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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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
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 333-114888
RIVERSOURCE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) 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|
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|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No | |
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|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT 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................................................................................................ 1
1A. Risk Factors............................................................................................ 8
1B. Unresolved Staff Comments............................................................................... 16
2. Properties.............................................................................................. 16
3. Legal Proceedings....................................................................................... 16
4. Submission of Matters to a Vote of Security Holders..................................................... 16
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities....................................................................................... 16
6. Selected Financial Data................................................................................. 16
7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk.............................................. 32
8. Financial Statements and Supplementary Data............................................................. 32
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 71
9A. Controls and Procedures................................................................................. 71
9B. Other Information....................................................................................... 72
PART III
10. Directors and Executive Officers of the Registrant...................................................... 72
11. Executive Compensation.................................................................................. 72
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......... 72
13. Certain Relationships and Related Transactions, and Director Independence............................... 72
14. Principal Accountant Fees and Services.................................................................. 72
PART IV
15. Exhibits and Financial Statement Schedules.............................................................. 73
Signatures.............................................................................................. 74
Exhibit 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 one wholly-owned operating
subsidiary, RiverSource Life Insurance Co. of New York ("RiverSource Life of
NY"). RiverSource Life Insurance Company is a wholly-owned subsidiary of
Ameriprise Financial, Inc. ("Ameriprise Financial").
o RiverSource Life Insurance Company is domiciled in Minnesota and
holds Certificates of Authority in American Samoa, the District of
Columbia and all states except New York. RiverSource Life Insurance
Company issues insurance and annuity products.
o RiverSource Life of 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 changed its name to
RiverSource Life Insurance Co. of New York.
RiverSource Life Insurance Company and its subsidiary are referred to
collectively in this Form 10-K as "RiverSource Life".
A majority of RiverSource Life's business is sold through the retail
distribution channel of Ameriprise Financial Services, Inc., a subsidiary of
Ameriprise Financial. RiverSource Distributors, Inc., a subsidiary of
Ameriprise Financial, 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 mergers.
Ameriprise Financial was formerly a wholly-owned subsidiary of American
Express Company ("American Express"). On February 1, 2005, the American
Express Board of Directors announced its intention to pursue the disposition
of 100% of its shareholdings in Ameriprise Financial (the "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"). In connection with the
Distribution, Ameriprise Financial entered into certain agreements with
American Express to effect the Separation 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. Ameriprise 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 expenses incurred as a result of
Ameriprise Financial becoming an independent company. 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.
RiverSource Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its financial
strength ratings and to cover separation costs.
-1-
AMERIPRISE FINANCIAL'S NEW BRAND
--------------------------------
In 2005, in connection with the 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
RiverSource(SM) brand. The transition of the life insurance and annuity
products to the RiverSource(SM) brand was substantially complete as of
December 31, 2006.
As described above, Ameriprise Financial streamlined the organizational
structure of its life insurance business by consolidating its five life
insurance subsidiaries 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
reorganization incorporated the RiverSource(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.
ANNUITIES: PRODUCT FEATURES AND RISKS
-------------------------------------
RiverSource Life offers both fixed and variable deferred annuity products to a
broad range of consumers through multiple distribution channels. Fixed and
variable deferred annuities are products 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. RiverSource Life also offers immediate
annuities in which payments begin within one year of issue and continue for
life or for a fixed period of time.
RiverSource Life is one of the largest issuers of annuities in the United
States. For the year ended December 31, 2006, on a consolidated basis, its
variable annuity products ranked eighth in new sales of variable annuities
according to VARDS(R). RiverSource Life had fixed and variable annuity cash
sales in 2006 of $12.9 billion, up from $9.3 billion in 2005. 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.
RiverSource Life receives fees charged on assets allocated to its separate
accounts. Investment management performance is also critical to the
profitability of the annuity business.
VARIABLE ANNUITIES
A variable annuity provides a contract owner with investment returns linked to
underlying investment accounts 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, 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"), guaranteed minimum withdrawal benefit ("GMWB"),
guaranteed minimum income benefit ("GMIB") and guaranteed minimum accumulation
benefit ("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.
The majority of the variable annuity contracts 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.
RiverSource 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.
Available 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 can also obtain a lump sum principal-back
guarantee by purchasing the optional GMAB rider for an additional charge. The
GMAB provides a guaranteed contract value at the end of a ten-year waiting
period regardless of the investment performance of the contract. The guarantee
is equal to the greater of the total amount of purchase payments made or 80%
of the highest anniversary value, adjusted for any withdrawals.
Certain variable annuity contracts 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. RiverSource 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.
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 RiverSource Life support the contractual
obligations under the guaranteed benefit riders RiverSource Life issues (see
"General and Variable Account Assets-The General Account" below). As a
result, RiverSource 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. RiverSource Life's exposure to
risk from guaranteed benefits generally will increase when equity markets
decline.
FIXED ANNUITIES
RiverSource Life's fixed annuity products provide a contract owner with cash
value that increases by a fixed or indexed interest rate. Fixed rates are
periodically reset at the discretion of RiverSource Life, subject to certain
policy terms establishing minimum guaranteed interest crediting rates.
RiverSource 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.
RiverSource 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, 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") model regulation for a guaranteed index rate. In
response, RiverSource Life filed a number of contract changes in recent years
to implement lower minimum guarantees. RiverSource 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
-------------------------------------
RiverSource 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 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.
-3-
RiverSource Life's sales of individual life insurance in 2006, as measured by
scheduled annual premiums, excluding lump sum and excess premiums, consisted
of 82% variable universal life, 9% fixed universal life and 9% traditional
life. RiverSource 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
RiverSource Life to mitigate this risk.
VARIABLE UNIVERSAL LIFE INSURANCE
RiverSource 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 include RiverSource
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, 2006. 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, dated September 30, 2006, the most
recent report available). RiverSource Life's major source of revenue from
variable universal life insurance is cost of insurance and other charges.
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.
RiverSource 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 RiverSource 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 3.0% to 5.0% as of December 31, 2006.
RiverSource 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. RiverSource Life has sold very little traditional whole life
insurance in recent years.
TERM LIFE INSURANCE
RiverSource 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, RiverSource 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
RiverSource Life also issues DI insurance. For the nine months ended September
30, 2006, RiverSource Life was ranked as the seventh largest provider of
individual (non-cancelable) DI insurance based on premiums (according to LIMRA
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 TERM CARE INSURANCE
As of December 31, 2002, RiverSource Life discontinued underwriting LTC
insurance. Although new product sales were discontinued in the fourth quarter
of 2002, RiverSource Life retained 50% of the risk on existing contracts and
the remaining 50% of the risk was ceded on a coinsurance basis to affiliates
of Genworth Financial, Inc. ("Genworth"). In addition, in May 2003,
RiverSource Life began outsourcing claims administration on its existing block
of LTC policies to Genworth.
Beginning in 2004, RiverSource 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 47 states, covering 86% of the eligible
premiums, with an average approved rate increase of 33.2%. Implementation of
rate increases is expected to continue 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
RiverSource Life's policyholders and contractholders may be placed in the
general account of RiverSource Life (the "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").
THE GENERAL ACCOUNT
Assets in the general account support all obligations of RiverSource Life
other than those supported by the separate accounts. RiverSource Life bears
the investment risk of the general account assets.
In the general account, RiverSource 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. RiverSource Life does not invest in securities to generate
trading profits.
In accordance with regulatory investment guidelines, RiverSource Life
Insurance Company and 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 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.
RiverSource 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, 2006, this rate varied among fixed
accounts and was as low as 1.5% and as high as 7.4%. To the extent the yield
on RiverSource Life's invested general account asset portfolio declines below
its target spread plus the minimum guarantee, RiverSource 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 RiverSource 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,
margins may be negatively impacted as the interest rates available on
RiverSource 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.
THE VARIABLE ACCOUNT
Variable annuity and insurance 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, RiverSource 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.
RiverSource Life's major source of revenue from the variable annuities it
issues is the fees it receives under the terms of the variable annuity
contracts. These fees include, for example, mortality and expense risk
charges, administrative charges and fees for 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 for the RiverSource Variable
Portfolio Funds which are available as investment options under the variable
annuity and life insurance products. Prior to the fourth quarter of 2005,
Ameriprise Financial was the investment manager for the RiverSource Variable
Portfolio Funds.
-5-
In the fourth quarter of 2005, RiverSource Investments, LLC replaced
Ameriprise Financial as the investment manager. As a result, RiverSource Life
now receives internal allocation payments as compensation from RiverSource
Investments, LLC for providing these non-investment advisory 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
-----------
RiverSource Life competes with other insurers and product manufacturers
including insurance companies, such as Hartford, 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 RiverSource Life's annuity and/or
insurance 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.
REGULATION
----------
The Minnesota Department of Commerce regulates RiverSource Life Insurance
Company, and the New York State Insurance Department (together with the
Minnesota Department of Commerce, the "Domiciliary Regulators") regulates
RiverSource Life of NY.
In addition to being regulated by their Domiciliary Regulators, RiverSource
Life Insurance Company and RiverSource Life of NY are regulated by each of the
insurance regulators in the states where each is authorized to transact the
business of insurance. Other 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 RiverSource 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. RiverSource Life has been contacted by regulatory
agencies for information relating to some of these investigations and is
cooperating with those inquiries. RiverSource Life has reviewed its
compensation arrangements and other operations that may be affected by these
regulatory investigations. In addition, RiverSource 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 RiverSource Life. Also, recent federal legislative
proposals aimed at the promotion of tax-advantaged savings may adversely
impact RiverSource Life's sales of annuity and life insurance products if
enacted.
FINANCIAL STRENGTH RATINGS
--------------------------
RiverSource Life Insurance Company receives ratings from independent rating
agencies. Ratings are important to maintaining public confidence in
RiverSource Life. Lowering of RiverSource 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.
RiverSource 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
-----------
RiverSource Life reinsures a portion of the 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. To minimize exposure to significant losses
from reinsurer insolvencies, RiverSource Life evaluates the financial
condition of its reinsurers prior to entering 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, RiverSource Life reinsures 90% of the death benefit liability
related to individual fixed and variable universal life and term life
insurance products. As 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 RiverSource 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,
RiverSource Life retained 50% of the risk and the remaining 50% of the risk
was ceded on a coinsurance basis to affiliates of Genworth Financial, Inc.
Risk on variable life and universal life policies is reinsured on a yearly
renewable term basis. Starting in 2001, risk on most term life policies is
reinsured on a coinsurance basis.
RiverSource 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. RiverSource 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") 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.
RiverSource 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, 2006, RiverSource Life Insurance Company's company action
level RBC was $590 million, and the corresponding total adjusted capital was
$3.5 billion, which represents 595% of the company action level RBC.
As described above, RiverSource Life Insurance Company maintains capital well
in excess of the company action level required by the Minnesota Department of
Commerce, its primary regulator.
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 RiverSource Life's
business, financial condition or results of operations. Based on current
information, the following information identifies the most significant risk
factors affecting RiverSource Life in each of these categories of risk.
However, the risks and uncertainties RiverSource 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 RiverSource Life's business.
RISKS RELATING TO RIVERSOURCE LIFE'S BUSINESS
---------------------------------------------
RIVERSOURCE LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY INTEREST
RATE FLUCTUATIONS AND BY 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, RiverSource 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, RiverSource 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
RiverSource 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 RiverSource Life's financial condition and results of operations. An
increase in policy surrenders and withdrawals also may require RiverSource
Life to accelerate amortization of deferred acquisition costs ("DAC"), which
would increase its expenses and reduce its net earnings.
During periods of falling interest rates, RiverSource Life's "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 or could become negative,
primarily because some of these products have guaranteed minimum crediting
rates.
-8-
Interest rate fluctuations also could have an adverse effect on the results of
RiverSource Life's investment portfolio. During periods of declining market
interest rates, the interest RiverSource Life receives on variable interest
rate investments decreases. In addition, during those periods, RiverSource
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 RiverSource 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 RiverSource Life's investment portfolio to interest rate
fluctuations, see "Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Risk Management."
POOR INVESTMENT PERFORMANCE IN RIVERSOURCE LIFE'S PRODUCTS COULD ADVERSELY
AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RiverSource 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
RiverSource Life's prospects for growth, because:
o sales of variable products might decrease;
o existing clients might withdraw assets from RiverSource Life's
variable products in favor of better performing products of other
companies, which would result in lower revenues; and
o RiverSource Life's ability to attract funds from existing and new
clients might diminish.
A DOWNGRADE OR A POTENTIAL DOWNGRADE IN RIVERSOURCE 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
RiverSource Life's products, the ability to market its products and its
competitive position. Any downgrade in RiverSource 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 RiverSource 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 RiverSource Life to reduce prices for many of its products
to remain competitive; and
o adversely affecting RiverSource Life's ability to obtain reinsurance
or obtain reasonable pricing on reinsurance.
INTENSE COMPETITION AND THE ECONOMICS OF CHANGES IN RIVERSOURCE LIFE'S PRODUCT
REVENUE MIX AND DISTRIBUTION CHANNELS COULD NEGATIVELY AFFECT RIVERSOURCE
LIFE'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE AND 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 RiverSource Life. If
Ameriprise Financial's branded advisor network opened or expanded its
distribution of annuity and insurance products of other companies, RiverSource
Life could experience lower sales of its products or other developments, which
could have a material adverse effect on RiverSource Life's financial condition
and results of operations.
-9-
DOWNTURNS AND VOLATILITY IN EQUITY MARKETS COULD ADVERSELY AFFECT RIVERSOURCE
LIFE'S BUSINESS AND PROFITABILITY.
Significant downturns and volatility in equity markets could have an adverse
effect on RiverSource Life's financial condition and results of operations.
Market downturns and volatility may cause potential new purchasers to refrain
from purchasing RiverSource 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.
Additionally, downturns and volatility in equity markets can have an adverse
effect on RiverSource 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 RiverSource 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 RiverSource Life's
business results to equity market fluctuations, see "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations-Risk
Management."
DEFAULTS IN RIVERSOURCE LIFE'S FIXED INCOME SECURITIES PORTFOLIO WOULD
ADVERSELY AFFECT ITS EARNINGS.
Issuers of the fixed income securities that RiverSource Life owns may default
on principal and interest payments. At both December 31, 2006 and 2005, 7% of
RiverSource 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 of December 31, 2006, 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 $33 million.
Default-related declines in the value of RiverSource Life's fixed income
securities portfolio could cause its net earnings to decline and could weaken
its capital position.
SOME OF RIVERSOURCE LIFE'S INVESTMENTS ARE RELATIVELY ILLIQUID.
RiverSource Life invests a portion of its owned assets in certain privately
placed fixed income securities, mortgage loans, policy loans, and
collateralized debt obligations, among others, all of which are relatively
illiquid. These asset classes represented 15.8% of the carrying value of
RiverSource Life's investment portfolio as of December 31, 2006. If
RiverSource 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 RiverSource 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 RiverSource
Life's financial condition and results of operations.
RIVERSOURCE LIFE'S AFFILIATED DISTRIBUTOR MAY BE UNABLE TO ATTRACT AND RETAIN
FINANCIAL ADVISORS.
RiverSource Life is dependent on the branded financial advisors of its
affiliated broker-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 selling firm. There can be no assurance that
RiverSource Life's affiliated selling firm will be successful in its efforts
to recruit and retain new advisors to its network. If RiverSource Life's
affiliated selling firm is unable to attract and retain quality financial
advisors, fewer advisors would be available to sell RiverSource Life's annuity
and insurance products and RiverSource Life's financial condition and results
of operations could be materially adversely affected.
RIVERSOURCE LIFE AND ITS AFFILIATES FACE INTENSE COMPETITION IN ATTRACTING AND
RETAINING KEY TALENT.
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 RiverSource Life will be successful in its efforts to
recruit and retain the required personnel. If RiverSource Life is unable to
attract and retain qualified individuals or its recruiting and retention costs
increase significantly, its financial condition and results of operations could
be materially adversely affected.
-10-
IF THE COUNTERPARTIES TO RIVERSOURCE LIFE'S REINSURANCE ARRANGEMENTS OR TO THE
DERIVATIVE INSTRUMENTS IT USES TO HEDGE ITS BUSINESS RISKS DEFAULT,
RIVERSOURCE LIFE MAY BE EXPOSED TO RISKS IT HAD SOUGHT TO MITIGATE, WHICH
COULD ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RiverSource Life uses reinsurance to mitigate its risks in various
circumstances. See "Item 1 - Business-Reinsurance." Reinsurance does not
relieve RiverSource Life of its direct liability to its policyholders, even
when the reinsurer is liable to RiverSource Life. Accordingly, RiverSource
Life bears credit risk with respect to its reinsurers. RiverSource 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 RiverSource Life's financial condition and results of
operations that could be material.
In addition, RiverSource Life uses derivative instruments to hedge various
business risks. RiverSource Life enters into a variety of derivative
instruments with a number of counterparties. If RiverSource Life's
counterparties fail to honor their obligations under the derivative
instruments, RiverSource Life's hedges of the related risk will be
ineffective. That failure could have an adverse effect on RiverSource Life's
financial condition and results of operations that could be material.
RIVERSOURCE LIFE'S BUSINESS IS HEAVILY REGULATED, AND CHANGES IN REGULATION
MAY REDUCE ITS PROFITABILITY AND LIMIT ITS GROWTH.
RiverSource 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 RiverSource
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 RiverSource Life's direct and indirect compliance and other
expenses of doing business. The costs of the compliance requirements
RiverSource Life faces, and the constraints they impose on its operations,
could have a material adverse effect on RiverSource Life's financial condition
and results of operations. For a further discussion of the regulatory
framework in which RiverSource Life operates, see "Item 1 -
Business-Regulation." For more information regarding ongoing investigations,
see "Item 3-Legal Proceedings."
LEGAL AND REGULATORY ACTIONS ARE INHERENT IN RIVERSOURCE LIFE'S BUSINESS AND
COULD RESULT IN FINANCIAL LOSSES OR HARM ITS BUSINESS.
RiverSource 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.
COMPETITIVE AND REGULATORY PRESSURES MAY REQUIRE RIVERSOURCE LIFE TO REDUCE
THE LEVELS OF ITS FEES.
RiverSource 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
RiverSource 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 RiverSource Life's ability to
maintain or increase its market share and profitability." In addition,
RiverSource 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 RiverSource Life. See the
risk factor entitled "RiverSource Life's business is heavily regulated, and
changes in regulation may reduce its profitability and limit its growth" and
"Item 3-Legal Proceedings" for more information regarding this and other
regulatory matters. Reductions or other changes in the fees that RiverSource
Life charges for its products and services could reduce its revenues and
earnings.
-11-
MISCONDUCT BY RIVERSOURCE LIFE'S EMPLOYEES AND ITS AFFILIATES' EMPLOYEES IS
DIFFICULT TO DETECT AND DETER AND COULD HARM RIVERSOURCE LIFE'S BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Misconduct by RiverSource 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 RiverSource Life's
businesses and could include:
o attempting to bind RiverSource 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 RiverSource Life's control
procedures.
RiverSource Life cannot always deter misconduct by employees and agents and
the precautions RiverSource Life takes to prevent and detect this activity may
not be effective in all cases. RiverSource 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.
IF RIVERSOURCE 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.
RiverSource 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 RiverSource Life expects to incur over time. The assumptions
and estimates RiverSource Life makes in establishing reserves require certain
judgments about future experience and, therefore, are inherently uncertain.
RiverSource 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. RiverSource Life continually monitors its
reserve levels. If RiverSource 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. For more
information on how RiverSource Life sets its reserves, see Note 1 to the
Consolidated Financial Statements.
RIVERSOURCE LIFE MAY FACE LOSSES IF MORBIDITY RATES OR MORTALITY RATES DIFFER
SIGNIFICANTLY FROM ITS PRICING EXPECTATIONS.
RiverSource Life sets prices for its life, DI and LTC insurance and some
annuity products based upon expected claim payment patterns, derived from
assumptions RiverSource 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 RiverSource 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, RiverSource 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 RiverSource Life previously underwrote to the extent they are not
fully reinsured. If mortality rates are higher than its pricing assumptions,
RiverSource 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 RiverSource Life's claims experience may differ significantly
from its pricing assumptions is particularly significant for its LTC insurance
products. Although RiverSource Life has the ability to seek and implement
future 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,
RiverSource Life's ability to forecast future claim rates for LTC insurance is
more limited than for life insurance. RiverSource 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.
-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 RiverSource 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 RiverSource Life would be required to accelerate the
amortization of expenses it deferred in connection with the acquisition of the
policy or contract.
For RiverSource 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 RiverSource Life assumed, then
RiverSource 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 RiverSource Life had assumed, which led it to increase
premium rates on certain of these policies.
Because RiverSource 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 RiverSource Life to increase premiums during the life of
the policy or contract, RiverSource 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 RiverSource 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 RiverSource
Life's products.
RIVERSOURCE LIFE MAY BE REQUIRED TO ACCELERATE THE AMORTIZATION OF DAC, WHICH
WOULD INCREASE ITS EXPENSES AND REDUCE PROFITABILITY.
DAC represent 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, 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, DAC are generally amortized as a
percentage of premiums over 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 customer asset value growth
rates for variable products. RiverSource Life periodically reviews and, where
appropriate, adjusts its assumptions. When RiverSource 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, RiverSource Life had $4.4 billion and $4.0
billion of DAC, respectively, and it amortized $356 million and $316 million,
respectively, of DAC as a current period expense for the years ended December
31, 2006 and 2005, respectively. For more information regarding DAC, see "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Deferred Acquisition Costs" and
"- Recent Accounting Pronouncements."
STATE INSURANCE REGULATORS MAY ADOPT NEW RESERVE OR CAPITAL REQUIREMENTS,
POTENTIALLY IMPACTING RIVERSOURCE LIFE'S FINANCIAL STRENGTH RATINGS.
RiverSource Life must comply with statutory reserve and capital requirements.
State regulators are continually reviewing and updating these requirements.
There continues to be 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
RIVERSOURCE LIFE'S PRODUCTS LESS ATTRACTIVE TO CLIENTS.
Many of the products RiverSource 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.
RIVERSOURCE 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.
RiverSource Life has devoted significant resources toward developing its risk
management policies and procedures and expects to continue to do so in the
future. Nonetheless, RiverSource 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 are publicly available or
otherwise accessible to RiverSource 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
RiverSource Life's risk exposure in all market environments or against all
types of risk.
RIVERSOURCE LIFE IS SUBJECT TO TAX CONTINGENCIES THAT COULD ADVERSELY AFFECT
THE 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. RiverSource 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
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CLIENT ACQUISITION AND RETENTION MAY BE ADVERSELY AFFECTED BY RIVERSOURCE
LIFE'S SEPARATION FROM AMERICAN EXPRESS.
Although RiverSource Life generally operated independently of American
Express' other operations with respect to client services prior to the
Separation and Distribution, RiverSource Life 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, RiverSource 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. However, overall response
rates, marginal costs and profitability from these efforts may be negatively
affected as a result of the loss of this affiliation. RiverSource 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 RiverSource Life to another company. Loss of a significant portion of
these clients could negatively impact RiverSource Life's business.
AMERIPRISE FINANCIAL AND RIVERSOURCE 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 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 RiverSource Life that it considered to be a reasonable reflection of
separation costs benefiting RiverSource 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 Separation and Distribution. 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 incur
significant additional separation costs in 2007. This risk has been partly
offset by the contribution of capital from American Express to Ameriprise
Financial, and in turn, from Ameriprise Financial to RiverSource Life.
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As a result of the Separation, Ameriprise Financial (and hence, RiverSource
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, which could decrease its overall
profitability.
RIVERSOURCE LIFE MAY NOT HAVE SUFFICIENT CAPITAL GENERATION ABILITY TO MEET
ITS OPERATING AND REGULATORY CAPITAL REQUIREMENTS.
As a stand-alone company, Ameriprise Financial (and hence, RiverSource Life)
is required to maintain higher capital ratios to retain its credit ratings. In
addition, RiverSource 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 "Item 1 -
Business-Risk-Based Capital" for more information regarding capital
requirements and see "Item 3-Legal Proceedings" for more information
regarding pending regulatory and legal proceedings. Although Ameriprise
Financial made a $650 million capital contribution to RiverSource Life to
cover, among other things, allocated separation costs, RiverSource Life cannot
be certain that this capital contribution will be sufficient to cover all of
the additional costs. If it is not sufficient, RiverSource 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 RIVERSOURCE LIFE, TO
ITS OWN SYSTEMS, IT COULD EXPERIENCE TEMPORARY BUSINESS INTERRUPTIONS AND
INCUR SUBSTANTIAL ADDITIONAL COSTS.
Ameriprise Financial (and hence, RiverSource 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. RiverSource Life anticipates this will involve
significant costs. RiverSource 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. RiverSource Life may not be successful
in implementing its new technology infrastructure and transitioning its data,
and RiverSource Life may incur substantially higher costs for implementation
than currently anticipated. RiverSource 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 RiverSource Life's business and make
it vulnerable to its competitors.
Ameriprise Financial (and hence, RiverSource Life) continues to rely on
American Express' disaster recovery capabilities as part of its business
continuity processes. RiverSource Life will only have the right to use
American Express' disaster recovery resources until 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. RiverSource 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. RiverSource 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.
AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS COULD INCREASE
RIVERSOURCE LIFE'S U.S. FEDERAL INCOME TAX COSTS.
Due to the Separation, 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. As a result of these and other inefficiencies,
the aggregate amount of U.S. federal income tax that RiverSource Life pays may
increase and RiverSource Life may, in addition, not be able to fully realize
certain of its deferred tax assets.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
RiverSource Life Insurance Company occupies office space in Minneapolis,
Minnesota, which is leased or owned by Ameriprise Financial. RiverSource Life
Insurance Company reimburses Ameriprise Financial for rent based on direct and
indirect allocation methods. RiverSource Life of NY rents office space in
Albany, New York. RiverSource Life believes that the facilities occupied 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. RiverSource Life has received
requests for information concerning some of these practices and is cooperating
fully with these inquiries.
RiverSource Life is involved in a number of other legal and arbitration
proceedings concerning matters arising in connection with the conduct of its
business activities. RiverSource 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.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
RiverSource Life Insurance Company, formerly known as IDS Life Insurance
Company, is a stock life insurance company with one wholly-owned operating
subsidiary, RiverSource Life Insurance Co. of New York ("RiverSource Life of
NY"). RiverSource Life Insurance Company is a wholly-owned subsidiary of
Ameriprise Financial, Inc. ("Ameriprise Financial").
o RiverSource Life Insurance Company is domiciled in Minnesota and
holds Certificates of Authority in American Samoa, the District of
Columbia and all states except New York. RiverSource Life Insurance
Company issues insurance and annuity products.
o RiverSource Life of 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 changed its name to
RiverSource Life Insurance Co. of New York.
RiverSource Life Insurance Company and its subsidiary are referred to
collectively in this Form 10-K as "RiverSource Life".
No 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 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 formerly a wholly-owned subsidiary of American
Express Company ("American Express"). On February 1, 2005, the American
Express Board of Directors announced its intention to pursue the disposition
of 100% of its shareholdings in Ameriprise Financial (the "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"). In connection with the
Distribution, Ameriprise Financial entered into certain agreements with
American Express to effect the Separation 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. Ameriprise 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 expenses incurred as a result of
Ameriprise Financial becoming an independent company. 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.
RiverSource Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its financial
strength ratings and to cover separation costs.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE
YEAR ENDED DECEMBER 31, 2005
Overview
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 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 their
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. For the
year ended December 31, 2006, $61 million of gross realized investment gains
were partially offset by $10 million of gross realized investment losses
classified as Available-for-Sale.
For the year ended December 31, 2005, $108 million of gross realized
investment gains were partially offset by $39 million of gross realized
investment losses, as well as $19 million of other-than-temporary impairment
losses on investments, classified as Available-for-Sale. Included in net
realized investment gains classified as Available-for-Sale for the year ended
December 31, 2005 were gross realized investment gains and losses of $39
million and $14 million, respectively, related to the sale of all of
RiverSource Life's retained interest in a collateralized debt obligation
("CDO") securitization trust.
Benefits and Expenses
Total benefits and expenses for the year ended December 31, 2006 were $2.7
billion, an increase of $69 million from the year ended December 31, 2005
total of $2.6 billion.
Death and other benefits for traditional life insurance decreased $14 million
or 33.3% 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 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 $7 million or 9.2%
to $83 million for the year ended December 31, 2006 reflecting unfavorable
claims experience relative to 2005.
Interest credited to account values decreased by $59 million or 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, partially
offset by the effect of appreciation on EIA linked to the S&P 500 Index in
2006 versus depreciation in 2005.
Amortization of DAC increased $40 million to $356 million for the year ended
December 31, 2006 from $316 million for the year ended December 31, 2005.
For the year ended December 31, 2006, RiverSource Life recorded a net benefit
from DAC unlocking of $26 million, primarily resulting in a $38 million
benefit in DAC amortization expense and a $12 million increase in death and
other benefits for investment contracts and universal life-type insurance. DAC
unlocking for the third quarter of 2005 resulted in a $67 million reduction to
DAC amortization.
The DAC unlocking net benefit for the third quarter of 2006 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 $8 million from modeling lower variable product fund fee
revenue and $8 million from model changes related to variable life second to
die insurance.
The DAC unlocking net benefit for the third quarter of 2005 primarily
reflected a $32 million benefit from modeling improvements in mortality, a $33
million benefit from lower than previously assumed surrender rates and higher
associated surrender charges and a $2 million net benefit from other changes
in DAC valuation assumptions.
For the years ended December 31, 2006 and 2005, RiverSource Life incurred $131
million and $121 million, respectively, in separation costs. Separation costs
incurred during 2006 and 2005 primarily related to technology costs and
marketing and rebranding. Separation costs incurred during 2005 also included
costs related to advisor retention programs.
Other insurance and operating expenses increased $53 million or 9.0% to $641
million for the year ended December 31, 2006 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 years ended
December 31, 2006 and 2005, respectively.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies that RiverSource Life uses affect its
Consolidated Financial Statements. Certain accounting and reporting policies
are critical to an understanding of RiverSource Life's financial condition and
results of operations and, in some cases, the application of these policies
can be significantly affected by the estimates, judgments and assumptions made
by management during the preparation of the Consolidated Financial Statements.
The accounting and reporting policies RiverSource Life has identified as
fundamental to a full understanding of its financial condition and results of
operations are described below. See Note 2 to the Consolidated Financial
Statements for further information about RiverSource Life's accounting
policies.
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VALUATION OF INVESTMENTS
The most significant component of investments is Available-for-Sale
securities, 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 December 31, 2006 was
determined by quoted market prices. RiverSource Life records unrealized
securities gains (losses) in accumulated other comprehensive income (loss),
net of income tax provision (benefit) and net of adjustments in other asset
and liability balances, such as DAC, to reflect the expected impact on their
carrying values had the unrealized securities gains (losses) been realized as
of the respective balance sheet dates. At December 31, 2006, RiverSource Life
had net unrealized pretax losses on Available-for-Sale securities of $293
million. RiverSource Life recognizes gains and losses in results of operations
upon disposition of the securities. RiverSource 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. RiverSource Life also considers the extent to which
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. As of December 31,
2006, there were $514 million in gross unrealized losses that related to $18.7
billion of Available-for-Sale securities, of which $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 RiverSource 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 RiverSource
Life has the ability as well as the intent to hold these securities for a time
sufficient to recover its cost, RiverSource Life concluded that none of these
securities was other-than-temporarily impaired at December 31, 2006.
DEFERRED ACQUISITION COSTS
For RiverSource 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 RiverSource Life's annuity products are typically 10 to 25 years, while
projection periods for RiverSource 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.
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
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 consolidated results of 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.
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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 is 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 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 is based on an equity return assumption of 8%, net of
management fees, with adjustments made for fixed income allocations. If
RiverSource Life increased or decreased its assumption related to this growth
rate by 100 basis points, the impact on the DAC balance would be an increase
or decrease of approximately $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
RiverSource Life's DAC balances. For example, if RiverSource 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 the DAC balance would be an increase or decrease of
approximately $5 million. Additionally, if RiverSource 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 the DAC balance would be an increase or decrease of approximately $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 and 2004, see Note
6 to the Consolidated Financial Statements.
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 less withdrawals and various charges.
The majority of the variable annuity contracts offered by RiverSource 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. RiverSource 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") benefits. In addition, RiverSource Life offers contracts containing
guaranteed minimum income benefit ("GMIB"), GMWB and guaranteed minimum
accumulation benefit ("GMAB") provisions.
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In determining the liabilities for variable annuity death benefits and GMIB,
RiverSource 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 course of quarterly 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 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).
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 and are recorded
at fair 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.
Liabilities for equity indexed annuities are equal to the accumulation of host
contract values covering guaranteed benefits and the market value of embedded
equity options.
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, 2006, depending on
year of issue, with an average rate of approximately 5.9%.
Life, Disability Income and Long Term Care Insurance
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 are equal to
the death benefits payable under the policies. Liabilities for unpaid amounts
on reported DI and LTC claims include any periodic or other benefit amounts
due and accrued, along with estimates of the present value of obligations 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 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 based on periodic analysis of the actual time lag
between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future
claims on term life, whole life, DI 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 assets
supporting the liability. Anticipated mortality and morbidity rates are based
on established industry mortality and morbidity tables, with modifications
based on RiverSource Life's experience. Anticipated premium payments and
persistency rates vary by policy form, issue age, policy duration and certain
other pricing factors. Anticipated interest rates for term and whole life
range from 4.0% to 10.0% at December 31, 2006, depending on policy form, issue
year and policy duration. Anticipated 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 realized policy
margins.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The fair value of RiverSource 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
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 derivative 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 recognized in
current period earnings, generally as a component of net investment income.
These derivatives primarily provide economic hedges to equity market
exposures. Examples include structured derivatives and options and futures
that economically hedge the equity components of certain annuities.
For further details on the types of derivatives RiverSource Life uses and how
it accounts for them, see Note 14 to the Consolidated Financial Statements.
INCOME TAX ACCOUNTING
Income taxes, as reported in the Consolidated Financial Statements, represent
the net amount of income taxes that RiverSource Life expects to pay to or
receive from various taxing jurisdictions in connection with its operations.
RiverSource 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
RiverSource 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 RiverSource 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.
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, 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 RiverSource Life's ability to fully realize certain deferred tax
assets, including the capital losses.
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 RiverSource Life will realize the benefit of
deferred tax assets, including capital loss deferred tax 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,
see Note 3 to the Consolidated Financial Statements.
FINANCIAL CONDITION
RiverSource Life's total assets and liabilities increased in 2006 primarily
due to higher separate account assets and liabilities, which increased as a
result of positive variable annuity net flows and market appreciation.
Investments primarily include corporate debt securities and mortgage and other
asset-backed securities. At December 31, 2006, RiverSource Life's corporate
debt securities comprise a diverse portfolio with the largest concentrations
accounting for approximately 67% of the portfolio in the following industries:
banking and finance, utilities, and communications and media. Investments also
include $3.7 billion and $4.0 billion of mortgage loans on real estate, policy
loans and other investments at December 31, 2006 and 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 $1.7 billion and $2.1 billion of below investment grade
securities classified as Available-for-Sale securities (excluding net
unrealized appreciation and depreciation) at December 31, 2006 and 2005,
respectively. These investments represent 7% of RiverSource Life's investment
portfolio at both December 31, 2006 and 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. RiverSource 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, resulted from net
inflows of $5.3 billion and market appreciation.
RiverSource 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
LIQUIDITY STRATEGY
The liquidity requirements of RiverSource 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. RiverSource 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, 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, RiverSource
Life paid dividends to Ameriprise Financial of $380 million.
As a result of the mergers described in the Overview, both RiverSource Life
Insurance Company and RiverSource Life of NY were able to release certain
statutory reserves previously held as a result of asset adequacy testing.
RiverSource Life Insurance Company and RiverSource Life of NY reduced
statutory reserves by $112 million and $22 million, respectively, as of
December 31, 2006.
REGULATORY CAPITAL
RiverSource Life Insurance Company and RiverSource Life of NY are subject to
regulatory capital requirements. Actual capital, determined on a statutory
basis, and regulatory capital requirements for each of the life insurance
entities are as 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 RiverSource Life. Payments due by period as of December
31, 2006 are as follows:
PAYMENTS DUE IN YEAR ENDING
---------------------------------------------------------------
2008- 2010- 2012 AND
TOTAL 2007 2009 2011 THEREAFTER
---------- ----------- ---------- ----------- ------------
(IN MILLIONS)
Insurance and annuities (1) ........ $ 44,599 $ 3,517 $ 6,329 $ 5,506 $ 29,247
(1) These scheduled payments are represented by reserves of approximately $30
billion at December 31, 2006 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.
OFF-BALANCE SHEET ARRANGEMENTS
Consolidated Variable Interest Entities
During the years ended December 31, 2005 and 2004, RiverSource Life
consolidated three secured loan trusts ("SLTs") which provided returns to
investors primarily based on the performance of an underlying portfolio of
high-yield loans and which were managed by an affiliate. One SLT was
liquidated in 2004, resulting in a cumulative pretax charge of $24 million. An
additional $4 million pretax 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, 2005. There was no remaining exposure in 2006 related to these
SLTs as a result of their liquidation.
-25-
Retained Interest in Assets Transferred to Unconsolidated Entities
In 2001, RiverSource 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 million, into a
securitization trust. In return, RiverSource Life received $90 million in cash
(excluding transaction expenses) relating to sales to unaffiliated investors
and retained interests with allocated book amounts aggregating $586 million.
During the second quarter of 2005, RiverSource Life sold all of its retained
interest in the CDO-related securitization trust and realized a net pretax
gain of $25 million.
RECENT 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 comment.
RISK MANAGEMENT
In accordance with regulatory investment guidelines, RiverSource Life
Insurance Company and 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 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.
RiverSource 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, RiverSource Life
develops specific investment guidelines that are designed to optimize trade
offs between risk and return and help ensure RiverSource 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.
RiverSource 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 managing risk.
Investment in fixed maturity securities is designed to provide RiverSource
Life with a targeted margin between the yield earned on investments and the
interest rate credited to clients' accounts. RiverSource Life does not trade
in securities to generate short-term profits for its own account.
As part of RiverSource Life's investment process, management, with the
assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process 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.
RiverSource 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. RiverSource 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,
RiverSource 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 RiverSource 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 RiverSource Life's annuity and insurance products and its
investment portfolio. RiverSource 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 differ 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.
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 two 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 risk of higher interest rates, RiverSource Life
has purchased swaption contracts which had the notional amounts and fair value
assets as 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 return on those investments intended to fund
the 3% guarantee. RiverSource Life earns income from the difference between
the return earned on invested assets and the 3% guarantee rate credited to
customer accounts. The spread between return earned and amount credited is
affected by changes in interest rates. RiverSource Life estimates that if,
hypothetically, interest rates had 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 positive impact of nearly $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 amount
credited depends on changes in equity markets. To hedge this exposure, a
portion of the proceeds from the sale of equity indexed annuities are used to
purchase 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 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 impact to pretax income for the 12
month period without hedging would be a positive $15 million. The impact of
its 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 the recognition of DAC amortization expense. When events occur that
reduce or increase current period estimated gross profits, DAC amortization
expense is typically reduced or increased as well, somewhat mitigating the
impact of the event on pretax income.
INTEREST RATE RISK - DAC
An increase in interest rates would 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 increased
DAC amortization. RiverSource Life estimates that if, hypothetically, interest
rates had increased by 100 basis points at December 31, 2006 and remain at
that level for 12 months, the negative impact to pretax income from increased
DAC amortization would be $8 million.
-30-
EQUITY PRICE RISK - DAC
A decline in equity markets would result in reduced fee revenue and an
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 decreased DAC amortization. RiverSource Life estimates that
if, hypothetically, equity markets declined by 10% at December 31, 2006, 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 market 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 derivative contract, RiverSource Life determines the
variability of the contract's potential market and credit exposures and
whether such variability might reasonably be expected to create exposure to a
counterparty in excess of established limits.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect RiverSource
Life's plans, estimates and 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" 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.
RiverSource 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 interest rate, equity market and other financial
market environments;
o changes in the regulatory environment and judicial or legislative
developments, including the increasing focus on customer
suitability, sales practices and disclosure, as well as ongoing
legal proceedings and regulatory actions;
o RiverSource Life's investment management performance;
o effects of competition in the financial services industry and
changes in RiverSource Life's product distribution mix and
distribution channels;
o RiverSource Life's capital structure as a subsidiary of 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 certain annuity and
insurance products;
o successfully cross-selling insurance and annuity products and
services to Ameriprise Financial's customer base;
o RiverSource Life's ability to effectively hedge risks relating to
guaranteed benefit riders and certain other products;
o the impact of the separation of Ameriprise Financial from American
Express;
o the impact of intercompany 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 economy.
A further description of these and other risks and uncertainties can be found
under "Item 1A - Risk Factors".
-31-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NUMBER
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm ............................... 33
Consolidated Balance Sheets at December 31, 2006 and 2005 ............................. 34
Consolidated Statements of Income for each of the three years ended
December 31, 2006, 2005 and 2004 ...................................................... 35
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2006, 2005 and 2004 ...................................................... 36 to 37
Consolidated Statements of Shareholder's Equity for each of the three years ended
December 31, 2006, 2005 and 2004 ...................................................... 38
Notes to Consolidated Financial Statements ............................................ 39 to 70
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.
-32-
Report of Independent Registered Public Accounting Firm
The Board of Directors
RiverSource Life Insurance Company
We have audited the accompanying consolidated balance sheets of RiverSource
Life Insurance Company, formerly IDS Life Insurance Company, (a wholly-owned
subsidiary of Ameriprise Financial, Inc.) as of December 31, 2006 and 2005,
and the related consolidated statements of income, shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of RiverSource 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 RiverSource Life
Insurance Company at December 31, 2006 and 2005, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 26, 2007
- 33 -
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
DECEMBER 31,
--------------------------
2006 2005
----------- -----------
ASSETS
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2006, $25,289; 2005, $27,817)............... $ 24,995 $ 27,753
Common and preferred stocks, at fair value (cost: 2006, $30; 2005, $0)....................... 31 -
Mortgage loans on real estate, at cost (less allowance for loan losses: 2006, $37; 2005, $41).. 2,790 2,842
Policy loans................................................................................... 642 605
Trading securities and other investments....................................................... 241 548
----------- -----------
Total investments.......................................................................... 28,699 31,748
Cash and cash equivalents...................................................................... 160 272
Reinsurance recoverables....................................................................... 1,137 983
Amounts due from brokers....................................................................... 7 4
Other accounts receivable...................................................................... 90 63
Accrued investment income...................................................................... 309 329
Deferred acquisition costs..................................................................... 4,411 4,036
Deferred sales inducement costs................................................................ 452 370
Other assets................................................................................... 321 220
Separate account assets........................................................................ 49,287 37,930
----------- -----------
Total assets............................................................................... $ 84,873 $ 75,955
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits......................................................................... $ 29,561 $ 32,312
Policy claims and other policyholders' funds................................................... 93 90
Amounts due to brokers......................................................................... 132 32
Deferred income taxes, net..................................................................... 90 9
Other liabilities.............................................................................. 440 421
Separate account liabilities................................................................... 49,287 37,930
----------- -----------
Total liabilities.......................................................................... 79,603 70,794
----------- -----------
Shareholder's equity:
Common stock, $30 par value;
100,000 shares authorized, issued and outstanding.......................................... 3 3
Additional paid-in capital..................................................................... 2,021 2,020
Retained earnings.............................................................................. 3,455 3,269
Accumulated other comprehensive loss, net of tax:
Net unrealized securities losses .......................................................... (168) (91)
Net unrealized derivative losses .......................................................... (41) (40)
----------- -----------
Total accumulated other comprehensive loss..................................................... (209) (131)
----------- -----------
Total shareholder's equity................................................................. 5,270 5,161
----------- -----------
Total liabilities and shareholder's equity................................................. $ 84,873 $ 75,955
=========== ===========
See Notes to Consolidated Financial Statements.
-34-
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2006 2005 2004
----------- ----------- -----------
REVENUES
Premiums:
Traditional life insurance............................................. $ 72 $ 75 $ 68
Disability income and long term care insurance......................... 322 295 284
----------- ----------- -----------
Total premiums..................................................... 394 370 352
Net investment income.................................................... 1,661 1,789 1,775
Contractholder and policyholder charges.................................. 637 577 555
Mortality and expense risk and other fees................................ 636 489 430
Net realized investment gain............................................. 51 48 27
----------- ----------- -----------
Total revenues..................................................... 3,379 3,273 3,139
----------- ----------- -----------
BENEFITS AND EXPENSES
Death and other benefits:
Traditional life insurance............................................. 28 42 37
Investment contracts and universal life-type insurance................. 267 232 228
Disability income and long term care insurance......................... 83 76 67
Increase in liabilities for future policy benefits:
Traditional life insurance............................................. - 5 1
Disability income and long term care insurance......................... 143 141 123
Interest credited to account values...................................... 1,052 1,111 1,128
Amortization of deferred acquisition costs............................... 356 316 261
Separation costs......................................................... 131 121 -
Other insurance and operating expenses................................... 641 588 502
----------- ----------- -----------
Total benefits and expenses...................................... 2,701 2,632 2,347
----------- ----------- -----------
Income before income tax provision and accounting change.................... 678 641 792
Income tax provision........................................................ 192 182 226
----------- ----------- -----------
Income before accounting change............................................. 486 459 566
Cumulative effect of accounting change, net of tax.......................... - - (70)
----------- ----------- -----------
Net income.................................................................. $ 486 $ 459 $ 496
=========== =========== ===========
See Notes to Consolidated Financial Statements.
-35-
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
YEARS ENDED DECEMBER 31,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 486 $ 459 $ 496
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change, net of tax.......................... - - 70
Amortization of deferred acquisition costs................................... 356 316 261
Amortization of deferred sales inducement costs.............................. 48 40 34
Capitalization of deferred acquisition costs................................. (687) (633) (534)
Capitalization of deferred sales inducement costs............................ (126) (94) (71)
Amortization of premium, net................................................. 75 83 93
Deferred income taxes........................................................ 123 122 70
Contractholder and policyholder charges, non-cash............................ (220) (232) (232)
Net realized investment gain................................................. (51) (48) (27)
Net realized gain on trading securities and equity method investments in
hedge funds............................................................... (16) (24) (38)
Change in operating assets and liabilities:
Trading securities and equity method investments in hedge funds, net......... 297 247 7
Future policy benefits for traditional life, disability income and long term
care insurance............................................................ 274 230 235
Policy claims and other policyholders' funds................................. 2 20 2
Policy loans, excluding universal life-type insurance:
Repayment................................................................. 35 36 37
Issuance.................................................................. (39) (39) (39)
Reinsurance recoverables..................................................... (154) (106) (122)
Other accounts receivable.................................................... (27) (10) 16
Accrued investment income.................................................... 20 23 4
Other assets and liabilities, net............................................ (280) 47 (3)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... $ 116 $ 437 $ 259
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
-36-
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in millions)
YEARS ENDED DECEMBER 31,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Proceeds from sales............................................................ $ 1,897 $ 3,124 $ 1,603
Maturities, sinking fund payments and calls.................................... 2,014 2,242 1,931
Purchases...................................................................... (1,433) (5,780) (4,393)
Other investments, excluding policy loans:
Proceeds from sales, maturities, sinking fund payments and calls............... 519 653 690
Purchases...................................................................... (441) (543) (402)
Change in amounts due to and from brokers, net................................... 98 (128) (71)
Change in restricted cash........................................................ - 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........................................................ 1,267 1,532 2,351
Interest credited to account values............................................ 1,052 1,111 1,128
Surrenders and other benefits.................................................. (4,869) (3,330) (2,716)
Policy loans:
Repayment...................................................................... 108 89 84
Issuance....................................................................... (140) (103) (93)
Capital contribution from Ameriprise Financial, Inc. ............................ - 650 -
Cash dividend to Ameriprise Financial, Inc. ..................................... (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................................... 272 162 422
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 160 $ 272 $ 162
========== ========== ==========
Supplemental disclosures:
Income taxes paid, net...................................................... $ 64 $ 96 $ 196
Interest paid on borrowings................................................. $ 1 $ - $ -
See Notes to Consolidated Financial Statements.
-37-
RIVERSOURCE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 2006
(in millions)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME/(LOSS) TOTAL
------------ ------------ ------------ ----------------- ------------
BALANCES AT DECEMBER 31, 2003........................ $ 3 $ 1,370 $ 3,624 $ 399 $ 5,396
Comprehensive income:
Net income....................................... - - 496 - 496
Change in unrealized holding losses on
securities, net................................ - - - (35) (35)
Change in unrealized derivative losses, net...... - - - (23) (23)
------------
Total comprehensive income........................... - - - - 438
Cash dividends to Ameriprise Financial, Inc......... - - (930) - (930)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 2004........................ $ 3 $ 1,370 $ 3,190 $ 341 $ 4,904
Comprehensive loss:
Net income....................................... - - 459 - 459
Change in unrealized holding losses on
securities, net................................ - - - (461) (461)
Change in unrealized derivative losses, net..... - - - (11) (11)
------------
Total comprehensive loss............................. - - - - (13)
Capital contribution from Ameriprise
Financial, Inc.................................... - 650 - - 650
Cash dividend to Ameriprise Financial, Inc........... - - (380) - (380)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 2005........................ $ 3 $ 2,020 $ 3,269 $ (131) $ 5,161
Comprehensive income:
Net income....................................... - - 486 - 486
Change in unrealized holding losses on
securities, net................................ - - - (77) (77)
Change in unrealized derivative losses, net..... - - - (1) (1)
------------
Total comprehensive income........................... - - - - 408
Tax adjustment of share-based incentive employee
compensation plan................................. - 1 - - 1
Cash dividend to Ameriprise Financial, Inc........... - - (300) - (300)
------------ ------------ ------------- ----------------- ------------
BALANCES AT DECEMBER 31, 2006........................ $ 3 $ 2,021 $ 3,455 $ (209) $ 5,270
============ ============ ============= ================= ============
See Notes to Consolidated Financial Statements.
-38-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
RiverSource Life Insurance Company, formerly known as IDS Life Insurance
Company, is a stock life insurance company with one wholly-owned
operating subsidiary, RiverSource Life Insurance Co. of New York
("RiverSource Life of NY"). RiverSource Life Insurance Company is a
wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise
Financial").
o RiverSource Life Insurance Company is domiciled in Minnesota and
holds Certificates of Authority in American Samoa, the District of
Columbia and all states except New York. RiverSource Life Insurance
Company issues insurance and annuity products.
o RiverSource Life of 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
changed its name to RiverSource Life Insurance Co. of New York.
RiverSource Life Insurance Company and its subsidiary are referred to
collectively in this Form 10-K as "RiverSource Life".
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 formerly a wholly-owned subsidiary of American
Express Company ("American Express"). On February 1, 2005, the American
Express Board of Directors announced its intention to pursue the
disposition of 100% of its shareholdings in Ameriprise Financial (the
"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"). In connection with the Distribution, Ameriprise
Financial entered into certain agreements with American Express to effect
the Separation 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.
Ameriprise 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 expenses incurred as a result of
Ameriprise Financial becoming an independent company. 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. RiverSource Life received a capital contribution of $650
million from Ameriprise Financial during the third quarter of 2005 to
support its financial strength ratings and to cover separation costs.
-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 fixed 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 continue
for life or for a fixed period 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,
RiverSource 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. RiverSource Life issues both variable and fixed universal
life insurance, traditional life insurance including whole life and term
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.
Under RiverSource Life's variable life insurance and variable annuity
products described above, the purchaser may choose among investment
options that include RiverSource 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 RiverSource Life Insurance Company and, its wholly-owned subsidiary,
RiverSource Life of NY. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying Consolidated Financial Statements are prepared in
accordance with U.S. generally accepted accounting principles ("U.S.
GAAP") which vary in certain respects from reporting practices prescribed
or permitted by state insurance regulatory authorities as described in
Note 11. Certain reclassifications of prior period amounts have been made
to conform to the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
RiverSource Life consolidates all 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 RiverSource 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
RiverSource 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 RiverSource Life owns less than a 20% voting
interest and does not exercise significant influence, or as
Available-for-Sale securities, as applicable.
RiverSource Life also consolidates all variable interest entities
("VIEs") for which it is considered to be the primary beneficiary. The
determination as to whether an entity is a VIE is based on the amount and
characteristics of the entity's equity. The determination as to whether
RiverSource Life is considered to be the primary beneficiary is based on
whether RiverSource Life will absorb a majority of the VIE's expected
losses, receive a majority of the VIE's expected residual return, or
both. RiverSource Life liquidated its interest in all consolidated VIEs
during 2004 and 2005. 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") are not consolidated. Such
QSPEs included a securitization trust containing a majority of
RiverSource Life's rated collateralized debt obligations ("CDOs") for
which RiverSource Life sold all of its retained interests 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 with unrealized
gains (losses) recorded in accumulated other comprehensive income (loss),
net of income tax provision (benefit) and net of adjustments in other
asset and liability balances, such as 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. RiverSource 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.
Commercial Mortgage Loans on Real Estate, Net
Commercial mortgage loans on real estate, net, reflect principal amounts
outstanding less allowance for losses. The allowance for 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 loan losses considers other
factors, including historical experience, economic conditions and
geographic concentrations. Management regularly evaluates the adequacy of
the allowance for loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
RiverSource 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. Separate account and mutual fund seed money is carried at fair
market value with changes in value recognized within net investment
income. The carrying value of equity method investments in hedge funds
reflects RiverSource 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.
CASH AND CASH EQUIVALENTS
RiverSource Life has defined cash equivalents to include highly liquid
investments with original maturities of 90 days or less.
REINSURANCE
RiverSource Life reinsures a portion of the 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. To minimize
exposure to significant losses from reinsurer insolvencies, RiverSource
Life evaluates the financial condition of its reinsurers prior to
entering 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, RiverSource Life reinsures 90% of the death benefit liability
related to individual fixed and variable universal life and term life
insurance products. 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 the same reinsurance levels. The maximum amount of life
insurance risk retained by RiverSource 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 except 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 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. Starting in 2001, risk on most term life policies
is reinsured on a coinsurance basis.
RiverSource Life retains all risk for new claims on disability income
("DI") contracts. Risk is currently managed by limiting the amount of
disability insurance written on any one individual. RiverSource Life also
retains all accidental death benefit and almost all waiver of premium
risk.
DEFERRED ACQUISITION COSTS
DAC represent 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 insurance products. These costs
are deferred to the extent they are recoverable from future profits or
premiums.
DEFERRED SALES INDUCEMENT COSTS
Deferred sales inducement costs ("DSIC") consist of bonus interest
credits and premium 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. The amounts capitalized are
amortized using the same methodology and assumptions used to amortize
DAC.
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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 recorded at fair value within other
assets or liabilities. The fair value of RiverSource 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 reported in accumulated other comprehensive income (loss) and
reclassified into earnings when the hedged item or transaction 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 de-designated or 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 in earnings immediately.
Derivative financial instruments that are entered into for hedging
purposes are designated as such at the time RiverSource Life enters into
the contract. For all derivative financial instruments that are
designated for hedging activities, RiverSource 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. RiverSource 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, RiverSource Life will discontinue the application
of hedge accounting.
RiverSource Life currently has economic hedges that either do not qualify
or are not designated as accounting hedges. For derivative financial
instruments that do not qualify for hedge accounting, or are not
designated as hedges, changes in fair value are reported in current
period earnings generally as a component of net investment income.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities are primarily funds held for
exclusive benefit of variable annuity and variable life insurance
contractholders. RiverSource Life receives mortality and expense risk and
other fees, guarantee fees and cost of insurance charges from the related
accounts.
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 less withdrawals and various
charges.
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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 RiverSource
Life contain guaranteed 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. RiverSource Life also offers variable annuities with death benefit
provisions that gross up the amount payable by a certain percentage of
contract earnings, which are referred to as gain gross-up ("GGU")
benefits. In addition, RiverSource Life offers contracts containing
guaranteed minimum income benefit ("GMIB"), guaranteed minimum withdrawal
benefit ("GMWB") and guaranteed minimum accumulation benefit ("GMAB")
provisions.
In determining the liabilities for variable annuity death benefits and
GMIB, RiverSource 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 course of
quarterly 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 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).
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 and are
recorded at fair 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.
Liabilities for equity indexed annuities are equal to the accumulation of
host contract values covering guaranteed benefits and the market value of
embedded equity options.
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, 2006,
depending on year of issue, with an average rate of approximately 5.9%.
Life, Disability Income and Long Term Care Insurance
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.
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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 are
equal to the death benefits payable under the policies. Liabilities for
unpaid amounts on reported DI and LTC claims include any periodic or
other benefit amounts due and accrued, along with estimates of the
present value of obligations 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
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 based on periodic analysis of the
actual time lag between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future
claims on term life, whole life, DI 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 assets
supporting the liability. Anticipated mortality and morbidity rates are
based on established industry mortality and morbidity tables, with
modifications based on RiverSource Life's experience. Anticipated premium
payments and persistency rates vary by policy form, issue age, policy
duration and certain other pricing factors. Anticipated interest rates
for term and whole life range from 4.0% to 10.0% at December 31, 2006,
depending on policy form, issue year and policy duration. Anticipated
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 realized
policy margins.
REVENUES AND EXPENSES
RiverSource 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 primarily includes interest income earned on fixed
maturity securities classified as Available-for-Sale; commercial mortgage
loans on real estate and policy loans; mark-to-market of trading
securities and certain derivatives; and pro-rata share of net income or
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,
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.
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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
RiverSource Life's separate account assets. RiverSource Life's management
and other fees are generally computed as a contractual rate based on the
underlying asset values and are generally received monthly.
Net Realized Investment Gain
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.
Death 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
Direct sales commissions and other costs deferred 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 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.
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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 provide 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 is 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 period when growth
rates fall short of 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
Separation.
Other Insurance and Operating 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 from American
Express, RiverSource Life was required to file a short period income tax
return through September 30, 2005 which was included as 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
Ameriprise Financial's affiliated group for five tax years following the
Distribution. 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.
RiverSource Life's provision for income taxes represents the net amount
of income taxes that it expects to pay or receive from various taxing
jurisdictions in connection with its operations. Inherent in the
provision for income taxes are estimates and judgment regarding the tax
treatment of certain offsets and credits.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("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") FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain 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. The impact of the adoption of FSP FAS 115-1 and FAS 124-1 on
RiverSource Life's consolidated financial condition and results of
operations was not material.
In September 2005, the American 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"). SOP
05-1 provides clarifying guidance on accounting by insurance enterprises
for DAC associated 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 these
transactions as contract continuations and has 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 DAC 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 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 Separate Accounts" ("SOP 03-1"). SOP 03-1
provides guidance on; (i) the classification and valuation of
long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and valuation. The
adoption of SOP 03-1 resulted in a cumulative effect of accounting change
that reduced first quarter 2004 results by $71 million ($109 million
pretax). The cumulative effect of accounting change consisted of: (i) $43
million pretax from establishing additional liabilities for certain
variable annuity guaranteed benefits ($33 million) and from considering
these liabilities in valuing DAC and DSIC associated with those contracts
($10 million); and (ii) $66 million pretax from establishing additional
liabilities for certain variable universal life and single pay universal
life insurance contracts under which contractual costs 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 million offset). Prior to RiverSource Life's
adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable. Amounts 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") 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 RiverSource
Life's calculation of liabilities that were recorded in the first quarter
of 2004 upon adoption of SOP 03-1.
4. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of Available-for-Sale securities by type:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2006 COST GAINS LOSSES VALUE
---------------------------------------------- ------------ ------------ ------------ -----------
(IN MILLIONS)
Fixed maturities:
Corporate debt securities..................... $ 12,232 $ 119 $ (262) $ 12,089
Mortgage and other asset-backed securities.... 9,398 27 (175) 9,250
Foreign corporate bonds and obligations....... 3,080 39 (68) 3,051
U.S. government and agencies obligations...... 295 13 (5) 303
State and municipal obligations............... 165 4 (4) 165
Foreign government bonds and obligations...... 117 18 - 135
Structured investments (a).................... 2 - - 2
------------ ------------ ------------ -----------
Total fixed maturities........................ 25,289 220 (514) 24,995
Common and preferred stocks................... 30 1 - 31
------------ ------------ ------------ -----------
Total ........................................ $ 25,319 $ 221 $ (514) $ 25,026
============ ============ ============ ===========
(a) Includes unconsolidated collateralized debt obligations.
-50-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2005 COST GAINS LOSSES VALUE
---------------------------------------------- ------------ ------------ ------------ -----------
(IN MILLIONS)
Fixed maturities:
Corporate debt securities..................... $ 13,319 $ 208 $ (199) $ 13,328
Mortgage and other asset-backed securities.... 10,805 46 (159) 10,692
Foreign corporate bonds and obligations....... 3,149 67 (55) 3,161
U.S. government and agencies obligations...... 300 16 (5) 311
State and municipal obligations............... 114 3 (3) 114
Foreign government bonds and obligations...... 128 17 - 145
Structured investments (a).................... 2 - - 2
------------ ------------ ------------ -----------
Total fixed maturities........................ 27,817 357 (421) 27,753
Common and preferred stocks................... - - - -
------------ ------------ ------------ -----------
Total ........................................ $ 27,817 $ 357 $ (421) $ 27,753
============ ============ ============ ===========
(a) Includes unconsolidated collateralized debt obligations.
At December 31, 2006 and 2005, fixed maturity securities, excluding net
unrealized appreciation and depreciation, comprised approximately 87% of
RiverSource Life's total investments. These securities are rated by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
("S&P"), except for approximately $1.2 billion and $1.0 billion of
securities at December 31, 2006 and 2005, respectively, 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, excluding net
unrealized appreciation and depreciation, on December 31 is as follows:
RATING 2006 2005
------------------------------------------------------------------ ---------------- ----------------
AAA............................................................ 38% 40%
AA............................................................. 9 6
A.............................................................. 19 21
BBB............................................................ 27 26
Below investment grade......................................... 7 7
---------------- ----------------
Total...................................................... 100% 100%
================ ================
At December 31, 2006 and 2005, approximately 47% 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.
-51-
RIVERSOURCE 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:
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... $ 6,184 $ (133) $ 1,619 $ (66) $ 7,803 $ (199)
Mortgage and other
asset-backed securities. 6,002 (88) 2,059 (71) 8,061 (159)
Foreign corporate bonds
and obligations......... 1,204 (31) 535 (24) 1,739 (55)
U.S. government and
agencies obligations.... 149 (3) 72 (2) 221 (5)
State and municipal
obligations............. 67 (2) 15 (1) 82 (3)
Foreign government bonds
and obligations......... 13 - - - 13 -
Structured investments...... 2 - - - 2 -
----------- ----------- ----------- ----------- ----------- -----------
Total................... $ 13,621 $ (257) $ 4,300 $ (164) $ 17,921 $ (421)
=========== =========== =========== =========== =========== ===========
-52-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
In evaluating potential other-than-temporary impairments, RiverSource
Life considers the extent to which amortized costs exceed 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, 2006:
LESS THAN 12 MONTHS 12 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%.......... 178 $ 2,233 $ (24) 657 $ 15,304 $ (407) 835 $ 17,537 $ (431)
90% - 95%........... - - - 59 1,035 (69) 59 1,035 (69)
80% - 90%........... - - - 6 89 (14) 6 89 (14)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........... 178 $ 2,233 $ (24) 722 $ 16,428 $ (490) 900 $ 18,661 $ (514)
========== ========== ========== ========== ========== ========== ========== ========== ==========
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 were attributable to
changes in interest rates. A portion of the gross unrealized losses
particularly related to corporate debt securities was also attributed to
credit spreads and specific issuer credit events. As noted in the table
above, a significant portion of the gross unrealized losses relates to
securities that have a fair value to amortized cost ratio of 95% or above
resulting in an overall 97% ratio of fair value to amortized cost for all
securities with an unrealized loss. From an overall perspective, the
gross unrealized losses were 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, was $5 million. The securities related to this issuer have a
fair value to amortized cost ratio of 95%-100% and have been in an
unrealized loss position for more than 12 months. There were no
securities with a fair value to amortized cost ratio less than 80% in the
portfolio.
RiverSource Life monitors the investments and metrics described
previously on a quarterly basis to identify and evaluate investments that
have indications of possible other-than-temporary impairments. See the
Investments section of Note 2 for information regarding RiverSource
Life's policy for determining when an investment's decline in value is
other-than-temporary. As stated earlier, RiverSource 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, RiverSource 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 had
other-than-temporary impairment at December 31, 2006.
The change in net unrealized securities gains (losses) in other
comprehensive income includes three components, net of tax: (i)
unrealized gains (losses) that arose from changes in the market value of
securities that were held during the period (holding gains (losses));
(ii) (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)) 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 balance sheet dates.
-53-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The following table presents the components of the change in net
unrealized securities gains (losses), net of tax, included in other
comprehensive income (loss):
2006 2005 2004
---------- ---------- ----------
(IN MILLIONS)
Holding (losses) gains, net of tax of $63, $261 and
$23, respectively.................................... $ (116) $ (485) $ 42
Reclassification of realized gains, net of tax of $17,
$17 and $11, respectively............................ (33) (32) (20)
DAC, net of tax of $15, $28 and $3, respectively....... 29 53 6
DSIC, net of tax of $2, $5 and $4, respectively........ 3 8 (7)
Fixed annuity liabilities, net of tax of $22, $3 and
$30, respectively.................................... 40 (5) (56)
---------- ---------- ----------
Net unrealized securities losses....................... $ (77) $ (461) $ (35)
========== ========== ==========
Available-for-Sale securities by maturity at December 31, 2006 were as
follows:
AMORTIZED FAIR
COST VALUE
------------ ------------
(IN MILLIONS)
Due within one year.................................... $ 521 $ 522
Due after one year through five years.................. 6,625 6,592
Due after five years through 10 years.................. 7,558 7,395
Due after 10 years..................................... 1,185 1,234
------------ ------------
15,889 15,743
Mortgage and other asset-backed securities............. 9,398 9,250
Structured investments................................. 2 2
Common and preferred stocks............................ 30 31
------------ ------------
Total ................................................. $ 25,319 $ 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 common and preferred
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:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Sales............................................ $ 1,897 $ 3,124 $ 1,603
Maturities, sinking fund payments and calls...... $ 2,014 $ 2,242 $ 1,931
Purchases........................................ $ (1,433) $ (5,780) $ (4,393)
-54-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Net realized gains and losses on Available-for-Sale securities, using the
specific identification method, are noted in the following table for the
years ended December 31:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Gross realized gains from sales.................. $ 60 $ 108 $ 48
Gross realized losses from sales................. $ (10) $ (39) $ (18)
Other-than-temporary impairments................. $ - $ (19) $ -
The $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.
During the second quarter of 2005, RiverSource Life sold all of its
retained interest in a CDO securitization trust and realized a net pretax
gain of $25 million.
At December 31, 2006 and 2005, bonds carried at $18 and $16 million,
respectively, were on deposit with various states as required by law.
COMMERCIAL MORTGAGE LOANS ON REAL ESTATE AND SYNDICATED LOANS, NET
The following is a summary of commercial mortgage loans on real estate
and syndicated loans at December 31:
2006 2005
----------- -----------
(IN MILLIONS)
Commercial mortgage loans on real estate...............$ 2,827 $ 2,883
Less: allowance for loan losses......................... (37) (41)
----------- -----------
Commercial mortgage loans on real estate, net..........$ 2,790 $ 2,842
=========== ===========
Syndicated loans.......................................$ 112 $ 131
Less: allowance for loan losses......................... (4) (4)
----------- -----------
Net syndicated loans...................................$ 108 $ 127
=========== ===========
Commercial mortgage loans are first mortgages on real estate. RiverSource
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. Commercial 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 funding commitments at December 31, 2006 and 2005
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, RiverSource Life's recorded investment in
impaired commercial mortgage loans on real estate was nil and $14
million, respectively, with related allowances for commercial mortgage
loan losses of nil and $4 million, respectively. During 2006 and 2005,
the average recorded investment in impaired commercial mortgage loans on
real estate was $3 million and $6 million, respectively. RiverSource Life
recognized nil, nil, and $1 million of interest income related to
impaired commercial mortgage loans on real estate for the years ended
December 31, 2006, 2005 and 2004, respectively.
-55-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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:
2006 2005
--------------------------------- --------------------------------
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 Central.................................... 337 1 308 22
New England...................................... 197 2 164 21
--------------- ----------------- -------------- -----------------
2,827 94 2,883 107
Less: allowance for loan losses.................. (37) - (41) -
--------------- ----------------- -------------- -----------------
Total.........................................$ 2,790 $ 94 $ 2,842 $ 107
=============== ================= ============== =================
Concentrations of credit risk of commercial mortgage loans on real estate
by property type at December 31 were:
2006 2005
--------------------------------- --------------------------------
ON-BALANCE FUNDING ON-BALANCE FUNDING
COMMERCIAL MORTGAGE LOANS BY PROPERTY TYPE SHEET COMMITMENTS SHEET COMMITMENTS
--------------- ----------------- -------------- -----------------
(IN MILLIONS)
Office buildings.................................$ 962 $ 4 $ 1,048 $ 36
Shopping centers and retail...................... 718 71 704 37
Apartments....................................... 470 2 454 11
Industrial buildings............................. 458 12 454 12
Hotels and motels................................ 89 4 92 6
Medical buildings................................ 45 - 47 3
Mixed use........................................ 44 - 39 -
Retirement homes................................. - - 5 -
Other............................................ 41 1 40 2
--------------- ----------------- --------------- ----------------
2,827 94 2,883 107
Less: allowance for loan losses.................. (37) - (41) -
--------------- ----------------- --------------- ----------------
Total.........................................$ 2,790 $ 94 $ 2,842 $ 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 INVESTMENT GAIN
Net investment income for the years ended December 31 is summarized as
follows:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Income on fixed maturities........................ $ 1,408 $ 1,449 $ 1,451
Income on commercial mortgage loans on real estate 181 197 221
Trading securities and other investments.......... 89 164 138
----------- ----------- -----------
1,678 1,810 1,810
Less: investment expenses......................... 17 21 35
----------- ----------- -----------
Total.......................................... $ 1,661 $ 1,789 $ 1,775
=========== =========== ===========
Net realized investment gain for the years ended December 31 is
summarized as follows:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Fixed maturities.................................. $ 50 $ 50 $ 31
Commercial mortgage loans on real estate.......... 1 (2) (3)
Trading securities and other investments.......... - - (1)
----------- ----------- -----------
Total.......................................... $ 51 $ 48 $ 27
=========== =========== ===========
5. VARIABLE INTEREST ENTITIES
During the years ended December 31, 2005 and 2004, RiverSource Life
consolidated three secured loan trusts ("SLTs") which provided returns to
investors primarily based on the performance of an underlying portfolio
of high-yield loans and which were managed by an affiliate. One SLT was
liquidated in 2004, resulting in a cumulative pretax charge of $24
million. An additional $4 million pretax 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, 2005. Consolidated results of
operations for the year ended December 31, 2004 included non-cash charges
related to the liquidated SLTs of $28 million that included a $24 million
charge related to the complete liquidation of an SLT in 2004.
RiverSource 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
million of CDO residual tranches managed by an affiliate where
RiverSource Life is not the primary beneficiary. RiverSource Life's
maximum exposure to loss as a result of its investment in the CDO
residual tranches is represented by the carrying value.
-57-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEFERRED ACQUISITION COSTS AND DEFERRED SALES INDUCEMENT COSTS
The balances of and changes in DAC were as follows:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Balance, beginning of year............................. $ 4,036 $ 3,638 $ 3,336
Impact of SOP 03-1..................................... - - 20
Capitalization of acquisition costs.................... 687 633 534
Amortization, excluding impact of changes in
assumptions........................................ (409) (383) (341)
Amortization, impact of annual third quarter changes
in DAC-related assumptions......................... 38 67 24
Amortization, impact of other quarter changes in
DAC-related assumptions(a) ........................ 15 - 56
Impact of changes in net unrealized securities losses.. 44 81 9
----------- ----------- -----------
Balance, end of year................................... $ 4,411 $ 4,036 $ 3,638
=========== =========== ===========
(a) Amount in 2004 was primarily related to a $66 million reduction in
DAC amortization expense to reflect the lengthening of the
amortization periods for certain annuity and life insurance products
impacted by RiverSource Life's adoption of SOP 03-1 on January 1,
2004, partially offset by a $10 million increase in amortization
expense due to a LTC DAC valuation system conversion.
The balances of and changes in DSIC were as follows:
2006 2005 2004
----------- ----------- -----------
(IN MILLIONS)
Balance, beginning of year............................. $ 370 $ 303 $ 279
Impact of SOP 03-1..................................... - - (3)
Capitalization of sales inducements.................... 126 94 71
Amortization........................................... (48) (40) (34)
Impact of changes in net unrealized securities losses
(gains) ........................................... 4 13 (10)
----------- ----------- -----------
Balance, end of year................................... $ 452 $ 370 $ 303
=========== =========== ===========
7. LINES OF CREDIT
RiverSource Life has available a committed line of credit with Ameriprise
Financial aggregating $200 million. The interest rate for any borrowings
is established by 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 2005.
8. VARIABLE ANNUITY GUARANTEES
The majority of the variable annuity contracts offered by RiverSource
Life contain GMDB provisions. RiverSource Life also offers GGU provisions
on variable annuities with death benefit provisions and contracts
containing GMIB provisions. RiverSource Life has established additional
liabilities for these variable annuity death benefits and GMIB
provisions. The 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-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. VARIABLE ANNUITY GUARANTEES (CONTINUED)
The variable annuity contracts with GMWB riders typically have account
values that are based on an underlying portfolio of mutual funds, the
values of which fluctuate based on financial market performance. Most of
the GMWB 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, regardless of the performance 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 owners 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 end of a 10-year waiting period.
The following table provides summary information related to all variable
annuity guarantees for which RiverSource Life has established additional
liabilities as of December 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-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. VARIABLE ANNUITY GUARANTEES (CONTINUED)
DECEMBER 31,
-----------------------
VARIABLE ANNUITY GUARANTEES BY BENEFIT TYPE(1) (CONTINUED) 2006 2005
------------------------------------------------------------------------------ ----------- ----------
(IN MILLIONS, EXCEPT AGE)
CONTRACTS WITH GMIB:
Total contract value....................................................... $ 928 $ 793
Contract value in separate accounts........................................ $ 853 $ 712
Net amount at risk(2)...................................................... $ 14 $ 16
Weighted average attained age.............................................. 61 60
CONTRACTS WITH GMWB:
Total contract value....................................................... $ 4,791 $ 2,542
Contract value in separate accounts........................................ $ 4,761 $ 2,510
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 value in separate accounts........................................ $ 2,349 $ -
Benefit amount in excess of account value.................................. $ - $ -
Weighted average attained age.............................................. 63 -
CONTRACTS WITH GMAB:
Total contract value....................................................... $ 1,350 $ 161
Contract value in separate accounts........................................ $ 1,340 $ 161
Benefit amount in excess of account value.................................. $ - $ 1
Weighted average attained age.............................................. 55 56
(1) Individual variable annuity contracts may have more than one
guarantee and therefore may be included in 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 GMIB and assumes 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:
GMDB & GGU GMIB GMWB GMAB
----------------- ---------- ------------ ----------
(IN MILLIONS)
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 $ 3 $ - $ -
Reported claims........................................ 12 - - -
Liability balance at December 31....................... 16 4 9 1
Incurred claims (adjustments) (sum of reported
and change in liability)............................ (1) 1 9 1
The liabilities for guaranteed benefits are supported by general account
assets. Changes in these liabilities are included in death and other
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.
-60-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, RiverSource 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:
2006 2005 2004
---------- ---------- ----------
(IN MILLIONS)
Current income tax:
Federal.............................................. $ 66 $ 56 $ 160
State................................................ 3 4 (4)
---------- ---------- ----------
Total current income tax................................ 69 60 156
Deferred federal income tax............................. 123 122 70
---------- ---------- ----------
Income tax provision.................................... $ 192 $ 182 $ 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
---------- ---------- ----------
Tax at U.S. statutory rate.............................. 35.0% 35.0% 35.0%
Changes in taxes resulting from:
Tax-exempt interest and dividend income............ (6.5) (9.4) (4.0)
State taxes, net of federal benefit................ 0.3 0.4 (0.3)
Taxes applicable to prior years.................... - 3.2 (2.6)
Other, net......................................... (0.5) (0.8) 0.4
---------- ---------- ----------
Income tax provision.................................... 28.3% 28.4% 28.5%
========== ========== ==========
-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 RiverSource Life's deferred income tax assets and liabilities as of
December 31, 2006 and 2005 are reflected in the following table:
2006 2005
---------- ----------
(IN MILLIONS)
Deferred income tax assets:
Liabilities for future policy benefits........................... $ 1,146 $ 1,102
Investment related............................................... 75 70
Net unrealized losses on Available-for Sale securities and
derivatives.................................................... 115 71
Other............................................................ 45 62
---------- ----------
Gross deferred income tax assets.................................... 1,381 1,305
Deferred income tax liabilities:
Deferred acquisition costs....................................... 1,253 1,154
Deferred sales inducement costs.................................. 158 130
Other............................................................ 60 30
---------- ----------
Gross deferred income tax liabilities............................... 1,471 1,314
---------- ----------
Net deferred income tax liabilities................................. $ 90 $ 9
========== ==========
A portion of RiverSource 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, 2006, RiverSource Life
no longer had a policyholders' surplus account 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. RiverSource Life has made distributions of $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 RiverSource Life is liquidated. Deferred income taxes had not been
previously established.
RiverSource Life is required to establish a valuation allowance for any
portion of the deferred tax assets that management believes will not be
realized. Included in RiverSource 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. RiverSource Life has
$156 million in capital loss carryforwards that expire December 31, 2009
for which the deferred tax benefit is reflected in the investment 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 RiverSource
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 RiverSource
Life to utilize all of its deferred tax assets. Accordingly, no valuation
allowance for deferred tax assets has been established as of December 31,
2006 and 2005.
As a result of the Distribution, RiverSource Life was required to file a
short period income tax return through September 30, 2005 which was
included as part of the American Express consolidated income tax return
for the year ended December 31, 2005. Additionally, RiverSource Life 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, RiverSource Life was also
required to file a separate short period 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 loss in the Consolidated
Statements of Shareholder's Equity are presented net of the following
income tax benefit amounts:
2006 2005 2004
---------- ---------- ----------
(IN MILLIONS)
Net unrealized securities losses.................... $ 41 $ 248 $ 19
Net unrealized derivative losses.................... 1 6 12
---------- ---------- ----------
Net income tax benefit.............................. $ 42 $ 254 $ 31
========== ========== ==========
11. STATUTORY CAPITAL AND SURPLUS
State insurance statutes contain limitations as to the amount of
dividends or distributions that insurers may make without providing prior
notification to state regulators. For RiverSource Life Insurance Company,
dividends or distributions in excess of unassigned surplus, as determined
in accordance with accounting practices prescribed by the 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 $1.2 billion and $925
million as of December 31, 2006 and 2005, respectively.
In addition, dividends or distributions, 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 as "extraordinary dividends."
Extraordinary dividends also require advance notice to the Minnesota
Department of Commerce, and are subject to potential disapproval. For
2007, dividends or distributions in excess of $469 million would be
extraordinary.
Statutory net gain from operations and net income for the years ended
December 31 and capital and surplus as of December 31 are summarized as
follows:
2006 2005 2004
---------- ---------- ----------
(IN MILLIONS)
Statutory net gain from operations................. $ 469 $ 327 $ 438
Statutory net income............................... 514 339 438
Statutory capital and surplus...................... 3,258 2,942 2,277
12. RELATED PARTY TRANSACTIONS
Ameriprise Financial was the investment manager for the proprietary
mutual funds used as investment options by RiverSource Life's variable
annuity and variable life insurance contract owners for the period from
the third quarter of 2003 through the third quarter of 2005. In the
fourth quarter of 2005, RiverSource Investments, LLC replaced Ameriprise
Financial as the investment manager. RiverSource Life provides all fund
management services, other than investment management and is compensated
for the administrative services it provides. For the year ended December
31, 2006, RiverSource Life received $76 million from RiverSource
Investments, LLC for administrative services RiverSource Life provided.
For the year ended December 31, 2005, RiverSource Life received $56
million from Ameriprise Financial and $20 million from RiverSource
Investments, LLC 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. RiverSource 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. RiverSource
Life's share of the total net periodic pension cost was approximately $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 and $1 million in 2004.
RiverSource Life also participates in the defined contribution pension
plans of Ameriprise Financial which cover all employees who have met
certain employment requirements. RiverSource 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 were $3 million, $2 million and $2 million, respectively.
RiverSource 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 was approximately $1 million
each year.
Charges by Ameriprise Financial and affiliated companies for use of joint
facilities, technology support, marketing services and other services
aggregated $755 million, $725 million and $601 million for 2006, 2005 and
2004, respectively. Certain of these costs are included in DAC. Expenses
allocated to RiverSource Life may not be reflective of expenses that
would have been incurred by RiverSource 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, 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, RiverSource Life approved and paid
dividends to Ameriprise Financial of $380 million.
Included in other liabilities at December 31, 2006 and 2005 are $1
million and $8 million, respectively, payable to Ameriprise Financial for
federal income taxes.
-66-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REINSURANCE
At December 31, 2006, 2005 and 2004, traditional life and universal life
insurance in force aggregated $174.1 billion, $160.1 billion and $147.5
billion, respectively, of which $102.4 billion, $86.3 billion and $70.9
billion was reinsured at the respective year ends. Life insurance in
force is reported on a statutory basis. RiverSource Life also reinsures a
portion of the risks assumed under LTC policies.
The effect of reinsurance on premiums for 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 $115 million, $106
million and $73 million, for the years ended December 31, 2006, 2005 and
2004, respectively. Reinsurance contracts do not relieve RiverSource Life
from its primary obligation to policyholders.
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. RiverSource Life enters into
various derivative financial instruments as part of its ongoing risk
management activities. RiverSource Life does not engage in any derivative
instrument trading activities. Credit risk associated with RiverSource
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, RiverSource Life may, from time to time, enter into master
netting agreements wherever practical. As of December 31, 2006 and 2005,
the total net fair values, excluding accruals, of derivative 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
RiverSource Life uses interest rate products, primarily interest rate
swaptions, to hedge the risk of increasing interest rates on forecasted
fixed premium product sales. During 2006, 2005 and 2004, no amounts were
reclassified into earnings from accumulated other comprehensive income.
At December 31, 2006, RiverSource Life expects to reclassify
approximately $1 million of net pretax losses on derivative instruments
from accumulated other comprehensive income (loss) to earnings during the
next 12 months. Currently, the longest period of time over which
RiverSource Life is hedging exposure to the variability in future cash
flows is 12 years and relates to forecasted fixed annuity sales. There
were losses of $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 year ended December 31, 2004 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, RiverSource Life recognized the following
impacts in other comprehensive income related to its cash flow hedging
activity, net of tax:
2006 2005 2004
------------ ----------- -----------
(IN MILLIONS)
Holding losses, net of tax of $6, $11 and $11, respectively... $ (10) $ (21) $ (21)
Reclassification of realized losses (gains), net of tax of
$5, $5 and $1, respectively ................................ 9 10 (2)
------------ ----------- -----------
Net change in unrealized derivative losses.................... $ (1) $ (11) $ (23)
============ =========== ===========
Derivatives Not Designated as Hedges
RiverSource Life has economic hedges that either do not qualify or are
not designated for hedge accounting treatment. The 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 RiverSource Life related to equity indexed annuities
will positively or negatively impact earnings. As a means of economically
hedging its obligations under the provisions of these products,
RiverSource 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.
RiverSource Life economically hedges the exposure related to the GMWB
provision using various equity futures, interest rate swaps and
structured derivatives.
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 reflected in
interest credited to account values and the changes in fair value of the
GMWB and GMAB features are reflected in death and other benefits for
investment contracts and universal life-type insurance. The fair value of
the embedded derivatives for equity indexed annuities and the fair value
of the embedded options for GMWB and GMAB are recognized in future
policy benefits in the Consolidated Balance Sheets. The total fair value
of these instruments, excluding the host contract, was $33 million and
$48 million at December 31, 2006 and 2005, respectively.
-68-
RIVERSOURCE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 2006 and 2005, 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 RiverSource Life, therefore, cannot be estimated by aggregating the
amounts presented herein. The following table discloses carrying values
and fair values for financial instruments at December 31:
2006 2005
-------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- ------------
(IN MILLIONS)
Financial Assets
----------------
Assets for which carrying values approximate
fair values.................................. $ 75,336 $ 75,336 $ 66,718 $ 66,718
Commercial mortgage loans on real estate, net.. 2,790 2,875 2,842 2,977
Other investments.............................. 108 112 127 131
Financial Liabilities
---------------------
Liabilities (assets) for which carrying values
approximate fair values...................... $ (10) $ (10) $ 32 $ 32
Fixed annuity reserves......................... 21,626 20,981 24,638 23,841
Separate account liabilities................... 43,516 41,623 33,154 31,743
As of December 31, 2006 and 2005, the carrying and fair values of
off-balance sheet financial instruments are not material. 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, Available-for-Sale securities, policy loans, trading
securities, separate account assets and derivative financial instruments.
Generally these assets are short-term in duration, variable rate in
nature or are recorded at fair value on the Consolidated Balance Sheets.
The fair value of commercial mortgage loans on real estate, except those
with significant credit deterioration, was 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.
Other investments include RiverSource Life's interest in syndicated
loans, which are carried at amortized cost less allowance for losses.
Fair values were based on quoted market prices.
FINANCIAL LIABILITIES
Liabilities for which carrying values approximate fair values include
certain other liabilities and derivative liabilities. Generally these
liabilities are either short-term in duration, variable rate in nature or
are recorded at fair value on the 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 excluded life
insurance-related elements of $1.5 billion as of both December 31, 2006
and 2005. If the fair value of the fixed annuities were realized, the
surrender charges received would be offset by the write-off of DAC and
DSIC associated with the fixed annuities of $422 million and $496 million
as of December 31, 2006 and 2005, respectively.
Fair values of separate account liabilities, excluding life
insurance-related elements of $5.8 billion and $4.8 billion as of
December 31, 2006 and 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-off of DAC and DSIC associated with
separate account liabilities of $2.3 billion and $2.0 billion as of
December 31, 2006 and 2005, respectively.
16. COMMITMENTS AND CONTINGENCIES
At December 31, 2006 and 2005, RiverSource Life had no material
commitments to purchase investments other than mortgage loan fundings
(see Note 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 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. RiverSource Life has received requests for
information and has been contacted by regulatory authorities concerning
its practices and is cooperating fully with these inquiries.
RiverSource 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. RiverSource 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.
-70-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
RiverSource Life's Consolidated Financial Statements for the years ended
December 31, 2006, 2005 and 2004 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 PricewaterhouseCoopers 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 year 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 RiverSource 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 year ended December 31, 2005. PricewaterhouseCoopers LLP continued as the
independent registered public accountants for the consolidated financial
statements of American Express for 2005.
PricewaterhouseCoopers LLP did not issue any report on RiverSource Life's
Consolidated Financial Statements for either of 2005 or 2004. 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 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
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
reasonable level of assurance as of December 31, 2006.
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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
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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
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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 as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated by reference.
3.1.1 Copy of Certificate of Amendment of Certificate of Incorporation of IDS
Life Insurance Company dated June 22, 2006, filed electronically as
Exhibit 3.1 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. 28 to Registration Statement No.
333-69777 is incorporated by reference.
4.1 Instruments defining the rights of security holders, including
indentures, are incorporated by reference to Registration Statement
Nos. 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 Principal 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 Selling Agreement by and among RiverSource Life Insurance
Company, RiverSource Distributors, Inc. and Ameriprise Financial
Services, Inc. effective Jan. 1, 2007.
*10.3 Copy of Marketing Support Services Agreement between Ameriprise
Financial Services, Inc. and RiverSource Life Insurance Company
effective Jan. 1, 2007.
*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 RiverSource 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 Life Insurance
Company effective Jan. 1, 2007.
E-1
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-2