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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X]----------------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20052006
OR
[ ]| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO ________
COMMISSION FILE NUMBER 33-28976
IDS333-114888
RIVERSOURCE LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
organization)
829
55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:Registrant's telephone number, including area code (612) 671-3131
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SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(b) OF THE ACT:of the Act: NONE
SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(g) OF THE ACT:of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ]| | No [X]|X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ]| | No [X]|X|
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]|X| No [ ]| |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]| | Accelerated filer [ ]| | Non-accelerated filer [X]|X|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ]| | No [X]|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 March 9, 2006
----- ----------------------------CLASS OUTSTANDING AT FEBRUARY 28, 2007
- -------------------------------------- --------------------------------
Common Stock (par value $30 per share) 100,000 shares
All outstanding shares of the registrant are directly owned by Ameriprise
Financial, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
PART I PAGE
1. Business.................................................................................Business................................................................................................ 1
1A. Risk Factors............................................................................. 10Factors............................................................................................ 8
1B. Unresolved Staff Comments................................................................ 19Comments............................................................................... 16
2. Properties............................................................................... 19Properties.............................................................................................. 16
3. Legal Proceedings........................................................................ 19Proceedings....................................................................................... 16
4. Submission of Matters to a Vote of Security Holders...................................... 19Holders..................................................... 16
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities................................................ 20Securities....................................................................................... 16
6. Selected Financial Data.................................................................. 20Data................................................................................. 16
7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............................................................................ 21Operations................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk............................... 37Risk.............................................. 32
8. Financial Statements and Supplementary Data.............................................. 37Data............................................................. 32
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 38Disclosure.................... 71
9A. Controls and Procedures.................................................................. 38Procedures................................................................................. 71
9B. Other Information........................................................................ 39Information....................................................................................... 72
PART III
10. Directors and Executive Officers of the Registrant....................................... 39Registrant...................................................... 72
11. Executive Compensation................................................................... 39Compensation.................................................................................. 72
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...................................................................... 39Matters.......... 72
13. Certain Relationships and Related Transactions........................................... 39
PART IIITransactions, and Director Independence............................... 72
14. Principal AccountingAccountant Fees and Services................................................... 40Services.................................................................. 72
PART IV
15. Exhibits and Financial Statement Schedules.................................................. 41
Signatures............................................................................... 42
Index to Financial Statements............................................................ F-1Schedules.............................................................. 73
Signatures.............................................................................................. 74
Exhibit Index............................................................................Index........................................................................................... E-1
PART I
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ITEM 1. BUSINESS
INTRODUCTION
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RiverSource Life Insurance Company, formerly known as IDS Life Insurance
Company, is a stock life insurance company with fourone wholly-owned operating
subsidiaries: IDSsubsidiary, RiverSource Life Insurance CompanyCo. of New York American Partners("RiverSource Life Insurance Company, American Enterprise Life Insurance
Company and American Centurion Life Assurance Company. IDSof
NY"). RiverSource Life Insurance Company is a wholly-owned subsidiary of
Ameriprise Financial, Inc. (Ameriprise Financial)("Ameriprise Financial").
o IDSRiverSource 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. IDSRiverSource Life Insurance
Company issues insurance and annuity products.
o American Enterprise Life Insurance Company (American Enterprise
Life) is a stock life insurance company domiciled in Indiana, which
holds Certificates of Authority in the District of Columbia and all
states except New York. American Enterprise Life issues fixed and
variable annuity contracts primarily through regional and national
financial institutions and regional and/or independent
broker-dealers. (In past years, American Enterprise Life issued a
nominal number of variable universal life contracts.)
o American Partners Life Insurance Company (American Partners Life)
is a stock life insurance company domiciled in Arizona, which holds
Certificates of Authority in the District of Columbia and all
states except New York and New Hampshire. American Partners Life
markets annuity products directly to customers, generally persons
holding an American Express(R) Card.
o IDS Life Insurance Company of New York (IDSRiverSource Life of New York)NY is a stock life insurance company domiciled
in New York, which holds Certificates of Authority in New York and
North Dakota. RiverSource Life of NY issues insurance and annuity
products.
On December 31, 2006, IDS Life Insurance Company completed an Agreement and
Plan of Merger with both American Enterprise Life Insurance Company ("American
Enterprise Life") and American Partners Life Insurance Company ("American
Partners Life") whereby both companies merged with and into IDS Life Insurance
Company. As a result of the merger, American Enterprise Life and American
Partners Life ceased to exist. Prior to the merger, both companies were
wholly-owned operating subsidiaries of IDS Life Insurance Company. Immediately
following the merger, IDS Life Insurance Company changed its name to
RiverSource Life Insurance Company.
Also on December 31, 2006, American Centurion Life Assurance Company
("American Centurion Life") merged with and into IDS Life Insurance Company of
New York ("IDS Life of New York"). As a result of the merger, American
Centurion Life ceased to exist. Prior to the merger, American Centurion Life
was a wholly-owned operating subsidiary of IDS Life Insurance Company.
Immediately following the merger, IDS Life of New York issues insurance and annuity products.
o American Centurion Life Assurance Company (American Centurion Life)
is a stock life insurance company domiciled in New York, which
holds Certificates of Authority in New York, Alabama and Delaware.
American Centurion Life issues fixed and variable annuity contracts
primarily through financial institutions and independent
broker-dealers. American Centurion Life also markets annuity
products directly, generallychanged its name to
persons holding an American
Express(R) Card.
IDSRiverSource Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and
American Enterprise REO 1, LLC which hold real estate investments. IDSCo. of New York.
RiverSource Life Insurance Company and its seven subsidiariessubsidiary are referred to
collectively in this Form 10-K as "IDS"RiverSource Life".
BusinessA majority of RiverSource Life's business is sold through the retail
distribution channel of Ameriprise Financial Services, Inc., a subsidiary of
Ameriprise Financial, for IDS Life
Insurance Company and IDS LifeFinancial. RiverSource Distributors, Inc., a subsidiary of
New York represents the majority of IDS
Life's business, whereas business sold through third party distribution by
American Enterprise Life and American Centurion Life and business sold
directly to consumers by American Partners Life and American Centurion Life
represent a smaller portion of IDS Life's business. Ameriprise Financial,
Services, Inc. serves as the principal underwriter and distributor of
variable annuity and life insurance products issued by RiverSource Life.
No material effect on consolidated financial condition and results of
operations is expected for RiverSource Life as a result of the four operating subsidiaries of IDS Life. IDS Life Insurance Company serves
as distributor for the variable products it issues.
1
Prior to August 1, 2005,mergers.
Ameriprise Financial was referred to asformerly a wholly-owned subsidiary of American
Express Financial Corporation.Company ("American Express"). On February 1, 2005, the American
Express Company
(American Express)Board of Directors announced its intention to pursue the disposition
of 100% of its shareholdings in what is now Ameriprise Financial (the Separation)"Separation")
through a tax-free distribution to American Express shareholders. Effective as
of the close of business on September 30, 2005, American Express completed the
Separation and the distribution of Ameriprise Financial common shares to
American Express shareholders (the Distribution)"Distribution"). In connection with the
Distribution, Ameriprise Financial entered into certain agreements with
American Express to effect the separation of its businessSeparation and to define the responsibility for
obligations arising before and after the date of the Distribution, including,
among others, obligations relating to transition services, taxes, and
employees. IDSAmeriprise Financial has incurred $654 million of pretax
non-recurring separation costs since the Separation announcement through
December 31, 2006 and expects to incur a total of approximately $875 million.
RiverSource Life was allocated certain separation
and Distribution-related expenses incurred as a result of
Ameriprise Financial becoming an independent company. Cumulatively,RiverSource Life has
been allocated $252 million in total pretax non-recurring separation costs
since the expensesSeparation announcement through December 31, 2006 and expects to be
allocated to IDS Life area significant to IDS Life. IDSportion of the remaining separation costs in 2007.
RiverSource Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its current financial
strength ratings and to cover the allocated separation costs.
-1-
AMERIPRISE FINANCIAL'S NEW BRAND
--------------------------------
In 2005, in connection with the separation,Separation, Ameriprise Financial launched a
new brand name strategy for its businesses. In October 2005, it began
marketing products, including life insurance and annuities, under the
RiverSourceRiverSource(SM) brand. The transition of the life insurance and annuity
products to the RiverSourceRiverSource(SM) brand is expected to be completed by the endwas substantially complete as of
December 31, 2006.
As described above, Ameriprise Financial will streamlinestreamlined the organizational
structure of its life insurance business by consolidating certain of its five life
insurance subsidiaries at
year-end 2006.into two as of December 31, 2006, RiverSource Life
Insurance Company and RiverSource Life of NY. RiverSource Life of NY is a
wholly-owned subsidiary of RiverSource Life Insurance Company. This
organization will incorporatereorganization incorporated the new RiverSourceRiverSource(SM) branding strategy into the names
of Ameriprise Financial's life insurance company subsidiaries and is expected
to result in certain expense and capital-deployment efficiencies.
It is expected that the formal legal entity
consolidation and legal entity name changes with respect to the insurance
company subsidiaries will not be complete until year-end 2006 due to the
time required to obtain all necessary state regulatory approvals.
ANNUITIES: PRODUCT FEATURES AND RISKS
-------------------------------------
IDSRiverSource Life offers both fixed and variable deferred annuity products to a
broad range of consumers through multiple distribution channels. VariableFixed and
fixedvariable deferred annuities issued by IDS Life may be deferred,are products where assets accumulate until the
contract is surrendered, the contract ownercontractholder (or in some contracts, the
annuitant) dies, or the contract ownercontractholder or annuitant begins receiving benefits
under an annuity payout option; oroption. RiverSource Life also offers immediate
whereannuities in which payments begin within one year of issue and continue for
life or for a fixed period of time.
IDSRiverSource Life is one of the largest issuers of annuities in the United
States. For the year ended December 31, 2005,2006, on a consolidated basis, ourits
variable annuity products ranked 11theighth in new sales of variable annuities
according to VARDS. IDSVARDS(R). RiverSource Life had fixed and variable annuity cash
sales in 20052006 of $7.6$12.9 billion, up from 2004 as a result of a 41% increase$9.3 billion in variable2005. Variable
annuities cash sales increased 46%, partially offset by a 13% decrease in cash
sales of fixed annuities. The relative proportion between fixed and variable
annuity sales is generally driven by the relative performance of the equity
and fixed income markets. In times of lackluster performance in equity
markets, fixed sales are generally stronger. In times of superior performance
in equity markets, variable sales are generally stronger. The relative
proportion between fixed and variable annuity sales is also influenced by
product design and other factors.
IDSRiverSource Life receives fees charged on assets allocated to its separate
accounts. Investment management performance is also critical to the
profitability of the annuity business.
2
VARIABLE ANNUITIES
A variable annuity provides a contract owner with investment returns linked to
the underlying investment optionsaccounts of the contract owner's choice. Most variable
annuity products in force offer a fixed account investment option with
guaranteed minimum interest crediting rates ranging up to 4.0% as of December
31, 2005.2006.
Contract purchasers can choose to add various optional benefit provisions to
their contracts to meet their needs. These include enhanced guaranteed minimum
death benefit (GMDB)("GMDB"), guaranteed minimum withdrawal benefit (GMWB)("GMWB"),
guaranteed minimum income benefit (GMIB)("GMIB") and guaranteed minimum accumulation
benefit (GMAB)("GMAB") provisions. In general, these provisions can help protect
contract owners and beneficiaries from a shortfall in death or living benefits
due to a decline in the value of their underlying investment accounts.
Innovative features forThe majority of the variable annuity products have continued to evolve. These
features include GMDBs. Undercontracts RiverSource Life offers contain
GMDB provisions. RiverSource Life's largest-selling variable annuities are the
RiverSource Retirement Advisor Plus(SM) series of variable annuities, which
include the RiverSource Retirement Advisor Advantage Plus(SM) Variable Annuity
and the RiverSource Retirement Advisor Select Plus(SM) Variable Annuity (the
"Retirement Advisor Plus(SM) Variable Annuities"). Under the Retirement
Advisor Plus(SM) Variable Annuities, the standard GMDB provides that if the
contract owner is age 75 or younger on the date the contract is issued, the
beneficiary will receive the greater of (i) contract value less any purchase
payment credits subject to recapture less a pro-rata portion of any rider
fees, or (ii) purchase payments minus adjusted partial surrenders. If the
contract owner is age 76 or older at contract issue, the beneficiary will
receive the contract value, less any purchase payment credits subject to
recapture and less a pro-rata portion of any rider fees.
Additional optional GMDBs are also available. For example, RiverSource
Retirement Advisor Advantage Plus(SM) Variable Annuity contract owners age 76 or
older at contract issue may purchase the optional Return of Purchase Payment
Death Benefit for an additional charge which adds the return of purchase
payments less adjusted partial surrenders to the standard death benefit.
-2-
Contract owners may also purchase a maximum anniversary value death benefit or
a five-year maximum anniversary value death benefit for an additional charge.
These death benefit riders guarantee to pay the beneficiary the maximum
account value on any contract anniversary or any fifth contract anniversary,
plus subsequent purchase payments less adjusted partial surrenders.
IDSRiverSource Life's contract owners also may purchase an enhanced earnings
death benefit or an enhanced earnings plus death benefit for an additional
charge. These death benefit riders are intended to provide additional benefits
to offset expenses after the contract owner's death.
InnovativeAvailable features for annuity products also include the GMWB and GMWB for
life. The GMWB is designed to protect the contract owner's principal by
allowing the client to withdraw the principal over a period of time,
regardless of the investment performance of the contract. The GMWB for life is
an enhanced benefit that also allows periodic withdrawals for the life of the
policyholder, regardless of the investment performance of the contract.
Variable annuity contract owners age 79 or younger at contract issue can also obtain thea lump sum principal-back
guarantee by purchasing the optional GMAB rider for an additional charge, whichcharge. The
GMAB provides a guaranteed contract value at the end of a ten-year waiting
period. The guaranteed value is the total
amount of purchase payments made minus any withdrawals,period regardless of the investment performance of the contract. American Enterprise Life and other subsidiariesThe guarantee
is equal to the greater of IDS Life also offer
variable annuities with a varietythe total amount of GMDB features and certain optional
"living" benefits, i.e. GMWB, GMIB and GMAB. For example, American
Enterprise Life issues certainpurchase payments made or 80%
of the highest anniversary value, adjusted for any withdrawals.
Certain variable annuity contracts that contain a GMIB feature which, if elected by
the contract owner and after a stipulated waiting period from contract
issuance, guarantees a minimum lifetime annuity based on predetermined annuity
purchase rates that may be in excess of what the contract account value can
purchase at then-current annuity purchase rates. American EnterpriseRiverSource Life bears the
risk that protracted under-performance of the financial markets could result
in GMIB being higher than what accumulated contract owner account balances
would support.
3
RiverSource Life earns fee-based revenue in the form of mortality and expense
risk charges and fees charged for optional features elected by the contract
owner and the other contract charges.
The general account assets of IDSRiverSource Life support the contractual
obligations under the guaranteed benefit riders IDSRiverSource Life issues (see
"General and Variable Account Assets--TheAssets-The General Account" below). As a
result, IDSRiverSource Life bears the risk that protracted under-performance of
the financial markets could result in guaranteed benefit payments being higher
than what current account values would support. IDSRiverSource Life's exposure to
risk from guaranteed benefits generally will increase when equity markets
decline.
IDS Life's largest-selling variable annuities are the RiverSource Retirement
Advisor Plus(SM) series of variable annuities, which include the RiverSource
Retirement Advisor Advantage Plus(SM) Variable Annuity and the RiverSource
Retirement Advisor Select Plus(SM) Variable Annuity (the Retirement Advisor
Plus(SM) Variable Annuities).
FIXED ANNUITIES
IDSRiverSource Life's fixed annuity products provide a contract owner with a cash
value that increases by a fixed or indexed interest rate. Fixed rates are
periodically reset at the discretion of IDSRiverSource Life, subject to certain
policy terms establishing minimum guaranteed interest crediting rates.
IDSRiverSource Life's earnings from fixed annuities are based upon the spread
between rates earned on assets purchased with fixed annuity deposits and the
rates at which interest is credited to its fixed annuity contracts.
IDSRiverSource Life resets interest rates based on a number of factors, including
interest rate scenario models and risk/return measures. The fixed annuity
contracts in force provide guaranteed minimum interest crediting rates ranging
from 1.5% to 5.0% as of December 31, 2005.2006. In 2003, and in response to a
declining interest rate environment, several states adopted an interim
regulation allowing for a guaranteed minimum interest crediting rate of 1.5%
and/or a model regulation providing for a guaranteed indexed rate and have now
adopted regulations that mirror the National Association of Insurance
Commissioners (NAIC)("NAIC") model regulation for a guaranteed index rate. In
response, IDSRiverSource Life filed a number of contract changes in recent years
to implement lower minimum guarantees. IDSRiverSource Life will continue to
implement contract changes as states continue to adopt the new model
regulation or as the interim regulation expires according to its terms.
INSURANCE: PRODUCT FEATURES AND RISKS
-------------------------------------
IDSRiverSource Life issues both variable and fixed universal life insurance,
traditional life insurance including whole life and term life and disability
income ("DI") insurance. (RiverSource Life discontinued underwriting new long
term care ("LTC") policies as of December 31, 2002). Universal life insurance
is a wide rangeform of permanent life insurance products, each described below.
IDScharacterized by its flexible premiums,
its flexible death benefit amounts and its unbundling of the pricing factors
(i.e., mortality, interest and expenses). Traditional life insurance refers to
whole and term life insurance policies that pay a specified sum to a
beneficiary upon death of the insured for a fixed premium. Variable universal
life insurance combines the premium and death benefit flexibility of universal
life with underlying fund investment flexibility and the risks associated
therewith.
-3-
RiverSource Life's sales of individual life insurance in 2005,2006, as measured by
scheduled annual premiums, excluding lump sum and excess premiums, consisted
of 89%82% variable universal life, 2%9% fixed universal life and 9% traditional
life. IDSRiverSource Life issues only non-participating life insurance policies,
which do not pay dividends to policyholders from the insurers' earnings. One
of the major risks inherent in life insurance is the risk that mortality will
be greater than anticipated. As discussed below, reinsurance is critical for
IDSRiverSource Life to mitigate this risk.
VARIABLE UNIVERSAL LIFE INSURANCE
IDSRiverSource Life's best-selling life insurance products are variable universal
life insurance policies. Variable universal life insurance provides life
insurance coverage along with investment returns linked to underlying
investment accounts of the policyholder's choice. Options may include Ameriprise Financial'sRiverSource
Variable Portfolio Funds as well as funds of other companies. Variable
universal life insurance products in force offered a fixed account investment
option with guaranteed minimum interest crediting rates ranging from 3.0% to
4.5% as of December 31, 2005. For the year
ended December 31, 2005, IDS2006. RiverSource Life Insurance Company ranked first
in sales of variable universal life based on total premiums (according to the
Tillinghast Towers-Perrin Value(TM) Survey)Survey, dated September 30, 2006, the most
recent report available). IDSRiverSource Life's major source of revenue from
variable universal life insurance is cost of insurance and other charges.
4
IDS Life's variable life insurance products include RiverSource(SM) Variable
Universal Life IV and RiverSource(SM) Variable Universal Life IV - Estate
Series, which are individual flexible premium life insurance policies. The
Estate Series policy is available to policyholders with initial specified
insurance coverage of $1 million or more. IDS Life also issues RiverSource(SM)
Succession Select Variable Life Insurance (Succession Select), a flexible
premium survivorship variable life insurance policy that insures two lives.
Succession Select is often used for estate planning purposes. Finally, IDS
Life issues RiverSource(SM) Single Premium Variable Life, an individual single
premium variable life insurance policy.
FIXED UNIVERSAL LIFE INSURANCE AND TRADITIONAL WHOLE LIFE INSURANCE
Fixed universal life and traditional whole life insurance policies do not
subject the policyholder to the investment risks associated with variable
universal life insurance.
IDSRiverSource Life's fixed universal life insurance products provide life
insurance coverage and cash value that increases by a fixed interest rate. The
rate is periodically reset at the discretion of the issuing companyRiverSource Life subject to
certain policy terms relative to minimum interest crediting rates. Universal
life insurance products in force provided guaranteed minimum interest
crediting rates ranging from 4.0%3.0% to 5.0% as of December 31, 2005.
IDS Life's universal life insurance products as of December 31, 2005
included Life Protection Plus, Life Protection Select and Life Protection
Select-Estate Series. The Estate Series policy is available to policyholders
with initial specified insurance coverage of $1 million or more. In January
2006, IDS Life introduced two new universal life products,2006.
RiverSource
Foundations(SM) Universal Life and RiverSource Foundations Protector(SM)
Universal Life. Both products are also available to policyholders as an
estate series when the initial specified insurance coverage is $1 million or
more. The guaranteed minimum interest crediting rate is 3.0%.
IDS Life also offers non-participating traditional whole life
insurance, which combines a death benefit with a cash value that generally
increases gradually in amount over a period of years and does not pay a
dividend. IDSRiverSource Life has sold very little traditional whole life
insurance in recent years.
TERM LIFE INSURANCE
IDSRiverSource Life also offers term life insurance. Term life insurance only
provides a death benefit, does not build up cash value and does not pay a
dividend. The policyholder chooses the term of coverage with guaranteed
premiums at the time of issue. During the chosen term, IDSRiverSource Life cannot
raise premium rates even if claims experience were to deteriorate. At the end
of the chosen term, coverage may continue with higher premiums until the
maximum age is attained, at which point the policy expires with no value.
DISABILITY INCOME INSURANCE
IDSRiverSource Life also issues disability income (DI)DI insurance. For the nine months ended September
30, 2005, IDS2006, RiverSource Life was ranked as the eighthseventh largest provider of
individual (non-cancelable) DI insurance based on premiums (according to LIMRA
International)International(R)). DI insurance provides monthly benefits to individuals who
are unable to earn income at either their occupation at time of disability
("own occupation") or at any suitable occupation ("any occupation"). for
premium payments that are guaranteed not to change. Depending upon
occupational and medical underwriting criteria, applicants for DI insurance
can choose "own occupation" and "any occupation" coverage for varying benefit
periods up to age 65. In some states, applicants may also choose various
benefit riders to help them integrate individual DI insurance benefits with
social security or similar benefit plans and to help them protect their DI
insurance benefits from the risk of inflation.
LONG-TERMLONG TERM CARE INSURANCE
As of December 31, 2002, IDSRiverSource Life generally discontinued underwriting long-term care (LTC)LTC
insurance. Although new product sales were discontinued in the fourth quarter
of 2002, IDSRiverSource Life retained 50% of the risk on existing contracts and
ceded the remaining 50% of the risk was ceded on a coinsurance basis to General Electric
Capital Assurance Company (GECA), oneaffiliates
of the Genworth Financial, insurance
companies.Inc. ("Genworth"). In addition, in May 2003,
IDSRiverSource Life began outsourcing claims administration on its existing block
of LTC policies to GECA.
5
Genworth.
Beginning in 2004, IDSRiverSource Life filed for approval to implement rate
increases on its existing block of nursing home-only indemnity LTC insurance
policies. Implementation of these rate increases began in early 2005, and
approvals have been received in over 4547 states, covering over 83%86% of the eligible
premiums, with an average approved rate increase of 32.1%33.2%. Implementation of
rate increases is expected to continue through 2006.in 2007 and may be sought with respect
to other existing blocks of long term care insurance policies, in each case
subject to regulatory approval.
-4-
GENERAL AND VARIABLE ACCOUNT ASSETS
-----------------------------------
Depending on the life insurance and annuity product purchased, the assets of
IDSRiverSource Life's policyholders and contractholders may be placed in the
general account of IDSRiverSource Life (the general account)"general account") for fixed products
and for the fixed account options under certain variable products or, in the
case of variable life insurance and variable annuity products, in separate
accounts that invest in underlying investment options (the variable account)"variable
account").
THE GENERAL ACCOUNT
Assets in the general account support all obligations of IDSRiverSource Life
other than those supported by the separate accounts. IDSRiverSource Life bears
the investment risk of the general account assets.
In the general account, IDSRiverSource Life, through its investment manager,
RiverSource Investments, LLC, primarily invests in fixed maturity securities
over a broad range of maturities for the purpose of providing a targeted rate
of return on its investments while controlling risk. The majority of these
fixed maturity securities are interest-bearing investments such as government
obligations, mortgage-backed obligations and various corporate debt
instruments. IDSRiverSource Life does not invest in securities to generate
trading profits.
In accordance with regulatory investment guidelines, IDSRiverSource Life
Insurance Company and its subsidiaries,RiverSource Life of NY, through their respective boards
of directors or board of directors' investment committees or staff functions,
review models projecting different interest rate scenarios, risk/return
measures, and their effect on profitability.profitability in order to guide the management
of the general account assets. They also review the distribution of assets in
the portfolio by type and credit risk sector. The objective is to structure
the investment securities portfolio in the general account to meet contractual
obligations under the insurance and annuity products and achieve targeted
levels of profitability within defined risk parameters.
IDSRiverSource Life has the discretion to set the rate of interest credited to
contract owners' accounts subject to each contract's guaranteed minimum
interest crediting rate. As of December 31, 2005,2006, this rate varied among fixed
accounts and was as low as 1.5% and as high as 6.9%7.4%. To the extent the yield
on IDSRiverSource Life's invested general account asset portfolio declines below
its target spread plus the minimum guarantee, IDSRiverSource Life's profitability
would be negatively affected.
The interest rates credited to contract owners' fixed accounts generally reset
towards new business rates; therefore, margins may be negatively impacted by
increases in the general level of interest rates. Part of IDSRiverSource Life's
strategy includes the use of derivatives, such as interest rate swaptions, for
risk management purposes. These derivatives help protect margins by increasing
investment returns if there is a sudden and severe rise in interest rates,
thereby lessening the impact of an increase in rates credited to contract
owners' fixed accounts. Conversely, in a low interest rate environment,
such as that experienced recently, margins may be negatively impacted as the interest rates available on
IDSRiverSource Life's invested assets approach guaranteed minimum interest rates
on the insurance or annuity contracts in force. This negative impact may be
compounded by the fact that many of these interest-bearing investments are
callable or pre-payable by the issuer and calls and prepayments are more
likely to occur in a low interest rate environment.
In light of the interest rate
environment in 2003, when interest rates were at relative lows, IDS Life
imposed a fixed account allocation and transfer requirement for new variable
annuity sales in 2003. These requirements were relaxed slightly beginning in
2004 with the introduction of lower guaranteed minimum interest rates.
6
THE VARIABLE ACCOUNTSACCOUNT
Variable insuranceannuity and annuityinsurance products offer variable account investment
options. In addition, many of these products offer fixed account options.
Under the variable account option, contract owners bear the investment risk.
The variable accounts are registered as unit investment trusts under the
Investment Company Act of 1940. State insurance law prescribes that variable
accounts constitute a separate operation from the general account and as such
are only available to fund the liabilities of the separate accounts. Under the
subaccounts of each variable account, IDSRiverSource Life credits or charges
income, capital gains and losses only to that subaccount.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate
their payments among these variable subaccounts. The underlying funds are
managed both by affiliated and unaffiliated third-party money managers. These
funds invest in portfolios containing a variety of securities including common
stocks, bonds, managed assets and/or short-term securities. The value of the
subaccounts fluctuates with the investment return of the underlying funds in
which the subaccounts invest.
IDSRiverSource Life's major source of revenue from the variable annuities it
issues is the fees it receives includingunder the terms of the variable annuity
contracts. These fees include, for example, mortality and expense risk
charges, administrative charges and other fees includingfor optional benefit riders and
surrender or withdrawal charges. In addition, RiverSource Life receives
payments from its affiliate, RiverSource Investments, LLC, for providing
certain sponsor and related servicing activity. In addition, IDS
Life also receives marketing and administrative support payments fromactivity for the affiliates of other companies' funds includedRiverSource Variable
Portfolio Funds which are available as investment options in itsunder the variable
annuity and variable life insurance products. These fees vary based
on the level of variable account assets. Prior to the fourth quarter of 2003, these fees included investment advisory fees as IDS Life served as2005,
Ameriprise Financial was the investment manager for affiliated variable portfolio mutual funds. In the fourth quarter of 2003, Ameriprise Financial replaced IDS Life as the
investment manager and assumed these duties for the mutual funds and
retained IDS Life to provide certain underlying sponsor and related
services. At that time, IDS Life began receiving internal allocation
payments from Ameriprise Financial as compensation for providing these
non-investment advisory services.RiverSource Variable
Portfolio Funds.
-5-
In the fourth quarter of 2005, RiverSource Investments, LLC replaced
Ameriprise Financial as the investment manager. As a result, IDSRiverSource Life
now receives internal allocation payments as compensation from RiverSource
Investments, LLC for providing these non-investment advisory services.services to the
RiverSource Variable Portfolio Funds.
In addition to the revenues described above, RiverSource Life receives
shareholder servicing payments from other companies' funds included as
investment options under its variable annuity and life insurance products. It
also receives marketing and administrative support payments from the
affiliates of other companies' funds which are included as investment options
in its variable annuity and life insurance products. These fees are generally
based on the level of variable account assets held in a particular fund and
accordingly will vary based on market conditions.
COMPETITION
-----------
IDSRiverSource Life competes with other insurers and product manufacturers
including insurance companies, such as Hartford, Metlife,MetLife, Lincoln National and
Nationwide, as well as certain banks, securities brokerage firms, independent
financial advisors and other financial intermediaries that market insurance,
annuities, mutual funds, retirement accounts and other financial products.
Competitive factors affecting the sale of IDSRiverSource Life's insuranceannuity and/or
annuityinsurance products include:
o financial strength ratings from agencies such as A.M. Best;
o the breadth, quality, design and pricing of products and services
offered;
o guaranteed benefit features;
o the quality of underwriting;
o the effectiveness of advertising and promotion campaigns;
o reputation and recognition in the marketplace;
o distribution capabilities and compensation; and
o the quality of customer service.
7
REGULATION
----------
The Minnesota Department of Commerce (Insurance Division), the Indiana
Department ofregulates RiverSource Life Insurance
Company, and the Arizona Department of Insurance
(collectively, and with the New York State Insurance Department (together with the
Minnesota Department of Commerce, the "Domiciliary Regulators") regulate IDS Life Insurance Company, American
Enterprise Life and American Partners Life, respectively. The New York State
Insurance Department regulates
American Centurion Life and IDSRiverSource Life of New
York.NY.
In addition to being regulated by their Domiciliary Regulators, IDSRiverSource
Life Insurance Company and its four life insurance subsidiariesRiverSource Life of NY are regulated by each of the
insurance regulators in the states where each is authorized to transact the
business of insurance. The otherOther states also regulate such matters as the
licensing of sales personnel and, in some cases, the marketing and contents of
insurance policies and annuity contracts. The primary purpose of such
regulation and supervision is to protect the interests of contractholders and
policyholders. Financial regulation of IDSRiverSource Life is extensive and its
financial and intercompany transactions (such as intercompany dividends,
capital contributions and investment activity) are often subject to
pre-notification and continuing evaluation by the Domiciliary Regulators.
Virtually all states require participation in insurance guaranty associations
which assess fees to insurance companies in order to fund claims of
policyholders and contractholders of insolvent insurance companies.
Because RiverSource Life issues variable annuity and life insurance products
required to be registered under federal and state securities laws, many
aspects of its business are subject to extensive regulation and examination by
the Securities and Exchange Commission, the National Association of Securities
Dealers and other federal and state regulatory bodies.
Insurance companies have recently been the subject of increasing regulatory,
legislative and judicial scrutiny. Numerous state and federal regulatory
agencies have commenced investigations regarding sales and marketing
practices, compensation arrangements and anticompetitive activities, and
market timing and late trading in connection with insurance, annuity and
mutual fund products. IDSRiverSource Life has been contacted by regulatory
agencies for information relating to some of these investigations and is
cooperating with those inquiries. IDSRiverSource Life has reviewed its
compensation arrangements and other operations that may be affected by these
regulatory investigations. In addition, IDSRiverSource Life is reviewing the
legal precedents and new industry-wide legislation, rules and regulations that
may arise from ongoing investigations.
-6-
At the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities and life insurance policies, accounting procedures, and the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance policy. Adoption of any new
federal regulation in any of these areas or other areas could potentially have
an adverse effect upon IDSRiverSource Life. Also, recent federal legislative
proposals aimed at the promotion of tax-advantaged savings may adversely
impact IDSRiverSource Life's sales of annuity and life insurance products if
enacted.
FINANCIAL STRENGTH RATINGS
--------------------------
IDSRiverSource Life Insurance Company receives ratings from independent rating
agencies. Ratings are important to maintaining public confidence in
IDSRiverSource Life. Lowering of IDSRiverSource Life's ratings could have a material
adverse effect on its ability to market its products and could lead to
increased surrenders. Rating agencies continually evaluate the financial
soundness and claims-paying ability of insurance companies based on a number
of different factors.
More specifically, the ratings assigned are developed from an evaluation of a
company's balance sheet strength, operating performance and business profile.
Balance sheet strength reflects a company's ability to meet its current and
ongoing obligations to its policyholders and includes analysis of a company's
capital adequacy. The evaluation of operating performance centers on the
stability and sustainability of a company's source of earnings. The analysis
of a business profile reviews a company's mix of business, market position and
depth and experience of management. The ratings relate to an insurer's general
account and not to the management or performance of the variable accounts.
8
Generally, IDS Life Insurance Company's four insurance subsidiaries do not
receive an individual rating, but receive the same rating as IDS Life
Insurance Company. IDSRiverSource Life Insurance Company is currently rated "A+" (Superior) by A.M.
Best Company, Inc. and its claims-paying ability/financial strength was rated
"Aa3" (Excellent) by Moody's Investors Service, Inc. (Moody's), "AA-" (Very
Strong) by Fitch, and "AA-" (Very Strong) by Standard & Poor's. RiverSource
Life of NY does not receive an individual rating, but receives the same rating
as RiverSource Life Insurance Company.
REINSURANCE
-----------
IDSRiverSource Life reinsures a portion of the insurance risks associated with its life and
LTC insurance products through reinsurance agreements with unaffiliated
insurance companies. Reinsurance is used in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. IDSTo minimize exposure to significant losses
from reinsurer insolvencies, RiverSource Life evaluates the financial
condition of its reinsurers prior to manage exposure to significant losses from
reinsurer insolvencies. IDSentering into new reinsurance treaties
and on a periodic basis during the terms of the treaties. RiverSource Life
remains primarily liable as the direct insurer on all risks reinsured.
Generally, IDSRiverSource Life reinsures 90% of the death benefit liability
related to individual fixed and variable universal life and term life
insurance products. IDSAs a result, RiverSource Life retains and is at risk for,
at most, 10% of each policy's death benefit from the first dollar of coverage
for new sales of these policies subject to the reinsurer actually paying.
RiverSource Life began reinsuring risks at this level beginning in 2001 for
term life insurance and 2002 for variable and universal life insurance.
Policies issued prior to these dates are not subject to these same reinsurance
levels. The maximum amount of life insurance risk retained by IDSRiverSource Life
is $750,000 on any policy insuring a single life and $1.5 million on any
flexible premium survivorship variable life policy. For existing LTC policies,
IDSRiverSource Life retained 50% of the risk and the remaining 50% of the risk
was ceded on a coinsurance basis to GECA.affiliates of Genworth Financial, Inc.
Risk on variable life and universal life policies is reinsured on a yearly
renewable term basis. RiskStarting in 2001, risk on recentmost term life and LTC policies is
reinsured on a coinsurance basis.
IDSRiverSource Life retains all risk for new claims on DI contracts. Risk is
currently managed by limiting the amount of disability insurance written on
any one individual. IDSRiverSource Life also retains all risk on accidental death
benefit and almost all waiver of premium risk.
RISK-BASED CAPITAL
------------------
The NAIC defines Risk-Based Capital (RBC)("RBC") requirements for life insurance
companies. The RBC requirements are used by the NAIC and state insurance
regulators to identify companies that merit regulatory action designed to
protect policyholders. The NAIC RBC report is completed as of December 31 and
filed annually, along with the statutory financial statements.
IDSRiverSource Life Insurance Company would be subject to various levels of
regulatory intervention if its total adjusted statutory capital were to fall
below the RBC requirement. At the "company action level," defined as total
adjusted capital level between 100% and 75% of the RBC requirement, an insurer
must submit a plan for corrective action with its primary state regulator.
-7-
The "regulatory action level," which is between 75% and 50% of the RBC
requirement, subjects an insurer to examination, analysis and specific
corrective action prescribed by the primary state regulator. If a company's
total adjusted capital falls between 50% and 35% of its RBC requirement,
referred to as "authorized control level," the insurer's primary state
regulator may place the insurer under regulatory control. Insurers with total
adjusted capital below 35% of the requirement will be placed under regulatory
control.
At December 31, 2005, IDS2006, RiverSource Life Insurance Company's company action
level RBC was $751.0$590 million, and the corresponding total adjusted capital was
approximately $3.3$3.5 billion, which represents 435%595% of the company action level RBC.
As described above, IDSRiverSource Life Insurance Company maintains capital well
in excess of the company action level required by the Minnesota Department of
Commerce, its primary regulator.
9
ITEM 1A. RISK FACTORS
If any of the following risks and uncertainties develops into actual events,
these events could have a material adverse effect on IDSRiverSource Life's
business, financial condition or results of operations. Based on current
information, the following information identifies the most significant risk
factors affecting IDSRiverSource Life in each of these categories of risk.
However, the risks and uncertainties IDSRiverSource Life faces are not limited to
those described below. Additional risks and uncertainties which are not
presently known or which are currently believed to be immaterial may also
adversely affect IDSRiverSource Life's business.
RISKS RELATING TO IDSRIVERSOURCE LIFE'S BUSINESS
----------------------------------------------------------------------------------
RIVERSOURCE LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY INTEREST
RATE FLUCTUATIONS COULD ADVERSELY AFFECT IDS LIFE'S BUSINESS AND PROFITABILITY.
IDSBY ECONOMIC AND OTHER FACTORS.
RiverSource Life's financial condition and results of operations may be
materially affected by economic and other factors. Many such factors of a
global or localized nature include: political, economic and market conditions;
technological changes and events; inflation; investor sentiment and confidence
in the financial markets; terrorism events and armed conflicts; and natural
disasters such as weather catastrophes and widespread health emergencies. In
addition, during periods of unfavorable market or economic conditions, the
level of consumer investing and insuring activity may also decrease, which may
negatively impact the results of RiverSource Life's businesses. Moreover,
fluctuations in economic and market activity could impact the way
then-existing customers allocate their available resources, which could affect
RiverSource Life's persistency, surrender and product cash value loan
experience and could negatively impact its business.
RiverSource Life's insurance and annuity products are sensitive to interest
rate fluctuations, and its future costs associated with such variations may
differ from its historical costs. In addition, interest rate fluctuations
could result in fluctuations in the valuation of certain minimum guaranteed
benefits contained in some of its variable annuity products.
During periods of increasing market interest rates, IDSRiverSource Life must
offer higher crediting rates on interest-sensitive products, such as fixed
universal life insurance and fixed annuities, and it must increase crediting
rates on insurance and annuity products to keep these products competitive.
Because returns on invested assets may not increase as quickly as current
interest rates, IDSRiverSource Life may have to accept a lower "spread," or the
difference between the returns it earns on the investments that support its
obligations under these products and the amounts that it must pay
policyholders and contractholders, and thus lower profitability or face a
decline in sales and greater loss of existing contracts and related assets. In
addition, increases in market interest rates may cause increased policy
surrenders, withdrawals from life insurance policies and annuity contracts and
requests for policy loans, as policyholders and contractholders seek to shift
assets to products with perceived higher returns. This process may lead to an
earlier than expected flow of cash out of the business. Also, increases in
market interest rates may result in extension of the maturity of some of
IDSRiverSource Life's investment assets. These earlier outflows and asset
maturity extensions may require investment assets to be sold at a time when
the prices of those assets are lower because of the increase in market
interest rates, which may result in realized investment losses. Increases in
crediting rates, as well as surrenders and withdrawals, could have an adverse
effect on IDSRiverSource Life's financial condition and results of operations. An
increase in policy surrenders and withdrawals also may require IDSRiverSource
Life to accelerate amortization of deferred policy acquisition costs (DAC)("DAC"), which
would increase its expenses and reduce its net earnings.
During periods of falling interest rates, IDSRiverSource Life's spread"spread" or the
difference between the returns it earns on the investments that support its
obligations under these products and the amounts that it must pay
policyholders and contractholders, may be reduced.
Because IDS Life may adjust the interest rates it credits on most of these
products downward only at limited, pre-established intervals, andreduced or could become negative,
primarily because some of themthese products have guaranteed minimum crediting
rates, its spreads could
decrease and potentially become negative.rates.
-8-
Interest rate fluctuations also could have an adverse effect on the results of
IDSRiverSource Life's investment portfolio. During periods of declining market
interest rates, the interest IDSRiverSource Life receives on variable interest
rate investments decreases. In addition, during those periods, IDSRiverSource
Life is forced to reinvest the cash it receives as interest or return of
principal on its investments in lower-yielding high-grade instruments or in
lower-credit instruments to maintain comparable returns. Issuers of fixed
income securities also may decide to prepay their obligations in order to
borrow at lower market rates, which exacerbates the risk that IDSRiverSource Life
may have to invest the cash proceeds of these securities in lower-yielding or
lower-credit instruments.
For additional information regarding the sensitivity of the fixed income
securities in IDSRiverSource Life's investment portfolio to interest rate
fluctuations, see "Management's"Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-- RiskOperations-Risk Management."
10
POOR INVESTMENT PERFORMANCE IN IDSRIVERSOURCE LIFE'S PRODUCTS COULD ADVERSELY
AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
IDSRiverSource Life believes that investment performance is an important factor
in the growth of its variable annuity and variable life insurance business.
Poor investment performance could impair revenues and earnings, as well as
IDSRiverSource Life's prospects for growth, because:
o sales of variable products might decrease;
o existing clients might withdraw assets from IDSRiverSource Life's
variable products in favor of better performing products of other
companies, which would result in lower revenues; and
o IDSRiverSource Life's ability to attract funds from existing and new
clients might diminish.
A DOWNGRADE OR A POTENTIAL DOWNGRADE IN IDSRIVERSOURCE LIFE'S FINANCIAL STRENGTH
RATINGS COULD RESULT IN A LOSS OF BUSINESS AND ADVERSELY AFFECT ITS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Financial strength ratings, which various ratings organizations publish as a
measure of an insurance company's ability to meet contractholder and
policyholder obligations, are important to maintaining public confidence in
IDSRiverSource Life's products, the ability to market its products and its
competitive position. Any downgrade in IDSRiverSource Life's financial strength
ratings, or the announced potential for a downgrade, could have a significant
adverse effect on its financial condition and results of operations in many
ways, including:
o reducing new sales of insurance and annuity products;
o adversely affecting IDSRiverSource Life's relationships with
distributors of its products;
o materially increasing the number or amount of policy surrenders and
withdrawals by contractholders and policyholders;
o requiring IDSRiverSource Life to reduce prices for many of its products
to remain competitive; and
o adversely affecting IDSRiverSource Life's ability to obtain reinsurance
or obtain reasonable pricing on reinsurance.
IF IDS LIFE IS UNABLE TO EFFECTIVELY MANAGEINTENSE COMPETITION AND THE ECONOMICS OF CHANGES IN ITSRIVERSOURCE LIFE'S PRODUCT
DISTRIBUTIONREVENUE MIX AND DISTRIBUTION CHANNELS COULD NEGATIVELY AFFECT RIVERSOURCE
LIFE'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE AND OTHER TRENDS
ADVERSELY AFFECTING SALES OF ITS PRODUCTS, ITS RESULTS OF OPERATIONS COULD
BE ADVERSELY AFFECTED.PROFITABILITY.
RiverSource Life operates in an intensely competitive industry. RiverSource
Life competes based on a number of factors including name recognition,
service, product performance and features, price, perceived financial
strength, and claims-paying ratings. RiverSource Life's competitors include
insurers and other financial institutions. RiverSource Life may face
competitors that have greater market share, offer a broader range of products,
have greater financial resources or offer higher claims-paying ratings than
RiverSource Life does.
Currently, Ameriprise Financial's branded advisor network distributes annuity
and insurance products issued almost exclusively by IDSRiverSource Life. If
Ameriprise Financial's branded advisor network opened or expanded its
distribution network is opened toof annuity and insurance products of other companies, IDSRiverSource
Life cannot assure
that there would not becould experience lower sales of its products or other developments, which
could have a material adverse effect on itsRiverSource Life's financial condition
and results of operations.
-9-
DOWNTURNS AND VOLATILITY IN EQUITY MARKETS COULD ADVERSELY AFFECT IDSRIVERSOURCE
LIFE'S BUSINESS AND PROFITABILITY.
Significant downturns and volatility in equity markets could have an adverse
effect on IDSRiverSource Life's financial condition and results of operations.
Market downturns and volatility may cause potential new purchasers to refrain
from purchasing IDSRiverSource Life's variable annuities and variable universal
life insurance products that have returns linked to the performance of the
equity markets. Downturns may also cause contractholders in annuity products
and policyholders in insurance products to withdraw cash values from those
products.
11
Additionally, downturns and volatility in equity markets can have an adverse
effect on IDSRiverSource Life's revenues because the value of investments under
management will be reduced. Some of its variable annuity products contain
GMDB, GMWB, GMIB and GMAB riders. A significant market decline could result in
guaranteed minimum benefits being higher than what current account values
would support, which could have an adverse effect on IDSRiverSource Life's
financial condition and results of operations. Although RiverSource Life has
hedged a portion of the guarantees for the variable annuity contracts in order
to mitigate the financial risk of an equity market decline, there can be no
assurance that such a decline would not materially impact the profitability of
certain products or product lines.
For additional information regarding the sensitivity of IDSRiverSource Life's
business results to equity market fluctuations, see "Management's"Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations--RiskOperations-Risk
Management."
DEFAULTS IN IDSRIVERSOURCE LIFE'S FIXED INCOME SECURITIES PORTFOLIO WOULD
ADVERSELY AFFECT ITS EARNINGS.
Issuers of the fixed income securities that IDSRiverSource Life owns may default
on principal and interest payments. At both December 31, 2006 and 2005, and 2004, 7% and 8%,
respectively, of
IDSRiverSource Life's investment portfolio had ratings below investment grade.
Moreover, economic downturns and corporate malfeasance can increase the number
of companies, including those with investment grade ratings that default on
their debt obligations, as occurred in 2001 and
2002.obligations. As of December 31, 2005, IDS2006, RiverSource Life had fixed
income securities in or near default (where the issuer had missed payment of
principal or interest or entered bankruptcy) with a fair value of $52.8$33 million.
Default-related declines in the value of IDSRiverSource Life's fixed income
securities portfolio could cause its net earnings to decline and could weaken
its capital position.
SOME OF IDSRIVERSOURCE LIFE'S INVESTMENTS ARE RELATIVELY ILLIQUID.
IDSRiverSource Life invests a portion of its owned assets in certain privately
placed fixed income securities, mortgage loans, policy loans, and
real estate,collateralized debt obligations, among others, all of which are relatively
illiquid. These asset classes represented approximately 16.8%15.8% of the carrying value of
IDSRiverSource Life's investment portfolio as of December 31, 2005.2006. If
IDSRiverSource Life requires significant amounts of cash on short notice in
excess of its normal cash requirements, it may have difficulty selling these
investments in a timely manner, or be forced to sell them for an amount less
than it would otherwise have been able to realize, or both. For example, if an
unexpected number of contractholders of its annuity products exercise their
surrender right and IDSRiverSource Life is unable to access other liquidity
sources, it may have to quickly liquidate assets. Any inability to quickly
dispose of illiquid investments could have an adverse effect on IDSRiverSource
Life's financial condition and results of operations.
INTENSE COMPETITION COULD NEGATIVELY AFFECT IDS LIFE'S ABILITY TO MAINTAIN
OR INCREASE ITS MARKET SHARE AND PROFITABILITY.
IDS Life operates in an intensely competitive industry. IDS Life competes
based on a number of factors including name recognition, service, product
performance and features, price, perceived financial strength, and
claims-paying ratings. IDS Life's competitors include insurers and other
financial institutions. IDS Life may face competitors that have greater
market share, offer a broader range of products, have greater financial
resources or offer higher claims-paying ratings than IDS Life does.
IDSRIVERSOURCE LIFE'S AFFILIATED DISTRIBUTOR MAY BE UNABLE TO ATTRACT AND RETAIN
FINANCIAL ADVISORS.
IDSRiverSource Life is dependent on the branded financial advisors of its
affiliated distributorbroker-dealer selling firm for a significant portion of the sales
of its annuity and insurance products. A significant number of its branded
financial advisors operate as independent contractors under a franchise
agreement with its affiliated distributor.selling firm. There can be no assurance that
IDSRiverSource Life's affiliated distributorselling firm will be successful in its efforts
to recruit and retain new advisors to its network. If IDSRiverSource Life's
affiliated distributorselling firm is unable to attract and retain quality financial
advisors, or its recruitingfewer advisors would be available to sell RiverSource Life's annuity
and retention costs increase significantly, itsinsurance products and RiverSource Life's financial condition and results
of operations could be materially adversely affected.
12
IDSRIVERSOURCE LIFE AND ITS AFFILIATES MAY BE UNABLE TO ATTRACTFACE INTENSE COMPETITION IN ATTRACTING AND
RETAINRETAINING KEY PERSONNEL.
IDSTALENT.
RiverSource Life's continued success depends to a substantial degree on its
and its affiliates' ability to attract and retain qualified personnel to
conduct its business. The market for qualified talent is extremely competitive
and has grown more so in recent periods due to industry growth. There can be
no assurance that IDSRiverSource Life will be successful in its efforts to
recruit and retain the required personnel. If IDSRiverSource Life is unable to
attract and retain qualified individuals or its recruiting and retention costs
increase significantly, its operationsfinancial condition and financial results of operations could
be materially adversely affected.
-10-
IF THE COUNTERPARTIES TO IDSRIVERSOURCE LIFE'S REINSURANCE ARRANGEMENTS OR TO THE
DERIVATIVE INSTRUMENTS IT USES TO HEDGE ITS BUSINESS RISKS DEFAULT,
IDSRIVERSOURCE LIFE MAY BE EXPOSED TO RISKS IT HAD SOUGHT TO MITIGATE, WHICH
COULD ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
IDSRiverSource Life uses reinsurance to mitigate its risks in various
circumstances. See "Business--Reinsurance."Item 1 - Business-Reinsurance." Reinsurance does not
relieve IDSRiverSource Life of its direct liability to its policyholders, even
when the reinsurer is liable to IDSRiverSource Life. Accordingly, IDSRiverSource
Life bears credit risk with respect to its reinsurers. IDSRiverSource Life cannot
provide assurance that its reinsurers will pay the reinsurance recoverable
owed to it now or in the future or that they will pay these recoverables on a
timely basis. A reinsurer's insolvency or its inability or unwillingness to
make payments under the terms of its reinsurance agreement could have an
adverse effect on IDSRiverSource Life's financial condition and results of
operations that could be material.
In addition, IDSRiverSource Life uses derivative instruments to hedge various
business risks. IDSRiverSource Life enters into a variety of derivative
instruments with a number of counterparties. If IDSRiverSource Life's
counterparties fail to honor their obligations under the derivative
instruments, itsRiverSource Life's hedges of the related risk will be
ineffective. That failure could have an adverse effect on itsRiverSource Life's
financial condition and results of operations that could be material.
IDSRIVERSOURCE LIFE'S BUSINESS IS HEAVILY REGULATED, AND CHANGES IN REGULATION
MAY REDUCE ITS PROFITABILITY AND LIMIT ITS GROWTH.
IDSRiverSource Life operates in a highly regulated industry, and is required to
obtain and maintain licenses for its business in addition to being subject to
regulatory oversight. Regulators have significantly increased the level of
regulation in recent years and have several outstanding proposals for
additional regulation. Various regulatory and governmental bodies have the
authority to review its products and business practices and those of its
employees and to bring regulatory or other legal actions against IDSRiverSource
Life if, in their view, its practices, or those of its employees are improper.
Compliance with applicable laws and regulations is time consuming and
personnel-intensive. Changes in these laws and regulations may increase
materially IDSRiverSource Life's direct and indirect compliance and other
expenses of doing business. The costs of the compliance requirements
IDSRiverSource Life faces, and the constraints they impose on its operations,
could have a material adverse effect on IDSRiverSource Life's financial condition
and results of operations. For a further discussion of the regulatory
framework in which IDSRiverSource Life operates, see "Business--Regulation."Item 1 -
Business-Regulation." For more information regarding ongoing investigations,
see "Item 3--Legal3-Legal Proceedings."
LEGAL AND REGULATORY ACTIONS ARE INHERENT IN IDSRIVERSOURCE LIFE'S BUSINESS AND
COULD RESULT IN FINANCIAL LOSSES OR HARM ITS BUSINESS.
IDSRiverSource Life is, and in the future may be, subject to legal and regulatory
actions in the ordinary course of its operations. Substantial legal liability
in legal or regulatory actions could have a material financial effect or cause
significant reputational harm, which in turn could seriously harm its business
prospects.
13
COMPETITIVE AND REGULATORY PRESSURES MAY REQUIRE IDSRIVERSOURCE LIFE TO REDUCE
THE LEVELS OF ITS FEES.
IDSRiverSource Life's profit margins and earnings are dependent in part on its
ability to maintain current fee levels for the products and services that it
offers. Competition within the financial services industry could lead
IDSRiverSource Life to reduce the fees that it charges its clients for products
and services. See the risk factor entitled "Intense competition and the
economics of changes in RiverSource Life's product revenue mix and
distribution channels could negatively affect IDSRiverSource Life's ability to
maintain or increase its market share and profitability." In addition,
IDSRiverSource Life may be required to reduce its fee levels, or restructure the
fees it charges, as a result of regulatory initiatives or proceedings that are
either industry-wide or specifically targeted at IDSRiverSource Life. See the
risk factor entitled "IDS"RiverSource Life's business is heavily regulated, and
changes in regulation may reduce its profitability and limit its growth" and
"Item 3--Legal3-Legal Proceedings" for more information regarding this and other
regulatory matters. Reductions or other changes in the fees that IDSRiverSource
Life charges for its products and services could reduce its revenues and
earnings.
-11-
MISCONDUCT BY IDSRIVERSOURCE LIFE'S EMPLOYEES AND ITS AFFILIATES' EMPLOYEES IS
DIFFICULT TO DETECT AND DETER AND COULD HARM IDSRIVERSOURCE LIFE'S BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Misconduct by IDSRiverSource Life's employees and its affiliates' employees could
result in violations of law, regulatory sanctions and/or serious reputational
or financial harm. Misconduct can occur in each of IDSRiverSource Life's
businesses and could include:
o attempting to bind IDSRiverSource Life to transactions that exceed
authorized limits;
o hiding unauthorized or unsuccessful activities resulting in unknown
and unmanaged risks or losses;
o improperly using, disclosing, or otherwise compromising confidential
information;
o engaging in fraudulent or otherwise improper activity;
o engaging in unauthorized or excessive trading to the detriment of
customers; or
o otherwise not complying with laws or IDSRiverSource Life's control
procedures.
IDSRiverSource Life cannot always deter misconduct by employees and agents and
the precautions IDSRiverSource Life takes to prevent and detect this activity may
not be effective in all cases. IDSRiverSource Life also cannot provide assurance
that misconduct by employees and agents will not lead to a material adverse
effect on its business, financial condition or results of operations or financial condition.operations.
IF IDSRIVERSOURCE LIFE'S RESERVES FOR FUTURE POLICY BENEFITS AND CLAIMS ARE
INADEQUATE, IT MAY BE REQUIRED TO INCREASE ITS RESERVE LIABILITIES, WHICH
COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
IDSRiverSource Life establishes reserves as estimates of its liabilities for
future obligations under its products. Reserves do not represent an exact
calculation of liability, but rather are estimates of contract benefits and
related expenses IDSRiverSource Life expects to incur over time. The assumptions
and estimates IDSRiverSource Life makes in establishing reserves require certain
judgments about future experience and, therefore, are inherently uncertain.
IDSRiverSource Life cannot determine with precision the actual amounts that it
will pay for contract benefits, the timing of payments, or whether the assets
supporting its stated reserves will increase to the levels it estimates before
payment of benefits or claims. IDSRiverSource Life continually monitors its
reserve levels continually.levels. If IDSRiverSource Life were to conclude that its reserves are
insufficient to cover actual or expected contract benefits, it would be
required to increase its reserves and potentially incur income statement
charges for the period in which it makes the determination, which could
adversely affect its financial condition and results of operations and financial condition.operations. For more
information on how IDSRiverSource Life sets its reserves, see Note 1 to the
Consolidated Financial Statements.
14
IDSRIVERSOURCE LIFE MAY FACE LOSSES IF MORBIDITY RATES OR MORTALITY RATES DIFFER
SIGNIFICANTLY FROM ITS PRICING EXPECTATIONS.
IDSRiverSource Life sets prices for its life, DI and LTC insurance and some
annuity products based upon expected claim payment patterns, derived from
assumptions IDSRiverSource Life makes about the morbidity rates, or likelihood of
sickness, and the mortality rates, or likelihood of death, of its
policyholders and contractholders. The long-term profitability of these
products depends upon how IDSRiverSource Life's actual experience compares with
its pricing assumptions. For example, if morbidity rates are higher, or
mortality rates are lower, than its pricing assumptions, IDSRiverSource Life
could be required to make greater payments under DI and LTC insurance policies
and immediate annuity contracts than it had projected. The same holds true for
LTC policies IDSRiverSource Life previously underwrote to the extent they are not
fully reinsured. If mortality rates are higher than its pricing assumptions,
IDSRiverSource Life could be required to make greater payments under its life
insurance policies and annuity contracts with GMDBs than it had projected.
The risk that IDSRiverSource Life's claims experience may differ significantly
from its pricing assumptions is particularly significant for its LTC insurance
products notwithstanding itsproducts. Although RiverSource Life has the ability to seek and implement
future price increases.rate increases, such increases are subject to regulatory approval. As
with life insurance, LTC insurance policies provide for long-duration coverage
and its actual claims experience will emerge over many years. However, as a
relatively new product in the market, LTC insurance does not have the
extensive claims experience history of life insurance, and, as a result,
IDSRiverSource Life's ability to forecast future claim rates for LTC insurance is
more limited than for life insurance. IDSRiverSource Life has sought to moderate
these uncertainties to some extent by partially reinsuring LTC policies that
it had previously underwritten and by discontinuing underwriting LTC
insurance.
IDS-12-
RIVERSOURCE LIFE MAY FACE LOSSES IF THERE ARE SIGNIFICANT DEVIATIONS FROM ITS
ASSUMPTIONS REGARDING THE FUTURE PERSISTENCY OF ITS INSURANCE POLICIES AND
ANNUITY CONTRACTS.
The prices and expected future profitability of IDSRiverSource Life's insurance
and deferred annuity products are based in part upon expected patterns of
premiums, expenses and benefits, using a number of assumptions, including
those related to persistency, which is the probability that a policy or
contract will remain in force from one period to the next. The effect of
persistency on profitability varies for different products. For most of its
life insurance and deferred annuity products, actual persistency that is lower
than its persistency assumptions could have an adverse impact on
profitability, especially in the early years of a policy or contract,
primarily because IDSRiverSource Life would be required to accelerate the
amortization of expenses it deferred in connection with the acquisition of the
policy or contract.
For IDSRiverSource Life's LTC insurance, actual persistency that is higher than
its persistency assumptions could have a negative impact on profitability. If
these policies remain in force longer than IDSRiverSource Life assumed, then
IDSRiverSource Life could be required to make greater benefit payments than it
had anticipated when it priced or partially reinsured these products. Some of
its LTC insurance policies have experienced higher persistency and higher
morbidity rates than IDSRiverSource Life had assumed, which led it to increase
premium rates on certain of these policies.
Because IDSRiverSource Life's assumptions regarding persistency experience are
inherently uncertain, reserves for future policy benefits and policy claims
and other policyholders' funds may prove to be inadequate if actual
persistency experience is different from those assumptions. Although some of
its products permit IDSRiverSource Life to increase premiums during the life of
the policy or contract, IDSRiverSource Life cannot guarantee that these increases
would be sufficient to maintain profitability. Additionally, some of these
pricing changes require regulatory approval, which may not be forthcoming.
Moreover, many of IDSRiverSource Life's products do not permit premium increases
or limit those increases during the life of the policy or contract.
Significant deviations in experience from pricing expectations regarding
persistency could have an adverse effect on the profitability of IDSRiverSource
Life's products.
15
IDSRIVERSOURCE LIFE MAY BE REQUIRED TO ACCELERATE THE AMORTIZATION OF DAC, WHICH
WOULD INCREASE ITS EXPENSES AND REDUCE PROFITABILITY.
DAC representsrepresent the costs of acquiring new business, principally direct sales
commissions and other distribution and underwriting costs that have been
deferred on the sale of annuities andannuity, life, DI and LTC insurance. For annuity and
universal life products, DAC are amortized based on projections of estimated
gross profits over amortization periods equal to the approximate life of the
business. For other insurance products, IDS Life amortizes DAC over periods
approximating the lives of the related policy or contract,are generally amortized as a
percentage of premiums or estimated gross profits associated with that
policy or contract.
IDSover amortization periods equal to the premium-paying
period.
RiverSource Life's projections underlying the amortization of DAC require the
use of certain assumptions, including interest margins, mortality rates,
persistency rates, maintenance expense levels and clientcustomer asset value growth
rates for variable products. IDSRiverSource Life periodically reviews and, where
appropriate, adjusts its assumptions. When IDSRiverSource Life changes its
assumptions, it may be required to accelerate the amortization of DAC or to
record a charge to increase benefit reserves.
As of December 31, 2006 and 2005, and 2004, IDSRiverSource Life had $4.0$4.4 billion and $3.6$4.0
billion of DAC, respectively, and it amortized $315.9$356 million and $260.8$316 million,
respectively, of DAC as a current period expense for the years ended December
31, 20052006 and 2004,2005, respectively. For more information regarding DAC, see "Management's"Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations-CriticalOperations - Critical Accounting Policies.Policies - Deferred Acquisition Costs" and
"- Recent Accounting Pronouncements."
STATE INSURANCE REGULATORS MAY ADOPT NEW RESERVE OR CAPITAL REQUIREMENTS,
POTENTIALLY IMPACTING IDSRIVERSOURCE LIFE'S FINANCIAL STRENGTH RATINGS.
IDSRiverSource Life must comply with statutory reserve and capital requirements.
State regulators are continually reviewing and updating these requirements.
As of
December 31, 2005, IDS Life was subjectThere continues to new capital requirements for
variable annuity contracts with guaranteed death or living benefits. These
new requirements had minimal impact on IDS Life's Consolidated Balance Sheet
in 2005, but that may not continue to be true in the event equity market
values fall in the future.
There is active discussion at the NAIC of moving to a
principles-based reserving system. Capital requirements for fixed and variable
annuities and fixed single pay life insurance products are currently
principles-based and the NAIC is discussing similar requirements for other
products. This could change statutory reserve requirements significantly, and
it is not possible to estimate the impact at this time.
-13-
CHANGES IN U.S. FEDERAL INCOME OR ESTATE TAX LAW COULD MAKE SOME OF
IDSRIVERSOURCE LIFE'S PRODUCTS LESS ATTRACTIVE TO CLIENTS.
Many of the products IDSRiverSource Life issues or on which its business is based
(including both insurance products and non-insurance products) enjoy favorable
treatment under current U.S. federal income or estate tax law. Changes in U.S.
federal income or estate tax law could make some of its products less
attractive to clients.
IDSRIVERSOURCE LIFE'S RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT BE FULLY
EFFECTIVE IN MITIGATING ITS RISK EXPOSURE IN ALL MARKET ENVIRONMENTS OR
AGAINST ALL TYPES OF RISK.
IDSRiverSource Life has devoted significant resources toward developing its risk
management policies and procedures and expects to continue to do so in the
future. Nonetheless, IDSRiverSource Life's policies and procedures to identify,
monitor and manage risks may not be fully effective in mitigating its risk
exposure in all market environments or against all types of risk. Many of its
methods of managing risk and exposures are based upon its use of observed
historical market behavior or statistics based on historical models. As a
result, these methods may not accurately predict future exposures, which could
be significantly greater than what its models indicate. Other risk management
methods depend upon the evaluation of information regarding markets, clients,
catastrophe occurrence or other matters that isare publicly available or
otherwise accessible to IDSRiverSource Life, which may not always be accurate,
complete, up-to-date or properly evaluated. Management of operational, legal
and regulatory risks requires, among other things, policies and procedures to
properly record and verify a large number of transactions and events, and
these policies and procedures may not be fully effective in mitigating
IDSRiverSource Life's risk exposure in all market environments or against all
types of risk.
16
IDS LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY ECONOMIC AND
OTHER FACTORS.
IDS Life's financial condition and results of operations may be materially
affected by economic and other factors. Many such factors of a global or
localized nature include: political, economic and market conditions;
technological changes and events; inflation; investor sentiment and
confidence in the financial markets; terrorism events and armed conflicts;
and natural disasters such as weather catastrophes and widespread health
emergencies. In addition, during periods of unfavorable market or economic
conditions, the level of consumer investing and insuring activity may also
decrease, which may negatively impact the results of IDS Life's businesses.
Moreover, fluctuations in economic and market activity could impact the way
then-existing customers allocate their available resources, which could
affect IDS Life's persistency, surrender and product cash value loan
experience and could negatively impact its business.
IDSRIVERSOURCE LIFE IS SUBJECT TO TAX CONTINGENCIES THAT COULD ADVERSELY AFFECT
RESERVES.
IDSTHE PROVISION FOR INCOME TAXES.
RiverSource Life is subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which it has
significant business operations. These tax laws are complex and subject to
different interpretations by the taxpayer and the relevant governmental taxing
authorities. IDSRiverSource Life must make judgments and interpretations about
the application of these inherently complex tax laws when determining the
provision for income taxes and must also make estimates about when in the
future certain items affect taxable income in the various tax jurisdictions.
Disputes over interpretations of the tax laws may be settled with the taxing
authority upon examination or audit.
RISKS RELATING TO AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS
-------------------------------------------------------------------------
CLIENT ACQUISITION AND RETENTION MAY BE ADVERSELY AFFECTED BY IDSRIVERSOURCE
LIFE'S SEPARATION FROM AMERICAN EXPRESS.
Although IDSRiverSource Life generally operated independently of American
Express' other operations with respect to client services prior to the
separationSeparation and Distribution, IDSRiverSource Life has relied on the American Express
brand and cardmember relationships in acquiring clients as part of its growth
strategy. As part of a marketing and branding arrangement between Ameriprise
Financial and American Express, IDSRiverSource Life has a limited right to
continue until September 30, 2007 to market its products in a manner similar
to the methods it used prior to the separation.Separation. However, overall response
rates, marginal costs and profitability from these efforts may be negatively
affected as a result of the loss of this affiliation. IDSRiverSource Life cannot
provide assurance that the clients it gained as a result of being affiliated
with American Express will not move some or all of their existing business
from IDSRiverSource Life to another company. Loss of a significant portion of
these clients could negatively impact IDSRiverSource Life's business.
AMERIPRISE FINANCIAL AND IDSRIVERSOURCE LIFE HAVE EXPERIENCED INCREASED COSTS IN
CONNECTION WITH THE SEPARATION.
Ameriprise Financial is in the process of developing certain independent
facilities, systems, infrastructure and personnel to replace services it had
access to from American Express. Ameriprise Financial has also made
significant investments to develop its new brands and establish its ability,
and the ability of its subsidiaries, to operate without access to American
Express'sExpress operational and administrative infrastructure. These initiatives have
been costly to implement. In 2005, Ameriprise Financial developed an
allocation policy for separation costs resulting in the allocation of certain
costs to IDSRiverSource Life that it considered to be a reasonable reflection of
separation costs benefiting IDSRiverSource Life. These costs generally consist of
allocated financial advisor and employee retention program costs, re-branding
and marketing costs and costs to separate and reestablish technology platforms
related to the separationSeparation and Distribution of
Ameriprise Financial. IDSDistribution. RiverSource Life has incurred and been
allocated approximately
$121.3$252 million in total pretax non-recurring separation costs since
the Separation announcement through December 31, 20052006 and IDS Life expects to incur
significant additional separation costs.costs in 2007. This risk has been greatlypartly
offset by the contribution of capital from American Express to Ameriprise
Financial, and in turn, from Ameriprise Financial to IDSRiverSource Life.
17
-14-
As a stand-alone company,result of the Separation, Ameriprise Financial and(and hence, IDS LifeRiverSource
Life) do not have the same purchasing power they had through American Express
and, in some cases, may not have as favorable terms or prices as those
obtained prior to the separation and Distribution,Separation, which could decrease its overall
profitability.
IDSRIVERSOURCE LIFE MAY NOT HAVE SUFFICIENT CAPITAL GENERATION ABILITY TO MEET
ITS OPERATING AND REGULATORY CAPITAL REQUIREMENTS.
As a stand-alone company, Ameriprise Financial and(and hence, IDS LifeRiverSource Life)
is required to maintain higher capital ratios to retain its credit ratings. In
addition, IDSRiverSource Life needs to cover volatility associated with
variations in its operating, risk-based and regulatory capital requirements,
including separation costs and contingent exposures, for example, in
connection with its ongoing legal and regulatory matters. See "Business--Risk-Based"Item 1 -
Business-Risk-Based Capital" for more information regarding capital
requirements and see "Item 3--Legal3-Legal Proceedings" for more information
regarding pending regulatory and legal proceedings. Although Ameriprise
Financial made a $650 million capital contribution to IDSRiverSource Life to
cover, among other things, allocated separation costs, IDSRiverSource Life cannot
be certain that this capital contribution will be sufficient to cover all of
the additional costs. If it is not sufficient, IDSRiverSource Life's financial
condition could be adversely affected and its financial strength ratings may
be downgraded. RiverSource Life has been allocated $252 million in total
pretax non-recurring separation costs since the Separation announcement
through December 31, 2006 and expects to be allocated a significant portion of
the remaining separation costs in 2007.
AS AMERIPRISE FINANCIAL BUILDS ITS INFORMATION TECHNOLOGY INFRASTRUCTURE AND
TRANSITIONS ITS DATA AND THAT OF ITS AFFILIATES, SUCH AS IDSRIVERSOURCE LIFE, TO
ITS OWN SYSTEMS, IT COULD EXPERIENCE TEMPORARY BUSINESS INTERRUPTIONS AND
INCUR SUBSTANTIAL ADDITIONAL COSTS.
Ameriprise Financial and(and hence, IDS LifeRiverSource Life) is in the process of
installing and implementing an information technology infrastructure to
support its business functions, including accounting and reporting, customer
service and distribution. IDSRiverSource Life anticipates this will involve
significant costs. IDSRiverSource Life may incur temporary interruptions in
business operations if it cannot transition effectively from American Express'
existing technology infrastructure (which covers hardware, applications,
network, telephony, databases, backup and recovery solutions), as well as the
people and processes that support them. IDSRiverSource Life may not be successful
in implementing its new technology infrastructure and transitioning its data,
and IDSRiverSource Life may incur substantially higher costs for implementation
than currently anticipated. IDSRiverSource Life's failure to avoid operational
interruptions as it implements the new infrastructure and transitions its
data, or its failure to implement the new infrastructure and transition its
data successfully, could disrupt its business and have a material adverse
effect on its profitability. In addition, technology service failures could
have adverse regulatory consequences for IDSRiverSource Life's business and make
it vulnerable to its competitors.
Ameriprise Financial and(and hence, IDS LifeRiverSource Life) continues to rely on
American Express' disaster recovery capabilities as part of its business
continuity processes. IDSRiverSource Life will only have the right to use
American Express' disaster recovery resources for up to two years after the Distribution. IDSuntil September 30, 2007.
RiverSource Life will be required to develop and implement its own disaster
recovery infrastructure and develop business continuity for its operations,
which it anticipates will involve significant costs. IDSRiverSource Life may not
be successful in developing stand-alone disaster recovery capabilities and
business continuity processes, and may incur substantially higher costs for
implementation than currently anticipated. IDSRiverSource Life's failure to avoid
operational interruptions as it implements new business continuity processes,
or its failure to implement the new processes successfully, could disrupt its
business and have a material adverse effect on its profitability in the event
of a significant business disruption.
18
AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS COULD INCREASE
IDSRIVERSOURCE LIFE'S U.S. FEDERAL INCOME TAX COSTS.
Due to the separation, IDSSeparation, RiverSource Life will not be able to file a
consolidated U.S. federal income tax return with the other members of the
Ameriprise Financial affiliated group for five tax years following the
Distribution. As a consequence, during this period, net operating and capital
losses, credits, and other tax attributes generated by one group will not be
available to offset income earned or taxes owed by the other group for U.S.
federal income tax purposes. Any benefits relating to taxes arising from being part
of the larger American Express group may also not be available. As a result of these and other inefficiencies,
the aggregate amount of U.S. federal income tax that IDSRiverSource Life pays may
increase and IDSRiverSource Life may, in addition, not be able to fully realize
certain of its deferred tax assets.
-15-
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
IDSRiverSource Life Insurance Company occupies office space in Minneapolis,
Minnesota, which is leased or owned by Ameriprise Financial. IDSRiverSource Life
Insurance Company reimburses Ameriprise Financial for rent based on direct and
indirect allocation methods. IDSRiverSource Life of New York and American Centurion Life rentNY rents office space in
Albany, New York. FacilitiesRiverSource Life believes that the facilities occupied by IDS Life are
believed to be adequate for the purposes for which they are used and are
well maintained.suit
its needs.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission, the National Association of Securities
Dealers and several state authorities have brought proceedings challenging
several mutual fund and variable product financial practices, generally
including suitability, late trading, market timing, compensation and
disclosure of revenue sharing arrangements. IDSRiverSource Life has received
requests for information concerning some of these practices and is cooperating
fully with these inquiries.
IDSRiverSource Life is involved in a number of other legal and arbitration
proceedings concerning matters arising in connection with the conduct of its
business activities. IDSRiverSource Life believes that it is not a party to, nor
are any of its properties the subject of, any pending legal, arbitration or
regulatory proceedings that would have a material adverse effect on its
consolidated financial condition, results of operations or liquidity. However,
it is possible that the outcome of any such proceedings could have a material
impact on results of operations in any particular reporting period as the
proceedings are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
19
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Not applicable.All of RiverSource Life Insurance Company's outstanding common stock is owned
by Ameriprise Financial, Inc. There is no established public trading market
for RiverSource Life Insurance Company's common stock.
For discussion regarding RiverSource Life Insurance Company's payment of
dividends and restrictions on dividends, see "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Capital Strategy" and Note 11 of the Notes to Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2)(a) of Form 10-K.
20
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IDSOVERVIEW
RiverSource Life follows United States generally accepted accounting principles
(GAAP), and the following discussion is presented on a consolidated basis
consistent with GAAP.
The following discussion may contain forward-looking statements that reflect
IDS Life's plans, estimates and beliefs. Actual results could differ
materially from those discussed in forward-looking statements. Factors that
could cause or contribute to these differences include, but are not limited
to, those discussed under "Forward-Looking Statements" and "Item 1A-Risk
Factors" of this Form 10-K.
The following management's narrative analysis of the results of operations
is presented pursuant to General Instructions I(2)(a) of Form 10-K in lieu
of Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following information should be read in conjunction with IDS Life's
accompanying consolidated financial statements and related notes included
elsewhere in this Form 10-K.
OverviewInsurance Company, formerly known as IDS Life Insurance
Company, is a stock life insurance company with fourone wholly-owned operating
subsidiaries: IDSsubsidiary, RiverSource Life Insurance CompanyCo. of New York American Partners("RiverSource Life Insurance Company, American Enterprise Life
Insurance Company and American Centurion Life Assurance Company. IDSof
NY"). RiverSource Life Insurance Company is a wholly-owned subsidiary of
Ameriprise Financial, Inc. (Ameriprise Financial)("Ameriprise Financial").
o IDSRiverSource 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. IDSRiverSource Life Insurance
Company issues insurance and annuity products.
o American Enterprise Life Insurance Company (American Enterprise Life)
is a stock life insurance company domiciled in Indiana, which holds
Certificates of Authority in the District of Columbia and all states
except New York. American Enterprise Life issues fixed and variable
annuity contracts primarily through regional and national financial
institutions and regional and/or independent broker-dealers. (In
past years, American Enterprise Life issued a nominal number of
variable universal life contracts.)
o American Partners Life Insurance Company (American Partners Life) is a
stock life insurance company domiciled in Arizona, which holds
Certificates of Authority in the District of Columbia and all states
except New York and New Hampshire. American Partners Life markets
annuity products directly to customers, generally persons holding
an American Express(R) Card.
21
o IDS Life Insurance Company of New York (IDSRiverSource Life of New York)NY is a stock life insurance company domiciled
in New York, which holds Certificates of Authority in New York and
North Dakota. RiverSource Life of NY issues insurance and annuity
products.
On December 31, 2006, IDS Life Insurance Company completed an Agreement and
Plan of Merger with both American Enterprise Life Insurance Company ("American
Enterprise Life") and American Partners Life Insurance Company ("American
Partners Life") whereby both companies merged with and into IDS Life Insurance
Company. As a result of the merger, American Enterprise Life and American
Partners Life ceased to exist. Prior to the merger, both companies were
wholly-owned operating subsidiaries of IDS Life Insurance Company. Immediately
following the merger, IDS Life Insurance Company changed its name to
RiverSource Life Insurance Company.
Also on December 31, 2006, American Centurion Life Assurance Company
("American Centurion Life") merged with and into IDS Life Insurance Company of
New York ("IDS Life of New York"). As a result of the merger, American
Centurion Life ceased to exist. Prior to the merger, American Centurion Life
was a wholly-owned operating subsidiary of IDS Life Insurance Company.
Immediately following the merger, IDS Life of New York issues insurance and annuity products.
o American Centurion Life Assurance Company (American Centurion Life)
is a stock life insurance company domiciled in New York, which holds
Certificates of Authority in New York, Alabama and Delaware.
American Centurion Life issues fixed and variable annuity contracts
primarily through financial institutions and independent broker-
dealers. American Centurion Life also markets annuity products
directly, generallychanged its name to
persons holding an American Express(R)
Card.
IDSRiverSource Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and
American Enterprise REO 1, LLC which hold real estate investments. IDSCo. of New York.
RiverSource Life Insurance Company and its seven subsidiariessubsidiary are referred to
collectively in this Form 10-K as "IDS"RiverSource Life".
PriorNo material effect on the United States generally accepted accounting
principles ("U.S. GAAP") consolidated financial condition and results of
operations is expected for RiverSource Life as a result of the mergers.
The following discussion and management's narrative analysis of the financial
condition and results of operations should be read in conjunction with the
"Forward-Looking Statements," "Item 1A - Risk Factors" and the Consolidated
Financial Statements and Notes. Management's narrative analysis is presented
pursuant to August 1, 2005,General Instructions I(2) (a) of Form 10-K in lieu of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Ameriprise Financial was referred to asformerly a wholly-owned subsidiary of American
Express Financial Corporation.Company ("American Express"). On February 1, 2005, the American
Express Company
(American Express)Board of Directors announced its intention to pursue the disposition
of 100% of its shareholdingshareholdings in what is now Ameriprise Financial (the Separation)"Separation")
through a tax-free distribution to American Express shareholders. Effective as
of the close of business on September 30, 2005, American Express completed the
Separation and the distribution of Ameriprise Financial common shares to
American Express shareholders (the Distribution)"Distribution"). In connection with the
Distribution, Ameriprise Financial entered into certain agreements with
American Express to effect the separation of its businessSeparation and to define the responsibility for
obligations arising before and after the date of the Distribution, including,
among others, obligations relating to transition services, taxes, and
employees. IDSAmeriprise Financial has incurred $654 million of pretax
non-recurring separation costs since the Separation announcement through
December 31, 2006 and expects to incur a total of approximately $875 million.
RiverSource Life was allocated certain separation and Distribution-related expenses incurred as a result of
Ameriprise Financial becoming an independent company. Cumulatively,RiverSource Life has
been allocated $252 million in total pretax non-recurring separation costs
since the expenses incurredSeparation announcement through December 31, 2006 and expects to be
allocated to IDS Life
area significant to IDS Life. IDSportion of the remaining separation costs in 2007.
RiverSource Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its current financial
strength ratings and to cover the allocated
separation costs.
-17-
RESULTS OF OPERATIONS FOR THE YEARSYEAR ENDED DECEMBER 31, 2006 COMPARED TO THE
YEAR ENDED DECEMBER 31, 2005
AND 2004
Income before taxesOverview
Consolidated net income was $486 million for the year ended December 31, 2006
compared to $459 million for the year ended December 31, 2005, an increase of
$27 million. The net income growth was positively impacted by strong growth in
separate account assets, both from variable annuity net flows and accounting change declined 19%market
appreciation. Net flows of client assets are a measure of new sales of, or
deposits into, RiverSource Life's products offset by redemptions of, or
withdrawals from, RiverSource Life's products. Net flows can have a
significant impact on RiverSource Life's results of operations due to $640.4their
impact on revenues and expenses. These positive impacts were partially offset
by lower account balances and spread compression in the fixed annuity
products.
Revenues
Total revenues for the year ended December 31, 2006 were $3.4 billion, an
increase of $106 million from the year ended December 31, 2005 of $3.3
billion. Total premiums increased $24 million or 6.5% to $394 million for the
year ended December 31, 2006.
Premiums for disability income ("DI") and long term care ("LTC") insurance
increased $27 million or 9.2% including $15 million as a result of a review of
RiverSource Life's LTC reinsurance arrangements during the third quarter of
2006. Higher DI insurance in force levels also contributed to the increase in
premiums.
Net investment income decreased $128 million or 7.2% to $1.7 billion for the
year ended December 31, 2006 reflecting a decrease in both the average yield
and the average level of invested assets. The lower level of invested assets
reflects declining fixed annuity account values due to a shift in sales from
fixed to variable products. Also, the decrease reflects unfavorable
mark-to-market adjustments on derivatives economically hedging guaranteed
minimum withdrawal benefit ("GMWB") riders and equity method investments in
hedge funds. Fluctuations in the value of the GMWB embedded derivative which
partially offsets the mark-to-market of the GMWB hedges are reported in the
death and other benefits for investment contracts and universal life-type
insurance line item on RiverSource Life's Consolidated Statements of Income.
These changes were partially offset by favorable mark-to-market adjustments on
derivatives economically hedging equity index annuities ("EIA"). Fluctuations
in the EIA embedded derivative are reported in interest credited to account
values on RiverSource Life's Consolidated Statements of Income.
Contractholder and policyholder charges increased $60 million or 10.4% to $637
million for the year ended December 31, 2006 primarily due to an increase in
the cost of insurance charges on variable universal life products and charges
for variable annuity GMWB riders as well as $18 million from recognizing
previously deferred cost of insurance revenues.
Mortality and expense risk and other fees increased $147 million or 30.1% to
$636 million for the year ended December 31, 2006 reflecting higher average
values of separate account assets due to positive net flows and market
appreciation.
Net realized investment gains were $51 million for the year ended December 31,
2006 compared to $48 million for the year ended December 31, 2005. The decrease primarily reflects separation
costs, higher other insurance and operating expenses and amortization of
deferred policy acquisition costs (DAC), partially offset by increased
mortality and expense risk and other fees, contractholder and policyholder
charges and net realized gain on investments.
Net income forFor the
year ended December 31, 2004 reflects the $70.62006, $61 million ($108.6 million pretax) cumulative effect of accounting change as a result
of IDS Life's January 1, 2004 adoption of the American Institute of
Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (SOP 03-1). SOP 03-1 requires insurance
enterprises to establish liabilities for benefits that may become payable
under variable annuity death benefit guarantees or other insurance or
annuity contract provisions. See the "Recently Issued Accounting Standards"
section in Note 1 to the Consolidated Financial Statements regarding the
impact of adoption of SOP 03-1.
REVENUES
Total revenues increased $133.9 million or 4% primarily due to higher netgross realized gain on investments, mortality and expense risk and other fees and
contractholder and policyholder charges compared to 2004.
Disability income (DI) and long-term care insurance (LTC) premiums increased
$11.5 million or 4% reflecting higher DI insurance in force levels.
22
Net investment income increased $13.9 million or 1%. The increase reflects a
$13.9 million pretax gain for 2005 compared to a $27.9 million charge in
2004 all related to the liquidation of secured loan trusts (SLTs) offset by
lower interest on mortgage investments and lower mark-to-market gains
on
trading securities and equity method investments in hedge funds.
Additionally, the average yield decreased compared to 2004,were partially offset by an increase in the average level$10 million of invested assets.
Contractholder and policyholder charges increased $22.8 million or 4%gross realized investment losses
classified as a
result of a $13.2 million increase in the cost of insurance on higher
average variable and fixed universal life policies in force, as well as an
increase in surrender charges on annuities.
Mortality and expense risk and other fees increased $58.3 million or 14%
reflecting higher average market values of separate account assets due to
increased inflows and market appreciation.
Net realized gain on investments was $48.3 million in 2005 compared to $27.3
million in 2004.Available-for-Sale.
For the year ended December 31, 2005, $107.9$108 million of totalgross realized
investment gains were partially offset by $59.6 million of impairments
and losses. Included in these total net investment gains and losses were
$107.8$39 million of gross realized
gains and $38.6 million of gross realizedinvestment losses, from sales of securities, as well as $19.4$19 million of other-than-temporary impairment
losses on investments, classified as Available-for-Sale. Included in the net
realized gain on investmentsinvestment gains classified as Available-for-Sale for the year ended
December 31, 2005 were gross realized investment gains and losses of $39.2$39
million and $14.3$14 million, respectively, related to the sale of all of
IDSRiverSource Life's retained interest in a collateralized debt obligations
(CDO)obligation
("CDO") securitization trust.
ForBenefits and Expenses
Total benefits and expenses for the year ended December 31, 2004, $49.5 million of total investment
gains2006 were partially offset by $22.2 million of impairments and losses.
Included in these total net investment gains and losses were $48.4 million
of gross realized gains and $17.5 million of gross realized losses from
sales of securities, as well as $0.1 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Total benefits and expenses increased $285.9 million or 12%, reflecting
separation costs,$2.7
billion, an increase in DAC amortization expense and higher other
insurance and operating expenses, partially offset by lower interest
crediting rates.of $69 million from the year ended December 31, 2005
total of $2.6 billion.
Death and other benefits for traditional life insurance increased $4.7decreased $14 million
or 13% primarily due33.3% to $28 million for the year ended December 31, 2006 reflecting lower
claims volume.
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Death and other benefits for investment contracts and universal life-type
insurance increased $35 million or 15.1% to $267 million for the year ended
December 31, 2006 reflecting a net increase in force levels.guaranteed minimum death
benefit ("GMDB") costs of $17 million, $26 million of additional claims
expense (including $7 million in connection with the recognition of the
previously deferred cost of insurance revenues discussed above), the impact of
$12 million in deferred acquisition costs ("DAC") unlocking reserve for
certain variable plans, higher sales inducement costs of $6 million and other
increases in costs and benefits of $5 million, partially offset by a net
decrease in GMWB costs of $31 million.
Death and other benefits for DI and LTC insurance increased $8.6$7 million or 13% primarily due9.2%
to increased DI in force levels.
Increase in liabilities$83 million for future policy benefits for DI and LTC insurance
increased $18.0 million or 15% primarilythe year ended December 31, 2006 reflecting inclusion of a $13.3
million maintenance reserve adjustment for LTC insurance.unfavorable
claims experience relative to 2005.
Interest credited to account values decreased $17.5by $59 million or 2%,5.3% to $1.1
billion for the year ended December 31, 2006 primarily due to lower interest
crediting rates and lower average accumulation values of annuities, as well aspartially
offset by the effect of appreciation on equity indexed annuities of lower
appreciationEIA linked to the S&P 500 Index in
the Standard & Poor's (S&P) 500 during 20052006 versus 2004.
23
DAC amortization expense increased to $315.9 milliondepreciation in 2005 from $260.8
million in 2004. DAC amortization expense in 2005 was reduced by $67.0
million as a result of the annual DAC assessment performed in the third
quarter, while DAC amortization expense in 2004 was reduced by $65.7 million
in the first quarter as a result of lengthening amortization periods for
certain insurance and annuity products in conjunction with the adoption of
SOP 03-1 and by $23.7 million as a result of the annual DAC assessment in
the third quarter. Equity market conditions and other factors also resulted
in increased amortization2005.
Amortization of DAC in 2005 comparedincreased $40 million to 2004, particularly for
IDS Life's growing variable annuity business. See the "Deferred Policy
Acquisition Costs" section for further discussion of DAC and related third
quarter 2005 and 2004 adjustments.
Separation costs generally consist of allocated financial advisor and
employee retention program costs, re-branding and marketing costs and costs
to separate and reestablish technology platforms related to the separation
and Distribution of Ameriprise Financial. During 2005, IDS Life was
allocated and incurred $121.3 million in separation costs. See Note 1 to the
Consolidated Financial Statements for further discussion regarding the
separation and the allocation of costs to IDS Life.
Other insurance and operating expenses increased $87.3 million or 17%
reflecting increases in distribution costs and non-deferrable expenses
related to product management and higher business investment initiatives.
INCOME TAXES
IDS Life's effective tax rate declined to 28% in 2005 from 29% in 2004 which
resulted from relatively lower levels of pretax income compared to
tax-advantaged items in 2005. Additionally, the 2005 effective tax rate
reflects a $20 million tax expense and the 2004 effective tax rate reflects
a $20 million tax benefit applicable to prior years amendments.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Pretax income rose 38% to $792.4$356 million for the year ended
December 31, 2004. The increase primarily reflects increased net investment income,
mortality and expense risk and other fees, net realized gain on investments,
lower interest credited to account values and lower amortization of DAC,
partially offset by higher other insurance and operating expenses.
Net income2006 from $316 million for the year ended December 31, 2004 reflects the $70.6 million
($108.6 million pretax) impact of IDS Life's January 1, 2004 adoption of SOP
03-1. SOP 03-1 requires insurance enterprises to establish liabilities for
benefits that may become payable under variable annuity death benefit
guarantees or other insurance or annuity contract provisions. See the
"Recently Issued Accounting Standards" section in Note 1 to the Consolidated
Financial Statements regarding the impact of adoption of SOP 03-1.
REVENUES
Total revenues increased $162.0 million or 5% primarily due to higher net
investment income, mortality and expense risk and other fees and net
realized gain on investments compared to 2003.
Net investment income increased $72.3 million or 4%. Net investment income
for the year ended December 31, 2003 includes $77.3 million of amortization
expense of certain low income housing investments. See effective tax rate
discussion below.
Contractholder and policyholder charges increased $24.2 million or 5%
reflecting increased cost of insurance charges on variable universal life
products as well as an increase in the amount of surrender charges on
variable annuity products.
24
Mortality and expense risk and other fees increased $39.8 million or 10%
reflecting higher average market values of separate account assets, and the
impact of the change from IDS Life to Ameriprise Financial as investment
manager of the internally managed proprietary funds during the fourth
quarter of 2003. Concurrent with the investment manager change, IDS Life
entered into an agreement with Ameriprise Financial to receive fees for the
services, other than investment management, that IDS Life continues to
provide the underlying proprietary mutual funds. IDS Life's administrative
service fees will vary with the market values of these proprietary mutual
funds. Prior to this change, IDS Life received management fees directly from
the proprietary funds and was party to an agreement with Ameriprise
Financial to compensate Ameriprise Financial for the investment sub-advisory
services Ameriprise Financial provided these proprietary funds. In addition
to IDS Life's administrative service fees, IDS Life receives mortality and
expense risk fees from the separate accounts based on the level of assets.
Net realized gain on investments was $27.3 million in 2004 compared to $4.4
million in 2003.2005.
For the year ended December 31, 2004, $49.52006, RiverSource Life recorded a net benefit
from DAC unlocking of $26 million, of
total investment gains were partially offset by $22.2primarily resulting in a $38 million
of impairments
and losses. Included in these total net investment gains and losses were
$48.4 million of gross realized gains and $17.5 million of gross realized
losses from sales of securities, as well as $0.1 million of
other-than-temporary impairment losses on investments, classified as
Available-for-Sale.
For the year ended December 31, 2003, $257.0 million of total investment
gains were partially offset by $252.6 million of impairments and losses.
Included in these total net investment gains and losses were $255.3 million
of gross realized gains and $135.5 million of gross realized losses from
sales of securities, as well as $102.6 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Total benefits and expenses decreased $55.8 million or 2%, reflecting lower
interest crediting rates and the effect on equity indexed annuities of lower
appreciation in the S&P 500 during 2004 versus 2003, a reductionbenefit in DAC amortization expense and a $12 million increase in conjunction with the adoption of SOP 03-1death and
third
quarterother benefits for investment contracts and universal life-type insurance. DAC
adjustments, partially offset by higher other insurance and
operating expenses.
Interest credited to account values decreased $114.1 million or 9%,
primarily due to lower interest crediting rates and the effect on equity
indexed annuities of lower appreciation in the S&P 500 during 2004 versus
2003, partially offset by higher average accumulation values of annuities
and in force levels of life insurance products.
DAC amortization expense decreased to $260.8 million in 2004 from $264.3
million in 2003. The decrease was primarily due to a $65.7 million
adjustment associated with the lengthening of amortization periodsunlocking for
certain insurance and annuity products in conjunction with the adoption of
SOP 03-1, and approximately $23.7 million in net favorable DAC adjustments
in the third quarter of 2004 as2005 resulted in a result of changes$67 million reduction to
DAC assumptions as
compared to a $1.8 millionamortization.
The DAC unlocking net favorable DAC adjustment inbenefit for the third quarter of 2003. See the "Deferred Policy Acquisition Costs" section for further
discussion2006 primarily
reflected a $25 million benefit from modeling increased product persistency
and a $15 million benefit from modeling improvements in mortality, offset by
negative impacts of DAC$8 million from modeling lower variable product fund fee
revenue and related third quarter 2004 and 2003 adjustments.
Other insurance and operating expenses increased $50.8$8 million or 11%
reflecting increases in distribution costs and non-deferrable expensesfrom model changes related to product management and business reinvestment initiatives. These
increases were partially offset by a reduction relatedvariable life second to
the change in
investment manager of the proprietary mutual funds from IDS Life to
Ameriprise Financial. Effective with this change, the previously existing
arrangement under which IDS Life compensated Ameriprise Financialdie insurance.
The DAC unlocking net benefit for
investment sub-advisory services was terminated.
INCOME TAXES
IDS Life's effective tax rate rose to 29% in 2004 from 12% in 2003 primarily
due to the impact of lower levels of tax-advantaged items in pretax income
during 2004, reduced low income housing credits as a result of the December
2003 distribution of substantially all of IDS Life's interests in low income
housing investments to Ameriprise Financial and the one-time effect of
favorable technical guidance related to the taxation of dividend income
recognized in 2003. For 2003 and prior years, IDS Life's federal income
taxes were reduced by credits arising from low income housing investments.
25
DEFERRED POLICY ACQUISITION COSTS
DAC represents the costs of acquiring new business, principally direct sales
commissions and other distribution and underwriting costs that have been
deferred on the sale of annuity and life, DI and LTC insurance products.
These costs are deferred to the extent they are recoverable from future
profits. For annuity and insurance products, DAC is amortized over periods
approximating the lives of the business, generally as a percentage of
premiums or estimated gross profits or as a portion of product interest
margins depending on the product's characteristics.
For IDS Life's annuity and insurance products, the projections underlying
the amortization of DAC require the use of certain assumptions, including
interest margins, mortality and morbidity rates, persistency, maintenance
expense levels and client asset value growth rates for variable products.
Management routinely monitors a wide variety of trends in the business,
including comparisons of actual and assumed experience. The client asset
value growth rate is the rate at which contract values are assumed to
appreciate in the future. The rate is net of asset fees and anticipates a
blend of equity and fixed income investments. Management reviews and, where
appropriate, adjusts its assumptions with respect to client asset value
growth rates on a quarterly basis.
Management monitors other principal DAC amortization assumptions, such as
interest margin, mortality and morbidity rates, persistency, and maintenance
expense level assumptions, each quarter. Unless management identifies a
significant deviation over the course of the quarterly monitoring,
management reviews and updates these DAC amortization assumptions annually
in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits used to amortize DAC might also
change. A change2005 primarily
reflected a $32 million benefit from modeling improvements in the required amortization percentage is applied
retrospectively; an increase in amortization percentage will result in an
increase in DAC amortization expense whilemortality, a decrease in amortization
percentage will result in a decrease in DAC amortization expense. The impact
on results of operations of changing assumptions can be either positive or
negative in any particular period and is reflected in the period in which
such changes are made. As a result of these reviews, IDS Life took actions
in both 2005 and 2004 that impacted the DAC balance and amortization
expense.
In the third quarter 2005, these actions resulted in a net $67.0$33
million DAC
amortization expense reduction consisting of the following:
o A $31.7 million reduction reflecting changes in previously assumed
mortality rates;
o A $32.8 million reduction reflectingbenefit from lower than previously assumed surrender rates and higher
associated surrender charges;
o A $6.0charges and a $2 million reductionnet benefit from improved average fee revenues;
o A $5.6 million reduction from the extension of the mean reversion
period by one year; and
o A $9.1 million increase reflecting changes from previously assumed
interest rate spreads, modeling changes, account maintenance
expenses, and other miscellaneous items.
In the third quarter 2004, these actions resulted in a net $23.7 million DAC
amortization expense reduction consisting of the following:
o A $4.2 million reduction reflecting changes
in previously assumed
mortality rates;
o A $12.7DAC valuation assumptions.
For the years ended December 31, 2006 and 2005, RiverSource Life incurred $131
million reduction reflecting changes from previously
assumed surrender and lapse rates;
o A $3.3$121 million, reduction from the extension of the mean reversion
period by one year;respectively, in separation costs. Separation costs
incurred during 2006 and 26
o A $3.5 million reduction reflecting higher than previously assumed
interest rate spreads2005 primarily related to technology costs and
other miscellaneous items.
In the third quarter 2003, these actions resulted in a net $1.8 million DAC
amortization expense reduction reflecting:
o A $105.4 million reduction resulting from extending 10-15 year
amortization periods for certain flex annuity contractsmarketing and rebranding. Separation costs incurred during 2005 also included
costs related to 20 years
based on current measurements of meaningful life;
o A $92.0 million increase resulting from the recognition of a
premium deficiency on IDS Life's LTC products; and
o A $11.6 million net increase across IDS Life's universal life,
variable universal life and annuity products, reflecting lower
than previously assumed interest rate spreads, separate account
fee rates and account maintenance expense.
During the first quarter of 2004 and in conjunction with the adoption of SOP
03-1, IDS Life (1) established additional liabilities for insurance benefits
that may become payable under variable annuity death benefit guarantees or
on certain variable universal life and single pay universal life insurance
contracts, which prior to January 1, 2004, were expensed when payable; and
(2) extended the time periods over which DAC associated with certainadvisor retention programs.
Other insurance and annuity products are amortizedoperating expenses increased $53 million or 9.0% to coincide with$641
million for the liability
funding periods in order to establish the proper relationships between these
liabilities and DAC associated with the same contracts. As a result, IDS
Life recognized a $108.6 million pretax charge due to an accounting change
on establishing the future liability under death benefit guarantees and
recognized a $65.7 million pretax reduction in DAC amortization expense to
reflect the lengthening of the amortization periods for certain products
impacted by SOP 03-1.
DAC balances for various insurance and annuity products sold by IDS Life atyear ended December 31, are set forth below:
(Millions) 2005 2004
---------------------------------------------------------------------------------------------------
Life, disability income and long-term care insurance $ 1,920 $ 1,766
Annuities 2,116 1,872
---------------------------------------------------------------------------------------------------
Total $ 4,036 $ 3,638
---------------------------------------------------------------------------------------------------
In addition to2006 primarily reflecting increased
corporate overhead expenses, business reinvestment initiatives and
compensation costs offset by a decrease in business services expenses.
Income Taxes
RiverSource Life's effective tax rate was 28.3% and 28.4% for the DAC balances shown above and in conjunction with IDS
Life's adoption of SOP 03-1, sales inducement costs previously included in
DAC were reclassified from DAC and presented as a separate line item in the
consolidated balance sheets. Deferred sales inducement costs were $370
million and $303 million atyears ended
December 31, 2006 and 2005, and 2004, respectively. Sales
inducement costs consist of bonus interest credits and deposit credits added
to certain annuity contract values. These benefits are capitalized to the
extent they are incremental to amounts that would be credited on similar
contracts without the applicable feature. The amounts capitalized are
amortized using the same methodology and assumptions used to amortize DAC.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies that IDSRiverSource Life uses affect its
Consolidated Financial Statements. Certain accounting and reporting policies
are critical to an understanding of IDSRiverSource Life's financial condition and
results of operations and
financial condition, 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.Consolidated Financial Statements.
The accounting and reporting policies IDSRiverSource Life has identified as
fundamental to a full understanding of its financial condition and results of
operations and
financial condition are described below. See Note 12 to the Consolidated Financial
Statements for further information about IDSRiverSource Life's accounting
policies.
27
-19-
VALUATION OF INVESTMENTS
The most significant component of investments is Available-for-Sale
securities. Generally, IDSsecurities, which RiverSource Life generally carries at fair value within its
Consolidated Balance Sheets. The fair value of approximately 95% of
RiverSource Life's Available-for-Sale securities at fair value on the Consolidated Balance Sheets andDecember 31, 2006 was
determined by quoted market prices. RiverSource Life records unrealized
securities gains (losses) in accumulated other comprehensive income (loss) within equity,,
net of income tax provision (benefit) and net of adjustments in other asset
and liability balances, such as DAC, to reflect the expected impactsimpact on their
carrying valuevalues had the unrealized securities gains (losses) been realized as
of the respective balance sheet date.dates. At December 31, 2005, IDS2006, RiverSource Life
had net unrealized pretax losses on Available-for-Sale securities of $63.8$293
million. IDSRiverSource Life recognizes gains and losses in results of operations
upon disposition of the securities. IDSRiverSource Life also recognizes losses in
results of operations when management determines that a decline in value is
other-than-temporary. This determination requires the exercise of judgment
regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. IDSRiverSource Life also considers the extent to which amortized
cost exceeds fair value and the duration of that difference and management's
judgment about the issuer's current and prospective financial condition, as
well as its ability and intent to hold until recovery. The fair value of approximately 96% of the investment portfolio
classified as Available-for-Sale as of December 31, 2005 is determined by
quoted market prices. As of December 31,
2005,2006, there were $420.9$514 million in gross unrealized losses that related to $17.9$18.7
billion of Available-for-Sale securities, of which $4.3$16.4 billion has been in a
continuous unrealized loss position for 12 months or more. These investment
securities had a ratio of 97% of fair value to cost at December 31, 2006. As
part of IDSRiverSource Life's ongoing monitoring process, management determined
that a majority of the gross unrealized losses on these securities is
attributable to changes in interest rates. Additionally, because IDSRiverSource
Life has the ability as well as the intent to hold these securities for a time
sufficient to recover its amortized cost, IDSRiverSource Life concluded that none of these
securities was other-than-temporarily impaired at December 31, 2005.2006.
DEFERRED POLICY ACQUISITION COSTS
DAC represents the costs of acquiring new business, principally direct sales
commissions and other distribution and underwriting costs that have been
deferred on the sale of annuity and life, DI and LTC insurance products.
These costs are deferred to the extent they are recoverable from future
profits. For annuity and insurance products, DAC is amortized over periods
approximating the lives of the business, principally as a percentage of
premiums or estimated gross profits or as a portion of product interest
margins depending on the product's characteristics.
For IDSRiverSource Life's annuity and life, DI and LTC insurance products, the
DAC balances at any reporting date are supported by projections that show that
management expects there to be adequate premiums or estimated gross profits
after that date to amortize the remaining DAC balances. These projections are
inherently uncertain because they require management to make assumptions about
financial markets, anticipated mortality and morbidity levels and policyholder
behavior over periods extending well into the future. Projection periods used
for IDSRiverSource Life's annuity products are typically 10 to 25 years, while
projection periods for IDSRiverSource Life's life, DI and LTC insurance products
are often 50 years or longer. Management regularly monitors financial market
conditions and actual policyholder behavior experience and compares them to
its assumptions.
For annuity and universal life insurance products, the assumptions made in
projecting future results and calculating the DAC balance and DAC amortization
expense are management's best estimates. Management is required to update
these assumptions whenever it appears that, based on actual experience or
other evidence, earlier estimates should be revised. When assumptions are
changed, the percentage of estimated gross profits used to amortize DAC might
also change. A change in the required amortization percentage is applied
retrospectively; an increase in amortization percentage will result in a
decrease in the DAC balance and an increase in DAC amortization expense, while
a decrease in amortization percentage will result in an increase in the DAC
balance and a decrease in DAC amortization expense. The impact on results of
operations of changing assumptions can be either positive or negative in any
particular period and is reflected in the period in which such changes are
made.
28
For other life, DI and LTC insurance products, the assumptions made in
calculating the DAC balance and DAC amortization expense are consistent with
those used in determining the liabilities and, therefore are intended to
provide for adverse deviations in experience and are revised only if
management concludes experience will be so adverse that DAC is not recoverable.recoverable
or if premium rates charged for the contract are changed. If management
concludes that DAC is not recoverable, DAC is reduced to the amount that is
recoverable based on best estimate assumptions and there is a corresponding
expense recorded in the Consolidated Statementsconsolidated results of Income.operations.
For annuity and life, DI and LTC insurance products, key assumptions
underlying these long-term projections include interest rates (both earning
rates on invested assets and rates credited to policyholder accounts), equity
market performance, mortality and morbidity rates and the rates at which
policyholders are expected to surrender their contracts, make withdrawals from
their contracts and make additional deposits to their contracts. Assumptions
about interest rates are the primary factor used to project interest margins,
while assumptions about rates credited to policyholder accounts and equity
market performance are the primary factors used to project client asset value
growth rates, and assumptions about surrenders, withdrawals and deposits
comprise projected persistency rates. Management must also make assumptions to
project maintenance expenses associated with servicing its annuity and
insurance business during the DAC amortization period.
-20-
The client asset value growth rate is the rate at which variable annuity and
variable universal life insurance contract values are assumed to appreciate in
the future. The rate is net of asset fees and anticipates a blend of equity
and fixed income investments. Management reviews and, where appropriate,
adjusts its assumptions with respect to client asset value growth rates on a
quarterlyregular basis. IDSRiverSource Life uses a mean reversion method as a monthly guideline in
setting near-term client asset value growth rates based on a long-term view of
financial market performance as well as actual historical performance. In
periods when market performance results in actual contract value growth at a
rate that is different than that assumed, IDSRiverSource Life will reassessreassesses the
near-term rate in order to continue to project its best estimate of long-term
growth. The near-term growth rate is reviewed to ensure consistency with
management's assessment of anticipated equity market performance. Management is currently assumingDAC
amortization expense recorded in a 7%period when client asset value growth rates
exceed our near-term estimate will typically be less than in a period when
growth rates fall short of our near-term estimate. The long-term client asset
value growth rate.rate is based on an equity return assumption of 8%, net of
management fees, with adjustments made for fixed income allocations. If
IDSRiverSource Life increased or decreased its assumption related to this growth
rate by 100 basis points, the impact on annualthe DAC amortization expensebalance would be aan increase
or decrease or increase of approximately $65$35 million.
Management monitors other principal DAC amortization assumptions, such as
persistency, mortality, morbidity, interest margin and maintenance expense
levels each quarter and, when assessed independently, each could impact
IDSRiverSource Life's DAC balances. For example, if IDSRiverSource Life increased or
decreased its interest margin on its universal life insurance and on the fixed
portion of its variable universal life insurance products by 10 basis points,
the impact on annualthe DAC amortization expensebalance would be aan increase or decrease or increase of
approximately $5 million. Additionally, if IDSRiverSource Life extended or
reduced the amortization periods by one year for variable annuities to reflect
changes in premium paying persistency and/or surrender assumptions, the impact
on annualthe DAC amortization expensebalance would be aan increase or decrease or increase of approximately $30$32
million. The amortization impact of extending or reducing the amortization
period any additional years is not linear.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions described
previously. Unless management identifies a significant deviation over the
course of the quarterly monitoring, management reviews and updates these DAC
amortization assumptions annually in the third quarter of each year. An
assessment of sensitivity associated with changes in any single assumption
would not necessarily be an indicator of future results.
In periods prior to 2007, RiverSource Life's policy has been to treat certain
internal replacement transactions as continuations and to continue
amortization of DAC associated with the existing contract against revenues
from the new contract. RiverSource Life will account for many of these
transactions differently as a result of adopting American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 05-1,
"Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection With Modifications or Exchanges of Insurance Contracts" ("SOP
05-1") effective January 1, 2007. See Note 3 to the Consolidated Financial
Statements for additional information about the effect of RiverSource Life's
adoption of SOP 05-1.
For additional information about RiverSource Life's accounting policies for
amortization and capitalization of DAC, see Note 2 and Note 3 to the
Consolidated Financial Statements. For details regarding the balances of and
changes in DAC for the years ended December 31, 2006, 2005 2004 and 2003,2004, see Note
46 to the Consolidated Financial Statements.
29
LIABILITIES FOR FUTURE POLICY BENEFITS AND POLICY CLAIMS AND OTHER
POLICYHOLDERS' FUNDS
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders' funds
related to fixed annuities and variable annuity guarantees include liabilities
for fixed account values on fixed and variable deferred annuities, guaranteed
benefits associated with variable annuities, equity indexed annuities and
fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred annuities
are equal to accumulation values, which are the cumulative gross deposits and
credited interest and fund performance less withdrawals and mortality and expense
riskvarious charges.
The majority of the variable annuity contracts offered by IDSRiverSource Life
contain guaranteed minimum death benefit (GMDB)GMDB provisions. When market values of the client'scustomer's accounts
decline, the death benefit payable on a contract with a GMDB may exceed the
contract accumulation value. IDSRiverSource Life also offers variable annuities
with death benefit provisions that gross up the amount payable by a certain
percentage of contract earnings; these are referred to as gain gross-up
(GGU)("GGU") benefits. In addition, IDSRiverSource Life offers contracts containing
guaranteed minimum withdrawal benefit (GMWB), guaranteed minimum
income benefit (GMIB)("GMIB"), GMWB and guaranteed minimum
accumulation benefit (GMAB)("GMAB") provisions.
Effective January 1, 2004,-21-
In determining the liabilities for GMDB, GGUvariable annuity death benefits and GMIB,
RiverSource Life projects these benefits have
been established under SOP 03-1. Actuarialand contract assessments using
actuarial models to simulate various equity market scenarios are used to project thesescenarios. Significant
assumptions made in projecting future benefits and contract assessments and include making significant assumptions relatedrelate to
clientcustomer asset value growth rates, mortality, persistency and investment
margins. These
assumptions, as well as their periodic review by management,margins and are consistent with those used for DAC purposes. Prior toasset valuation for the
adoptionsame contracts. As with DAC, management will review, and where appropriate,
adjust its assumptions each quarter. Unless management identifies a material
deviation over the course of SOP 03-1, amounts
paidquarterly monitoring, management will review and
update these assumptions annually in the third quarter of each year. The
variable annuity death benefit liability is determined by estimating the
expected value of death benefits in excess of the projected contract
accumulation value were expensed. Seeand recognizing the "Recently Issued
Accounting Standards" sectionexcess over the estimated meaningful
life based on expected assessments (e.g., mortality and expense fees,
contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period from
contract issuance, a GMIB guarantees a minimum lifetime annuity based on a
specified rate of contract accumulation value growth and predetermined annuity
purchase rates. The GMIB liability is determined each period by estimating the
expected value of annuitization benefits in Note 1 toexcess of the Consolidated Financial
Statements for more information about these guaranteed benefits.projected contract
accumulation value at the date of annuitization and recognizing the excess
over the estimated meaningful life based on expected assessments.
GMWB and GMAB provisions are considered embedded derivatives under Statement
of Financial Accounting Standards Board No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) and, accordingly, are carriedrecorded
at fair value within future policy benefits for variable annuity guarantees
on the Consolidated Balance Sheets.value. The fair value of these embedded derivatives is based on the
present value of future benefits less applicable fees charged for the
provision. Changes in fair value are reflected in death and other benefits for
investment contracts and universal life-type insurance within the Consolidated Statements of Income.insurance.
Liabilities for equity indexed deferred annuities issued in 1999 or later are equal to the accumulation of host
contract values covering guaranteed benefits and the market value of embedded
equity options. Liabilities for
equity indexed deferred annuities issued before 1999 are equal to the
present value of guaranteed benefits and the intrinsic value of index-based
benefits. Accounting for equity indexed deferred annuities issued before
1999 differs from those issued in 1999 and later due to the treatment of
embedded equity options within the contracts. Embedded equity options are
considered embedded derivatives under SFAS 133. However, SFAS 133 allowed
companies to elect whether to separately account for embedded derivatives
related to contracts issued prior to January 1, 1999. IDS Life elected not
to separately account for embedded derivatives related to contacts issued
prior to January 1, 1999.
Liabilities for fixed annuities in a benefit or payout status are based on
future estimated payments using established industry mortality tables and
interest rates, ranging from 4.6% to 9.5% at December 31, 2005,2006, depending on
year of issue, with an average rate of approximately 6.0%5.9%.
Life, Disability Income and Long-TermLong Term Care PoliciesInsurance
Future policy benefits and policy claims and other policyholders' funds
related to life, DI and LTC insurance include liabilities for fixed account
values on fixed and variable universal life policies, liabilities for unpaid
amounts on reported claims, estimates of benefits payable on claims incurred
but not yet reported and estimates of benefits that will become payable on
term life, whole life, DI and LTC policies as claims are incurred in the
future.
Liabilities for fixed account values on fixed and variable universal life
insurance are equal to accumulation values. Accumulation values are the
cumulative gross deposits and credited interest less various contractual
expense and mortality charges and less amounts withdrawn by policyholders.
Liabilities for unpaid amounts on reported life insurance claims that have been reported but have not
yet been paid (unpaid claim liabilities) are equal to
the death benefits payable under the policies. ForLiabilities for unpaid amounts
on reported DI and LTC claims unpaid claim liabilities
are equal toinclude any periodic or other benefit amounts
due and accrued, includingalong with estimates of the expensepresent value of reviewingobligations for
continuing benefit payments. These amounts are calculated based on claim
continuance tables which estimate the likelihood an individual will continue
to be eligible for benefits. Present values are calculated at interest rates
established when claims and making benefit payment determinations.are incurred. Anticipated claim continuance rates are
based on established industry tables, adjusted as appropriate for RiverSource
Life's experience. Interest rates used with DI claims range from 3.0% to 8.0%
at December 31, 2006, with an average rate of 5.0%. Interest rates used with
LTC claims range from 4.0% to 7.0% at December 31, 2006, with an average rate
of 4.4%.
Liabilities for estimated benefits payable on claims that have occurredbeen incurred
but have not yet been reported are estimated based on periodic analysis of the actual time lag
between when a claim occurs and when it is reported.
Where applicable, amounts recoverable from other insurers
who share in the risk of the products offered (reinsurers) are separately
recorded as receivables.
30
Liabilities for fixed and variable universal life insurance are equal to
accumulation values which are the cumulative deposits, credited interest,
and fund performance less withdrawals and mortality and expense risk
charges. Liabilities forestimates of benefits that will become payable on future
benefitsclaims on term andlife, whole life, insuranceDI and LTC policies are based on the net
level premium method, using anticipated premium payments, mortality and
morbidity rates, policy persistency and interest rates earned on the assets
supporting the liability. Anticipated mortality and morbidity rates are based
on established industry mortality and morbidity tables, with modifications
based on IDSRiverSource Life's experience. Anticipated policy premium payments and
persistency rates vary by policy form, issue age, policy duration and policy duration.certain
other pricing factors. Anticipated interest rates for term and whole life
range from 4.0% to 10.0% at December 31, 2005,2006, depending on policy form, issue
year and policy duration. IDSAnticipated interest rates for DI are 7.5% at policy
issue grading to 5.0% over 5 years. Anticipated discount rates for LTC are
currently 5.4% at December 31, 2006 grading up to 9.4% over 40 years.
-22-
Where applicable, benefit amounts expected to be recoverable from other
insurers who share in the risk are separately recorded as reinsurance
recoverable within receivables.
RiverSource Life issues only non-participating life and health insurance
policies, which do not pay dividends to policyholders from the insurers' earnings.
Liabilities for futurerealized policy
benefits include both policy reserves and
claim reserves on DI and LTC products. Policy reserves are the amounts
needed to meet obligations for future claims and are based on the net level
premium method, using anticipated premium payments and morbidity, mortality,
policy persistency and discount rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for DI policies, occupation class. Anticipated interest rates
for DI policy reserves are 7.5% at policy issue and grade to 5.0% over 5
years. Anticipated interest rates for LTC care policy reserves were 5.3% at
December 31, 2005 grading up to 9.4% over 40 years.
Claim reserves on DI and LTC products are the amounts needed to meet
obligations for continuing claim payments on already incurred claims. Claim
reserves are calculated based on claim continuance tables which estimate the
likelihood that an individual will continue to be eligible for benefits and
anticipated interest rates earned on assets supporting the reserves.
Anticipated claim continuance rates are based on established industry
tables. Anticipated interest rates for claim reserves for both DI and LTC
range from 3.0% to 8.0% at December 31, 2005, with an average rate of
approximately 4.9% at December 31, 2005.margins.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The fair value of IDSRiverSource Life's derivative financial instruments areis
determined using either market quotes or valuation models that are based upon
the net present value of estimated future cash flows and incorporate current
market data inputs. In certain instances, the fair value includes structuring
costs incurred at the inception of the transaction. The accounting for the
change in the fair value of a derivative financial instrument depends on its
intended use and the resulting hedge designation, if any. IDSRiverSource Life
currently designates derivatives as cash flow hedges or, in certain
circumstances, does not designate derivatives as accounting hedges.
For derivative financial instruments that qualify as cash flow hedges, the
effective portions of the gain or loss on the derivativesderivative instruments are
reported in accumulated other comprehensive income (loss) and reclassified
into earnings when the hedged item or transactions impact earnings. Any
ineffective portion of the gain or loss is also reported currently in earnings
as a component of net investment income.
For derivative financial instruments that do not qualify for hedge accounting
or are not designated as hedges, changes in fair value are reportedrecognized in
current period earnings, generally as a component of net investment income.
These derivatives primarily provide economic hedges to equity market
exposures. An example includesExamples include structured derivatives and options and futures
that economically hedge the equity components of certain annuities.
For further details on the types of derivatives IDSRiverSource Life uses and how
it accountedaccounts for them, see Note 1014 to the Consolidated Financial Statements.
31
INCOME TAX ACCOUNTING
Income taxes, as reported in the Consolidated Financial Statements, represent
the net amount of income taxes that IDSRiverSource Life expects to pay to or
receive from various taxing jurisdictions in connection with its operations.
IDSRiverSource Life provides for income taxes based on amounts that it believes
it will ultimately owe. Inherent in the provision for income taxes are
estimates and judgments regarding the tax treatment of certain items and the
realization of certain offsets and credits. In the event that the ultimate tax
treatment of items or the realization of offsets or credits differs from
IDSRiverSource Life's estimates, it may be required to significantly change the
provision for income taxes recorded in its Consolidated Financial Statements.
In connection with the provision for income taxes, the Consolidated Financial
Statements reflect certain amounts related to deferred tax assets and
liabilities, which result from temporary differences between the assets and
liabilities measured for financial statement purposes versus the assets and
liabilities measured for tax return purposes. Among IDSRiverSource Life's
deferred tax assets is a significant deferred tax asset relating to capital
losses realized for tax return purposes and capital losses that have been
recognized for financial statement purposes but not yet 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.
IDSRiverSource Life will not be able to file a consolidated U.S. federal income
tax return with the other members of the Ameriprise Financial affiliated group
for five tax years following the Distribution, which will result in net
operating and capital losses, credits and other tax attributes generated by
one group not being available to offset income earned or taxes owed by the
other group during the period of non-consolidation. This lack of consolidation
could affect IDSRiverSource Life's ability to fully realize certain deferred tax
assets, including the capital losses referred to above.
IDSlosses.
RiverSource Life is required to establish a valuation allowance for any
portion of deferred tax assets that management believes will not be realized.
It is likely that management will need to identify and implement appropriate
planning strategies to ensure its ability to realize deferred tax assets
relating to capital losses and avoid the establishment of a valuation
allowance with respect to it. In the opinion of management, it is currently
more likely than not that IDSRiverSource Life will realize the benefit of
deferred tax assets, including capital loss deferred tax assets, and,assets; therefore, no
such valuation allowance has been established.
-23-
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their expected
impact on future consolidated financial condition or results of operations,
or financial
condition, see Note 13 to the Consolidated Financial Statements.
FINANCIAL CONDITION
IDSRiverSource Life's total assets and liabilities increased in 20052006 primarily
due to higher separate account assets and liabilities, which increased as a
result of positive variable annuity net client inflowsflows and market appreciation.
Investments primarily include corporate debt securities and mortgage and other
asset-backed securities. At December 31, 2005, IDS2006, RiverSource Life's corporate
debt securities comprise a diverse portfolio with the largest concentrations
accounting for approximately 68%67% of the portfolio in the following industries:
banking and finance, utilities, and communications and media. Investments also
include $4.0$3.7 billion and $4.3$4.0 billion of mortgage loans on real estate, policy
loans and other investments at December 31, 20052006 and 2004,2005, respectively.
Investments are principally funded by sales of insurance and annuities and by
reinvested income. Maturities of these investment securities are largely
matched with the expected future payments of insurance and annuity
obligations.
Investments include $2.1$1.7 billion and $2.2$2.1 billion of below investment grade
securities classified as Available-for-Sale securities (excluding net
unrealized appreciation and depreciation) at December 31, 20052006 and 2004,2005,
respectively. These investments represent 7% and
8% of IDSRiverSource Life's investment
portfolio at both December 31, 20052006 and 2004,
respectively.
32
2005.
Separate account assets represent funds held for the exclusive benefit of
variable annuity contractholders and variable life insurance policyholders.
These assets are generally carried at market value, and separate account
liabilities are equal to separate account assets. IDSRiverSource Life earns
administration and other fees from the related accounts. The increase in
separate account assets and liabilities to $49.3 billion as of December 31,
2006 compared to $37.9 billion as of December 31, 2005, compared to $32.5 billion as of December 31, 2004, resulted from net
inflows of $3.1$5.3 billion and market appreciation.
IDSRiverSource Life holds reserves for current and future obligations that are
related to fixed annuities, certain guaranteed payments under variable
annuities and life, DI and LTC insurance. Reserves related to fixed annuities,
guarantees under variable annuities and life, DI and LTC insurance are
reflected in future policy benefits in the Consolidated Balance Sheets.
Reserves for fixed annuities and universal life contracts are equal to the
underlying contract accumulation values. Reserves for other life, DI and LTC
insurance products are based on various assumptions, including mortality
rates, morbidity rates and policy persistency.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALLIQUIDITY STRATEGY
The liquidity requirements of IDSRiverSource Life 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
RiverSource Life has established are repurchase agreements and an available
line of credit with Ameriprise Financial aggregating $200 million. 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. IDSRiverSource Life
routinely reviews its sources and uses of funds in order to meet its ongoing
obligations. RiverSource Life of NY paid ordinary dividends to RiverSource
Life during the second quarter of 2006 of $23 million.
At December 31, 2006 and 2005, RiverSource Life had securities sold under
repurchase agreements totaling nil and $25 million, respectively and no
amounts were outstanding on the line of credit with Ameriprise Financial.
-24-
CAPITAL ACTIVITY
RiverSource Life paid $300 million of dividends to Ameriprise Financial during
2006 comprised of $100 million of extraordinary cash dividends in each of the
second and third quarters of 2006 and $100 million of ordinary cash dividends
in the fourth quarter of 2006. Prior to the payment of the extraordinary cash
dividends, RiverSource Life made the required advance notices to the Minnesota
Department of Commerce, its primary state regulator, and received responses
stating there were no objections to the payment of these dividends. In
connection with the separation, IDSSeparation, RiverSource Life received a capital
contribution of $650 million from Ameriprise Financial during the third
quarter of 2005 to support its current financial strength ratings and to cover
the allocated separation costs. During the fourth quarter of 2005, IDSRiverSource
Life approved and paid dividends to Ameriprise Financial of $380 million.
DuringAs a result of the secondmergers described in the Overview, both RiverSource Life
Insurance Company and fourth quarterRiverSource Life of 2004, IDSNY were able to release certain
statutory reserves previously held as a result of asset adequacy testing.
RiverSource Life approvedInsurance Company and paid dividends to
Ameriprise FinancialRiverSource Life of $430NY reduced
statutory reserves by $112 million and $500$22 million, respectively. IDS
Life expects to continue to maintain adequate capital to meet internal and
external RBC requirements.
FUNDING STRATEGY
Atrespectively, as of
December 31, 20052006.
REGULATORY CAPITAL
RiverSource Life Insurance Company and 2004, IDSRiverSource Life had outstanding reverse repurchase
agreements totaling $25.0 millionof NY are subject to
regulatory capital requirements. Actual capital, determined on a statutory
basis, and $47.0 million, respectively. The
reverse repurchase agreementsregulatory capital requirements for each of the life insurance
entities are used strictly as short-term sources of
funds.follows:
ACTUAL CAPITAL(a)
DECEMBER 31, REGULATORY
----------------------- CAPITAL
2006 2005 REQUIREMENT(b)
---------- --------- -----------------
(IN MILLIONS)
RiverSource Life Insurance Company...................... $ 3,511 $ 3,270 $ 590
RiverSource Life Insurance Co. of New York.............. 348 308 38
(a) Actual capital, as defined by the NAIC 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 most recent statutory
risk-based capital filing as of December 31, 2006.
CONTRACTUAL COMMITMENTS
The contractual obligations identified in the table below include balance
sheet transactions that represent material expected or contractually committed
future obligations of IDSRiverSource Life. Payments due by period as of December
31, 20052006 are as follows:
Payments due in year ending
- ----------------------------------------------------------------------------------------------------------------------------------
(Millions) Total 2006 2007- 2009-PAYMENTS DUE IN YEAR ENDING
---------------------------------------------------------------
2008- 2010- 2012 AND
TOTAL 2007 2009 2011 and
2008 2010 thereafter
- ----------------------------------------------------------------------------------------------------------------------------------THEREAFTER
---------- ----------- ---------- ----------- ------------
(IN MILLIONS)
Insurance and annuities (1) ........ $ 53,46744,599 $ 3,7153,517 $ 7,2646,329 $ 6,8595,506 $ 35,629
- ----------------------------------------------------------------------------------------------------------------------------------
29,247
(1) These scheduled payments are represented by reserves of approximately $32$30
billion at December 31, 20052006 and are based on interest credited,
mortality, morbidity, lapse, surrender and premium payment assumptions.
Actual payment obligations may differ if experience varies from these
assumptions. Separate account liabilities have been excluded as
associated contractual obligations would be met by separate account
assets.
33
OFF-BALANCE SHEET ARRANGEMENTS
Consolidated Variable Interest Entities
Assets consolidated as a result ofDuring the years ended December 31, 2003 adoption2005 and 2004, RiverSource Life
consolidated three secured loan trusts ("SLTs") which provided returns to
investors primarily based on the performance of Financial Accounting Standards Board Interpretation No. 46, "Consolidationan underlying portfolio of
Variable Interest Entities," as revised (FIN 46) were $907 million. The
consolidated assets consisted of $834 million of cashhigh-yield loans and $73 million of
derivatives, essentially all of which were restricted. The effect of
consolidating these assets on IDS Life's balance sheet was offsetmanaged by IDS
Life's previously recorded carrying values of its investment in such
structures, which totaled $673 million, and $166 million of newly
consolidated liabilities.
The consolidation of FIN 46-related entities resulted in a cumulative effect
of accounting change that increased 2003 net income through a non-cash gain
of $44.5 million ($68.4 million pretax) related to the consolidation of
three SLTs. The initial gain related to the application of FIN 46 for the
SLTs had no cash flow effect on IDS Life.an affiliate. One SLT was
liquidated in 2004, resulting in a cumulative net pretax charge of $24.2$24 million. An
additional $4 million duringpretax charge was incurred in 2004 due to the expected
liquidation of the two remaining SLTs in 2005. Those remaining SLTs were
liquidated in 2005, resulting in a $14 million pretax gain for the year ended
December 31, 2004 and the other two SLTs were liquidated in 2004 and
2005 resulting in a $3.7 million pretax charge in 2004 and a $13.9 million
pretax gain in 2005. There iswas no remaining exposure in 2006 related to these
SLTs as a result of December 31, 2005.their liquidation.
-25-
Retained Interest in Assets Transferred to Unconsolidated Entities
In 2001, IDSRiverSource Life placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other liquid
securities, having an aggregate book value of $675.3$675 million, into a
securitization trust. In return, IDSRiverSource Life received $89.5$90 million in cash
(excluding transaction expenses) relating to sales to unaffiliated investors
and retained interests with allocated book amounts aggregating $585.8$586 million.
During the second quarter of 2005, IDSRiverSource Life sold all of its retained
interest in the CDO-related securitization trust and realized a net pretax
gain of $24.9$25 million.
The carrying valueRECENT DEVELOPMENTS
RiverSource Life is assessing a comment from the Minnesota Department of
Commerce related to the actuarial calculation of disability income insurance
unpaid claims, received as part of its routine financial examination of
RiverSource Life Insurance Company for each of the five years in the period
ended December 31, 2005. RiverSource Life's management does not believe that
there will be a material adverse effect on its consolidated financial
condition and results of operations upon resolution of this retained interest
was $526.2 million at December 31, 2004, of which $389.9 million was
considered investment grade.
CONTINGENT LIQUIDITY PLANNING
Ameriprise Financial has developed a contingent funding plan that enables
IDS Life to meet client obligations during periods in which its clients
elect to withdraw funds from their annuity and insurance contracts.
Ameriprise Financial designed this plan to allow IDS Life to meet these
client withdrawals by selling or obtaining financing, through repurchase
agreements, of portions of its investment securities portfolio.comment.
RISK MANAGEMENT
In accordance with regulatory investment guidelines, IDSRiverSource Life
Insurance Company and its subsidiaries,RiverSource Life of NY, through their respective boards
of directors or board of directors' investment committees or staff functions,
review models projecting different interest rate scenarios, risk/return
measures, and their effect on profitability.profitability in order to guide the management
of the general account assets. They also review the distribution of assets in
the portfolio by type and credit risk sector. The objective is to structure
the investment securities portfolio in the general account to meet contractual
obligations under the insurance and annuity products and achieve targeted
levels of profitability within defined risk parameters.
IDSRiverSource Life has developed an asset/liability management approach with
separate investment objectives to support specific product liabilities, such
as insurance and annuities. As part of this approach, IDSRiverSource Life
develops specific investment guidelines that are designed to optimize trade
offs between risk and return and help ensure IDSRiverSource Life is able to
support future benefit payments under its insurance and annuity obligations.
These same objectives must be consistent with management's overall investment
objectives for the general account investment portfolio.
34
IDSRiverSource Life's owned investment securities are primarily invested in
long-term and intermediate-term fixed maturity securities to provide clients
with a competitive rate of return on their investments while controllingmanaging risk.
Investment in fixed maturity securities is designed to provide IDSRiverSource
Life with a targeted margin between the yield earned on investments and the
interest rate credited to clients' accounts. IDSRiverSource Life does not trade
in securities to generate short-term profits for its own account.
As part of IDSRiverSource Life's investment process, management, with the
assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process conducted by IDS Life's Investment Committee involves the review of certain
invested assets which the committee evaluates to determine whether or not any
investments are other-than-temporarily impaired and/or which specific interest
earning investments should be put on an interest non-accrual basis.
IDSRiverSource Life has two principal components of market risk: interest rate
risk and equity market risk. Interest rate risk results from investing in
assets that are somewhat longer and reset less frequently than the liabilities
they support. IDSRiverSource Life manages interest rate risk through the use of a
variety of tools that include modifying the maturities of investments
supporting its fixed annuities and insurance products. Additionally,
IDSRiverSource Life enters into derivative financial instruments, such as
interest rate swaps, caps, floors and swaptions, which change the interest
rate characteristics of client liabilities or investment assets. Because
certain of its investment activities are impacted by the value of its managed
equity-based portfolios, from time to time IDSRiverSource Life enters into risk
management strategies that may include the use of equity derivative financial
instruments, such as equity options, to mitigate its exposure to volatility in
the equity markets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest rate and equity price risks are the market risks to which RiverSource
Life has material exposure. To evaluate interest rate and equity price risk
RiverSource Life performs sensitivity testing which measures the impact on
pretax income from the sources listed below for a 12 month period following a
100 basis point increase in interest rates and a 10% decline in equity
markets.
-26-
At December 31, 2006, aggregating RiverSource Life's exposure from all sources
of interest rate risk net of financial derivatives hedging that exposure
detailed below, RiverSource Life estimates a negative impact of $23 million on
pretax income for the 12 month period if, hypothetically, interest rates had
increased by 100 basis points and remain at that level for 12 months. This
compares with an estimate of $27 million made at December 31, 2005 for 12
months following a 100 basis point increase in interest rates at December 31,
2005.
At December 31, 2006, aggregating RiverSource Life's exposure from all sources
of equity price risk net of financial derivatives hedging that exposure
detailed below, RiverSource Life estimates a negative impact of $79 million on
pretax income for the 12 month period if, hypothetically, equity markets had
declined by 10% and remain at that level for 12 months. This compares with an
estimate of $51 million made at December 31, 2005 for 12 months following a
hypothetical 10% drop in equity markets at December 31, 2005.
The numbers below show RiverSource Life's estimate of the pretax impact of
these hypothetical market moves, net of hedging, as of December 31, 2006.
Following the table is a discussion by source of risk and the portfolio
management techniques and derivative financial instruments RiverSource Life
uses to mitigate these risks.
NET RISK EXPOSURE TO
PRETAX INCOME
----------------------------------
SOURCES OF MARKET RISK INTEREST RATE EQUITY PRICE
--------------------------------------------------------------------- ---------------- ----------------
(IN MILLIONS)
Variable annuities and variable universal life ("VUL") products.... $ 7 $ (95)
Fixed annuities, fixed portion of variable annuities, fixed
portion of VUL and fixed insurance products...................... (22) -
Deferred acquisition costs ("DAC") reserves........................ (8) 16
---------------- ----------------
Total............................................................ $ (23) $ (79)
================ ================
Actual results could differ materially from those illustrated above as they
are based on a number of estimates and assumptions. These include assuming the
composition of invested assets and liabilities does not change in the 12 month
period following the market shock and assuming the increase in interest rates
produces a parallel shift in the yield curve. The selection of a 100 basis
point interest rate increase and a 10% equity market decline should not be
construed as a prediction of future market events.
VARIABLE ANNUITIES AND VUL PRODUCTS
With variable annuities and VUL products, the policyholder chooses how the
premiums are invested. They can choose equity or non-equity investments and
those investments are carried in separate account assets. Annuity payouts, VUL
cash value and death benefits fluctuate with the performance of the
investments that the policyholder chooses. Therefore, for these products,
policyholders assume the bulk of the investment risk. RiverSource Life faces
interest rate and equity price risk on these products from two primary
sources: the guaranteed benefits associated with variable annuities and the
management fees earned on separate account assets.
The guaranteed benefits associated with the variable annuities are GMWB, GMAB,
GMDB and GMIB options. Each of the guaranteed benefits mentioned above
guarantees payouts to the annuity holder under certain specific conditions
regardless of the performance of the underlying investment assets.
The total value of all variable annuity contracts has grown from $39.8 billion
at December 31, 2005 to $49.2 billion at December 31, 2006. These contract
values include GMWB contracts which have grown from $2.5 billion at December
31, 2005 to $7.2 billion at December 31, 2006. Reserve liabilities for the
guaranteed benefits are recorded in future policy benefits on RiverSource
Life's Consolidated Balance Sheets. At December 31, 2006, the reserve for the
GMWB was a negative $12 million compared with a reserve of a positive $9 million
at December 31, 2005. The negative reserve indicates that RiverSource Life
expects the GMWB fees charged to more than offset the future benefits to be
paid to policyholders under the guaranteed benefit provisions. At December 31,
2006, the reserve for the other variable annuity guaranteed benefits, GMAB,
GMDB and GMIB, was $26 million compared with $21 million at December 31, 2005.
-27-
RiverSource Life manages the market risk on the guaranteed benefits by product
design and by the use of financial derivatives which hedge the GMWB. The
design of the GMWB is an example of how RiverSource Life uses product design
to manage risk. First, the GMWB provision requires that policyholders invest
their funds in one of five asset allocation models, thus ensuring
diversification across asset classes and underlying funds, reducing the
likelihood that payouts from the guaranteed benefits will be required to
compensate policyholders for investment losses. Second, the GMWB provision
does not offer automatic annual percentage increases to the guaranteed amount,
thus preventing the guaranteed amount from growing during a down market.
In addition to product design, RiverSource Life has implemented a
comprehensive hedging program which utilizes a primarily static hedging
approach. A primarily static approach improves mitigation of market
dislocation and operational risks as compared to a primarily dynamic hedging
approach. Currently, RiverSource Life only hedges GMWB. The notional amounts
and fair value assets (liabilities) of derivatives hedging GMWB were as follows:
DECEMBER 31,
----------------------------------------------------
2006 2005
-------------------------- -------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------- ------------ ------------
(IN MILLIONS)
Purchased puts................................ $ 1,410 $ 171 $ 629 $ 95
Interest rate swaps........................... 359 (1) - -
Written S&P 500 futures(1).................... (111) - - -
- --------------------------
(1) These Standard & Poor's ("S&P") 500 futures are cash settled daily and,
therefore, have no fair value.
INTEREST RATE RISK - VARIABLE ANNUITIES
The GMWB create obligations which are carried at fair value separately from
the underlying host variable annuity contract. Changes in fair value of the
GMWB are recorded through earnings with fair value calculated based on
projected, discounted cash flows over the life of the contract, including
projected, discounted benefits and fees. Increases in interest rates reduce
the fair value of the GMWB liability. At December 31, 2006, if interest rates
had increased by 100 basis points and remain at that level for 12 months,
RiverSource Life estimates that the fair value would decrease by $57 million
with a favorable impact to pretax income. The GMWB interest rate exposure is
hedged with a portfolio of customized equity index puts and interest rate
swaps. At December 31, 2006, RiverSource Life had equity puts with a notional
amount of $1.4 billion, and interest rate swaps with a notional amount of $359
million. Terms of the swaps designate RiverSource Life as the variable rate
payor. If interest rates were to increase, RiverSource Life would have to pay
more to the swap counterparty, and the fair value of equity puts would
decrease, resulting in a negative impact to pretax income. For a hypothetical
100 basis point increase in interest rates sustained for a 12 month period,
RiverSource Life estimates that the negative impact of the derivatives on
pretax income would be $53 million. The net impact on pretax income after
hedging would be a favorable $4 million.
GMAB creates interest rate risk in the same way as the GMWB discussed above -
the fair value of the guaranteed benefits changes with changes in interest
rates. For a hypothetical 100 basis point increase in interest rates at
December 31, 2006, sustained for 12 months, the fair value of the GMAB would
decrease by $8 million, with a corresponding favorable impact on pretax
income. RiverSource Life does not hedge the interest rate exposure on GMAB.
Separate account assets are held for the exclusive benefit of variable annuity
and VUL contract holders. RiverSource Life does, however, receive asset-based
investment management fees on fixed income investments the annuity and VUL
policyholders have in the separate accounts. An increase in interest rates
would decrease fixed rate separate account assets and decrease related fees
with a negative impact to pretax income. At December 31, 2006, RiverSource
Life estimates the interest rate risk from this exposure on pretax income if,
hypothetically, interest rates had increased immediately by 100 basis points
and remain at that level for 12 months to be a negative $5 million for the 12
month period. RiverSource Life does not hedge this exposure.
-28-
EQUITY PRICE RISK - VARIABLE ANNUITIES AND VUL PRODUCTS
The variable annuity guaranteed benefits guarantee payouts to the annuity
holder under certain specific conditions, regardless of the performance of the
investment assets. For this reason, when equity markets decline, the returns
from the separate account assets coupled with guaranteed benefit fees from
annuity holders may not be sufficient to fund expected payouts. In that case,
reserves must be increased with a negative impact to earnings. RiverSource
Life estimates the negative impact on pretax income before hedging to be $42
million if, hypothetically, equity markets had declined by 10% at December 31,
2006 and remain at that level for 12 months. Of the $42 million, $7 million is
attributable to GMWB.
Currently RiverSource Life only hedges GMWB. RiverSource Life's hedging
program is static which reduces risk to major disruptions in the market and
severe liquidity events because its program does not rely on frequent dynamic
rebalancing and the ability to trade in the market. In addition, the primarily
static nature of the hedge reduces the likelihood of operational and execution
errors. The core derivative instrument with which RiverSource Life hedges the
equity price risk of GMWB is a long-dated structured equity put contract; this
core instrument is supplemented with equity futures. The equity put contracts
had a notional amount of $1.4 billion at December 31, 2006. If,
hypothetically, equity markets had declined by 10% at December 31, 2006 and
remain at that level for 12 months, RiverSource Life estimates a positive
impact to pretax income of $4 million from the puts and futures. The net
equity price exposure to pretax income from all variable annuity guarantee
benefits would be a negative $38 million.
A decline in equity markets would also reduce the asset-based management fees
RiverSource Life earns on equity market investments that its annuity and VUL
policyholders have in separate accounts. At December 31, 2006, RiverSource
Life estimates the equity price risk from this exposure on pretax income if,
hypothetically, equity markets decreased immediately by 10% and remain at that
level for 12 months to be a negative impact of $57 million for the 12 month
period.
FIXED ANNUITIES, FIXED PORTION OF VARIABLE ANNUITIES, FIXED PORTION OF VUL AND
FIXED INSURANCE PRODUCTS
Interest rate exposures arise primarily with respect to the fixed account
portion of IDSRiverSource Life's annuity and insurance products and its
investment portfolio. SuchRiverSource Life guarantees an interest rate to the
holders of these products. Premiums collected from clients are primarily
invested in fixed rate securities to fund the client credited rate with the
spread between the rate earned from investments and the rate credited to
clients recorded as earned income. Client liabilities and investment assets
generally do not
create naturally offsetting positionsdiffer as it relates to basis, repricing or maturity
characteristics. Rates credited to clients' accounts generally reset at
shorter intervals than the yield on underlying investments.
Further,Therefore, in an increasing rate environment, higher interest rates are
reflected in crediting rates to clients sooner than in rates earned on
invested assets resulting in a reduced spread between the expected maturitiestwo rates, reduced
earned income and a negative impact on pretax income. RiverSource Life had
$26.5 billion in reserves in future policy benefits on its Consolidated
Balance Sheets at December 31, 2006 to recognize liabilities created by these
products. To hedge against the investmentrisk of higher interest rates, RiverSource Life
has purchased swaption contracts which had the notional amounts and fair value
assets may not alignas follows:
DECEMBER 31,
----------------------------------------------------
2006 2005
-------------------------- -------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------- ------------ ------------
(IN MILLIONS)
Purchased swaptions........................... $ 1,200 $ 2 $ 1,200 $ 8
If interest rates had increased by 100 basis points at December 31, 2006 and
remain at that level for 12 months, RiverSource Life estimates the impact on
pretax income for the 12 month period to be a negative $22 million.
EQUITY INDEXED ANNUITIES
RiverSource Life's equity indexed annuity product is a single premium annuity
issued with an initial term of seven years. The annuity guarantees the
contractholder a minimum return of 3% on 90% of the initial premium or end of
prior term accumulation value upon renewal plus a return that is linked to the
performance of the S&P 500 Index.
-29-
The equity-linked return is based on a participation rate initially set at
between 50% and 90% of the S&P 500 Index which is guaranteed for the initial
seven-year term when the contract is held to full term. Of the $29.6 billion
in future policy benefits at December 31, 2006, $317 million relates to the
liabilities created by this product. The notional amounts and fair value
assets (liabilities) of derivatives hedging this product were as follows:
DECEMBER 31,
----------------------------------------------------
2006 2005
-------------------------- -------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------- ------------ ------------
(IN MILLIONS)
Purchased calls............................... $ 151 $ 37 $ 197 $ 27
Purchased Knock-in-Puts....................... 86 3 129 3
Written Knock-in-Puts......................... (67) (1) (101) (1)
Purchased S&P 500 futures(1).................. 34 - 32 -
- -----------------------
(1) These S&P 500 futures are cash settled daily and, therefore, have no fair
value.
INTEREST RATE RISK - EQUITY INDEXED ANNUITIES
Most of the proceeds from the sale of equity indexed annuities are invested in
fixed income securities with the surrender or other benefit paymentsreturn on those investments intended to fund
the 3% guarantee. RiverSource Life earns income from fixed annuitythe difference between
the return earned on invested assets and insurance
products. Therefore, IDS Life's interestthe 3% guarantee rate credited to
customer accounts. The spread margins arebetween return earned and amount credited is
affected by changes in the general level of interest rates. The extent to which the
level ofRiverSource Life estimates that if,
hypothetically, interest rates affects spread margins is managed primarilyhad increased by 100 basis points at December
31, 2006 and remain at that level for 12 months, the unhedged exposure would be
a negative impact of $2 million on pretax income for the 12 month period
offset by a combinationpositive impact of modifyingnearly $2 million from its hedging strategy for
an immaterial net exposure.
EQUITY PRICE RISK - EQUITY INDEXED ANNUITIES
The equity-linked return to investors creates equity price risk as the maturity structureamount
credited depends on changes in equity markets. To hedge this exposure, a
portion of the investment portfolioproceeds from the sale of equity indexed annuities are used to
more closely alignpurchase futures, calls and puts which generate returns to replicate what
RiverSource Life must credit to client accounts. In conjunction with
purchasing puts, RiverSource Life also writes puts. Pairing purchased puts with
written puts allows RiverSource Life to better match the client liability maturities,characteristics of
the liability. For this product, RiverSource Life estimates that if,
hypothetically, the equity markets had declined by 10% at December 31, 2006
and remain at that level for 12 months, the useimpact to pretax income for the 12
month period without hedging would be a positive $15 million. The impact of
derivative financial instrumentsits hedging strategy offsets that gain for an immaterial net exposure.
DAC
For annuity and universal life products, DAC are amortized on the basis of
estimated gross profits. Estimated gross profits are a proxy for pretax income
prior to modify the interest rate risk
characteristics associated with certain client liabilities and investment
assets.
IDS Life has entered into swaptionsrecognition of DAC amortization expense. When events occur that
reduce or other interest floors and caps to
mitigateincrease current period estimated gross profits, DAC amortization
expense is typically reduced or increased as well, somewhat mitigating the
impact of increasing interest rates related to the forecasted
interest payments of future annuity sales to clients. Such annuities
generally contain fixed interest rate provisions, which are set at the time
of the future issuance, and impact the total interest payment cash flows
related to the annuities. Therefore, this strategy allows IDS Life to "lock
in" interest rate risk associated with the forecasted annuity sale cash
flows at a specified market rate in the event that interest rates rise but
not "lock in" the interest rate risk in the event that interest rates
decline. The total notional of derivatives outstanding under this risk
management strategy was $1.2 billion as of December 31, 2005 and 2004. The
total fair value of these derivative financial instruments was $8.4 million
and $27.3 million as of December 31, 2005 and 2004, respectively. IDS Life
recognized $1.8 million of losses in the Consolidated Statements of Income
for the year ended December 31, 2005. No losses were recognized for the
years ended December 31, 2004 and 2003, respectively. No cash was paid for
the years ended December 31, 2005 and 2004. Total cash paid was $71.8
million for the year ended December 31, 2003.
The negative effect on IDS Life's pretax earnings of a 100 basis pointincome.
INTEREST RATE RISK - DAC
An increase in interest rates which assumes repricingswould result in a significant decrease in
guaranteed living benefit reserves associated with RiverSource Life's variable
annuity products, with the decrease partially offset by changes in hedge asset
values. This would result in increased estimated gross profits and client behavior
based on the application of proprietary models, to the book of business for
years endedincreased
DAC amortization. RiverSource Life estimates that if, hypothetically, interest
rates had increased by 100 basis points at December 31, 20052006 and 2004remain at
that level for 12 months, the negative impact to pretax income from increased
DAC amortization would be approximately $27.4 million
and $15.5 million, respectively.
35
$8 million.
-30-
EQUITY MARKETPRICE RISK IDS Life has three primary exposures to the general level of equity markets.
One exposure is that IDS Life earns fees from variable annuity and variable
life insurance products. The amount of fees is generally based on the value
of the portfolios, and thus is subject to fluctuation with the general level
of equity market values. To reduce the sensitivity of IDS Life's fee
revenues to the general performance of equity markets, IDS Life may from
time to time enter into various combinations of financial instruments such
as equity market put and collar options that mitigate the negative effect on
fees that would result from a decline in the equity markets.
The second exposure is the equity risk related to certain annuity products
that pay interest based upon the relative change in the S&P 500 index. IDS
Life enters into options and futures contracts to economically hedge this
risk. These products generally have rates that are paid to clients based on
equity market performance, with minimum guarantees. The minimum guarantees
are provided by a portfolio of fixed income securities, while the equity
based return is provided by a portfolio of equity options and futures
constructed to replicate the return to the contractholder.
Finally, although IDS Life currently bears all risk related to GMDB, GMIB
and GMAB, IDS Life hedges its GMWB risk using structured option contracts
which are designed to mitigate economic risk and its exposure to income
statement volatility. Such annuities, which were first introduced in 2004,
typically have account values that are based on an underlying portfolio of
mutual funds which fluctuate based on equity market performance. The GMWB
guarantees that over a period no shorter than 14 years the client can
withdraw an amount equal to what has been paid into the contract, regardless
of the performance of the underlying funds. This option is an embedded
derivative that is accounted for at fair value, with changes in fair value
recorded through earnings. To economically hedge these changes in market
value, IDS Life may pursue a portfolio of equity future contracts
constructed to offset a portion of the changes in the option mark-to-market.
For all of IDS Life's economic equity risk hedges, the total notional of
derivatives outstanding under this risk management strategy was $854.1
million and $261.0 million as of December 31, 2005 and 2004, respectively.
The total net fair value of these derivative financial instruments was
$123.8 million and $26.9 million as of December 31, 2005 and 2004,
respectively. The total amounts recognized in the Consolidated Statements of
Income for these contracts were $9.1 million, $4.0 million and $7.0 million
for the years ended December 31, 2005, 2004 and 2003, respectively. Cash
(paid)/received related to these derivative financial instruments totaled
$(87.8) million, $4.4 million and $(3.1) million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The negative effect on IDS Life's pretax earnings of a 10%- DAC
A decline in equity markets would be approximately $51.3 millionresult in reduced fee revenue and $38.8 million based onan
increase in guaranteed death and living benefit reserves associated with
RiverSource Life's variable annuity products, with the increase partly offset
by changes in hedge asset values. This would result in decreased estimated
gross profits and insurance business in force and index options as ofdecreased DAC amortization. RiverSource Life estimates that
if, hypothetically, equity markets declined by 10% at December 31, 20052006, the
positive impact to pretax income from decreased DAC amortization would be $16
million over a 12 month period.
CREDIT RISK
RiverSource Life's potential derivative credit exposure to each counterparty
is aggregated with all of its other exposures to the counterparty to determine
compliance with established credit and 2004, respectively.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
As described previously, various aspectsmarket risk limits at the time
RiverSource Life enters into a derivative transaction. Credit exposures may
take into account enforceable netting arrangements. Before executing a new
type or structure of IDS Life's business are impacted
by equity market levels and other market-based events. Several areas in
particular involve DAC and deferred sales inducements, recognition of GMDB,
GMWB, GMIB and GMAB, asset management fees, and mortality and expense risk
and other fees. The direction and magnitudederivative contract, RiverSource Life determines the
variability of the changescontract's potential market and credit exposures and
whether such variability might reasonably be expected to create exposure to a
counterparty in equity markets
can increase or decrease amortizationexcess of DAC and deferred sales inducement
costs, incurred amounts under GMDB, GMWB, GMIB and GMAB and asset management
fees and mortality and expense risk and other fees and correspondingly
affect results of operations in any particular period.
36
established limits.
FORWARD-LOOKING STATEMENTS
This report includescontains forward-looking statements which are subject to risksthat reflect RiverSource
Life's plans, estimates and uncertainties.beliefs. RiverSource Life's actual results could
differ materially from those described in these forward-looking statements.
The words "believe," "expect," "anticipate," "optimistic," "intend," "plan,"
"aim," "will," "may," "should," "could," "would," "likely,""likely" 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. RiverSource Life cautions the reader
that the following list of factors is not exhaustive. There may also be other
risks that RiverSource Life 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.
IDSRiverSource Life undertakes no obligation to update or revise any
forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the following:
o changes in the success, timeliness and financial
impact (including the amount of intercompany costs allocated to IDS Life,
cost savingsinterest rate, equity market and other benefits including increased revenues), bothfinancial
market environments;
o changes in the short-termregulatory environment and over time, of reengineering initiatives being implementedjudicial or considered by Ameriprise Financial that could impact IDS Life,legislative
developments, including cost management, structuralthe increasing focus on customer
suitability, sales practices and strategic measures such as vendor, process,
facilities and operations consolidation and outsourcing (including, among
others, technologies operations); the ability to control and manage
operating infrastructure, advertising and promotion expenses as business
expands or changes; a downturn in IDS Life's businesses and/or negative
changes in IDS Life's credit or financial strength ratings, which could
result in decreased liquidity, negative impact on marketing and sale of
products, and higher borrowing costs; IDS Life's ability to improve
investment performance, including attracting and retaining high-quality
personnel, and reduce outflows of invested funds; IDS Life's ability to
develop and introduce new and attractive products to clients in a timely
manner and effectively manage the economics in selling a growing volume of
non-proprietary mutual funds and other retail financial products to clients;
fluctuation in the equity and fixed income markets, which can affect the
amount and types of investment products sold by IDS Life, and other fees
received based on the value of those assets; IDS Life's ability to recover
DAC,disclosure, as well as ongoing
legal proceedings and regulatory actions;
o RiverSource Life's investment management performance;
o effects of competition in the timingfinancial services industry and
changes in RiverSource Life's product distribution mix and
distribution channels;
o RiverSource Life's capital structure as a subsidiary of such DAC amortization,Ameriprise
Financial, including the ability of its parent to support its
financial strength and ratings;
o risks of default by issuers of investments RiverSource Life owns or
by counterparties to derivative or reinsurance arrangements;
o experience deviations from RiverSource Life's assumptions regarding
morbidity, mortality and persistency in connection with the
sale ofcertain annuity and
insurance products;
the level of GMDB or living benefits
paid to clients; changes in assumptions relating to DAC, which could impact
the amount of DAC amortization; IDS Life's ability to avoid deterioration in
its high-yield portfolio in order to mitigate losses in its investment
portfolio; fluctuations in interest rates, which impact IDS Life's borrowing
costs, return on lending products and spreads in the insurance and annuity
products; accuracy of estimates for the fair value of the assets in IDS
Life's investment portfolio and, in particular, those investments that are
not readily marketable; the potential negative effect on IDS Life's
businesses and infrastructure, including information technology, of
terrorist attacks, disasters or other catastrophic events in the future;
changes in laws or government regulations, including changes in tax laws or
regulations that could result in the elimination of certain tax benefits;
outcomes and costs associated with litigation and compliance and regulatory
matters;o successfully cross-selling insurance and annuity products and
services to Ameriprise Financial's customer base;
lower than anticipated
spreads in the insuranceo RiverSource Life's ability to effectively hedge risks relating to
guaranteed benefit riders and annuity business; the type and the value of
certain benefit features on variable annuity contracts; the affect of
assessments and other surcharges for guaranty funds; the response of
reinsurance companies under reinsurance contracts;products;
o the impact of the separation of Ameriprise Financial from American
Express;
o the impact of reinsurance ratesintercompany allocations to RiverSource Life from
Ameriprise Financial and its affiliates;
o Ameriprise Financial's ability to attract, recruit and retain
qualified advisors and employees and its ability to distribute its
products through current and future distribution channels;
o RiverSource Life's ability to establish its new brands;
o changes in U.S. federal income or estate tax laws potentially making
RiverSource Life's products less attractive to clients;
o RiverSource Life's ability to recover from catastrophes, both
natural and man-made; and
o general economic and political factors, including consumer
confidence in the availabilityeconomy.
A further description of these and adequacy of reinsurance;other risks and competitive pressures in IDS Life's business. Seeuncertainties can be found
under "Item 1A-Risk1A - Risk Factors" for
further discussion of risks..
-31-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in "Management's"Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements.
See Index to Financial Statements at page F-1 hereof.
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
IDS Life's Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003 have been audited by Ernst & Young LLP, IDS Life's
independent registered public accounting firm.
Through 2004, Ernst & Young LLP provided audit services to IDS Life as part
of the audit services it provided to American Express. In 2004, the Audit
Committee of American Express' Board of Directors determined to request
proposals from auditing firms for their 2005 audit. This request was made
pursuant to the American Express Audit Committee charter, which requires a
detailed review of the outside audit firm at least every ten years. At a
meeting held on November 22, 2004, the American Express Audit Committee
approved the future engagement of PricewaterhouseCoopers LLP as independent
registered public accountants for the fiscal year ending December 31, 2005
and dismissed Ernst & Young LLP for the 2005 fiscal year. This decision also
applied to IDS Life. Ernst & Young LLP continued as auditors of American
Express and IDS Life for the year ended December 31, 2004.
Ernst & Young LLP's reports on IDS Life's Consolidated Financial Statements
for the fiscal years ended December 31, 2004 and 2003, did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of IDS Life's Consolidated Financial
Statements for each of the two fiscal years ended December 31, 2004 and
2003, there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to
the matter in their report. During the two most recent fiscal years and
subsequent interim period proceeding the dismissal of Ernst & Young LLP,
there were no "reportable events" (as defined in Regulation S-K, Item
304(a)(1)(v)).
In connection with the Separation and Distribution from American Express, on
February 18, 2005, the Audit Committee of the Board of Directors of American
Express dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP
to be the independent registered public accountants of IDS Life for the year
ended December 31, 2005. PricewaterhouseCoopers LLP continues as the
independent registered public accountants for the Consolidated Financial
Statements of American Express for the 2005 fiscal year.
PricewaterhouseCoopers LLP did not issue any report on IDS Life's
Consolidated Financial Statements for either of the past two years. During
the period from November 22, 2004 and through February 18, 2005, there were
no disagreements between IDS Life and PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement
disclosures, or auditing scope or procedures, which, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused
PricewaterhouseCoopers LLP to make reference to the matter in their report.
There have been no "reportable events," as defined in Item 304(a)(1)(v) of
Regulation S-K, during the period between November 22, 2004 to February 18,
2005.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
IDS Life 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 and
pursuant to the regulations of the Securities and Exchange Commission,
including controls and procedures designed to ensure that this information
is accumulated and communicated to IDS Life's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding the required disclosure. It should be noted
that, because of inherent limitations, IDS Life's disclosure controls and
procedures, however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the disclosure controls
and procedures are met.
38
IDS Life's management, with the participation of IDS Life's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of IDS
Life's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Based on such evaluation, IDS Life's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, IDS Life's disclosure controls and procedures were effective
at a reasonable level of assurance as of December 31, 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
American Express has historically provided a variety of corporate and other
support services for IDS Life, including information technology, treasury,
accounting, financial reporting, tax administration, human resources,
marketing, legal, procurement and other services. American Express will
continue to provide IDS Life with many of these services pursuant to a
transition services agreement for a transition period of up to two years
following the Distribution. IDS Life is now relying upon American Express as
a third party to perform these services, many of which may impact its
financial reporting processes. During this transition there have been some
changes in personnel and in relative responsibility for oversight of the
processes. IDS Life considers this a material change in internal control
over financial reporting.
Other than the changes mentioned above, no other changes in IDS Life's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal
quarter of the year to which this report relates have materially affected,
or are reasonably likely to materially affect, IDS Life's internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
39
PART III
--------
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express has
appointed Ernst & Young LLP (Ernst & Young) as independent auditors to audit
the Consolidated Financial Statements of IDS Life for the years ended
December 31, 2005 and 2004.
FEES PAID TO THE REGISTRANT'S INDEPENDENT AUDITOR
The following table presents fees for professional services rendered by
Ernst & Young for the audit of IDS Life's financial statements for the years
ended December 31, 2005 and 2004 and other fees billed for other services
rendered by Ernst & Young during those periods.
Thousands 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Audit Fees (1) $ 1,423 $ 1,434
Tax Fees (2) - -
All Other Fees (3) - -
- ---------------------------------------------------------------------------------------------------------------
Total $ 1,423 $ 1,434
===============================================================================================================
(1) Audit fees included audit work performed in the review and preparation
of the financial statements, as well as, services that generally only the
independent auditor can be expected to provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review
of documents filed with the Securities and Exchange Commission.
(2) Tax fees included all services performed by the independent auditor's
tax personnel.
(3) All other fees included miscellaneous out-of-pocket expenses.
POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY INDEPENDENT AUDITOR
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of
the engagement of Ernst & Young are subject to the specific pre-approval of
the Audit Committee of Ameriprise Financial. All audit and permitted
non-audit services to be performed by Ernst & Young for IDS Life require
pre-approval by the Audit Committee of Ameriprise Financial in accordance
with pre-approval procedures established by the Audit Committee of
Ameriprise Financial. The procedures require all proposed engagements of
Ernst & Young for services to IDS Life of any kind to be directed to the
General Auditor of Ameriprise Financial, and then submitted for approval to
the Audit Committee of Ameriprise Financial prior to the beginning of any
services.
In 2005, 100% of the services provided by Ernst & Young for IDS Life were
pre-approved by the Audit Committee of American Express prior to the
Distribution and, thereafter, by the Audit Committee of Ameriprise
Financial.
40
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
See Index to Financial Statements on page F-1 hereof.
(2) Financial Statement Schedules
See Index to Financial Statements on page F-1 hereof.
All information on schedules to the Consolidated Financial
Statements required by Rule 7-05 in Article 7 of Regulation S-X is
included in the Consolidated Financial Statements or is not
required. Therefore, all schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-3 hereof.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
IDS LIFE INSURANCE COMPANY
Registrant
March 9, 2006 By /s/ Mark E. Schwarzmann
- ------------- ------------------------------------------
Date Mark E. Schwarzmann, Chairman
of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 9, 2006 /s/ Gumer C. Alvero
- ------------- ---------------------------------------------
Date Gumer C. Alvero, Director and Executive
Vice President - Annuities
March 9, 2006 /s/ Timothy V. Bechtold
- ------------- ---------------------------------------------
Date Timothy V. Bechtold, Director and President
March 9, 2006 /s/ Arthur H. Berman
- ------------- ---------------------------------------------
Date Arthur H. Berman, Director
March 9, 2006 /s/ Brian J. McGrane
- ------------- ---------------------------------------------
Date Brian J. McGrane, Director, Executive Vice
President and Chief Financial Officer
March 9, 2006 /s/ David K. Stewart
- ------------- ---------------------------------------------
Date David K. Stewart, Vice President and
Controller
March 9, 2006 /s/ Kevin E. Palmer
- ------------- ---------------------------------------------
Date Kevin E. Palmer, Director, Vice President and
Chief Actuary
March 9, 2006 /s/ Mark E. Schwarzmann
- ------------- ---------------------------------------------
Date Mark E. Schwarzmann, Director, Chairman
of the Board and Chief Executive Officer
42
IDS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(ITEM 14 (a))AND SUPPLEMENTARY DATA
Page NumberPAGE NUMBER
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm F-2............................... 33
Consolidated Balance Sheets at December 31, 2006 and 2005 and 2004 F-3............................. 34
Consolidated Statements of Income for each of the three years ended
December 31, 2006, 2005 and 2004 and 2003 F-4...................................................... 35
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2006, 2005 and 2004 and 2003 F-5...................................................... 36 to F-637
Consolidated Statements of Stockholder'sShareholder's Equity for each of the three years ended
December 31, 2006, 2005 and 2004 and 2003 F-7...................................................... 38
Notes to Consolidated Financial Statements F-8............................................ 39 to F-3870
SCHEDULES:
All information on schedules to the Consolidated Financial Statements required
by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated
Financial Statements and notes thereto or is not required. Therefore, all
schedules have been omitted.
F-1
-32-
Report of Independent Registered Public Accounting Firm
The Board of Directors
IDSRiverSource Life Insurance Company
We have audited the accompanying Consolidated Balance Sheetsconsolidated balance sheets of RiverSource
Life Insurance Company, formerly IDS Life Insurance Company, (a wholly-owned
subsidiary of Ameriprise Financial, Inc.) as of December 31, 20052006 and 2004,2005,
and the related Consolidated Statementsconsolidated statements of Income, Stockholder's Equity,income, shareholder's equity, and
Cash Flowscash flows for each of the three years in the period ended December 31, 2005.2006.
These financial statements are the responsibility of IDSRiverSource Life
Insurance Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDSRiverSource Life
Insurance Company at December 31, 2006 and 2005, and 2004, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2005,2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the Consolidated Financial Statements, in 2004 IDS
Life Insurance Company adopted the provisions of the American Institute of
Certified Public Accountants' Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" and in 2003 adopted the provisions of
Financial Accounting Standards Board Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 27, 2006
F-2
26, 2007
- 33 -
IDSRIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands,(in millions, except share data)amounts)
DECEMBER 31,
--------------------------
2006 2005
2004
------------------ ---------------------------- -----------
ASSETS
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2006, $25,289; 2005, $27,817,021; 2004,
$27,400,640)$27,817)............... $ 27,753,17424,995 $ 28,131,195
Preferred27,753
Common and commonpreferred stocks, at fair value (cost: 2006, $30; 2005, $13; 2004, $30,019) 21 31,256$0)....................... 31 -
Mortgage loans on real estate, at cost (less allowance for loan losses: 2006, $37; 2005, $41,347;
2004, $45,347) 2,842,362 2,923,542$41).. 2,790 2,842
Policy loans 605,212 588,574loans................................................................................... 642 605
Trading securities and other investments 547,668 802,096
------------------ -----------------investments....................................................... 241 548
----------- -----------
Total investments 31,748,437 32,476,663investments.......................................................................... 28,699 31,748
Cash and cash equivalents 233,589 131,427
Restricted cash - 535,821equivalents...................................................................... 160 272
Reinsurance recoverables 982,521 876,408recoverables....................................................................... 1,137 983
Amounts due from brokers 4,166 7,109brokers....................................................................... 7 4
Other accounts receivable 62,930 52,527receivable...................................................................... 90 63
Accrued investment income 328,567 351,522income...................................................................... 309 329
Deferred policy acquisition costs 4,035,879 3,637,956costs..................................................................... 4,411 4,036
Deferred sales inducement costs 370,166 302,997costs................................................................ 452 370
Other assets 220,371 186,003assets................................................................................... 321 220
Separate account assets 37,929,960 32,454,032
------------------ -----------------assets........................................................................ 49,287 37,930
----------- -----------
Total assetsassets............................................................................... $ 75,916,58684,873 $ 71,012,465
================== =================75,955
=========== ===========
LIABILITIES AND STOCKHOLDER'SSHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuitiesbenefits......................................................................... $ 26,126,06829,561 $ 26,978,596
Variable annuity guarantees 29,550 32,955
Universal life insurance 3,711,628 3,689,639
Traditional life insurance 298,479 271,516
Disability income and long-term care insurance 2,145,969 1,942,65632,312
Policy claims and other policyholders' funds 90,233 69,884funds................................................... 93 90
Amounts due to brokers 31,772 162,609brokers......................................................................... 132 32
Deferred income taxes, net 9,099 141,202net..................................................................... 90 9
Other liabilities 381,938 363,821liabilities.............................................................................. 440 421
Separate account liabilities 37,929,960 32,454,032
------------------ -----------------liabilities................................................................... 49,287 37,930
----------- -----------
Total liabilities 70,754,696 66,106,910
------------------ -----------------
Stockholder'sliabilities.......................................................................... 79,603 70,794
----------- -----------
Shareholder's equity:
CapitalCommon stock, $30 par value;
100,000 shares authorized, issued and outstanding 3,000 3,000outstanding.......................................... 3 3
Additional paid-in capital 2,020,388 1,370,388capital..................................................................... 2,021 2,020
Retained earnings 3,269,206 3,190,474earnings.............................................................................. 3,455 3,269
Accumulated other comprehensive (loss) income,loss, net of tax:
Net unrealized securities (losses) gains (90,632) 370,615losses .......................................................... (168) (91)
Net unrealized derivative losses (40,072) (28,922)
------------------ -----------------.......................................................... (41) (40)
----------- -----------
Total accumulated other comprehensive (loss) income (130,704) 341,693
------------------ ------------------loss..................................................... (209) (131)
----------- -----------
Total stockholder's equity 5,161,890 4,905,555
------------------ -----------------shareholder's equity................................................................. 5,270 5,161
----------- -----------
Total liabilities and stockholder's equityshareholder's equity................................................. $ 75,916,58684,873 $ 71,012,465
================== =================75,955
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
-34-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December(in millions)
YEARS ENDED DECEMBER 31,
(Thousands)
-----------------------------------------
2006 2005 2004
2003
------------------- -------------------- ------------------------------ ----------- -----------
REVENUES
Premiums:
Traditional life insuranceinsurance............................................. $ 74,75172 $ 68,33575 $ 64,89068
Disability income and long-termlong term care insurance 295,084 283,608 284,111
------------------- -------------------- -------------------insurance......................... 322 295 284
----------- ----------- -----------
Total premiums 369,835 351,943 349,001premiums..................................................... 394 370 352
Net investment income 1,791,324 1,777,446 1,705,185income.................................................... 1,661 1,789 1,775
Contractholder and policyholder charges 577,159 554,344 530,190charges.................................. 637 577 555
Mortality and expense risk and other fees 488,633 430,320 390,516fees................................ 636 489 430
Net realized gain on investments 48,296 27,292 4,445
------------------- -------------------- -------------------investment gain............................................. 51 48 27
----------- ----------- -----------
Total revenues 3,275,247 3,141,345 2,979,337
------------------- -------------------- -------------------revenues..................................................... 3,379 3,273 3,139
----------- ----------- -----------
BENEFITS AND EXPENSES
Death and other benefits:
Traditional life insurance 41,550 36,843 38,870insurance............................................. 28 42 37
Investment contracts and universal life-type insurance 232,816 227,664 209,065insurance................. 267 232 228
Disability income and long-termlong term care insurance 75,864 67,261 57,339insurance......................... 83 76 67
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 4,638 1,381 (2,401)insurance............................................. - 5 1
Disability income and long-termlong term care insurance 141,286 123,289 142,532insurance......................... 143 141 123
Interest credited to account values 1,110,425 1,127,875 1,242,020values...................................... 1,052 1,111 1,128
Amortization of deferred policy acquisition costs 315,882 260,778 264,308costs............................... 356 316 261
Separation costs 121,264 -costs......................................................... 131 121 -
Other insurance and operating expenses 591,133 503,872 453,065
------------------- -------------------- -------------------expenses................................... 641 588 502
----------- ----------- -----------
Total benefits and expenses 2,634,858 2,348,963 2,404,798
------------------- -------------------- -------------------expenses...................................... 2,701 2,632 2,347
----------- ----------- -----------
Income before income tax provision and accounting change 640,389 792,382 574,539change.................... 678 641 792
Income tax provision 181,657 226,177 66,945
------------------- -------------------- -------------------provision........................................................ 192 182 226
----------- ----------- -----------
Income before accounting change 458,732 566,205 507,594change............................................. 486 459 566
Cumulative effect of accounting change, net of taxtax.......................... - (70,568) 44,463
------------------- -------------------- -------------------- (70)
----------- ----------- -----------
Net incomeincome.................................................................. $ 458,732486 $ 495,637459 $ 552,057
=================== ==================== ===================496
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-4
-35-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December(in millions)
YEARS ENDED DECEMBER 31,
(Thousands)
--------------------------------------
2006 2005 2004
2003
--------------- ---------------- ------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 458,732486 $ 495,637459 $ 552,057496
Adjustments to reconcile net income to net cash provided by
(used
in) operating activities:
Cumulative effect of accounting change, net of taxtax.......................... - 70,568 (44,463)- 70
Amortization of deferred policy acquisition costs 315,882 260,778 264,308costs................................... 356 316 261
Amortization of deferred sales inducement costs 40,332 33,825 23,968costs.............................. 48 40 34
Capitalization of deferred policy acquisition costs (632,743) (533,842) (516,928)costs................................. (687) (633) (534)
Capitalization of deferred sales inducement costs (94,319) (70,860) (71,839)costs............................ (126) (94) (71)
Amortization of premium, net 83,152 92,617 160,862net................................................. 75 83 93
Deferred income taxes 122,264 70,574 (30,714)
Policyholdertaxes........................................................ 123 122 70
Contractholder and contractholderpolicyholder charges, non-cash (231,503) (231,611) (234,098)non-cash............................ (220) (232) (232)
Net realized gain on investments (48,296) (27,292) (4,445)investment gain................................................. (51) (48) (27)
Net realized gain on trading securities and equity method investments in
hedge funds (24,037) (37,460) (30,400)funds............................................................... (16) (24) (38)
Change in operating assets and liabilities:
Trading securities and equity method investments in hedge funds, net 246,828 6,788 (358,200)net......... 297 247 7
Future policy benefits for traditional life, disability income and long-termlong term
care insurance 230,276 235,327 265,233insurance............................................................ 274 230 235
Policy claims and other policyholders' funds 20,349 1,973 (17,489)funds................................. 2 20 2
Policy loans, excluding universal life-type insurance:
Repayment 35,996 37,592 43,596
Issuance (38,688) (39,230) (34,490)Repayment................................................................. 35 36 37
Issuance.................................................................. (39) (39) (39)
Reinsurance recoverables (106,113) (121,894) (121,004)recoverables..................................................... (154) (106) (122)
Other accounts receivable (10,403) 15,895 (12,177)receivable.................................................... (27) (10) 16
Accrued investment income 22,955 3,852 (64,359)income.................................................... 20 23 4
Other assets and liabilities, net 38,782 (12,765) (130,066)
--------------- ---------------- ---------------
Net cash provided by (used in) operating activitiesnet............................................ (280) 47 (3)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... $ 429,446116 $ 250,472437 $ (360,648)
--------------- ---------------- ---------------
See Notes to Consolidated Financial Statements.
F-5259
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
-36-
IDS
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December(CONTINUED)
(in millions)
YEARS ENDED DECEMBER 31,
(Thousands)--------------------------------------
2006 2005 2004
2003
--------------- ----------------- --------------------------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
SalesProceeds from sales............................................................ $ 3,124,1541,897 $ 1,603,2853,124 $ 12,232,2351,603
Maturities, sinking fund payments and calls 2,241,829 1,931,070 4,152,088
Purchases (5,780,183) (4,392,522) (20,527,995)calls.................................... 2,014 2,242 1,931
Purchases...................................................................... (1,433) (5,780) (4,393)
Other investments, excluding policy loans:
Sales,Proceeds from sales, maturities, sinking fund payments and calls 652,831 690,333 621,163
Purchases (542,610) (402,235) (438,336)calls............... 519 653 690
Purchases...................................................................... (441) (543) (402)
Change in amounts due to and from brokers, net (127,894) (71,415) (3,261,601)net................................... 98 (128) (71)
Change in restricted cash 535,821 298,627cash........................................................ - --------------- ----------------- -----------------
Net cash provided by (used in) investing activities 103,948 (342,857) (7,222,446)
--------------- ----------------- -----------------536 299
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.............................. 2,654 104 (343)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type insurance:
Considerations received 1,532,282 2,350,426 4,267,115received........................................................ 1,267 1,532 2,351
Interest credited to account values 1,110,425 1,127,875 1,242,020values............................................ 1,052 1,111 1,128
Surrenders and other benefits (3,329,993) (2,715,847) (2,235,889)
Universal life-type insurance policybenefits.................................................. (4,869) (3,330) (2,716)
Policy loans:
Repayment 89,322 84,281 85,760
Issuance (103,268) (93,217) (81,740)Repayment...................................................................... 108 89 84
Issuance....................................................................... (140) (103) (93)
Capital contribution from Ameriprise Financial, Inc. 650,000............................ - 282,061650 -
Cash dividend to Ameriprise Financial, Inc. (380,000) (930,000) -
--------------- ----------------- -----------------
Net cash (used in) provided by financing activities (431,232) (176,482) 3,559,327
--------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 102,162 (268,867) (4,023,767)..................................... (300) (380) (930)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES............................................ (2,882) (431) (176)
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (112) 110 (260)
Cash and cash equivalents at beginning of year 131,427 400,294 4,424,061
--------------- ----------------- -----------------
Cash and cash equivalents at end of yearyear................................... 272 162 422
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 233,589160 $ 131,427272 $ 400,294
=============== ================= =================162
========== ========== ==========
Supplemental disclosures:
Income taxes paid, net...................................................... $ 95,79464 $ 196,39796 $ 103,034196
Interest paid on borrowingsborrowings................................................. $ 364 $ 411 $ 2,926
Non-cash ownership transfer of net assets of American
Express Corporation to Ameriprise Financial, Inc. in
20031 $ - $ - $ 282,061
See Notes to Consolidated Financial Statements.
F-6
-37-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'SSHAREHOLDER'S EQUITY
For the three years ended DecemberTHREE YEARS ENDED DECEMBER 31, 2005
(Thousands)
Accumulated
Additional Other
Capital Paid-in Retained Comprehensive
Total Stock Capital Earnings Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------2006
(in millions)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME/(LOSS) TOTAL
------------ ------------ ------------ ----------------- ------------
Balances at DecemberBALANCES AT DECEMBER 31, 20022003........................ $ 4,944,2513 $ 3,0001,370 $ 1,088,3273,624 $ 3,354,841399 $ 498,0835,396
Comprehensive income:
Net income 552,057 552,057income....................................... - - 496 - 496
Change in unrealized holding losses on
securities, net (90,695) (90,695)net................................ - - - (35) (35)
Change in unrealized derivative losses, net (7,777) (7,777)
----------------net...... - - - (23) (23)
------------
Total comprehensive income 453,585
Capital contribution 282,061 282,061
Non-cash dividend of American Express Corporationincome........................... - - - - 438
Cash dividends to Ameriprise Financial, Inc. (282,061) (282,061)Inc......... - ------------------------------------------------------------------------------------------------------------------------------------
Balances at December- (930) - (930)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 20032004........................ $ 5,397,8363 $ 3,0001,370 $ 1,370,3883,190 $ 3,624,837341 $ 399,6114,904
Comprehensive income:loss:
Net income 495,637 495,637income....................................... - - 459 - 459
Change in unrealized holding losses on
securities, net (34,841) (34,841)net................................ - - - (461) (461)
Change in unrealized derivative losses, net (23,077) (23,077)
----------------net..... - - - (11) (11)
------------
Total comprehensive income 437,719loss............................. - - - - (13)
Capital contribution from Ameriprise
Financial, Inc.................................... - 650 - - 650
Cash dividendsdividend to Ameriprise Financial, Inc. (930,000) (930,000)Inc........... - ------------------------------------------------------------------------------------------------------------------------------------
Balances at December- (380) - (380)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 20042005........................ $ 4,905,5553 $ 3,0002,020 $ 1,370,3883,269 $ 3,190,474(131) $ 341,6935,161
Comprehensive loss:income:
Net income 458,732 458,732income....................................... - - 486 - 486
Change in unrealized holding losses on
securities, net (461,247) (461,247)net................................ - - - (77) (77)
Change in unrealized derivative losses, net (11,150) (11,150)
----------------net..... - - - (1) (1)
------------
Total comprehensive loss (13,665)
Capital contribution from Ameriprise Financial,
Inc. 650,000 650,000income........................... - - - - 408
Tax adjustment of share-based incentive employee
compensation plan................................. - 1 - - 1
Cash dividend to Ameriprise Financial, Inc. (380,000) (380,000)Inc........... - ------------------------------------------------------------------------------------------------------------------------------------
Balances at December- (300) - (300)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 20052006........................ $ 5,161,8903 $ 3,0002,021 $ 2,020,3883,455 $ 3,269,206(209) $ (130,704)
====================================================================================================================================5,270
============ ============ ============= ================= ============
See Notes to Consolidated Financial Statements.
F-7-38-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
Basis of Presentation and Summary of Significant
--------------------------------------------------------------------
Accounting Policies
-------------------
Nature of BusinessRiverSource Life Insurance Company, formerly known as IDS Life Insurance
Company, is a stock life insurance company with fourone wholly-owned
operating subsidiaries: IDSsubsidiary, RiverSource Life Insurance CompanyCo. of New York
American Partners("RiverSource Life Insurance Company, American Enterprise
Life Insurance Company and American Centurion Life Assurance Company.
IDSof NY"). RiverSource Life Insurance Company is a
wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial)("Ameriprise
Financial").
o IDSRiverSource 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. IDSRiverSource Life Insurance
Company issues insurance and annuity products.
o American Enterprise Life Insurance Company (American Enterprise
Life) is a stock life insurance company domiciled in Indiana, which
holds Certificates of Authority in the District of Columbia and all
states except New York. American Enterprise Life issues fixed and
variable annuity contracts primarily through regional and national
financial institutions and regional and/or independent
broker-dealers. (In past years, American Enterprise Life issued a
nominal number of variable universal life contracts.)
o American Partners Life Insurance Company (American Partners Life)
is a stock life insurance company domiciled in Arizona, which holds
Certificates of Authority in the District of Columbia and all
states except New York and New Hampshire. American Partners Life
markets annuity products directly to customers, generally persons
holding an American Express(R) Card.
o IDS Life Insurance Company of New York (IDSRiverSource Life of New York)NY is a stock life insurance company domiciled
in New York, which holds Certificates of Authority in New York and
North Dakota. RiverSource Life of NY issues insurance and annuity
products.
On December 31, 2006, IDS Life Insurance Company completed an Agreement
and Plan of Merger with both American Enterprise Life Insurance Company
("American Enterprise Life") and American Partners Life Insurance Company
("American Partners Life") whereby both companies merged with and into
IDS Life Insurance Company. As a result of the merger, American
Enterprise Life and American Partners Life ceased to exist. Prior to the
merger, both companies were wholly-owned operating subsidiaries of IDS
Life Insurance Company. Immediately following the merger, IDS Life
Insurance Company changed its name to RiverSource Life Insurance Company.
Also on December 31, 2006, American Centurion Life Assurance Company
("American Centurion Life") merged with and into IDS Life Insurance
Company of New York ("IDS Life of New York"). As a result of the merger,
American Centurion Life ceased to exist. Prior to the merger, American
Centurion Life was a wholly-owned operating subsidiary of IDS Life
Insurance Company. Immediately following the merger, IDS Life of New York
issues insurance and annuity products.
o American Centurion Life Assurance Company (American Centurion Life)
is a stock life insurance company domiciled in New York, which
holds Certificates of Authority in New York, Alabama and Delaware.
American Centurion Life issues fixed and variable annuity contracts
primarily through financial institutions and independent
broker-dealers. American Centurion Life also markets annuity
products directly, generallychanged its name to persons holding an American
Express(R) Card.
IDSRiverSource Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and
American Enterprise REO 1, LLC which hold real estate investments. IDSCo. of New York.
RiverSource Life Insurance Company and its seven subsidiariessubsidiary are referred to
collectively in this Form 10-K as "IDS"RiverSource Life".
F-8
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to August 1, 2005,No material effect on the consolidated financial condition and results of
operations is expected for RiverSource Life as a result of the mergers.
Ameriprise Financial was referred to asformerly a wholly-owned subsidiary of American
Express Financial Corporation.Company ("American Express"). On February 1, 2005, the American
Express Company (American Express)Board of Directors announced its intention to pursue the
disposition of 100% of its shareholdingshareholdings in what is now Ameriprise Financial (the
Separation)"Separation") through a tax-free distribution to American Express
shareholders. Effective as of the close of business on September 30,
2005, American Express completed the Separation and the distribution of
Ameriprise Financial common shares to American Express shareholders (the
Distribution)"Distribution"). In connection with the Distribution, Ameriprise
Financial entered into certain agreements with American Express to effect
the separation of its businessSeparation and to define the responsibility for obligations arising
before and after the date of the Distribution, including, among others,
obligations relating to transition services, taxes, and employees.
IDSAmeriprise Financial has incurred $654 million of pretax non-recurring
separation costs since the Separation announcement through December 31,
2006 and expects to incur a total of approximately $875 million.
RiverSource Life was allocated certain separation and
Distribution-related expenses incurred as a result of
Ameriprise Financial becoming an independent company. Cumulatively,RiverSource Life
has been allocated $252 million in total pretax non-recurring separation
costs since the expenses
incurredSeparation announcement through December 31, 2006 and
expects to be allocated to IDS Life area significant to IDS Life. IDSportion of the remaining separation
costs in 2007. RiverSource Life received a capital contribution of $650
million from Ameriprise Financial during the third quarter of 2005 to
support its current
financial strength ratings and to cover the allocated separation costs.
IDS-39-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
RiverSource Life's principal products are variable deferred annuities and
variable universal life insurance which are issued primarily to
individuals. It also offers single
premiumfixed annuities where assets accumulate until
the contract is surrendered, the contractholder (or in some contracts,
the annuitant) dies, or the contractholder or annuitant begins receiving
benefits under an annuity payout option. It also offers immediate
annuities in which payments begin within one year of issue and flexible premium deferred annuities on bothcontinue
for life or for a fixed and
variable dollar basis. Immediate annuities are offered as well. IDSperiod of time. RiverSource Life's fixed deferred
annuities guarantee a relatively low annual interest rate during the
accumulation period (the time before annuity payments begin). However,
IDSRiverSource Life has the option of paying a higher rate set at its
discretion. In addition, persons owning one type of annuity may have
their interest calculated based on an increase in a broad-based stock
market index. IDSRiverSource Life also offersissues both variable annuities, including the RiverSource Retirement Advisor Advantage
Plus(SM) Variable Annuity and the RiverSource Retirement Advisor Select
Plus(SM) Variable Annuity. Life insurance products currently offered by
IDS Life includefixed universal
life (fixed and variable, singleinsurance, traditional life and
joint life), single premium life,insurance including whole life and term
products.life and disability income insurance. (RiverSource Life discontinued
underwriting new long term care ("LTC") policies as of December 31,
2002). Universal life insurance is a form of permanent life insurance
characterized by its flexible premiums, its flexible death benefit
amounts and its unbundling of the pricing factors (i.e., mortality,
interest and expenses). Traditional life insurance refers to whole and
term life insurance policies that pay a specified sum to a beneficiary
upon death of the insured for a fixed premium. Variable universal life
insurance combines the premium and death benefit flexibility of universal
life with underlying fund investment flexibility and the risks associated
therewith. Waiver of premium and accidental death benefit riders are
generally available with these life insurance products.
IDS Life also markets disability
income (DI) insurance. Although IDS Life discontinued issuance of
long-term care (LTC) insurance at the end of 2002, IDS Life retains
risk on a large block of existing contracts, 50% of which are
reinsured. In May 2003, IDS Life began outsourcing claims
administration.
Under IDSRiverSource Life's variable life insurance and variable annuity
products described above, the purchaser may choose among investment
options that include IDSRiverSource Life's "general account" as well as from
a variety of portfolios including common stocks, bonds, managed assets
and/or short-term securities.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts
of IDSRiverSource Life Insurance Company and, its wholly-owned subsidiaries and
certain variable interest entities (VIEs).subsidiary,
RiverSource Life of NY. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying Consolidated Financial Statements have beenare prepared in
conformityaccordance with United StatesU.S. generally accepted accounting principles (GAAP)("U.S.
GAAP") which vary in certain respects from reporting practices prescribed
or permitted by state insurance regulatory authorities as described in
Note 7.11. Certain reclassifications of prior yearperiod amounts have been reclassifiedmade
to conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
IDS2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
RiverSource Life consolidates all non-variable interest entities in which it holds a greater
than 50% voting interest, except for variable interest entities which are
consolidated when certain conditions are met and immaterial seed money
investments in separate accounts, which are accounted for as trading
securities. Entities in which IDSRiverSource Life holds a greater than 20%
but less than 50% voting interest are accounted for under the equity
method. Additionally, other investments in hedge funds in which
IDSRiverSource Life holds an interest that is less than 50% are accounted
for under the equity method. All other investments are accounted for
under the cost method where IDSRiverSource Life owns less than a 20% voting
interest and does not exercise significant influence, or as
Available-for-Sale securities, as applicable.
IDSRiverSource Life also consolidates all VIEsvariable interest entities
("VIEs") for which it is considered to be the primary beneficiary pursuant to Financial Accounting Standards
Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest
Entities," as revised (FIN 46).beneficiary. The
determination as to whether an entity is a VIE is based on the amount and
characteristics of the entity's equity. In general, FIN 46 requires a VIEThe determination as to be consolidated
when an enterprise has a variable interest for which itwhether
RiverSource Life is deemedconsidered to be the primary beneficiary which means that itis based on
whether RiverSource Life will absorb a majority of the VIEsVIE's expected
losses, receive a majority of the VIEsVIE's expected residual return, or
both. IDSRiverSource Life liquidated its interest in all consolidated VIEs
during 2004 and 2005 resulting in2005. There were no consolidated VIEs as of December 31,
2006 and 2005.
-40-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Qualifying Special Purpose Entities (QSPEs) under Statement of
Financial Accounting Standard (SFAS) No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"("QSPEs") are not consolidated. Such
QSPEs includeincluded a securitization trust containing a majority of
itsRiverSource Life's rated collateralized debt obligations (CDOs), as described in Note 2. IDS("CDOs") for
which RiverSource Life sold all of its retained interestinterests in this securitization trust in 2005.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated Financial
Statements. In part, they are based upon assumptions concerning future
events. Among the more significant are those that relate to investment
securities valuation and recognition of other-than-temporary impairments,
valuation of deferred acquisition costs ("DAC") and the corresponding
recognition of DAC amortization, derivative financial instruments and
hedging activities, income taxes and recognition of deferred tax assets
and liabilities. These accounting estimates reflect the best judgment of
management and actual results could differ.
BALANCE SHEET
INVESTMENTS
Investments consist of the following:
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value on the
Consolidated Balance Sheets with unrealized
gains (losses) recorded in accumulated other comprehensive income (loss) within equity,,
net of income tax provision (benefit) and net of adjustments in other
asset and liability balances, such as deferred policy acquisition costs (DAC),DAC, to reflect the expected impact
on their carrying values had the unrealized gains (losses) been realized
as of the respective balance sheet date. Gains and losses are recognized
in consolidated results of operations upon disposition of the securities.
In addition, losses are also recognized when management determines that a
decline in value is other-than-temporary, which requires judgment
regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer
downgrade, default or bankruptcy. IDSRiverSource Life also considers the
extent to which amortized cost exceeds fair value, the duration of that
difference and management's judgment about the issuer's current and
prospective financial condition, as well as its ability and intent to
hold until recovery. Other-than-temporary impairment charges are recorded
in net realized gains (losses) on investments within the Consolidated
Statements of Income. Fair value is generally based on quoted market
prices.
F-10
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCommercial Mortgage Loans on Real Estate, Net
MortgageCommercial mortgage loans on real estate, net, reflect principal amounts
outstanding less allowance for mortgage loan losses. The allowance for mortgage loan losses is
measured as the excess of the loan's recorded investment over the present
value of its expected principal and interest payments discounted at the
loan's effective interest rate, or the fair value of collateral.
Additionally, the level of the allowance for mortgage loan losses considers other
factors, including historical experience, economic conditions and
current economic and political conditions.geographic concentrations. Management regularly evaluates the adequacy of
the allowance for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
IDSRiverSource Life generally stops accruing interest on commercial mortgage
loans for which interest payments are delinquent more than three months.
Based on management's judgment as to the ultimate collectibility of
principal, interest payments received are either recognized as income or
applied to the recorded investment in the loan.
Policy Loans
Policy loans include life insurance policy and annuity loans. These loans
are carried at the aggregate of the unpaid loan balances, which do not
exceed the cash surrender values of the related policies.
-41-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Trading Securities and Other Investments
Included in trading securities and other investments are hedge fund
investments, separate account and mutual fund seed money and syndicated
loans and real
estate.loans. Separate account and mutual fund seed money is carried at fair
market value with changes in value recognized in the Consolidated Statements of
Income within net investment
income. The carrying value of equity method investments in hedge funds
reflects IDSRiverSource Life's original investment and its share of earnings
or losses of the hedge funds subsequent to the date of investment, and
approximate fair value. Syndicated loans reflect amortized cost less
allowance for losses.
Real
estate investments reflect properties acquired in satisfaction of debt
and are carried at the lower of cost or the property's net realizable
value.
CASH AND CASH EQUIVALENTS
IDSRiverSource Life has defined cash equivalents to include highly liquid
investments with original maturities of 90 days or less.
RESTRICTED CASH
As a result of the adoption of FIN 46 in 2003, IDS Life consolidated
restricted cash held by secured loan trusts (SLTs) where such cash
cannot be utilized for operations. The SLTs were liquidated in 2004 and
2005.
REINSURANCE
IDSRiverSource Life reinsures a portion of the insurance risks associated with its
life and LTC insurance products through reinsurance agreements with
unaffiliated insurance companies. Reinsurance is used in order to limit
losses, minimize exposure to large risks, provide additional capacity for
future growth and to effect business-sharing arrangements. IDSTo minimize
exposure to significant losses from reinsurer insolvencies, RiverSource
Life evaluates the financial condition of its reinsurers prior to
manage its
exposure to significant losses from reinsurer insolvencies. IDSentering into new reinsurance treaties and on a periodic basis during the
terms of the treaties. RiverSource Life remains primarily liable as the
direct insurer on all risks reinsured.
F-11
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, IDSRiverSource Life reinsures 90% of the death benefit liability
related to individual fixed and variable universal life and term life
insurance products. IDSRiverSource Life began reinsuring risks at this level
beginning in 2001 for term life insurance and 2002 for variable and
universal life insurance. Policies issued prior to these dates are not
subject to thesethe same reinsurance levels. The maximum amount of life
insurance risk retained by IDSRiverSource Life is $750,000 on any policy
insuring a single life and $1.5 million on any flexible premium
survivorship variable life policy. For existing LTC policies IDSexcept those
sold by RiverSource Life of NY prior to 1996, RiverSource Life retained
50% of the risk and the remaining 50% of the risk was ceded on a
coinsurance basis to General Electric
Capital Assurance Company.affiliates of Genworth Financial, Inc. ("Genworth").
Reinsurance recoverable from Genworth related to RiverSource Life's long
term care liabilities was $945 million at December 31, 2006, while
amounts recoverable from each other reinsurer were much smaller. Risk on
variable life and universal life policies is reinsured on a yearly
renewable term basis. RiskStarting in 2001, risk on recentmost term life and LTC policies
is reinsured on a coinsurance basis.
IDSRiverSource Life retains all risk for new claims on DIdisability income
("DI") contracts. Risk is currently managed by limiting the amount of
disability insurance written on any one individual. IDSRiverSource Life also
retains all accidental death benefit and almost all waiver of premium
risk.
DEFERRED POLICY ACQUISITION COSTS
DAC representsrepresent the costs of acquiring new business, principally direct
sales commissions and other distribution and underwriting costs that have
been deferred on the sale of annuity and life, DI and LTC
insurance products. These costs
are deferred to the extent they are recoverable from future profits. For annuity and insurance products,
DAC is amortized over periods approximating the lives of the business,
generally as a percentage of premiums or estimated gross profits or
as
a portion of product interest margins depending on the product's
characteristics.
For IDS Life's annuity and insurance products, the projections
underlying the amortization of DAC require the use of certain
assumptions, including interest margins, mortality and morbidity rates,
persistency, maintenance expense levels and customer asset value growth
rates for variable products. Management routinely monitors a wide
variety of trends in the business, including comparisons of actual and
assumed experience. The customer asset value growth rate is the rate at
which contract values are assumed to appreciate in the future. The rate
is net of asset fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its
assumptions with respect to client asset value growth rates on a
quarterly basis.
Management monitors other principal DAC assumptions, such as interest
margin, mortality and morbidity rates, persistency and maintenance
expense level assumptions, each quarter. Unless management identifies a
material deviation over the course of the quarterly monitoring,
management reviews and updates these DAC assumptions annually in the
third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins
used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an increase in DAC amortization
expense while a decrease in amortization percentage will result in a
decrease in DAC amortization expense. The impact on results of
operations of changing assumptions with respect to the amortization of
DAC can be either positive or negative in any particular period and is
reflected in the period in which such changes are made.
F-12
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSpremiums.
DEFERRED SALES INDUCEMENT COSTS
Deferred sales inducement costs (DSIC)("DSIC") consist of bonus interest
credits and depositpremium credits added to certain annuity contract and
insurance policy values. These benefits are capitalized to the extent
they are incremental to amounts that would be credited on similar
contracts without the applicable feature. These costs were previously included in DAC and
were reclassified as part of the adoption of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP
03-1). The amounts capitalized are
amortized using the same methodology and assumptions used to amortize
DAC.
-42-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instruments are classified on the Consolidated Balance
Sheetsrecorded at fair value within other
assets or liabilities. The fair value of IDSRiverSource Life's derivative
financial instruments is determined using either market quotes or
valuation models that are based upon the net present value of estimated
future cash flows and incorporate current market data inputs. In certain
instances, the fair value includes structuring costs incurred at the
inception of the transaction. The accounting for the change in the fair
value of a derivative financial instrument depends on its intended use
and the resulting hedge designation, if any. RiverSource Life generally
designates its hedges as cash flows hedges or accounts for them as
economic hedges.
For derivative financial instruments that qualify as cash flow hedges,
the effective portions of the gain or loss on the derivative instruments
are recordedreported in accumulated other comprehensive income (loss) and
reclassified into earnings when the hedged item or transactions impacttransaction impacts
earnings. The amount that is reclassified into earnings is presented in
the Consolidated Statements of Income with the hedged instrument or
transaction impact. Any ineffective portion of the gain or loss is
reported currently in earnings as a component of net investment income.
If a hedge is no longer designatedde-designated or is terminated prior to maturity, the amount
previously recorded in accumulated other comprehensive income (loss) is
recognized into earnings over the period that the hedged item impacts
earnings. For any hedge relationships that are discontinued because the
forecasted transaction is not expected to occur according to the original
strategy, any related amounts previously recorded in accumulated other
comprehensive income (loss) are recognized intoin earnings immediately.
Derivative financial instruments that are entered into for hedging
purposes are designated as such at the time that IDSRiverSource Life enters into
the contract. For all derivative financial instruments that are
designated for hedging activities, IDSRiverSource Life formally documents
all of the hedging relationships between the hedge instruments and the
hedged items at the inception of the relationships. Management also
formally documents its risk management objectives and strategies for
entering into the hedge transactions. IDSRiverSource Life formally assesses,
at inception and on a quarterly basis, whether derivatives designated as
hedges are highly effective in offsetting the fair value or cash flows of
hedged items. If it is determined that a derivative is not highly
effective as a hedge, IDSRiverSource Life will discontinue the application
of hedge accounting.
See Note 10
for information regarding the cash flow hedges used by IDS Life.
IDSRiverSource Life currently has economic hedges that either do not qualify
or are not designated for hedgeas accounting treatment under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).hedges. For derivative financial
instruments that do not qualify for hedge accounting, or are not
designated under SFAS 133 as hedges, changes in fair value are reported in current
period earnings generally as a component of net investment income.
See the "Derivatives Not Designated
as Hedges" section of Note 10 which describes the types of economic
hedges used by IDS Life.
F-13
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities are primarily funds held for
exclusive benefit of variable annuity contractholders and variable life insurance
policyholders. IDScontractholders. RiverSource Life receives mortality and expense risk and
other fees, including payments from its affiliate, RiverSource Investments,
LLC for providing certain sponsor and related servicing activity, which
are based on asset levels, guaranteed minimum death benefit (GMDB)guarantee fees and cost of insurance charges from the related
accounts.
In
addition, IDS Life also receives marketing and administrative support
payments from the affiliates of other companies' funds included as
investment options in its variable annuity and variable life insurance
products, which vary based on the level of variable assets. Prior to
the fourth quarter of 2003, these fees included investment advisory
fees as IDS Life served as the investment manager for affiliate
variable portfolio mutual funds. In the fourth quarter of 2003,
Ameriprise Financial replaced IDS Life as the investment manager and
assumed these duties for the mutual funds and retained IDS Life to
provide underlying sponsor and related services. At that time, IDS Life
began receiving internal allocation fees from Ameriprise Financial as
compensation for providing these non-investment advisory services. In
the fourth quarter of 2005, RiverSource Investments, LLC replaced
Ameriprise Financial as the investment manager. As a result, IDS Life
now receives internal allocation payments as compensation from
RiverSource Investments, LLC for providing these non-investment
advisory services.
IDS Life provides contractual mortality assurances to variable annuity
contractholders that the net assets of the separate accounts will not
be affected by future variations in the actual life expectancy
experience of the annuitants and beneficiaries from the mortality
assumptions implicit in the annuity contracts. IDS Life makes periodic
fund transfers to, or withdrawals from, the separate account assets for
such actuarial adjustments for variable annuities that are in the
benefit payment period. IDS Life also guarantees that the rates at
which administrative charges are deducted from contract funds will not
exceed contractual maximums.
For variable life insurance, IDS Life guarantees that the rates at
which insurance charges and administrative charges are deducted from
contract funds will not exceed contractual maximums.
LIABILITIES FOR FUTURE POLICY BENEFITS AND POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS
Fixed Annuities and Variable Annuity Guarantees
Future policy benefits and policy claims and other policyholders' funds
related to fixed annuities and variable annuity guarantees include
liabilities for fixed account values on fixed and variable deferred
annuities, guaranteed benefits associated with variable annuities,
equity indexed annuities and fixed annuities in a payout status.
Liabilities for fixed account values on fixed and variable deferred
annuities are equal to accumulation values, which are the cumulative
gross deposits and credited interest and fund performance less withdrawals and mortality and
expense riskvarious
charges.
-43-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of the variable annuity contracts offered by IDSRiverSource
Life contain GMDBguaranteed minimum death benefit ("GMDB") provisions. When
market values of the customer's accounts decline, the death benefit
payable on a contract with a GMDB may exceed the contract accumulation
value. IDSRiverSource Life also offers variable annuities with death benefit
provisions that gross up the amount payable by a certain percentage of
contract earnings. Theseearnings, which are referred to as gain gross-up (GGU)("GGU")
benefits. In addition, IDSRiverSource Life offers contracts containing
guaranteed minimum withdrawalincome benefit (GMWB)("GMIB"), guaranteed minimum incomewithdrawal
benefit (GMIB)("GMWB") and guaranteed minimum accumulation benefit (GMAB)("GMAB")
provisions.
F-14
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 2004,In determining the liabilities for GMDB, GGUvariable annuity death benefits and
GMIB, RiverSource Life projects these benefits have been established under SOP 03-1. Actuarialand contract assessments
using actuarial models to simulate various equity market scenarios are used to project thesescenarios.
Significant assumptions made in projecting future benefits and
contract assessments and include making significant assumptions relatedrelate to customer asset value growth rates, mortality,
persistency and investment margins. These assumptions, as well as their periodic review
by management,margins and are consistent with those used for
DAC purposes. Prior
toasset valuation for the adoptionsame contracts. As with DAC, management will
review and where appropriate, adjust its assumptions each quarter.
Unless management identifies a material deviation over the course of
SOP 03-1, amounts paidquarterly monitoring, management will review and update these assumptions
annually in the third quarter of each year.
The variable annuity death benefit liability is determined by estimating
the expected value of death benefits in excess of the projected contract
accumulation value were expensed when payable. Seeand recognizing the "Recently Issued Accounting
Standards" section belowexcess over the estimated
meaningful life based on expected assessments (e.g., mortality and
Note 5 for more information about these
guaranteed benefits.expense fees, contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period
from contract issuance, a GMIB guarantees a minimum lifetime annuity
based on a specified rate of contract accumulation value growth and
predetermined annuity purchase rates. The GMIB liability is determined
each period by estimating the expected value of annuitization benefits in
excess of the projected contract accumulation value at the date of
annuitization and recognizing the excess over the estimated meaningful
life based on expected assessments.
GMWB and GMAB provisions are considered embedded derivatives under SFAS
133 and accordingly, are
carriedrecorded at fair value within future policy
benefits for variable annuity guarantees on the Consolidated Balance
Sheets.value. The fair value of these embedded derivatives is
based on the present value of future benefits less applicable fees
charged for the provision. Changes in fair value are reflected in death
and other benefits for investment contracts and universal life-type
insurance
within the Consolidated Statements of Income.insurance.
Liabilities for equity indexed deferred annuities issued in 1999 or
later are equal to the accumulation of
host contract values covering guaranteed benefits and the market value of
embedded equity options.
Liabilities for equity indexed deferred annuities issued before 1999
are equal to the present value of guaranteed benefits and the intrinsic
value of index-based benefits. Accounting for equity indexed deferred
annuities issued before 1999 differs from those issued in 1999 and
later due to the treatment of embedded equity options within the
contracts. Embedded equity options are considered embedded derivatives
under SFAS 133. However, SFAS 133 allowed companies to elect whether to
separately account for embedded derivatives which are part of contracts
issued prior to January 1, 1999. IDS Life elected not to separately
account for embedded derivatives related to contacts issued prior to
January 1, 1999.
Liabilities for fixed annuities in a benefit or payout status are based
on future estimated payments using established industry mortality tables
and interest rates, ranging from 4.6% to 9.5% at December 31, 2005,2006,
depending on year of issue, with an average rate of approximately 6.0%5.9%.
Life, Disability Income and Long-TermLong Term Care PoliciesInsurance
Future policy benefits and policy claims and other policyholders' funds
related to life, DI and LTC insurance include liabilities for fixed
account values on fixed and variable universal life policies, liabilities
for unpaid amounts on reported claims, estimates of benefits payable on
claims incurred but not yet reported and estimates of benefits that will
become payable on term life, whole life, DI and LTC policies as claims
are incurred in the future.
Liabilities for fixed account values on fixed and variable universal life
insurance are equal to accumulation values. Accumulation values are the
cumulative gross deposits and credited interest less various contractual
expense and mortality charges and less amounts withdrawn by
policyholders.
-44-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liabilities for unpaid amounts on reported life insurance claims that have been reported but have not
yet been paid (unpaid claim liabilities) are
equal to the death benefits payable under the policies. ForLiabilities for
unpaid amounts on reported DI and LTC claims unpaid
claim liabilities are equal toinclude any periodic or
other benefit amounts due and accrued, includingalong with estimates of the
expensepresent value of reviewingobligations for continuing benefit payments. These
amounts are calculated based on claim continuance tables which estimate
the likelihood an individual will continue to be eligible for benefits.
Present values are calculated at interest rates established when claims
and making benefit payment
determinations.are incurred. Anticipated claim continuance rates are based on
established industry tables, adjusted as appropriate for RiverSource
Life's experience. Interest rates used with DI claims range from 3.0% to
8.0% at December 31, 2006, with an average rate of 5.0%. Interest rates
used with LTC claims range from 4.0% to 7.0% at December 31, 2006, with
an average rate of 4.4%.
Liabilities for estimated benefits payable on claims that have been
incurred but not yet reported are estimated based on periodic analysis of the
actual time lag between when a claim occurs and when it is reported.
Where applicable,
amounts recoverable from other insurers who share in the risk of the
products offered (reinsurers) are separately recorded as receivables.
Liabilities for fixed and variable universal life insurance are equal
to accumulation values which are the cumulative gross deposits, credited
interest, and fund performance less withdrawals and mortality and
expense risk charges. Liabilities forestimates of benefits that will become payable on future
benefitsclaims on term andlife, whole life, insuranceDI and LTC policies are based on the net
level premium method, using anticipated premium payments, mortality and
morbidity rates, policy persistency and interest rates earned on the assets
supporting the liability. Anticipated mortality and morbidity rates are
based on established industry mortality and morbidity tables, with
modifications based on IDSRiverSource Life's experience. Anticipated
policy premium
payments and persistency rates vary by policy form, issue age, policy
duration and policy duration.certain other pricing factors. Anticipated interest rates
for term and whole life range from 4%4.0% to 10%10.0% at December 31, 2005,2006,
depending on policy form, issue year and policy duration. IDSAnticipated
interest rates for DI are 7.5% at policy issue grading to 5.0% over five
years. Anticipated discount rates for LTC are currently 5.4% at December
31, 2006 grading up to 9.4% over 40 years.
Where applicable, benefit amounts expected to be recoverable from other
insurers who share in the risk are separately recorded as reinsurance
recoverable within receivables.
RiverSource Life issues only non-participating life and health insurance
policies, which do not pay dividends to policyholders from the
insurers' earnings.
F-15
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liabilities for futurerealized
policy benefits include both policy reserves and
claim reserves on DI and LTC products. Policy reserves are the amounts
needed to meet obligations for future claims and are based on the net
level premium method, using anticipated premium payments and morbidity,
mortality, policy persistency and discount rates. Anticipated morbidity
and mortality rates are based on established industry morbidity and
mortality tables. Anticipated policy persistency rates vary by policy
form, issue age, policy duration and, for DI policies, occupation
class. Anticipated discount rates for DI policy reserves are 7.5% at
policy issue and grade to 5% over 5 years. Anticipated discount rates
for LTC policy reserves are currently 5.3% at December 31, 2005 grading
up to 9.4% over 40 years.
Claim reserves on DI and LTC products are the amounts needed to meet
obligations for continuing claim payments on already incurred claims.
Claim reserves are calculated based on claim continuance tables which
estimate the likelihood that an individual will continue to be eligible
for benefits and anticipated interest rates earned on assets supporting
the reserves. Anticipated claim continuance rates are based on
established industry tables. Anticipated interest rates for claim
reserves for both DI and LTC range from 3.0% to 8.0% at December 31,
2005, with an average rate of approximately 4.9%.margins.
REVENUES AND EXPENSES
IDSRiverSource Life's principal sources of revenue include premium revenues,
net investment income, contractholder and policyholder charges and
mortality and expense risk and other fees.
Premium Revenues
Premium revenues include premiums on traditional life, DI and LTC
insurance products. Such premiums are net of reinsurance ceded and are
recognized as revenue when due.
Net Investment Income
Net investment income predominantly consists ofprimarily includes interest income earned on fixed
maturity securities classified as Available-for-Sale,Available-for-Sale; commercial mortgage
loans on real estate and policy loans,loans; mark-to-market of trading
securities and hedges on equity indexed annuitiescertain derivatives; and GMWB, and
allocatedpro-rata share of net income fromor
loss of equity method investments in hedge funds. Interest income is
accrued as earned using the effective interest method, which makes an
adjustment of the yield for security premiums and discounts on all
performing fixed maturity securities classified as Available-for-Sale,
excluding structured securities, and commercial mortgage loans on real estate so that the related security
or loan recognizes a constant rate of return on the outstanding balance
throughout its term.
-45-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contractholder and Policyholder Charges
Contractholder and policyholder charges include certain charges assessed
on annuities and fixed and variable universal life insurance, such as
cost of insurance and administrative and surrender charges. Cost of
insurance charges on fixed and variable universal life insurance are
recognized as revenue when earned, whereas contract charges and surrender
charges on annuities and universal and variable universal life insurance
are recognized as revenue when collected.
Mortality and Expense Risk and Other Fees
Mortality and expense risk and other fees include risk, management and
administration fees, which are generated directly and indirectly from
IDSRiverSource Life's separate account assets. IDSRiverSource Life's management
and other fees are generally computed as a contractual rate based on the
underlying asset values and are generally received monthly.
F-16
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Realized Investment Gain (Loss) on Investments
Realized gains and losses are recognized using the specific
identification method, on a trade date basis, and charges are recorded
when securities are determined to be other-than-temporarily impaired.
SeparationDeath and Other Benefits
Death and other benefits expenses consist of amounts paid under insurance
policies and annuity contracts, including benefits paid under optional
variable annuity guaranteed benefit riders. Amounts are net of benefit
payments recovered or expected to be recovered under reinsurance
contracts. Death and other benefits expenses also include amortization of
DSIC.
Interest Credited to Account Values
Interest credited to account values represents amounts earned on fixed
account values associated with fixed and variable universal life and
annuity contracts and equity indexed annuities in accordance with
contract provisions.
Amortization of Deferred Acquisition Costs
During 2005, Ameriprise Financial developed an allocation policy for
separationDirect sales commissions and other costs resultingdeferred as DAC associated with
the sale of annuity and insurance products are amortized over time. For
annuity and universal life contracts, DAC are amortized based on
projections of estimated gross profits over amortization periods equal to
the approximate life of the business. For other insurance products, DAC
are generally amortized as a percentage of premiums over amortization
periods equal to the premium-paying period.
For annuity and universal life insurance products, the assumptions made
in projecting future results and calculating the DAC balance and DAC
amortization expense are management's best estimates. Management is
required to update these assumptions whenever it appears that, based on
actual experience or other evidence, earlier estimates should be revised.
When assumptions are changed, the percentage of estimated gross profits
used to amortize DAC might also change. A change in the allocationrequired
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in a decrease in the DAC balance and
an increase in DAC amortization expense, while a decrease in amortization
percentage will result in an increase in the DAC balance and a decrease
in DAC amortization expense. The impact on results of certain costsoperations of
changing assumptions can be either positive or negative in any particular
period and is reflected in the period in which such changes are made.
-46-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For other life, DI and LTC insurance products, the assumptions made in
calculating the DAC balance and DAC amortization expense are consistent
with those used in determining the liabilities and, therefore are intended
to IDSprovide for adverse deviations in experience and are revised only if
management concludes experience will be so adverse that DAC is not
recoverable or if premium rates charged for the contract are changed. If
management concludes that DAC is not recoverable, DAC is reduced to the
amount that is recoverable based on best estimate assumptions and there
is a corresponding expense recorded in RiverSource Life's consolidated
results of operations.
For annuity, life, DI and LTC insurance products, key assumptions
underlying those long-term projections include interest rates (both
earning rates on invested assets and rates credited to policyholder
accounts), equity market performance, mortality and morbidity rates and
the rates at which policyholders are expected to surrender their
contracts, make withdrawals from their contracts and make additional
deposits to their contracts. Assumptions about interest rates are the
primary factor used to project interest margins, while assumptions about
rates credited to policyholder accounts and equity market performance are
the primary factors used to project client asset value growth rates, and
assumptions about surrenders, withdrawals and deposits comprise projected
persistency rates. Management must also make assumptions to project
maintenance expenses associated with servicing annuity and insurance
business during the DAC amortization period.
The client asset value growth rate is the rate at which variable annuity
and variable universal life insurance contract values are assumed to
appreciate in the future. The rate is net of asset fees and anticipates a
blend of equity and fixed income investments. Management reviews and,
where appropriate, adjusts its assumptions with respect to client asset
value growth rates on a regular basis. RiverSource Life uses a mean
reversion method as a guideline in setting near-term client asset value
growth rates based on a long-term view of financial market performance as
well as actual historical performance. In periods when market performance
results in actual contract value growth at a rate that it consideredis different than
that assumed, RiverSource Life reassesses the near-term rate in order to
continue to project its best estimate of long-term growth. The near-term
growth rate is reviewed to ensure consistency with management's
assessment of anticipated equity market performance. DAC amortization
expense recorded in a period when client asset value growth rates exceed
near-term estimate will typically be less than in a reasonable reflectionperiod when growth
rates fall short of separation
costs benefiting IDS Life.near-term estimate.
The analysis of DAC balances and the corresponding amortization is a
dynamic process that considers all relevant factors and assumptions
described previously. Unless management identifies a significant
deviation over the course of the quarterly monitoring, management reviews
and updates these DAC amortization assumptions annually in the third
quarter of each year.
Separation Costs
Separation costs generally consist of allocated financial advisor and
employee retention program costs, re-branding and marketing costs and
costs to separate and reestablish technology platforms related to the
separationSeparation.
Other Insurance and DistributionOperating Expenses
Other insurance and operating expenses primarily includes expenses
allocated to RiverSource Life from its parent, Ameriprise Financial for
RiverSource Life's share of compensation, professional and consultant
fees, information technology and communications, facilities and
equipment, advertising and promotion and legal and regulatory.
-47-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
As a result of the Separation of Ameriprise Financial.
Income Taxes
IDS Life's taxableFinancial from American
Express, RiverSource Life was required to file a short period income istax
return through September 30, 2005 which was included inas part of the
American Express consolidated income tax return for the year ending
December 31, 2005. Additionally, RiverSource Life will not be able to
file a consolidated U.S. federal income tax return with other members of
American Express through September 30, 2005. IDS
Life will file a separate consolidated life insurance company federal
income tax returnAmeriprise Financial's affiliated group for five tax years following the
Distribution
includingDistribution. Therefore, RiverSource Life was also required to file a
separate short period consolidated life insurance company income tax
return for the period October 1, 2005 through December 31, 2005.
IDS
Life providesRiverSource Life's provision for income taxes based onrepresents the net amount
of income taxes that it expects to pay or receive from various taxing
jurisdictions in connection with its operations. RECENTLY ISSUEDInherent in the
provision for income taxes are estimates and judgment regarding the tax
treatment of certain offsets and credits.
3. RECENT ACCOUNTING STANDARDS
On November 3, 2005,PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB)("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Early adoption is
permitted provided that the entity has not issued financial statements
for any period within the year of adoption. The provisions of SFAS 157
are required to be applied prospectively as of the beginning of the
fiscal year in which SFAS 157 is initially applied, except for certain
financial instruments as defined in SFAS 157 which will require
retrospective application of SFAS 157. The transition adjustment, if any,
will be recognized as a cumulative-effect adjustment to the opening
balance of retained earnings for the fiscal year of adoption. RiverSource
Life is currently evaluating the impact of SFAS 157 on its consolidated
financial condition and results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements" ("SAB 108"). SAB 108 addresses quantifying the
financial statement effects of misstatements, specifically, how the
effects of prior year uncorrected errors must be considered in
quantifying misstatements in the current year financial statements. SAB
108 does not change the SEC staff's previous positions in SAB No. 99,
"Materiality," regarding qualitative considerations in assessing the
materiality of misstatements. SAB 108 was effective for fiscal years
ending after November 15, 2006. The effect of adopting SAB 108 on
RiverSource Life's consolidated financial condition and results of
operations was insignificant.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. RiverSource Life adopted FIN 48 as of January 1, 2007. The
effect of adopting FIN 48 on RiverSource Life's consolidated financial
condition and results of operations was not material.
-48-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS
155: (i) permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation; (ii) clarifies which interest-only and
principal-only strips are not subject to the requirements of SFAS 133;
(iii) establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; (iv) clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives;
and (v) amends SFAS 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative
financial instrument. RiverSource Life adopted SFAS 155 as of January 1,
2007. The effect of adopting SFAS 155 on its consolidated financial
condition and results of operations is not expected to be significant.
Effective January 1, 2006, RiverSource Life adopted SFAS No. 154,
"Accounting Changes and Error Corrections," ("SFAS 154"). This Statement
replaced APB Opinion No. 20, "Accounting Changes," and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and
changed the requirements for the accounting for and reporting of a change
in accounting principle. The effect of adopting SFAS 154 on RiverSource
Life's consolidated financial condition and results of operations was
insignificant.
Effective January 1, 2006, RiverSource Life adopted FASB Staff Position
(FSP)("FSP") FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments."Investments" ("FSP FAS 115-1
and FAS 124-1"). FSP FAS 115-1 and FAS 124-1 address the determination as
to when an investment is considered impaired, whether that impairment is
other-than-temporary and the measurement of loss. It also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting
periods beginning after December 15, 2005. IDS Life anticipatesThe impact of the impactadoption of FSP FAS 115-1 and FAS 124-1 on
IDSRiverSource Life's consolidated financial condition and results of
operations and financial condition willwas not be material.
In September 2005, the AICPAAmerican Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 05-1, "Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts" (SOP
05-1)Contracts," ("SOP 05-1"). SOP
05-1 provides clarifying guidance on accounting by insurance enterprises
for DAC on internal replacementsassociated with any insurance or annuity contract that is
internally replaced with another contract or significantly modified. SOP
05-1 is effective for transactions occurring in fiscal years beginning
after December 15, 2006. RiverSource Life has accounted for many of insurancethese
transactions as contract continuations and investment contractshas continued amortization of
existing DAC against revenue from the new or modified contract. In
addition, RiverSource Life has not anticipated these transactions in
establishing amortization periods or other than those specifically describedDAC valuation assumptions.
Many of these transactions no longer qualify as continuations under SOP
05-1. Effective with RiverSource Life's adoption of SOP 05-1 as of
January 1, 2007, RiverSource Life will account for such transactions as
contract terminations which will result in SFAS
No. 97,accelerated DAC amortization.
As a result of adopting SOP 05-1, RiverSource Life has determined that in
the first quarter of 2007 it will record as a cumulative change in
accounting principle a pretax reduction to DAC of approximately $210
million and an after-tax decrease to retained earnings of approximately
$137 million. The adoption of SOP 05-1 is also expected to result in an
increase in DAC amortization in 2007. The expected increase to
amortization expense may vary depending upon future changes in underlying
valuation assumptions.
-49-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Effective January 1, 2004, RiverSource Life adopted SOP 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments." Separate Accounts" ("SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with
earlier adoption encouraged. IDS Life is currently evaluating the
impact of SOP 05-1 on IDS Life's consolidated results of operations and
financial condition.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" (SFAS 154)03-1"). This statement replaces APB Opinion No. 20,
"Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements" and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. IDS Life does not
anticipate SFAS 154 will materially impact its Consolidated Financial
Statements upon its adoption on January 1, 2006.
F-17
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2004, the FASB issued FSP No. 97-1, "Situations in Which
Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments (SFAS
No. 97), Permit or Require Accrual of an Unearned Revenue Liability"
(FSP 97-1). The implementation of SOP 03-1 raised a question regarding
the interpretation of the requirements of SFAS No. 97 concerning when
it is appropriate to record an unearned revenue liability. FSP 97-1
clarifies that SFAS No. 97 is clear in its intent and language, and
requires the recognition of an unearned revenue liability for amounts
that have been assessed to compensate insurers for services to be
performed over future periods. SOP 03-1 describes one situation, when
assessments result in profits followed by losses, where an unearned
revenue liability is required. SOP 03-1 does not amend SFAS No. 97 or
limit the recognition of an unearned revenue liability to the situation
described in SOP 03-1. The guidance in FSP 97-1 is effective for
financial statements for fiscal periods beginning after June 18, 2004.
The adoption of FSP 97-1 did not have a material impact on IDS Life's
consolidated results of operations or financial condition.
In July 2003, the AICPA issued SOP 03-1 effective for fiscal years
beginning after December 15, 2003. SOP 03-1
provides guidance onon; (i) the classification and valuation of
long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and accounting for interests in separate
accounts. Additionally, SOP 03-1 provides clarifying guidance as to the
recognition of bonus interest and other sales inducement benefits and
the presentation of any deferred amounts in the financial statements.
Lastly, SOP 03-1 requires insurance enterprises to establish additional
liabilities for benefits that may become payable under variable annuity
death benefit guarantees or other insurance or annuity contract
provisions. Where an additional liability is established, the
recognition of this liability will then be considered in amortizing DAC
and any DSIC associated with those insurance or annuity contracts.valuation. The
adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative effect of accounting change
that reduced first quarter 2004 results by $70.6$71 million ($108.6109 million
pretax). The cumulative effect of accounting change consisted of: (i) $42.9$43
million pretax from establishing additional liabilities for certain
variable annuity guaranteed benefits ($32.833 million) and from considering
these liabilities in valuing DAC and DSIC associated with those contracts
($10.110 million); and (ii) $65.7$66 million pretax from establishing additional
liabilities for certain variable universal life and single pay universal
life insurance contracts under which contractual costcosts of insurance
charges are expected to be less than future death benefits ($92 million)
and from considering these liabilities in valuing DAC associated with
those contracts ($26.326 million offset). Prior to theRiverSource Life's
adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable. IDSAmounts expensed in 2004 to establish and maintain
additional liabilities for certain variable annuity guaranteed benefits
were $53 million (of which $33 million was part of the adoption charges
described previously). RiverSource Life's accounting for separate
accounts was already consistent with the provisions of SOP 03-1 and,
therefore, there was no impact related to this requirement.
The AICPA released a series of technical practice aids (TPAs)("TPAs") in
September 2004, which provide additional guidance related to, among other
things, the definition of an insurance benefit feature and the definition
of policy assessments in determining benefit liabilities, as described
within SOP 03-1. The TPAs did not have a material effect on IDSRiverSource
Life's calculation of liabilities that were recorded in the first quarter
of 2004 upon adoption of SOP 03-1.
F-18
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued FIN 46, which addresses consolidation
by business enterprises of VIEs and was subsequently revised in
December 2003. The VIEs primarily impacted by FIN 46, which IDS Life
consolidated as of December 31, 2003, relate to three SLTs, which were
managed by an affiliate and partially owned by IDS Life. The
consolidation of the three SLTs partially owned by IDS Life and managed
by an affiliate, resulted in a cumulative effect of accounting change
that increased 2003 net income through a non-cash gain of $44.5 million
($68.4 million pretax). The Company liquidated its interest in all
consolidated VIEs during 2004 and 2005. See Note 3 for further
discussion of consolidated VIEs.
2. Investments
-----------4. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of Available-for-Sale securities at December 31, 2005 are distributed by type as presented below:type:
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2006 COST GAINS LOSSES VALUE
---------------------------------------------- ------------ ------------ ------------ -----------
(IN MILLIONS)
Fixed maturities:
Corporate debt securitiessecurities..................... $ 13,318,63612,232 $ 208,577119 $ (198,774)(262) $ 13,328,43912,089
Mortgage and other asset-backed securities 10,804,984 45,531 (158,784) 10,691,731securities.... 9,398 27 (175) 9,250
Foreign corporate bonds and obligations 3,148,534 67,097 (54,721) 3,160,910obligations....... 3,080 39 (68) 3,051
U.S. Governmentgovernment and agencies obligations 300,337 16,207 (5,282) 311,262obligations...... 295 13 (5) 303
State and municipal obligations 114,165 2,756 (3,262) 113,659obligations............... 165 4 (4) 165
Foreign government bonds and obligations 127,912 16,922 (114) 144,720obligations...... 117 18 - 135
Structured investments(a) 2,453investments (a).................... 2 - - 2,453
---------------------------------------------------------------------------------------------------------------------2
------------ ------------ ------------ -----------
Total fixed maturities 27,817,021 357,090 (420,937) 27,753,174
Preferredmaturities........................ 25,289 220 (514) 24,995
Common and common stocks 13 8preferred stocks................... 30 1 - 21
---------------------------------------------------------------------------------------------------------------------31
------------ ------------ ------------ -----------
Total ........................................ $ 27,817,03425,319 $ 357,098221 $ (420,937)(514) $ 27,753,195
---------------------------------------------------------------------------------------------------------------------
25,026
============ ============ ============ ===========
(a) Includes unconsolidated CDOs.collateralized debt obligations.
F-19-50-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale securities at December 31, 2004 are distributed by
type as presented below:
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2005 COST GAINS LOSSES VALUE
---------------------------------------------- ------------ ------------ ------------ -----------
(IN MILLIONS)
Fixed maturities:
Corporate debt securitiessecurities..................... $ 13,718,13813,319 $ 531,970208 $ (36,990)(199) $ 14,213,11813,328
Mortgage and other asset-backed securities 9,383,868 143,102 (30,487) 9,496,483securities.... 10,805 46 (159) 10,692
Foreign corporate bonds and obligations 3,185,592 139,821 (14,178) 3,311,235obligations....... 3,149 67 (55) 3,161
U.S. Governmentgovernment and agencies obligations 330,540 15,181 (513) 345,208obligations...... 300 16 (5) 311
State and municipal obligations 114,161 3,493 (2,569) 115,085obligations............... 114 3 (3) 114
Foreign government bonds and obligations 104,442 15,507 (552) 119,397obligations...... 128 17 - 145
Structured investments(a) 563,899investments (a).................... 2 - (33,230) 530,669
---------------------------------------------------------------------------------------------------------------------- 2
------------ ------------ ------------ -----------
Total fixed maturities 27,400,640 849,074 (118,519) 28,131,195
Preferredmaturities........................ 27,817 357 (421) 27,753
Common and common stocks 30,019 1,237preferred stocks................... - 31,256
---------------------------------------------------------------------------------------------------------------------- - -
------------ ------------ ------------ -----------
Total ........................................ $ 27,430,65927,817 $ 850,311357 $ (118,519)(421) $ 28,162,451
---------------------------------------------------------------------------------------------------------------------
27,753
============ ============ ============ ===========
(a) Includes unconsolidated CDOs.collateralized debt obligations.
At December 31, 20052006 and 2004,2005, fixed maturity securities, excluding net
unrealized appreciation and depreciation, comprised approximately 87% of
IDSRiverSource Life's total investments. These securities are rated by
Moody's Investors Service, Inc. (Moody's)("Moody's") and Standard & Poor's
(S&P)("S&P"), except for approximately $1.2 billion and $1.0 billion of
securities at both December 31, 2006 and 2005, and 2004respectively, which are
rated by RiverSource Investments, LLC's internal analysts using criteria
similar to Moody's and S&P. Ratings on investment grade securities are
presented using S&P's convention and, if the two agencies' ratings
differ, the lower rating is used. A summary by rating, (excludingexcluding net
unrealized appreciation and depreciation)depreciation, on December 31 is as follows:
RatingRATING 2006 2005
2004
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------- ----------------
AAAAAA............................................................ 38% 40%
37%
AAAA............................................................. 9 6
3
A 20 22
BBBA.............................................................. 19 21
BBB............................................................ 27 26 30
Below investment grade 8 8
---------------------------------------------------------------------------------------------------------
Totalgrade......................................... 7 7
---------------- ----------------
Total...................................................... 100% 100%
---------------------------------------------------------------------------------------------------------================ ================
At December 31, 20052006 and 2004,2005, approximately 47% and 61%, respectively, of the securities rated
AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of
any other issuer were greater than 10% of stockholder's equity.
F-20-51-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The following table provides 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 of December 31, 2006:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------- ------------------------- -------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES: VALUE LOSSES VALUE LOSSES VALUE LOSSES
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
Corporate debt securities... $ 1,166 $ (16) $ 7,680 $ (246) $ 8,846 $ (262)
Mortgage and other
asset-backed securities. 862 (5) 6,616 (170) 7,478 (175)
Foreign corporate bonds
and obligations......... 196 (3) 1,834 (65) 2,030 (68)
U.S. government and
agencies obligations.... 5 - 214 (5) 219 (5)
State and municipal
obligations............. 3 - 81 (4) 84 (4)
Foreign government bonds
and obligations......... - - 3 - 3 -
Structured investments...... 1 - - - 1 -
----------- ----------- ----------- ----------- ----------- -----------
Total................... $ 2,233 $ (24) $ 16,428 $ (490) $ 18,661 $ (514)
=========== =========== =========== =========== =========== ===========
The following table provides 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 of December 31, 2005:
---------------------------------------------------------------------------------------------------------------------------
(Thousands) Less thanLESS THAN 12 monthsMONTHS 12 months or more Total
---------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities: Value Losses Value Losses Value Losses
---------------------------------------------------------------------------------------------------------------------------MONTHS OR MORE TOTAL
------------------------- ------------------------- -------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES: VALUE LOSSES VALUE LOSSES VALUE LOSSES
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
Corporate debt securitiessecurities... $ 6,184,2896,184 $ (132,802)(133) $ 1,618,5521,619 $ (65,972)(66) $ 7,802,8417,803 $ (198,774)(199)
Mortgage and other
asset-backed securities 6,001,482 (87,558) 2,059,075 (71,226) 8,060,557 (158,784)securities. 6,002 (88) 2,059 (71) 8,061 (159)
Foreign corporate bonds
and obligations 1,203,652 (31,308) 535,393 (23,413) 1,739,045 (54,721)obligations......... 1,204 (31) 535 (24) 1,739 (55)
U.S. Governmentgovernment and
agencies obligations 148,584 (3,062) 72,844 (2,220) 221,428 (5,282)obligations.... 149 (3) 72 (2) 221 (5)
State and municipal
obligations 67,353 (2,589) 14,348 (673) 81,701 (3,262)obligations............. 67 (2) 15 (1) 82 (3)
Foreign government bonds
and obligations 13,344 (114) - - 13,344 (114)
Structured investments 2,189obligations......... 13 - - - 2,18913 -
---------------------------------------------------------------------------------------------------------------------------
Total $ 13,620,893 $ (257,433) $ 4,300,212 $ (163,504) $ 17,921,105 $ (420,937)
---------------------------------------------------------------------------------------------------------------------------
The following table provides 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 of December 31, 2004:
------------------------------------------------------------------------------------------------------------------------------
(Thousands) Less than 12 months 12 months or more Total
------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities: Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 2,410,156 $ (20,461) $ 645,898 $ (16,529) $ 3,056,054 $ (36,990)
Mortgage and other
asset-backed securities 2,560,175 (17,686) 550,728 (12,801) 3,110,903 (30,487)
Foreign corporate bonds 641,928 (6,571) 373,312 (7,607) 1,015,240 (14,178)
U.S. Government and
agencies obligations 159,904 (498) 533 (15) 160,437 (513)
State and municipal
obligationsStructured investments...... 2 - - 62,454 (2,569) 62,454 (2,569)
Foreign government bonds
and obligations 1,002 (33) 9,008 (519) 10,010 (552)
Structured investments - 2 -
526,190 (33,230) 526,190 (33,230)
------------------------------------------------------------------------------------------------------------------------------
Total----------- ----------- ----------- ----------- ----------- -----------
Total................... $ 5,773,16513,621 $ (45,249)(257) $ 2,168,1234,300 $ (73,270)(164) $ 7,941,28817,921 $ (118,519)
------------------------------------------------------------------------------------------------------------------------------(421)
=========== =========== =========== =========== =========== ===========
-52-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
In evaluating potential other-than-temporary impairments, IDSRiverSource
Life considers the extent to which amortized costs exceedsexceed fair value and
the duration of that difference. A key metric in performing this
evaluation is the ratio of fair value to amortized cost. The following
table summarizes the unrealized losses by ratio of fair value to
amortized cost as of December 31, 2005:2006:
(Millions, except
number of securities) Less thanLESS THAN 12 monthsMONTHS 12 months or more Total
-------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross
Ratio of Fair Value Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
to Amortized Cost Securities Value Losses Securities Value Losses Securities Value Losses
-------------------------------------------------------------------------------------------------------------------------------MONTHS OR MORE TOTAL
---------------------------------- ---------------------------------- ----------------------------------
NUMBER GROSS NUMBER GROSS NUMBER GROSS
RATIO OF FAIR VALUE OF FAIR UNREALIZED OF FAIR UNREALIZED OF FAIR UNREALIZED
TO AMORTIZED COST SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
95% - 100% 645.......... 178 $ 13,2002,233 $ (223) 213(24) 657 $ 3,97115,304 $ (141) 858(407) 835 $ 17,17117,537 $ (364)(431)
90% - 95% 36 340 (22) 24 321 (22) 60 661 (44)........... - - - 59 1,035 (69) 59 1,035 (69)
80% - 90% 9 81 (12) 3 8 (1) 12........... - - - 6 89 (13)
-------------------------------------------------------------------------------------------------------------------------------
Total 690(14) 6 89 (14)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........... 178 $ 13,6212,233 $ (257) 240(24) 722 $ 4,30016,428 $ (164) 930(490) 900 $ 17,92118,661 $ (421)
-------------------------------------------------------------------------------------------------------------------------------(514)
========== ========== ========== ========== ========== ========== ========== ========== ==========
F-21
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A majority of the gross unrealized losses related to corporate debt
securities and substantially all of the gross unrealized losses related
to mortgage and other asset-backed securities arewere attributable to
changes in interest rates. A portion of the gross unrealized losses
particularly related to corporate debt securities iswas also attributed to
credit spreads and specific issuer credit events. As noted in the table
above, a significant portion of the gross unrealized losslosses relates to
securities that have a fair value to amortized cost ratio of 95% or above
resulting in an overall 98%97% ratio of fair value to amortized cost for all
securities with an unrealized loss. From an overall perspective, the
gross unrealized losses arewere not concentrated in any individual
industries or with any individual securities. However, the securities
with a fair value to amortized cost ratio of 80%-90% primarily relate to
the auto and paper industries. The largest unrealized loss associated
with an individual issuer, excluding GNMA, FNMA and FHLMC mortgage-backed
securities, is $6was $5 million. The securities related to this issuer have a
fair value to amortized cost ratio of 80%-90%95%-100% and have been in an
unrealized loss position for lessmore than 12 months. IDSThere were no
securities with a fair value to amortized cost ratio less than 80% in the
portfolio.
RiverSource Life monitors the investments and metrics discusseddescribed
previously on a quarterly basis to identify and evaluate investments that
have indications of possible other-than-temporary impairment.impairments. See the
Investments section of Note 12 for information regarding IDSRiverSource
Life's policy for determining when an investment's decline in value is
other-than-temporary. As stated earlier, IDSRiverSource Life's ongoing
monitoring process has revealed that a significant portion of the gross
unrealized losses on its Available-for-Sale securities are attributable
to changes in interest rates. Additionally, IDSRiverSource Life has the
ability and intent to hold these securities for a time sufficient to
recover its amortized cost and has, therefore, concluded that none are other-than-temporarily
impairedhad
other-than-temporary impairment at December 31, 2005.2006.
The change in net unrealized securities gains (losses) recognized in
accumulated 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 (holding gains (losses)),;
(ii) gains (losses)(gains) losses that were previously unrealized, but have been
recognized in current period net income due to sales and
other-than-temporary impairments of Available-for-Sale securities
(reclassification of realized (gains) losses)gains (losses)) and (iii) other items
primarily consisting of adjustments in asset and liability balances, such
as DAC, DSIC and annuity liabilities to reflect the expected impact on
their carrying values had the unrealized gains (losses) been realized as
of the respective consolidated balance sheet dates.
-53-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The following table presents thesethe components of the change in net
unrealized securities gains (losses), net of tax, included in other
comprehensive income (loss), net of tax::
(Thousands)2006 2005 2004
2003
----------------------------------------------------------------------------------------------------------------------------- ---------- ----------
(IN MILLIONS)
Holding (losses) gains, net of tax of $260,090,
$22,633,$63, $261 and
$44,705, respectively$23, respectively.................................... $ (483,023)(116) $ 42,034(485) $ (83,106)42
Reclassification of realized gains, net of tax of $18,381, $10,765,$17,
$17 and $6,044, respectively (34,137) (19,993) (11,225)$11, respectively............................ (33) (32) (20)
DAC, net of tax of $28,372, $3,179$15, $28 and $1,958,
respectively 52,690 5,905 3,636$3, respectively....... 29 53 6
DSIC, net of tax of $4,614, $3,538,$2, $5 and $0,
respectively 8,568 (6,571) -$4, respectively........ 3 8 (7)
Fixed annuity liabilities, net of tax of $2,878,
$30,270,$22, $3 and
$0, respectively (5,345) (56,216) -
-------------------------------------------------------------------------------------------------------------------$30, respectively.................................... 40 (5) (56)
---------- ---------- ----------
Net unrealized securities losseslosses....................... $ (461,247)(77) $ (34,841)(461) $ (90,695)
-------------------------------------------------------------------------------------------------------------------(35)
========== ========== ==========
F-22
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a distribution of
Available-for-Sale securities by maturity as ofat December 31, 2005:2006 were as
follows:
Amortized Fair
(Thousands) Cost Value
-------------------------------------------------------------------------------------------------AMORTIZED FAIR
COST VALUE
------------ ------------
(IN MILLIONS)
Due within 1 yearone year.................................... $ 525,818521 $ 529,579522
Due after 1one year through 5 years 4,288,859 4,301,151five years.................. 6,625 6,592
Due after 5five years through 10 years 11,063,792 11,020,647years.................. 7,558 7,395
Due after 10 years 1,131,115 1,207,613
-------------------------------------------------------------------------------------------------
17,009,584 17,058,990years..................................... 1,185 1,234
------------ ------------
15,889 15,743
Mortgage and other asset-backed securities 10,804,984 10,691,731securities............. 9,398 9,250
Structured investments 2,453 2,453
Preferredinvestments................................. 2 2
Common and common stocks 13 21
-------------------------------------------------------------------------------------------------preferred stocks............................ 30 31
------------ ------------
Total ................................................. $ 27,817,03425,319 $ 27,753,195
-------------------------------------------------------------------------------------------------25,026
============ ============
The expected payments on mortgage and other asset-backed securities and
structured investments may not coincide with their contractual
maturities. As such, these securities, as well as preferredcommon and commonpreferred
stocks, were not included in the maturities distribution.
The table below includes sales, maturities, and purchases of investments
classified as Available-for-Sale for the years ended December 31:
(Thousands)2006 2005 2004
2003
------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
SalesSales............................................ $ 3,124,1541,897 $ 1,603,2853,124 $ 12,232,2351,603
Maturities, sinking fund payments and callscalls...... $ 2,241,8292,014 $ 1,931,0702,242 $ 4,152,088
Purchases1,931
Purchases........................................ $ 5,780,183(1,433) $ 4,392,522(5,780) $ 20,527,995
--------------------------------------------------------------------------------------------------------(4,393)
Included in net realized gains and losses were gross-54-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Net realized gains and losses on sales ofAvailable-for-Sale securities, as well as other-than-temporary losses
on investments, classified as Available-for-Sale, using the
specific identification method, asare noted in the following table for the
years ended December 31:
(Thousands)2006 2005 2004
2003
----------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Gross realized gains from salessales.................. $ 107,80060 $ 48,412108 $ 255,34848
Gross realized losses from salessales................. $ (38,602)(10) $ (17,524)(39) $ (135,465)(18)
Other-than-temporary impairmentsimpairments................. $ (19,380)- $ (131)(19) $ (102,614)
-------------------------------------------------------------------------------------------------------
The $19.4$19 million of other-than-temporary impairments in 2005 primarily
related to corporate debt securities within the auto industry which were
downgraded in 2005 and subsequently deteriorated throughout the year in
terms of their fair value to amortized cost ratio.
The $102.6 million
of other-than-temporary impairments in 2003 consisted of $54.4 million
related to corporate debt securities, $40.9 million related to IDS
Life's interests in a CDO securitization trust which was sold in 2005
as discussed below, and $7.3 million related to other securities. The
other-than-temporary impairments related to corporate debt securities
primarily resulted from continued operating difficulties and
bankruptcies of certain large airline carriers and the related overall
impact on the airline industry. The other-than-temporary impairments
related to IDS Life's interests in the CDO securitization trust
primarily resulted from defaults associated with a specific CDO within
the securitization trust.
F-23
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 2005, IDSRiverSource Life sold all of its
retained interest in the CDO-relateda CDO securitization trust and realized a net pretax
gain of $24.9$25 million. The carrying value of this retained
interest was $526.2 million at December 31, 2004, of which $389.9
million was considered investment grade.
At December 31, 20052006 and 2004,2005, bonds carried at $15.8$18 and $16 million,
respectively, were on deposit with various states as required by law.
COMMERCIAL MORTGAGE LOANS ON REAL ESTATE AND SYNDICATED LOANS, NET
The following is a summary of commercial mortgage loans on real estate
and syndicated loans at December 31:
(Thousands)2006 2005
2004
----------------------------------------------------------------------------------------------------------------------- -----------
(IN MILLIONS)
MortgageCommercial mortgage loans on real estate...............$ 2,827 $ 2,883
Less: allowance for loan losses......................... (37) (41)
----------- -----------
Commercial mortgage loans on real estate, net..........$ 2,883,7092,790 $ 2,968,8892,842
=========== ===========
Syndicated loans.......................................$ 112 $ 131
Less: allowance for loan losses (41,347) (45,347)
------------------------------------------------------------------------------------------------------------
Net mortgage loans $ 2,842,362 $ 2,923,542
------------------------------------------------------------------------------------------------------------
Syndicated loans $ 130,869 $ 139,295
Less: allowance for loan losses (3,500) (3,500)
------------------------------------------------------------------------------------------------------------losses......................... (4) (4)
----------- -----------
Net syndicated loans loans...................................$ 127,369108 $ 135,795
------------------------------------------------------------------------------------------------------------127
=========== ===========
MortgageCommercial mortgage loans are first mortgages on real estate. IDSRiverSource
Life holds the mortgage documents, which gives it the right to take
possession of the property if the borrower fails to perform according to
the terms of the agreements. MortgageCommercial mortgage loan fundings are
restricted by state insurance regulatory authorities to 80% or less of
the market value of the real estate at the time of origination of the
loan. Commitments to fund mortgages are made in the ordinary course of
business. The estimated
fair value of the mortgagefunding commitments as ofat December 31, 2006 and 2005
and 2004
was not material.approximate fair value.
Syndicated loans, which are included as a component of other investments,
represent loans in which a group of lenders provide funds to borrowers.
There is usually one originating lender which retains a small percentage
and syndicates the remainder.
At December 31, 2006 and 2005, and 2004, IDSRiverSource Life's recorded investment in
impaired commercial mortgage loans on real estate was $14.0 millionnil and $11.3$14
million, respectively, with related allowances for commercial mortgage
loan losses of $4.0nil and $4 million, for both periods.respectively. During 20052006 and 2004,2005,
the average recorded investment in impaired commercial mortgage loans on
real estate was $6.3$3 million and $8.3$6 million, respectively. IDSRiverSource Life
recognized nil, $0.6
millionnil, and $0.8$1 million of interest income related to
impaired commercial mortgage loans on real estate for the years ended
December 31, 2006, 2005 and 2004, and 2003, respectively.
The balances of and changes in the total allowance for mortgage loan
losses as of and for the years ended December 31, are as follows:
(Thousands) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 45,347 $ 47,197 $ 44,312
Provision for mortgage loan losses - 9,500 11,687
Foreclosures, write-offs and loan sales (4,000) (11,350) (8,802)
-----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 41,347 $ 45,347 $ 47,197
-----------------------------------------------------------------------------------------------------------------
F-24-55-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration(CONTINUED)
4. INVESTMENTS (CONTINUED)
The balances of and changes in the allowance for commercial mortgage loan
losses were as follows:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
BALANCE AT JANUARY 1.................................. $ 41 $ 45 $ 47
Provision for commercial mortgage loan losses......... - - 9
Foreclosures, write-offs and loan sales............... (4) (4) (11)
----------- ----------- -----------
BALANCE AT DECEMBER 31................................ $ 37 $ 41 $ 45
=========== =========== ===========
Concentrations of credit risk of commercial mortgage loans on real estate
by region at December 31 were:
(Thousands)2006 2005
2004
--------------------------------------------------------------------------------------------------------------------------
On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
----------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------
ON-BALANCE FUNDING ON-BALANCE FUNDING
COMMERCIAL MORTGAGE LOANS BY U.S. REGION SHEET COMMITMENTS SHEET COMMITMENTS
--------------- ----------------- -------------- -----------------
(IN MILLIONS)
Atlantic.........................................$ 859 $ 41 $ 852 $ 22
North Central.................................... 739 22 843 6
Pacific.......................................... 397 15 364 27
Mountain......................................... 298 13 352 9
South Atlantic $ 594,022 $ 10,900 $ 588,764 $ 24,115
West North Central 436,367 6,200 433,298 14,550
East North Central 406,714 - 509,752 1,400
Pacific 364,448 26,750 332,764 13,700
Mountain 352,178 8,725 371,801 20,025
Middle Atlantic 257,625 11,500 270,509 2,600
West South Central 215,467 17,350 191,410 -Central.................................... 337 1 308 22
New England 164,047 20,550 198,297 6,515
East South Central 92,841 4,850 72,294 9,625
--------------------------------------------------------------------------------------------------------------------------
2,883,709 106,825 2,968,889 92,530England...................................... 197 2 164 21
--------------- ----------------- -------------- -----------------
2,827 94 2,883 107
Less: allowance for loan losses (41,347)losses.................. (37) - (45,347)(41) -
--------------------------------------------------------------------------------------------------------------------------
Total --------------- ----------------- -------------- -----------------
Total.........................................$ 2,842,3622,790 $ 106,82594 $ 2,923,5422,842 $ 92,530
--------------------------------------------------------------------------------------------------------------------------107
=============== ================= ============== =================
ConcentrationConcentrations of credit risk of commercial mortgage loans on real estate
by property type at December 31 were:
(Thousands)2006 2005
2004
-----------------------------------------------------------------------------------------------------------------------------
On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
-------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------
ON-BALANCE FUNDING ON-BALANCE FUNDING
COMMERCIAL MORTGAGE LOANS BY PROPERTY TYPE SHEET COMMITMENTS SHEET COMMITMENTS
--------------- ----------------- -------------- -----------------
(IN MILLIONS)
Office buildings buildings.................................$ 1,048,566962 $ 36,0004 $ 1,087,7001,048 $ 5,840
Department/retail stores 703,811 37,800 734,590 40,075
Apartments 454,024 10,500 505,632 24,87536
Shopping centers and retail...................... 718 71 704 37
Apartments....................................... 470 2 454 11
Industrial buildings 453,503 12,000 373,767 15,615
Hotels/motels 92,335 5,900 109,408buildings............................. 458 12 454 12
Hotels and motels................................ 89 4 92 6
Medical buildings................................ 45 - Medical buildings 46,851 2,700 46,96047 3
Mixed use........................................ 44 - Mixed use 39,31839 -
62,424 4,200
Nursing/retirement homes 4,898Retirement homes................................. - 9,875 - Other 40,403 1,925 38,533 1,925
-----------------------------------------------------------------------------------------------------------------------------
2,883,709 106,825 2,968,889 92,5305 -
Other............................................ 41 1 40 2
--------------- ----------------- --------------- ----------------
2,827 94 2,883 107
Less: allowance for loan losses (41,347)losses.................. (37) - (45,347)(41) -
-----------------------------------------------------------------------------------------------------------------------------
Total --------------- ----------------- --------------- ----------------
Total.........................................$ 2,842,3622,790 $ 106,82594 $ 2,923,5422,842 $ 92,530
-----------------------------------------------------------------------------------------------------------------------------107
=============== ================= =============== ================
Commitments to fund commercial mortgages were made in the ordinary course
of business. The funding commitments at December 31, 2006 and 2005
approximate fair value.
-56-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
SOURCES OF INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTSINVESTMENT GAIN
Net investment income for the years ended December 31 is summarized as
follows:
(Thousands)2006 2005 2004
2003
---------------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Income on fixed maturitiesmaturities........................ $ 1,448,8821,408 $ 1,450,9191,449 $ 1,423,5601,451
Income on commercial mortgage loans on real estate 196,840 221,022 247,001181 197 221
Trading securities and other investments 163,814 138,468 63,983
-----------------------------------------------------------------------------------------------------------------
1,809,536 1,810,409 1,734,544investments.......... 89 164 138
----------- ----------- -----------
1,678 1,810 1,810
Less: investment expenses 18,212 32,963 29,359
-----------------------------------------------------------------------------------------------------------------
Totalexpenses......................... 17 21 35
----------- ----------- -----------
Total.......................................... $ 1,791,3241,661 $ 1,777,4461,789 $ 1,705,185
-----------------------------------------------------------------------------------------------------------------1,775
=========== =========== ===========
F-25
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net realized gains (losses) on investmentsinvestment gain for the years ended December 31 is
summarized as follows:
(Thousands)2006 2005 2004
2003
---------------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Fixed maturitiesmaturities.................................. $ 49,81850 $ 30,75750 $ 17,269
Mortgage31
Commercial mortgage loans on real estate (1,627) (3,048) (10,865)estate.......... 1 (2) (3)
Trading securities and other investments 105 (417) (1,959)
-----------------------------------------------------------------------------------------------------------------.
Totalinvestments.......... - - (1)
----------- ----------- -----------
Total.......................................... $ 48,29651 $ 27,29248 $ 4,445
-----------------------------------------------------------------------------------------------------------------27
=========== =========== ===========
3. Variable Interest Entities
--------------------------
The VIEs for which IDS Life was considered5. VARIABLE INTEREST ENTITIES
During the primary beneficiary and
which were consolidated beginningyears ended December 31, 2003, relate to SLTs2005 and 2004, RiverSource Life
consolidated three secured loan trusts ("SLTs") which were partially owned by IDS Life and managed by an affiliate. The
consolidated SLTs provided returns to
investors primarily based on the performance of an underlying portfolio
of high-yield loans and which were managed by an affiliate. IDS Life liquidated its interest in all three
SLTs. One SLT was
liquidated in 2004, andresulting in a cumulative pretax charge of $24
million. An additional $4 million pretax charge was incurred in 2004 due
to the otherexpected liquidation of the two remaining SLTs in 2005. Those
remaining SLTs were liquidated in 2005, resulting in a non-cash $27.9 million cumulative
net pretax charge and a $13.9$14 million pretax
gain duringfor the yearsyear ended December 31, 2005. Consolidated results of
operations for the year ended December 31, 2004 and 2005, respectively. There is no remaining
exposureincluded non-cash charges
related to thesethe liquidated SLTs as of December 31, 2005. The following
table presents the consolidated assets, essentially all of which were
restricted, and other balances$28 million that included a $24 million
charge related to these entities at December
31:
(Millions) 2004
-----------------------------------------------------------------------------------------------------------
Restricted cash $ 536
Derivative financial instruments (a) 43
-----------------------------------------------------------------------------------------------------------
Total assets $ 579
Total liabilities 117
-----------------------------------------------------------------------------------------------------------
Net assets $ 462
-----------------------------------------------------------------------------------------------------------
(a) Represents the estimated fair market value of the total return swap
derivatives related to the consolidated SLTs which had a notional
amount of $1.8 billion as of December 31,the complete liquidation of an SLT in 2004.
IDSRiverSource Life has other significant variable interests for which it is
not considered the primary beneficiary and, therefore, does not
consolidate. These interests are represented by carrying values of $2.5$2
million of CDO residual tranches managed by an affiliate where
IDSRiverSource Life is not the primary beneficiary. IDSRiverSource Life's
maximum exposure to loss as a result of its investment in the CDO
residual tranches is represented by the carrying value.
F-26-57-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Deferred Policy Acquisition Costs and Deferred Sales Inducement Costs
---------------------------------------------------------------------(CONTINUED)
6. DEFERRED ACQUISITION COSTS AND DEFERRED SALES INDUCEMENT COSTS
The balances of and changes in DAC were as of and for the years ended
December 31, were:follows:
(Thousands)2006 2005 2004
2003
--------------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Balance, beginning of yearyear............................. $ 3,637,9564,036 $ 3,336,2083,638 $ 3,077,9943,336
Impact of SOP 03-103-1..................................... - 19,600 - 20
Capitalization of acquisition costs 632,743 533,842 516,928costs.................... 687 633 534
Amortization, excluding impact of changes in
assumptions (382,882) (340,578) (266,108)assumptions........................................ (409) (383) (341)
Amortization, impact of annual third quarter changes
in DAC-related assumptions 67,000 23,700 1,800assumptions......................... 38 67 24
Amortization, impact of other quarter changes in
DAC-related assumptions(a) ........................ 15 - 56,100 -56
Impact of changes in net unrealized securities losses 81,062 9,084 5,594
----------------------------------------------------------------------------------------------------------------losses.. 44 81 9
----------- ----------- -----------
Balance, end of yearyear................................... $ 4,035,8794,411 $ 3,637,9564,036 $ 3,336,208
----------------------------------------------------------------------------------------------------------------
3,638
=========== =========== ===========
(a) Primarily relatesAmount in 2004 was primarily related to a $65.7$66 million reduction in
DAC amortization expense to reflect the lengthening of the
amortization periods for certain annuity and life insurance products
impacted by IDSRiverSource Life's adoption of SOP 03-1 on January 1,
2004, partially offset by a $9.6$10 million increase in amortization
expense due to a LTC DAC valuation system conversion.
The balances of and changes in DSIC were as of and for the years ended
December 31, were:follows:
(Thousands)2006 2005 2004
2003
--------------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Balance, beginning of yearyear............................. $ 302,997370 $ 278,971303 $ 231,100279
Impact of SOP 03-103-1..................................... - (2,900) - (3)
Capitalization of sales inducements 94,319 70,860 71,839
Amortization (40,332) (33,825) (23,968)inducements.................... 126 94 71
Amortization........................................... (48) (40) (34)
Impact of changes in net unrealized securities losses
(gains) 13,182 (10,109) -
----------------------------------------------------------------------------------------------------------------........................................... 4 13 (10)
----------- ----------- -----------
Balance, end of yearyear................................... $ 370,166452 $ 302,997370 $ 278,971
----------------------------------------------------------------------------------------------------------------303
=========== =========== ===========
5. Variable Annuity Guarantees
---------------------------
This note discusses variable annuity guarantees7. LINES OF CREDIT
RiverSource Life has available a committed line of credit with Ameriprise
Financial aggregating $200 million. The interest rate for which liabilities
areany borrowings
is established under SOP 03-1, specifically GMDB, GGUby reference to LIBOR plus 28 basis points. There were no
amounts outstanding on this line of credit at December 31, 2006.
Also, RiverSource Life has a collateral loan agreement with Ameriprise
Financial aggregating up to $75 million. The interest rate for any
borrowings is equal to the preceding month's effective new money rate for
RiverSource Life's permanent investments. There were no amounts
outstanding at December 31, 2006 and GMIB. See
Note 10 for more information about guarantees for which liabilities are
established under SFAS 133, specifically GMWB and GMAB.2005.
8. VARIABLE ANNUITY GUARANTEES
The majority of the variable annuity contracts offered by IDSRiverSource
Life contain GMDB provisions. When market values of the customer's accounts
decline, the death benefit payable on a contract with a GMDB may exceed
the contract accumulation value. IDSRiverSource Life also offers GGU provisions
on variable annuities with death benefit provisions and contracts
containing GMIB provisions. If elected by the contract owner and after
a stipulated waiting period from contract issuance, a GMIB guarantees a
minimum lifetime annuity based on a specified rate of contract
accumulation value growth and predetermined annuity purchase rates. IDSRiverSource Life has established additional
liabilities for these variable annuity death benefits and GMIB
provisions. F-27The variable annuity contracts offered by RiverSource Life
may also contain GMWB and GMAB provisions, which are considered embedded
derivatives. RiverSource Life has established additional liabilities for
these embedded derivatives at fair value.
-58-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. VARIABLE ANNUITY GUARANTEES (CONTINUED)
The variable annuity death benefit liability is determined each period
by estimatingcontracts with GMWB riders typically have account
values that are based on an underlying portfolio of mutual funds, the
expected valuevalues of death benefits in excesswhich fluctuate based on financial market performance. Most of
the projectedGMWB in-force guarantee that over a period of approximately 14 years
the client can withdraw an amount equal to what has been paid into the
contract, accumulation value and recognizing the excess over
the estimated meaningful life based on expected assessments (e.g.,
mortality and expense fees, contractual administrative charges and
similar fees). Similarly, the GMIB liability is determined each period
by estimating the expected value of annuitization benefits in excessregardless of the projectedperformance of the underlying funds. In May
2006, RiverSource Life began offering an enhanced withdrawal benefit that
gives policyholders a choice to withdraw 6% per year for the life of the
policyholder or 7% per year until the amount withdrawn is equal to the
guaranteed amount. At issue, the guaranteed amount is equal to the amount
deposited, but the guarantee can be increased annually to the account
value (a "step-up") in the case of favorable market performance.
Variable annuity contract accumulationowners age 79 or younger at contract issue can
also obtain the principal-back guarantee by purchasing the optional GMAB
rider for an additional charge, which provides a guaranteed contract
value at the dateend of annuitization
and recognizing the excess over the estimated meaningful life based on
expected assessments.a 10-year waiting period.
The majority of the GMDB contracts providefollowing table provides summary information related to all variable
annuity guarantees for six year reset contract
values. In determining thewhich RiverSource Life has established additional
liabilities for variable annuity
death benefits and GMIB, IDS Life projects these benefits and contract
assessments using actuarial models to simulate various equity market
scenarios. Significant assumptions made in projecting future benefits
and assessments relate to customer asset value growth rates, mortality,
persistency and investment margins and are consistent with those used
for DAC asset valuation for the same contracts. As with DAC, management
will review, and where appropriate, adjust its assumptions each
quarter. Unless management identifies a material deviation over the
courseas of quarterly monitoring, management will review and update these
assumptions annually in the third quarter of each year.
F-28December 31:
VARIABLE ANNUITY GUARANTEES BY BENEFIT TYPE(1) 2006 2005
------------------------------------------------------------------------------ --------- ---------
(IN MILLIONS, EXCEPT AGE)
CONTRACTS WITH GMDB PROVIDING FOR RETURN OF PREMIUM:
Total contract value....................................................... $ 17,418 $ 9,107
Contract value in separate accounts........................................ $ 15,859 $ 7,410
Net amount at risk(2)...................................................... $ 13 $ 17
Weighted average attained age.............................................. 61 60
CONTRACTS WITH GMDB PROVIDING FOR SIX-YEAR RESET:
Total contract value....................................................... $ 23,544 $ 24,608
Contract value in separate accounts........................................ $ 20,058 $ 20,362
Net amount at risk(2)...................................................... $ 227 $ 763
Weighted average attained age.............................................. 61 61
CONTRACTS WITH GMDB PROVIDING FOR ONE-YEAR RATCHET:
Total contract value....................................................... $ 6,729 $ 5,129
Contract value in separate accounts........................................ $ 5,902 $ 4,211
Net amount at risk(2)...................................................... $ 26 $ 45
Weighted average attained age.............................................. 61 61
CONTRACTS WITH GMDB PROVIDING FOR FIVE-YEAR RATCHET:
Total contract value....................................................... $ 907 $ 537
Contract value in separate accounts........................................ $ 870 $ 502
Net amount at risk(2)...................................................... $ - $ -
Weighted average attained age.............................................. 57 56
CONTRACTS WITH OTHER GMDB:
Total contract value....................................................... $ 586 $ 456
Contract value in separate accounts........................................ $ 530 $ 390
Net amount at risk(2)...................................................... $ 11 $ 16
Weighted average attained age.............................................. 64 63
CONTRACTS WITH GGU DEATH BENEFIT:
Total contract value....................................................... $ 811 $ 620
Contract value in separate accounts........................................ $ 730 $ 536
Net amount at risk(2)...................................................... $ 62 $ 35
Weighted average attained age.............................................. 62 61
-59-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following provides summary information related to variable annuity
contracts for which IDS Life has established additional liabilities for
death benefits and GMIB as of December 31:(CONTINUED)
8. VARIABLE ANNUITY GUARANTEES (CONTINUED)
------------------------------------------------------------------------------------------------------------DECEMBER 31,
-----------------------
VARIABLE ANNUITY GMDB, GMIB AND GGUGUARANTEES BY BENEFIT TYPETYPE(1) (CONTINUED) 2006 2005
2004
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------- ----------
(IN MILLIONS, EXCEPT AGE)
Contracts with GMDBCONTRACTS WITH GMIB:
Total contract value....................................................... $ 928 $ 793
Contract Valuevalue in separate accounts........................................ $ 9,106,907853 $ 3,241,618
Providing for Return of Contract Value in Separate Accounts712
Net amount at risk(2)...................................................... $ 7,409,86514 $ 1,727,415
Premium Net Amount at Risk* $ 16,727 $ 110,92216
Weighted Average Attained Age 60 62
------------------------------------------------------------------------------------------------------------
Contracts with GMDB Total Contract Value $ 24,608,183 $ 27,453,193
Providing for Six Year Contract Value in Separate Accounts $ 20,362,261 $ 22,787,083
Reset Net Amount at Risk* $ 762,724 $ 1,267,225
Weighted Average Attained Ageaverage attained age.............................................. 61 60
------------------------------------------------------------------------------------------------------------
Contracts with GMDBCONTRACTS WITH GMWB:
Total contract value....................................................... $ 4,791 $ 2,542
Contract Valuevalue in separate accounts........................................ $ 5,129,2014,761 $ 4,039,358
Providing for One Year2,510
Benefit amount in excess of account value.................................. $ - $ 1
Weighted average attained age.............................................. 61 60
CONTRACTS WITH GMWB FOR LIFE:
Total contract value....................................................... $ 2,396 $ -
Contract Valuevalue in Separate Accountsseparate accounts........................................ $ 4,210,7582,349 $ 3,078,491
Ratchet Net Amount at Risk*-
Benefit amount in excess of account value.................................. $ 45,363- $ 55,622-
Weighted Average Attained Age 61 61
------------------------------------------------------------------------------------------------------------
Contracts with Otheraverage attained age.............................................. 63 -
CONTRACTS WITH GMAB:
Total contract value....................................................... $ 1,350 $ 161
Contract Valuevalue in separate accounts........................................ $ 993,1521,340 $ 494,668
GMDB Contract Value161
Benefit amount in Separate Accountsexcess of account value.................................. $ 891,930- $ 397,696
Net Amount at Risk* $ 16,415 $ 11,6891
Weighted Average Attained Age 59 66
------------------------------------------------------------------------------------------------------------
Contracts with GGU Total Contract Value $ 619,846 $ 450,067
Death Benefit Contract Valueaverage attained age.............................................. 55 56
(1) Individual variable annuity contracts may have more than one
guarantee and therefore may be included in Separate Accounts $ 535,821 $ 363,753
Net Amount at Risk* $ 34,844 $ 18,192
Weighted Average Attained Age 61 64
------------------------------------------------------------------------------------------------------------
Contracts with GMIB Total Contract Value $ 792,578 $ 603,251
Contract Value in Separate Accounts $ 711,759 $ 517,596
Net Amount at Risk* $ 15,970 $ 11,886
Weighted Average Attained Age 60 59
------------------------------------------------------------------------------------------------------------
*more than one benefit
type.
(2) Represents current death benefit less total contract value for GMDB,
amount of gross up for GGU and accumulated guaranteed minimum benefit
base less total contract value for GMDB,
amount of gross up for GGUGMIB and accumulated guaranteed minimum benefit
base less total contract value for GMIB and assumes the actuarially
remote scenario that all claims become payable on the actuarially
remote scenario that all claims become payable on the same day.
For the year ended December 31, 2006, additional liabilities (assets) and
incurred claims (adjustments) were:
------------------------------------------------------------------------------------------------------------
ADDITIONAL LIABILITIES AND INCURRED BENEFITS
GMDB & GGU GMIB ------------------------------------------------------------------------------------------------------------GMWB GMAB
----------------- ---------- ------------ ----------
(IN MILLIONS)
For the year ended
Liability balance at January 1......................... $ 16 $ 4 $ 9 $ 1
Reported claims........................................ 8 - - -
Liability (asset) balance at December 31............... 26 5 (12) (5)
Incurred claims (adjustments) (sum of reported
and change in liability (assets))................... 18 1 (21) (6)
For the year ended December 31, 2005, additional liabilities and incurred
claims (adjustments) were:
GMDB & GGU GMIB GMWB GMAB
----------------- ---------- ------------ ----------
(IN MILLIONS)
Liability balance at January 1......................... $ 29,96629 $ 2,989
December 31, 20053 $ - $ -
Reported claims $ 12,203 $claims........................................ 12 - - -
Liability balance at December 31 $ 16,451 $ 3,52831....................... 16 4 9 1
Incurred claims (reported +(adjustments) (sum of reported
and change in liability) $ (1,312) $ 539
------------------------------------------------------------------------------------------------------------............................ (1) 1 9 1
The additional liabilities for guaranteed benefits established under
SOP 03-1 are supported by general account
assets. Changes in these liabilities are included in death and other
benefits in the
Consolidated Statements of Income.benefits.
Contract values in separate accounts were invested in various equity,
bond and other funds as directed by the contractholder. No gains or
losses were recognized on assets transferred to separate accounts for the
periods presented.
F-29-60-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Income Taxes
------------
IDS(CONTINUED)
9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS AND
SEPARATE ACCOUNT LIABILITIES
Future policy benefits and policy claims and other policyholders' funds
as of December 31, consisted of the following:
2006 2005
----------- -----------
(IN MILLIONS)
Fixed annuities................................................................ $ 16,841 $ 18,793
Equity indexed annuities accumulated host values............................... 267 296
Equity indexed annuities embedded derivative reserve........................... 50 38
Variable annuities, with fixed sub-accounts.................................... 5,975 6,999
GMWB variable annuity guarantees............................................... (12) 9
Other variable annuity guarantees.............................................. 26 21
----------- -----------
Total annuities.............................................................. 23,147 26,156
VUL/UL insurance contract fixed sub-account.................................... 2,562 2,552
Other life, disability income and long term care insurance..................... 3,852 3,604
----------- -----------
Total future policy benefits................................................. 29,561 32,312
Policy claims and other policyholders' funds................................... 93 90
----------- -----------
Total future policy benefits and policy claims and other policyholders' funds $ 29,654 $ 32,402
=========== ===========
Separate account liabilities as of December 31, consisted of the
following:
2006 2005
------------ ------------
(IN MILLIONS)
Variable annuity contract reserves.................................. $ 43,515 $ 33,155
VUL insurance contract reserves..................................... 5,772 4,775
------------ ------------
Total separate account liabilities................................ $ 49,287 $ 37,930
============ ============
Fixed Annuities
Fixed annuities include both deferred and payout contracts. Deferred
contracts offer a guaranteed minimum rate of interest and security of the
principal invested. Payout contracts guarantee a fixed income payment for
life or the term of the contract. RiverSource Life generally invests the
proceeds from the annuity payments in fixed rate securities. The interest
rate risks under these obligations are partially hedged with derivative
instruments. These derivatives are cash flow hedges of interest credited
on forecasted sales rather than a hedge of in-force risk. These
derivatives consisted of interest rate swaptions with a notional value of
$1.2 billion at both December 31, 2006 and 2005. The fair value of these
swaptions was $2 million and $8 million at December 31, 2006 and 2005,
respectively.
-61-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS
AND SEPARATE ACCOUNT LIABILITIES (CONTINUED)
Equity Indexed Annuities
The Index 500 Annuity, RiverSource Life's equity indexed annuity product,
is a single premium deferred fixed annuity. The contract is issued with
an initial term of seven years and interest earnings are linked to the
S&P 500 Index. This annuity has a minimum interest rate guarantee of 3%
on 90% of the initial premium, adjusted for any surrenders. RiverSource
Life generally invests the proceeds from the annuity deposits in fixed
rate securities and hedges the equity risk with derivative instruments.
The equity component of these annuities is considered an embedded
derivative and is accounted for separately. The change in fair value of
the embedded derivative reserve is reflected in interest credited to
account values. As a means of economically hedging its obligation under
the stock market return provision, RiverSource Life purchases and writes
index options and enters into futures contracts. The changes in the fair
value of these hedge derivatives are included in net investment income.
The notional amounts and fair value assets (liabilities) of these options
and futures as of December 31 were as follows:
2006 2005
--------------------- --------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------
(IN MILLIONS)
Purchased options and futures............... $ 271 $ 40 $ 358 $ 30
Written options............................. $ (67) $ (1) $ (101) $ (1)
Variable Annuities
Purchasers of variable annuities can select from a variety of investment
options and can elect to allocate a portion to a fixed account. A vast
majority of the premiums received for variable annuity contracts are held
in separate accounts where the assets are held for the exclusive benefit
of those contractholders.
Most of the variable annuity contracts issued by RiverSource Life contain
one or more guaranteed benefits, including GMWB, GMAB, GMDB, GGU and GMIB
provisions. The GMWB and GMAB provisions are considered embedded
derivatives and are accounted for separately. The changes in fair values
of these embedded derivative reserves are reflected in death and other
benefits for investment contracts and universal life-type insurance. The
negative reserve in GMWB at December 31, 2006 reflects that under current
conditions and expectations, RiverSource Life believes the applicable
fees charged for the rider will more than offset the future benefits paid
to policyholders under the rider provisions. RiverSource Life does not
currently hedge its risk under the GMAB, GMDB, GGU and GMIB provisions.
The total value of variable annuity contracts with GMWB riders increased
from $2.5 billion at December 31, 2005 to $7.2 billion at December 31,
2006. As a means of economically hedging its obligation under the GMWB
provisions, RiverSource Life purchases structured equity put options,
enters into interest rate swaps and trades equity futures contracts. The
changes in the fair value of these hedge derivatives are included in net
investment income. The notional amounts and fair value assets (liabilities)
of these options, swaps and futures as of December 31, were as follows:
2006 2005
------------------------ --------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------
(IN MILLIONS)
Purchased options........................... $ 1,410 $ 171 $ 629 $ 95
Interest rate swaps......................... $ 359 $ (1) $ - $ -
Sold equity futures......................... $ (111) $ - $ - $ -
-62-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FUTURE POLICY BENEFITS, POLICY CLAIMS AND OTHER POLICYHOLDERS' FUNDS AND
SEPARATE ACCOUNT LIABILITIES (CONTINUED)
Insurance Liabilities
Variable universal life ("VUL") and universal life ("UL") is the largest
group of policies written by RiverSource Life. Purchasers of VUL can
select from a variety of investment options and can elect to allocate a
portion to a fixed account. A vast majority of the premiums received for
VUL contracts are held in separate accounts where the assets are held for
the exclusive benefit of those contractholders. RiverSource Life also
offers term and whole life insurance as well as disability products.
RiverSource Life no longer offers long term care products but has in-force
policies from prior years. Insurance liabilities include accumulation
values, unpaid reported claims, incurred but not reported claims, and
obligations for anticipated future claims.
10. INCOME TAXES
RiverSource Life qualifies as a life insurance company for federal income
tax purposes. As such, IDSRiverSource Life is subject to the Internal
Revenue Code provisions applicable to life insurance companies.
Provisions (benefits) for income taxes for the years ended December 31
were:
(Thousands)2006 2005 2004
2003
------------------------------------------------------------------------------------------------------------------------- ---------- ----------
(IN MILLIONS)
FederalCurrent income tax:
CurrentFederal.............................................. $ 55,76666 $ 159,78356 $ 91,862160
State................................................ 3 4 (4)
---------- ---------- ----------
Total current income tax................................ 69 60 156
Deferred 122,264 70,574 (30,714)
---------------------------------------------------------------------------------------------------------------
Total federal income taxes 178,030 230,357 61,148
State income taxes-current 3,627 (4,180) 5,797
---------------------------------------------------------------------------------------------------------------tax............................. 123 122 70
---------- ---------- ----------
Income tax provision before accounting changeprovision.................................... $ 181,657192 $ 226,177182 $ 66,945
===============================================================================================================226
========== ========== ==========
The principal reasons that the aggregate income tax provision is
different from that computed by using the U.S. statutory rate of 35% for
the years ended December 31 are as follows:
2006 2005 2004
2003
------------------------------------------------------------------------------------------------------------------------- ---------- ----------
Tax at U.S. statutory raterate.............................. 35.0% 35.0% 35.0%
Changes in taxes resulting from:
Tax-exempt interest and dividend income (9.7) (3.1) (10.6)income............ (6.5) (9.4) (4.0)
State income taxes, net of federal benefitbenefit................ 0.3 0.4 (0.4) 0.7
Affordable housing credits - - (12.8)(0.3)
Taxes applicable to prior yearsyears.................... - 3.2 (2.6)
-
Other, netnet......................................... (0.5) (0.4) (0.6)
---------------------------------------------------------------------------------------------------------------(0.8) 0.4
---------- ---------- ----------
Income tax provision before accounting changeprovision.................................... 28.3% 28.4% 28.5%
11.7%
========================================================================================================================= ========== ==========
-63-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities result from temporary
differences between the assets and liabilities measured for U.S. GAAP
reporting versus income tax return purposes. The significant components
of IDSRiverSource Life's deferred income tax assets and liabilities as of
December 31, 20052006 and 20042005 are reflected in the following table:
(Thousands)2006 2005
2004
------------------------------------------------------------------------------------------------------------------------- ----------
(IN MILLIONS)
Deferred income tax assets:
Policy reservesLiabilities for future policy benefits........................... $ 1,101,8361,146 $ 1,035,300
Other investments 69,864 139,066
Deferred taxes related to net1,102
Investment related............................................... 75 70
Net unrealized losses on Available-for Sale securities and
derivative
unrealized losses 70,379 -
Other 61,896 55,556
---------------------------------------------------------------------------------------------------------------
Totalderivatives.................................................... 115 71
Other............................................................ 45 62
---------- ----------
Gross deferred income tax assets 1,303,975 1,229,922
---------------------------------------------------------------------------------------------------------------assets.................................... 1,381 1,305
Deferred income tax liabilities:
Deferred policy acquisition costs 1,154,402 1,116,235costs....................................... 1,253 1,154
Deferred taxes related to net securities and derivative
unrealized gains - 183,988
Other 158,672 70,901
---------------------------------------------------------------------------------------------------------------
Totalsales inducement costs.................................. 158 130
Other............................................................ 60 30
---------- ----------
Gross deferred income tax liabilities 1,313,074 1,371,124
---------------------------------------------------------------------------------------------------------------
Deferredliabilities............................... 1,471 1,314
---------- ----------
Net deferred income tax liabilities, netliabilities................................. $ 9,09990 $ 141,202
---------------------------------------------------------------------------------------------------------------9
========== ==========
F-30
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A portion of IDSRiverSource Life's income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
"policyholders' surplus account." At December 31, 2005, IDS2006, RiverSource Life
no longer had a policyholders' surplus account balance of $1.1 million.balance. The American Jobs
Creation Act of 2004, which was enacted on October 22, 2004, provides a
two-year suspension of the tax on policyholders' surplus account
distributions. IDSRiverSource Life has made distributions of $19$1 million in
2006, which will not be subject to tax under the two-year suspension.
Previously, the policyholders' surplus account was only taxable if
dividends to shareholders exceeded the shareholders' surplus account
and/or IDSRiverSource Life is liquidated. Deferred income taxes of $0.4 million
havehad not been
established as distributions of the remaining
policyholders' surplus account are contemplated in 2006.
IDSpreviously established.
RiverSource Life is required to establish a valuation allowance for any
portion of the deferred income tax assets that management believes will not be
realized. Included in IDSRiverSource Life's deferred tax assets is a
significant deferred tax asset relating to capital losses realized for
tax return purposes and capital losses that have been recognized for
financial statement purposes but not yet 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. IDSRiverSource Life has
$231$156 million in capital loss carryforwards that expire December 31, 2009.
The2009
for which the deferred tax benefit of these capital loss carryforwards is reflected in the other investmentsinvestment related
deferred tax assets, net of other related items. Additionally,
RiverSource Life has $45 million in capital loss carryforwards that
expire December 31, 2009 as a result of the 2005 first short period tax
return filed with American Express. Based on analysis of IDSRiverSource
Life's tax position, management believes it is more likely than not that
the results of future operations and implementation of tax planning
strategies will generate sufficient taxable income to enable IDSRiverSource
Life to utilize all of its deferred tax assets. Accordingly, no valuation
allowance for deferred tax assets has been established as of December 31,
20052006 and 2004.2005.
As a result of the separation of Ameriprise Financial from American
Express, IDSDistribution, RiverSource Life will bewas required to file a
short period income tax return through September 30, 2005 which will bewas
included as part of the American Express consolidated income tax return
for the year ended December 31, 2005. Additionally, IDSRiverSource Life and subsidiaries will
not be able to file a consolidated U.S. federal income tax return with
other members of the Ameriprise Financial affiliated group for five tax
years following the Distribution. Therefore, IDSRiverSource Life willwas also be
required to file a separate short period consolidated life insurance company income tax return for the period
October 1, 2005 through December 31, 2005.
-64-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The items comprising other comprehensive incomeloss in the Consolidated
Statements of Stockholder'sShareholder's Equity are presented net of the following
income tax benefit amounts:
(Thousands)2006 2005 2004
2003
----------------------------------------------------------------------------------------------------------------- ---------- ----------
(IN MILLIONS)
Net unrealized securities losseslosses.................... $ 248,36341 $ 18,761248 $ 48,79119
Net unrealized derivative losses 6,004 12,426 4,188
-------------------------------------------------------------------------------------------------------losses.................... 1 6 12
---------- ---------- ----------
Net income tax benefitbenefit.............................. $ 254,36742 $ 31,187254 $ 52,979
-------------------------------------------------------------------------------------------------------31
========== ========== ==========
F-31
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Statutory Capital and Surplus
-----------------------------
Statutory capital and surplus available for distribution11. STATUTORY CAPITAL AND SURPLUS
State insurance statutes contain limitations as to the amount of
dividends or dividendsdistributions that insurers may make without providing prior
notification to Ameriprise Financial are limited to IDSstate regulators. For RiverSource Life Insurance Company'sCompany,
dividends or distributions in excess of unassigned surplus, as determined
in accordance with accounting practices prescribed by state insurance regulatory authorities. IDSthe State of
Minnesota, require advance notice to the Minnesota Department of
Commerce, RiverSource Life Insurance Company's primary regulator, and
are subject to potential disapproval. RiverSource Life Insurance
Company's statutory unassigned surplus aggregated $925.1
million$1.2 billion and $909.7$925
million as of December 31, 20052006 and 2004,2005, respectively.
In addition, any dividenddividends or distribution paid priordistributions, whose fair market value,
together with that of other dividends or distributions made within the
preceding 12 months, exceed the greater of the previous year's statutory
net gain from operations or 10% of the previous year-end statutory
capital and surplus are referred to December 24, 2006 (one year after IDS Life Insurance Company's most
recent dividend payment) wouldas "extraordinary dividends."
Extraordinary dividends also require pre-notificationadvance notice to the CommissionerMinnesota
Department of Commerce, of the State of Minnesota, who has the
authorityand are subject to disapprove and prevent payment thereof. From December 24,
2006 to December 31, 2006,potential disapproval. For
2007, dividends or distributions in excess of $327.5$469 million would be
subject to this same pre-notificationextraordinary.
Statutory net gain from operations and
potential disapproval.
Statutory net income for the years ended
December 31 and capital and surplus as of December 31 are summarized as
follows:
(Thousands)2006 2005 2004
2003
---------------------------------------------------------------------------------------------------------------------- ---------- ----------
(IN MILLIONS)
Statutory net incomegain from operations................. $ 341,235469 $ 379,950327 $ 432,063438
Statutory net income............................... 514 339 438
Statutory capital and surplus 2,942,153 2,276,724 2,804,593surplus...................... 3,258 2,942 2,277
IDS Life Insurance Company and its wholly-owned life insurance
subsidiaries are subject to regulatory capital requirements. Actual
capital, determined on a statutory basis, and regulatory capital
requirements for each of the life insurance entities as of December 31,
2005 are as follows:
Regulatory
Capital
(Thousands) Actual Capital(a) Requirement
-------------------------------------------------------------------------------------------------
IDS Life Insurance Company $ 3,270,285 $ 750,975
American Enterprise Life Insurance Company 583,303 125,285
IDS Life Insurance Company of New York 246,001 39,880
American Partners Life Insurance Company 67,382 10,906
American Centurion Life Assurance Company 61,748 12,654
-------------------------------------------------------------------------------------------------
(a) Actual Capital, as defined by the NAIC for purposes of meeting
regulatory capital requirements, includes statutory capital and
surplus, plus certain statutory valuation reserves.
8. Related Party Transactions
--------------------------
IDS Life loans funds to12. RELATED PARTY TRANSACTIONS
Ameriprise Financial under a collateral loan
agreement. There was no balance on the loan at December 31, 2005 and
2004. This loan can be increased to a maximum of $75 million and pays
interest at a rate equal to the preceding month's effective new money
rate for IDS Life's permanent investments.
F-32
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with Ameriprise Financial being named the investment manager for the proprietary
mutual funds used as investment options by IDSRiverSource Life's variable
annuity and variable life insurance contract owners infor the fourthperiod from
the third quarter of 2003 Ameriprise Financial received management
fees from these funds. IDS Life continues to provide all fund
management services, other than investment management, and entered into
an administrative services agreement with Ameriprise Financial to be
compensated forthrough the services IDS Life provides. For the years ended
December 31, 2005, 2004 and 2003, IDS Life received $55.7 million,
$81.5 million, and $14.1 million, respectively, under the agreement
with Ameriprise Financial.third quarter of 2005. In the
fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise
Financial as the investment manager. As a result, IDS Life'sRiverSource Life provides all fund
management services, other than investment management and is compensated
for the administrative service fees were
payableservices it provides. For the year ended December
31, 2006, RiverSource Life received $76 million from RiverSource
Investments, LLC rather than Ameriprise
Financial during the fourth quarter of 2005.for administrative services RiverSource Life provided.
For the year ended December 31, 2005, IDSRiverSource Life received $19.5$56
million under the agreement
withfrom Ameriprise Financial and $20 million from RiverSource
Investments, LLC.
IDSLLC for services provided for the periods they each were
investment managers. For the year ended December 31, 2004, RiverSource
Life received $82 million from Ameriprise Financial for administrative
services.
-65-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
RiverSource Life participates in the Ameriprise Financial Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. CompanyRiverSource Life contributions to the plan are
based on participants' age, years of service and total compensation for
the year. Funding of retirement costs for this plan complies with the
applicable minimum funding requirements specified by ERISA. IDSRiverSource
Life's share of the total net periodic pension cost was $0.9approximately $1
million for each of the years ended December 31, 2006, 2005 and 2004.
RiverSource Life participates in the Ameriprise Financial 2005 Incentive
Compensation Plan. Employees, directors and independent contractors are
eligible to receive incentive awards including stock options, restricted
stock awards, restricted stock units, performance shares and similar
awards designed to comply with the applicable federal regulations and
laws of jurisdiction. The expense for incentive awards was $2 million in
2006, $1 million in 2005 $0.5and $1 million in 2004, and $0.3 million in 2003.
IDS2004.
RiverSource Life also participates in the defined contribution pension
plans of Ameriprise Financial which cover all employees who have met
certain employment requirements. CompanyRiverSource Life contributions to the
plans are a percent of either each employee's eligible compensation or
basic contributions. Costs of these plans charged to operations in 2006,
2005 and 2004 and 2003 were $3.2$3 million, $2.4$2 million and $2.2$2 million, respectively.
IDSRiverSource Life participates in the defined benefit health care plans of
Ameriprise Financial that provide health care and life insurance benefits
to retired employees and retired financial advisors. The plans include
participant contributions and service related eligibility requirements.
Upon retirement, such employees are considered to have been employees of
Ameriprise Financial. Ameriprise Financial expenses these benefits and
allocates the expenses to its subsidiaries. The cost of these plans
charged to operations in 2006, 2005 and 2004 and 2003 was $1.1approximately $1 million
$0.5 million, and $2.1 million, respectively.each year.
Charges by Ameriprise Financial and affiliated companies for use of joint
facilities, technology support, marketing services and other services
aggregated $725.2$755 million, $600.6$725 million and $549.2$601 million for 2006, 2005 2004 and
2003,2004, respectively. Certain of these costs are included in DAC. Expenses
allocated to IDSRiverSource Life may not be reflective of expenses that
would have been incurred by IDSRiverSource Life on a stand-alone basis.
RiverSource Life paid $300 million of dividends to Ameriprise Financial
during 2006, comprised of $100 million of extraordinary cash dividends in
each of the second and third quarters of 2006 and $100 million of
ordinary cash dividends in the fourth quarter of 2006. Prior to the
payment of the extraordinary cash dividends, RiverSource Life made the
required advance notices to the Minnesota Department of Commerce, its
primary state regulator, and received responses stating there were no
objections to the payment of these dividends. The ordinary cash dividends
paid in the fourth quarter 2006 did not require prior notification and
response from the Minnesota Department of Commerce. RiverSource Life of
NY paid ordinary dividends to RiverSource Life during the second quarter
of 2006 of $23 million. In connection with the separation, IDSSeparation, RiverSource
Life received a capital contribution of $650 million from Ameriprise
Financial during the third quarter of 2005 to support its current
financial strength ratings and to cover the allocated separation costs.
During the fourth quarter of 2005, IDSRiverSource Life approved and paid
dividends to Ameriprise Financial of $380 million.
During the second and fourth quarter of 2004, IDS Life
approved and paid dividends to Ameriprise Financial of $430 million and
$500 million, respectively. IDS Life expects to continue to maintain
adequate capital to meet internal and external Risk-Based Capital
requirements.
Included in other liabilities at December 31, 2006 and 2005 and 2004 are $7.6$1
million and $30.1$8 million, respectively, payable to Ameriprise Financial for
federal income taxes.
F-33-66-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Reinsurance
-----------(CONTINUED)
13. REINSURANCE
At December 31, 2006, 2005 2004 and 2003,2004, traditional life and universal life
insurance in force aggregated $174.1 billion, $160.1 billion $147.5 billion and $131.1$147.5
billion, respectively, of which $102.4 billion, $86.3 billion $70.9 billion and $53.8$70.9
billion was reinsured at the respective year ends. IDSLife insurance in
force is reported on a statutory basis. RiverSource Life also reinsures a
portion of the risks assumed under LTC policies.
Under allThe effect of reinsurance agreements,on premiums ceded to reinsurers amounted to $174.9
million, $159.6 million and $144.7 million and reinsurancefor the years ended December 31, is
as follows:
2006 2005 2004
---------- ---------- ----------
(IN MILLIONS)
Direct premiums.................................... $ 561 $ 544 $ 508
Reinsurance assumed................................ 3 2 4
Reinsurance ceded.................................. (170) (176) (160)
---------- ---------- -----------
Net premiums....................................... $ 394 $ 370 $ 352
========== ========== ===========
Reinsurance recovered from reinsurers amounted to $105.6$115 million, $73.3$106
million and $60.3$73 million, for the years ended December 31, 2006, 2005 2004 and
2003,2004, respectively. Reinsurance contracts do not relieve IDSRiverSource Life
from its primary obligation to policyholders.
Life insurance in force is
reported on a statutory basis.
10. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instruments enable the end users to manage exposure
to credit and 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. IDSRiverSource Life enters into
various derivative financial instruments as part of its ongoing risk
management activities. IDSRiverSource Life does not engage in any derivative
instrument trading activities. Credit risk associated with IDSRiverSource
Life's derivatives is limited to the risk that a derivative counterparty
will not perform in accordance with the terms of the contract. To
mitigate such risk, counterparties are all required to be preapproved.
Additionally, IDSRiverSource Life may, from time to time, enter into master
netting agreements wherever practical. The following summarizes
IDS Life's useAs of December 31, 2006 and 2005,
the total net fair values, excluding accruals, of derivative financial instruments.product
assets were $212 million and $133 million, respectively, and derivative
liabilities were $7 million at both balance sheet dates. The net notional
amount of derivatives as of December 31, 2006 was $3.1 billion,
consisting of $3.2 billion purchased and $0.1 billion written.
Cash Flow Hedges
IDSRiverSource Life uses interest rate products, primarily interest rate
swaptions, to hedge the risk of increasing interest rates on forecasted
fixed annuitypremium product sales. During 2006, 2005 2004 and 2003,2004, no amounts were
reclassified into earnings from accumulated other comprehensive income.
Additionally, IDSAt December 31, 2006, RiverSource Life does not expectexpects to reclassify
any material
amountsapproximately $1 million of net pretax losses on derivative instruments
from accumulated other comprehensive income (loss) to earnings during the
next twelve12 months. Currently, the longest period of time over which
IDSRiverSource Life is hedging exposure to the variability in future cash
flows is 1312 years and relates to forecasted fixed annuity sales. There
were losses of $1.8$4 million for the year ended December 31, 2006, $2
million for the year ended December 31, 2005 and no gains or losses for
the yearsyear ended December 31, 2004 and 2003 on derivative transactions or portions
thereof that were ineffective as hedges or excluded from the assessment
of hedge effectiveness.
-67-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
During 2006, 2005 and 2004, and 2003, IDSRiverSource Life recognized the following
impacts in other comprehensive income related to its cash flow hedging
activity, net of tax:
(Thousands)2006 2005 2004
2003
---------------------------------------------------------------------------------------------------------------------- ----------- -----------
(IN MILLIONS)
Holding losses, net of tax of $6,628, $11,901,$6, $11 and $3,663, respectively$11, respectively... $ (12,309)(10) $ (22,102)(21) $ (6,802)(21)
Reclassification forof realized losses (gains), net of tax of
$624, $525,$5, $5 and $525,$1, respectively 1,159 (975) (975)
----------------------------------------------------------------------------------------------------------................................ 9 10 (2)
------------ ----------- -----------
Net change in unrealized derivative losseslosses.................... $ (11,150)(1) $ (23,077)(11) $ (7,777)
----------------------------------------------------------------------------------------------------------(23)
============ =========== ===========
Derivatives Not Designated as Hedges
IDSRiverSource Life has economic hedges that either do not qualify or are
not designated for hedge accounting treatment. F-34
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe fair value assets
(liabilities) of these purchased and written derivatives for the years
ended December 31 were as follows:
2006 2005
---------------------- ----------------------
PURCHASED WRITTEN PURCHASED WRITTEN
--------- ---------- --------- ----------
(IN MILLIONS)
Equity indexed annuities..................... $ 40 $ (1) $ 30 $ (1)
GMWB......................................... 170 - 95 -
--------- ---------- --------- ----------
Total........................................ $ 210 $ (1) $ 125 $ (1)
========= ========== ========= ==========
Futures contracts are settled daily by exchanging cash with the
counterparty and gains and losses are reported in earnings. Accordingly,
there are no amounts on the balance sheet related to these contracts.
Certain annuity products have returns tied to the performance of equity
markets. As a result of fluctuations in equity markets, the amount of
expenses incurred by IDSRiverSource Life related to equity-indexedequity indexed annuities
will positively or negatively impact earnings. As a means of economically
hedging its obligations under the provisions of these products,
IDSRiverSource Life writes and purchases index options and occasionally
enters into futures contracts. Purchased options used in conjunction with
these products are reported in other assets and written options are
included in other liabilities. Additionally, certain annuity products
contain GMWB provisions, which guarantee the right to make limited
partial withdrawals each contract year regardless of the volatility
inherent in the underlying investments. The GMWB provision is considered
an embedded derivative and is valued each period by estimating the
present value of future benefits less applicable fees charged for the
rider using actuarial models, which simulate various economic scenarios.
IDSRiverSource Life economically hedges the exposure related to the GMWB
provision using various equity futures, interest rate swaps and
structured derivatives.
As of December 31, 2005 and 2004, the fair value of the purchased
derivatives used in conjunction with these products was $124.6 million
and $27.8 million, respectively. As of December 31, 2005 and 2004, the
fair value of the written options was $(0.8) million and $(0.9)
million, respectively. Futures contracts are settled daily by
exchanging cash with the counterparty and gains and losses are reported
in earnings.
Embedded Derivatives
As noted above, certain annuity products have returns tied to the
performance of equity markets. The equity component of the annuity
product obligations are considered embedded derivatives. Additionally,
certain annuities contain GMWB and GMAB provisions, which are also
considered embedded derivatives. The fair value of the embedded
derivative is included as part of the equity indexed annuities. The
changes in fair value of the equity indexed annuities are recognizedreflected in
interest credited to account values and the changes in fair value of the
GMWB and GMAB features are recognizedreflected in death and other benefits for
investment contracts and universal life-type insurance. The fair value of
the embedded derivatives for equity indexed annuities is recognized in future policy
benefits for fixed annuities and the fair value
of the embedded options for GMWB and GMAB isare recognized in future
policy benefits for variable
annuity guarantees in the Consolidated Balance Sheets. The total fair value
of these instruments, excluding the host contract, was $47.9$33 million and
$34.6$48 million at December 31, 2006 and 2005, and 2004, respectively.
F-35-68-
IDSRIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Fair Value of Financial Instruments
-----------------------------------
The following table discloses fair value information for financial
instruments. Certain items, such as life insurance obligations,
employee benefit obligations, investments accounted for under the
equity method, DAC and DSIC are not reflected in the table as they are
not required to be disclosed in such table by SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments."(CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are estimates based upon market
conditions and perceived risks at December 31, 20052006 and 20042005, and require
management judgment to estimate such values. These figures may not be
indicative of future fair values. Additionally, management believes the
value of excluded assets and liabilities is significant. The fair value
of IDSRiverSource Life, therefore, cannot be estimated by aggregating the
amounts presented herein. The following table discloses carrying valuevalues
and fair value informationvalues for financial instruments at December 31:
2006 2005
2004
-------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Value Value Value Value
--------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- ------------
(IN MILLIONS)
Financial Assets
----------------
Assets for which carrying values approximate
fair valuesvalues.................................. $ 233,58975,336 $ 233,58975,336 $ 667,24866,718 $ 667,248
Available-for-Sale securities 27,753,195 27,753,195 28,162,451 28,162,451
Mortgage66,718
Commercial mortgage loans on real estate, net 2,842,362 2,976,688 2,923,542 3,149,986
Policy loans 605,212 605,212 588,574 588,574
Trading securities 23,956 23,956 168,055 168,055net.. 2,790 2,875 2,842 2,977
Other investments 127,369 131,475 135,795 140,428
Separate account assets 37,929,960 37,929,960 32,454,032 32,454,032
Derivative financial instruments 133,263 133,263 97,784 97,784investments.............................. 108 112 127 131
Financial Liabilities
---------------------
Liabilities (assets) for which carrying values
approximate fair valuesvalues...................... $ 25,000(10) $ 25,000(10) $ 47,00032 $ 47,00032
Fixed annuity reserves 24,637,806 23,840,988 25,522,643 24,733,010reserves......................... 21,626 20,981 24,638 23,841
Separate account liabilities 33,154,528 31,742,503 28,284,118 27,164,063
Derivative financial instruments 6,941 6,941 4,290 4,290
-------------------------------------------------------------------------------------------------------------------liabilities................... 43,516 41,623 33,154 31,743
As of December 31, 20052006 and 2004,2005, the carrying and fair values of
off-balance sheet financial instruments are not material. See Note 2
for carrying and fair value information regarding Available-for-Sale
securities and mortgage loans on real estate (net of allowance for loan
losses). The following
methods were used to estimate the fair values of financial assets and
financial liabilities:
FINANCIAL ASSETS
Assets for which carrying values approximate fair values include cash and
cash equivalents, restricted cash and certain other assets. The
carrying value approximates fair value due to the short-term nature of
these instruments.
Available-for-Sale securities, policy loans, trading
securities, separate account assets and derivative financial instruments.
Generally these assets are carriedshort-term in duration, variable rate in
nature or are recorded at fair value inon the Consolidated Balance Sheets.
Gains and losses are recognized in the
results of operations upon disposition. In addition, impairment losses
are recognized when management determines that a decline in value is
other-than-temporary.
F-36
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of commercial mortgage loans on real estate, except those
with significant credit deterioration, arewas estimated using discounted
cash flow analysis, based on current interest rates for loans with
similar terms to borrowers of similar credit quality. For loans with
significant credit deterioration, fair values are based on estimates of
future cash flows discounted at rates commensurate with the risk inherent
in the revised cash flow projections, or for collateral dependent loans,
on collateral values.
The fair value of policy loans approximates carrying value.
Trading securities are carried at fair value in the Consolidated
Balance Sheets with changes in fair value recognized in current period
earnings.
Other investments include IDSRiverSource Life's interest in syndicated
loans, which are carried at amortized cost less allowance for losses in the
Consolidated Balance Sheets.losses.
Fair values arewere based on quoted market prices.
Separate account assets are carried at fair value in the Consolidated
Balance Sheets.
Derivative financial instruments are carried at fair value within other
assets or other liabilities. The fair value of the derivative financial
instruments are determined using either market quotes or valuation
models that are based upon the net present value of estimated future
cash flows and incorporate current market data inputs.
FINANCIAL LIABILITIES
Liabilities for which carrying values approximate fair values include
certain other liabilities and derivative liabilities. The carrying value approximatesGenerally these
liabilities are either short-term in duration, variable rate in nature or
are recorded at fair value due toon the short-term nature of these instruments.Consolidated Balance Sheets.
-69-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values of fixed annuities in deferral status are estimated as the
accumulated value less applicable surrender charges. For annuities in
payout status, fair value is estimated using discounted cash flows based
on current interest rates. The fair value of these reserves excludesexcluded life
insurance relatedinsurance-related elements of $1.5 billion as of both December 31, 20052006
and 2004.2005. If the fair value of the fixed annuities were realized, the
surrender charges received would be offset by the write offwrite-off of the DAC and
DSIC associated with the fixed annuities of $496.4$422 million and $534.4$496 million
as of December 31, 20052006 and 2004,2005, respectively.
Fair values of separate account liabilities, excluding life
insurance-related elements of $5.8 billion and $4.8 billion and $4.2 billion atas of
December 31, 20052006 and 2004,2005, respectively, are estimated as the
accumulated value less applicable surrender charges. If the fair value of
the separate account liabilities were realized, the surrender charges
received would be offset by the write offwrite-off of the DAC and DSIC associated with
separate account liabilities of $2.0$2.3 billion and $1.7$2.0 billion as of
December 31, 2006 and 2005, and 2004, respectively.
F-37
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies
-----------------------------16. COMMITMENTS AND CONTINGENCIES
At December 31, 2006 and 2005, and 2004, IDSRiverSource Life had no material
commitments to purchase investments other than mortgage loan fundings
(see Note 2)4).
RiverSource Life's annuity and life products all have minimum interest
rate guarantees in their fixed accounts. As of December 31, 2006, these
guarantees range up to 5.0%. To the extent the yield on RiverSource
Life's invested assets portfolio declines below its target spread plus
the minimum guarantee, RiverSource Life's profitability would be
negatively affected.
The Securities and Exchange Commission,SEC, the National Association of Securities Dealers and several state
authorities have brought proceedings challenging several mutual fund and
variable product financial practices, generally including suitability,
late trading, market timing, compensation and disclosure of revenue
sharing arrangements. IDSRiverSource Life has received requests for
information and has been contacted by regulatory authorities concerning
its practices and is cooperating fully with these inquiries.
IDSRiverSource Life 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. IDSRiverSource Life
believes that it is not a party to, nor are any of its properties the
subject of, any pending legal, arbitration or regulatory proceedings that
would have a material adverse effect on its consolidated financial
condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material impact on
results of operations in any particular reporting period as the
proceedings are resolved.
The IRS routinely examines IDS-70-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
RiverSource Life's federal income tax returnsConsolidated Financial Statements for the years ended
December 31, 2006, 2005 and recently completed2004 have been audited by Ernst & Young LLP,
RiverSource Life's independent registered public accounting firm.
Through 2004, Ernst & Young LLP provided audit services to RiverSource Life as
part of the audit services it provided to American Express Company ("American
Express"). In 2004, the American Express Audit Committee of its Board of
Directors determined to request proposals from auditing firms for their 2005
audit. This request was made pursuant to the American Express Audit Committee
charter, which requires a detailed review of the outside audit firm at least
every 10 years. At a meeting held on November 22, 2004, the American Express
Audit Committee approved the future engagement of IDSPricewaterhouseCoopers LLP
as the independent registered public accountants for the fiscal year ending
December 31, 2005 and dismissed Ernst & Young LLP for 2005. This decision
also applied to RiverSource Life. Ernst & Young LLP continued as auditors of
American Express and RiverSource Life for the 1993 through 1996 tax
years. The IRS is currently conductingyear ended December 31, 2004.
Ernst & Young LLP's reports on RiverSource Life's Consolidated Financial
Statements for the fiscal years ended December 31, 2004, did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope, or accounting principles.
In connection with the audits of IDSRiverSource Life's Consolidated Financial
Statements for the year ended December 31, 2004, there were no disagreements
with Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report. During the two most
recent fiscal years and subsequent interim period proceeding the dismissal of
Ernst & Young LLP, there were no "reportable events" (as defined in Regulation
S-K, Item 304(a)(1)(v)).
In connection with the Separation and Distribution from American Express, on
February 18, 2005, the American Express Audit Committee of its Board of
Directors dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP
to be the independent registered public accountants of RiverSource Life for
the 1997 through 2002 tax years. Management does not believe there will be
a material adverse effect on IDS Life'syear ended December 31, 2005. PricewaterhouseCoopers LLP continued as the
independent registered public accountants for the consolidated financial
conditionstatements of American Express for 2005.
PricewaterhouseCoopers LLP did not issue any report on RiverSource Life's
Consolidated Financial Statements for either of 2005 or results2004. During the
period from November 22, 2004 and through February 18, 2005, there were no
disagreements between RiverSource Life and PricewaterhouseCoopers LLP on any
matter of operationsaccounting principles or practices, financial statement disclosures
or auditing scope or procedures, which, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to
make reference to the matter in their report. There have been no "reportable
events," as defined in Item 304(a)(1)(v) of Regulation S-K, during the period
between November 22, 2004 to February 18, 2005.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
RiverSource Life 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
and pursuant to SEC regulations, including controls and procedures designed to
ensure that this information is accumulated and communicated to RiverSource
Life's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding the required
disclosure. It should be noted that, because of inherent limitations,
RiverSource Life's disclosure controls and procedures, however well designed
and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the disclosure controls and procedures are met.
RiverSource Life's management, with the participation of RiverSource Life's
Chief 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, RiverSource Life's
Chief Executive Officer and Chief Financial Officer have concluded that
RiverSource Life's disclosure controls and procedures were effective at a
resultreasonable level of these audits.
F-38assurance as of December 31, 2006.
-71-
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in RiverSource Life's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fourth fiscal quarter of the year to which
this report relates that have materially affected, or are reasonably likely to
materially affect, RiverSource Life's internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of Ameriprise Financial has
appointed Ernst & Young LLP ("Ernst & Young") as independent auditors to audit
the Consolidated Financial Statements of RiverSource Life for the years ended
December 31, 2006 and 2005.
FEES PAID TO THE REGISTRANT'S INDEPENDENT AUDITOR
The following table presents fees for professional services rendered by Ernst
& Young for the audit of RiverSource Life's financial statements for the years
ended December 31, 2006 and 2005 and other fees billed for other services
rendered by Ernst & Young during those periods.
2006 2005
--------- ---------
(IN THOUSANDS)
Audit Fees (1) ................................................. $ 1,469 $ 1,423
Tax Fees (2) ................................................... - -
All Other Fees (3) ............................................. - -
--------- ---------
Total .......................................................... $ 1,469 $ 1,423
========= =========
(1) Audit fees included audit work performed in the review and preparation of
the financial statements, as well as services that generally only the
independent auditor can be expected to provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review
of documents filed with the Securities and Exchange Commission.
(2) Tax fees included all services performed by the independent auditor's tax
personnel.
(3) All other fees included miscellaneous out-of-pocket expenses.
-72-
POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY INDEPENDENT AUDITOR
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of
the engagement of Ernst & Young are subject to the specific pre-approval of
the Audit Committee of Ameriprise Financial. All audit and permitted non-audit
services to be performed by Ernst & Young for RiverSource Life require
pre-approval by the Audit Committee of Ameriprise Financial in accordance with
pre-approval procedures established by the Audit Committee of Ameriprise
Financial. The procedures require all proposed engagements of Ernst & Young
for services to RiverSource Life of any kind to be directed to the General
Auditor of Ameriprise Financial, and then submitted for approval to the Audit
Committee of Ameriprise Financial prior to the beginning of any services.
In 2006, 100% of the services provided by Ernst & Young for RiverSource Life
were pre-approved by the Audit Committee of Ameriprise Financial. In 2005,
100% of the services provided by Ernst & Young for RiverSource Life were
pre-approved by the Audit Committee of American Express prior to the
Distribution and, thereafter, by the Audit Committee of Ameriprise Financial.
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The information required herein has been provided in
Item 8.
(3) Exhibits
See Exhibit Index on pages E-1 through E-2 hereof.
-73-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 28, 2007 By /s/ Mark E. Schwarzmann
- ----------------- --------------------------------------------------
Date Mark E. Schwarzmann, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
February 28, 2007 /s/ Gumer C. Alvero
- ----------------- -----------------------------------------------
Date Gumer C. Alvero, Director and Executive Vice
President - Annuities
February 28, 2007 /s/ Timothy V. Bechtold
- ----------------- -----------------------------------------------
Date Timothy V. Bechtold, Director and President
February 28, 2007 /s/ Brian J. McGrane
- ----------------- -----------------------------------------------
Date Brian J. McGrane, Director, Executive Vice
President and Chief Financial Officer
February 28, 2007 /s/ David K. Stewart
- ----------------- -----------------------------------------------
Date David K. Stewart, Vice President and Controller
February 28, 2007 /s/ Kevin E. Palmer
- ----------------- -----------------------------------------------
Date Kevin E. Palmer, Director, Vice President and
Chief Actuary
February 28, 2007 /s/ Mark E. Schwarzmann
- ----------------- -----------------------------------------------
Date Mark E. Schwarzmann, Director, Chairman
of the Board and Chief Executive Officer
-74-
EXHIBIT INDEX
-------------
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference.
2.1 Copy of Articles of Merger by and between IDS Life Insurance Company
and American Enterprise Life Insurance Company dated March 17, 2006,
filed electronically as Exhibit 99.1 to Form 8-K filed on Jan. 5, 2007
is incorporated by reference.
2.2 Copy of Articles of Merger by and between IDS Life Insurance Company
and American Partners Life Insurance Company dated March 17, 2006,
filed electronically as Exhibit 99.2 to Form 8-K filed on Jan. 5, 2007
is incorporated by reference.
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company
filed electronically as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
3.23.1.1 Copy of the Amended By-lawsCertificate of IDS Life Insurance Company filed
electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
3.3 Copy of ResolutionCertificate of the Board of DirectorsIncorporation of IDS
Life Insurance Company dated May 5, 1989, establishing IDS Life Account MGAJune 22, 2006, filed electronically as
Exhibit 3.33.1 to Form 8-K filed on Jan. 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 electronically as Exhibit 27(f)(2)
to Post-Effective Amendment No. 528 to Registration Statement No.
33-28976333-69777 is incorporated herein by reference.
4.1 CopyInstruments defining the rights of Non-tax qualified Group Annuity Contract, Form 30363C,
filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 5security holders, including
indentures, are incorporated by reference to Registration Statement
No. 33-28976 is incorporated herein by
reference.
4.2Nos. 333-92297, 333-139763, 333-73958, 333-139759, 333-74865,
333-139760, 333-82149, 333-139761, 333-85567, 333-139762, 33-47302,
333-79311, 333-114888 and 33-28976.
*10.1 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C,
filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 5
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.3Principal Underwriter Agreement for Variable Annuities and
Variable Life Insurance between RiverSource Life Insurance Company and
RiverSource Distributors, Inc. effective Jan. 1, 2007.
*10.2 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract
filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 5
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate
filed electronically as Exhibit 4.4 to Post-Effective Amendment No. 5
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed
electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed
electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed
electronically as Exhibit 4.7 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
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4.9 Copy of Non-tax qualified Individual Annuity Contract, Form 30365D,
filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 10
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.10 Copy of Endorsement No. 30379 to the Individual Annuity Contract,
filed electronically as Exhibit 4.10 to Post-Effective Amendment No. 10
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C,
filed electronically as Exhibit 4.11 to Post-Effective Amendment No. 10
to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed
electronically as Exhibit 4.12 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13
to Post-Effective Amendment No. 12 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically
as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-50968 is incorporated herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed
electronically as Exhibit 4.2 to Post-Effective Amendment No. 2 to
Registration Statement No. 33-50968 is incorporated herein by
reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed
electronically as Exhibit 4.3 to Post-Effective Amendment No. 2 to
Registration Statement No. 33-50968 is incorporated herein by
reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660,
filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2
to Registration Statement No. 33-48701 is incorporated herein by
reference.
4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111,
filed electronically as Exhibit 4.1 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114,
filed electronically as Exhibit 4.2 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed
electronically as Exhibit 4.3 to Registration Statement No. 333-42793
is incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed
electronically as Exhibit 4.4 to Registration Statement No. 333-42793
is incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed
electronically as Exhibit 4.5 to Registration Statement No. 333-42793
is incorporated herein by reference.
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4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement No. 333-42793
is incorporated herein by reference.
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484,
filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 1
to Registration Statement No. 333-42793 is incorporated herein by
reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485,
filed electronically as Exhibit 4.8 to Post-Effective Amendment No. 1
to Registration Statement No. 333-42793 is incorporated herein by
reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed electronically
as Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
10.1 Copy of Gross Administrative ChargeSelling Agreement by and between
American Express Financial Corporation and IDSamong RiverSource Life Insurance
Company, dated NovemberRiverSource Distributors, Inc. and Ameriprise Financial
Services, Inc. effective Jan. 1, 2003 filed electronically as Exhibit 10 to the 2003
Form 10-K is incorporated herein by reference.
10.22007.
*10.3 Copy of Gross Administrative ChargeMarketing Support Services Agreement by and between Ameriprise
Financial Services, Inc. and RiverSource Investments, LLC, dated
OctoberLife Insurance Company
effective Jan. 1, 2005, filed electronically as Exhibit 10.1 to the Form 10-Q
for the quarterly period ending September 30, 2005 is incorporated
herein by reference.
10.32007.
*10.4 Copy of Investment Management and Services Agreement between
RiverSource Investments, LLC and RiverSource Life Insurance Company
effective Jan. 1, 2007.
*10.5 Form of Federal Income Tax Sharing Agreement by and among RiverSource
Life Insurance Company, RiverSource Life Insurance Co. of New York and
Ameriprise Financial, Inc. effective Jan. 1, 2007.
*10.6 Copy of Agreement by and among RiverSource Life Insurance Company,
Ameriprise India Private Limited, and Ameriprise Financial, Inc.
(a/k/a/ Supplementary Agreement No. 1) effective Jan. 1, 2007.
*10.7 Copy of Management, Service & Marketing Support Agreement by and
between IDSRiverSource Investments, LLC, RiverSource Service Corporation
and RiverSource Life Insurance Company effective Jan. 1, 2007.
*10.8 Copy of RiverSource Variable Portfolio Funds Service Agreement by and
between RiverSource Distributors, Inc. and RiverSource Investments, LLC,
dated OctoberLife Insurance
Company effective Jan. 1, 2005, filed electronically as Exhibit 10.2 to the Form
10-Q for the quarterly period ending September 30, 2005 is incorporated
herein by reference.2007.
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EXHIBIT INDEX (CONTINUED)
*31.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, 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.
*32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, 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.
* Filed electronically herewith.
E-3E-2