RIVERSOURCE LIFE INSURANCE CO – 10-Q – MANAGEMENT’S NARRATIVE ANALYSIS

 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, 2012 filed with the Securities and Exchange Commission on February 26, 2013 ("2012 10-K"), as well as its current reports on Form 8-K and other publicly available information.    The Company follows U.S. generally accepted accounting principles ("GAAP"), and the following discussion is presented on a consolidated basis consistent with GAAP.  In addition, certain reclassifications of prior year amounts have been made to conform to the current presentation.    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 2012 10-K.    

Recent Accounting Pronouncements

    For information regarding recent accounting pronouncements and their expected impact on the Company's future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.                                           32  --------------------------------------------------------------------------------

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Consolidated Results of Operations for the Six Months Ended June 30, 2013 and 2012

    The following table presents the Company's consolidated results of operations (unaudited):                                                     Six Months Ended                                                      June 30,                                              2013             2012               Change                                                           (in millions) Revenues Premiums                                  $       214    $           222    $    (8 )     (4 )% Net investment income                             717                754        (37 )     (5 ) Policy and contract charges                       850                799         51        6 Other revenue                                     176                158         18       11 Net realized investment losses                     (2 )                -         (2 )     NM Total revenues                                  1,955              1,933         22        1  Benefits and expenses Benefits, claims, losses and settlement expenses                               542                594        (52 )     (9 ) Interest credited to fixed accounts               396                415        (19 )     (5 ) Amortization of deferred acquisition costs                                             134                100         34       34 Other insurance and operating expenses            373                391        (18 )     (5 ) Total benefits and expenses                     1,445              1,500        (55 )     (4 ) Pretax income                                     510                433         77       18 Income tax provision                               84                 99        (15 )    (15 ) Net income                                $       426    $           334    $    92       28 %     NM  Not Meaningful    Overview    Net income increased $92 million or 28% compared to the prior year period. Pretax income increased $77 million or 18% compared to the prior year period primarily reflecting the impact of market appreciation and the market impact on variable annuity guaranteed living benefits (net of hedges and the related deferred acquisition costs ("DAC") and deferred sales inducement costs ("DSIC") amortization), partially offset by the negative impact of the continued low interest rate environment. The market impact on variable annuity guaranteed living benefits (net of hedges and the related DAC and DSIC amortization) was an expense of $45 million for the six months ended June 30, 2013 compared to an expense of $129 million for the prior year period. Results for the prior year period included a $32 million unfavorable impact from a tax-related item for an out-of-period correction in the second quarter of 2012.    Revenues   

Total revenues increased $22 million or 1% compared to the prior year period.

    Net investment income decreased $37 million or 5% compared to the prior year period reflecting a decrease in investment income on fixed maturities primarily due to lower invested assets and continued low interest rates.    

Policy and contract charges increased $51 million or 6% compared to the prior year period. The increase is primarily due to higher separate account fees driven by higher average separate account balances and higher fee rates.

Other revenue increased $18 million or 11% compared to the prior year period reflecting higher marketing support due to higher average separate account balances.

    Net realized investment losses for the six months ended June 30, 2013 were $2 million.  In the six months ended June 30, 2013, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $1 million offset by other-than-temporary impairments recognized in earnings were $2 million which primarily related to credit losses on non-agency residential mortgage backed securities.    Benefits and Expenses    Total benefits and expenses decreased $55 million or 4% compared to the prior year period primarily due to a decrease in benefits, claims, losses and settlement expenses, interest credited to fixed accounts and other insurance and operating expenses partially offset by an increase in amortization of DAC.                                           33  --------------------------------------------------------------------------------

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    Benefits, claims, losses and settlement expenses decreased $52 million, or 9%, compared to the prior year period primarily due to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization), which was an expense of $52 million for the six months ended June 30, 2013 compared to an expense of $160 million for the prior year period, partially offset by higher reserve funding related to higher fees from variable annuity guarantees, higher reserves associated with unlocking of interest rate assumptions in the third quarter of 2012, an $8 million increase in disability income reserves in the second quarter of 2013 related to prior periods, a $9 million benefit from a life insurance reserve release in the prior year period and an $8 million benefit from valuation model updates and enhancements in the prior year period. The market impact on DSIC was nil in the first half of 2013 compared to a benefit of $3 million in the prior year period.    Interest credited to fixed accounts decreased $19 million, or 5%, compared to the prior year period driven by lower average fixed annuity account balances. Average fixed annuities contract accumulation values decreased $465 million, or 3%, to $13.7 billion for the six months ended June 30, 2013 compared to the prior year period due to net outflows. Fixed annuities remain in net outflows due to low client demand given the interest rate environment.    Amortization of DAC increased $34 million or 34%, compared to the prior year period primarily due to the DAC offset to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization), as well as higher variable annuity DAC amortization associated with unlocking of interest rate assumptions in the third quarter of 2012. The DAC offset to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization) was a benefit of $7 million for the six months ended June 30, 2013 compared to a benefit of $31 million in the prior year period. The market impact on DAC was a benefit of $3 million for the six months ended June 30, 2013 compared to a benefit of $11 million in the prior year period as a result of favorable equity market returns largely offset by unfavorable bond fund returns in the first half of 2013 compared to favorable equity and bond fund returns in the first half of 2012.    Other insurance and operating expenses decreased $18 million or 5% compared to the prior year period. The decrease is primarily due to a decrease in direct operating expenses and a net $6 million charge in the prior year period for future assessments from state insurance guaranty funds primarily associated with the liquidation of Executive Life Insurance Company of New York. See Note 15 to the Consolidated Financial Statements for additional information on insurance industry guaranty fund assessments.    Income Taxes    The Company's effective tax rate was 16% for the six months ended June 30, 2013, compared to 23% for the six months ended June 30, 2012. The effective tax rate for both periods is lower than the statutory rate as a result of tax preferred items including the dividends received deduction, foreign tax credits and low income housing credits.  The decrease in the effective tax rate for the six months ended June 30, 2013 compared to the prior year period is a result of a $32 million correction of tax related to securities lending activities in 2012.    It is possible there will be corporate tax reform in the next few years.  While impossible to predict, corporate tax reform is likely to include a reduction in the corporate tax rate coupled with reductions in tax preferred items.  Any changes could have a material impact on the income tax expense and the deferred tax balances of the company.    Market Risk    The 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, the value of liabilities for guaranteed benefits associated with its variable annuities and the value of derivatives held to hedge these benefits.    The guaranteed benefits associated with the Company's variable annuities are guaranteed minimum withdrawal benefit ("GMWB"), guaranteed minimum accumulation benefits ("GMAB"), guaranteed minimum death benefits ("GMDB") and guaranteed minimum income benefits ("GMIB"). Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying investment assets.    The Company continues to utilize a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities.  This approach works with the premise that matched sensitivities will produce a highly effective hedging result.  The 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.                                           34 

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    To evaluate interest rate and equity price risk, the Company performs sensitivity testing which measures the impact on pretax income from the sources listed below for a 12-month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices.  The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities, indexed universal life insurance and the associated hedge assets, the Company assumed no change in implied market volatility despite the 10% drop in equity prices.    

The following tables present the Company's estimate of the impact on pretax income from these hypothetical market movements as of June 30, 2013.

                                            Equity Price Exposure to Pretax Income                                        Before            Hedge Equity Price Decline 10%            Hedge Impact         Impact          Net Impact                                                      (in millions)

Asset-based fees and expenses $ (74 ) $ - $

       (74 ) DAC and DSIC amortization(1) (2)              (97 )              -                (97 ) Variable annuity riders: GMDB and GMIB(2)                              (64 )              -                (64 ) GMWB                                         (143 )            150                  7 GMAB                                          (45 )             46                  1 DAC and DSIC amortization(3)                  N/A              N/A                 (3 ) Total variable annuity riders                (252 )            196                (59 ) Equity indexed annuities                        1               (1 )                - Indexed universal life insurance                5               (6 )               (1 ) Total                              $         (417 )   $        189     $         (231 )                                                            Interest Rate Exposure to Pretax Income                                                      Before              Hedge Interest Rate Increase 100 Basis Points           Hedge Impact          Impact           Net Impact                                                                     (in 

millions)

 Asset-based fees and expenses                     $         (22 )   $             -     $        (22 ) Variable annuity riders: GMWB                                                        490                (462 )             28 GMAB                                                         31                 (30 )              1 DAC and DSIC amortization(3)                                N/A                 N/A               (5 ) Total variable annuity riders                               521                (492 )             24 Fixed annuities, fixed portion of variable annuities and fixed insurance products                       49                   -               49 Indexed universal life insurance                              8                   -                8 Total                                             $         556     $          (492 )   $         59    

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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 $203 million related to a 10% equity price decline and an estimated positive net impact to pretax income of $78 million related to a 100 basis point increase in interest rates as of December 31, 2012.    Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with key policyholder behavior assumptions loaded to provide risk margins and with discount rates increased to reflect a current market estimate of the 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.                                           35 

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    Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming that implied market volatility does not change when equity prices fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, the Company has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has the Company tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.    The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events.  Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.    Fair Value Measurements    The Company reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents.  Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale.  The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available.  Broker quotes are obtained when quotes from pricing services are not available.  The Company validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 10 to the Consolidated Financial Statements for additional information on the 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 and indexed universal life insurance, the Company considers the assumptions participants in a hypothetical market would make to reflect an exit price.  As a result, the Company adjusts the valuation of variable annuity riders and indexed universal life insurance by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of the 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, 2013.  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 $133 million, net of DAC, DSIC and unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on June 30, 2013 credit spreads.   

Liquidity and Capital Resources

   Liquidity Strategy    The liquidity requirements of the Company are generally met by funds provided by investment income, maturities and periodic repayments of investments, deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial.  Other liquidity sources the Company has established are short-term borrowings and available lines of credit with Ameriprise Financial aggregating $1 billion.    The Company enters into short-term borrowings, which may include repurchase agreements and Federal Home Loan Bank ("FHLB") advances to reduce reinvestment risk from higher levels of expected annuity net cash flows. Short-term borrowings allow the Company to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements at June 30, 2013 and December 31, 2012 was $201 million and $501 million, respectively, which is collateralized with agency residential mortgage backed securities and commercial mortgage backed securities from the Company's investment portfolio.  RiverSource Life Insurance Company is a member of the FHLB of Des Moines, which provides RiverSource Life Insurance Company access to collateralized borrowings.  At June 30, 2013 and December 31, 2012, the Company had borrowings of $300 million and nil, respectively, from the FHLB
The outstanding balance under the lines of credit with Ameriprise Financial was $150 million at both June 30, 2013 and December 31, 2012.
    The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases.  The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.                                           36 
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   Table of Contents    Capital Activity    Dividends paid and received by RiverSource Life Insurance Company were as follows:                                                             Six Months Ended                                                              June 30,                                                         2013         2012                                                           (in millions) Cash dividends paid to Ameriprise Financial           $     535    $     
550
Cash dividends received from RiverSource Life of NY          25           30
During the six months ended June 30, 2013 and 2012, RiverSource Life Insurance Company made a cash contribution to RTA of $15 million and $53 million, respectively, for ongoing funding commitments related to affordable housing partnership investments.
Regulatory Capital
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements as follows:
                                                                                        Regulatory Capital                                                       Actual Capital (a)               Requirement(b)                                                                   December 31,          December 31,                                                June 30, 2013          2012                  2012                                                                   (in millions) RiverSource Life Insurance Company            $         2,809    $         3,257    $                620 RiverSource Life Insurance Co. of New York                237                256                      44    
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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 2012 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 introduction, cessation, terms or pricing of new or existing products and services and the consolidated tax rate;  †          other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and  
†          statements of assumptions underlying such statements.
    The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," "on pace," "project" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements.    
Such factors include, but are not limited to:
    †          conditions in the interest rate, credit default, equity market and foreign exchange environments, including changes in valuations, liquidity and volatility;  †          changes in and the adoption of relevant accounting standards and securities rating agency standards and processes, as well as changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation, including the rules and regulations implemented or to be implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act;  
†          the 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 Ameriprise Financial Services, Inc. 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,                                           37 
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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;  
†          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;
  †          interruptions or other failures in the Company's communications, technology and other operating systems, including errors or failures caused by third party service providers, interference or failures caused by third party attacks on the Company's systems, or the failure to safeguard the privacy or confidentiality of sensitive information and data on such systems; and  †          general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services the Company consumes in the conduct of its business, and applicable legislation and regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding the financial services industry and regulatory rulings and pronouncements.    The Company cautions the reader that the foregoing list of factors is not exhaustive.  There may also be other risks that the Company is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.  The Company undertakes no obligation to update publicly or revise any forward-looking statements.    
The foregoing list of factors should be read in conjunction with the "Risk Factors" discussion as Part I, Item 1A in the Company's 2012 10-K.


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