10-Q 1 riversourcelifeinsco03312017.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from_______________________to_______________________

Commission File No. 033-28976
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0823832
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1099 Ameriprise Financial Center, Minneapolis, Minnesota
 
55474
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  (612) 671-3131
 Former name, former address and former fiscal year, if changed since last report:   Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or 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 o
Accelerated Filer o
Non-Accelerated Filer x
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 3, 2017
Common Stock (par value $30 per share)
 
100,000 Shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
 
 
 
 
 


RIVERSOURCE LIFE INSURANCE COMPANY

FORM 10-Q
INDEX
Part I. Financial Information
 
Item 1. Financial Statements (Unaudited)
 
Consolidated Balance Sheets — March 31, 2017 and December 31, 2016
Consolidated Statements of Income — Three months ended March 31, 2017 and 2016
Consolidated Statements of Comprehensive Income — Three months ended March 31, 2017 and 2016
Consolidated Statements of Shareholder’s Equity — Three months ended March 31, 2017 and 2016
Consolidated Statements of Cash Flows — Three months ended March 31, 2017 and 2016
Notes to Consolidated Financial Statements
1. Basis of Presentation
2. Recent Accounting Pronouncements
3. Variable Interest Entities
4. Investments
5. Financing Receivables
6. Deferred Acquisition Costs and Deferred Sales Inducement Costs
7. Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities
8. Variable Annuity and Insurance Guarantees
9. Short-term Borrowings
10. Fair Values of Assets and Liabilities
11. Offsetting Assets and Liabilities
12. Derivatives and Hedging Activities
13. Shareholder’s Equity
14. Income Taxes
15. Contingencies
Item 2.  Management’s Narrative Analysis
Item 4.  Controls and Procedures
 
 
Part II.  Other Information
Item 1.  Legal Proceedings
Item 1A.  Risk Factors
Item 6.  Exhibits
Signatures
Exhibit Index


2


RIVERSOURCE LIFE INSURANCE COMPANY

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
March 31,
2017
 
December 31,
2016
(in millions, except share amounts)
Assets
 

 
 

Investments:
 

 
 

Available-for-Sale:
 

 
 

Fixed maturities, at fair value (amortized cost: 2017, $21,169; 2016, $21,464)
$
22,410

 
$
22,682

Common stocks, at fair value (cost: 2017 and 2016, $4)
8

 
10

Mortgage loans, at amortized cost (less allowance for loan losses: 2017 and 2016, $19)
2,862

 
2,874

Policy loans
830

 
830

Other investments
992

 
998

Total investments
27,102

 
27,394

Cash and cash equivalents
326

 
323

Reinsurance recoverables
2,642

 
2,623

Other receivables
202

 
262

Accrued investment income
226

 
237

Deferred acquisition costs
2,608

 
2,611

Other assets
3,747

 
4,305

Separate account assets
78,053

 
76,298

Total assets
$
114,906

 
$
114,053

 
 
 
 
Liabilities and Shareholder’s Equity
 

 
 

Liabilities:
 

 
 

Policyholder account balances, future policy benefits and claims
$
29,067

 
$
29,514

Short-term borrowings
200

 
200

Other liabilities
3,866

 
4,253

Separate account liabilities
78,053

 
76,298

Total liabilities
111,186

 
110,265

 
 
 
 
Shareholder’s equity:
 

 
 

Common stock, $30 par value; 100,000 shares authorized, issued and outstanding
3

 
3

Additional paid-in capital
2,466

 
2,466

Retained earnings
797

 
862

Accumulated other comprehensive income, net of tax
454

 
457

Total shareholder’s equity
3,720

 
3,788

Total liabilities and shareholder’s equity
$
114,906

 
$
114,053

See Notes to Consolidated Financial Statements.

3


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Revenues
 

 
 

Premiums
$
99

 
$
102

Net investment income
271

 
290

Policy and contract charges
483

 
469

Other revenues
100

 
98

Net realized investment gains
17

 
9

Total revenues
970

 
968

Benefits and expenses
 

 
 

Benefits, claims, losses and settlement expenses
322

 
226

Interest credited to fixed accounts
162

 
146

Amortization of deferred acquisition costs
57

 
90

Other insurance and operating expenses
177

 
177

Total benefits and expenses
718

 
639

Pretax income
252

 
329

Income tax provision
17

 
54

Net income
$
235

 
$
275

 
 
 
 
Supplemental Disclosures:
 

 
 
Total other-than-temporary impairment losses on securities
$
—

 
$
—

Portion of loss recognized in other comprehensive income (before taxes)
—

 
—

Net impairment losses recognized in net realized investment gains
$
—

 
$
—

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Net income
$
235

 
$
275

Other comprehensive income (loss), net of tax:
 
 
 
   Net unrealized gains (losses) on securities
(3
)
 
176

   Net unrealized gains on derivatives
1

 
1

Other
(1
)
 
—

Total other comprehensive income (loss), net of tax
(3
)
 
177

Total comprehensive income
$
232

 
$
452

See Notes to Consolidated Financial Statements.

4


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)
 
Common Shares
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive Income
 
Total
 
(in millions)
Balances at January 1, 2016(1)
$
3

 
$
2,465

 
$
1,176

 
$
395

 
$
4,039

Comprehensive income:
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
275

 
—

 
275

Other comprehensive income, net of tax
—

 
—

 
—

 
177

 
177

Total comprehensive income
 

 
 

 
 

 
 

 
452

Cash dividends to Ameriprise Financial, Inc.
—

 
—

 
(400
)
 
—

 
(400
)
Balances at March 31, 2016(1)
$
3

 
$
2,465

 
$
1,051

 
$
572

 
$
4,091

 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2017
$
3

 
$
2,466

 
$
862

 
$
457

 
$
3,788

Comprehensive income:
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
235

 
—

 
235

Other comprehensive loss, net of tax
—

 
—

 
—

 
(3
)
 
(3
)
Total comprehensive income
 

 
 

 
 

 
 

 
232

Cash dividends to Ameriprise Financial, Inc.
—

 
—

 
(300
)
 
—

 
(300
)
Balances at March 31, 2017
$
3

 
$
2,466

 
$
797

 
$
454

 
$
3,720

(1) Prior period retained earnings were restated in the fourth quarter of 2016. See Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
See Notes to Consolidated Financial Statements.


5


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Three Months Ended March 31,
2017
 
2016
(in millions)
Cash Flows from Operating Activities
 

 
 

Net income
$
235

 
$
275

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion, net
13

 
8

Deferred income tax expense (benefit)
(13
)
 
24

Contractholder and policyholder charges, non-cash
(90
)
 
(86
)
Loss from equity method investments
13

 
10

Net realized investment gains
(17
)
 
(11
)
Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains
—

 
2

Changes in operating assets and liabilities:
 

 
 

Deferred acquisition costs
3

 
27

Policyholder account balances, future policy benefits and claims, net
(352
)
 
730

Derivatives, net of collateral
280

 
(348
)
Reinsurance recoverables
(19
)
 
(39
)
Other receivables
36

 
(51
)
Accrued investment income
11

 
—

Other, net
(73
)
 
65

Net cash provided by operating activities
27

 
606

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Available-for-Sale securities:
 

 
 

Proceeds from sales
11

 
92

Maturities, sinking fund payments and calls
707

 
434

Purchases
(409
)
 
(534
)
Proceeds from sales, maturities and repayments of mortgage loans
115

 
408

Funding of mortgage loans
(103
)
 
(113
)
Proceeds from sales and collections of other investments
57

 
21

Purchase of other investments
(45
)
 
(36
)
Purchase of land, buildings, equipment and software
(1
)
 
(2
)
Change in policy loans, net
—

 
(5
)
Other, net
23

 
(1
)
Net cash provided by investing activities
355

 
264

See Notes to Consolidated Financial Statements.

6


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

 
Three Months Ended March 31,
2017
 
2016
(in millions)
Cash Flows from Financing Activities
 

 
 

Policyholder account balances:
 

 
 

Deposits and other additions
$
502

 
$
481

Net transfers (to) from separate accounts
(23
)
 
33

Surrenders and other benefits
(507
)
 
(497
)
Proceeds from lines of credit with Ameriprise Financial, Inc.
5

 
10

Payments on lines of credit with Ameriprise Financial, Inc.
(5
)
 
(10
)
Cash received for purchased options with deferred premiums
—

 
33

Cash paid for purchased options with deferred premiums
(51
)
 
(76
)
Cash dividends to Ameriprise Financial, Inc.
(300
)
 
(400
)
Net cash used in financing activities
(379
)
 
(426
)
Net increase in cash and cash equivalents
3

 
444

Cash and cash equivalents at beginning of period
323

 
370

Cash and cash equivalents at end of period
$
326

 
$
814

 
 
 
 
Supplemental Disclosures:
 

 
 

Income taxes paid, net
$
104

 
$
1

Non-cash investing activity:
 

 
 

Partnership commitments not yet remitted
9

 
10

See Notes to Consolidated Financial Statements.




7


RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned stock life insurance company subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
•
RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.
•
RiverSource Life of NY is domiciled and holds a Certificate of Authority in New York. RiverSource Life of NY issues insurance and annuity products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. (“RTA”). RTA is a stock company domiciled in Delaware and is a limited partner in affordable housing partnership investments.
The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and companies in which it directly or indirectly has a controlling financial interest (collectively, the “Company”). All intercompany transactions and balances have been eliminated in consolidation.
The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for fair statement of the consolidated financial position and results of operations for the interim periods have been made. Except for the adjustment described below, all adjustments made were of a normal recurring nature.
In the first quarter of 2017, the Company recorded a $20 million decrease to income tax provision related to an out-of-period correction for a reversal of a tax reserve. The impact to prior period financial statements was not material.
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on February 23, 2017 (“2016 10-K”).
The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. No subsequent events or transactions were identified.
2. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
In August 2016, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to classification of certain cash receipts and cash payments on the statement of cash flows. The update includes amendments to address diversity in practice for the classification of eight specific cash flow activities. The specific amendments the Company evaluated include the classification of debt prepayment and extinguishment costs, contingent consideration payments, proceeds from insurance settlements and corporate owned life insurance settlements, distributions from equity method investees and the application of the predominance principle to separately identifiable cash flows. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and all amendments must be adopted during the same period. The Company early adopted the standard for the interim period ended March 31, 2017 on a retrospective basis. The adoption of the standard did not have a material impact on the Company’s operating, investing or financing cash flows.
Future Adoption of New Accounting Standards
Receivables - 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 current guidance, premiums are 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 is effective for interim and annual periods beginning after December 15, 2018, and should 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. Early adoption is permitted. The update is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB updated the accounting standards related to the recognition of income tax impacts on intra-entity transfers. The update requires entities to recognize the income tax consequences of intra-entity transfers, other than inventory, upon the transfer of the asset. The update requires the selling entity to recognize a current tax expense or benefit and the purchasing entity to recognize

8


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

a deferred tax asset or liability when the transfer occurs. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
Financial Instruments – Measurement of Credit Losses
In June 2016, the FASB updated the accounting standards related to accounting for credit losses on certain types of financial instruments. The update replaces the current incurred loss model for estimating credit losses with a new model that requires an entity to estimate the credit losses expected over the life of the asset. Generally, the initial estimate of the expected credit losses and subsequent changes in the estimate will be reported in current period earnings and recorded through an allowance for credit losses on the balance sheet. The current credit loss model for Available-for-Sale debt securities does not change; however, the credit loss calculation and subsequent recoveries are required to be recorded through an allowance. The standard is effective for interim and annual periods beginning after December 15, 2019. Early adoption will be permitted for interim and annual periods beginning after December 15, 2018. A modified retrospective cumulative adjustment to retained earnings should be recorded as of the first reporting period in which the guidance is effective for loans, receivables, and other financial instruments subject to the new expected credit loss model. Prospective adoption is required for establishing an allowance related to Available-for-Sale debt securities, certain beneficial interests, and financial assets purchased with a more-than-insignificant amount of credit deterioration since origination. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
Leases – Recognition of Lease Assets and Liabilities on Balance Sheet
In February 2016, the FASB updated the accounting standards for leases. The update was issued to increase transparency and comparability for the accounting of lease transactions. The standard will require most lease transactions for lessees to be recorded on the balance sheet as lease assets and lease liabilities and both quantitative and qualitative disclosures about leasing arrangements. The standard is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The update should be applied at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB updated the accounting standards on the recognition and measurement of financial instruments. The update requires entities to carry marketable equity securities, excluding investments in securities that qualify for the equity method of accounting, at fair value with changes in fair value reflected in net income each reporting period. The update affects other aspects of accounting for equity instruments, as well as the accounting for financial liabilities utilizing the fair value option. The update eliminates the requirement to disclose the methods and assumptions used to estimate the fair value of financial assets or liabilities held at cost on the balance sheet and requires entities to use the exit price notion when measuring the fair value of financial instruments. The standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for certain provisions. Generally, the update should be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity at the beginning of the period of adoption. The update is not expected to have a material impact on the consolidated financial condition or results of operations.
Revenue from Contracts with Customers
In May 2014, the FASB updated the accounting standards for revenue from contracts with customers. The update provides a five step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other standards). The standard also updates the accounting for certain costs associated with obtaining and fulfilling a customer contract and requires disclosure of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. Subsequent related updates provide clarification on certain revenue recognition guidance in the new standard. The standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted for interim and annual periods beginning after December 15, 2016. The standard may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The Company plans to adopt the revenue recognition guidance in the first quarter of 2018. The update does not apply to revenue associated with the manufacturing of insurance and annuity products or financial instruments as these revenues are in the scope of other standards. Therefore, the Company does not expect the update to have an impact on these revenues. The Company’s implementation efforts include the identification of revenue within the guidance and the review of the customer contracts to determine the Company’s performance obligation and the associated timing of each performance obligation. The Company is reviewing certain payments received to determine whether they should be presented as revenue or as a reduction of expense. The Company does not expect a material impact to the timing of revenue recognition; however, the Company’s implementation effort to assess the impact of the standard on its consolidated financial condition, results of operations, and disclosures is still in process.

9


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3. Variable Interest Entities
The Company is a limited partner in affordable housing partnerships that qualify for government-sponsored low income housing tax credit programs and partnerships that invest in multi-family residential properties that were originally developed with an affordable housing component. The Company has determined it is not the primary beneficiary and therefore does not consolidate these partnerships.
A majority of the limited partnerships are VIEs. The Company’s maximum exposure to loss as a result of its investment in the VIEs is limited to the carrying value. The carrying value is reflected in other investments and was $481 million and $482 million as of March 31, 2017 and December 31, 2016, respectively. The Company had a $134 million and $135 million liability recorded as of March 31, 2017 and December 31, 2016, respectively, related to original purchase commitments not yet remitted to the VIEs. The Company has not provided any additional support and is not contractually obligated to provide additional support to the VIEs beyond the above mentioned funding commitments.
The Company invests in structured investments which are considered VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, commercial mortgage backed securities and residential mortgage backed securities. The Company classifies these investments as Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to the size of the Company’s investment in the entities and position in the capital structure of these entities. The Company’s maximum exposure to loss as a result of its investment in these structured investments is limited to its carrying value. The carrying value is included in Available-for-Sale fixed maturities on the Consolidated Balance Sheets. The Company has no obligation to provide financial or other support to the structured investments beyond its investment nor has the Company provided any support to the structured investments. See Note 4 for additional information on these structured investments.
4. Investments
Available-for-Sale securities distributed by type were as follows:
Description of Securities
 
March 31, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Noncredit OTTI (1)
 
 
(in millions)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Corporate debt securities
 
$
12,941

 
$
1,059

 
$
(38
)
 
$
13,962

 
$
—

Residential mortgage backed securities
 
3,320

 
66

 
(43
)
 
3,343

 
(2
)
Commercial mortgage backed securities
 
2,732

 
55

 
(36
)
 
2,751

 
—

State and municipal obligations
 
1,102

 
164

 
(18
)
 
1,248

 
—

Asset backed securities
 
822

 
25

 
(8
)
 
839

 
—

Foreign government bonds and obligations
 
249

 
20

 
(5
)
 
264

 
—

U.S. government and agencies obligations
 
3

 
—

 
—

 
3

 
—

Total fixed maturities
 
21,169

 
1,389

 
(148
)
 
22,410

 
(2
)
Common stocks
 
4

 
4

 
—

 
8

 
3

Total
 
$
21,173

 
$
1,393

 
$
(148
)
 
$
22,418

 
$
1


10


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Description of Securities
 
December 31, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Noncredit OTTI (1)
 
 
(in millions)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Corporate debt securities
 
$
13,105

 
$
1,060

 
$
(53
)
 
$
14,112

 
$
—

Residential mortgage backed securities
 
3,386

 
72

 
(43
)
 
3,415

 
(4
)
Commercial mortgage backed securities
 
2,837

 
58

 
(38
)
 
2,857

 
—

State and municipal obligations
 
1,092

 
161

 
(24
)
 
1,229

 
—

Asset backed securities
 
790

 
26

 
(11
)
 
805

 
—

Foreign government bonds and obligations
 
251

 
17

 
(7
)
 
261

 
—

U.S. government and agencies obligations
 
3

 
—

 
—

 
3

 
—

Total fixed maturities
 
21,464

 
1,394

 
(176
)
 
22,682

 
(4
)
Common stocks
 
4

 
6

 
—

 
10

 
3

Total
 
$
21,468

 
$
1,400

 
$
(176
)
 
$
22,692

 
$
(1
)
 (1) 
Represents the amount of other-than-temporary impairment (“OTTI”) losses in accumulated other comprehensive income (“AOCI”). Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.
As of March 31, 2017 and December 31, 2016, investment securities with a fair value of $1.4 billion and $1.5 billion, respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings, of which $523 million and $428 million, respectively, may be sold, pledged or rehypothecated by the counterparty.
As of both March 31, 2017 and December 31, 2016, fixed maturity securities comprised approximately 83% of the Company’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”). The Company 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, the Company may utilize ratings from other NRSROs or rate the securities internally. As of March 31, 2017 and December 31, 2016, approximately $971 million and $944 million, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC, an affiliate of the Company, using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
Ratings
 
March 31, 2017
 
December 31, 2016
Amortized Cost
 
Fair Value
 
Percent of Total Fair Value
 
Amortized Cost
 
Fair Value
 
Percent of Total Fair Value
 
 
(in millions, except percentages)
 
 
AAA
 
$
5,573

 
$
5,619

 
25
%
 
$
5,671

 
$
5,728

 
25
%
AA
 
1,050

 
1,220

 
6

 
1,013

 
1,177

 
5

A
 
3,636

 
4,040

 
18

 
3,767

 
4,167

 
19

BBB
 
9,522

 
10,128

 
45

 
9,584

 
10,190

 
45

Below investment grade
 
1,388

 
1,403

 
6

 
1,429

 
1,420

 
6

Total fixed maturities
 
$
21,169

 
$
22,410

 
100
%
 
$
21,464

 
$
22,682

 
100
%
As of March 31, 2017 and December 31, 2016, approximately 39% and 40%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. No holdings of any other issuer were greater than 10% of total equity.

11


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:
Description of Securities 
March 31, 2017
Less than 12 months
 
12 months or more
 
Total
Number 
of Securities
 
Fair Value
 
Unrealized Losses
Number 
of Securities
 
Fair Value
 
Unrealized Losses
Number 
of Securities
 
Fair Value
 
Unrealized Losses
 
(in millions, except number of securities)
Corporate debt securities
102

 
$
1,331

 
$
(21
)
 
22

 
$
193

 
$
(17
)
 
124

 
$
1,524

 
$
(38
)
Residential mortgage backed securities
65

 
1,382

 
(28
)
 
54

 
302

 
(15
)
 
119

 
1,684

 
(43
)
Commercial mortgage backed securities
78

 
1,288

 
(36
)
 
2

 
13

 
—

 
80

 
1,301

 
(36
)
State and municipal obligations
18

 
71

 
(3
)
 
2

 
111

 
(15
)
 
20

 
182

 
(18
)
Asset backed securities
15

 
150

 
(5
)
 
14

 
139

 
(3
)
 
29

 
289

 
(8
)
Foreign government bonds and obligations
4

 
10

 
—

 
14

 
21

 
(5
)
 
18

 
31

 
(5
)
Total
282

 
$
4,232

 
$
(93
)
 
108

 
$
779

 
$
(55
)
 
390

 
$
5,011

 
$
(148
)
Description of Securities 
December 31, 2016
Less than 12 months
 
12 months or more
 
Total
Number
of Securities
 
Fair Value
 
Unrealized Losses
Number 
of Securities
 
Fair Value
 
Unrealized Losses
Number 
of Securities
 
Fair Value
 
Unrealized Losses
 
(in millions, except number of securities)
Corporate debt securities
114

 
$
1,502

 
$
(26
)
 
33

 
$
319

 
$
(27
)
 
147

 
$
1,821

 
$
(53
)
Residential mortgage backed securities
56

 
1,282

 
(25
)
 
56

 
324

 
(18
)
 
112

 
1,606

 
(43
)
Commercial mortgage backed securities
80

 
1,378

 
(37
)
 
1

 
11

 
(1
)
 
81

 
1,389

 
(38
)
State and municipal obligations
18

 
66

 
(3
)
 
2

 
105

 
(21
)
 
20

 
171

 
(24
)
Asset backed securities
23

 
231

 
(6
)
 
12

 
114

 
(5
)
 
35

 
345

 
(11
)
Foreign government bonds and obligations
7

 
30

 
(1
)
 
15

 
23

 
(6
)
 
22

 
53

 
(7
)
Total
298

 
$
4,489

 
$
(98
)
 
119

 
$
896

 
$
(78
)
 
417

 
$
5,385

 
$
(176
)
As part of the Company’s ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities is attributable to a slight decline in interest rates on the long end of the interest rate curve and a modest tightening of credit spreads.
The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on Available-for-Sale securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss) (“OCI”):
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Beginning balance
$
21

 
$
33

Credit losses for which an other-than-temporary impairment was previously recognized
—

 
—

Ending balance
$
21

 
$
33


12


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)


Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains were as follows:
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Gross realized investment gains
$
17

 
$
3

Gross realized investment losses
—

 
(3
)
Total
$
17

 
$
—

See Note 13 for a rollforward of net unrealized investment gains (losses) included in AOCI.
Available-for-Sale securities by contractual maturity as of March 31, 2017 were as follows:
 
Amortized Cost
 
Fair Value
(in millions)
Due within one year
$
1,035

 
$
1,052

Due after one year through five years
5,364

 
5,659

Due after five years through 10 years
4,157

 
4,276

Due after 10 years
3,739

 
4,490

 
14,295

 
15,477

Residential mortgage backed securities
3,320

 
3,343

Commercial mortgage backed securities
2,732

 
2,751

Asset backed securities
822

 
839

Common stocks
4

 
8

Total
$
21,173

 
$
22,418

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities and asset backed securities are not due at a single maturity date. As such, these securities, as well as common stocks, were not included in the maturities distribution.
The following is a summary of net investment income:
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Fixed maturities
$
242

 
$
251

Mortgage loans
35

 
40

Other investments
—

 
6

 
277

 
297

Less: investment expenses
6

 
7

Total
$
271

 
$
290


13


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5. Financing Receivables
The Company’s financing receivables include commercial and residential mortgage loans, syndicated loans and policy loans. Syndicated loans are reflected in other investments.
Allowance for Loan Losses
Policy loans do not exceed the cash surrender value of the policy at origination. As there is minimal risk of loss related to policy loans, the Company does not record an allowance for loan losses for policy loans. The Company does not currently have an allowance for loan losses for residential mortgage loans.
The following table presents a rollforward of the allowance for loan losses for the three months ended and the ending balance of the allowance for loan losses by impairment method:
 
March 31,
2017
 
2016
(in millions)
Beginning balance
$
25

 
$
25

Provisions
—

 
1

Ending balance
$
25


$
26

 
 
 
 
Individually evaluated for impairment
$
2

 
$
4

Collectively evaluated for impairment
23

 
22

The recorded investment in financing receivables by impairment method was as follows:
 
March 31,
2017
 
December 31, 2016
(in millions)
Individually evaluated for impairment
$
18

 
$
10

Collectively evaluated for impairment
3,252

 
3,275

Total
$
3,270

 
$
3,285

As of March 31, 2017 and December 31, 2016, the Company’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $12 million and $5 million, respectively.
During the three months ended March 31, 2017 and 2016, the Company purchased $54 million and $13 million, respectively, of syndicated loans. On March 30, 2016, the Company sold $250 million (amortized cost, net of unamortized discount) of its residential mortgage loans to an unaffiliated third party. The Company received cash proceeds of $260 million and recognized a gain of $10 million.
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were $2 million as of both March 31, 2017 and December 31, 2016. All other loans were considered to be performing.
Commercial Mortgage Loans
The Company reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates as necessary. Commercial mortgage loans which management has assigned its highest risk rating were 1% and nil of total commercial mortgage loans as of March 31, 2017 and December 31, 2016, respectively. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. In addition, the Company reviews the concentrations of credit risk by region and property type.

14


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:
 
Loans
 
Percentage
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
(in millions)
 
 
 
 
South Atlantic
$
760

 
$
753

 
29
%
 
29
%
Pacific
714

 
722

 
28

 
28

Mountain
235

 
234

 
9

 
9

West North Central
213

 
212

 
8

 
8

Middle Atlantic
188

 
191

 
7

 
7

East North Central
200

 
195

 
8

 
8

West South Central
124

 
122

 
5

 
5

New England
82

 
84

 
3

 
3

East South Central
79

 
80

 
3

 
3

 
2,595

 
2,593

 
100
%
 
100
%
Less: allowance for loan losses
19

 
19

 
 

 
 

Total
$
2,576

 
$
2,574

 
 

 
 

Concentrations of credit risk of commercial mortgage loans by property type were as follows:
 
Loans
 
Percentage
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
(in millions)
 
 
 
 
Retail
$
897

 
$
916

 
34
%

35
%
Office
458

 
473

 
18

 
18

Apartments
511

 
483

 
20

 
19

Industrial
436

 
430

 
17

 
17

Mixed use
44

 
42

 
2

 
2

Hotel
41

 
41

 
1

 
1

Other
208

 
208

 
8

 
8

 
2,595

 
2,593

 
100
%
 
100
%
Less: allowance for loan losses
19

 
19

 
 

 
 

Total
$
2,576

 
$
2,574

 
 

 
 

Residential Mortgage Loans
The recorded investment in residential mortgage loans as of March 31, 2017 and December 31, 2016 was $285 million and $300 million, respectively. The Company considers the credit worthiness of borrowers (FICO score), collateral characteristics such as loan-to-value (“LTV”) and geographic concentration to determine when an amount for an allowance for loan losses for residential mortgage loans is appropriate. At a minimum, management updates FICO scores and LTV ratios semiannually. As of March 31, 2017 and December 31, 2016, no allowance for loan losses was recorded.


15


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

As of both March 31, 2017 and December 31, 2016, approximately 2% of residential mortgage loans had FICO scores below 640. As of both March 31, 2017 and December 31, 2016, none of the Company’s residential mortgage loans had LTV ratios greater than 90%. The Company’s most significant geographic concentrations for residential mortgage loans are in California representing 53% and 52% of the portfolio as of March 31, 2017 and December 31, 2016, respectively. Colorado and Washington represent 17% and 13%, respectively, of the portfolio as of March 31, 2017 and 18% and 13%, respectively, as of December 31, 2016. No other state represents more than 10% of the total residential mortgage loan portfolio.
Syndicated Loans
The recorded investment in syndicated loans as of March 31, 2017 and December 31, 2016 was $390 million and $392 million, respectively. The Company’s syndicated loan portfolio is diversified across industries and issuers. The primary credit indicator for syndicated loans is whether the loans are performing in accordance with the contractual terms of the syndication. Total nonperforming syndicated loans as of both March 31, 2017 and December 31, 2016 were $1 million.
Troubled Debt Restructurings
The recorded investment in restructured loans was not material as of March 31, 2017 and December 31, 2016. The troubled debt restructurings did not have a material impact to the Company’s allowance for loan losses or income recognized for the three months ended March 31, 2017 and 2016. There are no commitments to lend additional funds to borrowers whose loans have been restructured. 
6. Deferred Acquisition Costs and Deferred Sales Inducement Costs
The balances of and changes in DAC were as follows:
 
2017
 
2016
 
(in millions)
Balance at January 1
$
2,611

 
$
2,693

(1) 
Capitalization of acquisition costs
54

 
63

 
Amortization
(57
)
 
(90
)
 
Impact of change in net unrealized securities gains
—

 
(47
)
 
Balance at March 31
$
2,608

 
$
2,619

(1) 
(1) DAC balances were restated for the correction of commission expense accrual for certain insurance and annuity products in the fourth quarter of 2016. See Note 1 in the 2016 10-K.
The balances of and changes in DSIC, which is included in other assets, were as follows:
 
2017
 
2016
(in millions)
Balance at January 1
$
301

 
$
334

Capitalization of sales inducement costs
2

 
1

Amortization
(10
)
 
(12
)
Impact of change in net unrealized securities gains
—

 
(8
)
Balance at March 31
$
293

 
$
315


16


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7. Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities
Policyholder account balances, future policy benefits and claims consisted of the following:
 
March 31,
2017
 
December 31, 2016
 
(in millions)
 
Policyholder account balances
 
 
 
 
Fixed annuities
$
10,400

 
$
10,588

 
Variable annuity fixed sub-accounts
5,212

 
5,211

 
Variable universal life (“VUL”)/universal life (“UL”) insurance
3,011

 
3,007

 
Indexed universal life (“IUL”) insurance
1,127

 
1,054

 
Other life insurance
747

 
758

 
Total policyholder account balances
20,497

 
20,618

 
Future policy benefits
 
 
 
 
Variable annuity guaranteed minimum withdrawal benefits (“GMWB”)
637

 
1,017

 
Variable annuity guaranteed minimum accumulation benefits (“GMAB”)
(53
)
(1) 
(24
)
(1) 
Other annuity liabilities
71

 
66

 
Fixed annuities life contingent liabilities
1,488

 
1,497

 
Life, disability income and long term care insurance
5,610

 
5,556

 
VUL/UL and other life insurance additional liabilities
615

 
588

 
Total future policy benefits
8,368

 
8,700

 
Policy claims and other policyholders’ funds
202

 
196

 
Total policyholder account balances, future policy benefits and claims
$
29,067

 
$
29,514

 
(1) Includes the fair value of GMAB embedded derivatives that was a net asset as of both March 31, 2017 and December 31, 2016 reported as a contra liability.
Separate account liabilities consisted of the following:
 
March 31,
2017
 
December 31, 2016
(in millions)
Variable annuity
$
71,154

 
$
69,606

VUL insurance
6,867

 
6,659

Other insurance
32

 
33

Total
$
78,053

 
$
76,298

8. Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by the Company contain guaranteed minimum death benefit (“GMDB”) provisions. The Company also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits. In addition, the Company offers contracts with GMWB and GMAB provisions. The Company previously offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.
Certain UL policies offered by the Company provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.

17


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:
Variable Annuity
Guarantees by Benefit Type (1)
 
March 31, 2017
 
December 31, 2016
Total Contract Value
 
Contract Value in Separate Accounts
 
Net Amount at Risk
 
Weighted Average Attained Age
Total Contract Value
 
Contract Value in Separate Accounts
 
Net Amount at Risk
 
Weighted Average Attained Age
 
 
(in millions, except age)
GMDB:
Return of premium
 
$
57,540

 
$
55,555

 
$
50

 
66
 
$
56,143

 
$
54,145

 
$
208

 
65
Five/six-year reset
 
8,919

 
6,198

 
16

 
66
 
8,878

 
6,170

 
22

 
66
One-year ratchet
 
6,474

 
6,102

 
33

 
68
 
6,426

 
6,050

 
110

 
68
Five-year ratchet
 
1,560

 
1,501

 
2

 
64
 
1,542

 
1,483

 
7

 
64
Other
 
997

 
973

 
71

 
71
 
965

 
942

 
86

 
71
Total — GMDB
 
$
75,490

 
$
70,329

 
$
172

 
66
 
$
73,954

 
$
68,790

 
$
433

 
65
GGU death benefit
 
$
1,070

 
$
1,019

 
$
115

 
69
 
$
1,047

 
$
996

 
$
108

 
68
GMIB
 
$
240

 
$
222

 
$
9

 
68
 
$
245

 
$
227

 
$
13

 
68
GMWB:
GMWB
 
$
2,615

 
$
2,607

 
$
2

 
70
 
$
2,650

 
$
2,642

 
$
2

 
70
GMWB for life
 
40,729

 
40,594

 
221

 
66
 
39,436

 
39,282

 
495

 
66
Total — GMWB
 
$
43,344

 
$
43,201

 
$
223

 
66
 
$
42,086

 
$
41,924

 
$
497

 
66
GMAB
 
$
3,385

 
$
3,378

 
$
4

 
59
 
$
3,484

 
$
3,476

 
$
21

 
59
(1) 
Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.
The net amount at risk for GMDB, GGU and GMAB guarantees is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB and GMWB guarantees is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero. The present value is calculated using a discount rate that is consistent with assumptions embedded in the Company’s annuity pricing models.
The following table provides information related to insurance guarantees for which the Company has established additional liabilities:
 
March 31, 2017
 
December 31, 2016
Net Amount at Risk
 
Weighted Average Attained Age
 
Net Amount at Risk
 
Weighted Average Attained Age
(in millions, except age)
UL secondary guarantees
$
6,407

 
64
 
$
6,376

 
64
The net amount at risk for UL secondary guarantees is defined as the current guaranteed death benefit amount in excess of the current policyholder account balance.
Changes in additional liabilities (contra liabilities) for variable annuity and insurance guarantees were as follows:
 
GMDB & GGU
 
GMIB
 
GMWB (1)
 
GMAB (1)
 
UL
(in millions)
Balance at January 1, 2016
$
14

 
$
8

 
$
1,057

 
$
—

 
$
332

Incurred claims
4

 
—

 
649

 
31

 
22

Paid claims
(4
)
 
—

 
—

 
—

 
(6
)
Balance at March 31, 2016
$
14

 
$
8

 
$
1,706

 
$
31

 
$
348

 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
16

 
$
8

 
$
1,017

 
$
(24
)
 
$
434

Incurred claims
1

 
—

 
(380
)
 
(29
)
 
23

Paid claims
(1
)
 
(1
)
 
—

 
—

 
(8
)
Balance at March 31, 2017
$
16

 
$
7

 
$
637

 
$
(53
)
 
$
449

(1) 
The incurred claims for GMWB and GMAB represent the change in the fair value of the liabilities (contra liabilities) less paid claims.

18


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The liabilities for guaranteed benefits are supported by general account assets.
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
 
March 31,
2017
 
December 31, 2016
 
(in millions)
Mutual funds:
 

 
 

Equity
$
42,276

 
$
40,622

Bond
23,220

 
23,142

Other
5,145

 
5,326

Total mutual funds
$
70,641

 
$
69,090

9. Short-term Borrowings
The Company enters into repurchase agreements in exchange for cash which it accounts for as secured borrowings and has pledged Available-for-Sale securities to collateralize its obligations under the repurchase agreements. As of both March 31, 2017 and December 31, 2016, the Company has pledged $33 million of agency residential mortgage backed securities and $19 million of commercial mortgage backed securities. The amount of the Company’s liability including accrued interest as of both March 31, 2017 and December 31, 2016 was $50 million. The remaining maturity of outstanding repurchase agreements was less than four months as of March 31, 2017 and less than three months as of December 31, 2016. The weighted average annualized interest rate on the repurchase agreements held as of March 31, 2017 and December 31, 2016 was 1.1% and 0.9%, respectively.
RiverSource Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines which provides access to collateralized borrowings. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities to collateralize its obligation under these borrowings. The fair value of the securities pledged is recorded in investments and was $769 million and $771 million as of March 31, 2017 and December 31, 2016, respectively. The amount of the Company’s liability including accrued interest as of both March 31, 2017 and December 31, 2016 was $150 million. The remaining maturity of outstanding FHLB advances was less than three months as of March 31, 2017 and less than four months as of December 31, 2016. The weighted average annualized interest rate on the FHLB advances held as of both March 31, 2017 and December 31, 2016 was 0.8%.
10. Fair Values of Assets and Liabilities
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’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.

19


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
 
March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Assets
 

 
 

 
 

 
 

 
Available-for-Sale securities: Fixed maturities:
 

 
 

 
 

 
 

 
Corporate debt securities
$
—

 
$
12,777

 
$
1,185

 
$
13,962

 
Residential mortgage backed securities
—

 
3,186

 
157

 
3,343

 
Commercial mortgage backed securities
—

 
2,751

 
—

 
2,751

 
State and municipal obligations
—

 
1,248

 
—

 
1,248

 
Asset backed securities
—

 
790

 
49

 
839

 
Foreign government bonds and obligations
—

 
264

 
—

 
264

 
U.S. government and agencies obligations
3

 
—

 
—

 
3

 
Total Available-for-Sale securities: Fixed maturities
3

 
21,016

 
1,391

 
22,410

 
Common stocks
4

 
—

 
4

 
8

 
Cash equivalents
—

 
316

 
—

 
316

 
Other assets:
 
 
 
 
 
 
 

 
Interest rate derivative contracts
—

 
1,107

 
—

 
1,107

 
Equity derivative contracts
40

 
1,580

 
—

 
1,620

 
Credit derivative contracts
—

 
1

 
—

 
1

 
Foreign exchange derivative contracts
—

 
59

 
—

 
59

 
Total other assets
40

 
2,747

 
—

 
2,787

 
Separate account assets measured at net asset value (“NAV”)
 
 
 
 
 
 
78,053

(1) 
Total assets at fair value
$
47

 
$
24,079

 
$
1,395

 
$
103,574

 
Liabilities
 

 
 

 
 

 
 

 
Policyholder account balances, future policy benefits and claims:
 

 
 

 
 

 
 

 
EIA embedded derivatives
$
—

 
$
4

 
$
—

 
$
4

 
IUL embedded derivatives
—

 
—

 
493

 
493

 
GMWB and GMAB embedded derivatives
—

 
—

 
188

 
188

(2) 
Total policyholder account balances, future policy benefits and claims
—

 
4

 
681

 
685

(3) 
Other liabilities:
 

 
 

 
 

 
 

 
Interest rate derivative contracts
1

 
461

 
—

 
462

 
Equity derivative contracts
9

 
2,197

 
—

 
2,206

 
Foreign exchange derivative contracts
1

 
37

 
—

 
38

 
Other derivative contracts
—

 
4

 
—

 
4

 
Total other liabilities
11

 
2,699

 
—

 
2,710

 
Total liabilities at fair value
$
11

 
$
2,703

 
$
681

 
$
3,395

 


20


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

 
 

 
 

 
 

 
Available-for-Sale securities: Fixed maturities:
 

 
 

 
 

 
 

 
Corporate debt securities
$
—

 
$
12,955

 
$
1,157

 
$
14,112

 
Residential mortgage backed securities
—

 
3,300

 
115

 
3,415

 
Commercial mortgage backed securities
—

 
2,857

 
—

 
2,857

 
State and municipal obligations
—

 
1,229

 
—

 
1,229

 
Asset backed securities
—

 
792

 
13

 
805

 
Foreign government bonds and obligations
—

 
261

 
—

 
261

 
U.S. government and agencies obligations
3

 
—

 
—

 
3

 
Total Available-for-Sale securities: Fixed maturities
3

 
21,394

 
1,285

 
22,682

 
Common stocks
6

 
4

 
—

 
10

 
Cash equivalents
—

 
302

 
—

 
302

 
Other assets:
 

 
 

 
 

 
 

 
Interest rate derivative contracts
—

 
1,735

 
—

 
1,735

 
Equity derivative contracts
42

 
1,481

 
—

 
1,523

 
Credit derivative contracts
—

 
1

 
—

 
1

 
Foreign exchange derivative contracts
—

 
80

 
—

 
80

 
Other derivative contracts
1

 
6

 
—

 
7

 
Total other assets
43

 
3,303

 
—

 
3,346

 
Separate account assets measured at NAV
 
 
 
 
 
 
76,298

(1) 
Total assets at fair value
$
52

 
$
25,003

 
$
1,285

 
$
102,638

 
Liabilities
 

 
 

 
 

 
 

 
Policyholder account balances, future policy benefits and claims:
 

 
 

 
 

 
 

 
EIA embedded derivatives
$
—

 
$
5

 
$
—

 
$
5

 
IUL embedded derivatives
—

 
—

 
464

 
464

 
GMWB and GMAB embedded derivatives
—

 
—

 
614

 
614

(4) 
Total policyholder account balances, future policy benefits and claims
—

 
5

 
1,078

 
1,083

(5) 
Other liabilities:
 

 
 

 
 

 
 

 
Interest rate derivative contracts
1

 
964

 
—

 
965

 
Equity derivative contracts
2

 
1,986

 
—

 
1,988

 
Foreign exchange derivative contracts
2

 
45

 
—

 
47

 
Other derivative contracts
—

 
1

 
—

 
1

 
Total other liabilities
5

 
2,996

 
—

 
3,001

 
Total liabilities at fair value
$
5

 
$
3,001

 
$
1,078

 
$
4,084

 
(1) Amounts are comprised of certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy.
(2) The fair value of the GMWB and GMAB embedded derivatives included $585 million of individual contracts in a liability position and $397 million of individual contracts in an asset position as of March 31, 2017.
(3) The Company’s adjustment for nonperformance risk resulted in a $435 million cumulative decrease to the embedded derivatives as of March 31, 2017.
(4) The fair value of the GMWB and GMAB embedded derivatives included $880 million of individual contracts in a liability position and $266 million of individual contracts in an asset position as of December 31, 2016.
(5) The Company’s adjustment for nonperformance risk resulted in a $498 million cumulative decrease to the embedded derivatives as of December 31, 2016.

21


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
Available-for-Sale Securities: Fixed Maturities
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
(in millions)
Balance, January 1, 2017
$
1,157

 
$
115

 
$
13

 
$
—

 
$
1,285

Purchases
50

 
67

 
49

 
—

 
166

Settlements
(22
)
 
(2
)
 
(13
)
 
—

 
(37
)
Transfers into Level 3
—

 
—

 
—

 
4

 
4

Transfers out of Level 3
—

 
(23
)
 
—

 
—

 
(23
)
Balance, March 31, 2017
$
1,185

 
$
157

 
$
49

 
$
4

 
$
1,395

 
Changes in unrealized gains (losses) relating to assets held at March 31, 2017
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
Policyholder Account Balances,
Future Policy Benefits and Claims
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
(in millions)
Balance, January 1, 2017
$
464

 
$
614

 
$
1,078

Total (gains) losses included in:
 

 
 

 
 
Net income
19

(1) 
(499
)
(2) 
(480
)
Issues
22

 
77

 
99

Settlements
(12
)
 
(4
)
 
(16
)
Balance, March 31, 2017
$
493

 
$
188

 
$
681

 
Changes in unrealized (gains) losses relating to liabilities held at March 31, 2017
$
19

(1) 
$
(484
)
(2) 
$
(465
)
 
Available-for-Sale Securities: Fixed Maturities
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Total
(in millions)
Balance, January 1, 2016
$
1,235

 
$
21

 
$
3

 
$
133

 
$
1,392

Total gains included in:
 

 
 

 
 

 
 

 
 

Other comprehensive income
16

 
—

 
—

 
—

 
16

Purchases
—

 
—

 
9

 
—

 
9

Settlements
(8
)
 
(2
)
 
(2
)
 
—

 
(12
)
Balance, March 31, 2016
$
1,243

 
$
19

 
$
10

 
$
133

 
$
1,405

 
Changes in unrealized gains (losses) relating to assets held at March 31, 2016
$
—

 
$
—

 
$
—

 
$
—

 
$
—


22


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 
Policyholder Account Balances,
Future Policy Benefits and Claims
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
 (in millions)
Balance, January 1, 2016
$
364

 
$
851

 
$
1,215

Total (gains) losses included in:
 

 
 

 


Net income
(8
)
(1) 
602

(2) 
594

Issues
32

 
68

 
100

Settlements
(6
)
 
(6
)
 
(12
)
Balance, March 31, 2016
$
382

 
$
1,515

 
$
1,897

 
Changes in unrealized (gains) losses relating to liabilities held at March 31, 2016
$
(8
)
(1) 
$
616

(2) 
$
608

(1) 
Included in interest credited to fixed accounts in the Consolidated Statements of Income.
(2) 
Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
The increase (decrease) to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(45) million and $189 million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual for the three months ended March 31, 2017 and 2016, respectively.
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 Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
 
March 31, 2017
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
(in millions)
 
 
 
 
Corporate debt securities (private placements)
$
1,182

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9
%
-
2.5%
 
1.3
%
IUL embedded derivatives
$
493

 
Discounted cash flow
 
Nonperformance risk (1)
 
80 bps
 
 
GMWB and GMAB embedded derivatives
$
188

 
Discounted cash flow
 
Utilization of guaranteed withdrawals (2)
 
0.0
%
-
75.6%
 
 
 
 
 
 
 
Surrender rate
 
0.1
%
-
66.4%
 
 
 
 
 
 
 
Market volatility (3)
 
5.0
%
-
20.0%
 
 
 
 
 
 
 
Nonperformance risk (1)
 
80 bps
 
 

23


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 
December 31, 2016
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
(in millions)
 
 
 
 
Corporate debt securities (private placements)
$
1,154

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9
%
-
2.5%
 
1.3
%
IUL embedded derivatives
$
464

 
Discounted cash flow
 
Nonperformance risk (1)
 
82 bps
 
 
GMWB and GMAB embedded derivatives
$
614

 
Discounted cash flow
 
Utilization of guaranteed withdrawals (2)
 
0.0
%
-
75.6%
 
 
 
 
 
 
 
Surrender rate
 
0.1
%
-
66.4%
 
 
 
 
 
 
 
Market volatility (3)
 
5.3
%
-
21.2%
 
 
 
 
 
 
 
Nonperformance risk (1)
 
82 bps
 
 
(1) The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.
(2) 
The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year.
(3) 
Market volatility is implied volatility of fund of funds and managed volatility funds.
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 the Company.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) liability value. Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) liability value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution channel and whether the value of the guaranteed benefit exceeds the contract accumulation value.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. The Company’s cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third-party pricing services, non-binding broker quotes, or other model-based valuation techniques. Level 1 securities primarily include U.S. Treasuries. Level 2 securities primarily include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, state and municipal obligations, asset backed securities and U.S. agency and foreign government 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 primarily include certain corporate bonds, non-agency residential mortgage backed securities and asset backed securities. The fair value of corporate bonds, non-agency residential mortgage backed securities and certain asset backed securities classified as Level 3 is typically based on a single non-binding broker

24


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, the Company reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third-party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third-party pricing services. The Company’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. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV is used as a practical expedient for fair value and represents the exit price for the separate account. Separate account assets are excluded from classification in the fair value hierarchy.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The variation margin on futures contracts is also 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 swaps and the majority of options. Other derivative contracts consist of the Company’s macro hedge program. See Note 12 for further information on the macro hedge program. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial as of March 31, 2017 and December 31, 2016. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to contractholder behavior assumptions, implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivatives associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior are reviewed quarterly along with other valuation assumptions.
Other Liabilities
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The variation margin on futures contracts is also classified as Level 1. The fair value of derivatives that are traded in less active 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 swaps and the majority of options. Other derivative contracts consist of the Company’s macro hedge program. See Note 12 for further information on the

25


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

macro hedge program. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial as of March 31, 2017 and December 31, 2016. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value:
 
March 31, 2017
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Financial Assets
Mortgage loans, net
$
2,862

 
$
—

 
$
—

 
$
2,874

 
$
2,874

 
Policy loans
830

 
—

 
—

 
791

 
791

 
Other investments
400

 
—

 
357

 
46

 
403

 
 
Financial Liabilities
Policyholder account balances, future policy benefits and claims
$
10,715

 
$
—

 
$
—

 
$
11,247

 
$
11,247

 
Short-term borrowings
200

 
—

 
200

 
—

 
200

 
Other liabilities
171

 
—

 
—

 
164

 
164

 
Separate account liabilities measured at NAV
347

 
 
 
347

(1) 
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Financial Assets
Mortgage loans, net
$
2,874

 
$
—

 
$
—

 
$
2,865

 
$
2,865

 
Policy loans
830

 
—

 
—

 
807

 
807

 
Other investments
402

 
—

 
364

 
43

 
407

 
 
Financial Liabilities
Policyholder account balances, future policy benefits and claims
$
10,906

 
$
—

 
$
—

 
$
11,417

 
$
11,417

 
Short-term borrowings
200

 
—

 
200

 
—

 
200

 
Other liabilities
177

 
—

 
—

 
169

 
169

 
Separate account liabilities measured at NAV
341

 
 
 
341

(1) 
(1) 
Amounts are comprised of certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy.
Mortgage Loans, Net
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities, liquidity and characteristics including LTV ratio, occupancy rate, refinance risk, debt service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for the Company’s estimate of the amount recoverable on the loan.
The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.
Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.
Policy Loans
Policy loans represent loans made against the cash surrender value of the underlying life insurance or annuity product. These loans and the related interest are usually realized at death of the policyholder or contractholder or at surrender of the contract and are not

26


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

transferable without the underlying insurance or annuity contract. The fair value of policy loans is determined by estimating expected cash flows discounted at rates based on the U.S. Treasury curve. Policy loans are classified as Level 3 as the discount rate used may be adjusted for the underlying performance of individual policies.
Other Investments
Other investments primarily consist of syndicated loans and an investment in FHLB. The fair value of syndicated loans is obtained from a third-party pricing service or non-binding broker quotes. Syndicated loans that are priced using a market approach with observable inputs are classified as Level 2 and syndicated loans priced using a single non-binding broker quote are classified as Level 3. The fair value of the investment in FHLB is approximated by the carrying value and classified as Level 3 due to restrictions on transfer and lack of liquidity in the primary market for this asset.
Policyholder Account Balances, Future Policy Benefits and Claims
The fair value of fixed annuities in deferral status is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a margin for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of non-life contingent fixed annuities in payout status, EIA host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner. Given the use of significant unobservable inputs to these valuations, the measurements are classified as Level 3.
Short-term Borrowings
The fair value of short-term borrowings is obtained from a third-party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.
Other Liabilities
Other liabilities consist of future funding commitments to affordable housing partnerships and other real estate partnerships. The fair value of these future funding commitments is determined by discounting cash flows. The fair value of these commitments includes an adjustment for the Company’s nonperformance risk and is classified as Level 3 due to the use of the significant unobservable input.
Separate Account Liabilities
Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. The NAV of the related separate account assets is used as a practical expedient for fair value and represents the exit price for the separate account liabilities. Separate account liabilities are excluded from classification in the fair value hierarchy.
11. Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets. The Company’s derivative instruments and repurchase agreements are subject to master netting arrangements and collateral arrangements and qualify for offset. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. The Company’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 the Company’s assets subject to master netting arrangements:
 
 
March 31, 2017
 
Gross Amounts of
Recognized Assets
 
Gross Amounts Offset in the
Consolidated Balance Sheets
 
Amounts of Assets Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance Sheets
 
Net Amount
 
Financial Instruments (1)
 
Cash Collateral
 
Securities Collateral
 
 
(in millions)
 
Derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
OTC
$
2,752

 
$
—

 
$
2,752

 
$
(2,202
)
 
$
(343
)
 
$
(201
)
 
$
6

 
OTC cleared (2)
21

 
—

 
21

 
(21
)
 
—

 
—

 
—

 
Exchange-traded
14

 
—

 
14

 
(2
)
 
—

 
—

 
12

 
Total derivatives
$
2,787

 
$
—

 
$
2,787

 
$
(2,225
)
 
$
(343
)
 
$
(201
)
 
$
18


27


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

 
 

 
 

 
 

 
 

 
 

 
 

 
OTC
$
2,822

 
$
—

 
$
2,822

 
$
(2,161
)
 
$
(374
)
 
$
(235
)
 
$
52

 
OTC cleared
510

 
—

 
510

 
(507
)
 
(3
)
 
—

 
—

 
Exchange-traded
14

 
—

 
14

 
(2
)
 
—

 
—

 
12

 
Total derivatives
$
3,346

 
$
—

 
$
3,346

 
$
(2,670
)
 
$
(377
)
 
$
(235
)
 
$
64

(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.
(2) The decrease in OTC cleared derivatives from December 31, 2016 is a result of certain central clearing parties amending their rules resulting in variation margin payments being settlement payments, as opposed to collateral.
The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:
 
 
March 31, 2017
 
Gross Amounts of
Recognized Liabilities
 
Gross Amounts Offset in the
Consolidated Balance Sheets
 
Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance Sheets
 
Net Amount
 
Financial Instruments (1)
 
Cash Collateral
 
Securities Collateral
 
 
(in millions)
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC
$
2,684

 
$
—

 
$
2,684

 
$
(2,202
)
 
$
(1
)
 
$
(460
)
 
$
21

 
OTC cleared (2)
23

 
—

 
23

 
(21
)
 
—

 
—

 
2

 
Exchange-traded
3

 
—

 
3

 
(2
)
 
—

 
—

 
1

 
Total derivatives
2,710


—


2,710


(2,225
)

(1
)

(460
)

24

 
Repurchase agreements
50

 
—

 
50

 
—

 
—

 
(50
)
 
—

 
Total
$
2,760

 
$
—

 
$
2,760

 
$
(2,225
)
 
$
(1
)
 
$
(510
)
 
$
24

 
 
December 31, 2016
 
Gross Amounts of
Recognized Liabilities
 
Gross Amounts Offset in the
Consolidated Balance Sheets
 
 Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance Sheets
 
Net Amount
 
Financial Instruments (1)
 
Cash Collateral
 
Securities Collateral
 
 
(in millions)
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC
$
2,481

 
$
—

 
$
2,481

 
$
(2,161
)
 
$
—

 
$
(312
)
 
$
8

 
OTC cleared
515

 
—

 
515

 
(507
)
 
(8
)
 
—

 
—

 
Exchange-traded
5

 
—

 
5

 
(2
)
 
—

 
—

 
3

 
Total derivatives
3,001


—


3,001


(2,670
)

(8
)

(312
)

11

 
Repurchase agreements
50

 
—

 
50

 
—

 
—

 
(50
)
 
—

 
Total
$
3,051

 
$
—

 
$
3,051

 
$
(2,670
)
 
$
(8
)
 
$
(362
)
 
$
11

(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.
(2) The decrease in OTC cleared derivatives from December 31, 2016 is a result of certain central clearing parties amending their rules resulting in variation margin payments being settlement payments, as opposed to collateral.
In the tables above, the amounts of assets or liabilities presented in the Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual collateral may be greater than amounts presented in the tables.
When the fair value of collateral accepted by the Company is less than the amount due to the Company, there is a risk of loss if the counterparty fails to perform or provide additional collateral. To mitigate this risk, the Company monitors collateral values regularly

28


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

and requires additional collateral when necessary. When the value of collateral pledged by the Company declines, it may be required to post additional collateral.
Freestanding derivative instruments are reflected in other assets and other liabilities. Cash collateral pledged by the Company is reflected in other assets and cash collateral accepted by the Company is reflected in other liabilities. Repurchase agreements are reflected in short-term borrowings. See Note 12 for additional disclosures related to the Company’s derivative instruments and Note 9 for additional disclosures related to the Company’s repurchase agreements.
12. Derivatives and Hedging Activities
Derivative instruments enable the Company 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. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.
The Company’s freestanding derivative instruments are all subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 11 for additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.
The Company uses derivatives as economic hedges and accounting hedges. The following table presents the notional value and gross fair value of derivative instruments, including embedded derivatives:
 
March 31, 2017
 
December 31, 2016
Notional
 
Gross Fair Value
Notional
 
Gross Fair Value
Assets (1)
 
Liabilities (2)
Assets (1)
 
Liabilities (2)
(in millions)
Derivatives not designated as hedging instruments
Interest rate contracts
$
69,800

 
$
1,107

 
$
462

 
$
71,019

 
$
1,735

 
$
965

Equity contracts
58,967

 
1,620

 
2,206

 
59,401

 
1,523

 
1,988

Credit contracts
1,148

 
1

 
—

 
1,039

 
1

 
—

Foreign exchange contracts
4,520

 
59

 
38

 
4,494

 
80

 
47

Other contracts
3,436

 
—

 
4

 
1,258

 
7

 
1

Total non-designated hedges
137,871

 
2,787

 
2,710

 
137,211

 
3,346

 
3,001

 
Embedded derivatives
GMWB and GMAB (3)
N/A

 
—

 
188

 
N/A

 
—

 
614

IUL
N/A

 
—

 
493

 
N/A

 
—

 
464

EIA
N/A

 
—

 
4

 
N/A

 
—

 
5

Total embedded derivatives
N/A

 
—

 
685

 
N/A

 
—

 
1,083

Total derivatives
$
137,871

 
$
2,787

 
$
3,395

 
$
137,211

 
$
3,346

 
$
4,084

N/A  Not applicable.
(1) The fair value of freestanding derivative assets is included in Other assets on the Consolidated Balance Sheets.
(2) The fair value of freestanding derivative liabilities is included in Other liabilities on the Consolidated Balance Sheets. The fair value of GMWB and GMAB, IUL, and EIA embedded derivatives is included in Policyholder account balances, future policy benefits and claims on the Consolidated Balance Sheets.
(3) The fair value of the GMWB and GMAB embedded derivatives as of March 31, 2017 included $585 million of individual contracts in a liability position and $397 million of individual contracts in an asset position. The fair value of the GMWB and GMAB embedded derivatives as of December 31, 2016 included $880 million of individual contracts in a liability position and $266 million of individual contracts in an asset position.
See Note 10 for additional information regarding the Company’s fair value measurement of derivative instruments.
As of March 31, 2017 and December 31, 2016, investment securities with a fair value of $229 million and $235 million, respectively, were received as collateral to meet contractual obligations under derivative contracts, of which $124 million and $118 million, respectively, may be sold, pledged or rehypothecated by the Company. As of March 31, 2017 and December 31, 2016, the Company had sold, pledged, or rehypothecated $14 million and $19 million, respectively, of these securities. In addition, as of March 31, 2017 and December 31, 2016, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.

29


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables present a summary of the impact of derivatives not designated as hedging instruments, including embedded derivatives, on the Consolidated Statements of Income:
 
Interest Credited to Fixed Accounts
 
Benefits, Claims, Losses and Settlement Expenses
(in millions)
Three Months Ended March 31, 2017
 
 
 
Interest rate contracts
$
—

 
$
(75
)
Equity contracts
19

 
(416
)
Credit contracts
—

 
(8
)
Foreign exchange contracts
—

 
(24
)
Other contracts
—

 
(22
)
GMWB and GMAB embedded derivatives
—

 
426

IUL embedded derivatives
(7
)
 
—

Total gain (loss)
$
12

 
$
(119
)
 
Interest Credited to Fixed Accounts
 
Benefits, Claims, Losses and Settlement Expenses
(in millions)
Three Months Ended March 31, 2016
 
 
 
Interest rate contracts
$
—

 
$
755

Equity contracts
(3
)
 
(65
)
Credit contracts
—

 
(16
)
Foreign exchange contracts
—

 
(35
)
GMWB and GMAB embedded derivatives
—

 
(664
)
IUL embedded derivatives
14

 
—

Total gain (loss)
$
11

 
$
(25
)
The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to various products and transactions of the Company.
Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The GMAB and non-life contingent GMWB provisions are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. The Company economically hedges the exposure related to GMAB and non-life contingent GMWB provisions primarily using futures, options, interest rate swaptions, interest rate swaps, total return swaps and variance swaps.
The deferred premium associated with certain of the above options is paid or received semi-annually over the life of the option contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options as of March 31, 2017:
 
Premiums Payable
 
Premiums Receivable
(in millions)
2017
(1) 
$
210

 
$
68

2018
210

 
129

2019
255

 
171

2020
176

 
98

2021
167

 
107

2022-2026
580

 
182

  Total
$
1,598

 
$
755

(1) 2017 amounts represent the amounts payable and receivable for the period from April 1, 2017 to December 31, 2017.

30


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.
The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. As a means of economically hedging these risks, the Company uses futures, options, swaps and swaptions. Certain of the macro hedge derivatives used contain settlement provisions linked to both equity returns and interest rates; the remaining are either interest rate contracts or equity contracts. The Company’s macro hedge derivatives are included in Other contracts in the tables above.
EIA and IUL products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to EIA and IUL products will positively or negatively impact earnings over the life of these products. The equity component of the EIA and IUL product obligations are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and futures contracts.
Cash Flow Hedges
During the three months ended March 31, 2017, the Company held no derivatives that were designated as cash flow hedges.
As of March 31, 2017, the Company expects to reclassify $4 million of deferred losses on derivative instruments from AOCI to earnings during the next 12 months that will be recorded in net investment income. These were originally losses on derivative instruments related to interest rate swaptions. During the three months ended March 31, 2017 and 2016, no hedge relationships were discontinued due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the three months ended March 31, 2017 and 2016, amounts recognized in earnings on derivative transactions that were ineffective were not material. See Note 13 for a summary of net unrealized gains included in AOCI related to previously designated cash flow hedges.
Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is two years and relates to interest credited on forecasted fixed premium product sales.
Credit Risk
Credit risk associated with the Company’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, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. See Note 11 for additional information on the Company’s credit exposure related to derivative assets.
Certain of the Company’s derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s financial strength rating (or based on the debt rating of the Company’s parent, Ameriprise Financial). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company does not maintain a specific financial strength rating or Ameriprise Financial’s debt does not maintain a specific credit rating (generally an investment grade rating). If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. As of March 31, 2017 and December 31, 2016, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $305 million and $206 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of March 31, 2017 and December 31, 2016 was $284 million and $198 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position as of March 31, 2017 and December 31, 2016 were triggered, the aggregate fair value of additional assets that would be required to be posted as collateral or needed to settle the instruments immediately would have been $21 million and $8 million, respectively.

31


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

13. Shareholder’s Equity
The following tables provide the amounts related to each component of OCI:
 
Three Months Ended March 31, 2017
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
(in millions)
Net unrealized securities losses:
 
 
 
 
 
Net unrealized securities gains arising during the period (1)
$
38

 
$
(13
)
 
$
25

Reclassification of net securities gains included in net income (2)
(17
)
 
6

 
(11
)
Impact of deferred acquisition costs, deferred sales inducement costs, unearned revenue, benefit reserves and reinsurance recoverables
(26
)
 
9

 
(17
)
Net unrealized securities losses
(5
)
 
2

 
(3
)
Net unrealized derivatives gains:
 
 
 
 
 
Reclassification of net derivative losses included in net income (3)
2

 
(1
)
 
1

Net unrealized derivatives gains
2

 
(1
)
 
1

Other
(1
)
 
—

 
(1
)
Other comprehensive loss
$
(4
)
 
$
1

 
$
(3
)
 
Three Months Ended March 31, 2016
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
(in millions)
Net unrealized securities gains:
 
 
 
 
 
Net unrealized securities gains arising during the period (1)
$
469

 
$
(165
)
 
$
304

Impact of deferred acquisition costs, deferred sales inducement costs, unearned revenue, benefit reserves and reinsurance recoverables
(197
)
 
69

 
(128
)
Net unrealized securities gains
272

 
(96
)
 
176

Net unrealized derivatives gains:
 
 
 
 
 
Reclassification of net derivative losses included in net income (3)
1

 
—

 
1

Net unrealized derivatives gains
1

 
—

 
1

Other comprehensive income
$
273

 
$
(96
)
 
$
177

(1) Includes other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income during the period.
(2) Reclassification amounts are recorded in net realized investment gains.
(3) Reclassification amounts are recorded in net investment income.
Other comprehensive income (loss) related to net unrealized securities gains (losses) includes three components: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses; and (iii) other adjustments primarily consisting of changes in insurance and annuity asset and liability balances, such as DAC, DSIC, unearned revenue, benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.

32


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables present the changes in the balances of each component of AOCI, net of tax:
 
Net Unrealized Securities Gains
 
Net Unrealized Derivatives Gains
 
Other
 
Total
(in millions)
Balance, January 1, 2017
$
461

 
$
(4
)
 
$
—

 
$
457

  OCI before reclassifications
8

 
—

 
(1
)
 
7

  Amounts reclassified from AOCI
(11
)
 
1

 
—

 
(10
)
Total OCI
(3
)
 
1

 
(1
)
 
(3
)
Balance, March 31, 2017
$
458

(1) 
$
(3
)
 
$
(1
)
 
$
454

 
Net Unrealized Securities Gains
 
Net Unrealized Derivatives Gains
 
Total
(in millions)
Balance, January 1, 2016
$
403

 
$
(8
)
 
$
395

  OCI before reclassifications
176

 
1

 
177

  Amounts reclassified from AOCI
—

 
—

 
—

Total OCI
176

 
1

 
177

Balance, March 31, 2016
$
579

(1) 
$
(7
)
 
$
572

(1) Includes $1 million and $(2) million of noncredit related impairments on securities and net unrealized securities gains (losses) on previously impaired securities as of March 31, 2017 and March 31, 2016, respectively.
14. Income Taxes
The Company’s effective tax rate was 6.7% and 16.4% for the three months ended March 31, 2017 and 2016, respectively. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing tax credits. The decrease in the effective tax rate for the three months ended March 31, 2017 compared to the prior year period is primarily due to a $20 million benefit for a reversal of a tax reserve related to prior years.
Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $8 million, net of federal benefit, which will expire beginning December 31, 2017.
The Company 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 the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will not allow the Company to realize certain state deferred tax assets and state net operating losses. The valuation allowance for state deferred tax assets and state net operating losses was $8 million as of both March 31, 2017 and December 31, 2016.
As of March 31, 2017 and December 31, 2016, the Company had $67 million and $59 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $6 million, net of federal tax benefits, of unrecognized tax benefits as of both March 31, 2017 and December 31, 2016, would affect the effective tax rate.
The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $1 million and a net decrease of $39 million in interest and penalties for the three months ended March 31, 2017, and 2016, respectively. As of March 31, 2017 and December 31, 2016, the Company had a payable of $3 million and $2 million, respectively, related to accrued interest and penalties.
The Company or one or more of its subsidiaries 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 IRS has completed its examination of the 2006 through 2011 tax returns, and these years are effectively settled; however, the statutes of limitation, except for 2007, remain open for certain carryover adjustments. The IRS is currently auditing the Company’s U.S. income tax returns for 2012 through 2015. The Company’s or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 2010 through 2014.

33


RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

15. Contingencies
The Company is required by law to be a member of the guaranty fund association in every state where it is licensed to do business. In the event of insolvency of one or more unaffiliated insurance companies, the Company could be adversely affected by the requirement to pay assessments to the guaranty fund associations.
The Company projects its cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) and the amount of its premiums written relative to the industry-wide premium in each state. The Company accrues the estimated cost of future guaranty fund assessments when it is considered probable that an assessment will be imposed, the event obligating the Company to pay the assessment has occurred and the amount of the assessment can be reasonably estimated.
The Company has a liability for estimated guaranty fund assessments and a related premium tax asset. As of both March 31, 2017 and December 31, 2016, the estimated liability was $16 million and the related premium tax asset was $14 million. The expected period over which guaranty fund assessments will be made and the related tax credits recovered is not known.
Insurance companies have been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced examinations and other inquiries of insurance companies regarding sales and marketing practices (including sales to older consumers and disclosure practices), claims handling, and unclaimed property and escheatment practices and procedures. The Company has cooperated and will continue to cooperate with the applicable regulators.
The Company is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory investigation, examination or proceeding that is likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity.
Notwithstanding the foregoing, it is possible that the outcome of any current or future legal, arbitration or regulatory proceeding could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
Uncertain economic conditions, heightened and sustained volatility in the financial markets and significant financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the insurance industry generally.

34


RIVERSOURCE LIFE INSURANCE COMPANY

ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS
Overview
RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-Q as the “Company”. The following discussion and management’s narrative analysis of the financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements” that follow, the Consolidated Financial Statements and Notes presented in Item 1 and its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on February 23, 2017 (“2016 10-K”), as well as any current reports on Form 8-K and other publicly available information.
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Management’s narrative analysis is presented pursuant to General Instructions H(2)(a) of Form 10-Q in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
See Note 1 to the Consolidated Financial Statements for additional information.
A significant portion of the Company’s annuity product sales derive from annuities funding qualified accounts, specifically IRAs. As a provider of products and services to tax-qualified retirement accounts, certain aspects of the Company’s business fall within the compliance oversight of the Departments of Labor and Treasury, particularly regarding the enforcement of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the tax reporting requirements applicable to such accounts. The Department of Labor published regulations in April 2016 that would expand the scope of who is considered an ERISA fiduciary and therefore subject to certain ERISA transaction prohibitions involving the assets of IRA and ERISA plan clients. The regulations introduced additional exemptions and various amendments and revocations to pre-existing exemptions and focus on investment recommendations made by financial advisors or registered investment advisors to clients holding qualified accounts as well as how financial advisors are able to discuss IRA rollovers. To the extent the regulation becomes applicable, financial professionals who wish to be paid on a commission basis would need to comply with all of the conditions of an exemption in order to continue to recommend products to clients with IRAs and other retirement plans. While effective on June 7, 2016, these regulations are not scheduled to begin to become applicable until June 9, 2017, with full applicability of all requirements scheduled for January 1, 2018. As of February 3, 2017, per various memoranda and statements issued by President Trump and the Department of Labor, these regulations were under review by the Department of Labor. As a result, it is unclear whether the Department of Labor will substantially rescind or revise the regulations as adopted in 2016. In light of the uncertainty regarding the fiduciary regulation, while the Company prudently continues to prepare to comply with the Department of Labor’s investment fiduciary regulations and exemptions in the form in which they were adopted in April 2016, it is also evaluating the impact to its clients and business should the Department of Labor decide to rescind or revise the regulations per the developments since President Trump’s inauguration as generally described above.
Critical Accounting Estimates
The accounting and reporting policies that the Company uses affect its Consolidated Financial Statements. Certain of the Company’s accounting and reporting policies are critical to an understanding of the Company’s financial condition and results of operations. In some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of the Consolidated Financial Statements. These accounting policies are discussed in detail in “Management’s Narrative Analysis — Critical Accounting Estimates” in the Company’s 2016 10-K.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on the Company’s future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.

35


RIVERSOURCE LIFE INSURANCE COMPANY

Consolidated Results of Operations for the Three Months Ended March 31, 2017 and 2016
The following table presents the Company’s consolidated results of operations:
 
Three Months Ended March 31,
 
Change
 
2017
 
2016
 
 
(in millions)
 
 
Revenues
 
 
 
 
 
 
 
Premiums
$
99

 
$
102

 
$
(3
)
 
(3
)%
Net investment income
271

 
290

 
(19
)
 
(7
)
Policy and contract charges
483

 
469

 
14

 
3

Other revenues
100

 
98

 
2

 
2

Net realized investment gains
17

 
9

 
8

 
89

Total revenues
970

 
968

 
2

 
—

 
 
 
 
 
 
 
 
Benefits and expenses
 
 
 
 
 
 
 
Benefits, claims, losses and settlement expenses
322

 
226

 
96

 
42

Interest credited to fixed accounts
162

 
146

 
16

 
11

Amortization of deferred acquisition costs
57

 
90

 
(33
)
 
(37
)
Other insurance and operating expenses
177

 
177

 
—

 
—

Total benefits and expenses
718

 
639

 
79

 
12

Pretax income
252

 
329

 
(77
)
 
(23
)
Income tax provision
17

 
54

 
(37
)
 
(69
)
Net income
$
235

 
$
275

 
$
(40
)
 
(15
)%
Overall
Net income decreased $40 million or 15% to $235 million for the three months ended March 31, 2017 compared to $275 million for the prior year period. Pretax income decreased $77 million or 23% to $252 million for the three months ended March 31, 2017 compared to $329 million for the prior year period primarily due to the market impact on variable annuity guaranteed benefits (net of hedges and the related deferred sales inducement costs (“DSIC”) and deferred acquisition costs (“DAC”) amortization), the market impact on indexed universal life benefits (net of hedges and the related DAC amortization, unearned revenue amortization and the reinsurance accrual), an $11 million increase in life and disability income (“DI”) insurance claims and a negative impact from higher than expected lapses on variable annuities. These decreases were partially offset by market appreciation and the impact on DAC, DSIC and reserves for insurance features in non-traditional contracts from actual versus expected market performance based on the Company’s view of bond and equity performance.
The market impact on variable annuity guaranteed benefits (net of hedges and the related DSIC and DAC amortization) was an expense of $36 million for the three months ended March 31, 2017 compared to a benefit of $24 million for the prior year period.
The market impact on indexed universal life benefits (net of hedges and the related DAC amortization, unearned revenue amortization and the reinsurance accrual) was nil for the three months ended March 31, 2017 compared to a benefit of $19 million for the prior year period.
The impact on DAC, DSIC and reserves for insurance features in non-traditional long-duration contracts from actual versus expected market performance based on the Company’s view of bond and equity performance was a benefit of $19 million ($9 million for DAC, $2 million for DSIC and $8 million for insurance features in non-traditional long-duration contracts) for the three months ended March 31, 2017 reflecting favorable equity market returns compared to an expense of $10 million ($6 million for DAC, $1 million for DSIC and $3 million for insurance features in non-traditional long-duration contracts) for the prior year period.
The Company’s variable annuity account balances increased 3% to $76.4 billion as of March 31, 2017 compared to the prior year period due to equity market appreciation, partially offset by net outflows of $3.0 billion. Lapse rates were higher in the quarter, reflecting increased client asset transfers from variable annuities to fee-based investment advisory accounts, as well as from run-off of a closed block of policies distributed through third-parties.
The Company’s fixed annuity account balances declined 7% to $9.8 billion as of March 31, 2017 compared to the prior year period as older policies continue to lapse and new sales are limited due to low interest rates. Given the current interest rate environment, the Company’s current fixed annuity book is expected to gradually run off and earnings on its fixed annuity business will trend down.

36


RIVERSOURCE LIFE INSURANCE COMPANY

Revenues
Total revenues increased by $2 million for the three months ended March 31, 2017 compared to the prior year period.
Net investment income decreased $19 million or 7% to $271 million for the three months ended March 31, 2017 compared to $290 million for the prior year period reflecting a decrease in investment income on fixed maturities primarily due to lower invested assets and continued low interest rates.
Policy and contract charges increased $14 million or 3% to $483 million for the three months ended March 31, 2017 compared to $469 million for the prior year period primarily due to higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date and higher average fee rates.
Net realized investment gains were $17 million for the three months ended March 31, 2017 compared to $9 million for the prior year period. For the three months ended March 31, 2017, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $17 million. For the three months ended March 31, 2016, a net realized gain of $10 million from the sale of certain residential mortgage loans was partially offset by a $1 million increase in the provision for loan losses on syndicated loans.
Benefits and Expenses
Total benefits and expenses increased $79 million or 12% to $718 million for the three months ended March 31, 2017 compared to $639 million in the prior year period primarily due to the market impact on variable annuity guaranteed benefits (net of hedges and the related DSIC and DAC amortization).
Benefits, claims, losses and settlement expenses increased $96 million or 42% to $322 million for the three months ended March 31, 2017 compared to $226 million for the prior year period primarily reflecting the following items:
•
A $9 million increase in expense related to higher reserve funding driven by the impact of higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date.
•
A $10 million negative impact in the first quarter of 2017 from changes in assumptions in the third quarter unlocking process that result in ongoing increases to living benefit reserves.
•
A $9 million increase in life and DI insurance claims in the first quarter of 2017 compared to the prior year period.
•
The impact on DSIC and reserves for insurance features in non-traditional long-duration contracts from actual versus expected market performance based on the Company’s view of bond and equity performance was a benefit of $10 million for the three months ended March 31, 2017 reflecting favorable equity market returns compared to an expense of $4 million for the prior year period.
•
A $284 million increase in expense compared to the prior year period from the unhedged nonperformance credit spread risk adjustment on variable annuity guaranteed benefits. As the embedded derivative liability on which the nonperformance credit spread is applied increases (decreases), the impact of the nonperformance credit spread is favorable (unfavorable) to expense. The unfavorable impact of the nonperformance credit spread was $65 million for the three months ended March 31, 2017 compared to a favorable impact of $219 million for the prior year period.
•
A $201 million decrease in expense from other market impacts on variable annuity guaranteed benefits, net of hedges in place to offset those risks and the related DSIC amortization. This decrease was the result of a favorable $1.4 billion change in the market impact on variable annuity guaranteed living benefits reserves, an unfavorable $1.2 billion change in the market impact on derivatives hedging the variable annuity guaranteed benefits and a favorable $2 million change in the DSIC offset. The main market drivers contributing to these changes are summarized below:
•
Interest rate impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a lower expense in the first quarter of 2017 compared to the prior year period.
•
Equity market impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a benefit in the first quarter of 2017 compared to an expense in the prior year period.
•
Volatility impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a higher expense in the first quarter of 2017 compared to the prior year period.
•
Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various behavioral items, were a net favorable impact compared to the prior year period.
Interest credited to fixed accounts increased $16 million or 11% to $162 million for the three months ended March 31, 2017 compared to $146 million for the prior year period due to the market impact on indexed universal life benefits, net of hedges, which was nil for the three months ended March 31, 2017 compared to a benefit of $16 million for the prior year period.

37


RIVERSOURCE LIFE INSURANCE COMPANY

Amortization of DAC decreased $33 million or 37% to $57 million for the three months ended March 31, 2017 compared to $90 million for the prior year period primarily reflecting the following items:
•
The impact on DAC from actual versus expected market performance based on the Company’s view of bond and equity performance was a benefit of $9 million for the first quarter of 2017 reflecting favorable equity market returns compared to an expense of $6 million for the prior year period.
•
The DAC offset to the market impact on variable annuity guaranteed benefits (net of hedges and the related DSIC amortization) was a benefit of $6 million for the first quarter of 2017 compared to an expense of $17 million for the prior year period.
Income Taxes
The Company’s effective tax rate was 6.7% for the three months ended March 31, 2017 compared to 16.4% for the three months ended March 31, 2016. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing tax credits. The decrease in the effective tax rate for the three months ended March 31, 2017 compared to the prior year period was primarily due to a $20 million benefit for a reversal of a tax reserve related to prior years.
Market Risk
The Company’s primary market risk exposures are interest rate, equity price and credit risk. Equity price and interest rate fluctuations can have a significant impact on the Company’s results of operations, primarily due to the effects on asset-based fees and expenses, the “spread” income generated on its fixed annuities, fixed insurance and the fixed portion of its variable annuities and variable insurance contracts, the value of DAC and DSIC assets, the value of liabilities for guaranteed benefits associated with its variable annuities and the value of derivatives held to hedge these benefits.
The Company’s earnings from fixed annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts are based upon the spread between rates earned on assets held and the rates at which interest is credited to accounts. The Company primarily invests in fixed rate securities to fund the rate credited to clients. The Company guarantees an interest rate to the holders of these products. Investment assets and client liabilities generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments. Therefore, in an increasing interest rate environment, higher interest rates may be reflected in crediting rates to clients sooner than in rates earned on invested assets, which could result in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. However, the current low interest rate environment is resulting in interest rates below the level of some of the Company’s liability guaranteed minimum interest rates (“GMIRs”). Hence, a modest rise in interest rates would not necessarily result in changes to all the liability credited rates while projected asset purchases would capture the full increase in interest rates. This dynamic would result in widening spreads under a modestly rising rate scenario given the current relationship between the current level of interest rates and the underlying GMIRs on the business.
As a result of the low interest rate environment, the Company’s current reinvestment yields are generally lower than the current portfolio yield. The Company expects its portfolio income yields to continue to decline in future periods if interest rates remain low. The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans that may generate proceeds to reinvest through March 31, 2019 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, was $3.3 billion and 5.3%, respectively, as of March 31, 2017. In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled $3.3 billion and had a weighted average yield of 3.4% as of March 31, 2017. While these amounts represent investments that could be subject to reinvestment risk, it is also possible that these investments will be used to fund liabilities or may not be prepaid and will remain invested at their current yields. In addition to the interest rate environment, the mix of benefit payments versus product sales as well as the timing and volumes associated with such mix may impact the Company’s investment yield. Furthermore, reinvestment activities and the associated investment yield may also be impacted by corporate strategies implemented at management’s discretion. The average yield for investment purchases during the three months ended March 31, 2017 was approximately 3.7%.
The reinvestment of proceeds from maturities, calls and prepayments at rates below the current portfolio yield, which may be below the level of some liability GMIRs, will have a negative impact to future operating results. To mitigate the unfavorable impact that the low interest rate environment has on the Company’s spread income, it assesses reinvestment risk in its investment portfolio and monitors this risk in accordance with its asset/liability management framework. In addition, the Company may reduce the crediting rates on its fixed products when warranted, subject to guaranteed minimums.
In addition to the fixed rate exposures noted above, the Company also has the following variable annuity guarantee benefits: guaranteed minimum withdrawal benefits (“GMWB”), guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”). Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying invested assets.
The variable annuity guarantees continue to be managed by utilizing a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. The Company’s comprehensive hedging program focuses mainly on first order sensitivities of assets and

38


RIVERSOURCE LIFE INSURANCE COMPANY

liabilities: Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. The Company uses various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to manage the risk exposures. The exposures are measured and monitored daily and adjustments to the hedge portfolio are made as necessary.
The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. The Company assesses this residual risk under a range of scenarios in creating and executing the macro hedge program. As a means of economically hedging these risks, the Company uses futures, options, swaps and swaptions. Certain of the macro hedge derivatives used contain settlement provisions linked to both equity returns and interest rates; the remaining are interest rate contracts or equity contracts. The macro hedge program could result in additional earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory capital volatility, may not be closely aligned to changes in the variable annuity guarantee embedded derivatives.
To evaluate interest rate and equity price risk, the Company performs sensitivity testing which measures the impact on pretax income from the sources listed below for a 12-month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities, indexed universal life insurance and the associated hedge assets, the Company assumed no change in implied market volatility despite the 10% drop in equity prices.
The following tables present the Company’s estimate of the impact on pretax income from the above defined hypothetical market movements as of March 31, 2017:
Equity Price Decline 10%
 
Equity Price Exposure to Pretax Income
 
Before Hedge Impact
 
Hedge Impact
 
Net Impact
 
 
(in millions)
Asset-based fees and expenses
 
$
(84
)
 
$
—

 
$
(84
)
DAC and DSIC amortization (1) (2)
 
(126
)
 
—

 
(126
)
Variable annuity riders:
 
 

 
 

 
 
GMDB and GMIB (2)
 
(31
)
 
—

 
(31
)
GMWB
 
(470
)
 
315

 
(155
)
GMAB
 
(33
)
 
33

 
—

DAC and DSIC amortization (3)
 
N/A

 
N/A

 
(2
)
Total variable annuity riders
 
(534
)

348


(188
)
Macro hedge program (4)
 
—

 
19

 
19

Equity indexed annuities
 
1

 
(1
)
 
—

Indexed universal life insurance
 
58

 
(44
)
 
14

Total
 
$
(685
)

$
322


$
(365
)

39


RIVERSOURCE LIFE INSURANCE COMPANY

Interest Rate Increase 100 Basis Points
 
Interest Rate Exposure to Pretax Income
 
Before Hedge Impact
 
Hedge Impact
 
Net Impact
 
 
(in millions)
Asset-based fees and expenses
 
$
(28
)
 
$
—

 
$
(28
)
Variable annuity riders:
 
 

 
 

 
 

GMDB and GMIB
 
—

 
—

 
—

GMWB
 
906

 
(1,020
)
 
(114
)
GMAB
 
25

 
(27
)
 
(2
)
DAC and DSIC amortization (3)
 
N/A

 
N/A

 
35

Total variable annuity riders
 
931


(1,047
)

(81
)
Macro hedge program(4)
 
—

 
229

 
229

Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products
 
98

 
—

 
98

Indexed universal life insurance
 
84

 
2

 
86

Total
 
$
1,085


$
(816
)

$
304

N/A Not Applicable.
(1) 
Market impact on DAC and DSIC amortization resulting from lower projected profits.
(2) 
In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, the Company has not changed its assumed equity asset growth rates. This is a significantly more conservative estimate than if the Company assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. The Company makes this same conservative assumption in estimating the impact from GMDB and GMIB riders and the life contingent benefits associated with GMWB.
(3) 
Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.
(4) 
The market impact of the macro hedge program is modeled net of any related impact to DAC and DSIC amortization.
The above results compare to an estimated negative net impact to pretax income of $361 million related to a 10% equity price decline and an estimated positive net impact to pretax income of $141 million related to a 100 basis point increase in interest rates as of December 31, 2016. The change in interest rate exposure from December 31, 2016 is primarily the result of changes in market conditions.
Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with risk margins incorporated in contractholder behavior assumptions and with discount rates increased to reflect a current market estimate of the Company’s risk of nonperformance specific to these liabilities. The nonperformance spread risk is not hedged.
Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming that implied market volatility does not change when equity prices fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, the Company has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has the Company tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.
The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.
Fair Value Measurements
The Company reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale. The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. The Company 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 10 to the Consolidated Financial Statements for additional information on the Company’s fair value measurements.
Fair Value of Liabilities and Nonperformance Risk
Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for the Company’s obligations of its variable annuity riders and indexed universal life insurance, the Company considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, the Company adjusts the valuation of variable annuity riders and indexed universal life insurance by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of the Company’s nonperformance risk. The nonperformance risk

40


RIVERSOURCE LIFE INSURANCE COMPANY

adjustment is based on observable market data adjusted to estimate the risk of the Company not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of March 31, 2017. As the Company’s estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $253 million, net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on March 31, 2017 credit spreads.
Liquidity and Capital Resources
Liquidity Strategy
The liquidity requirements of the Company are generally met by funds provided by investment income, maturities and periodic repayments of investments, premiums and proceeds from sales of investments, fixed annuity and fixed insurance deposits as well as capital contributions from its parent, Ameriprise Financial, Inc. (“Ameriprise Financial”). Other liquidity sources the Company has established are short-term borrowings and available lines of credit with Ameriprise Financial aggregating $990 million.
The Company enters into short-term borrowings, which may include repurchase agreements and Federal Home Loan Bank (“FHLB”) advances to reduce reinvestment risk. Short-term borrowings allow the Company to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements as of both March 31, 2017 and December 31, 2016 was $50 million which is collateralized with agency residential mortgage backed securities and commercial mortgage backed securities from the Company’s investment portfolio. RiverSource Life Insurance Company is a member of the FHLB of Des Moines, which provides RiverSource Life Insurance Company access to collateralized borrowings. As of March 31, 2017, the Company had estimated maximum borrowing capacity of $5.2 billion under the FHLB facility, of which $150 million was outstanding and is collateralized with commercial mortgage backed securities.
The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
In 2009, the Company established an agreement to protect its exposure to Genworth Life Insurance Company (“GLIC”) for its reinsured LTC. In 2016, substantial enhancements to this reinsurance protection agreement were finalized. The terms of these confidential provisions within the agreement have been shared, in the normal course of regular reviews, with the Company’s domiciliary regulator and rating agencies. Management believes that this agreement and offsetting non LTC legacy arrangements with Genworth will enable the Company to recover on all net exposure in the event of an insolvency of GLIC.
Capital Activity
Dividends paid by RiverSource Life Insurance Company were as follows:
 
Three Months Ended March 31,
2017
 
2016
(in millions)
Cash dividends paid to Ameriprise Financial
$
300

 
$
400

Regulatory Capital
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities were as follows:
 
Actual Capital(1)
 
Regulatory Capital 
Requirements(2)
March 31,
2017
 
December 31,
2016
December 31,
2016
(in millions)
RiverSource Life Insurance Company
$
2,729

 
$
3,052

 
$
606

RiverSource Life Insurance Co. of NY
328

 
323

 
38

(1) Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(2) Regulatory capital requirement is based on the statutory risk-based capital filing.
Contractual Commitments
There have been no material changes to the Company’s contractual obligations disclosed in the Company’s 2016 10-K.

41


RIVERSOURCE LIFE INSURANCE COMPANY

Forward-Looking Statements
This report contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include: 
•
statements of the Company’s plans, intentions, expectations, objectives, or goals, including those related to the introduction, cessation, terms or pricing of new or existing products and services and the consolidated tax rate;
•
other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and
•
statements of assumptions underlying such statements.
The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on pace,” “project” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements.
Such factors include, but are not limited to: 
•
conditions in the interest rate, credit default, equity market and foreign exchange environments, including changes in valuations, liquidity and volatility;
•
changes in and the adoption of relevant accounting standards and securities rating agency standards and processes, as well as changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation, including the rules and regulations implemented or that may be implemented or modified in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act or in light of the U.S. Department of Labor rule and exemptions pertaining to the fiduciary status of investment advice providers to 401(k) plans, plan sponsors, plan participants and the holders of individual retirement or health savings accounts;
•
the Company’s investment management performance and consumer acceptance of the Company’s products;
•
effects of competition in the financial services industry, including pricing pressure, the introduction of new products and services and changes in product distribution mix and distribution channels;
•
changes to the Company’s reputation that may arise from employee or Ameriprise Financial Services, Inc. advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;
•
the Company’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings, as well as the opinions of rating agencies and other analysts or the Company’s regulators, distributors or policyholders and contractholders in response to any change or prospect of change in any such opinion;
•
risks of default, capacity constraint or repricing by issuers or guarantors of investments the Company owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from the Company’s assumptions regarding such risks, the evaluations or the prospect of changes in evaluations of any such third parties published by rating agencies or other analysts and the reactions of other market participants or the Company’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
•
experience deviations from the Company’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing or unlocking DAC and DSIC or market volatility underlying the Company’s valuation and hedging of guaranteed benefit annuity riders, or from assumptions regarding interest rates assumed in the Company’s loss recognition testing of its long term care business;
•
successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;
•
the Company’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;
•
the impact of intercompany allocations to the Company from Ameriprise Financial and its affiliates;
•
Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute the Company’s products through current and future distribution channels;
•
changes in capital requirements that may be indicated, required or advised by regulators or rating agencies;
•
the impacts of Ameriprise Financial’s efforts to improve distribution economics and realize benefits from re-engineering and tax planning;
•
interruptions or other failures in the Company’s communications, technology and other operating systems, including errors or failures caused by third-party service providers, interference or failures caused by third-party attacks on the Company’s systems, or the failure to safeguard the privacy or confidentiality of sensitive information and data on such systems; and

42


RIVERSOURCE LIFE INSURANCE COMPANY

•
general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services the Company consumes in the conduct of its business, and applicable legislation and regulation and changes therein, (such as the uncertain regulatory environment in the U.S. after the recent U.S. election), including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding the financial services industry and regulatory rulings and pronouncements.
The Company cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that the Company is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statements. The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion included in Part I, Item 1A of the Company’s 2016 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in and pursuant to Securities and Exchange Commission regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding the required disclosure. It should be noted that, because of inherent limitations, the Company’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.
The Company’s management, under the supervision and with the participation of the Company’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable level of assurance as of March 31, 2017.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life Insurance Company’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, RiverSource Life Insurance Company’s internal control over financial reporting.

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RIVERSOURCE LIFE INSURANCE COMPANY

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 15 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference. 
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors provided in Part I, Item 1A of RiverSource Life Insurance Company’s 2016 10K.
ITEM 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

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RIVERSOURCE LIFE INSURANCE 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.
 
 
RIVERSOURCE LIFE INSURANCE COMPANY
 
 
(Registrant)
 
 
 
 
Date:
May 3, 2017
By
/s/ John R. Woerner
 
 
 
John R. Woerner
 
 
 
Chairman and President
 
 
 
 
 
 
 
 
Date:
May 3, 2017
By
/s/ Brian J. McGrane
 
 
 
Brian J. McGrane
 
 
 
Executive Vice President and
 
 
 
Chief Financial Officer


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RIVERSOURCE LIFE INSURANCE COMPANY

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

Exhibit
Description
3.1
Copy of Certificate of Incorporation of IDS Life Insurance Company, filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976, is incorporated by reference.
3.1.1
Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on January 5, 2007, is incorporated by reference.
3.2
Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference.
10.1*
Copy of Amendment No. 2 to the Amended and Restated Management, Service & Marketing Support Agreement by and between Columbia Management Investments Advisers, LLC, Columbia Management Investment Services Corp. and RiverSource Life Insurance Company effective January 1, 2017.
31.1*
Certification of John R. Woerner, Chairman and President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32*
Certification of John R. Woerner, Chairman and President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following materials from RiverSource Life Insurance Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three months ended March 31, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016; (iv) Consolidated Statements of Shareholder’s Equity for the three months ended March 31, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (vi) Notes to the Consolidated Financial Statements.
______________________________________
*   Filed electronically herewith.


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