100%	—			—		3,376		—		—		—		3,376
60% - 80%	4,279			13,130		—		3,087		—		3,715		24,211
40% - 60%	—			6,362		3,581		7,872		1,402		8,177		27,394
< 40%	—			2,736		7,861		11,950		5,867		40,758		69,172
Total	$	4,279		$	22,228	$	14,818	$	22,909	$	7,269	$	52,650	$	124,153

Loan-to-value ratio is based on income and expense data provided by borrowers at least annually and long-term capital rate assumptions based on property type.

In addition, ACC reviews the concentrations of credit risk by region and property type. Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:


	Loans									Percentage
			June 30, 2020			December 31, 2019			June 30, 2020			December 31, 2019
			(in thousands)
East North Central	$	6,181		$	6,424		5	%		5	%
East South Central	3,943			4,266			3			4
Middle Atlantic	13,522			15,495			11			12
Mountain	13,196			13,556			10			11
New England	7,088			7,191			6			6
Pacific	42,485			39,342			34			31
South Atlantic	18,181			18,835			15			15
West North Central	7,041			7,396			6			6
West South Central	12,516			12,876			10			10
	124,153			125,381			100	%		100	%
Less: allowance for credit losses	904			2,341
Total	$	123,249		$	123,040

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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


	Loans									Percentage
			June 30, 2020			December 31, 2019			June 30, 2020			December 31, 2019
			(in thousands)
Apartments	$	31,323		$	32,162		25	%		25	%
Industrial	27,002			24,969			22			20
Mixed use	11,821			12,105			10			10
Office	14,645			14,952			12			12
Retail	38,454			39,719			31			32
Hotel	374			432			—			—
Other	534			1,042			—			1
	124,153			125,381			100	%		100	%
Less: allowance for credit losses	904			2,341
Total	$	123,249		$	123,040

Syndicated Loans

The recorded investment in syndicated loans as of June 30, 2020 and December 31, 2019 was $151.6 million and $147.5 million, respectively. ACC’s syndicated loan portfolio is diversified across industries and issuers. Total syndicated loans past due were nil as of both June 30, 2020 and December 31, 2019. ACC assigns an internal risk rating to each syndicated loan in its portfolio ranging from 1 through 5, with 5 reflecting the lowest quality.

The table below presents the amortized cost basis of syndicated loans as of June 30, 2020 by origination year and internal risk rating:


Internal Risk Rating	2020			2019		2018		2017		2016		Prior		Total
			(in thousands)
Risk 5	$	—		$	—	$	295	$	—	$	—	$	—	$	295
Risk 4	—			1,712		982		2,186		300		1,891		7,071
Risk 3	1,247			2,450		3,292		7,357		2,182		4,888		21,416
Risk 2	2,655			11,985		16,682		15,519		5,832		13,958		66,631
Risk 1	2,829			7,469		13,855		15,880		5,064		11,121		56,218
Total	$	6,731		$	23,616	$	35,106	$	40,942	$	13,378	$	31,858	$	151,631

Certificate Loans

Certificate loans do not exceed the cash surrender value at origination. As there is minimal risk of loss related to certificate loans, ACC does not record an allowance for credit losses.

Troubled Debt Restructurings

There were no loans accounted for as a troubled debt restructuring by ACC during both the three months and six months ended June 30, 2020 and 2019. The loan modifications granted during the three months ended June 30, 2020 are related to the COVID-19 pandemic and as such did not meet the definition of troubled debt restructurings. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

6. 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:


	June 30, 2020
			Level 1			Level 2			Level 3			Total
			(in thousands)
Assets
Cash equivalents	$	149,994		$	461,865		$	—		$	611,859
Available-for-Sale securities:
Residential mortgage backed securities	—			3,000,793			—			3,000,793
Corporate debt securities	—			488,689			13,042			501,731
Commercial mortgage backed securities	—			1,452,873			—			1,452,873
Asset backed securities	—			713,514			4,250			717,764
State and municipal obligations	—			19,794			—			19,794
U.S. government and agency obligations	1,464,562			—			—			1,464,562
Total Available-for-Sale securities	1,464,562			5,675,663			17,292			7,157,517
Equity securities	—			189			—			189
Equity derivative contracts	47			34,581			—			34,628
Total assets at fair value	$	1,614,603		$	6,172,298		$	17,292		$	7,804,193

Liabilities
Stock market certificate embedded derivatives	$	—		$	8,609		$	—		$	8,609
Equity derivative contracts	—			27,117			—			27,117
Total liabilities at fair value	$	—		$	35,726		$	—		$	35,726

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)


	December 31, 2019
			Level 1			Level 2			Level 3			Total
			(in thousands)
Assets
Cash equivalents	$	—		$	365,867		$	—		$	365,867
Available-for-Sale securities:
Residential mortgage backed securities	—			3,059,718			—			3,059,718
Corporate debt securities	—			510,567			14,270			524,837
Commercial mortgage backed securities	—			1,450,891			—			1,450,891
Asset backed securities	—			624,869			4,834			629,703
State and municipal obligations	—			32,740			—			32,740
U.S. government and agency obligations	1,678,883			—			—			1,678,883
Total Available-for-Sale securities	1,678,883			5,678,785			19,104			7,376,772
Equity securities	—			116			72			188
Equity derivative contracts	6			56,038			—			56,044
Total assets at fair value	$	1,678,889		$	6,100,806		$	19,176		$	7,798,871

Liabilities
Stock market certificate embedded derivatives	$	—		$	13,961		$	—		$	13,961
Equity derivative contracts	—			43,598			—			43,598
Total liabilities at fair value	$	—		$	57,559		$	—		$	57,559

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


	Available-for-Sale Securities
			Corporate Debt Securities			Asset Backed Securities			Total
			(in thousands)
Balance, April 1, 2020	$	12,988		$	4,834		$	17,822
Total gains (losses) included in:
Net income	(10)			12			2		(1)
Other comprehensive income (loss)	64			(596)			(532)




Balance, June 30, 2020	$	13,042		$	4,250		$	17,292

Changes in unrealized gains (losses) in net income relating to assets held at June 30, 2020	$	(10)		$	12		$	2	(1)
Changes in unrealized gains (losses) in other comprehensive income (loss) relating to assets held at June 30, 2020	$	64		$	(596)		$	(532)

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)


	Available-for-Sale Securities												Equity Securities
			Residential Mortgage Backed Securities			Corporate Debt Securities			Total
			(in thousands)
Balance, April 1, 2019	$	19,391		$	32,055		$	51,446		$	—
Total gains (losses) included in:
Net income	—			(16)			(16)		(1)	3		(1)
Other comprehensive income (loss)	12			168			180			—
Purchases	72,883			—			72,883			—
Settlements	(1,615)			(13,000)			(14,615)			—
Transfers into Level 3	—			—			—			118
Transfers out of Level 3	(3,226)			—			(3,226)			—
Balance, June 30, 2019	$	87,445		$	19,207		$	106,652		$	121

Changes in unrealized gains (losses) in net income relating to assets held at June 30, 2019	$	—		$	(16)		$	(16)	(1)	$	3	(1)


	Available-for-Sale Securities											Equity Securities
			Corporate Debt Securities			Asset Backed Securities			Total
			(in thousands)
Balance, January 1, 2020	$	14,270		$	4,834		$	19,104		$	72
Total gains (losses) included in:
Net income	(20)			22			2		(1)	—
Other comprehensive income (loss)	92			(606)			(514)			—

Settlements	(1,300)			—			(1,300)			—

Transfers out of Level 3	—			—			—			(72)
Balance, June 30, 2020	$	13,042		$	4,250		$	17,292		$	—

Changes in unrealized gains (losses) in net income relating to assets held at June 30, 2020	$	(20)		$	22		$	2	(1)	$	—
Changes in unrealized gains (losses) in other comprehensive income (loss) relating to assets held at June 30, 2020	$	92		$	(606)		$	(514)		$	—


	Available-for-Sale Securities															Equity Securities
			Residential Mortgage Backed Securities			Corporate Debt Securities			Commercial Mortgage Backed Securities			Total
			(in thousands)
Balance, January 1, 2019	$	62,588		$	41,842		$	19,787		$	124,217		$	—
Total gains (losses) included in:
Net income	22			(31)			—			(9)		(1)	3		(1)
Other comprehensive income (loss)	19			396			—			415			—
Purchases	72,883			—			—			72,883			—
Settlements	(4,842)			(23,000)			—			(27,842)			—
Transfers into Level 3	—			—			—			—			118
Transfers out of Level 3	(43,225)			—			(19,787)			(63,012)			—
Balance, June 30, 2019	$	87,445		$	19,207		$	—		$	106,652		$	121

Changes in unrealized gains (losses) in net income relating to assets held at June 30, 2019	$	—		$	(31)		$	—		$	(31)	(1)	$	3	(1)

⁽¹⁾Included in investment income in the Consolidated Statements of Operations.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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 values that are now based on a single non-binding broker quote.

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:

June 30, 2020

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(in thousands)

Corporate debt securities
(private placements)

13,038

Discounted cash flow

Yield/spread to U.S. Treasuries

1.5% - 1.7%

1.6%

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(in thousands)

Corporate debt securities
(private placements)

14,267

Discounted cash flow

Yield/spread to U.S. Treasuries

0.9% - 1.1%

1.0%

The weighted average for the spread to U.S. Treasuries for corporate debt securities (private placements) is weighted based on the security’s market value as a percentage of the aggregate market value of the securities.

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.

Uncertainty of Fair Value Measurements

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 have resulted 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.

Cash Equivalents

Cash equivalents include time deposits and other highly liquid investments with original or remaining maturities at the time of purchase of 90 days or less. U.S. Treasuries are classified as Level 1. ACC’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.

Available-for-Sale and Equity 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 include U.S. Treasuries.

Level 2 securities include residential mortgage backed securities, corporate bonds, commercial mortgage backed securities, asset backed securities, state and municipal obligations and equity securities. 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 include certain non-agency residential mortgage backed securities, corporate bonds, asset backed securities, commercial mortgage backed securities and equity securities. The fair value of these Level 3 securities 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.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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 both June 30, 2020 and December 31, 2019. See Note 7 and Note 8 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.

Fair Value on a Nonrecurring Basis

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

Assets and Liabilities Not Reported at Fair Value

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.


	June 30, 2020
			Carrying Value			Fair Value
									Level 1			Level 2			Level 3	Total
			(in thousands)
Financial Assets
Syndicated loans	$	149,307		$	—		$	130,507		$	11,777		$	142,284
Commercial mortgage loans	123,249			—			—			124,881			124,881
Certificate loans	233			—			233			—			233
Financial Liabilities
Certificate reserves	$	7,442,470		$	—		$	—		$	7,443,980		$	7,443,980


	December 31, 2019
			Carrying Value			Fair Value
									Level 1			Level 2			Level 3	Total
			(in thousands)
Financial Assets
Syndicated loans	$	146,819		$	—		$	140,294		$	6,287		$	146,581
Commercial mortgage loans	123,040			—			—			125,873			125,873
Certificate loans	216			—			216			—			216
Financial Liabilities
Certificate reserves	$	7,508,362		$	—		$	—		$	7,497,180		$	7,497,180

See Note 5 for additional information on syndicated, commercial mortgage and certificate loans. Certificate reserves represent customer deposits for fixed rate certificates and stock market certificates.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

7. 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 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:


	June 30, 2020
			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	$	34,581		$	—		$	34,581		$	(27,117)		$	(6,903)	$	561
Exchange-traded	47			—			47			—			—		47
Total	$	34,628		$	—		$	34,628		$	(27,117)		$	(6,903)	$	608


	December 31, 2019
			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	$	56,038		$	—		$	56,038		$	(43,598)		$	(12,185)	$	255
Exchange-traded	6			—			6			—			—		6
Total	$	56,044		$	—		$	56,044		$	(43,598)		$	(12,185)	$	261

⁽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:


	June 30, 2020
			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	$	27,117		$	—		$	27,117		$	(27,117)		$	—	$	—
Total	$	27,117		$	—		$	27,117		$	(27,117)		$	—	$	—


	December 31, 2019
			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	$	43,598		$	—		$	43,598		$	(43,598)		$	—	$	—
Total	$	43,598		$	—		$	43,598		$	(43,598)		$	—	$	—

⁽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.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

In the tables above, the amount 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.

When the fair value of collateral accepted by ACC is less than the amount due to ACC, there is a risk of loss if the counterparty fails to perform or provide additional collateral. To mitigate this risk, ACC monitors collateral values regularly and requires additional collateral when necessary. When the value of collateral pledged by ACC declines, it may be required to post additional collateral.

Cash collateral accepted by ACC is reflected in other liabilities. See Note 8 for additional disclosures related to ACC’s derivative instruments.

8. 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.

ACC uses derivatives as economic hedges of equity risk related to 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:


	June 30, 2020														December 31, 2019
			Notional			Gross Fair Value									Notional		Gross Fair Value
									Assets			Liabilities						Assets	Liabilities
			(in thousands)
Derivatives not designated as hedging instruments
Equity contracts ⁽¹⁾	$	656,281		$	34,628		$	27,117		$	742,387		$	56,044	$	43,598
Embedded derivatives
Stock market certificates ⁽²⁾	N/A			—			8,609			N/A			—		13,961
Total derivatives	$	656,281		$	34,628		$	35,726		$	742,387		$	56,044	$	57,559

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 6 for additional information regarding ACC’s fair value measurement of derivative instruments.

The following table presents 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 June 30,										Six Months Ended June 30,
								2020				2019				2020			2019
		(in thousands)
Equity contracts
Stock market certificates	Net provision for certificate reserves	$	5,112			$	1,994			$	(2,313)			$	7,441
Stock market certificates embedded derivatives	Net provision for certificate reserves	(4,853)				(297)		(1)		1,993				(5,839)		(1)
Total				$	259			$	1,697			$	(320)			$	1,602

⁽¹⁾These amounts include the impact of an out-of-period correction recorded in the second quarter of 2019. See Note 1 for more information.

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 CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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. The SRC was closed to new sales effective April 1, 2020. 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 both June 30, 2020 and December 31, 2019.

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 and collateral arrangements whenever practical. See Note 7 for additional information on ACC’s credit exposure related to derivative assets.

9. 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.

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.

10. Shareholder’s Equity

The following table provides information related to amounts reclassified from AOCI:


Accumulated Other Comprehensive Income (Loss) Reclassification	Location of (Gain) Loss Recognized in Income		Three Months Ended June 30,									Six Months Ended June 30,
						2020			2019			2020			2019
				(in thousands)
Unrealized net (gains) losses on Available-for-Sale securities		Net realized gain (loss) on investments		$	(392)		$	(121)		$	(633)		$	(88)
Tax expense (benefit)		Income tax expense (benefit)				82			25			133			18
Net of tax							$	(310)		$	(96)		$	(500)		$	(70)

During the three months and six months ended June 30, 2020, ACC received cash contributions from Ameriprise Financial of nil and $10.0 million, respectively. During the three months and six months ended June 30, 2019, ACC received cash contributions from Ameriprise Financial of nil and $4.5 million, respectively. ACC received these contributions to maintain compliance with capital requirements and these contributions were outside of the Capital Support Agreement between Ameriprise Financial and ACC. See additional discussion on the Capital Support Agreement in ACC’s 2019 10-K.

During the three months and six months ended June 30, 2020, ACC paid dividends to Ameriprise Financial of nil and $32.0 million, respectively. ACC did not pay any dividends to Ameriprise Financial during the three months and six months ended June 30, 2019.

AMERIPRISE CERTIFICATE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

11. Income Taxes

ACC’s effective tax rate was 23.4% and 25.7% for the three months ended June 30, 2020 and 2019, respectively. ACC’s effective tax rate was 24.3% and 25.2% for the six months ended June 30, 2020 and 2019, respectively. The effective tax rate for the three months ended June 30, 2020 is higher than the statutory rate primarily as a result of state income taxes, net of federal benefit. The effective tax rate for the three months ended June 30, 2019 is higher than the statutory rate primarily as a result of state income taxes, net of federal benefit and uncertain tax positions. The effective tax rates for the six months ended June 30, 2020 and 2019 are higher than the statutory rate primarily as a result of state income taxes, net of federal benefit. The decrease in the effective tax rate for the three months ended June 30, 2020 compared to the prior year period is primarily due to a reduction in uncertain tax positions.

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 June 30, 2020 and December 31, 2019.

As of June 30, 2020 and December 31, 2019, ACC had $4.0 million and $3.8 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $3.2 million and $3.0 million, net of federal tax benefits, of the unrecognized tax benefits as of June 30, 2020 and December 31, 2019, 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 $70 thousand in the next 12 months primarily due to state exams.

ACC recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. ACC recognized a net increase of $32 thousand and $68 thousand in interest and penalties for the three months and six months ended June 30, 2020, respectively. ACC recognized a net increase of $56 thousand and $98 thousand in interest and penalties for the three months and six months ended June 30, 2019, respectively. As of June 30, 2020 and December 31, 2019, ACC had a payable of $448 thousand and $380 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 state jurisdictions. The federal statute of limitations are closed on years through 2015, except for one issue for 2014 and 2015 which was claimed on amended returns. The Internal Revenue Service (“IRS”) is currently auditing Ameriprise Financial’s U.S. income tax returns for 2016, 2017 and 2018. Ameriprise Financial’s or its subsidiaries’, including ACC’s, state income tax returns are currently under examination by various jurisdictions for years ranging from 2010 through 2018.

AMERIPRISE CERTIFICATE COMPANY

ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS

The following information should be read in conjunction with Ameriprise Certificate Company’s (“ACC’s”) Consolidated Financial Statements and 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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 (“2019 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, LLC (“AFS”), an affiliate of ACC. AFS 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.

Recent Developments Regarding the COVID-19 Pandemic

The coronavirus disease 2019 (“COVID-19”) pandemic presents ongoing significant economic and societal disruption and market volatility, which has had and will continue to have ongoing impacts to ACC’s business and operating environment driven by significant volatility in the interest rate and equity markets and the potential associated implications to client behavior. There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it, or its impact on the overall economy.

ACC and its affiliates continue to implement comprehensive strategies to navigate the operating environment spurred by the pandemic. During the first quarter, ACC and its affiliates implemented a work-from-home protocol for virtually all of the employee population, restricted business travel, and provided resources for complying with the guidance from the World Health Organization, the U.S. Centers for Disease Control and governments. ACC and its affiliates have begun a thoughtful phased reopening of its offices in various locations while complying with applicable health agencies’ guidelines and governmental orders. ACC and its affiliates continue to operate successfully and satisfy elevated customer service volumes in this unique time – client service and the health and safety of ACC’s and its affiliates’ clients and employees remain priorities while the employee population has various work arrangements. The pandemic strategy ACC and its affiliates have employed is flexible and scalable, recognizing this pandemic is widespread and may occur in multiple waves, affecting different communities at different times with varying levels of severity.

There was significant economic volatility during the first half of 2020 and ACC’s results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic. There is still uncertainty surrounding the magnitude, duration, speed and reach of the ongoing global pandemic, as well as the impact of actions that have been or could be taken by governmental authorities, clients or other third parties. While ACC and its affiliates have successfully adapted to a virtual work environment and deployed numerous adaptive business strategies in recent months, the pandemic and its accompanying impact on the global financial markets and on ACC’s operations and financial results will cause results not to be comparable to the same period in previous years. The results presented in this report are not necessarily indicative of future operating results. For further information regarding the impact of the COVID-19 pandemic, and any potentially material effects, see Item 1A, “Risk Factors” in this report.

Significant Accounting Policies

ACC’s significant accounting policies are discussed in detail in Note 2 to the Consolidated Financial Statements and in “Management’s Narrative Analysis – Recent Accounting Pronouncements and Significant Accounting Policies” in ACC’s 2019 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 3 to the Consolidated Financial Statements.

Results of Operations for the Six Months Ended June 30, 2020 and 2019

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”).

AMERIPRISE CERTIFICATE COMPANY

Net income decreased $8.4 million, or 35%, to $15.4 million for the six months ended June 30, 2020 compared to $23.8 million for the prior year period primarily due to lower investment income, partially offset by lower net provision for certificate reserves, tax expense and investment expenses.

Investment income decreased $40.8 million, or 33%, to $83.2 million for the six months ended June 30, 2020 compared to $124.0 million for the prior year period reflecting a decrease in the average invested asset yield and lower average investment balances.

Investment expenses decreased $2.8 million, or 11%, to $21.7 million for the six months ended June 30, 2020 compared to $24.5 million for the prior year period primarily due to volume-driven decreases in distribution and investment advisory fees.

Net provision for certificate reserves decreased $26.9 million, or 40%, to $40.9 million for the six months ended June 30, 2020 compared to $67.8 million for the prior year period primarily due to lower average client crediting rates as well as lower average certificate balances.

ACC’s effective tax rate was 24.3% for the six months ended June 30, 2020 compared to 25.2% for the prior year period.

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 6 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 track,” “project,” “continue,” “able to remain,” “resume,” “deliver,” “develop,” “evolve,” “drive,” “enable,” “flexibility,” “scenario,” “case” 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 June 30, 2020.

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.

AMERIPRISE CERTIFICATE COMPANY

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 9 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

ITEM 1A. RISK FACTORS

ACC is including the following risk factor which should be read in conjunction with the risk factors provided in Part I, Item 1A of ACC’s 2019 10-K.

The COVID-19 pandemic creates significant risks and uncertainties for ACC’s business.

The ongoing coronavirus disease 2019 (“COVID-19”) pandemic creates significant and pervasive societal, economic and market disruption globally. In particular, global financial markets have seen increased volatility and significant changes to the value of investments. The extent to which the COVID-19 pandemic impacts ACC’s business, results of operations, and financial condition will depend on current and future developments. These developments are highly uncertain, including the scope, duration and severity of the pandemic, the effectiveness of ACC and its affiliates’ remote working and phased office reopening plans, the measures that may be taken by various governmental authorities in response to the outbreak (such as legislative action, stimulus, quarantines and travel restrictions, effectiveness of health care, and new or interim regulation), the actions of other third parties in response to the pandemic, and the possible further impacts on the global economy. Given the uncertainty of future developments, ACC seeks to manage its risks effectively, but ACC’s ability to do so is subject to the inherent limitations of obtaining timely, reliable analysis and information in a situation that continues to develop. No assurance can be given that the steps ACC and its affiliates have taken will continue to be effective or appropriate.

Starting at the end of the first quarter of 2020, the COVID-19 pandemic impacted (and will likely continue to impact) ACC. Consumer demand, client investing decisions in light of ongoing economic uncertainty, investment income, owned asset values, and other financial assumptions and reserve calculations have been (and may further be) negatively impacted from a decline and volatility of asset prices, reduction in interest rates, widening of credit spreads, credit deterioration, decreased liquidity in trading markets and other economic and market effects of the global pandemic. ACC and its affiliates are actively monitoring the potential direct and indirect impacts that the COVID-19 pandemic may have on its business. Should these conditions be prolonged or worsen for an extended time period, ACC could experience volatility and uncertainty in volumes, uncertainty in availability and price levels of financial assets and hedges, reduced client activity and fees, increased constraints and costs of capital, and demand for ACC’s products and services and other negative impacts on ACC’s financial position.

The COVID-19 pandemic may also affect the ability of ACC and its affiliates’ suppliers, distributors, vendors and other counterparties to provide products and services and otherwise fulfill their commitments to ACC and its affiliates. In addition, the market and economic uncertainty and the effects of the COVID-19 pandemic will heighten the other risks described in the section entitled “Risk Factors” in ACC’s most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K.

ITEM 6. EXHIBITS

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 Jason S. Bartylla pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32*			Certification of Abu M. Arif and Jason S. Bartylla pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewithin.

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:

August 10, 2020

By:

/s/ Abu M. Arif

Abu M. Arif

Chief Executive Officer

Date:

August 10, 2020

By:

/s/ Jason S. Bartylla

Jason S. Bartylla

Chief Financial Officer

Attached files

AMERIPRISE CERTIFICATE CO Reports

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