The following information should be read in conjunction with RiverSource Life
Insurance Company's Consolidated Financial Statements and Notes presented in
Part I, Item 1. RiverSource Life Insurance Company and its subsidiaries are
referred to collectively in this Form 10-Q as the "Company". This narrative
analysis may contain forward-looking statements that reflect the Company's
plans, estimates and beliefs. Actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
under "Forward-Looking Statements." The Company believes it is useful to read
this narrative analysis in conjunction with its Annual Report on Form 10-K for
the year ended December 31, 2011 filed with the Securities and Exchange
Commission on February 24, 2012 ("2011 10-K"), as well as its current reports on
Form 8-K and other publicly available information.
The Company follows U.S. generally accepted accounting principles ("GAAP"), and
the following discussion is presented on a consolidated basis consistent with
GAAP. Prior year amounts have been adjusted for the retrospective adoption of
new accounting rules on deferred acquisition costs ("DAC"). In addition,
certain reclassifications of prior year amounts have been made to conform to the
current presentation.
Management's narrative analysis of the results of operations is presented in
lieu of management's discussion and analysis of financial condition and results
of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
Overview
RiverSource Life Insurance Company is a stock life insurance company with one
wholly owned stock life insurance company subsidiary, RiverSource Life Insurance
Co. of New York ("RiverSource Life of NY"). RiverSource Life Insurance Company
is a wholly owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise
Financial").
† RiverSource Life Insurance Company is domiciled in Minnesota and
holds Certificates of Authority in American Samoa, the District of Columbia and
all states except New York. RiverSource Life Insurance Company issues insurance
and annuity products.
† RiverSource Life of NY is domiciled and holds a Certificate of
Authority in New York. RiverSource Life of NY issues insurance and annuity
products.
RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged
Investments, Inc. ("RTA"). RTA is a stock company domiciled in Delaware and is
a limited partner in affordable housing partnership investments.
Critical Accounting Policies
The accounting and reporting policies that the Company uses affect its
Consolidated Financial Statements. Certain of the Company's accounting and
reporting policies are critical to an understanding of the Company'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. These accounting policies are discussed in detail in
"Management's Narrative Analysis - Critical Accounting Policies" in the
Company's 2011 10-K.
The Company adopted new accounting rules for DAC on January 1, 2012 on a
retrospective basis. See Note 1 and Note 6 to the Consolidated Financial
Statements for the impact of the adoption on prior period financial condition
and results of operations and the updated accounting policies on the deferral of
acquisition costs.
A decrease of 100 basis points in various rate assumptions is likely to result
in an increase in DAC and deferred sales inducement costs ("DSIC") amortization
and an increase in benefits and claims expense from variable annuity
guarantees. The following table presents the estimated impact to current period
pretax income:
Estimated Impact to
Pretax Income(1)
(in millions)
Decrease in future near and long-term fixed income returns
by 100 basis points
$
(28 )
Decrease in future near-term equity fund growth returns by
100 basis points
$
(25 )
Decrease in future long-term equity fund growth returns by
100 basis points
(17 )
Decrease in future near and long-term equity returns by 100
basis points $ (42 )
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(1) An increase in the above assumptions by 100 basis points would result in
an increase to pretax income of approximately the same amount.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected
impact on future consolidated financial condition or results of operations, see
Note 2 to the Consolidated Financial Statements.
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The Company adopted new accounting rules for DAC on January 1, 2012 on a
retrospective basis. See Note 1 to the Consolidated Financial Statements for
the impact of the adoption on prior period results of operations and financial
condition.
Consolidated Results of Operations for the Six Months Ended June 30, 2012 and
2011
The following table presents the Company's consolidated results of operations
(unaudited):
Six Months Ended
June 30,
2012 2011 Change
(in millions, except percentages)
Revenues
Premiums $ 222 $ 249 $ (27 ) (11 )%
Net investment income 754 794 (40 ) (5 )
Policy and contract charges 799 777 22 3
Other revenue 158 151 7 5
Total revenues 1,933 1,971 (38 ) (2 )
Benefits and expenses
Benefits, claims, losses and
settlement expenses 594 492 102 21
Interest credited to fixed
accounts 415 420 (5 ) (1 )
Amortization of deferred
acquisition costs 100 133 (33 ) (25 )
Other insurance and operating
expenses 391 398 (7 ) (2 )
Total benefits and expenses 1,500 1,443 57 4
Pretax income 433 528 (95 ) (18 )
Income tax provision 99 96 3 3
Net income $ 334 $ 432 $ (98 ) (23 )%
Overview
Consolidated net income was $334 million for the six months ended June 30, 2012
compared to $432 million for the prior year period, a decrease of $98 million or
23%. Pretax income decreased $95 million or 18% to $433 million for the six
months ended June 30, 2012 from $528 million for the prior year period.
Revenues
Total revenues decreased $38 million or 2% to $1.9 billion for the six months
ended June 30, 2012 compared to $2.0 billion for the prior year period.
Premiums decreased $27 million or 11% to $222 million for the six months ended
June 30, 2012 compared to $249 million in the prior year period. The decrease
was primarily due to lower sales of immediate annuities with life contingencies.
The lower premiums are largely offset by the related favorable change in
reserves described below.
Net investment income decreased $40 million or 5% to $754 million for the six
months ended June 30, 2012 compared to $794 million in the prior year period.
The decrease is due to a decrease in net investment income on fixed maturities
primarily driven by lower interest rates.
Other revenue increased $7 million or 5% to $158 million for the six months
ended June 30, 2012 compared to $151 million in the prior year period reflecting
higher marketing support due to higher average separate account balances.
Benefits and Expenses
Total benefits and expenses increased $57 million or 4% to $1.5 billion for the
six months ended June 30, 2012 compared to $1.4 billion in the prior year
period.
Benefits, claims, losses and settlement expenses increased $102 million or 21%
to $594 million for the six months ended June 30, 2012 compared to $492 million
in the prior year period. The market impact of variable annuity guaranteed
living benefits, net of hedges and DSIC amortization, increased benefits expense
by $160 million for the six months ended June 30, 2012 compared to $34 million
in the prior year period, an increase of $126 million. The increase in the
market impact was the result of increased volatility in the market and larger
reserve balances due to general market conditions. This increase was partially
offset by a decrease in benefits expense primarily due to a $9 million benefit
from a life insurance reserve release in the second quarter of 2012 and annuity
valuation model adjustments, as well as a favorable change in reserves for
immediate annuities with life contingencies, driven by lower premiums. The
impact of annuity model updates and enhancements was an $8 million benefit in
the first half of 2012 compared to a $7 million benefit for the prior year
period.
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Amortization of DAC decreased $33 million or 25%, to $100 million for the six
months ended June 30, 2012 compared to $133 million in the prior year period.
Amortization of DAC in the first half of 2012 included a benefit of $42 million
due to market impacts, including a $31 million benefit offsetting higher
variable annuity guaranteed living benefits expense. Amortization of DAC in the
first half of 2011 included a benefit of $17 million due to market impacts,
including a $6 million benefit offsetting higher variable annuity guaranteed
living benefits expense.
Income Taxes
The Company's effective tax rate was 23% for the six months ended June 30, 2012,
compared to 18% for the six months ended June 30, 2011. The effective tax rate
for both periods is lower than the statutory rates as a result of tax preferred
items including the dividends received deduction, foreign tax credits and low
income housing credits in comparison to the levels of pretax income. The
significant increase in the effective tax rate for the six months ended June 30,
2012 compared to the prior year period is primarily a result of a correction of
tax related to securities lending activities. See Note 1 to the Consolidated
Financial Statements for additional information.
It is possible there will be corporate tax reform in the next few years. While
impossible to predict, corporate tax reform is likely to include a reduction in
the corporate tax rate coupled with reductions in tax preferred items. Any
changes could have a material impact on the income tax expense and the deferred
tax balances of the company.
Market Risk
The Company's primary market risk exposures are interest rate, equity price and
credit risk. Equity price and interest rate fluctuations can have a significant
impact on the Company's results of operations, primarily due to the effects on
asset-based fees and expenses, the "spread" income generated on its annuities
and universal life ("UL") insurance products, the value of DAC and DSIC, assets
associated with variable annuity and variable UL products, the values of
liabilities for guaranteed benefits associated with its variable annuities and
the values of derivatives held to hedge these benefits.
The guaranteed benefits associated with the Company's variable annuities are
guaranteed minimum withdrawal benefits ("GMWB"), guaranteed minimum accumulation
benefits ("GMAB"), guaranteed minimum death benefits ("GMDB") and guaranteed
minimum income benefits ("GMIB"). Each of these guaranteed benefits guarantees
payouts to the annuity holder under certain specific conditions regardless of
the performance of the underlying investment assets.
The Company continues to utilize a hedging program which attempts to match the
sensitivity of the assets with the sensitivity of the liabilities. This
approach works with the premise that matched sensitivities will produce a highly
effective hedging result. The Company's comprehensive hedging program focuses
mainly on first order sensitivities of assets and liabilities; Equity Market
Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally,
various second order sensitivities are managed. The Company uses various index
options across the term structure, interest rate swaps and swaptions, total
return swaps and futures to manage the risk exposures. The exposures are
measured and monitored daily and adjustments to the hedge portfolio are made as
necessary.
To evaluate interest rate and equity price risk, the Company performs
sensitivity testing which measures the impact on pretax income from the sources
listed below for a 12-month period following a hypothetical 100 basis point
increase in interest rates or a hypothetical 10% decline in equity prices. The
interest rate risk test assumes a sudden 100 basis point parallel shift in the
yield curve, with rates then staying at those levels for the next 12 months. The
equity price risk test assumes a sudden 10% drop in equity prices, with equity
prices then staying at those levels for the next 12 months. In estimating the
values of variable annuity riders, equity indexed annuities, indexed universal
life insurance and the associated hedge assets, the Company assumed no change in
implied market volatility despite the 10% drop in equity prices.
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The following tables present the Company's estimate of the impact on pretax
income from these hypothetical market movements as of June 30, 2012.
Equity Price Exposure to Pretax Income
Before Hedge
Equity Price Decline 10% Hedge Impact Impact Net Impact
(in millions)Asset-based fees and expenses $ (63 ) $ - $
(63 )
DAC and DSIC amortization(1) (2) (90 ) - (90 )
Variable annuity riders:
GMDB and GMIB(2) (42 ) - (42 )
GMWB (129 ) 106 (23 )
GMAB (52 ) 42 (10 )
DAC and DSIC amortization(3) N/A N/A 10
Total variable annuity riders (223 ) 148 (65 )
Equity indexed annuities 1 (1 ) -
Indexed universal life insurance 1 (1 ) -
Total $ (374 ) $ 146 $ (218 )
Interest Rate Exposure to Pretax Income
Before Hedge NetInterest Rate Increase 100 Basis Points Hedge Impact Impact
Impact
(in millions)
Asset-based fees and expenses $ (21 ) $ - $ (21 )
Variable annuity riders:
GMWB 577 (707 ) (130 )
GMAB 45 (52 ) (7 )
DAC and DSIC amortization(3) N/A N/A 32
Total variable annuity riders 622 (759 ) (105 )
Fixed annuities, fixed portion of variable
annuities and fixed insurance products 73 - 73
Indexed universal life insurance 4 - 4
Total $ 678 $ (759 ) $ (49 )
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N/A Not Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected
profits.
(2) In estimating the impact on DAC and DSIC amortization resulting from
lower projected profits, the Company has not changed its assumed equity asset
growth rates. This is a significantly more conservative estimate than if the
Company assumed management follows its mean reversion guideline and increased
near-term rates to recover the drop in equity values over a five-year period.
The Company makes this same conservative assumption in estimating the impact
from GMDB and GMIB riders.
(3) Market impact on DAC and DSIC amortization related to variable annuity
riders is modeled net of hedge impact.
The above results compare to an estimated negative net impact to pretax income
of $208 million related to a 10% equity price decline and an estimated
$24 million related to a 100 basis point increase in interest rates as of
December 31, 2011.
Net impacts shown in the above table from GMWB and GMAB riders result largely
from differences between the liability valuation basis and the hedging basis.
Liabilities are valued using fair value accounting principles, with key
policyholder behavior assumptions loaded to provide risk margins and with
discount rates increased to reflect a current market estimate of the Company's
risk of nonperformance specific to these liabilities. For variable annuity
riders introduced prior to mid-2009, management elected to hedge based on best
estimate policyholder behavior assumptions. For riders issued since mid-2009,
management has been hedging on a basis that includes risk margins related to
policyholder behavior. The nonperformance spread risk is not hedged.
Actual results could differ materially from those illustrated above as they are
based on a number of estimates and assumptions. These include assuming that
implied market volatility does not change when equity prices fall by 10%, that
management does not increase assumed equity asset growth rates to anticipate
recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB
liability values and that the 100 basis point increase in interest rates is a
parallel shift of the yield curve. Furthermore, the Company has not tried to
anticipate changes in client preferences for different types of assets or other
changes in client behavior, nor has the Company tried to anticipate actions
management might take to increase revenues or reduce expenses in these
scenarios.
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The selection of a 100 basis point interest rate increase as well as a 10%
equity price decline should not be construed as a prediction of future market
events. Impacts of larger or smaller changes in interest rates or equity prices
may not be proportional to those shown for a 100 basis point increase in
interest rates or a 10% decline in equity prices.
Fair Value Measurements
The Company reports certain assets and liabilities at fair value; specifically,
separate account assets, derivatives, embedded derivatives, most investments and
cash equivalents. Fair value assumes the exchange of assets or liabilities
occurs in orderly transactions. Companies are not permitted to use market
prices that are the result of a forced liquidation or distressed sale. The
Company includes actual market prices, or observable inputs, in its fair value
measurements to the extent available. Broker quotes are obtained when quotes
from pricing services are not available. The Company validates prices obtained
from third parties through a variety of means such as: price variance analysis,
subsequent sales testing, stale price review, price comparison across pricing
vendors and due diligence reviews of vendors. See Note 11 to the Consolidated
Financial Statements for additional information on the Company's fair value
measurements.
Fair Value of Liabilities and Nonperformance Risk
Companies are required to measure the fair value of liabilities at the price
that would be received to transfer the liability to a market participant (an
exit price). Since there is not a market for the Company's obligations of its
variable annuity riders, the Company considers the assumptions participants in a
hypothetical market would make to reflect an exit price. As a result, the
Company adjusts the valuation of variable annuity riders by updating certain
contractholder assumptions, adding explicit margins to provide for profit, risk
and expenses, and adjusting the rates used to discount expected cash flows to
reflect a current market estimate of the Company's nonperformance risk. The
nonperformance risk adjustment is based on broker quotes for credit default
swaps that are adjusted to estimate the risk of the Company not fulfilling these
liabilities. Consistent with general market conditions, this estimate resulted
in a spread over the LIBOR swap curve as of June 30, 2012. As the Company's
estimate of this spread widens or tightens, the liability will decrease or
increase. If this nonperformance credit spread moves to a zero spread over the
LIBOR swap curve, the reduction to net income would be approximately $265
million, net of DAC and DSIC amortization and income taxes, based on June 30,
2012 credit spreads.
Liquidity and Capital Resources
Liquidity Strategy
The liquidity requirements of the Company are generally met by funds provided by
investment income, maturities and periodic repayments of investments, deposits,
premiums and proceeds from sales of investments as well as capital contributions
from Ameriprise Financial. Other liquidity sources the Company has established
are repurchase agreements and available lines of credit with Ameriprise
Financial aggregating $1 billion.
RiverSource Life Insurance Company is a member of the Federal Home Loan Bank of
Des Moines ("FHLB"), which provides RiverSource Life Insurance Company access to
collateralized borrowings. At June 30, 2012 and December 31, 2011, the Company
had no borrowings from the FHLB. The Company enters into repurchase agreements
to reduce reinvestment risk from higher levels of expected annuity net cash
flows. Repurchase agreements allow the Company to receive cash to reinvest in
longer-duration assets, while paying back the short-term debt with cash flows
generated by the fixed income portfolio. The balance of repurchase agreements at
June 30, 2012 and December 31, 2011 was $498 million and $504 million,
respectively, which is collateralized with agency residential mortgage backed
securities and commercial mortgage backed securities from the Company's
investment portfolio.
The outstanding balance under the lines of credit with Ameriprise Financial was
$312 million and $300 million at June 30, 2012 and December 31, 2011,
respectively.
The primary uses of funds are policy benefits, commissions, other
product-related acquisition and sales inducement costs, operating expenses,
policy loans, dividends to Ameriprise Financial and investment purchases. The
Company routinely reviews its sources and uses of funds in order to meet its
ongoing obligations.
Capital Activity
Dividends paid and received by RiverSource Life Insurance Company were as
follows:
Six Months Ended
June 30,
2012 2011
(in millions)
Cash dividends paid to Ameriprise Financial $ 550 $
600
Cash dividends received from RiverSource Life of NY 30 29
Cash dividends received from RTA
- 53
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During the six months ended June 30, 2012, RiverSource Life Insurance Company
made a cash contribution to RTA of $53 million for ongoing funding commitments
related to affordable housing partnership investments.
Regulatory Capital
RiverSource Life Insurance Company and RiverSource Life of NY are subject to
regulatory capital requirements as follows:
Regulatory Capital
Actual Capital (a) Requirement(b)
June 30, December 31, December 31,
2012 2011 2011
(in millions)RiverSource Life Insurance Company $ 3,171 $ 3,058 $
619
RiverSource Life Insurance Co. of
New York 260 254 41
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(a) Actual capital, as defined by the National Association of Insurance
Commissioners for purposes of meeting regulatory capital requirements, includes
statutory capital and surplus, plus certain statutory valuation reserves.
(b) Regulatory capital requirement is based on the statutory risk-based
capital filing.
Contractual Commitments
There have been no material changes to the Company's contractual obligations
disclosed in the Company's 2011 10-K.
Forward-Looking Statements
This report contains forward-looking statements that reflect the Company's
plans, estimates and beliefs. The Company's actual results could differ
materially from those described in these forward-looking statements. Examples
of such forward-looking statements include:
† statements of the Company's plans, intentions, expectations,
objectives, or goals, including those related to the consolidated tax rate;
† other statements about future economic performance, the performance
of equity markets and interest rate variations and the economic performance of
the United States and of global markets; and
† statements of assumptions underlying such statements.
The words "believe," "expect," "anticipate," "optimistic," "intend," "plan,"
"aim," "will," "may," "should," "could," "would," "likely," "forecast," "on
pace," "project" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements. Forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from such statements.
Such factors include, but are not limited to:
† conditions in the interest rate, credit default, equity market and
foreign exchange environments, including changes in valuations, liquidity and
volatility;
† changes in and adoptions of relevant accounting standards, as well as
changes in the litigation and regulatory environment, including ongoing legal
proceedings and regulatory actions, the frequency and extent of legal claims
threatened or initiated by clients, other persons and regulators, and
developments in regulation and legislation, including the rules and regulations
implemented or to be implemented in connection with the Dodd-Frank Wall Street
Reform and Consumer Protection Act;
† the Company's investment management performance and consumer
acceptance of the Company's products;
† effects of competition in the financial services industry and changes
in the Company's product distribution mix and distribution channels;
† changes to the Company's reputation that may arise from employee or
affiliated advisor misconduct, legal or regulatory actions, improper management
of conflicts of interest or otherwise;
† the Company's capital structure as a subsidiary of Ameriprise
Financial, including the ability of its parent to support its financial strength
and ratings, as well as the opinions of rating agencies and other analysts or
the Company's regulators, distributors or policyholders and contractholders in
response to any change or prospect of change in any such opinion;
† risks of default by issuers or guarantors of investments the Company
owns or by counterparties to hedge derivative, insurance or reinsurance
arrangements, experience deviations from the Company's assumptions regarding
such risks, the evaluations or the prospect of changes in evaluations of any
such third parties published by rating agencies or other analysts and the
reactions of other market participants or the Company's regulators, distribution
partners or customers in response to any such evaluation or prospect of changes
in evaluation;
† experience deviations from the Company's assumptions regarding
morbidity, mortality and persistency in certain annuity and insurance products,
or from assumptions regarding market returns assumed in valuing or unlocking DAC
and DSIC or market volatility underlying the Company's valuation and hedging of
guaranteed living benefit annuity riders;
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† successfully cross-selling insurance and annuity products and
services to Ameriprise Financial's customer base;
† the Company's ability to effectively hedge risks relating to
guaranteed benefit riders and certain other products;
† the impact of intercompany allocations to the Company from Ameriprise
Financial and its affiliates;
† Ameriprise Financial's ability to attract, recruit and retain
qualified advisors and employees and its ability to distribute the Company's
products through current and future distribution channels;
† changes in capital requirements that may be indicated, required or
advised by regulators or rating agencies;
† the impacts of Ameriprise Financial's efforts to improve distribution
economics and realize benefits from reengineering and tax planning;
† changes in the capital markets and competitive environments induced
or resulting from the partial or total ownership or other support by central
governments of certain financial services firms or financial assets; and
† general economic and political factors, including consumer confidence
in the economy, the ability and inclination of consumers generally to invest, as
well as their ability and inclination to invest in financial instruments and
products other than cash and cash equivalents, the costs of products and
services the Company consumes in the conduct of its business, and applicable
legislation and regulation and changes therein, including tax laws, tax
treaties, fiscal and central government treasury policy, and policies regarding
the financial services industry and regulatory rulings and pronouncements.
The Company cautions the reader that the foregoing list of factors is not
exhaustive. There may also be other risks that the Company is unable to predict
at this time that may cause actual results to differ materially from those in
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date on which
they are made. The Company undertakes no obligation to update publicly or
revise any forward-looking statements.
The foregoing list of factors should be read in conjunction with the "Risk
Factors" discussion as Part I, Item 1A in the Company's 2011 10-K.
