10-Q 1 riversourcelifeinsco09302017.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 September 30, 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 November 1, 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 — September 30, 2017 and December 31, 2016
Consolidated Statements of Income — Three months and nine months ended September 30, 2017 and 2016
Consolidated Statements of Comprehensive Income — Three months and nine months ended September 30, 2017 and 2016
Consolidated Statements of Shareholder’s Equity — Nine months ended September 30, 2017 and 2016
Consolidated Statements of Cash Flows — Nine months ended September 30, 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


2


RIVERSOURCE LIFE INSURANCE COMPANY

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
September 30,
2017
 
December 31,
2016
(in millions, except share amounts)
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2017, $20,732; 2016, $21,464)
$
22,163

 
$
22,682

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

 
10

Mortgage loans (net of allowance for loan losses: 2017 and 2016, $19) (portion measured at fair value: 2017, $251; 2016, nil)
2,880

 
2,874

Policy loans
841

 
830

Other investments
957

 
998

Total investments
26,849

 
27,394

Cash and cash equivalents
734

 
323

Reinsurance recoverables
2,846

 
2,623

Other receivables
213

 
262

Accrued investment income
221

 
237

Deferred acquisition costs
2,624

 
2,611

Other assets
4,130

 
4,305

Separate account assets
80,654

 
76,298

Total assets
$
118,271

 
$
114,053

 
Liabilities and Shareholder’s Equity
Liabilities:
Policyholder account balances, future policy benefits and claims
$
29,242

 
$
29,514

Short-term borrowings
201

 
200

Other liabilities
4,369

 
4,253

Separate account liabilities
80,654

 
76,298

Total liabilities
114,466

 
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
848

 
862

Accumulated other comprehensive income, net of tax
488

 
457

Total shareholder’s equity
3,805

 
3,788

Total liabilities and shareholder’s equity
$
118,271

 
$
114,053

See Notes to Consolidated Financial Statements.

3


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
(in millions)
Revenues
Premiums
$
99

 
$
104

 
$
304

 
$
315

Net investment income
261

 
276

 
797

 
850

Policy and contract charges
444

 
557

 
1,415

 
1,501

Other revenues
103

 
104

 
308

 
303

Net realized investment gains (losses)
—

 
1

 
31

 
15

Total revenues
907

 
1,042

 
2,855

 
2,984

Benefits and expenses
Benefits, claims, losses and settlement expenses
236

 
590

 
920

 
1,148

Interest credited to fixed accounts
176

 
161

 
509

 
465

Amortization of deferred acquisition costs
32

 
144

 
142

 
299

Other insurance and operating expenses
176

 
149

 
527

 
505

Total benefits and expenses
620

 
1,044

 
2,098

 
2,417

Pretax income (loss)
287

 
(2
)
 
757

 
567

Income tax provision (benefit)
34

 
(38
)
 
71

 
33

Net income
$
253

 
$
36

 
$
686

 
$
534

 
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 (losses)
$
—

 
$
—

 
$
—

 
$
—

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
(in millions)
Net income
$
253

 
$
36

 
$
686

 
$
534

Other comprehensive income (loss), net of tax:
   Net unrealized gains (losses) on securities
(7
)
 
(26
)
 
29

 
340

   Net unrealized gains (losses) on derivatives
1

 
1

 
3

 
3

Other
—

 
—

 
(1
)
 
—

Total other comprehensive income (loss), net of tax
(6
)
 
(25
)
 
31

 
343

Total comprehensive income
$
247

 
$
11

 
$
717

 
$
877

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
—

 
—

 
534

 
—

 
534

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
343

 
343

Total comprehensive income
 
877

Tax adjustment on share-based incentive compensation plan
—

 
2

 
—

 
—

 
2

Cash dividends to Ameriprise Financial, Inc.
—

 
—

 
(800
)
 
—

 
(800
)
Balances at September 30, 2016(1)
$
3

 
$
2,467

 
$
910

 
$
738

 
$
4,118

 
Balances at January 1, 2017
$
3

 
$
2,466

 
$
862

 
$
457

 
$
3,788

Comprehensive income:
Net income
—

 
—

 
686

 
—

 
686

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
31

 
31

Total comprehensive income
 
717

Cash dividends to Ameriprise Financial, Inc.
—

 
—

 
(700
)
 
—

 
(700
)
Balances at September 30, 2017
$
3

 
$
2,466

 
$
848

 
$
488

 
$
3,805

(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)

 
Nine Months Ended September 30,
2017
 
2016
(in millions)
Cash Flows from Operating Activities
Net income
$
686

 
$
534

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

 
 

Depreciation, amortization and accretion, net
36

 
30

Deferred income tax (benefit) expense
(71
)
 
(5
)
Contractholder and policyholder charges, non-cash
(268
)
 
(260
)
Loss from equity method investments
44

 
43

Net realized investment (gains) losses
(31
)
 
(17
)
Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains (losses)
—

 
2

Changes in operating assets and liabilities:
 

 
 

Deferred acquisition costs
(31
)
 
87

Policyholder account balances, future policy benefits and claims, net
(118
)
 
1,389

Derivatives, net of collateral
500

 
(658
)
Reinsurance recoverables
(235
)
 
(200
)
Other receivables
50

 
(20
)
Accrued investment income
16

 
11

Other, net
(55
)
 
170

Net cash provided by (used in) operating activities
523

 
1,106

 
Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales
209

 
254

Maturities, sinking fund payments and calls
1,843

 
1,815

Purchases
(1,315
)
 
(2,343
)
Proceeds from sales, maturities and repayments of mortgage loans
341

 
679

Funding of mortgage loans
(352
)
 
(327
)
Proceeds from sales and collections of other investments
126

 
101

Purchase of other investments
(154
)
 
(105
)
Purchase of land, buildings, equipment and software
(7
)
 
(7
)
Change in policy loans, net
(11
)
 
(12
)
Other, net
31

 
23

Net cash provided by (used in) investing activities
711

 
78

See Notes to Consolidated Financial Statements.

6


RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

 
Nine Months Ended September 30,
2017
 
2016
(in millions)
Cash Flows from Financing Activities
Policyholder account balances:
Deposits and other additions
$
1,538

 
$
1,532

Net transfers from (to) separate accounts
(120
)
 
113

Surrenders and other benefits
(1,413
)
 
(1,448
)
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
43

 
242

Cash paid for purchased options with deferred premiums
(171
)
 
(238
)
Cash dividends to Ameriprise Financial, Inc.
(700
)
 
(800
)
Net cash provided by (used in) financing activities
(823
)
 
(599
)
Net increase (decrease) in cash and cash equivalents
411

 
585

Cash and cash equivalents at beginning of period
323

 
370

Cash and cash equivalents at end of period
$
734

 
$
955

 
Supplemental Disclosures:
Income taxes paid (received), net
$
243

 
$
(31
)
Interest paid on borrowings
1

 
1

Non-cash investing activity:
 

 
 

Partnership commitments not yet remitted
9

 
75

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.
In the third quarter of 2017, the Company recorded a $14 million out-of-period correction related to a variable annuity model assumption that decreased amortization of deferred acquisition costs (“DAC”) by $10 million and decreased benefits, claims, losses and settlement expenses by $4 million.
The impact to prior period financial statements of these out-of-period corrections 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
Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB updated the accounting standards to amend the hedge accounting recognition and presentation requirements. The objectives of the update are to better align the financial reporting of hedging relationships to the economic results of an entity’s risk management activities and simplify the application of the hedge accounting guidance. The update also adds new disclosures and amends existing disclosure requirements. The standard is effective for interim and annual periods beginning after December 15, 2018, and should be applied on a modified retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
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

8


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

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 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 on a retrospective basis 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

9


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

performance obligation and the associated timing of each performance obligation. The update is not expected to have a material impact on the consolidated financial condition and results of operations. The Company continues to evaluate the impact on disclosures.
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 $455 million and $482 million as of September 30, 2017 and December 31, 2016, respectively. The Company had a $114 million and $135 million liability recorded as of September 30, 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
 
September 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Noncredit OTTI (1)
 
 
(in millions)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Corporate debt securities
 
$
12,415

 
$
1,137

 
$
(21
)
 
$
13,531

 
$
—

Residential mortgage backed securities
 
3,065

 
66

 
(18
)
 
3,113

 
—

Commercial mortgage backed securities
 
3,148

 
61

 
(25
)
 
3,184

 
—

State and municipal obligations
 
1,109

 
196

 
(9
)
 
1,296

 
—

Asset backed securities
 
710

 
30

 
(2
)
 
738

 
—

Foreign government bonds and obligations
 
284

 
21

 
(5
)
 
300

 
—

U.S. government and agencies obligations
 
1

 
—

 
—

 
1

 
—

Total fixed maturities
 
20,732

 
1,511

 
(80
)
 
22,163

 
—

Common stocks
 
4

 
4

 
—

 
8

 
3

Total
 
$
20,736

 
$
1,515

 
$
(80
)
 
$
22,171

 
$
3


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 September 30, 2017 and December 31, 2016, investment securities with a fair value of $1.6 billion and $1.5 billion, respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings, of which $697 million and $428 million, respectively, may be sold, pledged or rehypothecated by the counterparty.
As of both September 30, 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 September 30, 2017 and December 31, 2016, approximately $962 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
 
September 30, 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
 
$
5,908

 
$
5,988

 
27
%
 
$
5,671

 
$
5,728

 
25
%
AA
 
1,079

 
1,274

 
6

 
1,013

 
1,177

 
5

A
 
3,579

 
4,019

 
18

 
3,767

 
4,167

 
19

BBB
 
8,985

 
9,666

 
44

 
9,584

 
10,190

 
45

Below investment grade
 
1,181

 
1,216

 
5

 
1,429

 
1,420

 
6

Total fixed maturities
 
$
20,732

 
$
22,163

 
100
%
 
$
21,464

 
$
22,682

 
100
%
As of September 30, 2017 and December 31, 2016, approximately 37% 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 
September 30, 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
53

 
$
520

 
$
(6
)
 
21

 
$
178

 
$
(15
)
 
74

 
$
698

 
$
(21
)
Residential mortgage backed securities
43

 
833

 
(11
)
 
26

 
249

 
(7
)
 
69

 
1,082

 
(18
)
Commercial mortgage backed securities
67

 
1,172

 
(19
)
 
14

 
180

 
(6
)
 
81

 
1,352

 
(25
)
State and municipal obligations
19

 
55

 
—

 
5

 
123

 
(9
)
 
24

 
178

 
(9
)
Asset backed securities
11

 
113

 
(1
)
 
9

 
63

 
(1
)
 
20

 
176

 
(2
)
Foreign government bonds and obligations
8

 
19

 
—

 
14

 
21

 
(5
)
 
22

 
40

 
(5
)
Total
201

 
$
2,712

 
$
(37
)
 
89

 
$
814

 
$
(43
)
 
290

 
$
3,526

 
$
(80
)
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 decline in interest rates on the long end of the interest rate curve and tighter 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 September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
(in millions)
Beginning balance
$
—

 
$
33

 
$
21

 
$
33

Reductions for securities sold during the period (realized)
—

 
—

 
(21
)
 
—

Ending balance
$
—

 
$
33

 
$
—

 
$
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 (losses) were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
(in millions)
Gross realized investment gains
$
5

 
$
5

 
$
38

 
$
18

Gross realized investment losses
(2
)
 
(3
)
 
(4
)
 
(11
)
Total
$
3

 
$
2

 
$
34

 
$
7

See Note 13 for a rollforward of net unrealized investment gains (losses) included in AOCI.
Available-for-Sale securities by contractual maturity as of September 30, 2017 were as follows:
 
Amortized Cost
 
Fair Value
(in millions)
Due within one year
$
1,560

 
$
1,588

Due after one year through five years
5,213

 
5,466

Due after five years through 10 years
3,314

 
3,460

Due after 10 years
3,722

 
4,614

 
13,809

 
15,128

Residential mortgage backed securities
3,065

 
3,113

Commercial mortgage backed securities
3,148

 
3,184

Asset backed securities
710

 
738

Common stocks
4

 
8

Total
$
20,736

 
$
22,171

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 September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
(in millions)
Fixed maturities
$
237

 
$
249

 
$
717

 
$
751

Mortgage loans
34

 
38

 
103

 
115

Other investments
(4
)
 
(4
)
 
(4
)
 
4

 
267

 
283

 
816

 
870

Less: investment expenses
6

 
7

 
19

 
20

Total
$
261

 
$
276

 
$
797

 
$
850

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 nine months ended and the ending balance of the allowance for loan losses by impairment method:
 
September 30,
2017
 
2016
(in millions)
Beginning balance
$
25

 
$
25

Charge-offs
—

 
(1
)
Provisions
—

 
1

Ending balance
$
25


$
25

 
 
 
 
Individually evaluated for impairment
$
3

 
$
2

Collectively evaluated for impairment
22

 
23

The recorded investment in financing receivables by impairment method was as follows:
 
September 30,
2017
 
December 31, 2016
(in millions)
Individually evaluated for impairment
$
18

 
$
10

Collectively evaluated for impairment
3,271

 
3,275

Total
$
3,289

 
$
3,285

As of September 30, 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 $13 million and $5 million, respectively.
During the three months ended September 30, 2017 and 2016, the Company purchased $14 million and $17 million, respectively, and sold $9 million and nil, respectively, of syndicated loans. During the nine months ended September 30, 2017 and 2016, the Company purchased $121 million and $54 million, respectively, of syndicated loans, and sold $12 million and $250 million, respectively, of loans. The $250 million (amortized cost, net of unamortized discount) of loans sold during the nine months ended September 30, 2016 consisted of residential mortgage loans sold on March 30, 2016 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 September 30, 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 September 30, 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.

13


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
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
(in millions)
 
 
 
 
South Atlantic
$
738

 
$
753

 
28
%
 
29
%
Pacific
754

 
722

 
28

 
28

Mountain
242

 
234

 
9

 
9

West North Central
205

 
212

 
8

 
8

Middle Atlantic
186

 
191

 
7

 
7

East North Central
231

 
195

 
9

 
8

West South Central
128

 
122

 
5

 
5

New England
79

 
84

 
3

 
3

East South Central
85

 
80

 
3

 
3

 
2,648

 
2,593

 
100
%
 
100
%
Less: allowance for loan losses
19

 
19

 
 

 
 

Total
$
2,629

 
$
2,574

 
 

 
 

Concentrations of credit risk of commercial mortgage loans by property type were as follows:
 
Loans
 
Percentage
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
(in millions)
 
 
 
 
Retail
$
896

 
$
916

 
34
%

35
%
Office
485

 
473

 
18

 
18

Apartments
540

 
483

 
20

 
19

Industrial
442

 
430

 
17

 
17

Mixed use
42

 
42

 
2

 
2

Hotel
40

 
41

 
1

 
1

Other
203

 
208

 
8

 
8

 
2,648

 
2,593

 
100
%
 
100
%
Less: allowance for loan losses
19

 
19

 
 

 
 

Total
$
2,629

 
$
2,574

 
 

 
 

Residential Mortgage Loans
The recorded investment in residential mortgage loans as of September 30, 2017 and December 31, 2016 was $251 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 September 30, 2017 and December 31, 2016, no allowance for loan losses was recorded.
As of September 30, 2017 and December 31, 2016, approximately 1% and 2%, respectively, of residential mortgage loans had FICO scores below 640. As of both September 30, 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 52% of the portfolio as of both September 30, 2017 and December 31, 2016. Colorado and Washington represent 18% and 13%, respectively, of the portfolio as of both September 30, 2017 and December 31, 2016. No other state represents more than 10% of the total residential mortgage loan portfolio.
During the third quarter of 2017, the Company entered into an agreement with an unaffiliated third party to sell its remaining $255 million of residential mortgage loans and recorded a $4 million loss to reflect the loans at fair value.


14


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

Syndicated Loans
The recorded investment in syndicated loans as of September 30, 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 September 30, 2017 and December 31, 2016 were $2 million and $1 million, respectively.
Troubled Debt Restructurings
The recorded investment in restructured loans was not material as of September 30, 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 and nine months ended September 30, 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
In the third quarter of the year, management updated market-related inputs and implemented model changes related to our living benefit valuation. In addition, management conducted its annual review of life insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking. The impact of unlocking to DAC in the third quarter of 2017 primarily reflected improved persistency and mortality on life insurance contracts and a correction related to a variable annuity model assumption partially offset by updates to market-related inputs to the living benefit valuation. The impact of unlocking to DAC in the third quarter of 2016 primarily reflected low interest rates that more than offset benefits from persistency on annuity contracts without living benefits. In addition, the Company’s review of its closed LTC business in the prior year period resulted in the write-off of DAC, which was included in the impact of unlocking.
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
173

 
212

(2) 
Amortization, excluding the impact of valuation assumptions review
(154
)
 
(218
)
 
Amortization, impact of valuation assumptions review
12

 
(81
)
 
Impact of change in net unrealized securities (gains) losses
(18
)
 
(105
)
 
Balance at September 30
$
2,624

 
$
2,501

(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.
(2) 
Includes a $27 million benefit related to the write-off of the deferred reinsurance liability in connection with the loss recognition on LTC business.
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
3

 
4

Amortization, excluding the impact of valuation assumptions review
(27
)
 
(32
)
Amortization, impact of valuation assumptions review
(1
)
 
4

Impact of change in net unrealized securities (gains) losses
1

 
(14
)
Balance at September 30
$
277

 
$
296


15


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:
 
September 30,
2017
 
December 31, 2016
 
(in millions)
 
Policyholder account balances
Fixed annuities (1)
$
10,100

 
$
10,588

 
Variable annuity fixed sub-accounts
5,187

 
5,211

 
Variable universal life (“VUL”)/universal life (“UL”) insurance
3,028

 
3,007

 
Indexed universal life (“IUL”) insurance
1,290

 
1,054

 
Other life insurance
731

 
758

 
Total policyholder account balances
20,336

 
20,618

 
 
Future policy benefits
Variable annuity guaranteed minimum withdrawal benefits (“GMWB”)
539

 
1,017

 
Variable annuity guaranteed minimum accumulation benefits (“GMAB”)
(73
)
(2) 
(24
)
(2) 
Other annuity liabilities
85

 
66

 
Fixed annuity life contingent liabilities
1,482

 
1,497

 
Life, disability income and long term care insurance
6,027

 
5,556

 
VUL/UL and other life insurance additional liabilities
674

 
588

 
Total future policy benefits
8,734

 
8,700

 
Policy claims and other policyholders’ funds
172

 
196

 
Total policyholder account balances, future policy benefits and claims
$
29,242

 
$
29,514

 
(1) 
Includes fixed deferred annuities, non-life contingent fixed payout annuities and equity indexed annuity (“EIA”) host contracts.
(2) 
Includes the fair value of GMAB embedded derivatives that was a net asset as of both September 30, 2017 and December 31, 2016 reported as a contra liability.
Separate account liabilities consisted of the following:
 
September 30,
2017
 
December 31, 2016
(in millions)
Variable annuity
$
73,467

 
$
69,606

VUL insurance
7,154

 
6,659

Other insurance
33

 
33

Total
$
80,654

 
$
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.

16


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)
September 30, 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
$
59,806

 
$
57,840

 
$
11

 
66
 
$
56,143

 
$
54,145

 
$
208

 
65
Five/six-year reset
8,869

 
6,141

 
13

 
66
 
8,878

 
6,170

 
22

 
66
One-year ratchet
6,502

 
6,139

 
12

 
69
 
6,426

 
6,050

 
110

 
68
Five-year ratchet
1,562

 
1,504

 
1

 
65
 
1,542

 
1,483

 
7

 
64
Other
1,057

 
1,034

 
58

 
72
 
965

 
942

 
86

 
71
Total — GMDB
$
77,796

 
$
72,658

 
$
95

 
66
 
$
73,954

 
$
68,790

 
$
433

 
65
GGU death benefit
$
1,103

 
$
1,052

 
$
126

 
69
 
$
1,047

 
$
996

 
$
108

 
68
GMIB
$
236

 
$
219

 
$
8

 
69
 
$
245

 
$
227

 
$
13

 
68
GMWB:
GMWB
$
2,525

 
$
2,517

 
$
2

 
71
 
$
2,650

 
$
2,642

 
$
2

 
70
GMWB for life
42,933

 
42,813

 
160

 
67
 
39,436

 
39,282

 
289

(2) 
66
Total — GMWB
$
45,458

 
$
45,330

 
$
162

 
67
 
$
42,086

 
$
41,924

 
$
291

 
66
GMAB
$
3,157

 
$
3,153

 
$
—

 
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.
(2) Amount revised to reflect updated contractholder mortality assumptions at December 31, 2016.
The net amount at risk for GMDB, GGU and GMAB is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB is defined as the greater of the present value of the minimum guaranteed annuity payments less the current contract value or zero. The net amount at risk for GMWB is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero.
The following table provides information related to insurance guarantees for which the Company has established additional liabilities:
 
September 30, 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
$
6,443

 
65
 
$
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
10

 
—

 
1,056

 
9

 
99

Paid claims
(7
)
 
—

 
—

 
(1
)
 
(18
)
Balance at September 30, 2016
$
17

 
$
8

 
$
2,113

 
$
8

 
$
413

 
Balance at January 1, 2017
$
16

 
$
8

 
$
1,017

 
$
(24
)
 
$
434

Incurred claims
3

 
—

 
(478
)
 
(49
)
 
59

Paid claims
(3
)
 
(1
)
 
—

 
—

 
(22
)
Balance at September 30, 2017
$
16

 
$
7

 
$
539

 
$
(73
)
 
$
471

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

17


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:
 
September 30,
2017
 
December 31, 2016
 
(in millions)
Mutual funds:
 

 
 

Equity
$
44,365

 
$
40,622

Bond
23,481

 
23,142

Other
5,117

 
5,326

Total mutual funds
$
72,963

 
$
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 September 30, 2017 and December 31, 2016, the Company has pledged $32 million and $33 million of agency residential mortgage backed securities and $16 million and $19 million of commercial mortgage backed securities, respectively. The amount of the Company’s liability including accrued interest as of both September 30, 2017 and December 31, 2016 was $50 million. The remaining maturity of outstanding repurchase agreements was less than one month as of September 30, 2017 and less than three months as of December 31, 2016. The weighted average annualized interest rate on the repurchase agreements held as of September 30, 2017 and December 31, 2016 was 1.4% 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 $764 million and $771 million as of September 30, 2017 and December 31, 2016, respectively. The amount of the Company’s liability including accrued interest was $151 million and $150 million as of September 30, 2017 and December 31, 2016, respectively. The remaining maturity of outstanding FHLB advances was less than three months as of September 30, 2017 and less than four months as of December 31, 2016. The weighted average annualized interest rate on the FHLB advances held as of September 30, 2017 and December 31, 2016 was 1.3% and 0.8%, respectively.
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.

18


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

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Assets
 

 
 

 
 

 
 

 
Available-for-Sale securities: Fixed maturities:
 

 
 

 
 

 
 

 
Corporate debt securities
$
—

 
$
12,385

 
$
1,146

 
$
13,531

 
Residential mortgage backed securities
—

 
3,024

 
89

 
3,113

 
Commercial mortgage backed securities
—

 
3,149

 
35

 
3,184

 
State and municipal obligations
—

 
1,296

 
—

 
1,296

 
Asset backed securities
—

 
738

 
—

 
738

 
Foreign government bonds and obligations
—

 
300

 
—

 
300

 
U.S. government and agencies obligations
1

 
—

 
—

 
1

 
Total Available-for-Sale securities: Fixed maturities
1

 
20,892

 
1,270

 
22,163

 
Common stocks
3

 
4

 
1

 
8

 
Cash equivalents
—

 
722

 
—

 
722

 
Other assets:
 
 
 
 
 
 
 

 
Interest rate derivative contracts
2

 
1,169

 
—

 
1,171

 
Equity derivative contracts
48

 
1,845

 
—

 
1,893

 
Credit derivative contracts
—

 
4

 
—

 
4

 
Foreign exchange derivative contracts
—

 
42

 
—

 
42

 
Total other assets
50


3,060

 
—

 
3,110

 
Separate account assets measured at net asset value (“NAV”)
 
 
 
 
 
 
80,654

(1) 
Total assets at fair value
$
54

 
$
24,678

 
$
1,271

 
$
106,657

 
Liabilities
 

 
 

 
 

 
 

 
Policyholder account balances, future policy benefits and claims:
 

 
 

 
 

 
 

 
EIA embedded derivatives
$
—

 
$
4

 
$
—

 
$
4

 
IUL embedded derivatives
—

 
—

 
577

 
577

 
GMWB and GMAB embedded derivatives
—

 
—

 
45

 
45

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

 
4

 
622

 
626

(3) 
Other liabilities:
 

 
 

 
 

 
 

 
Interest rate derivative contracts
—

 
416

 
—

 
416

 
Equity derivative contracts
5

 
2,474

 
—

 
2,479

 
Foreign exchange derivative contracts
—

 
27

 
—

 
27

 
Total other liabilities
5

 
2,917

 
—

 
2,922

 
Total liabilities at fair value
$
5

 
$
2,921

 
$
622

 
$
3,548

 


19


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
43

 
1,487

 
—

 
1,530

 
Credit derivative contracts
—

 
1

 
—

 
1

 
Foreign exchange derivative contracts
—

 
80

 
—

 
80

 
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

 
1,987

 
—

 
1,989

 
Foreign exchange derivative contracts
2

 
45

 
—

 
47

 
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 $494 million of individual contracts in a liability position and $449 million of individual contracts in an asset position as of September 30, 2017.
(3) 
The Company’s adjustment for nonperformance risk resulted in a $(376) million cumulative increase (decrease) to the embedded derivatives as of September 30, 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 increase (decrease) to the embedded derivatives as of December 31, 2016.

20


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
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
(in millions)
 
Balance, July 1, 2017
$
1,190

 
$
89

 
$
—

 
$
11

 
$
—

 
$
1,290

 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
1

 
—

 
—

 
—

 
—

 
1

(1) 
Other comprehensive income
(1
)
 
1

 
—

 
—

 
—

 
—

 
Purchases
38

 
—

 
35

 
—

 
—

 
73

 
Settlements
(82
)
 
(1
)
 
—

 
—

 
—

 
(83
)
 
Transfers into Level 3
—

 
—

 
—

 
—

 
1

 
1

 
Transfers out of Level 3
—

 
—

 
—

 
(11
)
 
—

 
(11
)
 
Balance, September 30, 2017
$
1,146

 
$
89

 
$
35

 
$
—

 
$
1

 
$
1,271

 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2017
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

(1) 
 
Policyholder Account Balances,
Future Policy Benefits and Claims
IUL Embedded Derivatives
 
GMWB and GMAB Embedded Derivatives
 
Total
(in millions)
Balance, July 1, 2017
$
527

 
$
272

 
$
799

Total (gains) losses included in:
 

 
 

 
 
Net income
35

(2) 
(309
)
(3) 
(274
)
Issues
26

 
84

 
110

Settlements
(11
)
 
(2
)
 
(13
)
Balance, September 30, 2017
$
577

 
$
45

 
$
622

 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2017
$
35

(2) 
$
(307
)
(3) 
$
(272
)
 
Available-for-Sale Securities: Fixed Maturities
 
 
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Total
 
Other Derivative Contracts
 
(in millions)
 
Balance, July 1, 2016
$
1,197

 
$
15

 
$
—

 
$
130

 
$
1,342

 
$
2

 
Total gains (losses) included in:
 

 
 

 
 

 
 

 
 

 
 
 
Net income
(1
)
 
—

 
—

 
1

 
—

(1) 
(2
)
(3) 
Other comprehensive income
(2
)
 
—

 
—

 
—

 
(2
)
 
—

 
Purchases
20

 
106

 
33

 
—

 
159

 
—

 
Settlements
(21
)
 
(1
)
 
—

 
(1
)
 
(23
)
 
—

 
Transfers out of Level 3
—

 
—

 
—

 
(12
)
 
(12
)
 
—

 
Balance, September 30, 2016
$
1,193

 
$
120

 
$
33

 
$
118

 
$
1,464

 
$
—

 
 
 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2016
$
(1
)
 
$
—

 
$
—

 
$
1

 
$
—

(1) 
$
(2
)
(3) 

21


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, July 1, 2016
$
408

 
$
1,965

 
$
2,373

Total (gains) losses included in:
 

 
 

 


Net income
12

(2) 
(280
)
(3) 
(268
)
Issues
25

 
77

 
102

Settlements
(7
)
 
(6
)
 
(13
)
Balance, September 30, 2016
$
438

 
$
1,756

 
$
2,194

 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2016
$
12

(2) 
$
(267
)
(3) 
$
(255
)
 
Available-for-Sale Securities: Fixed Maturities
 
Corporate Debt Securities
 
Residential Mortgage Backed Securities
 
Commercial Mortgage Backed Securities
 
Asset Backed Securities
 
Common Stocks
 
Total
 
(in millions)
 
Balance, January 1, 2017
$
1,157

 
$
115

 
$
—

 
$
13

 
$
—

 
$
1,285

 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
1

 
—

 
—

 
—

 
—

 
1

(1) 
Other comprehensive income
1

 
1

 
—

 
—

 
—

 
2

 
Purchases
96

 
67

 
35

 
49

 
—

 
247

 
Settlements
(109
)
 
(5
)
 
—

 
(13
)
 
—

 
(127
)
 
Transfers into Level 3
—

 
—

 
—

 
11

 
5

 
16

 
Transfers out of Level 3
—

 
(89
)
 
—

 
(60
)
 
(4
)
 
(153
)
 
Balance, September 30, 2017
$
1,146

 
$
89

 
$
35

 
$
—

 
$
1

 
$
1,271

 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2017
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

(1) 
 
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
75

(2) 
(798
)
(3) 
(723
)
Issues
70

 
238

 
308

Settlements
(32
)
 
(9
)
 
(41
)
Balance, September 30, 2017
$
577

 
$
45

 
$
622

 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2017
$
75

(2) 
$
(771
)
(3) 
$
(696
)

22


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

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

 
$
21

 
$
3

 
$
133

 
$
1,392

 
$
—

 
Total gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
(1
)
 
—

 
—

 
1

 
—

(1) 
(2
)
(3) 
Other comprehensive income
26

 
—

 
—

 
—

 
26

 
—

 
Purchases
34

 
106

 
42

 
—

 
182

 
2

 
Settlements
(101
)
 
(7
)
 
(3
)
 
(1
)
 
(112
)
 
—

 
Transfers into Level 3
—

 
—

 
—

 
12

 
12

 
—

 
Transfers out of Level 3
—

 
—

 
(9
)
 
(27
)
 
(36
)
 
—

 
Balance, September 30, 2016
$
1,193

 
$
120

 
$
33

 
$
118

 
$
1,464

 
$
—

 
 
 
 
 
Changes in unrealized gains (losses) relating to assets held at September 30, 2016
$
(1
)
 
$
—

 
$
—

 
$
1

 
$
—

(1) 
$
(2
)
(3) 
 
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

(2) 
708

(3) 
716

Issues
86

 
215

 
301

Settlements
(20
)
 
(18
)
 
(38
)
Balance, September 30, 2016
$
438

 
$
1,756

 
$
2,194

 
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2016
$
8

(2) 
$
830

(3) 
$
838

(1) 
Included in net investment income in the Consolidated Statements of Income.
(2) 
Included in interest credited to fixed accounts in the Consolidated Statements of Income.
(3) 
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 $(37) million and $8 million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual for the three months ended September 30, 2017 and 2016, respectively.
The increase (decrease) to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(91) million and $295 million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual for the nine months ended September 30, 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.

23


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

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:
 
September 30, 2017
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
(in millions)
 
 
 
 
Corporate debt securities (private placements)
$
1,144

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.8
%
-
2.3%
 
1.2
%
IUL embedded derivatives
$
577

 
Discounted cash flow
 
Nonperformance risk (1)
 
67 bps
 
 
GMWB and GMAB embedded derivatives
$
45

 
Discounted cash flow
 
Utilization of guaranteed withdrawals (2)
 
0.0
%
-
42.0%
 
 
 
 
 
 
 
Surrender rate
 
0.1
%
-
74.7%
 
 
 
 
 
 
 
Market volatility (3)
 
4.3
%
-
15.9%
 
 
 
 
 
 
 
Nonperformance risk (1)
 
67 bps
 
 
 
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.

24


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

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, commercial mortgage backed securities and asset backed securities. The fair value of corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as Level 3 is typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to 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. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial as of September 30, 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

25


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

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. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial as of September 30, 2017 and December 31, 2016. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
Loans held for sale are required to be recorded at the lower of cost or fair value. During the third quarter of 2017, the Company entered into an agreement with an unaffiliated third party to sell $255 million of residential mortgage loans at a $4 million loss.  The loans are measured at fair value on a nonrecurring basis. The fair value of the loans, which reflects the selling price negotiated with the third party, was $251 million as of September 30, 2017, and is classified as Level 3 as the valuation includes unobservable inputs.
During the reporting periods, there were no other 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:
 
September 30, 2017
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
Financial Assets
Mortgage loans, net
$
2,629

 
$
—

 
$
—

 
$
2,648

 
$
2,648

 
Policy loans
841

 
—

 
—

 
797

 
797

 
Other investments
401

 
—

 
352

 
51

 
403

 
 
Financial Liabilities
Policyholder account balances, future policy benefits and claims
$
10,415

 
$
—

 
$
—

 
$
11,052

 
$
11,052

 
Short-term borrowings
201

 
—

 
201

 
—

 
201

 
Other liabilities
145

 
—

 
—

 
140

 
140

 
Separate account liabilities measured at NAV
356

 
 
 
356

(1) 

26


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

 
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 as of December 31, 2016 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 as of December 31, 2016, 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 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.

27


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

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 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:
 
 
September 30, 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
$
3,079

 
$
—

 
$
3,079

 
$
(2,327
)
 
$
(636
)
 
$
(109
)
 
$
7

 
OTC cleared (2)
13

 
—

 
13

 
(12
)
 
—

 
—

 
1

 
Exchange-traded
18

 
—

 
18

 
(2
)
 
—

 
—

 
16

 
Total derivatives
$
3,110

 
$
—

 
$
3,110

 
$
(2,341
)
 
$
(636
)
 
$
(109
)
 
$
24

 
 
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.

28


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

The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:
 
 
September 30, 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
$
2,908

 
$
—

 
$
2,908

 
$
(2,327
)
 
$
(1
)
 
$
(578
)
 
$
2

 
OTC cleared (2)
12

 
—

 
12

 
(12
)
 
—

 
—

 
—

 
Exchange-traded
2

 
—

 
2

 
(2
)
 
—

 
—

 
—

 
Total derivatives
2,922


—


2,922


(2,341
)

(1
)

(578
)

2

 
Repurchase agreements
50

 
—

 
50

 
—

 
—

 
(48
)
 
2

 
Total
$
2,972

 
$
—

 
$
2,972

 
$
(2,341
)
 
$
(1
)
 
$
(626
)
 
$
4

 
 
December 31, 2016
 
Gross Amounts of
Recognized Liabilities
 
Gross Amounts Offset in the
Consolidated Balance Sheets
 
 Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance Sheets
 
Net Amount
 
Financial Instruments (1)
 
Cash Collateral
 
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 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.

29


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

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:
 
September 30, 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
$
65,248

 
$
1,171

 
$
416

 
$
71,019

 
$
1,735

 
$
965

Equity contracts
58,359

 
1,893

 
2,479

 
60,419

 
1,530

 
1,989

Credit contracts
718

 
4

 
—

 
1,039

 
1

 
—

Foreign exchange contracts
4,314

 
42

 
27

 
4,494

 
80

 
47

Other contracts
450

 
—

 
—

 
240

 
—

 
—

Total non-designated hedges
129,089

 
3,110

 
2,922

 
137,211

 
3,346

 
3,001

 
Embedded derivatives
GMWB and GMAB (3)
N/A

 
—

 
45

 
N/A

 
—

 
614

IUL
N/A

 
—

 
577

 
N/A

 
—

 
464

EIA
N/A

 
—

 
4

 
N/A

 
—

 
5

Total embedded derivatives
N/A

 
—

 
626

 
N/A

 
—

 
1,083

Total derivatives
$
129,089

 
$
3,110

 
$
3,548

 
$
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 September 30, 2017 included $494 million of individual contracts in a liability position and $449 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 September 30, 2017 and December 31, 2016, investment securities with a fair value of $122 million and $235 million, respectively, were received as collateral to meet contractual obligations under derivative contracts, of which $122 million and $118 million, respectively, may be sold, pledged or rehypothecated by the Company. As of September 30, 2017 and December 31, 2016, the Company had sold, pledged, or rehypothecated $12 million and $19 million, respectively, of these securities. In addition, as of September 30, 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.

30


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 September 30, 2017
 
 
 
Interest rate contracts
$
—

 
$
15

Equity contracts
18

 
(241
)
Credit contracts
—

 
(3
)
Foreign exchange contracts
—

 
1

Other contracts
—

 
(2
)
GMWB and GMAB embedded derivatives
—

 
227

IUL embedded derivatives
(24
)
 
—

Total gain (loss)
$
(6
)
 
$
(3
)
Nine Months Ended September 30, 2017
 
 
 
Interest rate contracts
$
—

 
$
63

Equity contracts
50

 
(859
)
Credit contracts
—

 
(22
)
Foreign exchange contracts
—

 
(27
)
Other contracts
—

 
(2
)
GMWB and GMAB embedded derivatives
—

 
569

IUL embedded derivatives
(43
)
 
—

Total gain (loss)
$
7

 
$
(278
)
 
Interest Credited to Fixed Accounts
 
Benefits, Claims, Losses and Settlement Expenses
(in millions)
Three Months Ended September 30, 2016
 
 
 
Interest rate contracts
$
—

 
$
(13
)
Equity contracts
12

 
(364
)
Credit contracts
—

 
(3
)
Foreign exchange contracts
—

 
(12
)
Other contracts
—

 
(2
)
GMWB and GMAB embedded derivatives
—

 
209

IUL embedded derivatives
(5
)
 
—

Total gain (loss)
$
7

 
$
(185
)
Nine Months Ended September 30, 2016
 
 
 
Interest rate contracts
$
—

 
$
1,191

Equity contracts
10

 
(525
)
Credit contracts
—

 
(34
)
Foreign exchange contracts
—

 
(66
)
Other contracts
—

 
(2
)
GMWB and GMAB embedded derivatives
—

 
(905
)
IUL embedded derivatives
12

 
—

Total gain (loss)
$
22

 
$
(341
)

31


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

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 and swaptions is paid or received semi-annually over the life of the contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options and swaptions as of September 30, 2017:
 
Premiums Payable
 
Premiums Receivable
(in millions)
2017
(1) 
$
95

 
$
25

2018
213

 
129

2019
275

 
170

2020
197

 
98

2021
168

 
107

2022-2026
669

 
182

  Total
$
1,617

 
$
711

(1) 2017 amounts represent the amounts payable and receivable for the period from October 1, 2017 to December 31, 2017.
Actual timing and payment amounts may differ due to future settlements, modifications or exercises of the contracts 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 contain settlement provisions linked to both equity returns and interest rates. The Company’s macro hedge derivatives that contain settlement provisions linked to both equity returns and interest rates are shown 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 nine months ended September 30, 2017, the Company held no derivatives that were designated as cash flow hedges.
As of September 30, 2017, the Company expects to reclassify $3 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 nine months ended September 30, 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 nine months ended September 30, 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 one year 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

32


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

through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting and collateral arrangements whenever practical. See Note 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 September 30, 2017 and December 31, 2016, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $368 million and $206 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of September 30, 2017 and December 31, 2016 was $366 million and $198 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position as of September 30, 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 $2 million and $8 million, respectively.
13. Shareholder’s Equity
The following tables provide the amounts related to each component of OCI:
 
Three Months Ended September 30,
2017
 
2016
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
(in millions)
Net unrealized securities gains (losses):
Net unrealized securities gains (losses) arising during the period (1)
$
52

 
$
(18
)
 
$
34

 
$
75

 
$
(25
)
 
$
50

Reclassification of net securities (gains) losses included in net income (2)
(3
)
 
1

 
(2
)
 
(1
)
 
—

 
(1
)
Impact of deferred acquisition costs, deferred sales inducement costs, unearned revenue, benefit reserves and reinsurance recoverables
(61
)
 
22

 
(39
)
 
(114
)
 
39

 
(75
)
Net unrealized securities gains (losses)
(12
)
 
5

 
(7
)
 
(40
)
 
14

 
(26
)
Net unrealized derivatives gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net derivative (gains) losses included in net income (3)
1

 
—

 
1

 
1

 
—

 
1

Net unrealized derivatives gains (losses)
1

 
—

 
1

 
1

 
—

 
1

Other comprehensive income (loss)
$
(11
)
 
$
5

 
$
(6
)
 
$
(39
)
 
$
14

 
$
(25
)

33


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

 
Nine Months Ended September 30,
2017
 
2016
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
Pretax
 
Income Tax Benefit (Expense)
 
Net of Tax
(in millions)
Net unrealized securities gains (losses):
Net unrealized securities gains (losses) arising during the period (1)
$
245

 
$
(85
)
 
$
160

 
$
1,067

 
$
(375
)
 
$
692

Reclassification of net securities (gains) losses included in net income (2)
(34
)
 
12

 
(22
)
 
(7
)
 
2

 
(5
)
Impact of deferred acquisition costs, deferred sales inducement costs, unearned revenue, benefit reserves and reinsurance recoverables
(168
)
 
59

 
(109
)
 
(533
)
 
186

 
(347
)
Net unrealized securities gains (losses)
43

 
(14
)
 
29

 
527

 
(187
)
 
340

Net unrealized derivatives gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net derivative (gains) losses included in net income (3)
4

 
(1
)
 
3

 
4

 
(1
)
 
3

Net unrealized derivatives gains (losses)
4

 
(1
)
 
3

 
4

 
(1
)
 
3

Other
(1
)
 
—

 
(1
)
 
—

 
—

 
—

Other comprehensive income (loss)
$
46

 
$
(15
)
 
$
31

 
$
531

 
$
(188
)
 
$
343

(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 (losses).
(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.
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, July 1, 2017
$
497

 
$
(2
)
 
$
(1
)
 
$
494

  OCI before reclassifications
(5
)
 
—

 
—

 
(5
)
  Amounts reclassified from AOCI
(2
)
 
1

 
—

 
(1
)
Total OCI
(7
)
 
1

 
—

 
(6
)
Balance, September 30, 2017
$
490

(1) 
$
(1
)
 
$
(1
)
 
$
488

 
Balance, January 1, 2017
$
461

 
$
(4
)
 
$
—

 
$
457

  OCI before reclassifications
51

 
—

 
(1
)
 
50

  Amounts reclassified from AOCI
(22
)
 
3

 
—

 
(19
)
Total OCI
29

 
3

 
(1
)
 
31

Balance, September 30, 2017
$
490

(1) 
$
(1
)
 
$
(1
)
 
$
488


34


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

 
Net Unrealized Securities Gains
 
Net Unrealized Derivatives Gains
 
Total
(in millions)
Balance, July 1, 2016
$
769

 
$
(6
)
 
$
763

  OCI before reclassifications
(25
)
 
—

 
(25
)
  Amounts reclassified from AOCI
(1
)
 
1

 
—

Total OCI
(26
)
 
1

 
(25
)
Balance, September 30, 2016
$
743

(1) 
$
(5
)
 
$
738

 
Balance, January 1, 2016
$
403

 
$
(8
)
 
$
395

  OCI before reclassifications
345

 
—

 
345

  Amounts reclassified from AOCI
(5
)
 
3

 
(2
)
Total OCI
340

 
3

 
343

Balance, September 30, 2016
$
743

(1) 
$
(5
)
 
$
738

(1) Includes $2 million and $1 million of noncredit related impairments on securities and net unrealized securities gains (losses) on previously impaired securities as of September 30, 2017 and September 30, 2016, respectively.
14. Income Taxes
The Company’s effective tax rate was 11.8% and 1,900.0% for the three months ended September 30, 2017 and 2016, respectively. The Company’s effective tax rate was 9.4% and 5.8% for the nine months ended September 30, 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 September 30, 2017 compared to the prior year period is primarily due to pretax income in the third quarter of 2017 compared to a pretax loss in the third quarter of 2016. The increase in the effective tax rate for the nine months ended September 30, 2017 compared to the prior year period is primarily due to an increase in pretax income.
Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $9 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 $10 million and $8 million as of September 30, 2017 and December 31, 2016, respectively.
As of September 30, 2017 and December 31, 2016, the Company had $62 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 September 30, 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 (decrease) of $(1) million and $1 million in interest and penalties for the three months and nine months ended September 30, 2017, respectively. The Company recognized a net increase (decrease) of nil and $(39) million for the three months and nine months ended September 30, 2016, respectively. As of September 30, 2017 and December 31, 2016, the Company had a payable of $3 million and $2 million, respectively, related to accrued interest and penalties.

35


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

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. In the third quarter, the Company received final cash settlements for resolution of the 2006 and 2011 audits. The Internal Revenue Service (“IRS”) has completed its examination of the 2008 through 2010 tax returns, and these years are effectively settled; however, the statutes of limitation, 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 2005 through 2015.
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 September 30, 2017 and December 31, 2016, the estimated liability was $15 million and $16 million, respectively, and the related premium tax asset was $12 million and $14 million, respectively. 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.

36


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. The first phase of the regulations went into effect on June 9, 2017 and requires financial advisors to make recommendations related to assets held in IRAs and employer sponsored retirement plans in accordance with the following impartial conduct standards: recommendations must be in the best interest of the client, compensation paid for the recommendations must be reasonable and the financial advisor must not make any misleading statements. The Company’s affiliated selling firms adopted policies and procedures designed to comply with the impartial conduct standards and communicated those policies and procedures to their affiliated advisors and staff. The second phase of the regulation puts into place a number of additional requirements including entering into a best interest contract with clients, enhanced disclosure of fees and conflicts of interest, limits on differential commissions within a product category, the adoption of policies and procedures to ensure the best interest standard is met, and findings related to platforms that are limited to products that pay third-party payments and/or include proprietary products. The second phase of the regulation pertaining to a new “best interest contract exemption” is currently scheduled to become effective on January 1, 2018. These regulations are currently under review by the Department of Labor and the Department has proposed to delay the second phase of the regulations until July 1, 2019 which would give the Department of Labor more time to determine if further revisions to the regulations are advisable. However, as of November 1, the Department of Labor has not issued final guidance implementing a further delay. 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 second phase of 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.

37


RIVERSOURCE LIFE INSURANCE COMPANY

Consolidated Results of Operations for the Nine Months Ended September 30, 2017 and 2016
The following table presents the Company’s consolidated results of operations:
 
Nine Months Ended September 30,
 
Change
2017
 
2016
(in millions)
 
 
Revenues
 
 
 
 
 
 
 
Premiums
$
304

 
$
315

 
$
(11
)
 
(3
)%
Net investment income
797

 
850

 
(53
)
 
(6
)
Policy and contract charges
1,415

 
1,501

 
(86
)
 
(6
)
Other revenues
308

 
303

 
5

 
2

Net realized investment gains
31

 
15

 
16

 
     NM
Total revenues
2,855

 
2,984

 
(129
)
 
(4
)
 
 
 
 
 
 
 
 
Benefits and expenses
 
 
 
 
 
 
 
Benefits, claims, losses and settlement expenses
920

 
1,148

 
(228
)
 
(20
)
Interest credited to fixed accounts
509

 
465

 
44

 
9

Amortization of deferred acquisition costs
142

 
299

 
(157
)
 
(53
)
Other insurance and operating expenses
527

 
505

 
22

 
4

Total benefits and expenses
2,098

 
2,417

 
(319
)
 
(13
)
Pretax income
757

 
567

 
190

 
34

Income tax provision
71

 
33

 
38

 
     NM
Net income
$
686

 
$
534

 
$
152

 
28
 %
NM  Not Meaningful.
Overall
In the third quarter of the year, management updated its market-related inputs and implemented model changes related to the living benefit valuation. In addition, management conducted its annual review of insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking.
The favorable unlocking impact in the third quarter of 2017 primarily reflected a positive impact from updates to market-related inputs to the living benefit valuation. In addition, premium deficiency testing of the Company’s closed long term care (“LTC”) business resulted in a loss recognition reserve of $57 million in the third quarter of 2017 primarily due to higher morbidity partially offset by premium increases.
The unfavorable unlocking impact in the third quarter of 2016 primarily reflected low interest rates and higher persistency on living benefit contracts that more than offset benefits from persistency on annuity contracts without living benefits, an update to market-related inputs related to the living benefit valuation and other model updates. The long-term interest rate assumption remained unchanged, but management extended the period it would take for rates to reach the long term level from 3.5 years to 5.5 years. In addition, the review of the Company’s closed LTC business in the third quarter of 2016 resulted in a loss recognition of $31 million due to low interest rates, higher morbidity and higher reinsurance expenses, slightly offset by premium increases. The $31 million, which is included in the unlocking impact in the third quarter of 2016, was comprised of $58 million of amortization of DAC and the release of the related deferred reinsurance liability of $27 million.

38


RIVERSOURCE LIFE INSURANCE COMPANY

The following table presents the total pretax impacts on the Company’s revenues and expenses attributable to unlocking for the nine months ended September 30:
Pretax Increase (Decrease)
 
2017
 
2016
 
 
(in millions)
Policy and contract charges
 
$
(47
)
 
$
64

Total revenues
 
(47
)
 
64

 
 
 
 
 
Benefits, claims, losses and settlement expenses
 
(139
)
 
229

Amortization of deferred acquisition costs
 
(12
)
 
81

Other insurance and operating expenses
 
—

 
(27
)
Total benefits and expenses
 
(151
)
 
283

Total
 
$
104

 
$
(219
)
Net income increased $152 million or 28% to $686 million for the nine months ended September 30, 2017 compared to $534 million for the prior year period. Pretax income increased $190 million or 34% to $757 million for the nine months ended September 30, 2017 compared to $567 million for the prior year period primarily due to the impact from unlocking, market appreciation and an unfavorable $29 million LTC reserve correction in the third quarter of 2016 partially offset by loss recognition of $57 million on LTC insurance products in the third quarter of 2017.
The following market-related impacts were also significant drivers of the year-over-year change in pretax income:
•
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) was an expense of $142 million for the nine months ended September 30, 2017 compared to an expense of $55 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 an expense of $16 million for the nine months ended September 30, 2017 compared to a benefit of $31 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 $63 million ($27 million for DAC, $6 million for DSIC and $30 million for insurance features in non-traditional long-duration contracts) for the nine months ended September 30, 2017 reflecting favorable equity market and bond fund returns compared to a benefit of $5 million ($3 million for DAC, $1 million for DSIC and $1 million for insurance features in non-traditional long-duration contracts) for the prior year period.
The Company’s variable annuity account balances increased 4% to $78.7 billion as of September 30, 2017 compared to the prior year period due to equity market appreciation, partially offset by net outflows of $3.7 billion. Lapse rates were higher in the nine months ended September 30, 2017, reflecting increased client asset transfers from variable annuities to affiliated fee-based investment advisory accounts.
The Company’s fixed deferred annuity account balances declined 7% to $9.5 billion as of September 30, 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 deferred annuity book is expected to gradually run off and earnings on its fixed deferred annuity business will trend down.
Revenues
Total revenues decreased by $129 million or 4% to $2.9 billion for the nine months ended September 30, 2017 compared to $3.0 billion the prior year period.
Net investment income decreased $53 million or 6% to $797 million for the nine months ended September 30, 2017 compared to $850 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 decreased $86 million or 6% to $1.4 billion for the nine months ended September 30, 2017 compared to $1.5 billion for the prior year period due to the impact of unlocking, partially offset by 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. Policy and contract charges for the nine months ended September 30, 2017 included a $47 million unfavorable impact from unlocking compared to a $64 million favorable impact in the prior year period. The primary driver of the unlocking impact to policy and contract charges for the nine months ended September 30, 2017 was a negative impact from lower projected gains on reinsurance contracts resulting from favorable mortality experience. The primary driver of the unlocking impact to policy and contract charges for the prior year period was a positive impact from higher projected gains on reinsurance contracts resulting from unfavorable mortality experience.

39


RIVERSOURCE LIFE INSURANCE COMPANY

Net realized investment gains were $31 million for the nine months ended September 30, 2017 compared to $15 million for the prior year period. For the nine months ended September 30, 2017, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $34 million partially offset by a loss of $4 million related to the intent to sell residential mortgage loans. For the nine months ended September 30, 2016, net realized gains of $7 million on Available-for-Sale securities due to sales, calls and tenders and a net realized gain of $10 million from the sale of certain residential mortgage loans were partially offset by a $1 million increase in the provision for loan losses on syndicated loans.
Benefits and Expenses
Total benefits and expenses decreased $319 million or 13% to $2.1 billion for the nine months ended September 30, 2017 compared to $2.4 billion in the prior year period primarily due to the impact of unlocking.
Benefits, claims, losses and settlement expenses decreased $228 million or 20% to $920 million for the nine months ended September 30, 2017 compared to $1.1 billion for the prior year period primarily reflecting the following items:
•
The nine months ended September 30, 2017 included a $139 million benefit from unlocking compared to a $229 million expense in the prior year period. The unlocking impact for the third quarter of 2017 primarily reflected a benefit from updates to market-related inputs to the living benefit valuation. The unlocking impact for the prior year period primarily reflected low interest rates and an unfavorable impact from persistency on living benefit reserves, partially offset by a benefit from updates to withdrawal utilization and fee assumptions, as well as market-related inputs to the living benefit valuation.
•
A $29 million increase in LTC reserves from a correction related to the claim utilization assumption in the third quarter of 2016.
•
A $57 million expense from loss recognition on LTC insurance products in the third quarter of 2017 primarily due to unfavorable morbidity experience partially offset by premium increases.
•
A $24 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 $21 million negative impact for the nine months ended September 30, 2017 from changes in assumptions in the prior year unlocking process that result in ongoing increases to living benefit reserves.
•
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 $36 million for the nine months ended September 30, 2017 reflecting favorable equity market and bond fund returns compared to a benefit of $2 million for the prior year period.
•
A $459 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 $122 million for the nine months ended September 30, 2017 compared to a favorable impact of $337 million for the prior year period.
•
A $345 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 $1.7 billion change in the market impact on variable annuity guaranteed living benefits reserves, an unfavorable $1.4 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 for the nine months ended September 30, 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 for the nine months ended September 30, 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 for the nine months ended September 30, 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 $44 million or 9% to $509 million for the nine months ended September 30, 2017 compared to $465 million for the prior year period primarily due to the market impact on indexed universal life benefits, net of hedges, which was an expense of $14 million for the nine months ended September 30, 2017 compared to a benefit of $25 million for the prior year period.
Amortization of DAC decreased $157 million or 53% to $142 million for the nine months ended September 30, 2017 compared to $299 million for the prior year period primarily reflecting the following items:
•
The impact of unlocking was a benefit of $12 million for the nine months ended September 30, 2017 compared to an expense of $81 million for the prior year period. The impact of unlocking in the third quarter of 2017 primarily reflected improved persistency and mortality on life insurance contracts and a $10 million benefit from a correction related to a variable annuity

40


RIVERSOURCE LIFE INSURANCE COMPANY

model assumption, partially offset by updates to the market-related inputs to the living benefit valuation. The impact of unlocking in the prior year period primarily reflected low interest rates that more than offset benefits from persistency on annuity contracts without living benefits. In addition, the Company wrote-off $58 million of DAC in connection with the loss recognition on LTC insurance products in the prior year period.
•
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 $27 million for the nine months ended September 30, 2017 reflecting favorable equity market and bond fund returns compared to a benefit of $3 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 $18 million for the nine months ended September 30, 2017 compared to an expense of $9 million for the prior year period.
Income Taxes
The Company’s effective tax rate was 9.4% for the nine months ended September 30, 2017 compared to 5.8% for the nine months ended September 30, 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 increase in the effective tax rate for the nine months ended September 30, 2017 compared to the prior year period was primarily due to higher levels of pretax income.
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 September 30, 2019 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, was $3.5 billion and 5.4%, respectively, as of September 30, 2017. In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled $3.1 billion and had a weighted average yield of 3.3% as of September 30, 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 nine months ended September 30, 2017 was approximately 3.5%.
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.

41


RIVERSOURCE LIFE INSURANCE COMPANY

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 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 September 30, 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
 
$
(89
)
 
$
—

 
$
(89
)
DAC and DSIC amortization (1) (2)
 
(129
)
 
—

 
(129
)
Variable annuity riders:
 
 

 
 

 
 
GMDB and GMIB (2)
 
(29
)
 
—

 
(29
)
GMWB
 
(379
)
 
233

 
(146
)
GMAB
 
(25
)
 
26

 
1

DAC and DSIC amortization (3)
 
N/A

 
N/A

 
(3
)
Total variable annuity riders
 
(433
)

259


(177
)
Macro hedge program (4)
 
—

 
27

 
27

Equity indexed annuities
 
1

 
(1
)
 
—

Indexed universal life insurance
 
66

 
(49
)
 
17

Total
 
$
(584
)

$
236


$
(351
)

42


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
 
983

 
(1,089
)
 
(106
)
GMAB
 
21

 
(23
)
 
(2
)
DAC and DSIC amortization (3)
 
N/A

 
N/A

 
18

Total variable annuity riders
 
1,004


(1,112
)

(90
)
Macro hedge program(4)
 
—

 
(1
)
 
(1
)
Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products
 
99

 
—

 
99

Indexed universal life insurance
 
93

 
2

 
95

Total
 
$
1,168


$
(1,111
)

$
75

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

43


RIVERSOURCE LIFE INSURANCE COMPANY

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 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 September 30, 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 $213 million, net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on September 30, 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 September 30, 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 September 30, 2017, the Company had estimated maximum borrowing capacity of $5.6 billion under the FHLB facility, of which $151 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 and received by RiverSource Life Insurance Company were as follows:
 
Nine Months Ended September 30,
2017
 
2016
(in millions)
Cash dividends paid to Ameriprise Financial
$
700

 
$
800

Cash dividends received from RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”)
50

 
50

Cash dividends received from RiverSource Tax Advantaged Investments, Inc.
20

 
15

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)
September 30,
2017
 
December 31,
2016
December 31,
2016
(in millions)
RiverSource Life Insurance Company
$
2,737

 
$
3,052

 
$
606

RiverSource Life Insurance Co. of NY
306

 
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.

44


RIVERSOURCE LIFE INSURANCE COMPANY

Insurance companies’ statutory capital is calculated in accordance with the accounting practices prescribed or permitted by domiciliary state insurance regulators. RiverSource Life Insurance Company received approval from the Minnesota Department of Commerce to apply a permitted statutory accounting practice, effective July 1, 2017 through June 30, 2018, for certain derivative instruments used to economically hedge the interest rate exposure of certain variable annuity products that do not qualify for statutory hedge accounting. The permitted practice is intended to mitigate the impact to statutory capital from the misalignment between variable annuity statutory reserves, which are not carried at fair value, and the fair value of derivatives used to economically hedge the interest rate exposure of non-life contingent living benefit guarantees. The permitted practice allows RiverSource Life Insurance Company to defer a portion of the change in fair value, net investment income and realized gains or losses generated from designated derivatives to the extent the amounts do not offset the current period interest-rate related change in the variable annuity statutory reserve liability. The deferred amount will be amortized over ten years using the straight-line method with the ability to accelerate amortization at management’s discretion. There was no immediate impact to statutory capital at the effective date for the permitted statutory accounting practice. As of September 30, 2017, application of this permitted practice resulted in a decrease to RiverSource Life Insurance Company’s statutory capital of approximately $21 million.
Contractual Commitments
There have been no material changes to the Company’s contractual obligations disclosed in the Company’s 2016 10-K.
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;

45


RIVERSOURCE LIFE INSURANCE COMPANY

•
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
•
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 September 30, 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.
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 10-K.

46


RIVERSOURCE LIFE INSURANCE COMPANY

ITEM 6. EXHIBITS
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.
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.
Certification of John R. Woerner, Chairman and President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
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 September 30, 2017, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three months and nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Shareholder’s Equity for the nine months ended September 30, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) Notes to the Consolidated Financial Statements.
* Filed electronically herewithin.


47


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:
November 1, 2017
By
/s/ John R. Woerner
 
 
 
John R. Woerner
 
 
 
Chairman and President
 
 
 
 
 
 
 
 
Date:
November 1, 2017
By
/s/ Brian J. McGrane
 
 
 
Brian J. McGrane
 
 
 
Executive Vice President and
 
 
 
Chief Financial Officer


48