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 June 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 033-28976
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota |
|
41-0823832 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
1099 Ameriprise Financial Center, Minneapolis, Minnesota |
|
55474 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrants telephone number, including area code: (612) 671-3131
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o |
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Accelerated Filer o |
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|
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Non-Accelerated Filer x (Do not check if a smaller reporting company) |
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Smaller reporting company 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 issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at July 31, 2013 |
Common Stock (par value $30 per share) |
|
100,000 shares |
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
RIVERSOURCE LIFE INSURANCE COMPANY
FORM 10-Q
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share amounts)
|
|
June 30, 2013 |
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December 31, 2012 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
Available-for-Sale: |
|
|
|
|
| ||
Fixed maturities, at fair value (amortized cost: 2013, $22,667; 2012, $23,058) |
|
$ |
24,411 |
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$ |
25,932 |
|
Common stocks, at fair value (cost: 2013 and 2012, $2) |
|
5 |
|
4 |
| ||
Mortgage loans, at amortized cost (less allowance for loan losses: 2013 and 2012, $26) |
|
3,360 |
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3,389 |
| ||
Policy loans |
|
760 |
|
752 |
| ||
Other investments |
|
762 |
|
743 |
| ||
Total investments |
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29,298 |
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30,820 |
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|
|
|
|
|
| ||
Cash and cash equivalents |
|
264 |
|
336 |
| ||
Restricted cash |
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5 |
|
86 |
| ||
Reinsurance recoverables |
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2,123 |
|
2,047 |
| ||
Other receivables |
|
300 |
|
203 |
| ||
Accrued investment income |
|
284 |
|
291 |
| ||
Deferred acquisition costs |
|
2,480 |
|
2,373 |
| ||
Deferred sales inducement costs |
|
392 |
|
404 |
| ||
Other assets |
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3,624 |
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3,793 |
| ||
Separate account assets |
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71,828 |
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69,395 |
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|
|
|
|
| ||
Total assets |
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$ |
110,598 |
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$ |
109,748 |
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|
|
|
|
|
| ||
Liabilities and Shareholders Equity |
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|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Future policy benefits |
|
$ |
29,521 |
|
$ |
30,670 |
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Policy claims and other policyholders funds |
|
137 |
|
132 |
| ||
Short-term borrowings |
|
501 |
|
501 |
| ||
Line of credit with Ameriprise Financial, Inc. |
|
150 |
|
150 |
| ||
Other liabilities |
|
4,345 |
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4,201 |
| ||
Separate account liabilities |
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71,828 |
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69,395 |
| ||
Total liabilities |
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106,482 |
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105,049 |
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|
|
|
|
| ||
Shareholders equity: |
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|
|
|
| ||
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding |
|
3 |
|
3 |
| ||
Additional paid-in capital |
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2,463 |
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2,462 |
| ||
Retained earnings |
|
891 |
|
1,000 |
| ||
Accumulated other comprehensive income, net of tax |
|
759 |
|
1,234 |
| ||
Total shareholders equity |
|
4,116 |
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4,699 |
| ||
|
|
|
|
|
| ||
Total liabilities and shareholders equity |
|
$ |
110,598 |
|
$ |
109,748 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions)
|
|
Three Months Ended |
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Six Months Ended |
| ||||||||
|
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2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Revenues |
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|
|
|
|
|
|
|
| ||||
Premiums |
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$ |
106 |
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$ |
110 |
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$ |
214 |
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$ |
222 |
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Net investment income |
|
359 |
|
377 |
|
717 |
|
754 |
| ||||
Policy and contract charges |
|
434 |
|
404 |
|
850 |
|
799 |
| ||||
Other revenues |
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88 |
|
81 |
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176 |
|
158 |
| ||||
Net realized investment losses |
|
(1 |
) |
(3 |
) |
(2 |
) |
|
| ||||
Total revenues |
|
986 |
|
969 |
|
1,955 |
|
1,933 |
| ||||
Benefits and expenses |
|
|
|
|
|
|
|
|
| ||||
Benefits, claims, losses and settlement expenses |
|
307 |
|
244 |
|
542 |
|
594 |
| ||||
Interest credited to fixed accounts |
|
198 |
|
209 |
|
396 |
|
415 |
| ||||
Amortization of deferred acquisition costs |
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75 |
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83 |
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134 |
|
100 |
| ||||
Other insurance and operating expenses |
|
190 |
|
190 |
|
373 |
|
391 |
| ||||
Total benefits and expenses |
|
770 |
|
726 |
|
1,445 |
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1,500 |
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|
|
|
|
|
|
|
|
| ||||
Pretax income |
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216 |
|
243 |
|
510 |
|
433 |
| ||||
Income tax provision |
|
30 |
|
80 |
|
84 |
|
99 |
| ||||
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|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
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$ |
186 |
|
$ |
163 |
|
$ |
426 |
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$ |
334 |
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|
|
|
|
|
|
|
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|
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Supplemental Disclosures: |
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|
|
|
|
|
|
|
| ||||
Total other-than-temporary impairment losses on securities |
|
$ |
(2 |
) |
$ |
(6 |
) |
$ |
(3 |
) |
$ |
(9 |
) |
Portion of loss recognized in other comprehensive income (loss) (before taxes) |
|
1 |
|
|
|
1 |
|
2 |
| ||||
Net impairment losses recognized in net realized investment losses |
|
$ |
(1 |
) |
$ |
(6 |
) |
$ |
(2 |
) |
$ |
(7 |
) |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
|
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Three Months Ended |
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Six Months Ended |
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2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Net income |
|
$ |
186 |
|
$ |
163 |
|
$ |
426 |
|
$ |
334 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains (losses) on securities: |
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|
|
|
|
|
|
|
| ||||
Net unrealized securities gains (losses) arising during the period |
|
(603 |
) |
135 |
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(744 |
) |
177 |
| ||||
Reclassification of net securities losses included in net income |
|
1 |
|
2 |
|
1 |
|
|
| ||||
Impact on deferred acquisition costs, deferred sales inducement costs, benefit reserves and reinsurance recoverables |
|
201 |
|
(59 |
) |
265 |
|
(62 |
) | ||||
Total net unrealized gains (losses) on securities |
|
(401 |
) |
78 |
|
(478 |
) |
115 |
| ||||
Net unrealized losses on derivatives: |
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|
|
|
|
|
|
|
| ||||
Reclassification of net derivative losses included in net income |
|
2 |
|
1 |
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3 |
|
2 |
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Total net unrealized losses on derivatives |
|
2 |
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1 |
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3 |
|
2 |
| ||||
Total other comprehensive income (loss), net of tax |
|
(399 |
) |
79 |
|
(475 |
) |
117 |
| ||||
Total comprehensive income (loss) |
|
$ |
(213 |
) |
$ |
242 |
|
$ |
(49 |
) |
$ |
451 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
(in millions)
|
|
Common |
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Additional |
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Retained |
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Accumulated |
|
Total |
| |||||
Balances at January 1, 2012 |
|
$ |
3 |
|
$ |
2,461 |
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$ |
1,215 |
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$ |
931 |
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$ |
4,610 |
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Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
334 |
|
|
|
334 |
| |||||
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
117 |
|
117 |
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Total comprehensive income |
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|
|
|
|
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451 |
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Cash dividend to Ameriprise Financial, Inc. |
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|
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|
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(550 |
) |
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(550 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2012 |
|
$ |
3 |
|
$ |
2,461 |
|
$ |
999 |
|
$ |
1,048 |
|
$ |
4,511 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances at January 1, 2013 |
|
$ |
3 |
|
$ |
2,462 |
|
$ |
1,000 |
|
$ |
1,234 |
|
$ |
4,699 |
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Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
426 |
|
|
|
426 |
| |||||
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
(475 |
) |
(475 |
) | |||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
(49 |
) | |||||
Tax adjustment on share-based incentive compensation plan |
|
|
|
1 |
|
|
|
|
|
1 |
| |||||
Cash dividend to Ameriprise Financial, Inc. |
|
|
|
|
|
(535 |
) |
|
|
(535 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances at June 30, 2013 |
|
$ |
3 |
|
$ |
2,463 |
|
$ |
891 |
|
$ |
759 |
|
$ |
4,116 |
|
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
|
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
426 |
|
$ |
334 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation, amortization and accretion, net |
|
(12 |
) |
(6 |
) | ||
Deferred income tax expense (benefit) |
|
12 |
|
(72 |
) | ||
Contractholder and policyholder charges, non-cash |
|
(139 |
) |
(135 |
) | ||
Loss from equity method investments |
|
8 |
|
12 |
| ||
Net realized investment gains |
|
|
|
(7 |
) | ||
Other-than-temporary impairments and provision for loan losses recognized in net realized investment losses |
|
2 |
|
7 |
| ||
Change in operating assets and liabilities: |
|
|
|
|
| ||
Deferred acquisition costs |
|
|
|
(26 |
) | ||
Deferred sales inducement costs |
|
27 |
|
18 |
| ||
Other investments, net |
|
|
|
25 |
| ||
Future policy benefits |
|
(692 |
) |
(54 |
) | ||
Policy claims and other policyholders funds |
|
5 |
|
4 |
| ||
Derivatives, net of collateral |
|
726 |
|
42 |
| ||
Reinsurance recoverables |
|
(67 |
) |
(68 |
) | ||
Other receivables |
|
26 |
|
(33 |
) | ||
Accrued investment income |
|
7 |
|
3 |
| ||
Other, net |
|
(114 |
) |
75 |
| ||
Net cash provided by operating activities |
|
215 |
|
119 |
| ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Available-for-Sale securities: |
|
|
|
|
| ||
Proceeds from sales |
|
130 |
|
113 |
| ||
Maturities, sinking fund payments and calls |
|
1,840 |
|
1,519 |
| ||
Purchases |
|
(1,482 |
) |
(1,380 |
) | ||
Proceeds from sales, maturities and repayments of mortgage loans |
|
352 |
|
120 |
| ||
Funding of mortgage loans |
|
(310 |
) |
(95 |
) | ||
Proceeds from sales of other investments |
|
79 |
|
55 |
| ||
Purchase of other investments |
|
(124 |
) |
(163 |
) | ||
Purchase of land, buildings, equipment and software |
|
(2 |
) |
(6 |
) | ||
Change in policy loans, net |
|
(8 |
) |
(9 |
) | ||
Other, net |
|
32 |
|
|
| ||
Net cash provided by investing activities |
|
507 |
|
154 |
| ||
See Notes to Consolidated Financial Statements.
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
(in millions)
|
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Policyholder and contractholder account values: |
|
|
|
|
| ||
Considerations received |
|
$ |
649 |
|
$ |
748 |
|
Net transfers to separate accounts |
|
(44 |
) |
(24 |
) | ||
Surrenders and other benefits |
|
(649 |
) |
(620 |
) | ||
Change in short-term borrowings, net |
|
(1 |
) |
(7 |
) | ||
Proceeds from line of credit with Ameriprise Financial, Inc. |
|
|
|
268 |
| ||
Payments on line of credit with Ameriprise Financial, Inc. |
|
|
|
(256 |
) | ||
Tax adjustment on share-based incentive compensation plan |
|
1 |
|
|
| ||
Cash paid for purchased options with deferred premiums |
|
(215 |
) |
(172 |
) | ||
Cash dividend to Ameriprise Financial, Inc. |
|
(535 |
) |
(550 |
) | ||
Net cash used in financing activities |
|
(794 |
) |
(613 |
) | ||
Net decrease in cash and cash equivalents |
|
(72 |
) |
(340 |
) | ||
Cash and cash equivalents at beginning of period |
|
336 |
|
828 |
| ||
Cash and cash equivalents at end of period |
|
$ |
264 |
|
$ |
488 |
|
Supplemental Disclosures: |
|
|
|
|
| ||
Income taxes paid, net |
|
$ |
84 |
|
$ |
146 |
|
Interest paid on borrowings |
|
2 |
|
2 |
| ||
Non-cash investing activity: |
|
|
|
|
| ||
Affordable housing partnership commitments not yet remitted |
|
28 |
|
22 |
|
See Notes to Consolidated Financial Statements.
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 two wholly owned subsidiaries, RiverSource Life Insurance Co. of New York and RiverSource Tax Advantaged Investments, Inc. (RTA). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial).
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 accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain reclassifications of prior period amounts have been made to conform to the current presentation. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Companys Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on February 26, 2013.
The Company has reclassified certain prior year amounts in the Consolidated Statements of Cash Flows within operating activities to provide more detail related to derivatives. The Company previously classified the change in freestanding derivatives in the Other, net line, and the change in derivatives collateral in the Derivatives collateral, net line within operating cash flows. The Company reclassified the changes in freestanding derivatives, as well as the change in derivatives collateral, to a new line titled Derivatives, net of collateral within operating cash flows.
The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been made. Except for the adjustment described below, all adjustments made were of a normal recurring nature.
In the second quarter of 2012, the Company made a correction for a tax item related to prior periods, which resulted in a $32 million decrease to net income. The Company discovered it had received incomplete data from a third party service provider for securities lending activities that resulted in the miscalculation of the Companys dividend received deduction and foreign tax credit, which resulted in an understatement of taxes payable and an overstatement of reported earnings in prior periods. Management determined that the effect of this correction was not material to the Consolidated Financial Statements for all prior periods. The Company resolved the data issue and stopped the securities lending that negatively impacted its tax position.
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.
2. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Comprehensive Income
In February 2013, the Financial Accounting Standards Board (FASB) updated the accounting standard related to comprehensive income. The update requires entities to provide information about significant amounts reclassified out of accumulated other comprehensive income (AOCI). The standard is effective for interim and annual periods beginning after December 15, 2012 and is required to be applied prospectively. The Company adopted the standard in the first quarter of 2013. The adoption of the standard did not have any effect on the Companys consolidated financial condition and results of operations. See Note 13 for the required disclosures.
Balance Sheet
In December 2011, the FASB updated the accounting standards to require new disclosures about offsetting assets and liabilities. The standard requires an entity to disclose both gross and net information about certain financial instruments and transactions subject to master netting arrangements (or similar agreements) or eligible for offset in the statement of financial position. The standard is effective for interim and annual periods beginning on or after January 1, 2013 on a retrospective basis. The Company adopted the standard in the first quarter of 2013. The adoption of the standard did not have any effect on the Companys consolidated financial condition and results of operations. See Note 11 for the required disclosures.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB updated the accounting standard for deferred acquisition costs (DAC). Under this new standard, only the following costs incurred in the acquisition of new and renewal insurance contracts are capitalizable as DAC: (i) incremental direct costs of a successful contract acquisition, (ii) portions of employees compensation and benefits directly related to time spent performing acquisition activities (that is, underwriting, policy issuance and processing, medical and inspection, and contract selling) for a contract that has been acquired, (iii) other costs related to acquisition activities that would not have been incurred had the acquisition of the contract not occurred, and (iv) advertising costs that meet the capitalization criteria in other GAAP guidance for certain direct-response marketing. All other acquisition related costs are expensed as incurred. The Company retrospectively adopted the new standard on January 1, 2012. The cumulative effect of the adoption reduced retained earnings by $1.4 billion after-tax and increased AOCI by $112 million after-tax, totaling to a $1.3 billion after-tax reduction in total equity at January 1, 2012.
Future Adoption of New Accounting Standards
Income Taxes
In July 2013, the FASB updated the accounting standard for income taxes. The update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard is effective for interim and annual periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.
3. Variable Interest Entities
RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.
RTAs maximum exposure to loss as a result of its investments in the affordable housing partnerships is limited to the carrying values of these investments. The carrying values are reflected in other investments and were $427 million and $409 million as of June 30, 2013 and December 31, 2012, respectively. RTA has no obligation to provide financial or other support to the affordable housing partnerships in addition to liabilities already recorded for future funding commitments nor has it provided any additional support to the affordable housing partnerships. The Company had liabilities of $113 million and $144 million recorded in other liabilities as of June 30, 2013 and December 31, 2012, respectively, related to the future funding commitments for affordable housing partnerships.
4. Investments
Available-for-Sale securities distributed by type were as follows:
|
|
June 30, 2013 |
| |||||||||||||
Description of Securities |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
Noncredit |
| |||||
|
|
(in millions) |
| |||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate debt securities |
|
$ |
14,654 |
|
$ |
1,431 |
|
$ |
(80 |
) |
$ |
16,005 |
|
$ |
2 |
|
Residential mortgage backed securities |
|
3,529 |
|
158 |
|
(82 |
) |
3,605 |
|
(20 |
) | |||||
Commercial mortgage backed securities |
|
2,453 |
|
177 |
|
(9 |
) |
2,621 |
|
|
| |||||
State and municipal obligations |
|
942 |
|
109 |
|
(29 |
) |
1,022 |
|
|
| |||||
Asset backed securities |
|
808 |
|
54 |
|
(4 |
) |
858 |
|
|
| |||||
Foreign government bonds and obligations |
|
241 |
|
18 |
|
(5 |
) |
254 |
|
|
| |||||
U.S. government and agencies obligations |
|
40 |
|
6 |
|
|
|
46 |
|
|
| |||||
Total fixed maturities |
|
22,667 |
|
1,953 |
|
(209 |
) |
24,411 |
|
(18 |
) | |||||
Common stocks |
|
2 |
|
3 |
|
|
|
5 |
|
2 |
| |||||
Total |
|
$ |
22,669 |
|
$ |
1,956 |
|
$ |
(209 |
) |
$ |
24,416 |
|
$ |
(16 |
) |
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
December 31, 2012 |
| |||||||||||||
Description of Securities |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
Noncredit |
| |||||
|
|
(in millions) |
| |||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate debt securities |
|
$ |
14,881 |
|
$ |
2,167 |
|
$ |
(7 |
) |
$ |
17,041 |
|
$ |
|
|
Residential mortgage backed securities |
|
3,446 |
|
233 |
|
(58 |
) |
3,621 |
|
(24 |
) | |||||
Commercial mortgage backed securities |
|
2,717 |
|
287 |
|
|
|
3,004 |
|
|
| |||||
State and municipal obligations |
|
976 |
|
180 |
|
(34 |
) |
1,122 |
|
|
| |||||
Asset backed securities |
|
808 |
|
66 |
|
(3 |
) |
871 |
|
|
| |||||
Foreign government bonds and obligations |
|
188 |
|
36 |
|
|
|
224 |
|
|
| |||||
U.S. government and agencies obligations |
|
42 |
|
7 |
|
|
|
49 |
|
|
| |||||
Total fixed maturities |
|
23,058 |
|
2,976 |
|
(102 |
) |
25,932 |
|
(24 |
) | |||||
Common stocks |
|
2 |
|
2 |
|
|
|
4 |
|
1 |
| |||||
Total |
|
$ |
23,060 |
|
$ |
2,978 |
|
$ |
(102 |
) |
$ |
25,936 |
|
$ |
(23 |
) |
(1) Represents the amount of other-than-temporary impairment (OTTI) losses in accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.
At June 30, 2013 and December 31, 2012, fixed maturity securities comprised approximately 83% and 84%, respectively, of the Companys total investments. Rating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), including Moodys Investors Service (Moodys), Standard & Poors Ratings Services (S&P) and Fitch Ratings Ltd. (Fitch). The Company uses the median of available ratings from Moodys, S&P and Fitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moodys, S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. At June 30, 2013 and December 31, 2012, approximately $1.4 billion and $1.5 billion, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||
Ratings |
|
Amortized |
|
Fair |
|
Percent of |
|
Amortized Cost |
|
Fair |
|
Percent of |
| ||||
|
|
(in millions, except percentages) |
| ||||||||||||||
AAA |
|
$ |
5,387 |
|
$ |
5,666 |
|
23 |
% |
$ |
5,680 |
|
$ |
6,198 |
|
24 |
% |
AA |
|
1,149 |
|
1,286 |
|
5 |
|
1,102 |
|
1,273 |
|
5 |
| ||||
A |
|
4,299 |
|
4,710 |
|
19 |
|
4,262 |
|
4,849 |
|
19 |
| ||||
BBB |
|
10,208 |
|
11,164 |
|
46 |
|
10,409 |
|
12,019 |
|
46 |
| ||||
Below investment grade |
|
1,624 |
|
1,585 |
|
7 |
|
1,605 |
|
1,593 |
|
6 |
| ||||
Total fixed maturities |
|
$ |
22,667 |
|
$ |
24,411 |
|
100 |
% |
$ |
23,058 |
|
$ |
25,932 |
|
100 |
% |
At June 30, 2013 and December 31, 2012, approximately 36% and 32%, 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.
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:
|
|
June 30, 2013 |
| ||||||||||||||||||||||
|
|
Less than 12 months |
|
12 months or more |
|
Total |
| ||||||||||||||||||
Description of Securities |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
| ||||||
|
|
(in millions, except number of securities) |
| ||||||||||||||||||||||
Corporate debt securities |
|
149 |
|
$ |
2,033 |
|
$ |
(74 |
) |
3 |
|
$ |
41 |
|
$ |
(6 |
) |
152 |
|
$ |
2,074 |
|
$ |
(80 |
) |
Residential mortgage backed securities |
|
36 |
|
917 |
|
(37 |
) |
48 |
|
234 |
|
(45 |
) |
84 |
|
1,151 |
|
(82 |
) | ||||||
Commercial mortgage backed securities |
|
20 |
|
198 |
|
(9 |
) |
|
|
|
|
|
|
20 |
|
198 |
|
(9 |
) | ||||||
State and municipal obligations |
|
|
|
|
|
|
|
2 |
|
100 |
|
(29 |
) |
2 |
|
100 |
|
(29 |
) | ||||||
Asset backed securities |
|
9 |
|
100 |
|
(3 |
) |
3 |
|
21 |
|
(1 |
) |
12 |
|
121 |
|
(4 |
) | ||||||
Foreign government bonds and obligations |
|
25 |
|
93 |
|
(5 |
) |
|
|
|
|
|
|
25 |
|
93 |
|
(5 |
) | ||||||
Total |
|
239 |
|
$ |
3,341 |
|
$ |
(128 |
) |
56 |
|
$ |
396 |
|
$ |
(81 |
) |
295 |
|
$ |
3,737 |
|
$ |
(209 |
) |
|
|
December 31, 2012 |
| ||||||||||||||||||||||
|
|
Less than 12 months |
|
12 months or more |
|
Total |
| ||||||||||||||||||
Description of Securities |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
|
Number of |
|
Fair |
|
Unrealized |
| ||||||
|
|
(in millions, except number of securities) |
| ||||||||||||||||||||||
Corporate debt securities |
|
50 |
|
$ |
477 |
|
$ |
(4 |
) |
6 |
|
$ |
70 |
|
$ |
(3 |
) |
56 |
|
$ |
547 |
|
$ |
(7 |
) |
Residential mortgage backed securities |
|
6 |
|
107 |
|
|
|
56 |
|
293 |
|
(58 |
) |
62 |
|
400 |
|
(58 |
) | ||||||
State and municipal obligations |
|
|
|
|
|
|
|
2 |
|
100 |
|
(34 |
) |
2 |
|
100 |
|
(34 |
) | ||||||
Asset backed securities |
|
1 |
|
10 |
|
|
|
5 |
|
86 |
|
(3 |
) |
6 |
|
96 |
|
(3 |
) | ||||||
Total |
|
57 |
|
$ |
594 |
|
$ |
(4 |
) |
69 |
|
$ |
549 |
|
$ |
(98 |
) |
126 |
|
$ |
1,143 |
|
$ |
(102 |
) |
As part of the Companys ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to movement in interest rates.
The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on securities for which a portion of the securities total other-than-temporary impairments was recognized in other comprehensive income (loss):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(in millions) |
| ||||||||||
Beginning balance |
|
$ |
75 |
|
$ |
105 |
|
$ |
87 |
|
$ |
106 |
|
Credit losses for which an other-than-temporary impairment was not previously recognized |
|
|
|
1 |
|
|
|
1 |
| ||||
Credit losses for which an other-than-temporary impairment was previously recognized |
|
1 |
|
5 |
|
2 |
|
6 |
| ||||
Reductions for securities sold during the period (realized) |
|
(10 |
) |
(21 |
) |
(23 |
) |
(23 |
) | ||||
Ending balance |
|
$ |
66 |
|
$ |
90 |
|
$ |
66 |
|
$ |
90 |
|
The change in net unrealized securities gains (losses) in other comprehensive income (loss) includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, deferred sales inducement costs (DSIC), benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table presents a rollforward of the net unrealized securities gains on Available-for-Sale securities included in accumulated other comprehensive income:
|
|
Net |
|
Deferred |
|
Accumulated Other |
| |||
|
|
(in millions) |
| |||||||
Balance at January 1, 2012 |
|
$ |
1,472 |
|
$ |
(515 |
) |
$ |
957 |
|
Net unrealized securities gains arising during the period(1) |
|
272 |
|
(95 |
) |
177 |
| |||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
|
(95 |
) |
33 |
|
(62 |
) | |||
Balance at June 30, 2012 |
|
$ |
1,649 |
|
$ |
(577 |
) |
$ |
1,072 |
(2) |
|
|
|
|
|
|
|
| |||
Balance at January 1, 2013 |
|
$ |
1,930 |
|
$ |
(675 |
) |
$ |
1,255 |
|
Net unrealized securities losses arising during the period(1) |
|
(1,129 |
) |
385 |
|
(744 |
) | |||
Reclassification of net securities losses included in net income |
|
1 |
|
|
|
1 |
| |||
Impact on DAC, DSIC, benefit reserves and reinsurance recoverables |
|
407 |
|
(142 |
) |
265 |
| |||
Balance at June 30, 2013 |
|
$ |
1,209 |
|
$ |
(432 |
) |
$ |
777 |
(2) |
(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 (loss) during the period.
(2) Includes $(9) million and $(20) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at June 30, 2013 and 2012, respectively.
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 |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(in millions) |
| ||||||||||
Gross realized investment gains |
|
$ |
2 |
|
$ |
4 |
|
$ |
2 |
|
$ |
8 |
|
Gross realized investment losses |
|
(1 |
) |
(1 |
) |
(1 |
) |
(1 |
) | ||||
Other-than-temporary impairments |
|
(1 |
) |
(6 |
) |
(2 |
) |
(7 |
) | ||||
Total |
|
$ |
|
|
$ |
(3 |
) |
$ |
(1 |
) |
$ |
|
|
Other-than-temporary impairments for the three months and six months ended June 30, 2013 and 2012 primarily related to credit losses on non-agency residential mortgage backed securities.
Available-for-Sale securities by contractual maturity at June 30, 2013 were as follows:
|
|
Amortized Cost |
|
Fair Value |
| ||
|
|
(in millions) |
| ||||
Due within one year |
|
$ |
1,293 |
|
$ |
1,320 |
|
Due after one year through five years |
|
4,387 |
|
4,700 |
| ||
Due after five years through 10 years |
|
6,664 |
|
7,189 |
| ||
Due after 10 years |
|
3,533 |
|
4,118 |
| ||
|
|
15,877 |
|
17,327 |
| ||
Residential mortgage backed securities |
|
3,529 |
|
3,605 |
| ||
Commercial mortgage backed securities |
|
2,453 |
|
2,621 |
| ||
Asset backed securities |
|
808 |
|
858 |
| ||
Common stocks |
|
2 |
|
5 |
| ||
Total |
|
$ |
22,669 |
|
$ |
24,416 |
|
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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Net investment income is summarized as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(in millions) |
| ||||||||||
Income on fixed maturities |
|
$ |
303 |
|
$ |
338 |
|
$ |
612 |
|
$ |
680 |
|
Income on mortgage loans |
|
52 |
|
38 |
|
103 |
|
73 |
| ||||
Other investments |
|
11 |
|
7 |
|
17 |
|
13 |
| ||||
|
|
366 |
|
383 |
|
732 |
|
766 |
| ||||
Less: investment expenses |
|
7 |
|
6 |
|
15 |
|
12 |
| ||||
Total |
|
$ |
359 |
|
$ |
377 |
|
$ |
717 |
|
$ |
754 |
|
5. Financing Receivables
The Companys financing receivables include commercial and residential mortgage loans, syndicated loans and policy loans. Syndicated loans are reflected in other investments. 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.
Allowance for Loan Losses
The following tables present a rollforward of the allowance for loan losses for the six months ended and the ending balance of the allowance for loan losses by impairment method and type of loan:
|
|
June 30, 2013 |
|
June 30, 2012 |
| ||||||||||||||
|
|
Commercial |
|
Syndicated |
|
Total |
|
Commercial |
|
Syndicated |
|
Total |
| ||||||
|
|
(in millions) |
| ||||||||||||||||
Beginning balance |
|
$ |
26 |
|
$ |
4 |
|
$ |
30 |
|
$ |
32 |
|
$ |
5 |
|
$ |
37 |
|
Charge-offs |
|
|
|
|
|
|
|
(2 |
) |
(1 |
) |
(3 |
) | ||||||
Ending balance |
|
$ |
26 |
|
$ |
4 |
|
$ |
30 |
|
$ |
30 |
|
$ |
4 |
|
$ |
34 |
|
Individually evaluated for impairment |
|
$ |
7 |
|
$ |
|
|
$ |
7 |
|
$ |
8 |
|
$ |
|
|
$ |
8 |
|
Collectively evaluated for impairment |
|
19 |
|
4 |
|
23 |
|
22 |
|
4 |
|
26 |
|
The recorded investment in financing receivables by impairment method and type of loan was as follows:
|
|
June 30, 2013 |
| ||||||||||
|
|
Commercial |
|
Residential |
|
Syndicated |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Individually evaluated for impairment |
|
$ |
55 |
|
$ |
|
|
$ |
2 |
|
$ |
57 |
|
Collectively evaluated for impairment |
|
2,469 |
|
862 |
|
288 |
|
3,619 |
| ||||
Total |
|
$ |
2,524 |
|
$ |
862 |
|
$ |
290 |
|
$ |
3,676 |
|
|
|
December 31, 2012 |
| ||||||||||
|
|
Commercial |
|
Residential |
|
Syndicated |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Individually evaluated for impairment |
|
$ |
39 |
|
$ |
|
|
$ |
|
|
$ |
39 |
|
Collectively evaluated for impairment |
|
2,442 |
|
934 |
|
303 |
|
3,679 |
| ||||
Total |
|
$ |
2,481 |
|
$ |
934 |
|
$ |
303 |
|
$ |
3,718 |
|
As of June 30, 2013 and December 31, 2012, the Companys recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $11 million and $10 million, respectively.
Residential mortgage loans are presented net of unamortized discount of $65 million and $80 million as of June 30, 2013 and December 31, 2012, respectively.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Purchases and sales of syndicated loans were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(in millions) |
| ||||||||||
Purchases |
|
$ |
37 |
|
$ |
24 |
|
$ |
59 |
|
$ |
53 |
|
Sales |
|
|
|
|
|
1 |
|
|
| ||||
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were $18 million and $4 million as of June 30, 2013 and December 31, 2012, respectively. 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 2% of total commercial mortgage loans at both June 30, 2013 and December 31, 2012. 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.
Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:
|
|
Loans |
|
Percentage |
| ||||||
|
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
| ||
|
|
(in millions) |
|
|
|
|
| ||||
South Atlantic |
|
$ |
639 |
|
$ |
625 |
|
25 |
% |
25 |
% |
Pacific |
|
595 |
|
565 |
|
24 |
|
23 |
| ||
Mountain |
|
260 |
|
262 |
|
10 |
|
11 |
| ||
East North Central |
|
253 |
|
255 |
|
10 |
|
10 |
| ||
West North Central |
|
209 |
|
216 |
|
8 |
|
9 |
| ||
Middle Atlantic |
|
199 |
|
198 |
|
8 |
|
8 |
| ||
West South Central |
|
165 |
|
159 |
|
7 |
|
6 |
| ||
New England |
|
134 |
|
135 |
|
5 |
|
5 |
| ||
East South Central |
|
70 |
|
66 |
|
3 |
|
3 |
| ||
|
|
2,524 |
|
2,481 |
|
100 |
% |
100 |
% | ||
Less: allowance for loan losses |
|
26 |
|
26 |
|
|
|
|
| ||
Total |
|
$ |
2,498 |
|
$ |
2,455 |
|
|
|
|
|
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
|
|
Loans |
|
Percentage |
| ||||||
|
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
| ||
|
|
(in millions) |
|
|
|
|
| ||||
Retail |
|
$ |
863 |
|
$ |
822 |
|
34 |
% |
33 |
% |
Office |
|
581 |
|
597 |
|
23 |
|
24 |
| ||
Industrial |
|
443 |
|
449 |
|
18 |
|
18 |
| ||
Apartments |
|
438 |
|
415 |
|
17 |
|
17 |
| ||
Mixed use |
|
33 |
|
42 |
|
1 |
|
2 |
| ||
Hotel |
|
26 |
|
36 |
|
1 |
|
1 |
| ||
Other |
|
140 |
|
120 |
|
6 |
|
5 |
| ||
|
|
2,524 |
|
2,481 |
|
100 |
% |
100 |
% | ||
Less: allowance for loan losses |
|
26 |
|
26 |
|
|
|
|
| ||
Total |
|
$ |
2,498 |
|
$ |
2,455 |
|
|
|
|
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Residential Mortgage Loans
In October 2012, the Company purchased $954 million of residential mortgage loans at fair value from an affiliate, Ameriprise Bank, FSB. The purchase price takes into account the credit quality of the loan portfolio resulting in no allowance for loan losses recorded at purchase. 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 June 30, 2013 and December 31, 2012, no allowance for loan losses was recorded.
As of June 30, 2013 and December 31, 2012, approximately 4% and 3%, respectively, of residential mortgage loans had FICO scores below 640. At June 30, 2013 and December 31, 2012, approximately 1% and 7%, respectively, of the Companys residential mortgage loans had LTV ratios greater than 90%. The Companys most significant geographic concentration for residential mortgage loans is in California representing 38% of the portfolio as of both June 30, 2013 and December 31, 2012. No other state represents more than 10% of the total residential mortgage loan portfolio.
Syndicated Loans
The Companys 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 at both June 30, 2013 and December 31, 2012 were $2 million.
Troubled Debt Restructurings
The following table presents the number of loans restructured by the Company during the period and their recorded investment at the end of the period:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||||||||||
|
|
Number |
|
Recorded |
|
Number |
|
Recorded |
|
Number |
|
Recorded |
|
Number |
|
Recorded |
| ||||
|
|
(in millions, except number of loans) |
| ||||||||||||||||||
Commercial mortgage loans |
|
3 |
|
$ |
9 |
|
1 |
|
$ |
1 |
|
3 |
|
$ |
9 |
|
1 |
|
$ |
1 |
|
Residential mortgage loans |
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
| ||||
Syndicated loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
1 |
| ||||
Total |
|
3 |
|
$ |
9 |
|
1 |
|
$ |
1 |
|
5 |
|
$ |
9 |
|
2 |
|
$ |
2 |
|
The troubled debt restructurings did not have a material impact to the Companys allowance for loan losses or income recognized for the three months and six months ended June 30, 2013 and 2012. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.
6. Deferred Acquisition Costs and Deferred Sales Inducement Costs
The balances of and changes in DAC were as follows:
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
Balance at January 1 |
|
$ |
2,373 |
|
$ |
2,413 |
|
Capitalization of acquisition costs |
|
134 |
|
126 |
| ||
Amortization |
|
(134 |
) |
(100 |
) | ||
Impact of change in net unrealized securities losses (gains) |
|
107 |
|
(35 |
) | ||
Balance at June 30 |
|
$ |
2,480 |
|
$ |
2,404 |
|
The balances of and changes in DSIC were as follows:
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
Balance at January 1 |
|
$ |
404 |
|
$ |
464 |
|
Capitalization of sales inducement costs |
|
3 |
|
4 |
| ||
Amortization |
|
(30 |
) |
(22 |
) | ||
Impact of change in net unrealized securities losses (gains) |
|
15 |
|
(6 |
) | ||
Balance at June 30 |
|
$ |
392 |
|
$ |
440 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
7. Future Policy Benefits, Policy Claims and Other Policyholders Funds and Separate Account Liabilities
Future policy benefits and policy claims and other policyholders funds consisted of the following:
|
|
June 30, |
|
December 31, |
| ||
|
|
(in millions) |
| ||||
Fixed annuities |
|
$ |
15,649 |
|
$ |
16,075 |
|
Equity indexed annuity (EIA) accumulated host values |
|
27 |
|
31 |
| ||
EIA embedded derivatives |
|
3 |
|
2 |
| ||
Variable annuity fixed sub-accounts |
|
4,861 |
|
4,843 |
| ||
Variable annuity guaranteed minimum withdrawal benefits (GMWB) |
|
84 |
|
799 |
| ||
Variable annuity guaranteed minimum accumulation benefits (GMAB) |
|
14 |
|
103 |
| ||
Other variable annuity guarantees |
|
14 |
|
13 |
| ||
Total annuities |
|
20,652 |
|
21,866 |
| ||
Variable universal life (VUL)/universal life (UL) insurance |
|
2,800 |
|
2,760 |
| ||
Indexed universal life (IUL) accumulated host values |
|
97 |
|
59 |
| ||
IUL embedded derivatives |
|
76 |
|
45 |
| ||
VUL/UL insurance additional liabilities |
|
281 |
|
294 |
| ||
Other life, disability income and long term care insurance |
|
5,615 |
|
5,646 |
| ||
Total future policy benefits |
|
29,521 |
|
30,670 |
| ||
Policy claims and other policyholders funds |
|
137 |
|
132 |
| ||
Total future policy benefits and policy claims and other policyholders funds |
|
$ |
29,658 |
|
$ |
30,802 |
|
Separate account liabilities consisted of the following:
|
|
June 30, |
|
December 31, |
| ||
|
|
(in millions) |
| ||||
Variable annuity variable sub-accounts |
|
$ |
65,479 |
|
$ |
63,302 |
|
VUL insurance variable sub-accounts |
|
6,308 |
|
6,051 |
| ||
Other insurance variable sub-accounts |
|
41 |
|
42 |
| ||
Total |
|
$ |
71,828 |
|
$ |
69,395 |
|
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.
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:
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||||||
Variable Annuity |
|
Total |
|
Contract |
|
Net |
|
Weighted |
|
Total |
|
Contract |
|
Net |
|
Weighted |
| ||||||
|
|
(in millions, except age) |
| ||||||||||||||||||||
GMDB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Return of premium |
|
$ |
48,065 |
|
$ |
46,279 |
|
$ |
62 |
|
63 |
|
$ |
45,697 |
|
$ |
43,942 |
|
$ |
61 |
|
63 |
|
Five/six-year reset |
|
11,018 |
|
8,498 |
|
77 |
|
63 |
|
11,233 |
|
8,722 |
|
115 |
|
63 |
| ||||||
One-year ratchet |
|
7,346 |
|
6,927 |
|
103 |
|
65 |
|
7,367 |
|
6,933 |
|
106 |
|
65 |
| ||||||
Five-year ratchet |
|
1,661 |
|
1,606 |
|
4 |
|
62 |
|
1,616 |
|
1,563 |
|
3 |
|
61 |
| ||||||
Other |
|
982 |
|
958 |
|
57 |
|
68 |
|
912 |
|
885 |
|
62 |
|
68 |
| ||||||
Total GMDB |
|
$ |
69,072 |
|
$ |
64,268 |
|
$ |
303 |
|
63 |
|
$ |
66,825 |
|
$ |
62,045 |
|
$ |
347 |
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
GGU death benefit |
|
$ |
980 |
|
$ |
928 |
|
$ |
102 |
|
64 |
|
$ |
958 |
|
$ |
907 |
|
$ |
93 |
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
GMIB |
|
$ |
411 |
|
$ |
387 |
|
$ |
59 |
|
66 |
|
$ |
425 |
|
$ |
399 |
|
$ |
72 |
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
GMWB: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
GMWB |
|
$ |
3,828 |
|
$ |
3,812 |
|
$ |
48 |
|
67 |
|
$ |
3,898 |
|
$ |
3,880 |
|
$ |
34 |
|
66 |
|
GMWB for life |
|
30,634 |
|
30,488 |
|
453 |
|
64 |
|
28,588 |
|
28,462 |
|
263 |
|
64 |
| ||||||
Total GMWB |
|
$ |
34,462 |
|
$ |
34,300 |
|
$ |
501 |
|
64 |
|
$ |
32,486 |
|
$ |
32,342 |
|
$ |
297 |
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
GMAB |
|
$ |
3,888 |
|
$ |
3,874 |
|
$ |
5 |
|
57 |
|
$ |
3,773 |
|
$ |
3,762 |
|
$ |
5 |
|
57 |
|
(1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.
(2) Represents the current guaranteed benefit amount in excess of the current contract value. GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract.
Changes in additional liabilities for variable annuity and insurance guarantees were as follows:
|
|
GMDB & |
|
GMIB |
|
GMWB |
|
GMAB |
|
UL |
| |||||
|
|
(in millions) |
| |||||||||||||
Balance at January 1, 2012 |
|
$ |
5 |
|
$ |
9 |
|
$ |
1,377 |
|
$ |
237 |
|
$ |
111 |
|
Incurred claims |
|
2 |
|
|
|
(119 |
) |
(57 |
) |
33 |
| |||||
Paid claims |
|
(5 |
) |
(1 |
) |
|
|
|
|
(5 |
) | |||||
Balance at June 30, 2012 |
|
$ |
2 |
|
$ |
8 |
|
$ |
1,258 |
|
$ |
180 |
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at January 1, 2013 |
|
$ |
4 |
|
$ |
9 |
|
$ |
799 |
|
$ |
103 |
|
$ |
155 |
|
Incurred claims |
|
3 |
|
|
|
(715 |
) |
(89 |
) |
36 |
| |||||
Paid claims |
|
(2 |
) |
|
|
|
|
|
|
(7 |
) | |||||
Balance at June 30, 2013 |
|
$ |
5 |
|
$ |
9 |
|
$ |
84 |
|
$ |
14 |
|
$ |
184 |
|
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:
|
|
June 30, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
Mutual funds: |
|
|
|
|
| ||
Equity |
|
$ |
32,886 |
|
$ |
32,054 |
|
Bond |
|
25,495 |
|
26,165 |
| ||
Other |
|
5,993 |
|
3,991 |
| ||
Total mutual funds |
|
$ |
64,374 |
|
$ |
62,210 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
9. Short-term Borrowings
The Company enters into repurchase agreements in exchange for cash which it accounts for as secured borrowings. The Company has pledged Available-for-Sale securities consisting of agency residential mortgage backed securities and commercial mortgage backed securities to collateralize its obligation under the repurchase agreements. The fair value of the securities pledged is recorded in investments and was $209 million and $518 million at June 30, 2013 and December 31, 2012, respectively. The amount of the Companys liability including accrued interest as of June 30, 2013 and December 31, 2012 was $201 million and $501 million, respectively. The weighted average annualized interest rate on the repurchase agreements held as of both June 30, 2013 and December 31, 2012 was 0.4%.
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 $376 million at June 30, 2013. The amount of the Companys liability including accrued interest as of June 30, 2013 was $300 million. The weighted average annualized interest rate on the FHLB advances held as of June 30, 2013 was 0.3%.
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 Companys 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.
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:
|
|
June 30, 2013 |
| ||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
|
$ |
|
|
$ |
14,447 |
|
$ |
1,558 |
|
$ |
16,005 |
|
Residential mortgage backed securities |
|
|
|
3,555 |
|
50 |
|
3,605 |
| ||||
Commercial mortgage backed securities |
|
|
|
2,457 |
|
164 |
|
2,621 |
| ||||
State and municipal obligations |
|
|
|
1,022 |
|
|
|
1,022 |
| ||||
Asset backed securities |
|
|
|
704 |
|
154 |
|
858 |
| ||||
Foreign government bonds and obligations |
|
|
|
254 |
|
|
|
254 |
| ||||
U.S. government and agencies obligations |
|
9 |
|
37 |
|
|
|
46 |
| ||||
Total Available-for-Sale securities: Fixed maturities |
|
9 |
|
22,476 |
|
1,926 |
|
24,411 |
| ||||
Common stocks |
|
2 |
|
3 |
|
|
|
5 |
| ||||
Cash equivalents |
|
|
|
213 |
|
|
|
213 |
| ||||
Other assets: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
|
|
|
1,638 |
|
|
|
1,638 |
| ||||
Equity derivative contracts |
|
326 |
|
1,094 |
|
|
|
1,420 |
| ||||
Credit derivative contracts |
|
|
|
7 |
|
|
|
7 |
| ||||
Foreign currency derivative contracts |
|
|
|
4 |
|
|
|
4 |
| ||||
Total other assets |
|
326 |
|
2,743 |
|
|
|
3,069 |
| ||||
Separate account assets |
|
|
|
71,828 |
|
|
|
71,828 |
| ||||
Total assets at fair value |
|
$ |
337 |
|
$ |
97,263 |
|
$ |
1,926 |
|
$ |
99,526 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Future policy benefits: |
|
|
|
|
|
|
|
|
| ||||
EIA embedded derivatives |
|
$ |
|
|
$ |
3 |
|
$ |
|
|
$ |
3 |
|
IUL embedded derivatives |
|
|
|
|
|
76 |
|
76 |
| ||||
GMWB and GMAB embedded derivatives |
|
|
|
|
|
11 |
|
11 |
| ||||
Total future policy benefits |
|
|
|
3 |
|
87 |
|
90 |
(1) | ||||
Other liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
|
|
|
1,483 |
|
|
|
1,483 |
| ||||
Equity derivative contracts |
|
269 |
|
1,827 |
|
|
|
2,096 |
| ||||
Total other liabilities |
|
269 |
|
3,310 |
|
|
|
3,579 |
| ||||
Total liabilities at fair value |
|
$ |
269 |
|
$ |
3,313 |
|
$ |
87 |
|
$ |
3,669 |
|
(1) The Companys adjustment for nonperformance risk resulted in a $263 million cumulative decrease to the embedded derivative liability.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
December 31, 2012 |
| ||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale securities: |
|
|
|
|
|
|
|
|
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
|
$ |
|
|
$ |
15,387 |
|
$ |
1,654 |
|
$ |
17,041 |
|
Residential mortgage backed securities |
|
|
|
3,598 |
|
23 |
|
3,621 |
| ||||
Commercial mortgage backed securities |
|
|
|
2,834 |
|
170 |
|
3,004 |
| ||||
State and municipal obligations |
|
|
|
1,122 |
|
|
|
1,122 |
| ||||
Asset backed securities |
|
|
|
715 |
|
156 |
|
871 |
| ||||
Foreign government bonds and obligations |
|
|
|
224 |
|
|
|
224 |
| ||||
U.S. government and agencies obligations |
|
10 |
|
39 |
|
|
|
49 |
| ||||
Total Available-for-Sale securities: Fixed maturities |
|
10 |
|
23,919 |
|
2,003 |
|
25,932 |
| ||||
Common stocks |
|
2 |
|
2 |
|
|
|
4 |
| ||||
Cash equivalents |
|
|
|
264 |
|
|
|
264 |
| ||||
Other assets: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
|
|
|
2,191 |
|
|
|
2,191 |
| ||||
Equity derivative contracts |
|
285 |
|
936 |
|
|
|
1,221 |
| ||||
Foreign currency derivative contracts |
|
|
|
6 |
|
|
|
6 |
| ||||
Total other assets |
|
285 |
|
3,133 |
|
|
|
3,418 |
| ||||
Separate account assets |
|
|
|
69,395 |
|
|
|
69,395 |
| ||||
Total assets at fair value |
|
$ |
297 |
|
$ |
96,713 |
|
$ |
2,003 |
|
$ |
99,013 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Future policy benefits: |
|
|
|
|
|
|
|
|
| ||||
EIA embedded derivatives |
|
$ |
|
|
$ |
2 |
|
$ |
|
|
$ |
2 |
|
IUL embedded derivatives |
|
|
|
|
|
45 |
|
45 |
| ||||
GMWB and GMAB embedded derivatives |
|
|
|
|
|
833 |
|
833 |
| ||||
Total future policy benefits |
|
|
|
2 |
|
878 |
|
880 |
(1) | ||||
Other liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate derivative contracts |
|
|
|
1,486 |
|
|
|
1,486 |
| ||||
Equity derivative contracts |
|
258 |
|
1,535 |
|
|
|
1,793 |
| ||||
Total other liabilities |
|
258 |
|
3,021 |
|
|
|
3,279 |
| ||||
Total liabilities at fair value |
|
$ |
258 |
|
$ |
3,023 |
|
$ |
878 |
|
$ |
4,159 |
|
(1) The Companys adjustment for nonperformance risk resulted in a $398 million cumulative decrease to the embedded derivative liability.
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 |
|
Future Policy Benefits |
| ||||||||||||||||||||
|
|
Corporate |
|
Residential |
|
Commercial |
|
Asset |
|
Total |
|
IUL |
|
GMWB and |
|
Total |
| ||||||||
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
| ||||||||
Balance, April 1, 2013 |
|
$ |
1,653 |
|
$ |
8 |
|
$ |
168 |
|
$ |
160 |
|
$ |
1,989 |
|
$ |
(61 |
) |
$ |
(266 |
) |
$ |
(327 |
) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
(1 |
) |
|
|
|
|
|
|
(1 |
)(1) |
(2 |
)(2) |
306 |
(3) |
304 |
| ||||||||
Other comprehensive loss |
|
(35 |
) |
|
|
(4 |
) |
3 |
|
(36 |
) |
|
|
|
|
|
| ||||||||
Purchases |
|
20 |
|
42 |
|
|
|
|
|
62 |
|
|
|
|
|
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issues |
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
(53 |
) |
(66 |
) | ||||||||
Settlements |
|
(79 |
) |
|
|
|
|
|
|
(79 |
) |
|
|
2 |
|
2 |
| ||||||||
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Transfers out of Level 3 |
|
|
|
|
|
|
|
(9 |
) |
(9 |
) |
|
|
|
|
|
| ||||||||
Balance, June 30, 2013 |
|
$ |
1,558 |
|
$ |
50 |
|
$ |
164 |
|
$ |
154 |
|
$ |
1,926 |
|
$ |
(76 |
) |
$ |
(11 |
) |
$ |
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Changes in unrealized gains (losses) relating to assets and liabilities held at June 30, 2013 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Benefits, claims, losses and settlement expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
299 |
|
$ |
299 |
|
Interest credited to fixed accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
(2 |
) |
(1) Represents a $1 million loss 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.
|
|
Available-for-Sale Securities: Fixed Maturities |
|
|
|
Future Policy Benefits |
| ||||||||||||||||||
|
|
Corporate |
|
Residential |
|
Commercial |
|
Asset |
|
Other |
|
Total |
|
Common |
|
GMWB and |
| ||||||||
|
|
(in millions) |
| ||||||||||||||||||||||
Balance, April 1, 2012 |
|
$ |
1,393 |
|
$ |
82 |
|
$ |
16 |
|
$ |
140 |
|
$ |
15 |
|
$ |
1,646 |
|
$ |
1 |
|
$ |
(840 |
) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
)(1) |
|
|
(528 |
)(2) | ||||||||
Other comprehensive income |
|
1 |
|
4 |
|
|
|
|
|
|
|
5 |
|
|
|
|
| ||||||||
Purchases |
|
95 |
|
|
|
8 |
|
|
|
|
|
103 |
|
|
|
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43 |
) | ||||||||
Settlements |
|
(43 |
) |
(3 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
5 |
| ||||||||
Transfers into Level 3 |
|
10 |
|
5 |
|
|
|
|
|
|
|
15 |
|
|
|
|
| ||||||||
Transfers out of Level 3 |
|
|
|
(24 |
) |
|
|
|
|
(15 |
) |
(39 |
) |
(1 |
) |
|
| ||||||||
Balance, June 30, 2012 |
|
$ |
1,456 |
|
$ |
59 |
|
$ |
24 |
|
$ |
140 |
|
$ |
|
|
$ |
1,679 |
|
$ |
|
|
$ |
(1,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Changes in unrealized losses relating to assets and liabilities held at June 30, 2012 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net realized investment losses |
|
$ |
|
|
$ |
(5 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(5 |
) |
$ |
|
|
$ |
|
|
Benefits, claims, losses and settlement expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(535 |
) |
(1) Represents a $5 million loss included in net realized investment losses in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
Available-for-Sale Securities: Fixed Maturities |
|
Future Policy Benefits |
| ||||||||||||||||||||
|
|
Corporate |
|
Residential |
|
Commercial |
|
Asset |
|
Total |
|
IUL |
|
GMWB and |
|
Total |
| ||||||||
|
|
(in millions) |
| ||||||||||||||||||||||
Balance, January 1, 2013 |
|
$ |
1,654 |
|
$ |
23 |
|
$ |
170 |
|
$ |
156 |
|
$ |
2,003 |
|
$ |
(45 |
) |
$ |
(833 |
) |
$ |
(878 |
) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
(1 |
) |
|
|
|
|
1 |
|
|
(1) |
(6 |
)(2) |
924 |
(3) |
918 |
| ||||||||
Other comprehensive loss |
|
(35 |
) |
|
|
(6 |
) |
7 |
|
(34 |
) |
|
|
|
|
|
| ||||||||
Purchases |
|
74 |
|
42 |
|
|
|
|
|
116 |
|
|
|
|
|
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issues |
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
(103 |
) |
(128 |
) | ||||||||
Settlements |
|
(134 |
) |
|
|
|
|
(1 |
) |
(135 |
) |
|
|
1 |
|
1 |
| ||||||||
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Transfers out of Level 3 |
|
|
|
(15 |
) |
|
|
(9 |
) |
(24 |
) |
|
|
|
|
|
| ||||||||
Balance, June 30, 2013 |
|
$ |
1,558 |
|
$ |
50 |
|
$ |
164 |
|
$ |
154 |
|
$ |
1,926 |
|
$ |
(76 |
) |
$ |
(11 |
) |
$ |
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Changes in unrealized gains (losses) relating to assets and liabilities held at June 30, 2013 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net investment income |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Benefits, claims, losses and settlement expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
908 |
|
908 |
| ||||||||
Interest credited to fixed accounts |
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
(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.
|
|
Available-for-Sale Securities: Fixed Maturities |
|
|
|
Future Policy Benefits |
| ||||||||||||||||||
|
|
Corporate |
|
Residential |
|
Commercial |
|
Asset |
|
Other |
|
Total |
|
Common |
|
GMWB and |
| ||||||||
|
|
(in millions) |
| ||||||||||||||||||||||
Balance, January 1, 2012 |
|
$ |
1,342 |
|
$ |
58 |
|
$ |
16 |
|
$ |
133 |
|
$ |
14 |
|
$ |
1,563 |
|
$ |
|
|
$ |
(1,585 |
) |
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
)(1) |
|
|
256 |
(2) | ||||||||
Other comprehensive income |
|
5 |
|
9 |
|
|
|
1 |
|
1 |
|
16 |
|
|
|
|
| ||||||||
Purchases |
|
193 |
|
24 |
|
8 |
|
|
|
|
|
225 |
|
1 |
|
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82 |
) | ||||||||
Settlements |
|
(94 |
) |
(6 |
) |
|
|
(1 |
) |
|
|
(101 |
) |
|
|
5 |
| ||||||||
Transfers into Level 3 |
|
10 |
|
5 |
|
|
|
7 |
|
|
|
22 |
|
|
|
|
| ||||||||
Transfers out of Level 3 |
|
|
|
(24 |
) |
|
|
|
|
(15 |
) |
(39 |
) |
(1 |
) |
|
| ||||||||
Balance, June 30, 2012 |
|
$ |
1,456 |
|
$ |
59 |
|
$ |
24 |
|
$ |
140 |
|
$ |
|
|
$ |
1,679 |
|
$ |
|
|
$ |
(1,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Changes in unrealized gains (losses) relating to assets and liabilities held at June 30, 2012 included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net investment income |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net realized investment losses |
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
| ||||||||
Benefits, claims, losses and settlement expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
(1) Represents a $7 million loss included in net realized investment losses in the Consolidated Statements of Income.
(2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The impact to pretax income of the Companys adjustment for nonperformance risk on the fair value of its embedded derivatives was $(28) million and $119 million, net of DAC, DSIC and unearned revenue amortization and the reinsurance accrual, for the three months ended June 30, 2013 and 2012, respectively. The impact to pretax income of the Companys adjustment for nonperformance risk on the fair value of its embedded derivatives was $(90) million and $6 million, net of DAC, DSIC and unearned revenue amortization and the reinsurance accrual, for the six months ended June 30, 2013 and 2012, respectively.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
|
|
June 30, 2013 |
| |||||||
|
|
Fair Value |
|
Valuation Technique |
|
Unobservable Input |
|
Range |
| |
|
|
(in millions) |
|
|
|
|
|
|
| |
Corporate debt securities (private placements) |
|
$ |
1,529 |
|
Discounted cash flow |
|
Yield/spread to U.S. Treasuries |
|
0.5% 5.8% (1.9%) |
|
|
|
|
|
|
|
|
|
|
| |
IUL embedded derivatives |
|
$ |
76 |
|
Discounted cash flow |
|
Nonperformance risk(3) |
|
96 |
bps |
|
|
|
|
|
|
|
|
|
|
|
GMWB and GMAB embedded derivatives |
|
$ |
11 |
|
Discounted cash flow |
|
Utilization of guaranteed withdrawals(1) |
|
0.0% 56.4% |
|
|
|
|
|
|
|
Surrender rate |
|
0.0% 56.3% |
| |
|
|
|
|
|
|
Market volatility(2) |
|
5.5% 21.2% |
| |
|
|
|
|
|
|
Nonperformance risk(3) |
|
96 |
bps |
|
|
December 31, 2012 |
| |||||||
|
|
Fair Value |
|
Valuation Technique |
|
Unobservable Input |
|
Range |
| |
|
|
(in millions) |
|
|
|
|
|
|
| |
Corporate debt securities (private placements) |
|
$ |
1,624 |
|
Discounted cash flow |
|
Yield/spread to U.S. Treasuries |
|
1.1% 8.5% (2.2%) |
|
|
|
|
|
|
|
|
|
|
|
|
IUL embedded derivatives |
|
$ |
45 |
|
Discounted cash flow |
|
Nonperformance risk(3) |
|
97 |
bps |
|
|
|
|
|
|
|
|
|
| |
GMWB and GMAB embedded derivatives |
|
$ |
833 |
|
Discounted cash flow |
|
Utilization of guaranteed |
|
|
|
|
|
|
|
|
|
withdrawals(1) |
|
0.0% 56.4% |
| |
|
|
|
|
|
|
Surrender rate |
|
0.0% 56.3% |
| |
|
|
|
|
|
|
Market volatility(2) |
|
5.6% 21.2% |
| |
|
|
|
|
|
|
Nonperformance risk(3) |
|
97 |
bps |
(1) The utilization of the guaranteed withdrawals represents the percentage of policyholders that will begin withdrawing in any given year.
(2) Market volatility is implied volatility of fund of funds.
(3) The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs 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) fair value measurement. Significant increases (decreases) in surrender rate and nonperformance risk used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement. Utilization of
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution system 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 Companys market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Companys income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. 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 include U.S. Treasuries. Level 2 securities include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, municipal bonds, 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.
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 Companys due diligence procedures include assessing the vendors 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 net asset value (NAV) of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter (OTC) markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The counterparties nonperformance risk associated with uncollateralized derivative assets was immaterial at June 30, 2013 and December 31, 2012. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Liabilities
Future Policy Benefits
The Company values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions 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 of these embedded derivatives also reflects a current estimate of the Companys nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Companys nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value of the liability, the IUL embedded derivatives are classified as Level 3. The embedded derivative liabilities attributable to these provisions are recorded in future policy benefits.
The Companys 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 fair value of derivatives that are traded in less active OTC markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The Companys nonperformance risk associated with uncollateralized derivative liabilities was immaterial at June 30, 2013 and December 31, 2012. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.
|
|
June 30, 2013 |
| |||||||||||||
|
|
Carrying |
|
Fair Value |
| |||||||||||
|
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(in millions) |
| |||||||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage loans, net |
|
$ |
3,360 |
|
$ |
|
|
$ |
|
|
$ |
3,447 |
|
$ |
3,447 |
|
Policy loans |
|
760 |
|
|
|
|
|
753 |
|
753 |
| |||||
Other investments |
|
309 |
|
|
|
278 |
|
35 |
|
313 |
| |||||
Restricted cash |
|
5 |
|
5 |
|
|
|
|
|
5 |
| |||||
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Future policy benefits |
|
$ |
14,389 |
|
$ |
|
|
$ |
|
|
$ |
14,972 |
|
$ |
14,972 |
|
Separate account liabilities |
|
371 |
|
|
|
371 |
|
|
|
371 |
| |||||
Line of credit with Ameriprise Financial |
|
150 |
|
|
|
|
|
150 |
|
150 |
| |||||
Short-term borrowings |
|
501 |
|
|
|
501 |
|
|
|
501 |
| |||||
Other liabilities |
|
113 |
|
|
|
|
|
111 |
|
111 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
|
|
December 31, 2012 |
| |||||||||||||
|
|
Carrying |
|
Fair Value |
| |||||||||||
|
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(in millions) |
| |||||||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage loans, net |
|
$ |
3,389 |
|
$ |
|
|
$ |
|
|
$ |
3,568 |
|
$ |
3,568 |
|
Policy loans |
|
752 |
|
|
|
|
|
725 |
|
725 |
| |||||
Other investments |
|
309 |
|
|
|
292 |
|
24 |
|
316 |
| |||||
Restricted cash |
|
86 |
|
86 |
|
|
|
|
|
86 |
| |||||
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Future policy benefits |
|
$ |
14,701 |
|
$ |
|
|
$ |
|
|
$ |
15,982 |
|
$ |
15,982 |
|
Separate account liabilities |
|
360 |
|
|
|
360 |
|
|
|
360 |
| |||||
Line of credit with Ameriprise Financial |
|
150 |
|
|
|
|
|
150 |
|
150 |
| |||||
Short-term borrowings |
|
501 |
|
|
|
500 |
|
|
|
500 |
| |||||
Other liabilities |
|
144 |
|
|
|
|
|
142 |
|
142 |
|
Mortgage Loans, Net
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics including 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 Companys estimate of the amount recoverable on the loan.
The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Companys estimate of current market conditions.
Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.
Policy Loans
The fair value of policy loans is determined using discounted cash flows and 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 service or non-binding broker quotes. Syndicated loans that are priced by multiple non-binding broker quotes 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 or lack of liquidity.
Restricted Cash
Restricted cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value. The fair value of restricted cash is classified as Level 1.
Future Policy Benefits
The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior and the Companys nonperformance risk specific to these liabilities. The fair value of other liabilities including 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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.
Line of Credit with Ameriprise Financial
The fair value of the line of credit is determined by discounting cash flows with an adjustment for the Companys nonperformance risk specific to this liability. The fair value of the line of credit is classified as Level 3.
Short-term Borrowings
The fair value of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.
Other Liabilities
Other liabilities consist of future funding commitments to affordable housing partnerships. The fair value of these future funding commitments is determined by discounting cash flows and is classified as Level 3 as the discount rate is adjusted.
11. Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets under GAAP. The Companys derivative instruments and repurchase agreements are subject to master netting arrangements and collateral arrangements and meet the GAAP guidance to 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 Companys policy is to recognize amounts subject to master netting arrangements on a gross basis on the Consolidated Balance Sheets.
The following tables present the gross and net information about the Companys assets subject to master netting arrangements:
|
|
June 30, 2013 |
| |||||||||||||||||||
|
|
|
|
Gross |
|
Amounts |
|
|
|
|
|
|
|
|
| |||||||
|
|
Gross |
|
Amounts |
|
of Assets |
|
Gross Amounts Not Offset |
|
|
| |||||||||||
|
|
Amounts of |
|
Offset in the |
|
Presented in |
|
in the Consolidated Balance Sheets |
|
|
| |||||||||||
|
|
Recognized |
|
Consolidated |
|
the Consolidated |
|
Financial |
|
Cash |
|
Securities |
|
Net |
| |||||||
|
|
Assets |
|
Balance Sheets |
|
Balance Sheets |
|
Instruments(1) |
|
Collateral |
|
Collateral |
|
Amount |
| |||||||
|
|
(in millions) |
| |||||||||||||||||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
OTC |
|
$ |
2,959 |
|
$ |
|
|
$ |
2,959 |
|
$ |
(2,757 |
) |
$ |
(122 |
) |
$ |
(55 |
) |
$ |
25 |
|
Exchange-traded |
|
110 |
|
|
|
110 |
|
|
|
|
|
|
|
110 |
| |||||||
Total derivatives |
|
$ |
3,069 |
|
$ |
|
|
$ |
3,069 |
|
$ |
(2,757 |
) |
$ |
(122 |
) |
$ |
(55 |
) |
$ |
135 |
|
|
|
December 31, 2012 |
| |||||||||||||||||||
|
|
|
|
Gross |
|
Amounts |
|
|
|
|
|
|
|
|
| |||||||
|
|
Gross |
|
Amounts |
|
of Assets |
|
Gross Amounts Not Offset |
|
|
| |||||||||||
|
|
Amounts of |
|
Offset in the |
|
Presented in |
|
in the Consolidated Balance Sheets |
|
|
| |||||||||||
|
|
Recognized |
|
Consolidated |
|
the Consolidated |
|
Financial |
|
Cash |
|
Securities |
|
Net |
| |||||||
|
|
Assets |
|
Balance Sheets |
|
Balance Sheets |
|
Instruments(1) |
|
Collateral |
|
Collateral |
|
Amount |
| |||||||
|
|
(in millions) |
| |||||||||||||||||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
OTC |
|
$ |
3,322 |
|
$ |
|
|
$ |
3,322 |
|
$ |
(2,676 |
) |
$ |
(262 |
) |
$ |
(355 |
) |
$ |
29 |
|
Exchange-traded |
|
96 |
|
|
|
96 |
|
|
|
|
|
|
|
96 |
| |||||||
Total derivatives |
|
$ |
3,418 |
|
$ |
|
|
$ |
3,418 |
|
$ |
(2,676 |
) |
$ |
(262 |
) |
$ |
(355 |
) |
$ |
125 |
|
(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.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables present the gross and net information about the Companys liabilities subject to master netting arrangements:
|
|
June 30, 2013 |
| |||||||||||||||||||
|
|
Gross |
|
Gross |
|
Amounts |
|
Gross Amounts Not Offset |
|
|
| |||||||||||
|
|
Recognized |
|
Consolidated |
|
the Consolidated |
|
Financial |
|
Cash |
|
Securities |
|
Net |
| |||||||
|
|
(in millions) |
| |||||||||||||||||||
OTC derivatives |
|
$ |
3,579 |
|
$ |
|
|
$ |
3,579 |
|
$ |
(2,757 |
) |
$ |
(6 |
) |
$ |
(811 |
) |
$ |
5 |
|
Repurchase agreements |
|
201 |
|
|
|
201 |
|
|
|
|
|
(201 |
) |
|
| |||||||
Total |
|
$ |
3,780 |
|
$ |
|
|
$ |
3,780 |
|
$ |
(2,757 |
) |
$ |
(6 |
) |
$ |
(1,012 |
) |
$ |
5 |
|
|
|
December 31, 2012 |
| |||||||||||||||||||
|
|
Gross |
|
Gross |
|
Amounts |
|
Gross Amounts Not Offset |
|
|
| |||||||||||
|
|
Recognized |
|
Consolidated |
|
the Consolidated |
|
Financial |
|
Cash |
|
Securities |
|
Net |
| |||||||
|
|
(in millions) |
| |||||||||||||||||||
OTC derivatives |
|
$ |
3,279 |
|
$ |
|
|
$ |
3,279 |
|
$ |
(2,676 |
) |
$ |
(67 |
) |
$ |
(532 |
) |
$ |
4 |
|
Repurchase agreements |
|
501 |
|
|
|
501 |
|
|
|
|
|
(501 |
) |
|
| |||||||
Total |
|
$ |
3,780 |
|
$ |
|
|
$ |
3,780 |
|
$ |
(2,676 |
) |
$ |
(67 |
) |
$ |
(1,033 |
) |
$ |
4 |
|
(1) Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
In the tables above, the amounts of assets or liabilities presented in the Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual amounts of collateral may be greater than amounts presented in the tables.
The Companys freestanding derivative instruments are reflected in other assets and other liabilities. Repurchase agreements are reflected in short-term borrowings. See Note 12 for additional disclosures related to the Companys derivative instruments and Note 9 for additional disclosures related to the Companys repurchase agreements.
12. Derivatives and Hedging Activities
Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Companys products and operations.
The Companys freestanding derivatives are recorded at fair value and are reflected in other assets or other liabilities. The Companys freestanding derivative instruments are all subject to master netting arrangements. The Companys 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 Companys freestanding derivatives after considering the effect of master netting arrangements and collateral.
In April 2012, the Financial Stability Oversight Council approved the final rule and interpretive guidance that provides the framework it will follow to determine if a nonbank financial company is a Systemically Important Financial Institution. The framework includes a three-stage process to help narrow down the pool of nonbank financial companies for review and possible designation. Stage 1 criteria include having at least $50 billion in assets and meeting one of five additional quantitative measures. One of the five thresholds is $3.5 billion of derivative liabilities after considering the effects of master netting arrangements and cash collateral held with the same counterparty. The following table presents the Companys derivative liabilities as defined by the rule:
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||
|
|
(in millions) |
| ||||
Fair value of OTC derivative liabilities after application of master netting agreements and cash collateral |
|
$ |
816 |
|
$ |
536 |
|
Fair value of embedded derivative liabilities |
|
90 |
|
880 |
| ||
Fair value of derivative liabilities after application of master netting agreements and cash collateral |
|
$ |
906 |
|
$ |
1,416 |
|
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company currently uses derivatives as economic hedges and accounting hedges. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives:
|
|
|
|
Asset |
|
|
|
Liability |
| ||||||||
Derivatives not designated |
|
Balance Sheet |
|
June 30, |
|
December 31, |
|
Balance Sheet |
|
June 30, |
|
December 31, |
| ||||
|
|
|
|
(in millions) |
|
|
|
(in millions) |
| ||||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Other assets |
|
$ |
1,638 |
|
$ |
2,191 |
|
Other liabilities |
|
$ |
1,483 |
|
$ |
1,486 |
|
Equity contracts |
|
Other assets |
|
1,404 |
|
1,215 |
|
Other liabilities |
|
2,090 |
|
1,792 |
| ||||
Credit contracts |
|
Other assets |
|
7 |
|
|
|
Other liabilities |
|
|
|
|
| ||||
Foreign currency contracts |
|
Other assets |
|
4 |
|
6 |
|
Other liabilities |
|
|
|
|
| ||||
Embedded derivatives(1) |
|
Not applicable |
|
|
|
|
|
Future policy benefits |
|
11 |
|
833 |
| ||||
Total GMWB and GMAB |
|
|
|
3,053 |
|
3,412 |
|
|
|
3,584 |
|
4,111 |
| ||||
Other derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
EIA embedded derivatives |
|
Not applicable |
|
|
|
|
|
Future policy benefits |
|
3 |
|
2 |
| ||||
IUL |
|
Other assets |
|
16 |
|
6 |
|
Other liabilities |
|
6 |
|
1 |
| ||||
IUL embedded derivatives |
|
Not applicable |
|
|
|
|
|
Future policy benefits |
|
76 |
|
45 |
| ||||
Total other |
|
|
|
16 |
|
6 |
|
|
|
85 |
|
48 |
| ||||
Total derivatives |
|
|
|
$ |
3,069 |
|
$ |
3,418 |
|
|
|
$ |
3,669 |
|
$ |
4,159 |
|
(1) The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
See Note 10 for additional information regarding the Companys fair value measurement of derivative instruments.
The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated
Statements of Income:
|
|
|
|
Amount of Gain (Loss) on Derivatives |
| ||||||||||
Derivatives not designated |
|
Location of Gain (Loss) on |
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
as hedging instruments |
|
Derivatives Recognized in Income |
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
(in millions) |
| ||||||||||
GMWB and GMAB |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Benefits, claims, losses and settlement expenses |
|
$ |
(380 |
) |
$ |
328 |
|
$ |
(512 |
) |
$ |
103 |
|
Equity contracts |
|
Benefits, claims, losses and settlement expenses |
|
12 |
|
188 |
|
(480 |
) |
(507 |
) | ||||
Credit contracts |
|
Benefits, claims, losses and settlement expenses |
|
8 |
|
1 |
|
8 |
|
(2 |
) | ||||
Foreign currency contracts |
|
Benefits, claims, losses and settlement expenses |
|
2 |
|
(3 |
) |
7 |
|
1 |
| ||||
Embedded derivatives(1) |
|
Benefits, claims, losses and settlement expenses |
|
255 |
|
(566 |
) |
822 |
|
179 |
| ||||
Total GMWB and GMAB |
|
|
|
(103 |
) |
(52 |
) |
(155 |
) |
(226 |
) | ||||
Other derivatives: |
|
|
|
|
|
|
|
|
|
|
| ||||
Equity |
|
|
|
|
|
|
|
|
|
|
| ||||
EIA |
|
Interest credited to fixed accounts |
|
|
|
|
|
1 |
|
1 |
| ||||
EIA embedded derivatives |
|
Interest credited to fixed accounts |
|
|
|
|
|
(1 |
) |
|
| ||||
IUL |
|
Interest credited to fixed accounts |
|
2 |
|
|
|
6 |
|
|
| ||||
IUL embedded derivatives |
|
Interest credited to fixed accounts |
|
2 |
|
|
|
5 |
|
|
| ||||
Total other |
|
|
|
4 |
|
|
|
11 |
|
1 |
| ||||
Total derivatives |
|
|
|
$ |
(99 |
) |
$ |
(52 |
) |
$ |
(144 |
) |
$ |
(225 |
) |
(1) The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.
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 and credit 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 Company economically hedges the exposure related to non-life contingent GMWB and GMAB provisions primarily using
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
various futures, options, interest rate swaptions, interest rate swaps, total return swaps, variance swaps and credit default swaps. At June 30, 2013 and December 31, 2012, the gross notional amount of derivative contracts for the Companys GMWB and GMAB provisions was $153.5 billion and $142.1 billion, respectively.
The deferred premium associated with certain of the above options is paid or received semi-annually over the life of the option contract. The following is a summary of the payments the Company is scheduled to make and receive for these options:
|
|
Premiums |
|
Premiums |
| ||
|
|
(in millions) |
| ||||
2013(1) |
|
$ |
182 |
|
$ |
29 |
|
2014 |
|
343 |
|
58 |
| ||
2015 |
|
316 |
|
56 |
| ||
2016 |
|
286 |
|
49 |
| ||
2017 |
|
236 |
|
43 |
| ||
2018-2027 |
|
778 |
|
107 |
| ||
(1) 2013 amounts represent the amounts payable and receivable for the period from July 1, 2013 to December 31, 2013.
Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.
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. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and futures contracts. The gross notional amount of EIA derivative contracts was $13 million and $10 million at June 30, 2013 and December 31, 2012, respectively. The gross notional amount of IUL derivative contracts was $327 million and $200 million at June 30, 2013 and December 31, 2012, respectively.
Embedded Derivatives
Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the EIA and IUL product obligations are also considered embedded derivatives. These embedded derivatives are bifurcated from their host contracts and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As discussed above, the Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.
Cash Flow Hedges
The Company has amounts classified in AOCI related to gains and losses associated with the effective portion of previously designated cash flow hedges. The Company reclassifies these amounts into income as the forecasted transactions impact earnings. During the six months ended June 30, 2013, the Company held no derivatives that were designated as cash flow hedges.
At June 30, 2013, the Company expects to reclassify $5 million of deferred loss 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 six months ended June 30, 2013 and 2012, no hedge relationships were discontinued due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the six months ended June 30, 2013 and 2012, amounts recognized in earnings on derivative transactions that were ineffective were not material.
The following table presents a rollforward of unrealized derivative losses related to cash flow hedges included in accumulated other comprehensive income (loss):
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
Net unrealized derivative losses at January 1 |
|
$ |
(21 |
) |
$ |
(26 |
) |
Reclassification of realized losses(1) |
|
4 |
|
3 |
| ||
Income tax benefit |
|
(1 |
) |
(1 |
) | ||
Net unrealized derivative losses at June 30 |
|
$ |
(18 |
) |
$ |
(24 |
) |
(1) Loss reclassified from AOCI to net investment income on the Consolidated Statements of Income.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is six years and relates to interest credited on forecasted fixed premium product sales.
Credit Risk
Credit risk associated with the Companys derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. See Note 11 for additional information on the Companys credit exposure related to derivative assets.
Certain of the Companys derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Companys financial strength rating (or based on the debt rating of the Companys parent, Ameriprise Financial). Additionally, certain of the Companys 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 Financials debt does not maintain a specific credit rating (generally an investment grade rating). If these termination provisions were to be triggered, the Companys counterparty could require immediate settlement of any net liability position. At June 30, 2013 and December 31, 2012, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $425 million and $364 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of June 30, 2013 and December 31, 2012 was $420 million and $360 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position at June 30, 2013 and December 31, 2012 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 $5 million and $4 million, respectively.
13. Shareholders Equity
The following table provides information related to amounts reclassified from AOCI:
|
|
|
|
Amount Reclassified |
| ||||
AOCI Reclassification |
|
Location of Loss (Gain) |
|
Three Months |
|
Six Months |
| ||
|
|
|
|
(in millions) |
| ||||
Net unrealized losses on Available-for-Sale securities |
|
Net investment income |
|
$ |
|
|
$ |
1 |
|
Tax expense |
|
Income tax provision |
|
1 |
|
|
| ||
Net of tax |
|
|
|
$ |
1 |
|
$ |
1 |
|
|
|
|
|
|
|
|
| ||
Losses on cash flow hedges: |
|
|
|
|
|
|
| ||
Swaptions |
|
Net investment income |
|
$ |
2 |
|
$ |
4 |
|
Tax benefit |
|
Income tax provision |
|
|
|
(1 |
) | ||
Net of tax |
|
|
|
$ |
2 |
|
$ |
3 |
|
The Company made adjustments to AOCI for the impact to DAC, DSIC, benefit reserves and reinsurance recoverable on net unrealized securities losses of $201 million and $265 million, net of tax, for the three months and six months ended June 30, 2013, respectively. See Note 4 for additional information related to the impact of DAC, DSIC, benefit reserves and reinsurance recoverable on net unrealized securities losses included in AOCI. See Note 12 for additional information regarding the Companys cash flow hedges.
14. Income Taxes
The Companys effective tax rates were 14% and 16% for the three months and six months ended June 30, 2013, respectively. The Companys effective tax rates were 33% and 23% for the three months and six months ended June 30, 2012, respectively. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction, foreign tax credits and low income housing credits. The decrease in the effective rates for the three months and six months ended June 30, 2013 compared to the prior year periods is the result of a $32 million correction of tax related to securities lending activities in 2012.
The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses that
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
have been recognized for financial statement purposes but not yet for tax return purposes as well as future deductible capital losses realized for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business including the ability to generate capital gains. Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies. Based on analysis of the Companys 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 all of certain state net operating losses and therefore a valuation allowance of $5 million was established as of both June 30, 2013 and December 31, 2012.
As of June 30, 2013 and December 31, 2012, the Company had $77 million and $65 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $20 million and $8 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2013 and December 31, 2012, respectively, would affect the effective tax rate.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $75 million in the next 12 months.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $1 million and $3 million in interest and penalties for the three months and six months ended June 30, 2013, respectively. The Company recognized a net increase of $1 million and a net decrease of $4 million in interest and penalties for the three months and six months ended June 30, 2012, respectively. As of June 30, 2013 and December 31, 2012, the Company had a payable of $33 million and $30 million, respectively, related to accrued interest and penalties.
The Company or one or more of its subsidiaries files income tax returns as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial, in the U.S. federal jurisdiction and various state jurisdictions. The Internal Revenue Service (IRS) had previously completed its field examination of the 1997 through 2007 tax returns in recent years. However, for federal income tax purposes, these years except for 2007, continue to remain open as a consequence of certain unagreed-upon issues. The IRS is in the process of completing the audit of the Companys income tax returns for 2008 and 2009 and began auditing 2010 and 2011 in the fourth quarter of 2012. The Company or certain of its subsidiaries state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2008 and remain open for the years after 2008.
15. Contingencies and Guarantees
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. With regard to an industry-wide investigation of unclaimed property and escheatment practices and procedures, the Company is responding to regulatory audits, market conduct examinations and other inquires (including inquiries from the States of Minnesota and New York and a multistate insurance department examination). The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.
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 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.
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. Uncertainty and volatility in the U.S. economy and financial markets in recent years have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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.
Executive Life Insurance Company of New York (ELNY) was placed into rehabilitation by a New York state court in 1991. On April 16, 2012, the court issued an order converting the rehabilitation into a liquidation proceeding under a plan submitted by the New York insurance regulator with support from NOLHGA and the industry.
During the second quarter of 2012, the Company established a liability for estimated guaranty fund assessments and a related premium tax asset, primarily associated with ELNY. At June 30, 2013 and December 31, 2012, the estimated liability was $22 million and $26 million, respectively, and the related premium tax asset was $17 million and $19 million, respectively. The Company has recently received assessments related to ELNY from some of the state guaranty fund associations, however, the expected period over which all of the assessments will be made and the related tax credits recovered is not known.
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.
ITEM 2. MANAGEMENTS NARRATIVE ANALYSIS
The following information should be read in conjunction with RiverSource Life Insurance Companys Consolidated Financial Statements and Notes presented in Part I, Item 1. RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-Q as the Company. This narrative analysis may contain forward-looking statements that reflect the Companys plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under Forward-Looking Statements. The Company believes it is useful to read this narrative analysis in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on February 26, 2013 (2012 10-K), as well as its current reports on Form 8-K and other publicly available information.
The Company follows U.S. generally accepted accounting principles (GAAP), and the following discussion is presented on a consolidated basis consistent with GAAP. In addition, certain reclassifications of prior year amounts have been made to conform to the current presentation.
Managements narrative analysis of the results of operations is presented in lieu of managements discussion and analysis of financial condition and results of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
Overview
RiverSource Life Insurance Company is a stock life insurance company with one wholly owned 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.
Critical Accounting Policies
The accounting and reporting policies that the Company uses affect its Consolidated Financial Statements. Certain of the Companys accounting and reporting policies are critical to an understanding of the Companys financial condition and results of operations and, in some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of the Consolidated Financial Statements. These accounting policies are discussed in detail in Managements Narrative Analysis Critical Accounting Policies in the Companys 2012 10-K.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on the Companys future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.
Consolidated Results of Operations for the Six Months Ended June 30, 2013 and 2012
The following table presents the Companys consolidated results of operations (unaudited):
|
|
Six Months Ended |
|
|
|
|
| |||||
|
|
2013 |
|
2012 |
|
Change |
| |||||
|
|
|
|
(in millions) |
|
|
|
|
| |||
Revenues |
|
|
|
|
|
|
|
|
| |||
Premiums |
|
$ |
214 |
|
$ |
222 |
|
$ |
(8 |
) |
(4 |
)% |
Net investment income |
|
717 |
|
754 |
|
(37 |
) |
(5 |
) | |||
Policy and contract charges |
|
850 |
|
799 |
|
51 |
|
6 |
| |||
Other revenue |
|
176 |
|
158 |
|
18 |
|
11 |
| |||
Net realized investment losses |
|
(2 |
) |
|
|
(2 |
) |
NM |
| |||
Total revenues |
|
1,955 |
|
1,933 |
|
22 |
|
1 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Benefits and expenses |
|
|
|
|
|
|
|
|
| |||
Benefits, claims, losses and settlement expenses |
|
542 |
|
594 |
|
(52 |
) |
(9 |
) | |||
Interest credited to fixed accounts |
|
396 |
|
415 |
|
(19 |
) |
(5 |
) | |||
Amortization of deferred acquisition costs |
|
134 |
|
100 |
|
34 |
|
34 |
| |||
Other insurance and operating expenses |
|
373 |
|
391 |
|
(18 |
) |
(5 |
) | |||
Total benefits and expenses |
|
1,445 |
|
1,500 |
|
(55 |
) |
(4 |
) | |||
Pretax income |
|
510 |
|
433 |
|
77 |
|
18 |
| |||
Income tax provision |
|
84 |
|
99 |
|
(15 |
) |
(15 |
) | |||
Net income |
|
$ |
426 |
|
$ |
334 |
|
$ |
92 |
|
28 |
% |
NM Not Meaningful
Overview
Net income increased $92 million or 28% compared to the prior year period. Pretax income increased $77 million or 18% compared to the prior year period primarily reflecting the impact of market appreciation and the market impact on variable annuity guaranteed living benefits (net of hedges and the related deferred acquisition costs (DAC) and deferred sales inducement costs (DSIC) amortization), partially offset by the negative impact of the continued low interest rate environment. The market impact on variable annuity guaranteed living benefits (net of hedges and the related DAC and DSIC amortization) was an expense of $45 million for the six months ended June 30, 2013 compared to an expense of $129 million for the prior year period. Results for the prior year period included a $32 million unfavorable impact from a tax-related item for an out-of-period correction in the second quarter of 2012.
Revenues
Total revenues increased $22 million or 1% compared to the prior year period.
Net investment income decreased $37 million or 5% compared to the prior year period reflecting a decrease in investment income on fixed maturities primarily due to lower invested assets and continued low interest rates.
Policy and contract charges increased $51 million or 6% compared to the prior year period. The increase is primarily due to higher separate account fees driven by higher average separate account balances and higher fee rates.
Other revenue increased $18 million or 11% compared to the prior year period reflecting higher marketing support due to higher average separate account balances.
Net realized investment losses for the six months ended June 30, 2013 were $2 million. In the six months ended June 30, 2013, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $1 million offset by other-than-temporary impairments recognized in earnings were $2 million which primarily related to credit losses on non-agency residential mortgage backed securities.
Benefits and Expenses
Total benefits and expenses decreased $55 million or 4% compared to the prior year period primarily due to a decrease in benefits, claims, losses and settlement expenses, interest credited to fixed accounts and other insurance and operating expenses partially offset by an increase in amortization of DAC.
Benefits, claims, losses and settlement expenses decreased $52 million, or 9%, compared to the prior year period primarily due to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization), which was an expense of $52 million for the six months ended June 30, 2013 compared to an expense of $160 million for the prior year period, partially offset by higher reserve funding related to higher fees from variable annuity guarantees, higher reserves associated with unlocking of interest rate assumptions in the third quarter of 2012, an $8 million increase in disability income reserves in the second quarter of 2013 related to prior periods, a $9 million benefit from a life insurance reserve release in the prior year period and an $8 million benefit from valuation model updates and enhancements in the prior year period. The market impact on DSIC was nil in the first half of 2013 compared to a benefit of $3 million in the prior year period.
Interest credited to fixed accounts decreased $19 million, or 5%, compared to the prior year period driven by lower average fixed annuity account balances. Average fixed annuities contract accumulation values decreased $465 million, or 3%, to $13.7 billion for the six months ended June 30, 2013 compared to the prior year period due to net outflows. Fixed annuities remain in net outflows due to low client demand given the interest rate environment.
Amortization of DAC increased $34 million or 34%, compared to the prior year period primarily due to the DAC offset to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization), as well as higher variable annuity DAC amortization associated with unlocking of interest rate assumptions in the third quarter of 2012. The DAC offset to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization) was a benefit of $7 million for the six months ended June 30, 2013 compared to a benefit of $31 million in the prior year period. The market impact on DAC was a benefit of $3 million for the six months ended June 30, 2013 compared to a benefit of $11 million in the prior year period as a result of favorable equity market returns largely offset by unfavorable bond fund returns in the first half of 2013 compared to favorable equity and bond fund returns in the first half of 2012.
Other insurance and operating expenses decreased $18 million or 5% compared to the prior year period. The decrease is primarily due to a decrease in direct operating expenses and a net $6 million charge in the prior year period for future assessments from state insurance guaranty funds primarily associated with the liquidation of Executive Life Insurance Company of New York. See Note 15 to the Consolidated Financial Statements for additional information on insurance industry guaranty fund assessments.
Income Taxes
The Companys effective tax rate was 16% for the six months ended June 30, 2013, compared to 23% for the six months ended June 30, 2012. The effective tax rate for both periods is lower than the statutory rate as a result of tax preferred items including the dividends received deduction, foreign tax credits and low income housing credits. The decrease in the effective tax rate for the six months ended June 30, 2013 compared to the prior year period is a result of a $32 million correction of tax related to securities lending activities in 2012.
It is possible there will be corporate tax reform in the next few years. While impossible to predict, corporate tax reform is likely to include a reduction in the corporate tax rate coupled with reductions in tax preferred items. Any changes could have a material impact on the income tax expense and the deferred tax balances of the company.
Market Risk
The Companys 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 Companys results of operations, primarily due to the effects on asset-based fees and expenses, the spread income generated on its annuities and universal life (UL) insurance products, the value of DAC and DSIC assets, the value of liabilities for guaranteed benefits associated with its variable annuities and the value of derivatives held to hedge these benefits.
The guaranteed benefits associated with the Companys variable annuities are guaranteed minimum withdrawal benefit (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 investment assets.
The Company continues to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. The Companys 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.
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 Companys estimate of the impact on pretax income from these hypothetical market movements as of June 30, 2013.
|
|
Equity Price Exposure to Pretax Income |
| |||||||
Equity Price Decline 10% |
|
Before |
|
Hedge |
|
Net Impact |
| |||
|
|
(in millions) |
| |||||||
Asset-based fees and expenses |
|
$ |
(74 |
) |
$ |
|
|
$ |
(74 |
) |
DAC and DSIC amortization(1) (2) |
|
(97 |
) |
|
|
(97 |
) | |||
Variable annuity riders: |
|
|
|
|
|
|
| |||
GMDB and GMIB(2) |
|
(64 |
) |
|
|
(64 |
) | |||
GMWB |
|
(143 |
) |
150 |
|
7 |
| |||
GMAB |
|
(45 |
) |
46 |
|
1 |
| |||
DAC and DSIC amortization(3) |
|
N/A |
|
N/A |
|
(3 |
) | |||
Total variable annuity riders |
|
(252 |
) |
196 |
|
(59 |
) | |||
Equity indexed annuities |
|
1 |
|
(1 |
) |
|
| |||
Indexed universal life insurance |
|
5 |
|
(6 |
) |
(1 |
) | |||
Total |
|
$ |
(417 |
) |
$ |
189 |
|
$ |
(231 |
) |
|
|
Interest Rate Exposure to Pretax Income |
| |||||||
Interest Rate Increase 100 Basis Points |
|
Before |
|
Hedge |
|
Net Impact |
| |||
|
|
(in millions) |
| |||||||
Asset-based fees and expenses |
|
$ |
(22 |
) |
$ |
|
|
$ |
(22 |
) |
Variable annuity riders: |
|
|
|
|
|
|
| |||
GMWB |
|
490 |
|
(462 |
) |
28 |
| |||
GMAB |
|
31 |
|
(30 |
) |
1 |
| |||
DAC and DSIC amortization(3) |
|
N/A |
|
N/A |
|
(5 |
) | |||
Total variable annuity riders |
|
521 |
|
(492 |
) |
24 |
| |||
Fixed annuities, fixed portion of variable annuities and fixed insurance products |
|
49 |
|
|
|
49 |
| |||
Indexed universal life insurance |
|
8 |
|
|
|
8 |
| |||
Total |
|
$ |
556 |
|
$ |
(492 |
) |
$ |
59 |
|
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.
(3) Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.
The above results compare to an estimated negative net impact to pretax income of $203 million related to a 10% equity price decline and an estimated positive net impact to pretax income of $78 million related to a 100 basis point increase in interest rates as of December 31, 2012.
Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins and with discount rates increased to reflect a current market estimate of the Companys risk of nonperformance specific to these liabilities. For variable annuity riders introduced prior to mid-2009, management elected to hedge based on best estimate policyholder behavior assumptions. For riders issued since mid-2009, management has been hedging on a basis that includes risk margins related to policyholder behavior. 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 Companys 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 Companys obligations of its variable annuity riders and indexed universal life insurance, the Company considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, the Company adjusts the valuation of variable annuity riders and indexed universal life insurance by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of the Companys nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are 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 June 30, 2013. As the Companys 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 $133 million, net of DAC, DSIC and unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on June 30, 2013 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, deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial. Other liquidity sources the Company has established are short-term borrowings and available lines of credit with Ameriprise Financial aggregating $1 billion.
The Company enters into short-term borrowings, which may include repurchase agreements and Federal Home Loan Bank (FHLB) advances to reduce reinvestment risk from higher levels of expected annuity net cash flows. 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 at June 30, 2013 and December 31, 2012 was $201 million and $501 million, respectively, which is collateralized with agency residential mortgage backed securities and commercial mortgage backed securities from the Companys 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. At June 30, 2013 and December 31, 2012, the Company had borrowings of $300 million and nil, respectively, from the FHLB which is collateralized with commercial mortgage backed securities.
The outstanding balance under the lines of credit with Ameriprise Financial was $150 million at both June 30, 2013 and December 31, 2012.
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.
Capital Activity
Dividends paid and received by RiverSource Life Insurance Company were as follows:
|
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
Cash dividends paid to Ameriprise Financial |
|
$ |
535 |
|
$ |
550 |
|
Cash dividends received from RiverSource Life of NY |
|
25 |
|
30 |
| ||
During the six months ended June 30, 2013 and 2012, RiverSource Life Insurance Company made a cash contribution to RTA of $15 million and $53 million, respectively, for ongoing funding commitments related to affordable housing partnership investments.
Regulatory Capital
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements as follows:
|
|
Actual Capital (a) |
|
Regulatory Capital |
| |||||
|
|
June 30, 2013 |
|
December 31, |
|
December 31, |
| |||
|
|
|
|
(in millions) |
|
|
| |||
RiverSource Life Insurance Company |
|
$ |
2,809 |
|
$ |
3,257 |
|
$ |
620 |
|
RiverSource Life Insurance Co. of New York |
|
237 |
|
256 |
|
44 |
| |||
(a) Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the statutory risk-based capital filing.
Contractual Commitments
There have been no material changes to the Companys contractual obligations disclosed in the Companys 2012 10-K.
Forward-Looking Statements
This report contains forward-looking statements that reflect the Companys plans, estimates and beliefs. The Companys actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:
· statements of the Companys 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 to be implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act;
· the Companys investment management performance and consumer acceptance of the Companys products;
· effects of competition in the financial services industry and changes in the Companys product distribution mix and distribution channels;
· changes to the Companys 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 Companys 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 Companys regulators,
distributors or policyholders and contractholders in response to any change or prospect of change in any such opinion;
· risks of default by issuers or guarantors of investments the Company owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from the Companys 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 Companys regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;
· experience deviations from the Companys 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 Companys valuation and hedging of guaranteed living benefit annuity riders;
· successfully cross-selling insurance and annuity products and services to Ameriprise Financials customer base;
· the Companys 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 Financials ability to attract, recruit and retain qualified advisors and employees and its ability to distribute the Companys 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 Financials efforts to improve distribution economics and realize benefits from reengineering and tax planning;
· interruptions or other failures in the Companys 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 Companys 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, 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 as Part I, Item 1A in the Companys 2012 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 Companys 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 Companys 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 Companys management, under the supervision and with the participation of the Companys 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 Companys principal executive officer and chief financial officer have concluded that the Companys disclosure controls and procedures were effective at a reasonable level of assurance as of June 30, 2013.
Changes in Internal Control over Financial Reporting
There have not been any changes in RiverSource Life Insurance Companys 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 Companys internal control over financial reporting.
The information set forth in Note 15 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
There have been no material changes in the risk factors provided in Part I, Item 1A of RiverSource Life Insurance Companys 2012 10-K.
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under Exhibit Index, which is incorporated herein by reference.
RIVERSOURCE LIFE INSURANCE COMPANY
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
RIVERSOURCE LIFE INSURANCE COMPANY | |
|
(Registrant) | |
|
|
|
|
|
|
Date: July 31, 2013 |
By |
/s/ John R. Woerner |
|
|
John R. Woerner |
|
|
Chairman and President |
|
|
|
|
|
|
Date: July 31, 2013 |
By |
/s/ Brian J. McGrane |
|
|
Brian J. McGrane |
|
|
Executive Vice President and |
|
|
Chief Financial Officer |
RIVERSOURCE LIFE INSURANCE COMPANY
The following exhibits are filed as part of this Quarterly Report:
Exhibit |
|
Description |
|
|
|
3.1 |
|
Copy of Certificate of Incorporation of IDS Life Insurance Company, filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976, is incorporated by reference. |
|
|
|
3.1.1 |
|
Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on January 5, 2007, is incorporated by reference. |
|
|
|
3.2 |
|
Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference. |
|
|
|
31.1* |
|
Certification of John R. Woerner, Chairman and President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2* |
|
Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. |
|
|
|
32* |
|
Certification of John R. Woerner, Chairman and President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101* |
|
The following materials from RiverSource Life Insurance Companys Quarterly Report on Form 10-Q for the period ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Income for the three months and six months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2013 and 2012; (iv) Consolidated Statements of Shareholders Equity for the six months ended June 30, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and (vi) Notes to the Consolidated Financial Statements. |
* Filed electronically herewith.
Exhibit 31.1
CERTIFICATION
I, John R. Woerner, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RiverSource Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 31, 2013
|
/s/ John R. Woerner | |
|
Name: |
John R. Woerner |
|
Title: |
Chairman and President |
Exhibit 31.2
CERTIFICATION
I, Brian J. McGrane, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RiverSource Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 31, 2013
|
/s/ Brian J. McGrane | |
|
Name: |
Brian J. McGrane |
|
Title: |
Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of RiverSource Life Insurance Company (the Company) for the quarterly period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), John R. Woerner, as Chairman and President of the Company, and Brian J. McGrane, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John R. Woerner |
| |
Name: |
John R. Woerner |
|
Title: |
Chairman and President |
|
Date: |
July 31, 2013 |
|
|
|
|
|
|
|
/s/ Brian J. McGrane |
| |
Name: |
Brian J. McGrane |
|
Title: |
Chief Financial Officer |
|
Date: |
July 31, 2013 |
|
Fair Values of Assets and Liabilities
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Fair Values of Assets and Liabilities | 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.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
(1) The Company’s adjustment for nonperformance risk resulted in a $263 million cumulative decrease to the embedded derivative liability.
(1) The Company’s adjustment for nonperformance risk resulted in a $398 million cumulative decrease to the embedded derivative liability.
The following tables provide a summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
(1) Represents a $1 million loss 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.
(1) Represents a $5 million loss included in net realized investment losses in the Consolidated Statements of Income. (2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(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.
(1) Represents a $7 million loss included in net realized investment losses in the Consolidated Statements of Income. (2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(28) million and $119 million, net of DAC, DSIC and unearned revenue amortization and the reinsurance accrual, for the three months ended June 30, 2013 and 2012, respectively. The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(90) million and $6 million, net of DAC, DSIC and unearned revenue amortization and the reinsurance accrual, for the six months ended June 30, 2013 and 2012, respectively.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The Company recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
(1) The utilization of the guaranteed withdrawals represents the percentage of policyholders that will begin withdrawing in any given year. (2) Market volatility is implied volatility of fund of funds. (3) The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs 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) fair value measurement. Significant increases (decreases) in surrender rate and nonperformance risk used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement. 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 system and whether the value of the guaranteed benefit exceeds the contract accumulation value.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or less. 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 include U.S. Treasuries. Level 2 securities include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, municipal bonds, 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.
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 net asset value (“NAV”) of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at June 30, 2013 and December 31, 2012. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
Liabilities
Future Policy Benefits
The Company values the embedded derivative liability attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions 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 of these embedded derivatives also reflects a current estimate of the Company’s nonperformance risk specific to these liabilities. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivative liability attributable to these provisions is recorded in future policy benefits.
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value of the liability, the IUL embedded derivatives are classified as Level 3. The embedded derivative liabilities attributable to these provisions are recorded in future policy benefits.
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 fair value of derivatives that are traded in less active OTC markets are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at June 30, 2013 and December 31, 2012. See Note 11 and Note 12 for further information on the credit risk of derivative instruments and related collateral.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value. All other financial instruments that are reported at fair value have been included above in the table with balances of assets and liabilities measured at fair value on a recurring basis.
Mortgage Loans, Net
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities and characteristics including LTV ratio, occupancy rate, refinance risk, debt-service coverage, location, and property condition. For commercial mortgage loans with significant credit deterioration, fair value is determined using the same adjustments as above with an additional adjustment for the Company’s estimate of the amount recoverable on the loan.
The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.
Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.
Policy Loans
The fair value of policy loans is determined using discounted cash flows and 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 service or non-binding broker quotes. Syndicated loans that are priced by multiple non-binding broker quotes 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 or lack of liquidity.
Restricted Cash
Restricted cash is generally set aside for specific business transactions and restrictions are specific to the Company and do not transfer to third party market participants; therefore, the carrying amount is a reasonable estimate of fair value. The fair value of restricted cash is classified as Level 1.
Future Policy Benefits
The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a provision for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of other liabilities including 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.
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 represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.
Line of Credit with Ameriprise Financial
The fair value of the line of credit is determined by discounting cash flows with an adjustment for the Company’s nonperformance risk specific to this liability. The fair value of the line of credit is classified as Level 3.
Short-term Borrowings
The fair value of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.
Other Liabilities
Other liabilities consist of future funding commitments to affordable housing partnerships. The fair value of these future funding commitments is determined by discounting cash flows and is classified as Level 3 as the discount rate is adjusted.
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Variable Interest Entities
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6 Months Ended |
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Jun. 30, 2013
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Variable Interest Entities | |
Variable Interest Entities | 3. Variable Interest Entities
RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.
RTA’s maximum exposure to loss as a result of its investments in the affordable housing partnerships is limited to the carrying values of these investments. The carrying values are reflected in other investments and were $427 million and $409 million as of June 30, 2013 and December 31, 2012, respectively. RTA has no obligation to provide financial or other support to the affordable housing partnerships in addition to liabilities already recorded for future funding commitments nor has it provided any additional support to the affordable housing partnerships. The Company had liabilities of $113 million and $144 million recorded in other liabilities as of June 30, 2013 and December 31, 2012, respectively, related to the future funding commitments for affordable housing partnerships. |
Financing Receivables (Tables)
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Financing Receivables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rollforward of the allowance for loan losses |
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Schedule of recorded investment in financing receivables by impairment method and type of loan |
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Schedule of purchases and sales of loans |
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Schedule of concentrations of credit risk of commercial mortgage loans by U.S. region |
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Schedule of concentrations of credit risk of commercial mortgage loans by property type |
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Schedule of troubled debt restructurings |
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Derivatives and Hedging Activities (Details) (USD $)
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6 Months Ended | |
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Jun. 30, 2013
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Dec. 31, 2012
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Net Derivative Liabilities | ||
Additional quantitative measures to determine SIFI status | 5 | |
Fair value of derivatives after application of master netting agreements and cash collateral | $ 906,000,000 | $ 1,416,000,000 |
Minimum
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Net Derivative Liabilities | ||
Threshold assets to determine the SIFI status | 50,000,000,000 | |
Additional quantitative measures to be met for the SIFI status | 1 | |
Threshold derivative liabilities to determine the SIFI status | 3,500,000,000 | |
OTC derivative
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Net Derivative Liabilities | ||
Fair value of derivatives after application of master netting agreements and cash collateral | 816,000,000 | 536,000,000 |
Embedded derivatives
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Net Derivative Liabilities | ||
Fair value of embedded derivative liabilities | $ 90,000,000 | $ 880,000,000 |
Offsetting Assets and Liabilities
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Jun. 30, 2013
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Offsetting Assets and Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Offsetting Assets and Liabilities | 11. Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets under GAAP. The Company’s derivative instruments and repurchase agreements are subject to master netting arrangements and collateral arrangements and meet the GAAP guidance to 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 on the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company’s assets subject to master netting arrangements:
(1) Represents the amount of assets that could be offset by liabilities with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:
(1) Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
In the tables above, the amounts of assets or liabilities presented in the Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual amounts of collateral may be greater than amounts presented in the tables.
The Company’s freestanding derivative instruments are reflected in other assets and 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. |
Variable Annuity and Insurance Guarantees (Details 3) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Mutual funds
|
||
Variable Annuity and Insurance Guarantees | ||
Total mutual funds | $ 64,374 | $ 62,210 |
Equity
|
||
Variable Annuity and Insurance Guarantees | ||
Total mutual funds | 32,886 | 32,054 |
Bond
|
||
Variable Annuity and Insurance Guarantees | ||
Total mutual funds | 25,495 | 26,165 |
Other
|
||
Variable Annuity and Insurance Guarantees | ||
Total mutual funds | $ 5,993 | $ 3,991 |
Derivatives and Hedging Activities (Details 2) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Derivatives and Hedging Activities | ||
Asset | $ 3,069 | $ 3,418 |
Derivatives not designated as hedging instruments
|
||
Derivatives and Hedging Activities | ||
Asset | 3,069 | 3,418 |
Liability | 3,669 | 4,159 |
Derivatives not designated as hedging instruments | GMWB and GMAB
|
||
Derivatives and Hedging Activities | ||
Asset | 3,053 | 3,412 |
Liability | 3,584 | 4,111 |
Derivatives not designated as hedging instruments | GMWB and GMAB | Interest rate contracts
|
||
Derivatives and Hedging Activities | ||
Asset | 1,638 | 2,191 |
Liability | 1,483 | 1,486 |
Derivatives not designated as hedging instruments | GMWB and GMAB | Equity derivatives
|
||
Derivatives and Hedging Activities | ||
Asset | 1,404 | 1,215 |
Liability | 2,090 | 1,792 |
Derivatives not designated as hedging instruments | GMWB and GMAB | Foreign currency contracts
|
||
Derivatives and Hedging Activities | ||
Asset | 4 | 6 |
Liability | 0 | |
Derivatives not designated as hedging instruments | GMWB and GMAB | Embedded derivatives
|
||
Derivatives and Hedging Activities | ||
Asset | 0 | |
Liability | 11 | 833 |
Derivatives not designated as hedging instruments | GMWB and GMAB | Credit contracts
|
||
Derivatives and Hedging Activities | ||
Asset | 7 | |
Derivatives not designated as hedging instruments | EIA embedded derivatives | Equity derivatives
|
||
Derivatives and Hedging Activities | ||
Liability | 3 | 2 |
Derivatives not designated as hedging instruments | IUL | Equity derivatives
|
||
Derivatives and Hedging Activities | ||
Asset | 16 | 6 |
Liability | 6 | 1 |
Derivatives not designated as hedging instruments | IUL embedded derivatives | Equity derivatives
|
||
Derivatives and Hedging Activities | ||
Liability | 76 | 45 |
Derivatives not designated as hedging instruments | Other derivatives
|
||
Derivatives and Hedging Activities | ||
Asset | 16 | 6 |
Liability | $ 85 | $ 48 |
Variable Annuity and Insurance Guarantees (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Variable Annuity and Insurance Guarantees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Variable Annuity Guarantees |
(1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table. (2) Represents the current guaranteed benefit amount in excess of the current contract value. GMIB, GMWB and GMAB benefits are subject to waiting periods and payment periods specified in the contract.
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Schedule of Changes in Additional Liabilities for Variable Annuity and Insurance Guarantees |
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Schedule of Separate Account Balances By Asset Type |
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Future Policy Benefits, Policy Claims and Other Policyholders' Funds and Separate Account Liabilities (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Future Policy Benefits, Policy Claims and Other Policyholders' Funds and Separate Account Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Future Policy Benefits, Policy Claims and Other Policyholders' Funds |
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Schedule of Separate Account Liabilities by Policy Type |
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Variable Interest Entities (Details) (Variable interests in affordable housing partnerships, RTA, USD $)
In Millions, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Variable interests in affordable housing partnerships | RTA
|
||
Variable Interest Entities | ||
Carrying values of investments reflected in other investments | $ 427 | $ 409 |
Obligation to provide financial or other support to the affordable housing partnerships | 0 | |
Liabilities related to the future funding commitments recorded in other liabilities | $ 113 | $ 144 |
Investments (Details 6) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Net investment income | ||||
Income on fixed maturities | $ 303 | $ 338 | $ 612 | $ 680 |
Income on mortgage loans | 52 | 38 | 103 | 73 |
Other investments | 11 | 7 | 17 | 13 |
Gross investment income | 366 | 383 | 732 | 766 |
Less: investment expenses | 7 | 6 | 15 | 12 |
Total | $ 359 | $ 377 | $ 717 | $ 754 |
Short-term Borrowings (Details) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Borrowings | ||
Amount of the company's liability including accrued interest | $ 501 | $ 501 |
Repurchase Agreements
|
||
Borrowings | ||
Fair value of securities pledged | 209 | 518 |
Amount of the company's liability including accrued interest | 201 | 501 |
Weighted average annual interest rate on the FHLB advances (as a percent) | 0.40% | 0.40% |
Federal Home Loan Bank (FHLB) Advances
|
||
Borrowings | ||
Fair value of securities pledged | 376 | |
Amount of the company's liability including accrued interest | $ 300 | |
Weighted average annual interest rate on the FHLB advances (as a percent) | 0.30% |
Shareholder's Equity (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Shareholder's Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of information related to amounts reclassified from AOCI |
|
Contingencies and Guarantees (Details) (Future guaranty fund assessments, USD $)
In Millions, unless otherwise specified |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2013
|
Dec. 31, 2012
|
|
Future guaranty fund assessments
|
||
Commitments and Contingencies | ||
Liability related to guaranty fund assessments | $ 22 | $ 26 |
Premium tax asset | $ 17 | $ 19 |
Financing Receivables (Details 3) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
item
|
Jun. 30, 2012
item
|
Jun. 30, 2013
item
|
Jun. 30, 2012
item
|
|
Troubled Debt Restructurings | ||||
Number of Loans | 3 | 1 | 5 | 2 |
Recorded Investment | $ 9 | $ 1 | $ 9 | $ 2 |
Commitments to lend additional funds to borrowers for restructured loans | 0 | 0 | ||
Commercial Mortgage Loans
|
||||
Troubled Debt Restructurings | ||||
Number of Loans | 3 | 1 | 3 | 1 |
Recorded Investment | 9 | 1 | 9 | 1 |
Residential Mortgage Loans
|
||||
Troubled Debt Restructurings | ||||
Number of Loans | 2 | |||
Syndicated Loans
|
||||
Troubled Debt Restructurings | ||||
Number of Loans | 1 | |||
Recorded Investment | $ 1 |
Deferred Acquisition Costs and Deferred Sales Inducement Costs (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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Deferred Acquisition Costs and Deferred Sales Inducement Costs | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of balances of and changes in DAC |
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Schedule of balances of and changes in DSIC |
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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (USD $)
In Millions, unless otherwise specified |
Total
|
Common Shares
|
Additional Paid-In Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Income
|
---|---|---|---|---|---|
Balances at Dec. 31, 2011 | $ 4,610 | $ 3 | $ 2,461 | $ 1,215 | $ 931 |
Comprehensive income: | |||||
Net income | 334 | 334 | |||
Other comprehensive income (loss), net of tax | 117 | 117 | |||
Total comprehensive income (loss) | 451 | ||||
Cash dividend to Ameriprise Financial, Inc. | (550) | (550) | |||
Balances at Jun. 30, 2012 | 4,511 | 3 | 2,461 | 999 | 1,048 |
Balances at Dec. 31, 2012 | 4,699 | 3 | 2,462 | 1,000 | 1,234 |
Comprehensive income: | |||||
Net income | 426 | 426 | |||
Other comprehensive income (loss), net of tax | (475) | (475) | |||
Total comprehensive income (loss) | (49) | ||||
Tax adjustment on share-based incentive compensation plan | 1 | 1 | |||
Cash dividend to Ameriprise Financial, Inc. | (535) | (535) | |||
Balances at Jun. 30, 2013 | $ 4,116 | $ 3 | $ 2,463 | $ 891 | $ 759 |
Basis of Presentation
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Basis of Presentation | |
Basis of Presentation | 1. Basis of Presentation
RiverSource Life Insurance Company is a stock life insurance company with two wholly owned subsidiaries, RiverSource Life Insurance Co. of New York and RiverSource Tax Advantaged Investments, Inc. (“RTA”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).
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 accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain reclassifications of prior period amounts have been made to conform to the current presentation. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on February 26, 2013.
The Company has reclassified certain prior year amounts in the Consolidated Statements of Cash Flows within operating activities to provide more detail related to derivatives. The Company previously classified the change in freestanding derivatives in the “Other, net” line, and the change in derivatives collateral in the “Derivatives collateral, net” line within operating cash flows. The Company reclassified the changes in freestanding derivatives, as well as the change in derivatives collateral, to a new line titled “Derivatives, net of collateral” within operating cash flows.
The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been made. Except for the adjustment described below, all adjustments made were of a normal recurring nature.
In the second quarter of 2012, the Company made a correction for a tax item related to prior periods, which resulted in a $32 million decrease to net income. The Company discovered it had received incomplete data from a third party service provider for securities lending activities that resulted in the miscalculation of the Company’s dividend received deduction and foreign tax credit, which resulted in an understatement of taxes payable and an overstatement of reported earnings in prior periods. Management determined that the effect of this correction was not material to the Consolidated Financial Statements for all prior periods. The Company resolved the data issue and stopped the securities lending that negatively impacted its tax position.
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. |
Investments
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Jun. 30, 2013
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Investments | 4. Investments
Available-for-Sale securities distributed by type were as follows:
(1) Represents the amount of other-than-temporary impairment (“OTTI”) losses in accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities subsequent to the initial impairment measurement date. These amounts are included in gross unrealized gains and losses as of the end of the period.
At June 30, 2013 and December 31, 2012, fixed maturity securities comprised approximately 83% and 84%, respectively, 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. At June 30, 2013 and December 31, 2012, approximately $1.4 billion and $1.5 billion, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
At June 30, 2013 and December 31, 2012, approximately 36% and 32%, 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.
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:
As part of the Company’s ongoing monitoring process, management determined that a majority of the gross unrealized losses on its Available-for-Sale securities are attributable to movement in interest rates.
The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses on securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income (loss):
The change in net unrealized securities gains (losses) in other comprehensive income (loss) includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses and (iii) other items primarily consisting of adjustments in asset and liability balances, such as DAC, deferred sales inducement costs (“DSIC”), benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.
The following table presents a rollforward of the net unrealized securities gains on Available-for-Sale securities included in accumulated other comprehensive income:
(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 (loss) during the period. (2) Includes $(9) million and $(20) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at June 30, 2013 and 2012, respectively.
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:
Other-than-temporary impairments for the three months and six months ended June 30, 2013 and 2012 primarily related to credit losses on non-agency residential mortgage backed securities.
Available-for-Sale securities by contractual maturity at June 30, 2013 were as follows:
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.
Net investment income is summarized as follows:
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Recent Accounting Pronouncements
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Jun. 30, 2013
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Recent Accounting Pronouncements | |
Recent Accounting Pronouncements | 2. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Comprehensive Income
In February 2013, the Financial Accounting Standards Board (“FASB”) updated the accounting standard related to comprehensive income. The update requires entities to provide information about significant amounts reclassified out of accumulated other comprehensive income (“AOCI”). The standard is effective for interim and annual periods beginning after December 15, 2012 and is required to be applied prospectively. The Company adopted the standard in the first quarter of 2013. The adoption of the standard did not have any effect on the Company’s consolidated financial condition and results of operations. See Note 13 for the required disclosures.
Balance Sheet
In December 2011, the FASB updated the accounting standards to require new disclosures about offsetting assets and liabilities. The standard requires an entity to disclose both gross and net information about certain financial instruments and transactions subject to master netting arrangements (or similar agreements) or eligible for offset in the statement of financial position. The standard is effective for interim and annual periods beginning on or after January 1, 2013 on a retrospective basis. The Company adopted the standard in the first quarter of 2013. The adoption of the standard did not have any effect on the Company’s consolidated financial condition and results of operations. See Note 11 for the required disclosures.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB updated the accounting standard for deferred acquisition costs (“DAC”). Under this new standard, only the following costs incurred in the acquisition of new and renewal insurance contracts are capitalizable as DAC: (i) incremental direct costs of a successful contract acquisition, (ii) portions of employees’ compensation and benefits directly related to time spent performing acquisition activities (that is, underwriting, policy issuance and processing, medical and inspection, and contract selling) for a contract that has been acquired, (iii) other costs related to acquisition activities that would not have been incurred had the acquisition of the contract not occurred, and (iv) advertising costs that meet the capitalization criteria in other GAAP guidance for certain direct-response marketing. All other acquisition related costs are expensed as incurred. The Company retrospectively adopted the new standard on January 1, 2012. The cumulative effect of the adoption reduced retained earnings by $1.4 billion after-tax and increased AOCI by $112 million after-tax, totaling to a $1.3 billion after-tax reduction in total equity at January 1, 2012.
Future Adoption of New Accounting Standards
Income Taxes
In July 2013, the FASB updated the accounting standard for income taxes. The update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard is effective for interim and annual periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations. |
Fair Values of Assets and Liabilities (Tables)
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Schedule of balances of assets and liabilities measured at fair value on a recurring basis |
(1) The Company’s adjustment for nonperformance risk resulted in a $263 million cumulative decrease to the embedded derivative liability.
(1) The Company’s adjustment for nonperformance risk resulted in a $398 million cumulative decrease to the embedded derivative liability. |
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Summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis |
(1) Represents a $1 million loss 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.
(1) Represents a $5 million loss included in net realized investment losses in the Consolidated Statements of Income. (2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.
(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.
(1) Represents a $7 million loss included in net realized investment losses in the Consolidated Statements of Income. (2) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income. |
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Significant unobservable inputs used in the fair value measurements |
(1) The utilization of the guaranteed withdrawals represents the percentage of policyholders that will begin withdrawing in any given year. (2) Market volatility is implied volatility of fund of funds. (3) The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives. |
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Schedule of carrying value and the estimated fair value of financial instruments that are not reported at fair value |
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Basis of Presentation (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
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Jun. 30, 2013
item
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Jun. 30, 2012
Correction for a tax item related to securities lending activities
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Basis of Presentation | ||
Number of wholly owned subsidiaries | 2 | |
Reclassifications of prior period amounts | ||
Decrease to net income resulting from prior period adjustments | $ 32 |
Offsetting Assets and Liabilities (Details 2) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2013
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Dec. 31, 2012
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Total | ||
Gross Amounts of Recognized Liabilities | $ 3,780 | $ 3,780 |
Gross Amounts Not Offset in the Consolidated Balance Sheets | ||
Financial Instruments | (2,757) | (2,676) |
Cash Collateral | (6) | (67) |
Securities Collateral | (1,012) | (1,033) |
Net Amount | 5 | 4 |
Repurchase agreements | ||
Gross Amounts of Recognized Liabilities | 201 | 501 |
Gross Amounts Not Offset in the Consolidated Balance Sheets | ||
Securities Collateral | (201) | (501) |
OTC derivatives
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Derivatives | ||
Gross Amounts of Recognized Liabilities | 3,579 | 3,279 |
Gross Amounts Not Offset in the Consolidated Balance Sheets | ||
Financial Instruments | (2,757) | (2,676) |
Cash Collateral | (6) | (67) |
Securities Collateral | (811) | (532) |
Net Amount | $ 5 | $ 4 |