10-Q 1 a12-19739_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2012

 

OR

 

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

 

For the Transition Period from                 to                

 

Commission File No.  033-28976

 

RIVERSOURCE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0823832

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1099 Ameriprise Financial Center, Minneapolis, Minnesota

 

55474

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (612) 671-3131

 

Former name, former address and former fiscal year, if changed since last report:   Not Applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

 

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

 

Class

 

Outstanding at November 5, 2012

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.

 

 

 



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

FORM 10-Q

 

INDEX

 

Part I.

Financial Information:

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2012 and December 31, 2011

1

 

 

 

 

 

 

Consolidated Statements of Income — Three months and nine months ended September 30, 2012 and 2011

2

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income — Three months and nine months ended September 30, 2012 and 2011

3

 

 

 

 

 

 

Consolidated Statements of Shareholder’s Equity — Nine months ended September 30, 2012 and 2011

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2012 and 2011

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

Management’s Narrative Analysis

32

 

 

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

 

Part II.

Other Information:

 

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

 

 

Item 1A.

Risk Factors

40

 

 

 

 

 

Item 6.

Exhibits

40

 

 

 

 

 

Signatures

41

 

 

 

 

Exhibit Index

E-1

 



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share amounts)

 

 

 

September 30, 2012

 

December 31, 2011

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2012, $23,293; 2011, $24,398)

 

$

26,221

 

$

26,577

 

Common stocks, at fair value (cost: 2012 and 2011, $1)

 

3

 

2

 

Commercial mortgage loans, at cost (less allowance for loan losses: 2012, $26; 2011, $32)

 

2,424

 

2,473

 

Policy loans

 

750

 

739

 

Other investments

 

755

 

730

 

Total investments

 

30,153

 

30,521

 

 

 

 

 

 

 

Cash and cash equivalents

 

1,102

 

828

 

Restricted cash

 

183

 

26

 

Reinsurance recoverables

 

2,006

 

1,953

 

Other receivables

 

171

 

162

 

Accrued investment income

 

283

 

307

 

Deferred income taxes, net

 

 

60

 

Deferred acquisition costs

 

2,371

 

2,413

 

Deferred sales inducement costs

 

416

 

464

 

Other assets

 

4,157

 

3,578

 

Separate account assets

 

68,798

 

63,174

 

 

 

 

 

 

 

Total assets

 

$

109,640

 

$

103,486

 

 

 

 

 

 

 

Liabilities and Shareholder’s Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Future policy benefits

 

$

31,063

 

$

31,169

 

Policy claims and other policyholders’ funds

 

130

 

121

 

Deferred income taxes, net

 

47

 

 

Borrowings under repurchase agreements

 

500

 

504

 

Line of credit with Ameriprise Financial, Inc.

 

150

 

300

 

Other liabilities

 

4,330

 

3,608

 

Separate account liabilities

 

68,798

 

63,174

 

Total liabilities

 

105,018

 

98,876

 

 

 

 

 

 

 

Shareholder’s equity:

 

 

 

 

 

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

 

3

 

3

 

Additional paid-in capital

 

2,462

 

2,461

 

Retained earnings

 

910

 

1,215

 

Accumulated other comprehensive income, net of tax

 

1,247

 

931

 

Total shareholder’s equity

 

4,622

 

4,610

 

 

 

 

 

 

 

Total liabilities and shareholder’s equity

 

$

109,640

 

$

103,486

 

 

See Notes to Consolidated Financial Statements.

 

1



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions)

 

 

 

Three Months Ended 
September 30,

 

Nine Months Ended 
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

111

 

$

127

 

$

333

 

$

376

 

Net investment income

 

364

 

421

 

1,118

 

1,215

 

Policy and contract charges

 

373

 

369

 

1,172

 

1,146

 

Other revenues

 

84

 

77

 

242

 

228

 

Net realized investment gains (losses)

 

1

 

(2

)

1

 

(2

)

Total revenues

 

933

 

992

 

2,866

 

2,963

 

 

 

 

 

 

 

 

 

 

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

Benefits, claims, losses and settlement expenses

 

376

 

93

 

970

 

585

 

Interest credited to fixed accounts

 

206

 

214

 

621

 

634

 

Amortization of deferred acquisition costs

 

52

 

187

 

152

 

320

 

Other insurance and operating expenses

 

185

 

185

 

576

 

583

 

Total benefits and expenses

 

819

 

679

 

2,319

 

2,122

 

Pretax income

 

114

 

313

 

547

 

841

 

Income tax provision

 

13

 

64

 

112

 

160

 

Net income

 

$

101

 

$

249

 

$

435

 

$

681

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

$

 

$

(3

)

$

(9

)

$

(40

)

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

 

(5

)

 

(3

)

22

 

Net impairment losses recognized in net realized investment gains (losses)

 

$

(5

)

$

(3

)

$

(12

)

$

(18

)

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

101

 

$

249

 

$

435

 

$

681

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized gains on securities:

 

 

 

 

 

 

 

 

 

Net unrealized securities gains arising during the period

 

309

 

226

 

486

 

328

 

Reclassification of net securities losses included in net income

 

 

2

 

 

2

 

Impact on deferred acquisition costs, deferred sales inducement costs, benefit reserves and reinsurance recoverables

 

(112

)

(182

)

(174

)

(218

)

Total net unrealized gains on securities

 

197

 

46

 

312

 

112

 

Net unrealized losses on derivatives:

 

 

 

 

 

 

 

 

 

Reclassification of net derivative losses included in net income

 

2

 

 

4

 

3

 

Total net unrealized losses on derivatives

 

2

 

 

4

 

3

 

Total other comprehensive income, net of tax

 

199

 

46

 

316

 

115

 

Total comprehensive income

 

$

300

 

$

295

 

$

751

 

$

796

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)

(in millions)

 

 

 

Common
Shares

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011, previously reported

 

$

3

 

$

2,460

 

$

3,410

 

$

675

 

$

6,548

 

Cumulative effect of change in accounting policies, net of tax

 

 

 

(1,416

)

85

 

(1,331

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011, as adjusted

 

3

 

2,460

 

1,994

 

760

 

5,217

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

681

 

 

681

 

Other comprehensive income, net of tax

 

 

 

 

115

 

115

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

796

 

Tax adjustment on share-based incentive compensation plan

 

 

1

 

 

 

1

 

Cash dividend to Ameriprise Financial, Inc.

 

 

 

(750

)

 

(750

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2011

 

$

3

 

$

2,461

 

$

1,925

 

$

875

 

$

5,264

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

3

 

$

2,461

 

$

1,215

 

$

931

 

$

4,610

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

435

 

 

435

 

Other comprehensive income, net of tax

 

 

 

 

316

 

316

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

751

 

Tax adjustment on share-based incentive compensation plan

 

 

1

 

 

 

1

 

Cash dividend to Ameriprise Financial, Inc.

 

 

 

(740

)

 

(740

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2012

 

$

3

 

$

2,462

 

$

910

 

$

1,247

 

$

4,622

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

Nine Months Ended
September  30,

 

 

 

2012

 

2011

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

435

 

$

681

 

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

 

 

 

 

 

Depreciation, amortization and accretion, net

 

(33

)

(69

)

Deferred income tax (benefit) expense

 

(63

)

138

 

Contractholder and policyholder charges, non-cash

 

(203

)

(197

)

Loss from equity method investments

 

18

 

25

 

Net realized investment gains

 

(13

)

(15

)

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

 

12

 

17

 

Change in operating assets and liabilities:

 

 

 

 

 

Deferred acquisition costs

 

(33

)

109

 

Deferred sales inducement costs

 

37

 

73

 

Other investments, net

 

25

 

 

Future policy benefits for traditional life, disability income and long term care insurance

 

191

 

187

 

Policy claims and other policyholders’ funds

 

9

 

(1

)

Reinsurance recoverables

 

(67

)

(85

)

Other receivables

 

(31

)

30

 

Accrued investment income

 

24

 

12

 

Derivatives collateral, net

 

(661

)

335

 

Other assets and liabilities, net

 

810

 

(154

)

Net cash provided by operating activities

 

457

 

1,086

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Available-for-Sale securities:

 

 

 

 

 

Proceeds from sales

 

148

 

498

 

Maturities, sinking fund payments and calls

 

2,346

 

2,460

 

Purchases

 

(1,551

)

(2,797

)

Proceeds from sales, maturities and repayments of commercial mortgage loans

 

180

 

169

 

Funding of commercial mortgage loans

 

(144

)

(108

)

Proceeds from sales of other investments

 

78

 

97

 

Purchase of other investments

 

(215

)

(256

)

Purchase of land, buildings, equipment and software

 

(7

)

(4

)

Change in policy loans, net

 

(11

)

(9

)

Net cash provided by investing activities

 

824

 

50

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Policyholder and contractholder account values:

 

 

 

 

 

Considerations received

 

1,082

 

978

 

Net transfers to separate accounts

 

(30

)

(3

)

Surrenders and other benefits

 

(909

)

(1,010

)

Change in borrowings under repurchase agreements, net

 

(5

)

107

 

Proceeds from line of credit with Ameriprise Financial, Inc.

 

268

 

415

 

Payments on line of credit with Ameriprise Financial, Inc.

 

(418

)

(118

)

Deferred premium options, net

 

(256

)

(177

)

Tax adjustment on share-based incentive compensation plan

 

1

 

1

 

Cash dividend to Ameriprise Financial, Inc.

 

(740

)

(750

)

Net cash used in financing activities

 

(1,007

)

(557

)

Net increase in cash and cash equivalents

 

274

 

579

 

Cash and cash equivalents at beginning of period

 

828

 

76

 

Cash and cash equivalents at end of period

 

$

1,102

 

$

655

 

Supplemental Disclosures:

 

 

 

 

 

Income taxes paid, net

 

$

14

 

$

230

 

Interest paid on borrowings

 

4

 

3

 

Non-cash investing activity:

 

 

 

 

 

Affordable housing partnership commitments not yet remitted

 

16

 

124

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

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 material 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, 2011, filed with the Securities and Exchange Commission on February 24, 2012.

 

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.

 

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 adjustments 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. During the second quarter, 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 has determined that the effect of this correction is not material to the Consolidated Financial Statements for all current and prior periods. The Company has resolved the data issue and has stopped the securities lending that negatively impacted its tax position.

 

In the third quarter of 2011, the Company made an adjustment for additional bond discount accretion investment income related to prior periods resulting from revisions to the accounting classification of certain structured securities, which resulted in a $34 million pretax benefit, net of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) amortization.  Management has determined that the effect of this adjustment is immaterial to prior periods presented.

 

On January 1, 2012, the Company retrospectively adopted the new accounting standard for DAC for insurance and annuity products. See Note 2 and Note 6 for further information on the new accounting standard and the resulting changes in the Company’s accounting policies on the deferral of acquisition costs.

 

6



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

The following tables present the effect of the change on affected financial statement line items for prior periods retrospectively adjusted.

 

 

 

December 31, 2011

 

 

 

Previously
Reported

 

Effect of
Change

 

As Adjusted

 

 

 

(in millions)

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Deferred income taxes, net

 

$

 

$

60

 

$

60

 

Deferred acquisition costs

 

4,367

 

(1,954

)

2,413

 

Total assets

 

$

105,380

 

$

(1,894

)

$

103,486

 

 

 

 

 

 

 

 

 

Liabilities and Shareholder’s Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Future policy benefits

 

$

31,182

 

$

(13

)

$

31,169

 

Deferred income taxes, net

 

620

 

(620

)

 

Other liabilities

 

3,607

 

1

 

3,608

 

Total liabilities

 

99,508

 

(632

)

98,876

 

 

 

 

 

 

 

 

 

Shareholder’s equity:

 

 

 

 

 

 

 

Retained earnings

 

2,589

 

(1,374

)

1,215

 

Accumulated other comprehensive income, net of tax

 

819

 

112

 

931

 

Total shareholder’s equity

 

5,872

 

(1,262

)

4,610

 

 

 

 

 

 

 

 

 

Total liabilities and shareholder’s equity

 

$

105,380

 

$

(1,894

)

$

103,486

 

 

 

 

December 31, 2010

 

 

 

Previously
Reported

 

Effect of
Change

 

As Adjusted

 

 

 

(in millions)

 

Statements of Shareholder’s Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

3,410

 

$

(1,416

)

$

1,994

 

Accumulated other comprehensive income, net of tax

 

675

 

85

 

760

 

Total shareholder’s equity

 

$

6,548

 

$

(1,331

)

$

5,217

 

 

 

 

Three Months Ended 
September 30, 2011

 

Nine Months Ended
September 30, 2011

 

 

 

Previously
Reported

 

Effect of
Change

 

As
Adjusted

 

Previously
Reported

 

Effect of
Change

 

As
Adjusted

 

 

 

(in millions)

 

Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

992

 

$

 

$

992

 

$

2,963

 

$

 

$

2,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefits, claims, losses and settlement expenses

 

92

 

1

 

93

 

584

 

1

 

585

 

Interest credited to fixed accounts

 

213

 

1

 

214

 

632

 

2

 

634

 

Amortization of deferred acquisition costs

 

299

 

(112

)

187

 

513

 

(193

)

320

 

Other insurance and operating expenses

 

153

 

32

 

185

 

481

 

102

 

583

 

Total benefits and expenses

 

757

 

(78

)

679

 

2,210

 

(88

)

2,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income

 

235

 

78

 

313

 

753

 

88

 

841

 

Income tax provision

 

36

 

28

 

64

 

129

 

31

 

160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

199

 

$

50

 

$

249

 

$

624

 

$

57

 

$

681

 

 

7



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

2.              Recent Accounting Pronouncements

 

Adoption of New Accounting Standards

 

Comprehensive Income

 

In June 2011, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to the presentation of comprehensive income. The standard requires entities to present all nonowner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The standard is effective for interim and annual periods beginning after December 15, 2011. The Company retrospectively adopted the standard in the first quarter of 2012.  The adoption of the standard did not impact the Company’s consolidated financial condition and results of operations.  See the Company’s Consolidated Statements of Comprehensive Income for the newly required statements.

 

Fair Value

 

In May 2011, the FASB updated the accounting standards related to fair value measurement and disclosure requirements. The standard requires entities, for assets and liabilities measured at fair value in the statement of financial position which are Level 3 fair value measurements, to disclose quantitative information about unobservable inputs and assumptions used in the measurements, a description of the valuation processes in place, and a qualitative discussion about the sensitivity of the measurements to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. In addition, the standard requires disclosure of fair value by level within the fair value hierarchy for each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The standard is effective for interim and annual periods beginning on or after December 15, 2011. The Company adopted the standard in the first quarter of 2012.  The adoption of the standard did not impact the Company’s consolidated financial condition and results of operations.  See Note 11 for the required disclosures.

 

Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements

 

In April 2011, the FASB updated the accounting standards related to accounting for repurchase agreements and other similar agreements. The standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings as opposed to sales. The standard is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The Company adopted the standard in the first quarter of 2012.  The adoption of the standard did not impact the Company’s consolidated financial condition and results of operations.

 

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

 

In October 2010, the FASB updated the accounting standard for 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 accumulated other comprehensive income by $112 million after-tax, totaling to a $1.3 billion after-tax reduction in total equity at January 1, 2012. See Note 1 and Note 6 for additional information on the adoption of this standard.

 

Future Adoption of New Accounting Standards

 

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 instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The standard is effective for interim and annual periods beginning on or after January 1, 2013 on a retrospective basis. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.

 

8



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

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 $417 million and $384 million as of September 30, 2012 and December 31, 2011, 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 $174 million and $267 million recorded in other liabilities as of September 30, 2012 and December 31, 2011, respectively, related to the future funding commitments for affordable housing partnerships.

 

4.              Investments

 

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

 

 

 

September 30, 2012

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Noncredit
OTTI(1)

 

 

 

(in millions)

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

14,707

 

$

2,211

 

$

(14

)

$

16,904

 

$

 

Residential mortgage backed securities

 

3,460

 

245

 

(65

)

3,640

 

(28

)

Commercial mortgage backed securities

 

2,979

 

307

 

 

3,286

 

 

State and municipal obligations

 

979

 

184

 

(37

)

1,126

 

 

Asset backed securities

 

930

 

67

 

(12

)

985

 

 

Foreign government bonds and obligations

 

188

 

35

 

 

223

 

 

U.S. government and agencies obligations

 

43

 

7

 

 

50

 

 

Other structured investments

 

7

 

 

 

7

 

 

Total fixed maturities

 

23,293

 

3,056

 

(128

)

26,221

 

(28

)

Common stocks

 

1

 

2

 

 

3

 

1

 

Total

 

$

23,294

 

$

3,058

 

$

(128

)

$

26,224

 

$

(27

)

 

 

 

December 31, 2011

 

Description of Securities

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Noncredit
OTTI(1)

 

 

 

(in millions)

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

14,770

 

$

1,726

 

$

(78

)

$

16,418

 

$

 

Residential mortgage backed securities

 

4,193

 

242

 

(126

)

4,309

 

(41

)

Commercial mortgage backed securities

 

3,355

 

276

 

 

3,631

 

 

State and municipal obligations

 

1,012

 

131

 

(47

)

1,096

 

 

Asset backed securities

 

883

 

43

 

(18

)

908

 

 

Foreign government bonds and obligations

 

126

 

19

 

(1

)

144

 

 

U.S. government and agencies obligations

 

49

 

8

 

 

57

 

 

Other structured investments

 

10

 

4

 

 

14

 

4

 

Total fixed maturities

 

24,398

 

2,449

 

(270

)

26,577

 

(37

)

Common stocks

 

1

 

1

 

 

2

 

 

Total

 

$

24,399

 

$

2,450

 

$

(270

)

$

26,579

 

$

(37

)

 


(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 both September 30, 2012 and December 31, 2011, fixed maturity securities comprised approximately 87% 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,

 

9



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. At September 30, 2012 and December 31, 2011, approximately $1.4 billion and $1.2 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:

 

 

 

September 30, 2012

 

December 31, 2011

 

Ratings

 

Amortized
Cost

 

Fair
Value

 

Percent of
Total Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Percent of
Total Fair
Value

 

 

 

(in millions, except percentages)

 

AAA

 

$

6,192

 

$

6,758

 

26

%

$

7,276

 

$

7,811

 

30

%

AA

 

1,034

 

1,207

 

5

 

1,161

 

1,291

 

5

 

A

 

4,389

 

5,009

 

19

 

4,148

 

4,578

 

17

 

BBB

 

10,220

 

11,831

 

45

 

10,211

 

11,446

 

43

 

Below investment grade

 

1,458

 

1,416

 

5

 

1,602

 

1,451

 

5

 

Total fixed maturities

 

$

23,293

 

$

26,221

 

100

%

$

24,398

 

$

26,577

 

100

%

 

At September 30, 2012 and December 31, 2011, approximately 31% and 33%, 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:

 

 

 

September 30, 2012

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities 

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number of

Securities

 

Fair
Value

 

Unrealized
Losses

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

15

 

$

130

 

$

(2

)

11

 

$

231

 

$

(12

)

26

 

$

361

 

$

(14

)

Residential mortgage backed securities

 

10

 

118

 

(1

)

46

 

276

 

(64

)

56

 

394

 

(65

)

State and municipal obligations

 

 

 

 

2

 

97

 

(37

)

2

 

97

 

(37

)

Asset backed securities

 

 

 

 

16

 

130

 

(12

)

16

 

130

 

(12

)

Total

 

25

 

$

248

 

$

(3

)

75

 

$

734

 

$

(125

)

100

 

$

982

 

$

(128

)

 

 

 

December 31, 2011

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities 

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

 

 

(in millions, except number of securities)

 

Corporate debt securities

 

70

 

$

1,004

 

$

(37

)

9

 

$

257

 

$

(41

)

79

 

$

1,261

 

$

(78

)

Residential mortgage backed securities

 

30

 

338

 

(8

)

48

 

283

 

(118

)

78

 

621

 

(126

)

State and municipal obligations

 

 

 

 

2

 

87

 

(47

)

2

 

87

 

(47

)

Asset backed securities

 

12

 

145

 

(3

)

18

 

96

 

(15

)

30

 

241

 

(18

)

Foreign government bonds and obligations

 

5

 

23

 

(1

)

 

 

 

5

 

23

 

(1

)

Total

 

117

 

$

1,510

 

$

(49

)

77

 

$

723

 

$

(221

)

194

 

$

2,233

 

$

(270

)

 

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 credit spreads.

 

10



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

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:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

Beginning balance

 

$

90

 

$

107

 

$

106

 

$

108

 

Credit losses for which an other-than-temporary impairment was not previously recognized

 

 

1

 

1

 

13

 

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

 

6

 

3

 

12

 

6

 

Reductions for securities sold during the period (realized)

 

 

 

(23

)

(16

)

Ending balance

 

$

96

 

$

111

 

$

96

 

$

111

 

 

The change in net unrealized securities gains (losses) in other comprehensive income 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, 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:

 

 

 

Net 
Unrealized 
Securities 
Gains

 

Deferred 
Income 
Tax

 

Accumulated Other
Comprehensive 
Income Related to
Net Unrealized 
Securities Gains

 

 

 

(in millions)

 

Balance at January 1, 2011

 

$

1,084

 

$

(379

)

$

705

 

Cumulative effect of accounting change

 

131

 

(46

)

85

(1)

Net unrealized securities gains arising during the period(2)

 

505

 

(177

)

328

 

Reclassification of net securities losses included in net income

 

3

 

(1

)

2

 

Impact on DAC, DSIC, benefit reserves and reinsurance recoverables

 

(335

)

117

 

(218

)

Balance at September 30, 2011

 

$

1,388

 

$

(486

)

$

902

(3)

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

$

1,472

 

$

(515

)

$

957

(1)

Net unrealized securities gains arising during the period(2)

 

749

 

(263

)

486

 

Impact on DAC, DSIC, benefit reserves and reinsurance recoverables

 

(268

)

94

 

(174

)

Balance at September 30, 2012

 

$

1,953

 

$

(684

)

$

1,269

(3)

 


(1)          The Company retrospectively adopted a new accounting standard on January 1, 2012 for DAC. See Note 1 and Note 2 for additional information on the adoption impact.

 

(2)          Includes other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income during the period.

 

(3)          Includes $(15) million and $(17) million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at September 30, 2012 and 2011, respectively.

 

11



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

Gross realized investment gains

 

$

5

 

$

 

$

13

 

$

33

 

Gross realized investment losses

 

 

 

(1

)

(18

)

Other-than-temporary impairments

 

(5

)

(3

)

(12

)

(18

)

Total

 

$

 

$

(3

)

$

 

$

(3

)

 

Other-than-temporary impairments for the three months and nine months ended September 30, 2012 and 2011 primarily related to credit losses on non-agency residential mortgage backed securities.

 

Available-for-Sale securities by contractual maturity at September 30, 2012 were as follows:

 

 

 

Amortized Cost

 

Fair Value

 

 

 

(in millions)

 

Due within one year

 

$

1,412

 

$

1,438

 

Due after one year through five years

 

4,151

 

4,454

 

Due after five years through 10 years

 

6,726

 

7,743

 

Due after 10 years

 

3,628

 

4,668

 

 

 

15,917

 

18,303

 

Residential mortgage backed securities

 

3,460

 

3,640

 

Commercial mortgage backed securities

 

2,979

 

3,286

 

Asset backed securities

 

930

 

985

 

Other structured investments

 

7

 

7

 

Common stocks

 

1

 

3

 

Total

 

$

23,294

 

$

26,224

 

 

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, asset backed securities and other structured investments 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:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

Income on fixed maturities

 

$

328

 

$

389

 

$

1,008

 

$

1,119

 

Income on commercial mortgage loans

 

36

 

38

 

109

 

113

 

Other investments

 

8

 

4

 

21

 

13

 

 

 

372

 

431

 

1,138

 

1,245

 

Less: investment expenses

 

8

 

10

 

20

 

30

 

Total

 

$

364

 

$

421

 

$

1,118

 

$

1,215

 

 

5.              Financing Receivables

 

The Company’s financing receivables include commercial 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.

 

12



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

Allowance for Loan Losses

 

The following table presents a rollforward of the allowance for loan losses for the nine months ended and the ending balance of the allowance for loan losses by impairment method and type of loan:

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Commercial
Mortgage 
Loans

 

Syndicated 
Loans

 

Total

 

Commercial
Mortgage 
Loans

 

Syndicated 
Loans

 

Total

 

 

 

(in millions)

 

Beginning balance

 

$

32

 

$

5

 

$

37

 

$

36

 

$

5

 

$

41

 

Charge-offs

 

(6

)

(1

)

(7

)

(2

)

 

(2

)

Provisions

 

 

 

 

(1

)

 

(1

)

Ending balance

 

$

26

 

$

4

 

$

30

 

$

33

 

$

5

 

$

38

 

Individually evaluated for impairment

 

$

5

 

$

 

$

5

 

$

10

 

$

 

$

10

 

Collectively evaluated for impairment

 

21

 

4

 

25

 

23

 

5

 

28

 

 

The recorded investment in financing receivables by impairment method and type of loan was as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Commercial 
Mortgage 
Loans

 

Syndicated
Loans

 

Total

 

Commercial 
Mortgage 
Loans

 

Syndicated
Loans

 

Total

 

 

 

(in millions)

 

Individually evaluated for impairment

 

$

39

 

$

1

 

$

40

 

$

64

 

$

1

 

$

65

 

Collectively evaluated for impairment

 

2,411

 

305

 

2,716

 

2,441

 

301

 

2,742

 

Total

 

$

2,450

 

$

306

 

$

2,756

 

$

2,505

 

$

302

 

$

2,807

 

 

As of September 30, 2012 and December 31, 2011, the Company’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $10 million and $4 million, respectively.

 

Purchases and sales of syndicated loans were as follows:

 

 

 

Three Months Ended 
September  30,

 

Nine Months Ended
September  30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

Purchases

 

$

21

 

$

82

 

$

74

 

$

185

 

Sales

 

4

 

 

4

 

2

 

 

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

 

Credit Quality Information

 

Nonperforming loans, which are generally loans 90 days or more past due, were $2 million and $12 million as of September 30, 2012 and December 31, 2011, 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% and 3% of total commercial mortgage loans at September 30, 2012 and December 31, 2011, respectively. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. In addition, the Company reviews the concentrations of credit risk by region and property type.

 

13



Table of Contents

 

RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Loans

 

Percent of
Loans

 

Funding 
Commitments

 

Loans

 

Percent of 
Loans

 

Funding 
Commitments

 

 

 

(in millions, except percentages)

 

South Atlantic

 

$

610

 

25

%

$

38

 

$

618

 

25

%

$

 

Pacific

 

552

 

22

 

30

 

556

 

22

 

1

 

Mountain

 

266

 

11

 

3

 

275

 

11

 

11

 

East North Central

 

249

 

10

 

10

 

247

 

10

 

 

West North Central

 

210

 

9

 

8

 

224

 

9

 

1

 

Middle Atlantic

 

203

 

8

 

6

 

217

 

9

 

 

West South Central

 

162

 

7

 

 

173

 

7

 

2

 

New England

 

133

 

5

 

4

 

130

 

5

 

 

East South Central

 

65

 

3

 

 

65

 

2

 

 

 

 

2,450

 

100

%

$

99

 

2,505

 

100

%

$

15

 

Less: allowance for loan losses

 

26

 

 

 

 

 

32

 

 

 

 

 

Total

 

$

2,424

 

 

 

 

 

$

2,473

 

 

 

 

 

 

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

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Loans

 

Percent of
Loans

 

Funding 
Commitments

 

Loans

 

Percent of
Loans

 

Funding 
Commitments

 

 

 

(in millions, except percentages)

 

Retail

 

$

815

 

33

%

$

37

 

$

825

 

33

%

$

2

 

Office

 

602

 

25

 

13

 

669

 

27

 

2

 

Industrial

 

460

 

19

 

9

 

455

 

18

 

1

 

Apartments

 

380

 

15

 

29

 

358

 

14

 

 

Mixed use

 

41

 

2

 

2

 

42

 

2

 

 

Hotel

 

37

 

1

 

 

51

 

2

 

 

Other

 

115

 

5

 

9

 

105

 

4

 

10

 

 

 

2,450

 

100

%

$

99

 

2,505

 

100

%

$

15

 

Less: allowance for loan losses

 

26

 

 

 

 

 

32

 

 

 

 

 

Total

 

$

2,424

 

 

 

 

 

$

2,473

 

 

 

 

 

 

Syndicated Loans

 

The Company’s syndicated loan portfolio is diversified across industries and issuers.  The primary credit indicator for syndicated loans is whether the loans are performing in accordance with the contractual terms of the syndication. Total nonperforming syndicated loans at both September 30, 2012 and December 31, 2011 were $1 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: