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RIVERSOURCE LIFE INSURANCE CO – 10-K – Management's Narrative Analysis
Overview
RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this Form 10-K as the "Company." 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. The Consolidated Financial Statements are prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). 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. The COVID-19 pandemic has presented ongoing significant economic and societal disruption and market unpredictability, which has affected the Company's business and operating environment driven by a low interest rate environment and volatility and changes in the equity markets and the potential associated implications to client behavior. COVID-19 continues its ongoing impact and has been occurring in multiple waves, so there are still no reliable estimates of how long the implications from the pandemic will last, the effects current and other new variants will ultimately have, how many people are likely to be affected by it, or its impact on the overall economy. There is still significant uncertainty around the extent to which the COVID-19 pandemic will continue to impact the Company's business, results of operations, and financial condition, which depends on current and future developments, including the ultimate scope, duration and severity of the pandemic, success of worldwide vaccination efforts, multiple mutations of COVID-19 or similar diseases, the effectiveness of the Company's office reopenings, the additional measures that may be taken by various governmental authorities in response to the outbreak, the actions of third parties in response to the pandemic, and the possible further impacts on the global economy. Given the ongoing impact of the pandemic, financial results may not be comparable to previous years and the results presented in this report may not necessarily be indicative of future operating results. For further information regarding the impact of the COVID-19 pandemic, and any potentially material effects, see Part 1 - Item 1A "Risk Factors" in this report. During the third quarter of 2021, RiverSource Life closed on a transaction with Commonwealth, effectiveJuly 1, 2021 , to reinsure approximately$7.0 billion of fixed deferred and immediate annuity policies. As part of the transaction, RiverSource Life transferred$7.8 billion in consideration primarily consisting of Available-for-Sale securities, commercial mortgage loans, syndicated loans and cash. The transaction resulted in a net realized gain of approximately$532 million on investments sold. A similar previously announced transaction withRiverSource Life Insurance Co. of New York did not receive regulatory approval in time to close bySeptember 30, 2021 and the transaction was terminated by the parties. The Company consolidates certain variable interest entities for which it provides investment management services. These entities are defined as consolidated investment entities ("CIEs"). While the consolidation of the CIEs impacts the Company's balance sheet and income statement, the exposure to these entities is unchanged and there is no impact to the underlying business results. For further information on CIEs, see Note 5 to the Consolidated Financial Statements. Changes in the fair value of assets and liabilities related to the CIEs, primarily syndicated loans and debt, are reflected in Net investment income.
See "Item 1 - Business" and Note 1 to the Consolidated Financial Statements for
a description of the business.
Critical Accounting Estimates
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. 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 and estimates the
Company 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 the Company's
accounting policies.
Valuation of Investments
The most significant component of the Company's investments is its
Available-for-Sale securities, which the Company carries at fair value within
its Consolidated Balance Sheets. See Note 13 to the Consolidated Financial
Statements for discussion of the fair value of Available-for-Sale securities.
Financial markets are subject to significant movements in valuation and
liquidity, which can impact the Company's ability to liquidate and the selling
price that can be realized for the Company's securities and increases the use of
judgment in determining the estimated fair value of certain investments. The
Company is unable to predict impacts and determine sensitivities in reported
amounts reflecting such market movements on its aggregate Available-for-Sale
portfolio. Changes to assumptions do not occur in isolation and it is
impracticable to predict such impacts at the individual security unit of measure
which are predominately Level 2 fair value and based on observable inputs.
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Deferred Acquisition Costs
See Note 2 to the Consolidated Financial Statements for discussion of the
Company's DAC accounting policy. See Note 3 to the Consolidated Financial
Statements for discussion of changes to the measurement of DAC amortization
effective for interim and annual periods beginning after
Non-Traditional Long-Duration Products
For the Company's non-traditional long-duration products (including variable,
structured variable and fixed deferred annuity contracts, universal life ("UL")
and variable universal life ("VUL") insurance products), the DAC balance at any
reporting date is based on projections that show management expects there to be
estimated gross profits ("EGPs") after that date to amortize the remaining
balance. These projections are inherently uncertain because they require
management to make assumptions about financial markets, mortality levels and
contractholder and policyholder behavior over periods extending well into the
future. Projection periods used for the Company's annuity products are typically
30 to 50 years and for UL insurance products 50 years or longer.
EGPs vary based on persistency rates (assumptions at which contractholders and
policyholders are expected to surrender, make withdrawals from and make deposits
to their contracts), mortality levels, client asset value growth rates (based on
equity and bond market performance), variable annuity benefit utilization and
interest margins (the spread between earned rates on invested assets and rates
credited to contractholder and policyholder accounts). Changes in these
assumptions can be offsetting and the Company is unable to predict their
movement, sensitivities in reported amounts, offsetting impacts or future
impacts to the Consolidated Financial Statements over time or in any given
future period. When assumptions are changed, the percentage of EGPs 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 effect on the DAC
balance that would result from the realization of unrealized gains (losses) on
securities is recognized with an offset to accumulated other comprehensive
income on the Consolidated Balance Sheets.
The client asset value growth rates are the rates at which variable annuity and
VUL insurance contract values invested in separate accounts are assumed to
appreciate in the future. The rates used vary by equity and fixed income
investments. The long-term client asset value growth rates are based on assumed
gross annual returns of 9% for equity funds and 5.65% for fixed income funds.
The Company typically uses a five-year mean reversion process as a guideline in
setting near-term equity fund growth rates based on a long-term view of
financial market performance as well as recent actual performance. The suggested
near-term equity fund growth rate is reviewed quarterly to ensure consistency
with management's assessment of anticipated equity market performance.
A decrease of 100 basis points in separate account fund growth rate assumptions
is likely to result in an increase in DAC amortization and an increase in
benefits and claims expense for variable annuity and VUL insurance contracts.
The following table presents the estimated impact to current period pretax
income:
Estimated Impact to Pretax Income (1)
Benefits and
DAC Amortization Claims Expense Total
(in millions)
Decrease in future near- and long-term fixed income fund growth
returns by 100 basis points
$
(38) $ (70)
Decrease in future near-term equity fund growth returns by 100
basis points
$
(35) $ (51)
Decrease in future long-term equity fund growth returns by 100
basis points
(22) (34) (56)
Decrease in future near- and long-term equity fund growth returns
by 100 basis points
$
(57) $ (85)
(1) An increase in the above assumptions by 100 basis points would result in an
increase to pretax income for approximately the same amount.
An assessment of sensitivity associated with isolated changes of any single
assumption is not an indicator of future results.
Traditional Long-Duration Products
For traditional long-duration products (including traditional life and DI insurance products), the DAC balance at any reporting date is based on projections that show management expects there to be adequate premiums after the date to amortize the remaining balance. These projections are inherently uncertain because they require management to make assumptions over periods extending well into the future. These assumptions include interest rates, persistency rates and mortality and morbidity rates and are not modified (unlocked) unless recoverability testing determines that reserves are inadequate. Changes in these assumptions can be offsetting and the Company is unable to predict their movement, sensitivities in reported amounts, offsetting impacts, or future impacts to the Consolidated Financial Statements over time or in any given future period. Projection periods used for the Company's traditional life insurance are up to 30 years. Projection periods for DI products are up to 45 years. The Company may experience accelerated amortization of DAC if policies terminate earlier than projected or a slower rate of amortization of DAC if policies persist longer than projected.
For traditional life and DI insurance products, the assumptions provide for
adverse deviations in experience and are revised only if
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management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions.
Future Policy Benefits and Claims
See Note 3 to the Consolidated Financial Statements for discussion of changes to the measurement of DAC amortization effective for interim and annual periods beginning afterDecember 15, 2022 .
The Company establishes reserves to cover the benefits associated with
non-traditional and traditional long-duration products. Non-traditional
long-duration products include variable annuity contracts, fixed annuity
contracts and UL and VUL policies. Traditional long-duration products include
term life, whole life, DI and LTC insurance products.
Guarantees accounted for as insurance liabilities include guaranteed minimum
death benefit ("GMDB"), gain gross-up ("GGU"), guaranteed minimum income benefit
("GMIB") and the life contingent benefits associated with guaranteed minimum
withdrawal benefit ("GMWB"). In addition, UL and VUL policies with product
features that result in profits followed by losses are accounted for as
insurance liabilities.
Guarantees accounted for as embedded derivatives include guaranteed minimum
accumulation benefit ("GMAB") and the non-life contingent benefits associated
with GMWB. In addition, the portion of structured variable annuities, indexed
annuities and indexed universal life ("IUL") policies allocated to the indexed
account is accounted for as an embedded derivative.
The establishment of reserves is an estimation process using a variety of
methods, assumptions and data elements. If actual experience is better than or
equal to the results of the estimation process, then reserves should be adequate
to provide for future benefits and expenses. If actual experience is worse than
the results of the estimation process, additional reserves may be required.
Non-Traditional Long-Duration Products, including Embedded Derivatives
UL and VUL
A portion of the Company's UL and VUL policies have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. The liability for these future losses is determined using actuarial models to estimate the death benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). Significant assumptions made in projecting future benefits and assessments relate to client asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC valuation for the same contracts. Changes in these assumptions can be offsetting and the Company is unable to predict their movement, sensitivities in reported amounts, offsetting impacts, or future impacts to the Consolidated Financial Statements over time or in any given future period. See Note 11 to the Consolidated Financial Statements for information regarding the liability for contracts with secondary guarantees.
Variable Annuities
The Company has approximately$92 billion of variable annuity account value that has been issued over a period of more than 50 years. The diversified variable annuity block consists of$35 billion of account value with no living benefit guarantees and$57 billion of account value with living benefit guarantees, primarily GMWB provisions. The business is predominately issued through theAmeriprise Financial Services, LLC ("AFS") financial advisor network. The majority of the variable annuity contracts offered by the Company contain GMDB provisions. The Company 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 GGU benefits. In addition, the Company offers contracts with GMWB and GMAB provisions and, untilMay 2007 , the Company offered contracts containing GMIB provisions. See Note 11 to the Consolidated Financial Statements for further discussion of variable annuity contracts. In determining the liabilities for GMDB, GGU, GMIB and the life contingent benefits associated with GMWB, the Company 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, benefit utilization and investment margins and are consistent with those used for DAC valuation for the same contracts. As with DAC, management reviews, and where appropriate, adjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year. Regarding the exposure to variable annuity living benefit guarantees, the source of behavioral risk is driven by changes in policyholder surrenders and utilization of guaranteed withdrawal benefits. The Company has extensive experience studies and analysis to monitor changes and trends in policyholder behavior. A significant volume of company-specific policyholder experience data is available and provides management with the ability to regularly analyze policyholder behavior. On a monthly basis, actual surrender and benefit utilization experience is compared to expectations. Experience data includes detailed policy information providing the opportunity to review impacts of multiple variables. The ability to analyze differences in experience, such as presence of a living benefit rider,
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existence of surrender charges, and tax qualifications provides the Company an
effective approach in quickly detecting changes in policyholder behavior.
At least annually, the Company performs a thorough policyholder behavior analysis to validate the assumptions included in its benefit reserve, embedded derivative and DAC balances. The variable annuity assumptions and resulting reserve computations reflect multiple policyholder variables. Differentiation in assumptions by policyholder age, existence of surrender charges, guaranteed withdrawal utilization, and tax qualification are examples of factors recognized in establishing management's assumptions used in reserve calculations. The extensive data derived from the Company's variable annuity block informs management in confirming previous assumptions and revising the variable annuity behavior assumptions. Changes in assumptions are governed by a review and approval process to ensure an appropriate measurement of all impacted financial statement balances. Changes in these assumptions can be offsetting and the Company is unable to predict their movement, sensitivities in reported amounts, offsetting impacts, or future impacts to the Consolidated Financial Statements over time or in any given future period. See the table in the previous discussion of "Deferred Acquisition Costs" for the estimated impact to benefits and claims expense related to variable annuity and VUL insurance contracts resulting from a decrease of 100 basis points in separate account fund growth rate assumptions.
Embedded Derivatives
The fair value of embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions fluctuate based on equity, interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. The fair value of embedded derivatives related to structured variable annuities, indexed annuities and IUL fluctuate based on equity markets and interest rates and is a liability. In addition, the valuation of embedded derivatives is impacted by an estimate of the Company's nonperformance risk adjustment. This estimate includes a spread over theLondon Inter-Bank Offered Rate ("LIBOR") swap curve as of the balance sheet date. As the Company's estimate of this spread over LIBOR widens or tightens, the liability will decrease or increase. Additionally, the Company'sCorporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management.
See Note 13 to the Consolidated Financial Statements for information regarding
the fair value measurement of embedded derivatives.
Traditional Long-Duration Products
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 unpaid amounts are calculated using anticipated claim continuance rates based on established industry tables, adjusted as appropriate for the Company's experience. The discount rates used to calculate present values are based on average interest rates earned on assets supporting the liability for unpaid amounts. Liabilities for estimates of benefits that will become payable on future claims on term life, whole life and DI policies are based on the net level premium and LTC policies are based on a gross premium valuation reflecting management's current best estimate assumptions. Net level premium includes anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Gross premium valuation includes expected premium rate increases, benefit reductions, 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 the Company's experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage its exposure to various market risks. All derivatives are recorded at fair value. The fair value of the Company's derivative 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 observable inputs to the extent available. The Company is unable to predict impacts and determine sensitivities in reported amounts reflecting such market movements on its aggregate derivative portfolio. Changes to assumptions do not occur in isolation and it is impracticable to predict such impacts at the individual security unit of measure which are predominately Level 2 fair value and based on observable inputs. For further details on the types of derivatives the Company uses and how it accounts for them, see Note 2, Note 13 and Note 17 to the Consolidated Financial Statements. For discussion of the Company's market risk exposures and hedging program and related sensitivity testing, see Item 7A - "Quantitative and Qualitative Disclosures About Market Risk."
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 3 to the Consolidated Financial Statements.
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Sources of Revenues and Expenses
Premiums
Premiums include premiums on traditional life, DI and LTC insurance products and immediate annuities with a life contingent feature and are net of reinsurance premiums. Net Investment Income Net investment income primarily includes interest income on fixed maturity securities classified as Available-for-Sale, commercial mortgage loans, policy loans, other investments and cash and cash equivalents and investments of CIEs; the changes in fair value of certain derivatives and certain assets and liabilities of CIEs; and the pro-rata share of net income or loss on equity method investments.
Policy and Contract Charges
Policy and contract charges include mortality and expense risk fees and certain other charges assessed on annuities and UL and VUL insurance, which consist of cost of insurance charges (net of reinsurance premiums and cost of reinsurance for UL and VUL insurance products), administrative and surrender charges and distribution fees from affiliated funds underlying the Company's variable annuity and VUL products.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) primarily include realized gains and
losses on the sale of investments and changes for the allowance for credit
losses.
Other Revenues
Other revenues primarily include fees received under marketing support
arrangements which are calculated as a percentage of the Company's separate
account assets and the accretion on fixed annuities reinsurance deposit
receivables.
For discussion of the Company's accounting policies on revenue recognition, see
Note 2 to the Consolidated Financial Statements.
Benefits, Claims, Losses and Settlement Expenses
Benefits, claims, losses and settlement expenses consist of amounts paid and
changes in liabilities held for anticipated future benefit payments under
insurance policies and annuity contracts, along with costs to process and pay
such amounts. Amounts are net of benefit payments recovered or expected to be
recovered under reinsurance contracts. Benefits under variable annuity
guarantees include the changes in fair value of GMWB and GMAB embedded
derivatives and the derivatives hedging these benefits, as well as the changes
in fair value of derivatives hedging GMDB provisions. The changes in fair value
of structured variable annuity embedded derivatives and the derivatives hedging
this product, as well as the amortization of deferred sales inducement costs
("DSIC") are also included in Benefits, claims losses and settlement expenses.
Interest Credited to Fixed Accounts
Interest credited to fixed accounts represents amounts earned by contractholders and policyholders on fixed account values associated with UL and VUL insurance and annuity contracts. The changes in fair value of indexed annuities and IUL embedded derivatives and the derivatives hedging these products are also included within Interest credited to fixed accounts.
Amortization of DAC
Direct sales commissions and other costs capitalized as DAC are amortized over time. For annuity and UL/VUL contracts, DAC are amortized based on projections of EGPs 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.
Interest and Debt Expense
Interest and debt expense primarily includes interest on CIE debt and long-term
debt.
Other Insurance and Operating Expenses
Other insurance and operating expenses include expenses allocated to the Company
from its parent, Ameriprise Financial, Inc. ("Ameriprise Financial"), for the
Company's share of compensation, professional and consultant fees and expenses
associated with information technology and communications, facilities and
equipment, advertising and promotion and legal and regulatory costs. Also
included are commissions, sales and marketing expenses and other operating
expenses. These expenses are presented net of acquisition cost deferrals.
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Consolidated Results of Operations
Year Ended
The following table presents the Company's consolidated results of operations:
Years Ended December 31,
2021 2020 Change
(in millions)
Revenues
Premiums $ (871) $ 341 $ (1,212) NM
Net investment income 827 869 (42) (5) %
Policy and contract charges 2,304 2,094 210 10
Other revenues 616 482 134 28
Net realized investment gains (losses) 595 (10) 605 NM
Total revenues 3,471 3,776 (305) (8)
Benefits and expenses
Benefits, claims, losses and settlement expenses 715 1,805 (1,090) (60)
Interest credited to fixed accounts 600 644 (44) (7)
Amortization of deferred acquisition costs 112 264 (152) (58)
Interest and debt expense 105 5 100 NM
Other insurance and operating expenses 738 665 73 11
Total benefits and expenses 2,270 3,383 (1,113) (33)
Pretax income 1,201 393 808 NM
Income tax provision (benefit) 137 (45) 182 NM
Net income $ 1,064 $ 438 $ 626 NM
NM Not Meaningful.
Overall
Net income increased
income increased
The following impacts were significant drivers of the year-over-year change in
pretax income:
•The favorable impact of the block transfer reinsurance transaction was$521 million for 2021 primarily reflecting the net realized gains on investments sold to the reinsurer. •The favorable impact of unlocking was$17 million for 2021 compared to an unfavorable impact of unlocking and long term care ("LTC") loss recognition of$454 million for the prior year. •The market impact on non-traditional long-duration products (including variable and fixed deferred annuity contracts and universal life ("UL") insurance contracts), net of hedges and the related DSIC and DAC amortization, unearned revenue amortization and the reinsurance accrual was an expense of$656 million for 2021 compared to an expense of$375 million for the prior year. •The impact on variable annuity and VUL products for the difference between assumed and updated separate account investment performance on DAC, DSIC, unearned revenue amortization, reinsurance accrual and additional insurance benefit reserves ("mean reversion related impact") was a benefit of$152 million for the year endedDecember 31, 2021 compared to a benefit of$87 million for the prior year. The Company's variable annuity account balances increased 8% to$92.3 billion as ofDecember 31, 2021 compared to the prior year due to market appreciation, partially offset by net outflows of$1.9 billion . Variable annuity sales increased 37% to$6.0 billion for 2021 compared to the prior year reflecting an increase in sales of structured variable annuities that was partially offset by a decrease in sales of variable annuities with living benefit guarantees. Sales of variable annuities without living benefit guarantees comprised 67% of total variable annuity sales in 2021 compared to 49% in 2020. The risk profile of its in force block continues to improve, with account values with living benefit riders down to 61% as ofDecember 31, 2021 compared to over 63% a year ago. The Company continues to optimize its risk profile and shift its business mix to lower risk offerings. During the fourth quarter of 2021, the Company made the decision to discontinue new sales of substantially all of its variable annuities with living benefit guarantees at the end of 2021, with a full exit by mid-2022. In addition, the Company has discontinued new sales of its universal life insurance with secondary guarantees and its single-pay fixed universal life with a long term care rider products at the end of 2021.
In the third quarter of the year, management updated its market-related
assumptions and implemented model changes related to the
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living benefit valuation. In addition, management conducted its annual review of life insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking. Management also reviewed its active life future policy benefit reserve adequacy for its LTC business in the third quarter. The following table presents the total pretax impacts on the Company's revenues and expenses attributable to unlocking and LTC loss recognition for the years endedDecember 31 : Pretax Increase (Decrease) 2021 2020 (in millions) Policy and contract charges$ 19 $ (1) Total revenues 19 (1) Benefits, claims, losses and settlement expenses: LTC unlocking and loss recognition 3
141
Unlocking impact, excluding LTC 59
212
Total benefits, claims, losses and settlement expenses 62
353 Amortization of DAC (60) 100 Total benefits and expenses 2 453 Pretax income$ 17 $ (454)
The primary drivers of the year-over-year unlocking impact excluding LTC include
the following items:
•Interest rate assumptions resulted in a lower expense in 2021 compared to the prior year period. The 10-yearTreasury rate assumption remained unchanged in 2021 at 3.5% with a grading period endingDecember 31, 2026 .
•Equity market volatility and correlation assumptions on variable annuities
resulted in a higher benefit in 2021 compared to the prior year.
•Surrenders assumptions on variable annuities with living benefit guarantees
resulted in a lower expense in 2021 compared to the prior year.
The unfavorable LTC unlocking impact of
unfavorable LTC unlocking and loss recognition impact of
prior year is primarily due to prior year updates to interest rate assumptions.
Revenues
Premiums decreased
reflecting ceded premiums of
transaction for life contingent immediate annuity policies.
Net investment income decreased$42 million , or 5%, for 2021 compared to the prior year primarily reflecting a decrease in investment income on fixed maturities due to lower yields as a result of lower interest rates and lower average invested assets due to the sale of investments to the reinsurer as a result of the fixed deferred and immediate annuity reinsurance transaction, partially offset by the consolidation of CIEs. Policy and contract charges increased$210 million , or 10%, for 2021 compared to the prior year period primarily due to higher separate account fees and higher contract and rider charges from increased account balances due to market appreciation, as well as the unearned revenue amortization and the reinsurance accrual offset to the market impact of IUL benefits, which was a benefit of$38 million for 2021 compared to a benefit of$10 million for the prior year. Other revenues increased$134 million , or 28%, for 2021 compared to the prior year period primarily reflecting higher fees from increased account balances due to market appreciation and the yield on deposit receivables. Net realized investment gains were$595 million for 2021 compared to net realized investment losses of$10 million for the prior year. For 2021, net realized investment gains included net realized gains of$556 million on Available-for-Sale securities and net realized gains of$59 million primarily related to commercial mortgage loans and syndicated loans. These net realized gains are primarily due to the sale of securities and loans to the reinsurer as a result of the fixed deferred and immediate annuity reinsurance transaction that closed in the third quarter of 2021.
Benefits and Expenses
Benefits, claims, losses and settlement expenses decreased
for 2021 compared to the prior year primarily reflecting the following items:
•A
for life contingent immediate annuity policies.
•A
year-over-year changes in the unhedged nonperformance credit spread risk
adjustment on variable annuity guaranteed benefits. The unfavorable impact of
the nonperformance credit spread was
favorable impact of
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embedded derivative liability on which the nonperformance credit spread is applied increases (decreases), the impact of the nonperformance credit spread on benefits expenses is favorable (unfavorable). Additionally, as the estimate of the nonperformance credit spread over the LIBOR swap curve tightens or widens, the embedded derivative liability will increase or decrease. •An$80 million decrease in expense from other market impacts on variable annuity guaranteed benefits, net of hedges in place to offset those risks and the related DSIC amortization. This increase was the result of a favorable$2.5 billion change in the market impact on variable annuity guaranteed living benefits reserves, partially offset by an unfavorable$2.4 billion change in the market impact on derivatives hedging the variable annuity guaranteed benefits. The main market drivers contributing to these changes are summarized below:
•Equity market impact on the variable annuity guaranteed living benefits
liability net of the impact on the corresponding hedge assets resulted in a
higher expense for 2021 compared to the prior year.
•Interest rate impact on the variable annuity guaranteed living benefits
liability net of the impact on the corresponding hedge assets resulted in an
expense for 2021 compared to a benefit in the prior year.
•Volatility impact on the variable annuity guaranteed living benefits liability
net of the impact on the corresponding hedge assets resulted in a lower
expense for 2021 compared to the prior year.
•Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various contractholder behavioral items, were a net benefit for 2021 compared to a net expense for the prior year.
•The impact of unlocking excluding LTC was an expense of
compared to an expense of
•The annual review of LTC future policy benefit reserve in 2021 resulted in
unlocking of
million
•The mean reversion related impact was a benefit of
compared to a benefit of
Interest credited to fixed accounts decreased
compared to the prior year primarily reflecting the following items:
•An$8 million decrease in expense from the unhedged nonperformance credit spread risk adjustment on IUL benefits. The unfavorable impact of the nonperformance credit spread was$10 million for 2021 compared to an unfavorable impact of$18 million for the prior year. •A$22 million decrease in expense from other market impacts on IUL benefits, net of hedges, which was a benefit of$54 million for 2021 compared to a benefit of$32 million for the prior year. The decrease in expense was primarily due to a decrease in the IUL embedded derivative in the current period, which reflected lower option costs due to higher discount rates compared to an increase in the IUL embedded derivative in the prior year period, which reflected higher option costs due to lower discount rates. Amortization of DAC decreased$152 million , or 58%, for 2021 compared to the prior year primarily reflecting the following items: •The impact of unlocking in 2021 was a benefit of$60 million compared to an expense of$100 million in the prior year period.
•The DAC offset to the market impact on non-traditional long-duration
products was a benefit of
•The mean reversion related impact was a benefit of
compared to a benefit of
•A higher level of normalized amortization due to the growth of variable
annuities and unlocked market and policyholder assumptions in the prior year.
Interest and debt expense increased$100 million for 2021 compared to the prior year reflecting the consolidation of CIEs and the issuance of a surplus note. OnDecember 23, 2020 , the Company issued a$500 million unsecured 3.5% surplus note to Ameriprise Financial.
Other insurance and operating expenses increased
compared to the prior year primarily reflecting higher expenses from the
consolidation of CIEs and higher distribution expenses.
Income Taxes
The Company's effective tax rate was 11.4% for 2021 compared to (11.5)% for the
prior year. See Note 19 to the Consolidated Financial Statements for additional
discussion on income taxes.
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,
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subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 13 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, fixed deferred indexed annuities, structured variable annuities, and IUL 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, fixed deferred indexed annuities, structured variable annuities, and IUL insurance by updating certain contractholder assumptions, adding explicit margins to provide for risk, and adjusting the rates used to discount expected cash flows to reflect a market estimate of the Company's nonperformance risk. The nonperformance risk adjustment is based on observable market data 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 ofDecember 31, 2021 . 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 future net income would be approximately$457 million , net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 21%), based onDecember 31, 2021 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, premiums and proceeds from sales of investments, fixed annuity and fixed insurance deposits as well as capital contributions from its parent, Ameriprise Financial. Other liquidity sources the Company has established are short-term borrowings and available lines of credit with Ameriprise Financial, aggregating$1.1 billion . See Note 14 to the Consolidated Financial Statements for additional information on the lines of credit. The Company enters into short-term borrowings, which may include repurchase agreements andFederal Home Loan Bank ("FHLB") advances to reduce reinvestment risk. Short-term borrowings allow the Company to receive cash to reinvest in longer-duration assets, while maintaining the flexibility to pay back the short-term debt with cash flows generated by the fixed income portfolio.RiverSource Life Insurance Company is a member of the FHLB ofDes Moines , which providesRiverSource Life Insurance Company access to collateralized borrowings. As ofDecember 31, 2021 and 2020, the Company had estimated maximum borrowing capacity of$4.0 billion and$5.7 billion , respectively, under the FHLB facility, of which$200 million was outstanding as of bothDecember 31, 2021 and 2020, and is collateralized with commercial mortgage backed securities. Short-term contractual obligations for the year 2022 include estimated insurance and annuity benefits of$1.6 billion in addition to operating liquidity needs. Long-term contractual obligations for years after 2022 include estimated insurance and annuity benefits of$42.9 billion .
See Note 12 to the Consolidated Financial Statements for further information
about the Company's long-term debt.
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. The Company believes these cash flows will be sufficient to fund its short-term and long-term operating liquidity needs and dividends to Ameriprise Financial. In 2009,River Source Life Insurance Company established an agreement to protect its exposure toGenworth Life Insurance Company ("GLIC") for its reinsured LTC. In 2016, substantial enhancements to this reinsurance protection agreement were finalized. The terms of these confidential provisions within the agreement have been shared, in the normal course of regular reviews, with the Company's domiciliary regulator and rating agencies. GLIC is domiciled inDelaware , so in the event GLIC were subjected to rehabilitation or insolvency proceedings, such proceedings would be located in (and governed by)Delaware laws.Delaware courts have a long tradition of respecting commercial and reinsurance affairs, as well as contracts among sophisticated parties. Similar credit protections to whatRiverSource Life Insurance Company has with GLIC have been tested and respected inDelaware and elsewhere inthe United States , and as a resultRiverSource Life Insurance Company believes its credit protections would be respected even in the unlikely event that GLIC becomes subject to rehabilitation or insolvency proceedings inDelaware . Accordingly, while no credit protections are perfect,RiverSource Life Insurance Company believes the correct way to think about the risks represented by its counterparty credit exposure to GLIC is not the full amount of the gross liability that GLIC reinsures, but a much smaller net exposure to GLIC (if any that might exist after taking into accountRiverSource Life Insurance Company's credit protections). Thus, management believes that this agreement and offsetting non LTC legacy arrangements with Genworth Financial, Inc. will enableRiverSource Life Insurance Company to recover on all net exposure in all material respects in the event of a rehabilitation or insolvency of GLIC. As ofDecember 31, 2021 , the Company's nursing home indemnity LTC block had approximately$74 million in gross in force annual premium and future policyholder benefits and claim reserves of approximately$1.3 billion , net of reinsurance, which was 52% of GAAP reserves. This block has been shrinking over the last few years given the average attained age is 83 and the average attained age of policyholders on claim is 88. Fifty-four percent of daily benefits in force in this block come from policies that have a lifetime
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benefit period.
As ofDecember 31, 2021 , the Company's comprehensive reimbursement LTC block had approximately$115 million in gross in force annual premium and future policyholder benefits and claim reserves of approximately$1.2 billion , net of reinsurance. This block has higher premiums per policy than the nursing home indemnity LTC policies. The average attained age is 78 and the average attained age of policyholders on claim is 85. Thirty-five percent of daily benefits in force in this block come from policies that have a lifetime benefit period. The Company utilizes three primary levers to manage its LTC business. First, the Company has taken an active approach of steadily increasing rates since 2005, with cumulative rate increases of 199% on its nursing home indemnity LTC block and 113% on its comprehensive reimbursement LTC block as ofDecember 31, 2021 . Second, the Company has a reserving process that reflects the policy features and risk characteristics of its blocks. As ofDecember 31, 2021 , the Company had 38,000 policies that were closed with claim activity, as well as 8,000 open claims. The Company applies this experience to its in force policies, which were 91,000 as ofDecember 31, 2021 , at a very granular level by issue year, attained age and benefit features. The Company's statutory reserves are approximately$381 million higher than its GAAP reserves and include margins on key assumptions for morbidity and mortality, as well as$363 million in asset adequacy reserves as ofDecember 31, 2021 . Lastly, the Company has prudently managed its investment portfolio primarily through a liquid, investment grade portfolio that is currently in a net unrealized gain position. The Company undertakes an extensive review of active life future policy benefit reserve adequacy annually during the third quarter of each year, or more frequently if appropriate, using current best estimate assumptions as of the date of the review. The annual review process includes an analysis of its key reserve assumptions, including those for morbidity, terminations (mortality and lapses), premium rate increases, and investment yields.
Capital Activity
Cash dividends or distributions paid and received by
Company
Years Ended December 31,
2021 2020 2019
(in millions)
Paid to Ameriprise Financial $ 1,900 $ 800 $ 1,350
Received from
("RiverSource Life of NY")
- - 43 Received from RiverSource Tax Advantaged Investments, Inc. 50 95 100 OnFebruary 23, 2022 ,RiverSource Life Insurance Company's Board of Directors declared a cash dividend of$300 million to Ameriprise Financial, payable on or afterMarch 25, 2022 , pending approval by theMinnesota Department of Commerce .
For dividends or distributions from the life insurance companies, notifications
to state insurance regulators were made in advance of payments in excess of
statutorily defined thresholds. See Note 15 to the Consolidated Financial
Statements for additional information.
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements as ofDecember 31 for each of the life insurance entities are as follows: Actual Capital (1) Regulatory Capital Requirement (2) December 31, December 31, December 31, 2021 2020 December 31, 2021 2020 (in millions) RiverSource Life Insurance Company$ 3,419 $ 5,021 $ 502 $ 993 RiverSource Life of NY 310 323 42 42
(1) Actual capital, as defined by the
Commissioners
statutory capital and surplus, plus certain statutory valuation reserves.
(2) Regulatory capital requirement is the company action level and is based on
the statutory risk-based capital filing.
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.
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The Company 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, the Company develops specific investment guidelines that are designed to optimize trade-offs between risk and return and help ensure the Company 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. The Company's owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to earn a competitive rate of return on investments while managing risk. Investments in fixed maturity securities are designed to provide the Company with a targeted margin between the yield earned on investments and the interest rate credited to clients' accounts. The Company does not trade in securities to generate short-term profits for its own account. As part of the Company'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. The Company has interest rate risk and equity market risk. Interest rate risk can result from investing in assets that do not exactly match the cash flow profile of the liabilities they support. The Company manages interest rate risk through the use of a variety of tools that include managing the duration of investments supporting its fixed annuities and insurance products. Additionally, the Company enters into derivative instruments, such as structured derivatives, options, futures and swaps, 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 the Company enters into risk management strategies that may include the use of equity derivative instruments, such as equity options, to mitigate its exposure to volatility in the equity markets.
Quantitative and Qualitative Disclosures About 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 fixed
deferred annuities, fixed insurance and the fixed portion of its variable
annuities and variable insurance contracts, 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
GMWB, GMAB, GMDB and GMIB. Each of these benefits guarantees payouts to the
annuity holder under certain specific conditions regardless of the performance
of the underlying invested assets.
The variable annuity guarantees continue to be managed by utilizing 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 options, swaptions, swaps
and futures to manage risk exposures. The exposures are measured and monitored
daily and adjustments to the hedge portfolio are made as necessary.
The Company has a macro hedge program to provide protection against the
statutory tail scenario risk arising from variable annuity reserves on its
statutory surplus and to cover some of the residual risks not covered by other
hedging activities. The Company assesses this residual risk under a range of
scenarios in creating and executing the macro hedge program. As a means of
economically hedging these risks, the Company may use a combination of futures,
options, swaps and swaptions. Certain of the macro hedge derivatives used
contain settlement provisions linked to both equity returns and interest rates;
the remaining are interest rate contracts or equity contracts. The macro hedge
program could result in additional earnings volatility as changes in the value
of the macro hedge derivatives, which are designed to reduce statutory capital
volatility, may not be closely aligned to changes in the variable annuity
guarantee embedded derivatives.
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, indexed annuities, IUL 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 the above defined hypothetical market movements as ofDecember 31, 2021 : Equity Price Exposure to Pretax Income Before Equity Price Decline 10% Hedge Impact Hedge Impact Net Impact (in millions) Asset-based fees and expenses $ (74) $ - $
(74)
DAC and DSIC amortization(1)(2) (27) -
(27)
Variable annuity riders and structured variable annuities: GMDB and GMIB(2) (6) - (6) GMWB(2) (327) 312 (15) GMAB (18) 18 - Structured variable annuities 358 (326) 32 DAC and DSIC amortization(3) N/A N/A
(2)
Total variable annuity riders and structured variable annuities 7 4 9 Macro hedge program(4) - 175 175 IUL insurance 61 (46) 15 Total $ (33) $ 133$ 98 Interest Rate Exposure to Pretax Income Before Interest Rate Increase 100 Basis Points Hedge Impact Hedge Impact Net Impact (in millions) Asset-based fees and expenses $ (16) $ -$ (16) Variable annuity riders and structured variable annuities: GMWB 1,402 (1,753) (351) GMAB 15 (20) (5) Structured variable annuities (20) 110 90 DAC and DSIC amortization(3) N/A N/A 38 Total variable annuity riders and structured variable annuities 1,397 (1,663) (228) Macro hedge program(4) - (3) (3) Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products 57 - 57 IUL insurance 19 1 20 Total$ 1,457 $ (1,665) $ (170) N/A Not Applicable.
(1) Market impact on DAC and DSIC amortization resulting from lower projected
profits.
(2) In estimating the impact to pretax income on DAC and DSIC amortization and additional insurance benefit reserves, the assumed equity asset growth rates reflect what management would follow in its mean reversion guidelines.
(3) Market impact on DAC and DSIC amortization related to variable annuity
riders and structured variable annuities is modeled net of hedge impact.
(4) The market impact of the macro hedge program is modeled net of any related
impact to DAC and DSIC amortization.
The above results compare to an estimated positive net impact to pretax income of$157 million related to a 10% equity price decline and an estimated negative net impact to pretax income of$253 million related to a 100 basis point increase in interest rates as ofDecember 31, 2020 . The change in equity price exposure as ofDecember 31, 2021 compared to prior year-end was primarily driven by a decrease in the equity hedge position. Net impacts shown in the above table from GMWB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with risk margins incorporated in contractholder behavior assumptions and with discount rates increased to reflect a current market estimate of the Company's risk of nonperformance specific to these liabilities. The Company's hedging is based on its determination of economic risk, which excludes certain items in the liability valuation including the nonperformance spread risk. 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% 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 all strategic actions management might take to increase revenues or reduce expenses in these scenarios. 27
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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.
Asset-Based Fees and Expenses
The Company earns asset-based management fees on its owned separate account assets partially offset by certain expenses. As ofDecember 31, 2021 , the value of these assets was$92.2 billion . This source of revenue is subject to both interest rate and equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. The Company does not currently hedge the interest rate or equity price risk of this exposure. DAC and DSIC Amortization For annuity and UL/VUL products, DAC and DSIC are amortized on the basis of EGPs. EGPs are a proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase current period EGPs, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income.
Variable Annuity Riders
The total contract value of all variable annuities as ofDecember 31, 2021 was$92.3 billion . These contract values include GMWB and GMAB contracts which were$54.3 billion and$2.0 billion , respectively, as ofDecember 31, 2021 . As ofDecember 31, 2021 , reserves for GMWB were net liabilities of$2.3 billion and reserves for GMAB were net assets of$23 million . The GMWB and GMAB reserves include the fair value of embedded derivatives, which fluctuates based on equity, interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. As ofDecember 31, 2021 , the reserve for GMDB and GMIB was a net liability of$41 million .
Equity Price Risk
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 prices 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 the Company's earnings. The core derivative instruments with which the Company hedges the equity price risk of its GMWB and GMAB provisions are longer dated put and call options; these core instruments are supplemented with equity futures and total return swaps. See Note 17 to the Consolidated Financial Statements for further information on the Company's derivative instruments.
Interest Rate Risk
The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at fair value separately from the underlying host variable annuity contract. Changes in the fair value of the GMWB and GMAB liabilities 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 and GMAB liabilities. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call options, futures, interest rate swaps and swaptions. The Company entered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to increase, the Company would have to pay more to the swap counterparty and the fair value of its equity puts would decrease, resulting in a negative impact to the Company's pretax income.
Structured Variable Annuities
Structured variable annuities offer the contract-holder the ability to allocate premiums to either an account that earns fixed interest (fixed account) or an account that credits interest based on the performance of various equity indices (indexed account) subject to a cap, floor, or buffer. Our earnings are based upon the spread between investment income earned and the credits made to the fixed and indexed accounts of the structured variable annuities. As ofDecember 31, 2021 , the Company had$4.4 billion in liabilities related to structured variable annuities.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. The equity price risk for structured variable annuities is evaluated together with the variable annuity riders as part of a hedge program using the derivative instruments consistent with the hedging on variable annuity riders.
Interest Rate Risk
The fair value of the embedded derivative associated with structured variable
annuities is based on a discounted cash flow approach. Changes in interest rates
impact the discounting of the embedded derivative liability. The spread between
the investment income earned and amounts credited to contract-holders is also
affected by changes in interest rates. These interest rate risks associated with
structured variable annuities are not currently hedged.
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Fixed Annuities,
Variable Insurance Contracts
The Company's earnings from fixed deferred annuities, fixed insurance, and the
fixed portion of variable annuities and variable insurance contracts are based
upon the spread between rates earned on assets held and the rates at which
interest is credited to accounts. The Company primarily invests in fixed rate
securities to fund the rate credited to clients. The Company guarantees an
interest rate to the holders of these products. Investment assets and client
liabilities 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 the underlying investments. Therefore, in an
increasing interest rate environment, higher interest rates may be reflected in
crediting rates to clients sooner than in rates earned on invested assets, which
could result in a reduced spread between the two rates, reduced earned income
and a negative impact on pretax income. However, the current low interest rate
environment is resulting in interest rates below the level of some of the
Company's liability guaranteed minimum interest rates ("GMIRs"). Hence, a modest
rise in interest rates would not necessarily result in changes to all the
liability credited rates while projected asset purchases would capture the full
increase in interest rates. This dynamic would result in widening spreads under
a modestly rising rate scenario given the current relationship between the
current level of interest rates and the underlying GMIRs on the business. Of the
$35.7 billion in Policyholder account balances, future policy benefits and
claims as of December 31, 2021 , $23.9 billion is related to liabilities created
by these products. The Company does not hedge this exposure.
As a result of the low interest rate environment, the Company's current
reinvestment yields are generally lower than the current portfolio yield. The
Company expects its portfolio income yields to continue to decline in future
periods if interest rates remain low. The carrying value and weighted average
yield of non-structured fixed maturity securities and commercial mortgage loans
that may generate proceeds to reinvest through 2023 due to prepayment, maturity
or call activity at the option of the issuer, excluding securities with a
make-whole provision, were $1.0 billion and 3.9%, respectively, as of December
31, 2021 . In addition, residential mortgage backed securities, which are subject
to prepayment risk as a result of the low interest rate environment, totaled
$2.3 billion and had a weighted average yield of 2.0% as of December 31, 2021 .
While these amounts represent investments that could be subject to reinvestment
risk, it is also possible that these investments will be used to fund
liabilities or may not be prepaid and will remain invested at their current
yields. In addition to the interest rate environment, the mix of benefit
payments versus product sales as well as the timing and volumes associated with
such mix may impact the Company's investment yield. Furthermore, reinvestment
activities and the associated investment yield may also be impacted by corporate
strategies implemented at management's discretion. The average yield for
investment purchases during the year ended December 31, 2021 was approximately
2.1%.
The reinvestment of proceeds from maturities, calls and prepayments at rates
below the current portfolio yield, which may be below the level of some
liability GMIRs, will have a negative impact to future operating results. To
mitigate the unfavorable impact that the low interest rate environment has on
the Company's spread income, it assesses reinvestment risk in its investment
portfolio and monitors this risk in accordance with its asset/liability
management framework. In addition, the Company may reduce the crediting rates on
its fixed products when warranted, subject to guaranteed minimums.
The following table presents the account values of fixed deferred annuities,
fixed insurance, and the fixed portion of variable annuities and variable
insurance contracts by range of GMIRs and the range of the difference between
rates credited to policyholders and contractholders as of December 31, 2021 and
the respective guaranteed minimums, as well as the percentage of account values
subject to rate reset in the time period indicated. Rates are reset at the
Company's discretion, subject to guaranteed minimums.
Account Values with Crediting Rates
1-49 bps above 50-99 bps above 100-150 bps above
At Guaranteed Minimum Guaranteed Minimum Guaranteed Minimum Guaranteed Minimum Total
(in billions, except percentages)
Range of Guaranteed Minimum Crediting
Rates
1% - 1.99% $ 1.3 $ 0.1 $ 0.1 $ 0.1 $ 1.6
2% - 2.99% 0.5 - - - 0.5
3% - 3.99% 7.4 - - - 7.4
4% - 5.00% 5.5 - - - 5.5
Total $ 14.7 $ 0.1 $ 0.1 $ 0.1 $ 15.0
Percentage of Account Values That Reset
In:
Next 12 months (1) 99 % 85 % 80 % 34 % 98 %
> 12 months to 24 months (2) 1 - 10 66 1
> 24 months (2) - 15 10 - 1
Total 100 % 100 % 100 % 100 % 100 %
(1) Includes contracts with annual discretionary crediting rate resets and
contracts with 12 or less months until the crediting rate becomes discretionary
on an annual basis.
(2) Includes contracts with more than 12 months remaining until the crediting
rate becomes an annual discretionary rate.
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Equity Indexed Annuities
The Company's equity indexed annuity ("EIA") 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. 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. As of December 31, 2021 , the Company had $19 million in liabilities
related to EIAs. The Company discontinued new sales of EIAs in 2007.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. To hedge this exposure, the Company purchases futures which generate returns to replicate what the Company must credit to client accounts.
Interest Rate Risk
Most of the proceeds received from EIAs are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. The Company 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. This risk is not currently hedged and was immaterial as ofDecember 31, 2021 . Indexed Universal Life IUL insurance is similar to UL in many regards, although the rate of credited interest above the minimum guarantee for funds allocated to an indexed account is linked to the performance of the specified index for the indexed account (subject to stated account parameters, which include a cap and floor, or a spread and floor). The Company offers an S&P 500® Index account option and a blended multi-index account option comprised of the S&P 500 Index, the MSCI® EAFE Index and the MSCI EM Index. Both options offer two crediting durations, one-year and two-year. The policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. As ofDecember 31, 2021 , the Company had$2.4 billion in liabilities related to the indexed accounts of IUL, with the vast majority in the S&P 500® Index account option.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. Most of the proceeds received from IUL insurance are invested in fixed income securities. To hedge the equity exposure, a portion of the investment earnings received from the fixed income securities is used to purchase call spreads which generate returns to replicate what the Company must credit to client accounts.
Interest Rate Risk
As mentioned above, most of the proceeds received from IUL insurance are invested in fixed income securities with the return on those investments intended to fund the purchase of call spreads and options. There are two risks relating to interest rates. First, the Company has the risk that investment returns are such that it does not have enough investment income to purchase the needed call spreads. Second, in the event the policy is surrendered, the Company pays out a book value surrender amount and there is a risk that it will incur a loss upon having to sell the fixed income securities backing the liability (if interest rates have risen). This risk is not currently hedged.
Credit Risk
The Company is exposed to credit risk within its investment portfolio, including
its loan portfolio, and through its derivative and reinsurance activities.
Credit risk relates to the uncertainty of an obligor's continued ability to make
timely payments in accordance with the contractual terms of the financial
instrument or contract. The Company considers its total potential credit
exposure to each counterparty and its affiliates to ensure compliance with
pre-established credit guidelines at the time it enters into a transaction which
would potentially increase the Company's credit risk. These guidelines and
oversight of credit risk are managed through a comprehensive enterprise risk
management program that includes members of senior management.
The Company manages the risk of credit-related losses in the event of
nonperformance by counterparties by applying disciplined fundamental credit
analysis and underwriting standards, prudently limiting exposures to
lower-quality, higher-yielding investments, and diversifying exposures by
issuer, industry, region and underlying investment type. The Company remains
exposed to occasional adverse cyclical economic downturns during which default
rates may be significantly higher than the long-term historical average used in
pricing.
The Company manages its credit risk related to over-the-counter derivatives by
entering into transactions with creditworthy counterparties, maintaining
collateral arrangements and through the use of master netting arrangements that
provide for a single net payment to be made by one counterparty to another at
each due date and upon termination. Generally, the Company's current credit
exposure on over-the-counter derivative contracts is limited to a derivative
counterparty's net positive fair value of derivative contracts after taking into
consideration the existence of netting arrangements and any collateral received.
This exposure is monitored and managed to an acceptable threshold level.
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The counterparty risk for centrally cleared over-the-counter derivatives is transferred to a central clearing party through contract novation. Because the central clearing party monitors open positions and adjusts collateral requirements daily, the Company has minimal credit exposure from such derivative instruments. Exchange-traded derivatives are effected through regulated exchanges that require contract standardization and initial margin to transact through the exchange. Because exchange-traded futures are marked to market and generally cash settled on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. Other exchange-traded derivatives would be exposed to nonperformance by counterparties for amounts in excess of initial margin requirements only if the exchange is unable to fulfill the contract. The Company manages its credit risk related to reinsurance treaties by evaluating the financial condition of reinsurance counterparties prior to entering into new reinsurance treaties. In addition, the Company regularly evaluates their financial strength during the terms of the treaties. As ofDecember 31, 2021 , the Company's largest reinsurance credit risks are related to coinsurance treaties with Commonwealth and with life insurance subsidiaries of Genworth Financial, Inc. See Note 7 and Note 9 to the Consolidated Financial Statements for additional information on reinsurance.
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; •statements of the Company's position, future performance and ability to pursue business strategy relative to the spread and impact of the COVID-19 pandemic and the related market, economic, client, governmental and healthcare system response;
•statements about the expected trend in the shift to lower-risk products,
including the exit from variable annuities with living benefit riders and the
discontinuance of new sales of universal life insurance with secondary
guarantees;
•other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance ofthe 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 track," "project," "continue," "able to remain," "resume," "deliver," "develop," "evolve," "drive," "enable," "flexibility," "scenario," "case" 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:
•the impacts on the Company's business of the COVID-19 pandemic and the related
economic, client, governmental and healthcare system responses;
•market fluctuations and general economic and political factors, including
volatility in the
volatility in the markets for the Company's products;
•changes in interest rates and periods of low interest rates;
•adverse capital and credit market conditions or any downgrade in the Company's
credit ratings;
•effects of competition and the Company's larger competitors' economies of
scale;
•declines in the Company's investment management performance;
•the Company's and its affiliates' ability to compete in attracting and
retaining talent, including AFS attracting and retaining financial advisors;
•impairment, negative performance or default by financial institutions or other
counterparties;
•poor performance of the Company's variable products;
•changes in valuation of securities and investments included in the Company's
assets;
•effects of the elimination of LIBOR on, and value of, securities and other
assets and liabilities tied to LIBOR;
•the determination of the amount of allowances taken on loans and investments;
•the illiquidity of the Company's investments;
•failures by other insurers that lead to higher assessments the Company owes to
state insurance guaranty funds;
•failures or defaults by counterparties to the Company's reinsurance
arrangements;
•inadequate reserves for future policy benefits and claims or for future
redemptions and maturities;
•deviations from the Company's assumptions regarding morbidity, mortality and
persistency affecting the Company's profitability;
•changes to the Company's or its affiliates' reputation arising from employee or
agent misconduct or otherwise;
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•direct or indirect effects of or responses to climate change;
•interruptions or other failures in the Company's operating systems and
networks, including errors or failures caused by third-party service providers,
interference or third-party attacks;
•interruptions or other errors in the Company's telecommunications or data
processing systems;
• identification and mitigation of risk exposure in market environments, new
products, vendors and other types of risk;
• occurrence of natural or man-made disasters and catastrophes; • legal and regulatory actions brought against the Company;
• changes to laws and regulations that govern operation of the Company's
business;
• changes in corporate tax laws and regulations and interpretations and
determinations of tax laws impacting the Company's products;
• protection of the Company's intellectual property and claims the Company
infringes the intellectual property of others; and
•changes in and the adoption of new accounting standards.
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 in Part I, Item 1A in the Company's 2021 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Items required under this section are included in Item 7 in this Annual Report
on Form 10-K - "Management's Narrative Analysis - Quantitative and Qualitative
Disclosures about Market Risk."
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Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 238)
34 Consolidated Balance Sheets -December 31, 2021 and 2020 37
Consolidated Statements of Income - Years ended
38
Consolidated Statements of Comprehensive Income - Years ended
2019
38
Consolidated Statements of Shareholder's Equity - Years ended
2019
39
Consolidated Statements of Cash Flows - Years ended
40
Notes to Consolidated Financial Statements 42
1. Nature of Business and Basis of Presentation 42
2. Summary of Significant Accounting Policies 42
3. Recent Accounting Pronouncements 50
4. Revenue from Contracts with Customers 52
5. Variable Interest Entities 53
6. Investments 57
7. Financing Receivables 60
8. Deferred Acquisition Costs and Deferred Sales Inducement Costs 63
9. Reinsurance 64
Policyholder Account Balances, Future Policy Benefits and
Claims and Separate
10. Account Liabilities 65
11. Variable Annuity and Insurance Guarantees 67
12. Debt 69
13. Fair Values of Assets and Liabilities 70
14. Related Party Transactions 80
15. Regulatory Requirements 81
16. Offsetting Assets and Liabilities 82
17. Derivatives and Hedging Activities 83
18. Shareholder's Equity 87
19. Income Taxes 88
20. Commitments, Guarantees and Contingencies 90
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.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofRiverSource Life Insurance Company and its subsidiaries (the "Company") as ofDecember 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of shareholder's equity and of cash flows for each of the three years in the period endedDecember 31, 2021 , including the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2021 in conformity with accounting principles generally accepted inthe United States of America .
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of the reserves for long term care policies
As described in Notes 2 and 10 to the consolidated financial statements, the total reserves for long term care policies was$5,664 million as ofDecember 31, 2021 , which is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. Liabilities for estimates of benefits that will become payable on future claims on long term care policies are based on a gross premium valuation reflecting management's current best estimate assumptions. Management utilizes best estimate assumptions as of the date the policy is issued with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, management performs premium deficiency tests using current best estimate assumptions annually in the third quarter of each year unless management identifies a material deviation over the course of quarterly monitoring. The best estimate assumptions include expected premium rate increases, benefit reductions, morbidity rates, policy persistency and interest rates earned on assets supporting the liability. If a premium deficiency is recognized, the assumptions as of the date of the loss recognition are locked in and used in subsequent periods, and it is recorded as a component of benefits, claims, losses and settlement expenses. As disclosed by management, this review did not result in the identification of a premium deficiency for 2021. The principal considerations for our determination that performing procedures relating to the valuation of the reserves for long term care policies is a critical audit matter are the significant judgment by management when developing the current best estimate assumptions used in the premium deficiency test on the reserves for long term care policies, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management's current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates, and interest rates earned on assets supporting the liability. Also, the audit effort involved the use of professionals with specialized skill and knowledge. 34
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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company's premium deficiency test on the reserves for long term care policies, including controls over management's development of the current best estimate assumptions. These procedures also included, among others, evaluating and testing management's process for performing the premium deficiency testing on the reserves for long term care policies, including testing that assumptions are accurately reflected in the valuation models and testing the completeness and accuracy of underlying data used by management. Evaluating and testing management's process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates, and interest rates earned on assets supporting the liability based on industry knowledge and data as well as historical Company data and experience, and (ii) evaluating the appropriateness of management's valuation models.
Valuation of the embedded derivatives in certain variable annuity riders
As described in Notes 2, 10, 11, and 13 to the consolidated financial statements, management values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. As there is no active market for the transfer of these embedded derivatives, such internal valuation models estimate fair value by discounting expected cash flows. As ofDecember 31, 2021 , the net embedded derivative liability in certain variable annuity riders was$1,486 million , and is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. Management's discounted cash flow model for estimating fair value includes observable capital market assumptions and incorporates significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk, all of which management believes a market participant would expect. The principal considerations for our determination that performing procedures relating to the valuation of the embedded derivatives in certain variable annuity riders is a critical audit matter are the significant judgment by management to estimate the fair value of the embedded derivatives in certain variable annuity riders, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk. Also, the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls related to the Company's estimate of the fair value of embedded derivatives in certain variable annuity riders, including controls over the significant unobservable inputs. These procedures also included, among others, evaluating and testing management's process for developing the fair value estimate. Testing management's process included evaluating the reasonableness of the significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk and testing the completeness and accuracy of underlying data used by management in the development of the significant unobservable inputs. Professionals with specialized skill and knowledge were used to assist in (i) evaluating the reasonableness of certain significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk based on industry knowledge and data as well as historical Company data and experience, and (ii) evaluating the appropriateness of management's models.
Valuation of certain guarantees on variable annuity and certain life insurance
policies accounted for as insurance liabilities
As described in Notes 2, 10, and 11 to the consolidated financial statements,
the Company issues universal life, variable universal life and variable annuity
policies that have product features that are accounted for as insurance
liabilities. As disclosed by management, the liability for these policies, which
is included in policyholder account balances, future policy benefits and claims
on the consolidated balance sheet, is determined using actuarial models to
estimate the present value of the projected benefits in excess of account value
and recognizing the excess over the estimated life based on expected
assessments. Significant assumptions used by management in projecting the
present value of future benefits and assessments include customer asset value
growth rates, mortality, persistency, and investment margins, and additionally
for variable annuity policies, benefit utilization.
The principal considerations for our determination that performing procedures
relating to the valuation of certain guarantees on variable annuity and certain
life insurance policies accounted for as insurance liabilities is a critical
audit matter are the significant judgment by management when developing the
estimate of certain guarantees on variable annuity and certain life insurance
policies accounted for as insurance liabilities, which in turn led to a high
degree of auditor judgment, subjectivity and effort in performing procedures and
evaluating management's significant assumptions related to customer asset value
growth rates, persistency, investment margins, and, for variable annuity
policies, benefit utilization. Also, the audit effort involved the use of
professionals with specialized skill and knowledge.
35
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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company's valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, including controls over management's development of the significant assumptions. These procedures also included, among others, evaluating and testing management's process for developing the estimate of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, testing the completeness and accuracy of underlying data used by management and testing that assumptions are accurately reflected in the models. Evaluating and testing management's process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the significant assumptions related to customer asset value growth rates, persistency, benefit utilization and investment margins based on industry knowledge and data as well as historical Company data and experience, and (ii) evaluating the appropriateness of management's models. /s/PricewaterhouseCoopers LLP Minneapolis, Minnesota February 25, 2022
We have served as the Company's auditor since 2010.
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Consolidated Balance Sheets
December 31,
2021 2020
(in millions, except share
amounts)
Assets
Investments:
Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2021,
Mortgage loans, at amortized cost (allowance for credit losses: 2021,
2020,
1,788 2,574 Policy loans 834 846
Other investments (allowance for credit losses: 2021, nil; 2020,
230 701 Total investments 19,091 26,976 Investments of consolidated investment entities, at fair value 2,184 1,918 Cash and cash equivalents 3,200 3,191 Cash of consolidated investment entities, at fair value 121 94
Reinsurance recoverables (allowance for credit losses: 2021,
4,529 3,409 Receivables 8,148 1,613 Receivables of consolidated investment entities, at fair value 17 16 Accrued investment income 124 172 Deferred acquisition costs 2,757 2,508 Other assets 7,084 6,969 Other assets of consolidated investment entities, at fair value 3 2 Separate account assets 92,238 87,556 Total assets
Liabilities and Shareholder's Equity Liabilities: Policyholder account balances, future policy benefits and claims$ 35,744 $ 33,986 Short-term borrowings 200 200 Debt of consolidated investment entities, at fair value 2,164 1,913 Long-term debt 500 500 Other liabilities 6,628 6,887
Other liabilities of consolidated investment entities, at fair value
137 69 Separate account liabilities 92,238 87,556 Total liabilities 137,611 131,111
Shareholder's equity:
Common stock,
3 Additional paid-in capital 2,466 2,466 Retained earnings (deficit) (912) (76) Accumulated other comprehensive income, net of tax 328 920 Total shareholder's equity 1,885 3,313 Total liabilities and shareholder's equity
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Income
Years Ended December 31,
2021 2020 2019
(in millions)
Revenues
Premiums $ (871) $ 341 $ 397
Net investment income 827 869 917
Policy and contract charges 2,304 2,094 2,042
Other revenues 616 482 464
Net realized investment gains (losses) 595 (10) (2)
Total revenues 3,471 3,776 3,818
Benefits and expenses
Benefits, claims, losses and settlement expenses 715 1,805 1,804
Interest credited to fixed accounts 600 644 669
Amortization of deferred acquisition costs 112 264 133
Interest and debt expense 105 5 -
Other insurance and operating expenses 738 665 685
Total benefits and expenses 2,270 3,383 3,291
Pretax income (loss) 1,201 393 527
Income tax provision (benefit) 137 (45) (60)
Net income $ 1,064 $ 438 $ 587
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2021 2020 2019
(in millions)
Net income $ 1,064 $ 438 $ 587
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities (592)
346 529
Total other comprehensive income (loss), net of tax (592)
346 529 Total comprehensive income$ 472 $ 784 $ 1,116
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Shareholder's Equity
Additional Retained Accumulated
Common Paid-In Earnings Other Comprehensive
Shares Capital (Deficit) Income (Loss) Total
(in millions)
Balances at January 1, 2019 3 2,466 1,058 45 3,572
Cumulative effect of adoption of premium
amortization on purchased callable debt
securities guidance - - (2) - (2)
Net income - - 587 587
Other comprehensive income (loss), net of tax - - - 529 529
Cash dividends to Ameriprise Financial, Inc. - - (1,350) - (1,350)
Balances at December 31, 2019 3 2,466 293 574 3,336
Cumulative effect of adoption of current
expected credit losses guidance - - (7) - (7)
Net income - - 438 - 438
Other comprehensive income (loss), net of tax - - - 346 346
Cash dividends to Ameriprise Financial, Inc. - - (800) - (800)
Balances at December 31, 2020 3 2,466 (76) 920 $ 3,313
Net income - - 1,064 - 1,064
Other comprehensive income (loss), net of tax - - - (592) (592)
Cash dividends to Ameriprise Financial, Inc. - - (1,900) - (1,900)
Balances at December 31, 2021 $ 3 $ 2,466 $ (912) $ 328 $ 1,885
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows
Years Ended December 31,
2021 2020 2019
(in millions)
Cash Flows from Operating Activities
Net income $ 1,064 $ 438 $ 587
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, amortization and accretion, net (98) (22) (22)
Deferred income tax (benefit) expense (40) (278) (278)
Contractholder and policyholder charges, non-cash (390) (385) (380)
Loss from equity method investments 72 73 99
Net realized investment (gains) losses (611) (12) (15)
Impairments and provision for loan losses (3) 22 17
Net losses (gains) of consolidated investment entities (20) (2) -
Changes in operating assets and liabilities:
Deferred acquisition costs (155) 48 (106)
Policyholder account balances, future policy benefits and claims, net
2,478 3,441 751 Derivatives, net of collateral (575) (134) 333 Reinsurance recoverables 29 (166) (90) Other receivables 114 62 19 Accrued investment income 10 (3) 26 Current income tax, net (321) 378 2
Other operating assets and liabilities of consolidated investment
entities
20 - - Other, net 4 79 23 Net cash provided by (used in) operating activities 1,578 3,539 966 Cash Flows from Investing Activities Available-for-Sale securities: Proceeds from sales 555 102 232 Maturities, sinking fund payments and calls 2,804 2,813 2,250 Purchases (3,677) (4,069) (1,772) Proceeds from sales, maturities and repayments of mortgage loans 272 207 223 Funding of mortgage loans (215) (135) (331) Proceeds from sales and collections of other investments 93 123 129 Purchase of other investments (32) (184) (164)
Proceeds from sales, maturities and repayments of investments by
consolidated investment entities
1,047 46 - Purchase of investments by consolidated investment entities (1,603) (57) - Purchase of equipment and software (13) (10) (10) Change in policy loans, net 12 21 (6) Cash paid for deposit receivables (377) (4) (349) Cash received for deposit receivables 254 93 98 Advance on line of credit to Ameriprise Financial, Inc. (1) (702) - Repayment from Ameriprise Financial, Inc. on line of credit 1 702 - Cash paid for written options with deferred premiums (552) (338) (243) Cash received from written options with deferred premiums 106 133 170
Net cash impact of consolidating consolidated investment entities
- 83 - Other, net (39) 2 42 Net cash provided by (used in) investing activities (1,365) (1,174) 269
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows (Continued)
Years Ended
2021 2020 2019
(in millions)
Cash Flows from Financing Activities
Policyholder account balances:
Deposits and other additions $ 1,553 $ 1,649 $ 2,152
Net transfers from (to) separate accounts (273) (125) (86)
Surrenders and other benefits (1,365) (1,357) (1,728)
Proceeds from line of credit with Ameriprise Financial, Inc. 6 186 73
Repayments to Ameriprise Financial, Inc. on line of credit (6) (236) (23)
Proceeds from long-term debt with Ameriprise Financial, Inc. - 500 -
Cash received from purchased options with deferred premiums 1,350 40 206
Cash paid for purchased options with deferred premiums (156) (211) (289)
Borrowings by consolidated investment entities 1,756 - -
Repayments of debt by consolidated investment entities (1,142) (1) -
Cash dividends to Ameriprise Financial, Inc. (1,900) (800) (1,350)
Net cash provided by (used in) financing activities (177) (355) (1,045)
Net increase (decrease) in cash and cash equivalents 36 2,010 190
Cash and cash equivalents at beginning of period 3,285 1,275 1,085
Cash and cash equivalents at end of period $ 3,321 $ 3,285 $ 1,275
Supplemental Disclosures:
Income taxes paid (received), net $ 496 $ (143) $ 215
Interest paid on borrowings - 2 5
Interest paid by consolidated investment entities 90 - -
Non-cash investing activity:
Partnership commitments not yet remitted - - 4
Exchange of an investment that resulted in a realized gain and an
increase to amortized cost
17 - -
Investments transferred in connection with fixed annuity reinsurance
transaction
7,513 - 1,265
See Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
1. Nature of Business and Basis of Presentation
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 inMinnesota and holds Certificates of Authority inAmerican Samoa , theDistrict of Columbia and all states exceptNew York .RiverSource Life Insurance Company issues insurance and annuity products.
•RiverSource Life of NY is domiciled and holds a Certificate of Authority in
York
RiverSource Life Insurance Company also wholly ownsRiverSource Tax Advantaged Investments, Inc. ("RTA")andColumbia Cent CLO Advisors, LLC ("Columbia Cent"). RTA is a stock company domiciled inDelaware and is a limited partner in affordable housing partnership investments. Columbia Cent provides asset management services to collateralized loan obligations ("CLOs"). The accompanying Consolidated Financial Statements include the accounts ofRiverSource Life Insurance Company and companies in which it directly or indirectly has a controlling financial interest and variable interest entities ("VIEs") in which it is the primary beneficiary (collectively, the "Company"). All intercompany transactions and balances have been eliminated in consolidation.
The accompanying Consolidated Financial Statements are prepared in accordance
with
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities as described in Note 15.
During the third quarter of 2021,RiverSource Life Insurance Company closed on a transaction withGlobal Atlantic Financial Group's subsidiaryCommonwealth Annuity and Life Insurance Company ("Commonwealth"), effectiveJuly 1, 2021 , to reinsure approximately$7.0 billion of fixed deferred and immediate annuity policies. As part of the transaction,RiverSource Life Insurance Company transferred$7.8 billion in consideration primarily consisting of Available-for-Sale securities, commercial mortgage loans, syndicated loans and cash. The transaction resulted in a net realized gain of approximately$532 million on investments sold. A similar previously announced transaction with RiverSource Life ofNew York did not receive regulatory approval in time to close bySeptember 30, 2021 and the transaction was terminated by the parties. The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. Other than disclosed in Note 14, no other subsequent events or transactions requiring recognition or disclosure were identified. The Company's principal products are variable annuities, structured variable annuities, universal life ("UL") insurance, including indexed universal life ("IUL") and variable universal life ("VUL") insurance, which are issued primarily to individuals. Waiver of premium and accidental death benefit riders are generally available with UL products, in addition to other benefit riders. Variable annuity contract purchasers can choose to add optional benefit riders to their contracts, such as guaranteed minimum death benefit ("GMDB"), guaranteed minimum withdrawal benefit ("GMWB") and guaranteed minimum accumulation benefit ("GMAB") riders. In 2020, the Company began offering structured variable annuities which give contractholders the option to allocate a portion of their account value to an indexed account with the contractholder's rate of return, which may be positive or negative, tied to selected indices. During 2021, the Company made the decision to discontinue new sales of substantially all of its variable annuities with living benefit guarantees at the end of 2021, with a full exit by mid-2022. As the Company continues to optimize its risk profile and shift its business mix to lower risk offerings, it has discontinued new sales of its UL insurance with secondary guarantees and its single-pay fixed universal life with a long term care rider products at the end of 2021.
The Company also offers immediate annuities, traditional life insurance and
disability income ("DI") insurance. In 2020, the Company discontinued sales of
fixed deferred annuities.
The Company's business is sold through the advisor network ofAmeriprise Financial Services, LLC ("AFS"), 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 the Company.
2. Summary of Significant Accounting Policies
The Company adopted accounting standard, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments, onJanuary 1, 2020 . The significant accounting policies forAvailable-for-Sale Securities , Financing Receivables, and Reinsurance were updated as a result of adopting the new accounting standard. 42
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Principles of Consolidation
A VIE is an entity that either has equity investors that lack certain essential
characteristics of a controlling financial interest (including substantive
voting rights, the obligation to absorb the entity's losses, or the rights
to receive the entity's returns) or has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Voting interest entities ("VOEs") are those entities that do not qualify as a
VIE. The Company consolidates VOEs in which it holds a greater than 50% voting
interest. The Company generally accounts for entities using the equity method
when it holds a greater than 20% but less than 50% voting interest or when the
Company exercises significant influence over the entity. All other investments
that are not reported at fair value as trading or Available-for-Sale securities
are accounted for using the measurement alternative method when the Company owns
less than a 20% voting interest and does not exercise significant influence.
Under the measurement alternative, the investment is recorded at the cost basis,
less impairments, if any, plus or minus observable price changes of identical or
similar investments of the same issuer.
A VIE is consolidated by the reporting entity that determines it has both:
•the power to direct the activities of the VIE that most significantly impact
the VIE's economic performance; and
•the obligation to absorb potentially significant losses or the right to receive
potentially significant benefits to the VIE.
All VIEs are assessed for consolidation under this framework. When evaluating entities for consolidation, the Company considers its contractual rights in determining whether it has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. In determining whether the Company has this power, it considers whether it is acting in a role that enables it to direct the activities that most significantly impact the economic performance of an entity or if it is acting in an agent role. In determining whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers an analysis of its rights to receive benefits such as investment returns and its obligation to absorb losses associated with any investment in the VIE in conjunction with other qualitative factors. Management and incentive fees that are at market and commensurate with the level of services provided, and where the Company does not hold other interests in the VIE that would absorb more than an insignificant amount of the VIE's expected losses or receive more than an insignificant amount of the VIE's expected residual returns, are not considered a variable interest and are excluded from the analysis. The consolidation guidance has a scope exception for reporting entities with interests in registered money market funds which do not have an explicit support agreement.
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 the recognition of credit losses or impairments, deferred
acquisition costs ("DAC") and the corresponding recognition of DAC amortization,
valuation of derivative instruments and hedging activities, litigation reserves,
future policy benefits and claims reserves and income taxes and the recognition
of deferred tax assets and liabilities. These accounting estimates reflect the
best judgment of management and actual results could differ.
Investments
Available-for-Sale securities are carried at fair value with unrealized gains
(losses) recorded in accumulated other comprehensive income ("AOCI"), net of
impacts to DAC, deferred sales inducement costs ("DSIC"), unearned revenue,
benefit reserves, reinsurance recoverables and income taxes. Gains and losses
are recognized on a trade date basis in the Consolidated Statements of Income
upon disposition of the securities.
Available-for-Sale securities are impaired when the fair value of an investment
is less than its amortized cost. When an Available-for-Sale security is
impaired, the Company first assesses whether or not: (i) it has the intent to
sell the security (made a decision to sell) or (ii) it is more likely than not
that the Company will be required to sell the security before its anticipated
recovery. If either of these conditions exist, the Company recognizes an
impairment by reducing the book value of the security for the difference between
the investment's amortized cost and its fair value with a corresponding charge
to earnings. Subsequent increases in the fair value of Available-for-Sale
securities that occur in periods after a write-down has occurred are recorded as
unrealized gains in other comprehensive income ("OCI"), while subsequent
decreases in fair value would continue to be recorded as reductions of book
value with a charge to earnings.
For securities that do not meet the above criteria, the Company determines
whether the decrease in fair value is due to a credit loss or due to other
factors. The amount of impairment due to credit-related factors, if any, is
recognized as an allowance for credit losses with a related charge to net
realized investment gains (losses). The allowance for credit losses is limited
to the amount by which the security's amortized cost basis exceeds its fair
value. The amount of the impairment related to other factors is recognized in
OCI.
Factors the Company considers in determining whether declines in the fair value
of fixed maturity securities are due to credit-related factors include: (i) the
extent to which the market value is below amortized cost; (ii) fundamental
analysis of the liquidity, business
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prospects and overall financial condition of the issuer; and (iii) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors. If through subsequent evaluation there is a sustained increase in cash flows expected, both the allowance and related charge to earnings may be reversed to reflect the increase in expected principal and interest payments. However, for Available-for-Sale securities that recognized an impairment prior toJanuary 1, 2020 by reducing the book value of the security, the difference between the new amortized cost basis and the improved cash flows expected to be collected is accreted as interest income. In order to determine the amount of the credit loss component for corporate debt securities, a best estimate of the present value of cash flows expected to be collected discounted at the security's effective interest rate is compared to the amortized cost basis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and the Company's position in the debtor's overall capital structure. When assessing potential credit-related impairments for structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities and asset backed securities), the Company also considers credit-related factors such as overall deal structure and its position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections. Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for Available-for-Sale securities. Accrued interest on Available-for-Sale securities is recorded as earned in Accrued investment income. Available-for-Sale securities are placed on nonaccrual status when the accrued balance becomes 90 days past due or earlier based on management's evaluation of the facts and circumstances of each security under review. All previously accrued interest is reversed through Net investment income.
Other Investments
Other investments primarily reflect the Company's interests in affordable
housing partnerships and syndicated loans. Affordable housing partnerships are
accounted for under the equity method.
Financing Receivables
Financing receivables are comprised of commercial loans, policy loans, and
deposit receivables.
Commercial Loans
Commercial loans include commercial mortgage loans and syndicated loans and are recorded at amortized cost less the allowance for loan losses. Commercial mortgage loans are recorded within Mortgage loans and syndicated loans are recorded within Other investments. Commercial mortgage loans are loans on commercial properties that are originated by the Company. Syndicated loans represent the Company's investment in loan syndications originated by unrelated third parties. Interest income is accrued as earned on the unpaid principal balances of the loans. Interest income recognized on commercial mortgage loans and syndicated loans is recorded in Net investment income.
Policy Loans
Policy loans do not exceed the cash surrender value at origination. As there is minimal risk of loss related to policy loans, there is no allowance for credit losses. Interest income is accrued as earned on the unpaid principal balances of the loans. Interest income recognized on policy loans is recorded in Net investment income. Deposit Receivables For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability related to insurance risk in accordance with applicable accounting standards. If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits made and any related embedded derivatives are included in Receivables. As amounts are received, consistent with the underlying contracts, deposit receivables are adjusted. Deposit receivables are accreted using the interest method and the accretion is reported in Other revenues.
See Note 7 for additional information on financing receivables.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected over the asset's expected life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Prior toJanuary 1, 2020 , the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset. Estimates of expected credit losses consider both historical charge-off and recovery experience as well as current economic conditions and management's expectation of future charge-off and recovery levels. Expected losses related to risks other than credit risk are excluded from the allowance for credit losses. The allowance for credit losses is measured and recorded upon initial recognition of the loan, regardless of whether it is originated or purchased. The methods and information used to develop the allowance for credit losses for each class of financing receivable are discussed below. 44
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Commercial Loans
The allowance for credit losses for commercial mortgage loans and syndicated
loans utilizes a probability of default and loss severity approach to estimate
lifetime expected credit losses. Actual historical default and loss severity
data for each type of commercial loan is adjusted for current conditions and
reasonable and supportable forecasts of future economic conditions to develop
the probability of default and loss severity assumptions that are applied to the
amortized cost basis of the loans over the expected life of each portfolio. The
allowance for credit losses on commercial mortgage loans and syndicated loans is
recorded through provisions charged to Net realized investment gains (losses)
and is reduced/increased by net charge-offs/recoveries.
Management determines the adequacy of the allowance for credit losses based on
the overall loan portfolio composition, recent and historical loss experience,
and other pertinent factors, including when applicable, internal risk ratings,
loan-to-value ("LTV") ratios and occupancy rates, along with reasonable and
supportable forecasts of economic and market conditions. This evaluation is
inherently subjective as it requires estimates, which may be susceptible to
significant change. While the Company may attribute portions of the allowance to
specific loan pools as part of the allowance estimation process, the entire
allowance is available to absorb losses expected over the life of the loan
portfolio.
Deposit receivables
The allowance for credit losses is calculated on an individual reinsurer basis. Deposit receivables are collateralized by underlying trust arrangements. Management evaluates the terms of the reinsurance and trust agreements, the nature of the underlying assets, and the potential for changes in the collateral value when considering the need for an allowance for credit losses.
Nonaccrual Loans
Commercial mortgage loans and syndicated loans are placed on nonaccrual status when either the collection of interest or principal has become 90 days past due or is otherwise considered doubtful of collection. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Interest payments received on loans on nonaccrual status are generally applied to principal unless the remaining principal balance has been determined to be fully collectible. Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for commercial mortgage loans and syndicated loans.
Restructured Loans
A loan is classified as a restructured loan when the Company makes certain
concessionary modifications to contractual terms for borrowers experiencing
financial difficulties. When the interest rate, minimum payments, and/or due
dates have been modified in an attempt to make the loan more affordable to a
borrower experiencing financial difficulties, the modification is considered a
troubled debt restructuring. Modifications to loan terms do not automatically
result in troubled debt restructurings ("TDRs"). Per the Interagency Statement
on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus, modifications made on a good faith basis
in response to the coronavirus disease 2019 ("COVID-19") pandemic to borrowers
who were not more than 30 days past due as of December 31, 2019 , such as payment
deferrals, extensions of repayment terms, fee waivers, or delays in payment that
are not significant to the unpaid principal value of the loan, are not
considered TDRs. Generally, performance prior to the restructuring or
significant events that coincide with the restructuring are considered in
assessing whether the borrower can meet the new terms which may result in the
loan being returned to accrual status at the time of the restructuring or after
a performance period. If the borrower's ability to meet the revised payment
schedule is not reasonably assured, the loan remains on nonaccrual status.
Charge-off and Foreclosure
Charge-offs are recorded when the Company concludes that all or a portion of the commercial mortgage loan or syndicated loan is uncollectible. Factors used by the Company to determine whether all amounts due on commercial mortgage loans will be collected, include but are not limited to, the financial condition of the borrower, performance of the underlying properties, collateral and/or guarantees on the loan, and the borrower's estimated future ability to pay based on property type and geographic location. Factors used by the Company to determine whether all amounts due on syndicated loans will be collected, include but are not limited to the borrower's financial condition, industry outlook, and internal risk ratings based on rating agency data and internal analyst expectations. If it is determined that foreclosure on a commercial mortgage loan is probable and the fair value is less than the current loan balance, expected credit losses are measured as the difference between the amortized cost basis of the asset and fair value less estimated selling costs. Upon foreclosure, the commercial mortgage loan and related allowance are reversed, and the foreclosed property is recorded as real estate owned within Other assets.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original or remaining
maturities at the time of purchase of 90 days or less.
Reinsurance
The Company cedes insurance risk to other insurers under reinsurance agreements.
Reinsurance premiums paid and benefits received are accounted for consistently
with the basis used in accounting for the policies from which risk is reinsured
and consistently with the terms of the reinsurance contracts. Reinsurance
premiums for traditional life,
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long term care ("LTC") , DI and life contingent immediate annuities, net of the
change in any prepaid reinsurance asset, are reported as a reduction of
Premiums. UL and VUL reinsurance premiums are reported as a reduction of Policy
and contract charges. In addition, for UL and VUL insurance policies, the net
cost of reinsurance ceded, which represents the discounted amount of the
expected cash flows between the reinsurer and the Company, is classified as an
asset or contra asset and amortized over the estimated life of the policies in
proportion to the estimated gross profits ("EGPs") and is subject to
retrospective adjustment in a manner similar to retrospective adjustment of DAC.
The assumptions used to project the expected cash flows are consistent with
those used for DAC valuation for the same contracts. Changes in the net cost of
reinsurance are reflected as a component of Policy and contract charges.
Reinsurance recoveries are reported as components of Benefits, claims, losses
and settlement expenses.
Insurance liabilities are reported before the effects of reinsurance.
Policyholder account balances, future policy benefits and claims recoverable
under reinsurance contracts are recorded within Reinsurance recoverables, net of
the allowance for credit losses. The Company evaluates the financial condition
of its reinsurers prior to entering into new reinsurance contracts and on a
periodic basis during the contract term. The allowance for credit losses related
to reinsurance recoverable is based on applying observable industry data
including insurer ratings, default and loss severity data to the Company's
reinsurance recoverable balances. Management evaluates the results of the
calculation and considers differences between the industry data and the
Company's data. Such differences include the fact that the Company has no actual
history of losses and the fact that industry data may contain non-life insurers.
This evaluation is inherently subjective as it requires estimates, which may be
susceptible to significant change given the long-term nature of these
receivables. In addition, the Company has a reinsurance protection agreement
that provides credit protections for its reinsured long term care business. The
allowance for credit losses on reinsurance recoverable is recorded through
provisions charged to Benefits, claims, losses and settlement expenses.
The Company also assumes life insurance and fixed annuity risk from other
insurers in limited circumstances. Reinsurance premiums received and benefits
paid are accounted for consistently with the basis used in accounting for the
policies from which risk is reinsured and consistently with the terms of the
reinsurance contracts. Liabilities for assumed business are recorded within
Policyholder account balances, future policy benefits and claims.
See Note 9 for additional information on reinsurance.
Land, Buildings, Equipment and Software
Land, buildings, equipment and internally developed software are carried at cost less accumulated depreciation or amortization and are reflected within other assets. The Company uses the straight-line method of depreciation and amortization over periods ranging from three to 39 years. As ofDecember 31, 2021 and 2020, land, buildings, equipment and software were$123 million and$124 million , respectively, net of accumulated depreciation of$216 million and$202 million , respectively. Depreciation and amortization expense for the years endedDecember 31, 2021 , 2020 and 2019 was$14 million ,$14 million and$16 million , respectively.
Derivative Instruments and Hedging Activities
Freestanding derivative instruments are recorded at fair value and are reflected
in Other assets or Other liabilities. The Company's policy is to not offset fair
value amounts recognized for derivatives and collateral arrangements executed
with the same counterparty under the same master netting arrangement. The
accounting for changes in the fair value of a derivative instrument depends on
its intended use and the resulting hedge designation, if any. The Company
primarily uses derivatives as economic hedges that are not designated as
accounting hedges or do not qualify for hedge accounting treatment. The Company
occasionally designates derivatives as (i) hedges of changes in the fair value
of assets, liabilities, or firm commitments ("fair value hedges") or (ii) hedges
of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability ("cash flow hedges").
Derivative instruments that are entered into for hedging purposes are designated
as such at the time the Company enters into the contract. For all derivative
instruments that are designated for hedging activities, the Company documents
all of the hedging relationships between the hedge instruments and the hedged
items at the inception of the relationships. Management also documents its risk
management objectives and strategies for entering into the hedge transactions.
The Company 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 no longer highly
effective as a hedge, the Company will discontinue the application of hedge
accounting.
For derivative instruments that do not qualify for hedge accounting or are not
designated as accounting hedges, changes in fair value are recognized in current
period earnings. Changes in fair value of derivatives are presented in the
Consolidated Statements of Income based on the nature and use of the instrument.
Changes in fair value of derivatives used as economic hedges are presented in
the Consolidated Statements of Income with the corresponding change in the
hedged asset or liability.
For derivative instruments that qualify as fair value hedges, changes in the
fair value of the derivatives, as well as changes in the fair value of the
hedged assets, liabilities or firm commitments, are recognized on a net basis in
current period earnings. The carrying value of the hedged item is adjusted for
the change in fair value from the designated hedged risk. If a fair value hedge
designation is removed or the hedge is terminated prior to maturity, previous
adjustments to the carrying value of the hedged item are recognized into
earnings over the remaining life of the hedged item.
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For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported in AOCI 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 in current period earnings as a component of Net investment income. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in AOCI is reclassified to earnings over the period that the hedged item impacts earnings. For 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 AOCI are recognized in earnings immediately. The equity component of indexed annuity, structured variable annuity and IUL obligations are considered embedded derivatives. Additionally, certain annuities contain GMAB and GMWB provisions. The GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives.
See Note 13 for information regarding the Company's fair value measurement of
derivative instruments and Note 17 for the impact of derivatives on the
Consolidated Statements of Income.
Deferred Acquisition Costs
The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of these costs which are incremental and direct to the acquisition of a new or renewal insurance policy or annuity contract are deferred. Significant costs capitalized include sales based compensation related to the acquisition of new and renewal insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation paid to AFS advisors and employees and third-party distributors is capitalized. Employee compensation and benefits costs which are capitalized relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct costs of acquiring an insurance policy or annuity contract are expensed as incurred. The DAC associated with insurance policies or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periods and other valuation assumptions. The Company monitors other DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin, variable annuity benefit utilization and maintenance expense levels each quarter and, when assessed independently, each could impact the Company's DAC balances. The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless the Company's 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.
Non-Traditional Long-Duration Products
For non-traditional long-duration products (including variable, structured
variable and fixed deferred annuity contracts, UL and VUL insurance products),
DAC are amortized based on projections of EGPs over amortization periods equal
to the approximate life of the business.
EGPs vary based on persistency rates (assumptions at which contractholders and
policyholders are expected to surrender, make withdrawals from and make deposits
to their contracts), mortality levels, client asset value growth rates (based on
equity and bond market performance), variable annuity benefit utilization and
interest margins (the spread between earned rates on invested assets and rates
credited to contractholder and policyholder accounts) and are management's best
estimates. Management regularly monitors financial market conditions and actual
contractholder and policyholder behavior experience and compares them to its
assumptions. These assumptions are updated whenever it appears that earlier
estimates should be revised. When assumptions are changed, the percentage of
EGPs 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. At each balance sheet date, the DAC balance is adjusted
for the effect that would result from the realization of unrealized gains
(losses) on securities impacting EGPs, with the related change recognized
through AOCI.
The client asset value growth rates are the rates at which variable annuity and
VUL insurance contract values invested in separate accounts are assumed to
appreciate in the future. The rates used vary by 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. The Company
typically uses a five-year mean reversion process as a guideline in setting
near-term equity fund growth rates based on a long-term view of financial market
performance as well as recent actual performance. The suggested near-term equity
fund growth rate is reviewed quarterly 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 management's
near-term estimate will typically be less than in a period when growth rates
fall short of management's near-term estimate.
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Traditional Long-Duration Products
For traditional long-duration products (including traditional life and DI insurance products), DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium paying period. The assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities. For traditional life and DI insurance products, the assumptions provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in the Consolidated Statements of Income.
Deferred Sales Inducement Costs
Sales inducement costs 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. DSIC is recorded in Other assets and amortization of DSIC is recorded in Benefits, claims, losses and settlement expenses.
Separate Account Assets and Liabilities
Separate account assets represent funds held for the benefit of and Separate account liabilities represent the obligation to the variable annuity contractholders and variable life insurance policyholders who have a contractual right to receive the benefits of their contract or policy and bear the related investment risk. Gains and losses on separate account assets accrue directly to the contractholder or policyholder and are not reported in the Company's Consolidated Statements of Income. Separate account assets are recorded at fair value and Separate account liabilities are equal to the assets recognized.
Policyholder Account Balances, Future Policy Benefits and Claims
The Company establishes reserves to cover the benefits associated with
non-traditional and traditional long-duration products. Non-traditional
long-duration products include variable and structured variable annuity
contracts, fixed annuity contracts and UL and VUL policies. Traditional
long-duration products include term life, whole life, DI and LTC insurance
products.
Guarantees accounted for as insurance liabilities include GMDB, gain gross-up
("GGU"), guaranteed minimum income benefit ("GMIB") and the life contingent
benefits associated with GMWB. In addition, UL and VUL policies with product
features that result in profits followed by losses are accounted for as
insurance liabilities.
Guarantees accounted for as embedded derivatives include GMAB and the non-life
contingent benefits associated with GMWB. In addition, the portion of structured
variable annuities, indexed annuities and IUL policies allocated to the indexed
account is accounted for as an embedded derivative.
Changes in future policy benefits and claims are reflected in earnings in the
period adjustments are made. Where applicable, benefit amounts expected to be
recoverable from reinsurance companies who share in the risk are separately
recorded as Reinsurance recoverables.
Non-Traditional Long-Duration Products
The liabilities for non-traditional long-duration products include fixed account values on variable and fixed annuities and UL and VUL policies, liabilities for guaranteed benefits associated with variable annuities and embedded derivatives for variable and structured variable annuities, indexed annuities and IUL products. Liabilities for fixed account values on variable, structured variable and fixed deferred annuities and UL and VUL policies are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges. A portion of the Company's UL and VUL policies have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. The liability for these future losses is determined by estimating the death benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). See Note 11 for information regarding the liability for contracts with secondary guarantees.
Liabilities for fixed deferred indexed annuity, structured variable annuity and
IUL products are equal to the accumulation of host contract values covering
guaranteed benefits and the fair value of embedded equity options.
The GMDB and GGU 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 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
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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 life based on
expected assessments.
The liability for the life contingent benefits associated with GMWB provisions is determined by estimating the expected value of benefits that are contingent upon survival after the account value is equal to zero and recognizing the benefits over the estimated life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees). In determining the liabilities for GMDB, GGU, GMIB and the life contingent benefits associated with GMWB, the Company 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, benefit utilization and investment margins and are consistent with those used for DAC valuation for the same contracts. As with DAC, unless the Company's management identifies a significant deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.
See Note 11 for information regarding variable annuity guarantees.
Liabilities for fixed annuities in a benefit or payout status utilize
assumptions established as of the date the payout phase is initiated. The
liabilities are the present value of future estimated payments reduced for
mortality (which is based on industry mortality tables with modifications based
on the Company's experience) and discounted with interest rates.
Embedded Derivatives
The fair value of embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions fluctuate based on equity, interest rate and credit markets and the estimate of the Company's nonperformance risk, which can cause these embedded derivatives to be either an asset or a liability. The fair value of embedded derivatives related to structured variable annuities, indexed annuities and IUL fluctuate based on equity markets and interest rates and the estimate of the Company's nonperformance risk and is a liability. See Note 13 for information regarding the fair value measurement of embedded derivatives.
Traditional Long-Duration Products
The liabilities for traditional long-duration products include 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 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 unpaid
amounts are calculated using anticipated claim continuance rates based on
established industry tables, adjusted as appropriate for the Company's
experience. The discount rates used to calculate present values are based on
average interest rates earned on assets supporting the liability for unpaid
amounts.
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 and DI insurance policies are based on the net level
premium and LTC policies are based on a gross premium valuation reflecting
management's current best estimate assumptions. Net level premium includes
anticipated premium payments, mortality and morbidity rates, policy persistency
and interest rates earned on assets supporting the liability. Gross premium
valuation includes expected premium rate increases, benefit reductions,
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
the Company's experience. Anticipated premium payments and persistency rates
vary by policy form, issue age, policy duration and certain other pricing
factors.
For term life, whole life, DI and LTC policies, the Company utilizes best
estimate assumptions as of the date the policy is issued with provisions for the
risk of adverse deviation, as appropriate. After the liabilities are initially
established, management performs premium deficiency tests using current best
estimate assumptions without provisions for adverse deviation annually in the
third quarter of each year unless management identifies a material deviation
over the course of quarterly monitoring. If the liabilities determined based on
these best estimate assumptions are greater than the net reserves (i.e., GAAP
reserves net of any DAC balance), the existing net reserves are adjusted by
first reducing the DAC balance by the amount of the deficiency or to zero
through a charge to current period earnings. If the deficiency is more than the
DAC balance, then the net reserves are increased by the excess through a charge
to current period earnings. If a premium deficiency is recognized, the
assumptions as of the date of the loss recognition are locked in and used in
subsequent periods. The assumptions for LTC insurance products are management's
best estimate as of the date of loss recognition and thus no longer provide for
adverse deviations in experience.
See Note 10 for information regarding the liabilities for traditional
long-duration products.
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Unearned Revenue Liability
The Company's UL and VUL policies require payment of fees or other policyholder assessments in advance for services to be provided in future periods. These charges are deferred as unearned revenue and amortized using EGPs, similar to DAC. The unearned revenue liability is recorded in Other liabilities and the amortization is recorded in Policy and contract charges.
Income Taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The Company's taxable income is included in the consolidated federal income tax return of Ameriprise Financial. The Company provides for income taxes on a separate return basis, except that, under an agreement between Ameriprise Financial and the Company, tax benefits are recognized for losses to the extent they can be used in the consolidated return. It is the policy of Ameriprise Financial that it will reimburse its subsidiaries for any tax benefits recorded. The Company's provision for income taxes represents the net amount of income taxes that the Company expects to pay or to receive from various taxing jurisdictions in connection with its operations. The Company provides for income taxes based on amounts that the Company believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.
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.
The Company is required to establish a valuation allowance for any portion of its deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. Consideration is given to, among other things in making this determination: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies. Management may need to identify and implement appropriate planning strategies to ensure its ability to realize deferred tax assets and reduce the likelihood of the establishment of a valuation allowance with respect to such assets. See Note 19 for additional information on the Company's valuation allowance. Changes in tax rates and tax law are accounted for in the period of enactment. Deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates and the effect is included in net income.
Revenue Recognition
Premiums on traditional life, DI and LTC insurance products and immediate
annuities with a life contingent feature are net of reinsurance ceded and are
recognized as revenue when due.
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 so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and updated future payment assumptions and a catch-up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Mortality and expense risk fees are based on a percentage of the fair value of assets held in the Company's separate accounts and recognized when assessed. Variable annuity guaranteed benefit rider charges, cost of insurance charges on UL and VUL insurance and contract charges (net of reinsurance premiums and cost of reinsurance for UL insurance products) and surrender charges on annuities and UL and VUL insurance are recognized as revenue when assessed. Realized gains and losses on the sale of securities, other than equity method investments, are recognized using the specific identification method, on a trade date basis.
Fees received under marketing support and distribution services arrangements are
recognized as revenue when earned.
See Note 4 for further discussion of accounting policies on revenue from
contracts with customers.
3. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Income Taxes - Simplifying the Accounting for Income Taxes
InDecember 2019 , theFinancial Accounting Standards Board ("FASB") updated the accounting standards to simplify the accounting for income taxes. The update eliminates certain exceptions to: (1) accounting principles related to intra-period tax allocation to be applied on a prospective basis, (2) deferred tax liabilities related to outside basis differences to be applied on a modified retrospective 50
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basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, and (3) year-to-date losses in interim periods to be applied on a prospective basis. The update also amends existing guidance related to situations when an entity receives: (1) a step-up in the tax basis of goodwill to be applied on a prospective basis, (2) an allocation of income tax expense when members of a consolidated tax filing group issue separate financial statements to be applied on a retrospective basis for all periods presented, (3) interim recognition of enactment of tax laws or rate changes to be applied on a prospective basis, and (4) franchise taxes and other taxes partially based on income to be applied on a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The standard is effective for interim and annual periods beginning afterDecember 15, 2020 , with early adoption permitted. The Company adopted the standard onJanuary 1, 2021 . The adoption of this standard had no impact on the Company's consolidated financial condition or results of operations.
Future Adoption of New Accounting Standards
Reference Rate Reform - Expedients for Contract Modifications
InMarch 2020 , the FASB updated the accounting standards to provide optional expedients and exceptions for applying GAAP to contracts, hedging or other transactions that are affected by reference rate reform (i.e., the elimination of LIBOR). The following expedients are provided for modified contracts whose reference rate is changed: (1) receivables and debt contracts are accounted for prospectively by adjusting the effective interest rate, (2) leases are accounted for as a continuation of the existing contracts with no reassessments of the lease classification and discount rate or remeasurements of lease payments that otherwise would be required, and (3) an entity is not required to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract. The amendments in this update were effective upon issuance and must be elected prior toDecember 31, 2022 . When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions. InJanuary 2021 , FASB updated the standard to allow an entity to elect to apply the treatment under the original guidance to derivative instruments that use an interest rate that for margining, discounting or contract price alignment that will be modified due to reference rate reform but did not qualify under the original guidance. The Company has not yet applied any of the optional expedients. The adoption of the standard is not expected to have an impact on the Company's consolidated results of operations and financial condition.
Financial Services - Insurance - Targeted Improvements to the Accounting for
Long-Duration Contracts
In
long-duration insurance contracts. The guidance revises key elements of the
measurement models and disclosure requirements for long-duration insurance
contracts issued by insurers and reinsurers.
The guidance establishes a significant new category of benefit features called
market risk benefits that protect the contractholder from other-than-nominal
capital market risk and expose the insurer to that risk. Insurers will have to
measure market risk benefits at fair value. Market risk benefits include
variable annuity guaranteed benefits (i.e. guaranteed minimum death, withdrawal,
withdrawal for life, accumulation and income benefits). The portion of the
change in fair value attributable to a change in the instrument-specific credit
risk of market risk benefits in a liability position will be recorded in OCI.
Significant changes also relate to the measurement of the liability for future
policy benefits for nonparticipating traditional long-duration insurance
contracts and immediate annuities with a life contingent feature including the
following:
•Insurers will be required to review and update the cash flow assumptions used
to measure the liability for future policy benefits rather than using
assumptions locked in at contract inception. The review of assumptions to
measure the liability for all future policy benefits will be required annually
at the same time each year, or more frequently if suggested by experience. The
effect of updating assumptions will be measured on a retrospective catch-up
basis and presented separate from the ongoing policyholder benefit expense in
the statement of operations in the period the update is made. This new unlocking
process will be required for the Company's term and whole life insurance,
disability income, long term care insurance and immediate annuities with a life
contingent feature.
•The discount rate used to measure the liability for future policy benefits will
be standardized. The current requirement to use a discount rate reflecting
expected investment yields will change to an upper-medium grade (low credit
risk) fixed income corporate instrument yield (generally interpreted as an "A"
rating) reflecting the duration characteristics of the liability. Entities will
be required to update the discount rate at each reporting date with the effect
of discount rate changes reflected in OCI.
•The current premium deficiency test is being replaced with a net premium ratio
cap of 100%. If the net premium ratio (i.e. the ratio of the present value of
total expected benefits and related expenses to the present value of total
expected premiums) exceeds 100%, insurers are required to recognize a loss in
the statement of operations in the period. Contracts from different issue years
will no longer be permitted to be grouped to determine contracts in a loss
position.
In addition, the update requires DAC and DSIC relating to all long-duration
contracts and most investment contracts to be amortized on a straight-line basis
over the expected life of the contract independent of profit emergence. Under
the new guidance, interest will not accrue to the deferred balance and DAC and
DSIC will not be subject to an impairment test.
The update requires significant additional disclosures, including disaggregated
rollforwards of the liability for future policy benefits, policyholder account
balances, market risk benefits, DAC and DSIC, as well as qualitative and
quantitative information about
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expected cash flows, estimates and assumptions. The standard is effective for interim and annual periods beginning afterDecember 15, 2022 . The standard should be applied to the liability for future policy benefits and DAC and DSIC on a modified retrospective basis and applied to market risk benefits on a retrospective basis with the option to apply full retrospective transition if certain criteria are met. Early adoption is permitted. The Company is currently in the process of implementing the standard, including the implementation of controlled measurement and reporting processes. The Company expects the impact of adopting the standard to be material to its consolidated financial condition and results of operations.
4. Revenue from Contracts with Customers
The following table presents disaggregated revenue from contracts with customers
and a reconciliation to total revenues reported on the Consolidated Statements
of Income.
Years Ended December 31,
2021 2020 2019
(in millions)
Policy and contract charges
Affiliated (from Columbia Management Investment Distributors,
Inc.) $ 193 $ 173 $ 170
Unaffiliated 17 14 14
Total 210 187 184
Other revenues
Administrative fees
Affiliated (from Columbia Management Investment Services,
Corp.) 49 44 43
Unaffiliated 20 18 20
69 62 63
Other fees
Affiliated (from Columbia Management Investment Advisers, LLC
("CMIA") and
389 351 344
Unaffiliated 5 4 4
394 355 348
Total 463 417 411
Total revenue from contracts with customers 673 604 595
Revenue from other sources (1) 2,798 3,172 3,223
Total revenues $ 3,471 $ 3,776 $ 3,818
(1) Amounts primarily consist of revenue associated with insurance and annuity
products or financial instruments.
The following discussion describes the nature, timing, and uncertainty of
revenues and cash flows arising from the Company's contracts with customers.
Policy and contract charges
The Company earns revenue for providing distribution-related services to affiliated and unaffiliated mutual funds that are available as underlying investments in its variable annuity and variable life insurance products. The performance obligation is satisfied at the time the mutual fund is distributed. Revenue is recognized over the time the mutual fund is held in the variable product and is generally earned based on a fixed rate applied, as a percentage, to the net asset value of the fund. The revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company's control, including market volatility and how long the fund(s) remain in the insurance policy or annuity contract. The revenue will not be recognized until it is probable that a significant reversal will not occur. These fees are accrued and collected on a monthly basis.
Other revenues
Administrative fees
The Company earns revenue for providing customer support, contract servicing and administrative services for affiliated and unaffiliated mutual funds that are available as underlying instruments in its variable annuity and variable life insurance products. The transfer agent and administration revenue is earned daily based on a fixed rate applied, as a percentage, to assets under management. These performance obligations are considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. These fees are accrued and collected on a monthly basis.
Other fees
The Company earns revenue for providing affiliated and unaffiliated partners an
opportunity to educate the financial advisors of its affiliate, AFS, that sell
the Company's products as well as product and marketing personnel to support the
offer, sale and servicing of
52
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funds within the Company's variable annuity and variable life insurance products. These payments allow the parties to train and support the advisors, explain the features of their products, and distribute marketing and educational materials. The affiliated revenue is earned based on a rate, updated at least annually, which is applied, as a percentage, to the market value of assets invested. The unaffiliated revenue is earned based on a fixed rate applied, as a percentage, to the market value of assets invested. These performance obligations are considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. These fees are accrued and collected on a monthly basis.
Receivables
Receivables for revenue from contracts with customers are recognized when the performance obligation is satisfied and the Company has an unconditional right to the revenue. Receivables related to revenues from contracts with customers were$62 million and$57 million as ofDecember 31, 2021 and 2020, respectively.
5. Variable Interest Entities
The Company provides asset management services to CLOs which are considered to be VIEs that are sponsored by the Company. In addition, the Company invests in structured investments other than CLOs and certain affordable housing partnerships which are considered VIEs. The Company consolidates the CLOs if the Company is deemed to be the primary beneficiary. The Company has no obligation to provide financial or other support to the non-consolidated VIEs beyond its initial investment and existing future funding commitments, and the Company has not provided any support to these entities. The Company has unfunded commitments related to consolidated CLOs of$27 million and$13 million as ofDecember 31, 2021 and 2020, respectively. See Note 20 for information on future funding commitments of other VIEs.
See Note 2 for further discussion of the Company's accounting policy
on consolidation.
CLOs
CLOs are asset backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by a CLO, offering investors various maturity and credit risk characteristics. The debt securities issued by the CLOs are non-recourse to the Company. The CLO's debt holders have recourse only to the assets of the CLO. The assets of the CLOs cannot be used by the Company. Scheduled debt payments are based on the performance of the CLO's collateral pool. The Company earns management fees from the CLOs based on the value of the CLO's collateral pool and, in certain instances, may also receive incentive fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company has invested in a portion of the unrated, junior subordinated notes and highly rated senior notes of certain CLOs. The Company consolidates certain CLOs where it is the primary beneficiary and has the power to direct the activities that most significantly impact the economic performance of the CLO.
Affordable Housing Partnerships and Other Real Estate Partnerships
The Company is a limited partner in affordable housing partnerships that qualify for government-sponsored low income housing tax credit programs and partnerships that invest in multi-family residential properties that were originally developed with an affordable housing component. The Company has determined it is not the primary beneficiary and therefore does not consolidate these partnerships. A majority of the limited partnerships are VIEs. The Company's maximum exposure to loss as a result of its investment in the VIEs is limited to the carrying value. The carrying value is reflected in other investments and was$138 million and$200 million as ofDecember 31, 2021 and 2020, respectively. The Company had a$8 million and$9 million liability recorded as ofDecember 31, 2021 and 2020, respectively, related to original purchase commitments not yet remitted to the VIEs. The Company has not provided any additional support and is not contractually obligated to provide additional support to the VIEs beyond the funding commitments. Structured Investments The Company invests in structured investments which are considered VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, and commercial and residential mortgage backed securities. The Company classifies these investments as Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to the size of the Company's investment in the entities and position in the capital structure of these entities. The Company's maximum exposure to loss as a result of its investment in these structured investments is limited to its amortized cost. See Note 6 for additional information on these structured investments. 53
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Fair Value of Assets and Liabilities
The Company categorizes its fair value measurements according to a three-level
hierarchy. See Note 13 for the definition of the three levels of the fair value
hierarchy.
The following tables present the balances of assets and liabilities held by
consolidated investment entities measured at fair value on a recurring basis:
December 31, 2021
Level 1 Level 2 Level 3 Total
(in millions)
Assets
Investments:
Common stocks $ - $ 3 $ - $ 3
Syndicated loans - 2,117 64 2,181
Total investments - 2,120 64 2,184
Receivables - 17 - 17
Other assets - - 3 3
Total assets at fair value $ - $ 2,137 $ 67 $ 2,204
Liabilities
Debt (1) $ - $ 2,164 $ - $ 2,164
Other liabilities - 137 - 137
Total liabilities at fair value $ - $ 2,301 $ - $ 2,301
December 31, 2020
Level 1 Level 2 Level 3 Total
(in millions)
Assets
Investments:
Corporate debt securities $ - $ 8 $ - $ 8
Common stocks - 1 - 1
Syndicated loans - 1,817 92 1,909
Total investments - 1,826 92 1,918
Receivables - 16 - 16
Other assets - - 2 2
Total assets at fair value $ - $ 1,842 $ 94 $ 1,936
Liabilities
Debt (1) $ - $ 1,913 $ - $ 1,913
Other liabilities - 69 - 69
Total liabilities at fair value $ -
(1) The carrying value of the CLOs' debt is set equal to the fair value of the CLOs' assets. The estimated fair value of the CLOs' debt was$2.2 billion and$2.0 billion as ofDecember 31, 2021 and 2020, respectively.
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The following tables provide a summary of changes in Level 3 assets held by
consolidated investment entities measured at fair value on a recurring basis:
Syndicated Loans Other Assets
Balance, January 1, 2021 $ 92 $ 2
Total gains (losses) included in:
Net income 2 (1) 1 (1)
Purchases 106 -
Sales (38) -
Settlements (49) -
Transfers into Level 3 119 2
Transfers out of Level 3 (150) (2)
Deconsolidation of consolidated investment entities (18) -
Balance, December 31, 2021 $ 64 $ 3
Changes in unrealized gains (losses) included in net income relating to
(1)
assets held at December 31, 2021 $ - $ 1
Syndicated Loans Other Assets
(in millions)
Balance, January 1, 2020 $ - $ -
Purchases - 2
Sales (2) -
Transfers into Level 3 15 -
Transfers out of Level 3 (70) -
Consolidation of consolidated investment entities 149 -
Balance, December 31, 2020 $ 92 $ 2
Changes in unrealized gains (losses) included in net income relating to
assets held at
$ - $ -
(1) Included in Net investment income.
Securities and loans transferred from Level 3 primarily represent assets with fair values that are now obtained from a third-party pricing service with observable inputs or priced in active markets. Securities and loans transferred to Level 3 represent assets with fair values that are now based on a single non-binding broker quote. All Level 3 measurements as ofDecember 31, 2021 and 2020 were obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to the Company.
Determination of Fair Value
Assets
Investments
The fair value of syndicated loans obtained from third-party pricing services
using a market approach with observable inputs is classified as Level 2. The
fair value of syndicated loans obtained from third-party pricing services with a
single non-binding broker quote as the underlying valuation source is classified
as Level 3. The underlying inputs used in non-binding broker quotes are not
readily available to the Company. See Note 13 for a description of the Company's
determination of the fair value of corporate debt securities, common stocks and
other investments.
Receivables
For receivables of the consolidated CLOs, the carrying value approximates fair
value as the nature of these assets has historically been short term and the
receivables have been collectible. The fair value of these receivables is
classified as Level 2.
55
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Liabilities
Debt
The fair value of the CLOs' assets, typically syndicated bank loans, is more observable than the fair value of the CLOs' debt tranches for which market activity is limited and less transparent. As a result, the fair value of the CLOs' debt is set equal to the fair value of the CLOs' assets and is classified as Level 2. Other Liabilities Other liabilities consist primarily of securities purchased but not yet settled held by consolidated CLOs. The carrying value approximates fair value as the nature of these liabilities has historically been short term. The fair value of these liabilities is classified as Level 2. Other liabilities also include accrued interest on the CLO debt.
Fair Value Option
The Company has elected the fair value option for the financial assets and
liabilities of the consolidated CLOs. Management believes that the use of the
fair value option better matches the changes in fair value of assets and
liabilities related to the CLOs.
The following table presents the fair value and unpaid principal balance of
loans and debt for which the fair value option has been elected:
December 31, December 31,
2021 2020
(in millions)
Syndicated loans
Unpaid principal balance $ 2,233 $ 1,990
Excess unpaid principal over fair value (52) (81)
Fair value $
2,181
Fair value of loans more than 90 days past due $ -$ 5 Fair value of loans in nonaccrual status 13 19
Difference between fair value and unpaid principal of loans more
than 90 days past due, loans in nonaccrual status or both
10 24 Debt Unpaid principal balance$ 2,296 $ 2,069 Excess unpaid principal over fair value (132) (156) Carrying value (1)$ 2,164 $ 1,913 (1) The carrying value of the CLOs' debt is set equal to the fair value of the CLOs' assets. The estimated fair value of the CLOs' debt was$2.2 billion and$2.0 billion as ofDecember 31, 2021 and 2020, respectively.
During the first quarter of 2021, the Company launched two new CLOs and issued
debt of
Interest income from syndicated loans, bonds and structured investments is recorded based on contractual rates in net investment income. Gains and losses related to changes in the fair value of investments are recorded in net investment income and gains and losses on sales of investments are recorded in net realized investment gains (losses). Interest expense on debt is recorded in interest and debt expense with gains and losses related to changes in the fair value of debt recorded in net investment income. Total net gains (losses) recognized in Net investment income related to the changes in fair value of investments the Company owns in the consolidated CLOs where it has elected the fair value option and collateralized financing entity accounting were immaterial for the years endedDecember 31, 2021 and 2020. Debt of the consolidated investment entities and the stated interest rates were as follows: Weighted Average Carrying Value Interest Rate December 31, December 31, December 31, December 31, 2021 2020 2021 2020 (in millions) Debt of consolidated CLOs due 2028-2034$ 2,164 $ 1,913 1.7 % 2.1 %
The debt of the consolidated CLOs has both fixed and floating interest rates,
which range from nil to 9.4%. The interest rates on the debt of CLOs are
weighted average rates based on the outstanding principal and contractual
interest rates.
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6. Investments
Available-for-Sale securities distributed by type were as follows:
December 31, 2021
Gross
Amortized Gross Unrealized Allowance for Fair
Description of Securities Cost Unrealized Gains Losses Credit Losses Value
(in millions)
Fixed maturities:
Corporate debt securities $ 8,447 $ 1,238 $ (47) $ - $ 9,638
Residential mortgage backed securities 2,226 36 (12) - 2,250
Commercial mortgage backed securities 2,615 56 (15) - 2,656
State and municipal obligations 832 244 (1) (1) 1,074
Asset backed securities 517 22 (2) - 537
Foreign government bonds and obligations 80 4 (1) - 83
U.S. government and agency obligations 1 - - - 1
Total $ 14,718 $ 1,600 $ (78) $ (1) $ 16,239
December 31, 2020
Gross
Amortized Gross Unrealized Allowance for Fair
Description of Securities Cost Unrealized Gains Losses Credit Losses Value
(in millions)
Fixed maturities:
Corporate debt securities $ 10,982 $ 1,903 $ (2) $ (10) $ 12,873
Residential mortgage backed securities 2,888 115 (1) - 3,002
Commercial mortgage backed securities 3,935 235 (4) - 4,166
State and municipal obligations 1,050 295 (1) - 1,344
Asset backed securities 1,168 45 (1) - 1,212
Foreign government bonds and obligations 236 22 (1) - 257
U.S. government and agency obligations 1 - - - 1
Total $ 20,260 $ 2,615 $ (10) $ (10) $ 22,855
In
primarily agency residential mortgage backed securities, from Ameriprise
Financial.
As of
Available-for-Sale securities in the tables above and is recorded in Accrued
investment income.
As ofDecember 31, 2021 and 2020, investment securities with a fair value of$2.4 billion and$2.9 billion , respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings, of which$314 million and$454 million , respectively, may be sold, pledged or rehypothecated by the counterparty. As of bothDecember 31, 2021 and 2020, fixed maturity securities comprised approximately 85% of the Company's total investments. Rating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations ("NRSROs"), including Moody's Investors Service ("Moody's"),Standard & Poor's Ratings Services ("S&P") andFitch Ratings Ltd. ("Fitch"). The Company uses the median of available ratings from Moody's, S&P and Fitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moody's, S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. As ofDecember 31, 2021 and 2020,$359 million and$553 million , respectively, of securities were internally rated by CMIA, an affiliate of the Company, using criteria similar to those used by NRSROs.
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A summary of fixed maturity securities by rating was as follows:
December 31, 2021 December 31, 2020
Percent of Percent of
Amortized Fair Total Fair Amortized Fair Total Fair
Ratings Cost Value Value Cost Value Value
(in millions, except percentages)
AAA $ 5,031 $ 5,107 31 % $ 7,323 $ 7,698 34 %
AA 757 932 6 1,036 1,266 6
A 1,662 2,013 12 2,663 3,235 14
BBB 6,293 7,063 44 7,770 9,026 39
Below investment grade 975 1,124 7 1,468 1,630 7
Total fixed maturities $ 14,718 $ 16,239 100 % $ 20,260 $ 22,855 100 %
As of December 31, 2021 and 2020, approximately 40% and 37%, respectively, of
securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. The
Company had holdings of $289 million in Ameriprise Advisor Financing, LLC
("AAF"), an affiliate of the Company, $247 million in Kraft Heinz Co., $225
million in Duke Energy Corp., $221 million in AT&T Inc., and $210 million in
Suncor Energy Inc., which were greater than 10% of the Company's total
shareholder's equity as of December 31, 2021 . The Company had holdings of $372
million in AAF which was greater than 10% of the Company's total shareholder's
equity as of December 31, 2020 . There were no other holdings of any other issuer
greater than 10% of the Company's total shareholder's equity as of both
December 31, 2021 and 2020.
The following tables summarize the fair value and gross unrealized losses on
Available-for-Sale securities, aggregated by major investment type and the
length of time that individual securities have been in a continuous unrealized
loss position for which no allowance for credit losses has been recorded:
December 31, 2021
Less than 12 months 12 months or more Total
Number of Fair Unrealized Number of Fair Unrealized Number of Fair
Unrealized
Description of Securities Securities Value Losses Securities Value Losses Securities Value Losses
(in millions, except number of securities)
Corporate debt securities 102 $ 2,007 $ (42) 14 $ 81 $ (5) 116 $ 2,088 $ (47)
Residential mortgage backed securities 55 1,162 (12) 2 1 - 57 1,163
(12)
Commercial mortgage backed securities 60 809 (15) 3 13 - 63 822
(15)
State and municipal obligations 25 63 (1) - - - 25 63 (1) Asset backed securities 5 91 (2) - - - 5 91 (2) Foreign government bonds and obligations 5 6 - 6 4 (1) 11 10 (1) Total 252$ 4,138 $ (72) 25$ 99 $ (6) 277$ 4,237 $ (78) December 31, 2020 Less than 12 months 12 months or more Total Number of Fair Unrealized Number of Fair Unrealized Number of Fair
Unrealized
Description of Securities Securities Value Losses Securities Value Losses Securities Value Losses
(in millions, except number of securities)
Corporate debt securities 26 $ 228 $ (1) 1 $ 12 $ (1) 27 $ 240 $ (2)
Residential mortgage backed securities 11 47 (1) 7 14 - 18 61
(1)
Commercial mortgage backed securities 12 179 (3) 7 60 (1) 19 239
(4)
State and municipal obligations 2 4 - 1 4 (1) 3 8 (1) Asset backed securities 4 65 - 2 36 (1) 6 101 (1) Foreign government bonds and obligations 1 3 - 7 8 (1) 8 11 (1) Total 56$ 526 $ (5) 25$ 134 $ (5) 81$ 660 $ (10) As part of the Company's ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities for which an allowance for credit losses has not been recognized during the year endedDecember 31 , 58
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2021 is primarily attributable to higher interest rates. The Company did not recognize these unrealized losses in earnings because it was determined that such losses were due to non-credit factors. The Company does not intend to sell these securities and does not believe that it is more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. As ofDecember 31, 2021 and 2020, approximately 92% and 83%, respectively, of the total of Available-for-Sale securities with gross unrealized losses were considered investment grade.
The following tables present a rollforward of the allowance for credit losses on
Available-for-Sale securities:
State and
Corporate Debt Municipal
Securities Obligations Total
(in millions)
Balance at January 1, 2021 $ 10
$ -
Additions for which credit losses were not previously
recorded
- 1 1 Charge-offs (10) - (10) Balance at December 31, 2021 $ - $ 1$ 1 Corporate Debt Securities (in millions) Balance at January 1, 2020 (1) $ - Additions for which credit losses were not previously recorded 13
Additional increases (decreases) on securities that had an allowance recorded in a
previous period
(3) Balance at December 31, 2020 $ 10 (1) Prior toJanuary 1, 2020 , credit losses on Available-for-Sale securities were not recorded in an allowance but were recorded as a reduction of the book value of the security if the security was other-than-temporarily impaired. Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in Net realized investment gains (losses) were as follows: Years Ended December 31, 2021 2020 2019 (in millions) Gross realized investment gains$ 576 $ 17 $
29
Gross realized investment losses (6) (2) (14) Credit losses (1) (10) (17) Other impairments (13) - - Total$ 556 $ 5 $ (2) Credit losses for the year endedDecember 31, 2021 primarily related to recording an allowance for credit losses on certain state and municipal securities. For the year endedDecember 31, 2020 , credit losses primarily related to recording an allowance for credit losses on certain corporate debt securities, primarily in the oil and gas industry. Other-than-temporary impairments for the year endedDecember 31, 2019 related to corporate debt securities. Other impairments for the year endedDecember 31, 2021 related to Available-for-Sale securities that were impaired when they were classified as held for sale prior to being sold in the reinsurance transaction. See Note 1 for more information on the reinsurance transaction.
See Note 18 for a rollforward of net unrealized investment gains (losses)
included in AOCI.
Available-for-Sale securities by contractual maturity as ofDecember 31, 2021 were as follows: Amortized Cost Fair Value (in millions) Due within one year $ 470$ 476 Due after one year through five years 1,878 1,981 Due after five years through 10 years 3,283 3,359 Due after 10 years 3,729 4,980 9,360 10,796 Residential mortgage backed securities 2,226 2,250 Commercial mortgage backed securities 2,615 2,656 Asset backed securities 517 537 Total$ 14,718 $ 16,239 59
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Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities and asset backed securities are not due at a single maturity date. As such, these securities were not included in the maturities distribution.
The following is a summary of Net investment income:
Years Ended December 31,
2021 2020 2019
(in millions)
Fixed maturities $ 643 $ 777 $ 848
Mortgage loans 102 115 119
Other investments 101 (3) (26)
846 889 941
Less: investment expenses 19 20 24
Total $ 827 $ 869 $ 917
Net realized investment gains (losses) are summarized as follows:
Years Ended December 31,
2021 2020 2019
(in millions)
Fixed maturities $ 556 $ 5 $ (2)
Mortgage loans 57 (10) -
Other investments (18) (5) -
Total $ 595 $ (10) $ (2)
7. Financing Receivables
Financing receivables are comprised of commercial loans, policy loans, and
deposit receivables. See Note 2 for information regarding the Company's
accounting policies related to financing receivables and the allowance for
credit losses.
Allowance for Credit Losses
The following tables present a rollforward of the allowance for credit losses:
Commercial Loans
(in millions)
Balance, January 1, 2021 $ 35
Provisions (23)
Balance, December 31, 2021 $ 12
Commercial Loans
(in millions)
Balance, December 31, 2019 (1) $ 20
Cumulative effect of adoption of current expected credit losses guidance
3 Balance, January 1, 2020 23 Provisions 12 Balance, December 31, 2020 $ 35 (1) Prior toJanuary 1, 2020 , the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset. Commercial Loans (in millions) Balance, January 1, 2019 $ 20 Charge-offs - Balance, December 31, 2019 $ 20 The decrease in the allowance for credit losses provision for commercial loans reflects the sale of certain commercial mortgage loans and syndicated loans in conjunction with the fixed deferred and immediate annuity reinsurance transaction discussed in Note 1. As ofDecember 31, 2021 and 2020, accrued interest on commercial loans was$11 million and$14 million , respectively, and is recorded in Accrued investment income and excluded from the amortized cost basis of commercial loans.
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Purchases and Sales
During the year ended
commercial mortgage loans.
During the years endedDecember 31, 2021 , 2020 and 2019, the Company purchased$26 million ,$140 million and$121 million , respectively, of syndicated loans and sold$340 million ,$13 million and$43 million , respectively, of syndicated loans.
The Company has not acquired any loans with deteriorated credit quality as of
the acquisition date.
Credit Quality Information
Nonperforming loans were nil and
respectively. All other loans were considered to be performing.
Commercial Mortgage Loans
The Company reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. Loan-to-value ratio is the primary credit quality indicator included in this review. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates when credit risk changes. Commercial mortgage loans which management has assigned its highest risk rating were less than 1% of total commercial mortgage loans as of bothDecember 31, 2021 and 2020. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. Total commercial mortgage loan modifications throughDecember 31, 2020 due to the COVID-19 pandemic consisted of 88 loans with a total unpaid balance of$360 million . Modifications primarily consisted of short-term forbearance and interest only payments. There were no additional modifications during the year endedDecember 31, 2021 . As ofDecember 31, 2021 , there were no loans remaining that were modified due to COVID-19. All loans returned to their normal payment schedules. Total commercial mortgage loans past due were nil as of bothDecember 31, 2021 and 2020.
The tables below present the amortized cost basis of commercial mortgage loans
by year of origination and loan-to-value ratio:
December 31, 2021
2021 2020 2019 2018 2017 Prior Total
Loan-to-Value Ratio (in millions)
> 100% $ - $ - $ 20 $ 10 $ - $ 29 $ 59
80% - 100% 9 2 9 2 - 29 51
60% - 80% 141 76 59 15 58 133 482
40% - 60% 37 30 75 74 49 393 658
< 40% 6 8 46 - 47 443 550
Total $ 193 $ 116 $ 209 $ 101 $ 154 $ 1,027 $ 1,800
December 31, 2020
2020 2019 2018 2017 2016 Prior Total
Loan-to-Value Ratio (in millions)
> 100% $ - $ - $ 2 $ - $ - $ 10 $ 12
80% - 100% 15 16 9 3 7 15 65
60% - 80% 85 152 27 29 46 141 480
40% - 60% 20 50 74 147 111 543 945
< 40% 7 22 69 88 58 856 1,100
Total $ 127 $ 240 $ 181 $ 267 $ 222 $ 1,565 $ 2,602
Loan-to-value ratio is based on income and expense data provided by borrowers at
least annually and long-term capitalization rate assumptions based on property
type.
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In addition, the Company reviews the concentrations of credit risk by region and property type. Concentrations of credit risk of commercial mortgage loans byU.S. region were as follows: Loans Percentage December 31, December 31, December 31, 2021 2020 December 31, 2021 2020 (in millions) East North Central$ 183 $ 250 10 % 10 % East South Central 54 111 3 4 Middle Atlantic 107 165 6 6 Mountain 111 234 6 10 New England 21 47 1 2 Pacific 589 784 33 30 South Atlantic 477 663 26 25 West North Central 136 192 8 7 West South Central 122 156 7 6 1,800 2,602 100 % 100 % Less: allowance for credit losses 12 28 Total $ 1,788 $ 2,574 Concentrations of credit risk of commercial mortgage loans by property type were as follows: Loans Percentage December 31, December 31, December 31, 2021 2020 December 31, 2021 2020 (in millions) Apartments $ 464 $ 680 26 % 26 % Hotel 15 49 1 2 Industrial 293 401 16 16 Mixed use 57 76 3 3 Office 254 358 14 14 Retail 589 843 33 32 Other 128 195 7 7 1,800 2,602 100 % 100 % Less: allowance for credit losses 12 28 Total $ 1,788 $ 2,574 Syndicated Loans The recorded investment in syndicated loans as of December 31, 2021 and 2020 was $43 million and $446 million, respectively. The Company's syndicated loan portfolio is diversified across industries and issuers. Total syndicated loans past due were nil and $2 million as of December 31, 2021 and 2020, respectively. The Company assigns an internal risk rating to each syndicated loan in its portfolio ranging from 1 through 5, with 5 reflecting the lowest quality.
The tables below present the amortized cost basis of syndicated loans by
origination year and internal risk rating:
December 31, 2021
2021 2020 2019 2018 2017 Prior Total
Internal Risk Rating (in millions)
Risk 5 $ - $ - $ - $ - $ - $ - $ -
Risk 4 - - - - - - -
Risk 3 - - - - - 1 1
Risk 2 11 - 4 1 8 4 28
Risk 1 4 - - 3 3 4 14
Total $ 15 $ - $ 4 $ 4 $ 11 $ 9 $ 43
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December 31, 2020
2020 2019 2018 2017 2016 Prior Total
Internal Risk Rating (in millions)
Risk 5 $ - $ - $ - $ - $ - $ 2 $ 2
Risk 4 - - 3 7 - 7 17
Risk 3 - 7 6 19 10 18 60
Risk 2 23 42 45 51 10 32 203
Risk 1 14 25 35 43 17 30 164
Total $ 37 $ 74 $ 89 $ 120 $ 37 $ 89 $ 446
Policy Loans
Policy loans do not exceed the cash surrender value at origination. As there is
minimal risk of loss related to policy loans, there is no allowance for credit
losses.
Deposit Receivables
Deposit receivables were $7.9 billion and $1.4 billion as of December 31, 2021
and 2020, respectively. Deposit receivables are fully collateralized by the fair
value of the assets held in trusts. Based on management's evaluation of the
nature of the underlying assets and the potential for changes in the collateral
value, there was no allowance for credit losses for deposit receivables as of
December 31, 2021 and 2020. The increase in deposit receivables is primarily
driven by the reinsurance transaction, effective July 1, 2021, to reinsure fixed
deferred and non-life contingent immediate annuity policies. See Note 1 for more
information on the fixed deferred and immediate annuity reinsurance transaction.
Troubled Debt Restructurings
There were no loans accounted for as a troubled debt restructuring by the
Company during the years ended December 31, 2021, 2020 and 2019. There are no
commitments to lend additional funds to borrowers whose loans have been
restructured.
8. Deferred Acquisition Costs and Deferred Sales Inducement Costs
Management updates market-related inputs on a quarterly basis and implements model changes related to the living benefit valuation. In addition, management conducts its annual review of life insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking. The impact of unlocking to DAC for the year ended December 31, 2021 primarily reflected a favorable impact from lower surrenders on variable annuities with living benefits and UL and VUL insurance products. The impact of unlocking to DAC for the year ended December 31, 2020 primarily reflected updates to interest rate assumptions, partially offset by a favorable impact from lower surrenders on annuity contracts with a withdrawal benefit. The impact of unlocking to DAC for the year ended December 31, 2019 primarily reflected updated mortality assumptions on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by an unfavorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
The balances of and changes in DAC were as follows:
2021 2020 2019
(in millions)
Balance at January 1 $ 2,508 $ 2,673 $ 2,742
Capitalization of acquisition costs 267 216 239
Amortization (172) (164) (119)
Amortization, impact of valuation assumptions review 60 (100) (14)
Impact of change in net unrealized (gains) losses on securities 94 (117) (175)
Balance at December 31 $ 2,757 $ 2,508 $ 2,673
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The balances of and changes in DSIC, which is included in Other assets, were as
follows:
2021 2020 2019
(in millions)
Balance at January 1 $ 187 $ 216 $ 249
Capitalization of sales inducement costs 1 1 1
Amortization (16) (13) (15)
Amortization, impact of valuation assumptions review 2 (16) -
Impact of change in net unrealized (gains) losses on securities 13 (1) (19)
Balance at December 31 $ 187 $ 187 $ 216
9. Reinsurance
The Company reinsures a portion of the insurance risks associated with its
traditional life, DI and LTC insurance products through reinsurance agreements
with unaffiliated reinsurance companies. During the third quarter of 2021, the
Company reinsured 100% of its insurance risk associated with its life contingent
immediate annuity policies in force as of July 1, 2021 through a reinsurance
agreement with Commonwealth. Policies issued after July 1, 2021 are not subject
to this reinsurance agreement. See Note 1 for more information on the fixed
deferred and immediate annuity reinsurance transaction.
Reinsurance contracts do not relieve the Company from its primary obligation to
policyholders.
The Company generally reinsures 90% of the death benefit liability for new term life insurance policies beginning in 2001 (RiverSource Life of NY began in 2002) and new individual UL and VUL insurance policies beginning in 2002 (2003 for RiverSource Life of NY). Policies issued prior to these dates are not subject to these same reinsurance levels. However, for IUL policies issued after September 1, 2013 and VUL policies issued after January 1, 2014, the Company generally reinsures 50% of the death benefit liability. Similarly, the Company reinsures 50% of the death benefit and morbidity liabilities related to its UL product with LTC benefits. The maximum amount of life insurance risk the Company will retain is $10 million on a single life and $10 million on any flexible premium survivorship life policy; however, reinsurance agreements are in place such that retaining more than $1.5 million of insurance risk on a single life or a flexible premium survivorship life policy is very unusual. Risk on UL and VUL policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 (2002 for RiverSource Life of NY) is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.
The Company also has life insurance and fixed annuity risk previously assumed
under reinsurance arrangements with unaffiliated insurance companies.
For existing LTC policies, the Company has continued ceding 50% of the risk on a
coinsurance basis to subsidiaries of Genworth Financial, Inc. ("Genworth") and
retains the remaining risk. For RiverSource Life of NY, this reinsurance
arrangement applies for 1996 and later issues only. Under these agreements, the
Company has the right, but never the obligation, to recapture some, or all, of
the risk ceded to Genworth.
Generally, the Company retains at most $5,000 per month of risk per life on DI
policies sold on policy forms introduced in most states starting in 2007 (2010
for RiverSource Life of NY) and reinsures the remainder of the risk on a
coinsurance basis with unaffiliated reinsurance companies. The Company retains
all risk for new claims on DI contracts sold on other policy forms introduced
prior to 2007 (2010 for RiverSource Life of NY). The Company also retains all
risk on accidental death benefit claims and substantially all risk associated
with waiver of premium provisions.
As of December 31, 2021 and 2020, traditional life and UL insurance policies in
force were $198.6 billion and $195.7 billion, respectively, of which $145.1
billion and $143.6 billion as of December 31, 2021 and 2020 were reinsured at
the respective year ends.
The effect of reinsurance on premiums for traditional long-duration products was
as follows:
Years Ended December 31,
2021 2020 2019
(in millions)
Direct premiums $ 490 $ 565 $ 621
Reinsurance ceded (1,361) (224) (224)
Net premiums $ (871) $ 341 $ 397
Policy and contract charges are presented on the Consolidated Statements of
Income net of $152 million, $140 million and $132 million of reinsurance ceded
for non-traditional long-duration products for the years ended
December 31, 2021, 2020 and 2019, respectively.
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The amount of claims recovered through reinsurance on all contracts was $404 million, $400 million and $377 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Reinsurance recoverables include approximately $2.6 billion and $2.7 billion
related to LTC risk ceded to Genworth as of December 31, 2021 and 2020,
respectively.
Policyholder account balances, future policy benefits and claims include
$413 million and $440 million related to previously assumed reinsurance
arrangements as of December 31, 2021 and 2020, respectively.
10. Policyholder Account Balances, Future Policy Benefits and Claims and
Separate Account Liabilities
Policyholder account balances, future policy benefits and claims consisted of
the following:
December 31,
2021 2020
(in millions)
Policyholder account balances
Fixed annuities (1) $ 8,117 $ 8,531
Variable annuity fixed sub-accounts 4,990 5,104
UL/VUL insurance 3,103 3,122
IUL insurance 2,534 2,269
Structured variable annuities 4,440 1,371
Other life insurance 563 605
Total policyholder account balances 23,747 21,002
Future policy benefits
Variable annuity GMWB 2,336 3,049
Variable annuity GMAB (2) (23) 1
Other annuity liabilities 67 211
Fixed annuity life contingent liabilities 1,278 1,370
Life and DI insurance 1,139 1,187
LTC insurance 5,664 5,722
UL/VUL and other life insurance additional liabilities 1,291 1,259
Total future policy benefits 11,752 12,799
Policy claims and other policyholders' funds 245 185
Total policyholder account balances, future policy benefits and
claims
$
35,744 $ 33,986
(1) Includes fixed deferred annuities, non-life contingent fixed payout
annuities and fixed deferred indexed annuity host contracts.
(2) Includes the fair value of GMAB embedded derivatives that was a net asset as
of December 31, 2021 reported as a contra liability.
Fixed Annuities
Fixed annuities include deferred, payout and fixed deferred indexed annuity
contracts. In 2020, the Company discontinued sales of fixed deferred and fixed
deferred indexed annuities.
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. 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 2.23% to 9.38% as of
December 31, 2021, depending on year of issue, with an average rate of
approximately 3.6%. The Company generally invests the proceeds from the annuity
contracts in fixed rate securities.
The Company's equity indexed annuity ("EIA") product is a single premium fixed
deferred annuity. The Company discontinued new sales of EIAs in 2007. The
contract was issued with an initial term of seven years and interest earnings
are linked to the performance of 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. The Company generally invests the proceeds from the annuity
contracts in fixed rate securities and hedges the equity risk with derivative
instruments.
The Company's fixed index annuity product is a fixed annuity that includes an
indexed account. The rate of interest credited above the minimum guarantee for
funds allocated to the indexed account is linked to the performance of the
specific index for the indexed account (subject to a cap). The Company
previously offered S&P 500® Index and MSCI® EAFE Index account options. Both
options offered two crediting durations, one-year and two-year. The
contractholder could allocate all or a portion of the policy value to a fixed or
indexed account. The portion of the policy allocated to the indexed account is
accounted for as an embedded derivative. The
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Company hedges the interest credited rate including equity and interest rate
risk related to the indexed account with derivative instruments. The
contractholder could choose to add a GMWB for life rider for an additional fee.
See Note 17 for additional information regarding the Company's derivative
instruments used to hedge the risk related to indexed annuities.
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 the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB or GGU provisions. The Company previously offered contracts with GMIB provisions. See Note 2 and Note 11 for additional information regarding the Company's variable annuity guarantees. The Company does not currently hedge its risk under the GGU and GMIB provisions. See Note 13 and Note 17 for additional information regarding the Company's derivative instruments used to hedge risks related to GMWB, GMAB and GMDB provisions.
Structured Variable Annuities
In 2020, the Company began offering structured variable annuities which gives contractholders the option to allocate a portion of their account value to an indexed account with the contractholder's rate of return, which may be positive or negative, tied to selected indices.
Insurance Liabilities
UL/VUL is the largest group of insurance policies written by the Company. Purchasers of UL accumulate cash value that increases by a fixed interest rate. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account or a separate account. A vast majority of the premiums received for VUL policies are held in separate accounts where the assets are held for the exclusive benefit of those policyholders. IUL is a UL policy that includes an indexed account. The rate of credited interest above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the specific index for the indexed account (subject to stated account parameters, which include a cap and floor, or a spread and floor). The Company offers an S&P 500® Index account option and a blended multi-index account option comprised of the S&P 500 Index, the MSCI® EAFE Index and the MSCI EM Index. Both options offer two crediting durations, one-year and two-year. The policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. The portion of the policy allocated to the indexed account is accounted for as an embedded derivative at fair value. The Company hedges the interest credited rate including equity and interest rate risk related to the indexed account with derivative instruments. See Note 17 for additional information regarding the Company's derivative instruments used to hedge the risk related to IUL. The Company also offers term life insurance as well as DI products. The Company no longer offers standalone LTC products and whole life insurance but has in force policies from prior years.
Insurance liabilities include accumulation values, incurred but not reported
claims, obligations for anticipated future claims and unpaid reported claims.
The liability for estimates of benefits that will become payable on future
claims on term life, whole life and DI policies is based on the net level
premium and LTC policies is based on a gross premium valuation reflecting
management's current best estimate assumptions. Both include the anticipated
interest rates earned on assets supporting the liability. Anticipated interest
rates for term and whole life ranged from 2.25% to 10% as of December 31, 2021.
Anticipated interest rates for DI policies ranged from 3.00% to 7.5% as of
December 31, 2021 and for LTC policies ranged from 5% to 5.7% as of
December 31, 2021.
The liability for unpaid reported claims on DI and LTC policies includes an
estimate of the present value of obligations for continuing benefit payments.
The discount rates used to calculate present values are based on average
interest rates earned on assets supporting the liability for unpaid amounts and
were 4.5% and 5.95% for DI and LTC claims, respectively, as of
December 31, 2021.
Portions of the Company's UL and VUL policies have product features that result
in profits followed by losses from the insurance component of the policy. These
profits followed by losses can be generated by the cost structure of the product
or secondary guarantees in the policy. The secondary guarantee ensures that,
subject to specified conditions, the policy will not terminate and will continue
to provide a death benefit even if there is insufficient policy value to cover
the monthly deductions and charges.
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Separate Account Liabilities
Separate account liabilities consisted of the following:
December 31,
2021 2020
(in millions)
Variable annuity $ 82,862 $ 79,299
VUL insurance 9,343 8,226
Other insurance 33 31
Total $ 92,238 $ 87,556
11. Variable Annuity and Insurance Guarantees
Most of the variable annuity contracts issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB or GGU provisions. The Company previously offered contracts containing GMIB provisions. See Note 2 and Note 10 for additional information regarding the Company's variable annuity guarantees. The GMDB and GGU provisions provide a specified minimum return upon death of the contractholder. The death benefit payable is the greater of (i) the contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract. The Company has the following primary GMDB provisions:
•Return of premium - provides purchase payments minus adjusted partial
surrenders.
•Reset - provides that the value resets to the account value every sixth
contract anniversary minus adjusted partial surrenders. This provision was often
provided in combination with the return of premium provision and is no
longer offered.
•Ratchet - provides that the value ratchets up to the maximum account value at specified anniversary intervals, plus subsequent purchase payments less adjusted partial surrenders. 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 fund performance. At contract issue, the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a "step-up") in the case of favorable market performance or by a benefit credit if the contract includes this provision.
The Company has GMWB riders in force, which contain one or more of the following
provisions:
•Withdrawals at a specified rate per year until the amount withdrawn is equal to
the guaranteed amount.
•Withdrawals at a specified rate per year for the life of the contractholder
("GMWB for life").
•Withdrawals at a specified rate per year for joint contractholders while either
is alive.
•Withdrawals based on performance of the contract.
•Withdrawals based on the age withdrawals begin.
•Credits are applied annually for a specified number of years to increase the
guaranteed amount as long as withdrawals have not been taken.
Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or a specified percentage of the highest anniversary value, adjusted for withdrawals. If the contract value is less than the guarantee at the end of the 10-year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
Certain UL policies provide secondary guarantee benefits. The secondary
guarantee ensures that, subject to specified conditions, the policy will not
terminate and will continue to provide a death benefit even if there is
insufficient policy value to cover the monthly deductions and charges.
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The following table provides information related to variable annuity guarantees
for which the Company has established additional liabilities:
December 31, 2021 December 31, 2020
Total Net Total Net
Contract Contract Value Amount Weighted Average Contract Contract Value Amount Weighted Average
Variable Annuity Guarantees by Benefit Type (1) Value in Separate Accounts at Risk Attained Age Value in Separate Accounts at Risk Attained Age
(in millions, except age)
GMDB:
Return of premium $ 70,020 $ 68,145 $ 6 69 $ 66,874 $ 64,932 $ 5 68
Five/six-year reset 8,309 5,612 6 68 8,116 5,386 6 68
One-year ratchet 6,177 5,858 13 71 6,094 5,763 8 71
Five-year ratchet 1,438 1,386 1 68 1,436 1,381 - 67
Other 1,302 1,286 38 74 1,261 1,243 45 73
Total - GMDB $ 87,246 $ 82,287 $ 64 69 $ 83,781 $ 78,705 $ 64 68
GGU death benefit $ 1,260 $ 1,198 $ 184 72 $ 1,183 $ 1,126 $ 162 71
GMIB $ 184 $ 170 $ 4 71 $ 187 $ 173 $ 6 71
GMWB:
GMWB $ 1,900 $ 1,895 $ 1 75 $ 1,972 $ 1,967 $ 1 74
GMWB for life 52,387 52,334 187 69 50,142 50,057 185 69
Total - GMWB $ 54,287 $ 54,229 $ 188 69 $ 52,114 $ 52,024 $ 186 69
GMAB $ 2,005 $ 2,005 $ - 62 $ 2,291 $ 2,291 $ - 61
(1) Individual variable annuity contracts may have more than one guarantee and
therefore may be included in more than one benefit type. Variable annuity
contracts for which the death benefit equals the account value are not shown in
this table.
The net amount at risk for GMDB, GGU and GMAB is defined as the current
guaranteed benefit amount in excess of the current contract value. The net
amount at risk for GMIB is defined as the greater of the present value of the
minimum guaranteed annuity payments less the current contract value or zero. The
net amount at risk for GMWB is defined as the greater of the present value of
the minimum guaranteed withdrawal payments less the current contract value or
zero.
The following table provides information related to insurance guarantees for
which the Company has established additional liabilities:
December 31, 2021 December 31, 2020
Weighted Average Weighted Average
Net Amount at Risk Attained Age Net Amount at Risk Attained Age
(in millions, except age)
UL secondary guarantees $ 6,564 68 $ 6,587 67
The net amount at risk for UL secondary guarantees is defined as the current
guaranteed death benefit amount in excess of the current policyholder account
balance.
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Changes in additional liabilities (contra liabilities) for variable annuity and
insurance guarantees were as follows:
GMDB &
GGU GMIB GMWB (1) GMAB (1) UL
(in millions)
Balance at January 1, 2019 $ 19 $ 8 $ 875 $ (19) $ 659
Incurred claims 2 (1) 587 (20) 141
Paid claims (5) - - - (42)
Balance at December 31, 2019 16 7 1,462 (39) 758
Incurred claims 15 - 1,587 40 209
Paid claims (7) (1) - - (51)
Balance at December 31, 2020 24 6 3,049 1 916
Incurred claims 17 - (713) (24) 140
Paid claims (5) (1) - - (36)
Balance at December 31, 2021 $ 36 $ 5 $ 2,336 $ (23) $ 1,020
(1) The incurred claims for GMWB and GMAB include the change in the fair value
of the liabilities (contra liabilities) less paid claims.
The liabilities for guaranteed benefits are supported by general account assets.
The following table summarizes the distribution of separate account balances by
asset type for variable annuity contracts providing guaranteed benefits:
December 31,
2021 2020
(in millions)
Mutual funds:
Equity $ 49,183 $ 45,947
Bond 24,998 26,073
Other 8,316 6,911
Total mutual funds $ 82,497 $ 78,931
No gains or losses were recognized on assets transferred to separate accounts
for the years ended December 31, 2021, 2020 and 2019.
12. Debt
Short-Term Borrowings
RiverSource Life Insurance Company is a member of the Federal Home Loan Bank ("FHLB") ofDes Moines which provides access to collateralized borrowings. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities to collateralize its obligation under these borrowings. The fair value of the securities pledged is recorded in Investments and was $1.0 billion and $1.2 billion as of December 31, 2021 and 2020, respectively. The amount of the Company's liability including accrued interest was $200 million as of both December 31, 2021 and 2020. The remaining maturity of outstanding FHLB advances was less than three months as of both December 31, 2021 and 2020. The weighted average annualized interest rate on the FHLB advances held as of December 31, 2021 and 2020 was 0.3% and 0.4%, respectively.
Lines of Credit
RiverSource Life Insurance Company , as the borrower, has a revolving credit agreement with Ameriprise Financial as the lender. The aggregate amount outstanding under the line of credit may not exceed 3% ofRiverSource Life Insurance Company's statutory admitted assets (excluding separate accounts) as of the prior year end. The interest rate for any borrowing under the agreement is established by reference to London Inter-Bank Offered Rate ("LIBOR") forU.S. dollar deposits with maturities comparable to the relevant interest period, plus an applicable margin subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. Amounts borrowed may be repaid at any time with no prepayment penalty. There were no amounts outstanding on this line of credit as of both December 31, 2021 and 2020. RiverSource Life of NY, as the borrower, has a revolving credit agreement with Ameriprise Financial as the lender. The aggregate amount outstanding under the line of credit may not exceed the lesser of $25 million or 3% of RiverSource Life of NY's statutory admitted assets (excluding separate accounts) as of the prior year end. The interest rate for any borrowing under the agreement is established by reference to LIBOR forU.S. dollar deposits with maturities comparable to the relevant interest period. Amounts borrowed may be repaid at any time with no prepayment penalty. There were no amounts outstanding on this line of credit as of both December 31, 2021 and 2020.
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RTA, as the borrower, has a revolving credit agreement with Ameriprise Financial as the lender not to exceed $100 million. The interest rate for any borrowing under the agreement is established by reference to LIBOR forU.S. dollar deposits with maturities comparable to the relevant interest period, plus an applicable margin subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. This line of credit is automatically renewed annually with Ameriprise Financial. There were no amounts outstanding on this revolving credit agreement as of both December 31, 2021 and 2020.
Long-Term Debt
The Company has a $500 million unsecured 3.5% surplus note due December 31, 2050 to Ameriprise Financial. The surplus note is subordinate in right of payment to the prior payment in full of the Company's obligations to policyholders, claimants and beneficiaries and all other creditors. No payment of principal or interest shall be made without the prior approval of theMinnesota Department of Commerce and such payments shall be made only fromRiverSource Life Insurance Company's statutory surplus. Interest payments, which commenced on June 30, 2021, are due semiannually in arrears on June 30 and December 31. Subject to the preceding conditions, the Company may prepay all or a portion of the principal at any time. The outstanding balance was $500 million as of both December 31, 2021 and 2020 and is recorded in Long-term debt.
13. Fair Values of Assets and Liabilities
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale. Valuation Hierarchy The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company's valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active
markets that are accessible at the measurement date.
Level 2 Prices or valuations based on observable inputs other than quoted
prices in active markets for identical assets and liabilities.
Level 3 Prices or valuations that require inputs that are both significant to
the fair value measurement and unobservable.
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The following tables present the balances of assets and liabilities measured at
fair value on a recurring basis:
December 31, 2021
Level 1 Level 2 Level 3 Total
(in millions)
Assets
Available-for-Sale securities: Corporate debt securities $ - $ 9,142 $ 496 $ 9,638 Residential mortgage backed securities - 2,250 - 2,250 Commercial mortgage backed securities - 2,656 - 2,656 State and municipal obligations - 1,074 - 1,074 Asset backed securities - 246 291 537 Foreign government bonds and obligations - 83 - 83 U.S. government and agency obligations 1 - - 1 Total Available-for-Sale securities 1 15,451 787 16,239 Cash equivalents 1,985 1,191 - 3,176
Receivables:
Fixed deferred indexed annuity ceded embedded derivatives - - 59 59
Other assets:
Interest rate derivative contracts 1 1,251 - 1,252
Equity derivative contracts 158 4,080 - 4,238
Foreign exchange derivative contracts 1 17 - 18
Credit derivative contracts - 9 - 9
Total other assets 160 5,357 - 5,517
Separate account assets at net asset value ("NAV") 92,238 (1)
Total assets at fair value $ 2,146 $ 21,999 $ 846 $ 117,229
Liabilities
Policyholder account balances, future policy benefits and
claims:
Fixed deferred indexed annuity embedded derivatives
$ - $ 5 $ 56 $ 61
IUL embedded derivatives - - 905 905
GMWB and GMAB embedded derivatives - - 1,486 1,486 (2)
Structured variable annuity embedded derivatives - - 406 406
Total policyholder account balances, future policy benefits (3)
and claims - 5 2,853 2,858
Other liabilities:
Interest rate derivative contracts 1 467 - 468
Equity derivative contracts 101 3,610 - 3,711
Foreign exchange derivative contracts 1 - - 1
Total other liabilities 103 4,077 - 4,180
Total liabilities at fair value $ 103 $ 4,082 $ 2,853 $ 7,038
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December 31, 2020
Level 1 Level 2 Level 3 Total
(in millions)
Assets
Available-for-Sale securities: Corporate debt securities $ - $ 12,107 $ 766 $ 12,873 Residential mortgage backed securities - 2,993 9 3,002 Commercial mortgage backed securities - 4,166 - 4,166 State and municipal obligations - 1,344 - 1,344 Asset backed securities - 817 395 1,212 Foreign government bonds and obligations - 257 - 257 U.S. government and agency obligations 1 - - 1 Total Available-for-Sale securities 1 21,684 1,170 22,855 Cash equivalents 2,419 713 - 3,132 Other assets: Interest rate derivative contracts 1 1,754 - 1,755 Equity derivative contracts 406 3,578 - 3,984 Foreign exchange derivative contracts 1 17 - 18 Credit derivative contracts - 1 - 1 Total other assets 408 5,350 - 5,758 Separate account assets at NAV 87,556 (1) Total assets at fair value $ 2,828 $ 27,747 $ 1,170 $ 119,301 Liabilities
Policyholder account balances, future policy benefits and
claims:
Fixed deferred indexed annuity embedded derivatives
$ - $ 3 $ 49 $ 52 IUL embedded derivatives - - 935 935 GMWB and GMAB embedded derivatives - - 2,316 2,316 (4) Structured variable annuity embedded derivatives - - 70 70 Total policyholder account balances, future policy benefits (5) and claims - 3 3,370 3,373 Other liabilities: Interest rate derivative contracts - 734 - 734 Equity derivative contracts 182 3,329 - 3,511 Foreign exchange derivative contracts 2 - - 2 Credit derivative contracts - 1 - 1 Total other liabilities 184 4,064 - 4,248 Total liabilities at fair value $ 184
$ 4,067 $ 3,370 $ 7,621
(1) Amounts are comprised of certain financial instruments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy.
(2) The fair value of the GMWB and GMAB embedded derivatives included $1.6
billion of individual contracts in a liability position and $133 million of
individual contracts in an asset position (recorded as a contra liability) as of
December 31, 2021.
(3) The Company's adjustment for nonperformance risk resulted in a $598 million
cumulative decrease to the embedded derivatives as of December 31, 2021.
(4) The fair value of the GMWB and GMAB embedded derivatives included $2.4
billion of individual contracts in a liability position and $67 million of
individual contracts in an asset position (recorded as a contra liability) as of
December 31, 2020.
(5) The Company's adjustment for nonperformance risk resulted in a $727 million
cumulative decrease to the embedded derivatives as of December 31, 2020.
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The following tables provide a summary of changes in Level 3 assets and
liabilities measured at fair value on a recurring basis:
Available-for-Sale Securities Receivables
Fixed Deferred
Indexed
Residential Annuity Ceded
Mortgage Backed Asset Backed Embedded
Corporate Debt Securities Securities Securities Total Derivatives
(in millions)
Balance at January 1, 2021 $ 766 $ 9 $ 395 $ 1,170 $ -
Total gains (losses) included in:
Net income (1) - - (1) (1) 3
Other comprehensive income (loss) (10) - (1) (11) -
Purchases 108 - - 108 -
Issues - - - - 57 (4)
Settlements (119) - (81) (200) (1)
Transfers into Level 3 168 - 2 170 -
Transfers out of Level 3 (416) (9) (24) (449) -
Balance at December 31, 2021 $ 496 $ - $ 291 $ 787 $ 59
Changes in unrealized gains (losses) in
net income relating to assets held at (1)
December 31, 2021 $ (1) $ - $ - $ (1) $ -
Changes in unrealized gains (losses) in
other comprehensive income (loss)
relating to assets held at December 31,
2021 $ (8) $ - $ (1) $ (9) $ -
Policyholder Account Balances, Future Policy Benefits and Claims
Structured
Fixed Deferred Variable
Indexed Annuity GMWB and GMAB Annuity
Embedded IUL Embedded Embedded Embedded
Derivatives Derivatives Derivatives Derivatives Total
(in millions)
Balance at January 1, 2021 $ 49 $ 935 $ 2,316 $ 70 $ 3,370
Total (gains) losses included in:
Net income 10 (2) 68 (2) (1,344) (3) 393 (3) (873)
Issues - - 369 (28) 341
Settlements (3) (98) 145 (29) 15
Balance at December 31, 2021 $ 56 $ 905 $ 1,486 $ 406 $ 2,853
Changes in unrealized (gains) losses in net
income relating to liabilities held at (2) (3)
December 31, 2021 $ - $ 68 $ (1,299) $ - $ (1,231)
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Available-for-Sale Securities
Residential
Mortgage Backed Asset Backed
Corporate Debt Securities Securities Securities Total
(in millions)
Balance at January 1, 2020 $ 735 $ 17 $ 389 $ 1,141
Total gains (losses) included in:
Other comprehensive income (loss) 15 1 (2) 14
Purchases 62 39 - 101
Settlements (46) - (6) (52)
Transfers into Level 3 - - 14 14
Transfers out of Level 3 - (48) - (48)
Balance at December 31, 2020 $ 766 $ 9 $ 395 $ 1,170
Changes in unrealized gains (losses) in net
income relating to assets held at December 31, (1)
2020 $ (1) $ - $ - $ (1)
Changes in unrealized gains (losses) in other
comprehensive income (loss) relating to assets
held at December 31, 2020 $ 15 $ 1 $ (2) $ 14
Policyholder Account Balances, Future Policy Benefits and Claims
Structured
Fixed Deferred Variable
Indexed Annuity GMWB and GMAB Annuity
Embedded IUL Embedded Embedded Embedded
Derivatives Derivatives Derivatives Derivatives Total
(in millions)
Balance at January 1, 2020 $ 43 $ 881 $ 763 $ - $ 1,687
Total (gains) losses included in:
Net income 4 (2) 76 (2) 1,152 (3) 91 (3) 1,323
Issues 3 61 362 (21) 405
Settlements (1) (83) 39 - (45)
Balance at December 31, 2020 $ 49 $ 935 $ 2,316 $ 70 $ 3,370
Changes in unrealized (gains) losses in net
income relating to liabilities held at (2) (3)
December 31, 2020 $ - $ 76 $ 1,206 $ - $ 1,282
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Available-for-Sale Securities
Residential
Mortgage Backed Asset Backed
Corporate Debt Securities Securities Securities Total
(in millions)
Balance at January 1, 2019 $ 871 $ 64 $ 374 $ 1,309
Total gains (losses) included in:
Net income (1) - - (1) (1)
Other comprehensive income (loss) 30 - 5 35
Purchases 55 27 - 82
Settlements (220) (3) - (223)
Transfers into Level 3 - - 10 10
Transfers out of Level 3 - (71) - (71)
Balance at December 31, 2019 $ 735 $ 17 $ 389 $ 1,141
Changes in unrealized gains (losses) in net
income relating to assets held at December 31, (1)
2019 $ (1) $ - $ - $ (1)
Policyholder Account
Balances, Future Policy Benefits and Claims
Fixed Deferred
Indexed Annuity GMWB and GMAB
Embedded IUL Embedded Embedded
Derivatives Derivatives Derivatives Total
(in millions)
Balance at January 1, 2019 $ 14 $ 628 $ 328 $ 970
Total (gains) losses included in:
Net income 8 (2) 209 (2) 80 (3) 297
Issues 21 113 361 495
Settlements - (69) (6) (75)
Balance at December 31, 2019 $ 43 $ 881 $ 763 $ 1,687
Changes in unrealized (gains) losses in net
income relating to liabilities held at (2) (3)
December 31, 2019 $ - $ 209 $ 82 $ 291
(1) Included in Net investment income.
(2) Included in Interest credited to fixed accounts.
(3) Included in Benefits, claims, losses and settlement expenses.
(4) Represents the amount of ceded embedded derivatives associated with fixed
deferred annuity products reinsured in the third quarter of 2021. See Note 1 for
additional information on the reinsurance transaction.
The increase (decrease) to pretax income of the Company's adjustment for
nonperformance risk on the fair value of its embedded derivatives was $(92)
million, $196 million and $(190) million, net of DAC, DSIC, unearned revenue
amortization and the reinsurance accrual, for the years ended December 31, 2021,
2020 and 2019, respectively.
Securities transferred from Level 3 primarily represent securities with fair
values that are obtained from a third-party pricing service with observable
inputs or fair values that were included in an observable transaction with a
market participant. Securities transferred to Level 3 represent securities with
fair values that are now based on a single non-binding broker quote.
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The following tables provide a summary of the significant unobservable inputs
used in the fair value measurements developed by the Company or reasonably
available to the Company of Level 3 assets and liabilities:
December 31, 2021
Fair
Value Valuation Technique Unobservable Input Range Weighted Average
(in millions)
Corporate debt securities $ 496 Discounted cash flow Yield/spread to U.S. Treasuries (1) 0.8% - 2.4% 1.1%
(private placements)
Asset backed securities $ 291 Discounted cash flow Annual default rate 5.8% 5.8%
Loss severity 25.0% 25.0%
Yield/spread to swap rates (2) 175 bps - 275 bps 182 bps
Fixed deferred indexed $ 59 Discounted cash flow Surrender rate (4) 0.0% - 66.8% 1.4%
annuity ceded embedded
derivatives
IUL embedded derivatives $ 905 Discounted cash flow Nonperformance risk (3) 65 bps 65 bps
Fixed deferred indexed $ 56 Discounted cash flow Surrender rate (4) 0.0% - 66.8% 1.4%
annuity embedded derivatives
Nonperformance risk (3) 65 bps 65 bps
GMWB and GMAB embedded $ 1,486 Discounted cash flow Utilization of guaranteed withdrawals 0.0% - 48.0% 10.6%
derivatives (5) (6)
Surrender rate (4) 0.1% - 55.7% 3.6%
Market volatility (7) (8) 4.3% - 16.8% 10.8%
Nonperformance risk (3) 65 bps 65 bps
Structured variable annuity $ 406 Discounted cash flow Surrender rate (4) 0.8% - 40.0% 0.9%
embedded derivatives
Nonperformance risk (3) 65 bps 65 bps
December 31, 2020
Fair
Value Valuation Technique Unobservable Input Range Weighted Average
(in millions)
Corporate debt securities $ 766 Discounted cash flow Yield/spread to U.S. Treasuries (1) 1.0% - 3.3% 1.5%
(private placements)
Asset backed securities $ 395 Discounted cash flow Annual default rate 5.3% 5.3%
Loss severity 25.0% 25.0%
Yield/spread to swap rates (2) 250 bps - 400 bps 259 bps
IUL embedded derivatives $ 935 Discounted cash flow Nonperformance risk (3) 65 bps 65 bps
Fixed deferred indexed $ 49 Discounted cash flow Surrender rate (4) 0.0% - 50.0% 1.2%
annuity embedded derivatives
Nonperformance risk (3) 65 bps 65 bps
GMWB and GMAB embedded $ 2,316 Discounted cash flow Utilization of guaranteed withdrawals 0.0% - 48.0% 10.6%
derivatives (5) (6)
Surrender rate (4) 0.1% - 73.5% 3.8%
Market volatility (7) (8) 4.3% - 17.1% 11.0%
Nonperformance risk (3) 65 bps 65 bps
Structured variable annuity $ 70 Discounted cash flow Surrender rate (4) 0.8% - 40.0% 0.9%
embedded derivatives
Nonperformance risk (3) 65 bps 65 bps (1) The weighted average for the spread toU.S. Treasuries for corporate debt securities (private placements) is weighted based on the security's market value as a percentage of the aggregate market value of the securities.
(2) The weighted average for the spread to swap rates for asset backed
securities is calculated as the sum of each tranche's balance multiplied by its
spread to swap divided by the aggregate balances of the tranches.
(3) The nonperformance risk is the spread added to the observable interest rates
used in the valuation of the embedded derivatives.
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(4) The weighted average surrender rate is weighted based on the benefit base of
each contract and represents the average assumption in the current year
including the effect of a dynamic surrender formula.
(5) The utilization of guaranteed withdrawals represents the percentage of
contractholders that will begin withdrawing in any given year.
(6) The weighted average utilization rate represents the average assumption for
the current year, weighting each policy evenly. The calculation excludes
policies that have already started taking withdrawals.
(7) Market volatility represents the implied volatility of fund of funds and
managed volatility funds.
(8) The weighted average market volatility represents the average volatility
across all contracts, weighted by the size of the guaranteed benefit.
Level 3 measurements not included in the table above are obtained from
non-binding broker quotes where unobservable inputs utilized in the fair value
calculation are not reasonably available to the Company.
Uncertainty of Fair Value Measurements
Significant increases (decreases) in the yield/spread toU.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the annual default rate used in the fair value measurement of Level 3 asset backed securities in isolation, generally, would have resulted in a significantly lower (higher) fair value measurement and significant increases (decreases) in loss severity in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in the yield/spread to swap rates in isolation
would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in the surrender rate used in the fair value measurement of the fixed deferred indexed annuity ceded embedded derivatives in isolation would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurements of the fixed deferred indexed annuity embedded derivatives and structured variable annuity embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value. Significant increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly higher (lower) liability value. Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution channel and whether the value of the guaranteed benefit exceeds the contract accumulation value. Determination of Fair Value The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company's market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company's income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy. Assets
Available-for-Sale Securities
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third-party pricing services, non-binding broker quotes, or other model-based valuation techniques.
Level 1 securities primarily include
Level 2 securities primarily include corporate bonds, residential mortgage
backed securities, commercial mortgage backed securities, state and municipal
obligations, asset backed securities and foreign government securities. The fair
value of these Level 2 securities is based on a market approach with prices
obtained from third-party pricing services. Observable inputs used to value
these securities can include, but are not limited to, reported trades, benchmark
yields, issuer spreads and non-binding broker quotes. The fair value of
securities included in an observable transaction with a market participant are
also considered Level 2 when the market is not active.
Level 3 securities primarily include certain corporate bonds, non-agency
residential mortgage backed securities, commercial mortgage backed securities
and asset backed securities with fair value typically based on a single
non-binding broker quote. The underlying inputs used for some of the non-binding
broker quotes are not readily available to the Company. The Company's privately
placed
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corporate bonds are typically based on a single non-binding broker quote. The fair value of affiliated asset backed securities is determined using a discounted cash flow model. Inputs used to determine the expected cash flows include assumptions about discount rates and default, prepayment and recovery rates of the underlying assets. Given the significance of the unobservable inputs to this fair value measurement, the fair value of the investment in the affiliated asset backed securities is classified as Level 3. In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third-party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third-party pricing services. The Company's due diligence procedures include assessing the vendor's valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.
Cash Equivalents
Cash equivalents include time deposits and other highly liquid investments with original or remaining maturities at the time of purchase of 90 days or less. Actively traded money market funds are measured at their NAV and classified as Level 1.U.S. Treasuries are also classified as Level 1. The Company's remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Receivables
During the third quarter of 2021, the Company reinsured its fixed deferred indexed annuity products which have an indexed account that is accounted for as an embedded derivative. The Company uses discounted cash flow models to determine the fair value of these ceded embedded derivatives. The fair value of fixed deferred indexed annuity ceded embedded derivatives includes significant observable interest rates, volatilities and equity index levels and significant unobservable surrender rates. Given the significance of the unobservable surrender rates, these embedded derivatives are classified as Level 3. See Note 1 for more information on the reinsurance transaction.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as
derivatives that are exchange-traded, are classified as Level 1 measurements.
The variation margin on futures contracts is also classified as Level 1. The
fair value of derivatives that are traded in less active
over-the-counter ("OTC") markets is generally measured using pricing models with
market observable inputs such as interest rates and equity index levels. These
measurements are classified as Level 2 within the fair value hierarchy and
include swaps and the majority of options. The counterparties' nonperformance
risk associated with uncollateralized derivative assets was immaterial as of
December 31, 2021 and 2020. See Note 16 and Note 17 for further information on
the credit risk of derivative instruments and related collateral.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV is used as a practical expedient for fair value and represents the exit price for the separate account. Separate account assets are excluded from classification in the fair value hierarchy. Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
There is no active market for the transfer of the Company's embedded derivatives
attributable to the provisions of certain variable annuity riders, fixed
deferred indexed annuity, structured variable annuity and IUL products.
The Company values the embedded derivatives attributable to the provisions of
certain variable annuity riders using internal valuation models. These models
calculate fair value as the present value of future expected benefit payments
less the present value of future expected rider fees attributable to the
embedded derivative feature. The projected cash flows used by these models
include observable capital market assumptions and incorporate significant
unobservable inputs related to implied volatility as well as contractholder
behavior assumptions that include margins for risk, all of which the Company
believes a market participant would expect. The fair value also reflects a
current estimate of the Company's nonperformance risk specific to these embedded
derivatives. Given the significant unobservable inputs to this valuation, these
measurements are classified as Level 3. The embedded derivatives attributable to
these provisions are recorded in Policyholder account balances, future policy
benefits and claims.
The Company uses a discounted cash flow model to determine the fair value of the
embedded derivatives associated with the provisions of its equity index annuity
product. The projected cash flows generated by this model are based on
significant observable inputs related to interest rates, volatilities and equity
index levels and, therefore, are classified as Level 2.
The Company uses discounted cash flow models to determine the fair value of the
embedded derivatives associated with the provisions of its fixed deferred
indexed annuity, structured variable annuity and IUL products. The structured
variable annuity product
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is a limited flexible purchase payment annuity that offers 45 different indexed account options providing equity market exposure and a fixed account. Each indexed account includes a protection option (a buffer or a floor). If the index has a negative return, contractholder losses will be reduced by a buffer or limited to a floor. The portion allocated to an indexed account is accounted for as an embedded derivative. The fair value of fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and significant unobservable surrender rates and the estimate of the Company's nonperformance risk. Given the significance of the unobservable surrender rates and the nonperformance risk assumption, the fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives are classified as Level 3.
The embedded derivatives attributable to these provisions are recorded in
Policyholder account balances, future policy benefits and claims.
Other Liabilities
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The variation margin on futures contracts is also classified as Level 1. The fair value of derivatives that are traded in less active OTC markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of options. The Company's nonperformance risk associated with uncollateralized derivative liabilities was immaterial as of December 31, 2021 and 2020. See Note 16 and Note 17 for further information on the credit risk of derivative instruments and related collateral.
Fair Value on a Nonrecurring Basis
The Company assesses its investment in affordable housing partnerships for impairment. The investments that are determined to be impaired are written down to their fair value. The Company uses a discounted cash flow model to measure the fair value of these investments. Inputs to the discounted cash flow model are estimates of future net operating losses and tax credits available to the Company and discount rates based on market condition and the financial strength of the syndicator (general partner). The balance of affordable housing partnerships measured at fair value on a nonrecurring basis was $93 million and $101 million as of December 31, 2021 and 2020, respectively, and is classified as Level 3 in the fair value hierarchy. The Company also measured certain equity-method investments at fair value on a nonrecurring basis using a discounted cash flow model. Inputs to the model include projected cash flows and a market-based discount rate. At December 31, 2021, the fair value of these investments was $7 million and is classified as Level 3 in the fair value hierarchy.
Assets and Liabilities Not Reported at Fair Value
The following tables provide the carrying value and the estimated fair value of
financial instruments that are not reported at fair value:
December 31, 2021
Carrying Fair Value
Value Level 1 Level 2 Level 3 Total
(in millions)
Financial Assets
Mortgage loans, net $ 1,788 $ - $ - $ 1,872 $ 1,872
Policy loans 834 - 834 - 834
Other investments 61 - 40 21 61
Receivables 7,876 - - 8,630 8,630
Financial Liabilities
Policyholder account balances, future policy
benefits and claims $ 12,342 $ - $ - $ 13,264 $ 13,264
Short-term borrowings 200 - 200 - 200
Long-term debt 500 - 498 - 498
Other liabilities 9 - - 9 9
Separate account liabilities - investment contracts 403 - 403 - 403
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December 31, 2020
Carrying Fair Value
Value Level 1 Level 2 Level 3 Total
(in millions)
Financial Assets
Mortgage loans, net $ 2,574 $ - $ - $ 2,724 $ 2,724
Policy loans 846 - 846 - 846
Other investments 457 - 417 40 457
Receivables 1,430 - - 1,732 1,732
Financial Liabilities
Policyholder account balances, future policy
benefits and claims $ 9,990 $ - $ - $ 11,686 $ 11,686
Short-term borrowings 200 - 200 - 200
Long-term debt 500 - 509 - 509
Other liabilities 12 - - 11 11
Separate account liabilities - investment contracts 351 - 351 - 351
Other investments include syndicated loans and the Company's membership in the
FHLB. Receivables include deposit receivables. See Note 7 for additional
information on mortgage loans, policy loans, syndicated loans and deposit
receivables.
Policyholder account balances, future policy benefits and claims includes fixed annuities in deferral status, non-life contingent fixed annuities in payout status, indexed and structured variable annuity host contracts, and the fixed portion of a small number of variable annuity contracts classified as investment contracts. See Note 10 for additional information on these liabilities. Short-term borrowings include FHLB borrowings. Long-term debt includes the surplus note with Ameriprise Financial. See Note 12 for further information on short-term borrowings and long-term debt. Other liabilities include future funding commitments to affordable housing partnerships and other real estate partnerships. Separate account liabilities are related to certain annuity products that are classified as investment contracts.
14. Related Party Transactions
Revenues
See Note 4 for information about revenues from contracts with customers earned
by the Company from related party transactions with affiliates.
The Company is the lessor of one real estate property which it leases to Ameriprise Financial under an operating lease that expires November 30, 2029. The Company earned $5 million in rental income for each of the years ended December 31, 2021, 2020 and 2019, which is reflected in Other revenues. The Company expects to earn $5 million in each year of the five year period ending December 31, 2026 and a total of $14 million thereafter.
Expenses
Charges by Ameriprise Financial and affiliated companies to the Company for use of joint facilities, technology support, marketing services and other services aggregated $345 million, $358 million and $370 million for the years ended December 31, 2021, 2020 and 2019, respectively. Certain of these costs are included in DAC. Expenses allocated to the Company may not be reflective of expenses that would have been incurred by the Company on a stand-alone basis.
Income Taxes
The Company's taxable income is included in the consolidated federal income tax return of Ameriprise Financial. The net amount due from (to) Ameriprise Financial for federal income taxes was $18 million and $(297) million as of December 31, 2021 and 2020, respectively, which is reflected in Other assets as of December 31, 2021 and Other liabilities as of December 31, 2020.
Investments
The Company invests in AA and A rated asset backed securities issued by AAF, an
affiliate of the Company. The asset backed securities are collateralized by a
portfolio of loans issued to advisors affiliated with AFS, an affiliated broker
dealer. As of December 31, 2021 and 2020, the fair value of these asset backed
securities was $289 million and $372 million, respectively, and is reported in
Investments: Available-for-Sale Fixed Maturities on the Company's Consolidated
Balance Sheets. Interest income from these asset backed securities was $12
million, $14 million and $14 million for the years ended December 31, 2021, 2020
and 2019, respectively, and is reported in Net investment income.
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Lines of Credit
RiverSource Life Insurance Company , as the lender, has a revolving credit agreement with Ameriprise Financial as the borrower. This line of credit is not to exceed 3% ofRiverSource Life Insurance Company's statutory admitted assets as of the prior year end. The interest rate for any borrowing is established by reference to LIBOR forU.S. dollar deposits with maturities comparable to the relevant interest period, plus an applicable margin subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. In the event of default, an additional 1% interest will accrue during such period of default. There were no amounts outstanding on this revolving credit agreement as of both December 31, 2021 and 2020. See Note 12 for information about additional lines of credit with an affiliate.
Long-Term Debt
See Note 12 for information about a surplus note to an affiliate.
Dividends or Distributions
Cash dividends or distributions paid and received byRiverSource Life Insurance Company were as follows: Years Ended December 31, 2021 2020 2019 (in millions) Paid to Ameriprise Financial $ 1,900 $ 800 $ 1,350 Received from RiverSource Life of NY - - 43 Received from RTA 50 95 100 On February 23, 2022,RiverSource Life Insurance Company's Board of Directors declared a cash dividend of $300 million to Ameriprise Financial, payable on or after March 25, 2022, pending approval by theMinnesota Department of Commerce . For dividends and other distributions from the life insurance companies, advance notification was provided to state insurance regulators prior to payments. See Note 15 for additional information.
15. Regulatory Requirements
TheNational Association of Insurance Commissioners ("NAIC") defines Risk-Based Capital ("RBC") requirements for insurance companies. The RBC requirements are used by the NAIC and state insurance regulators to identify companies that merit regulatory actions designed to protect policyholders. These requirements apply to the Company. The Company has met its minimum RBC requirements. Insurance companies are required to prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of their respective states of domicile, which vary materially from GAAP. Prescribed statutory accounting practices include publications of the NAIC, as well as state laws, regulations and general administrative rules. The more significant differences from GAAP include charging policy acquisition costs to expense as incurred, establishing annuity and insurance reserves using different actuarial methods and assumptions, classifying surplus notes as a component of statutory surplus rather than debt, valuing investments on a different basis and excluding certain assets from the balance sheet by charging them directly to surplus, such as a portion of the net deferred income tax assets.RiverSource Life Insurance Company received approval from theMinnesota Department of Commerce to apply a permitted statutory accounting practice, effective July 1, 2017 through June 30, 2019, for certain derivative instruments used to economically hedge the interest rate exposure of certain variable annuity products that do not qualify for statutory hedge accounting. The permitted practice was intended to mitigate the impact to statutory surplus from the misalignment between variable annuity statutory reserves, which are not carried at fair value, and the fair value of derivatives used to economically hedge the interest rate exposure of non-life contingent living benefit guarantees. The permitted practice allowedRiverSource Life Insurance Company to defer a portion of the change in fair value, net investment income and realized gains or losses generated from designated derivatives to the extent the amounts do not offset the current period interest-rate related change in the variable annuity statutory reserve liability. The deferred amount could be amortized over ten years using the straight-line method with the ability to accelerate amortization at management's discretion. As of June 30, 2019,RiverSource Life Insurance Company elected to accelerate amortization of the net deferred amount associated with its permitted practice. State insurance statutes contain limitations as to the amount of dividends and other distributions that insurers may make without providing prior notification to state regulators. ForRiverSource Life Insurance Company , payments in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by theState of Minnesota , require advance notice to theMinnesota 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 $175 million and $1.3 billion as of December 31, 2021 and 2020, respectively.
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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 theMinnesota Department of Commerce , and are subject to potential disapproval. Statutory capital and surplus was $3.4 billion and $4.8 billion as of December 31, 2021 and 2020, respectively.
Statutory net gain from operations and net income for
Company
Years Ended December 31,
2021 2020 2019
(in millions)
Statutory net gain from operations $ 1,366 $ 1,393 $ 1,505
Statutory net income
253 1,582 786
Government debt securities of $5 million and $4 million as of December 31, 2021
and 2020, respectively, were on deposit with various states as required by law.
16. Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting and collateral arrangements and qualify for offset. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. The Company's policy is to recognize amounts subject to master netting arrangements on a gross basis in the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company's
assets subject to master netting arrangements:
December 31, 2021
Gross Amounts Amounts of Assets
Offset in the Presented in Gross Amounts
Not Offset in the Consolidated Balance Sheets
Gross Amounts of Consolidated the Consolidated Securities
Recognized Assets Balance Sheets Balance Sheets Financial Instruments(1) Cash Collateral Collateral Net Amount
(in millions)
Derivatives:
OTC $ 5,330 $ - $ 5,330 $ (3,571) $ (1,623) $ (114) $ 22
OTC cleared 88 - 88 (41) - - 47
Exchange-traded 99 - 99 (91) - - 8
Total derivatives $ 5,517 $ - $ 5,517 $ (3,703) $ (1,623) $ (114) $ 77
December 31, 2020
Gross Amounts Amounts of Assets
Offset in the Presented in Gross Amounts
Not Offset in the Consolidated Balance Sheets
Gross Amounts of Consolidated the Consolidated Securities
Recognized Assets Balance Sheets Balance Sheets Financial Instruments(1) Cash Collateral Collateral Net Amount
(in millions)
Derivatives:
OTC $ 5,391 $ - $ 5,391 $ (3,801) $ (1,243) $ (315) $ 32
OTC cleared 58 - 58 (25) - - 33
Exchange-traded 309 - 309 (90) (165) - 54
Total derivatives $ 5,758 $ - $ 5,758 $ (3,916) $ (1,408) $ (315) $ 119
(1) Represents the amount of assets that could be offset by liabilities with the
same counterparty under master netting or similar arrangements that management
elects not to offset on the Consolidated Balance Sheets.
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The following tables present the gross and net information about the Company's
liabilities subject to master netting arrangements:
December 31, 2021
Gross Amounts Amounts of Gross Amounts Not Offset
Gross Amounts of Offset in the Liabilities Presented in
the Consolidated Balance Sheets
Recognized Consolidated in the Consolidated Financial Cash Securities
Liabilities Balance Sheets Balance Sheets Instruments(1) Collateral Collateral Net Amount
(in millions)
Derivatives:
OTC $ 4,048 $ - $ 4,048 $ (3,571) $ (181) $ (293) $ 3
OTC cleared 41 - 41 (41) - - -
Exchange-traded 91 - 91 (91) - - -
Total derivatives $ 4,180 $ - $ 4,180 $ (3,703) $ (181) $ (293) $ 3
December 31, 2020
Amounts of Gross Amounts Not Offset
Gross Amounts Liabilities in the
Consolidated Balance Sheets
Gross Amounts of Offset in the Presented in the
Recognized Consolidated Consolidated Financial Cash Securities
Liabilities Balance Sheets Balance Sheets Instruments(1)
Collateral Collateral Net Amount
(in millions)
Derivatives:
OTC $ 4,129 $ - $ 4,129 $ (3,801) $ (1) $ (327) $ -
OTC cleared 25 - 25 (25) - - -
Exchange-traded 94 - 94 (90) - - 4
Total derivatives $ 4,248 $ - $ 4,248 $ (3,916) $ (1) $ (327) $ 4
(1) Represents the amount of liabilities that could be offset by assets with the
same counterparty under master netting or similar arrangements that management
elects not to offset on the Consolidated Balance Sheets.
In the tables above, the amount of assets or liabilities presented are offset
first by financial instruments that have the right of offset under master
netting or similar arrangements, then any remaining amount is reduced by the
amount of cash and securities collateral. The actual collateral may be greater
than amounts presented in the tables.
When the fair value of collateral accepted by the Company is less than the
amount due to the Company, there is a risk of loss if the counterparty fails to
perform or provide additional collateral. To mitigate this risk, the Company
monitors collateral values regularly and requires additional collateral when
necessary. When the value of collateral pledged by the Company declines, it may
be required to post additional collateral.
Freestanding derivative instruments are reflected in Other assets and Other
liabilities. Cash collateral pledged by the Company is reflected in Other assets
and cash collateral accepted by the Company is reflected in Other liabilities.
See Note 17 for additional disclosures related to the Company's derivative
instruments.
17. Derivatives and Hedging Activities
Derivative instruments enable the Company to manage its exposure to 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. The Company primarily enters into derivative agreements for risk
management purposes related to the Company's products and operations.
Certain of the Company's freestanding derivative instruments are subject to
master netting arrangements. The Company's policy on the recognition of
derivatives on the Consolidated Balance Sheets is to not offset fair value
amounts recognized for derivatives and collateral arrangements executed with the
same counterparty under the same master netting arrangement. See Note 16 for
additional information regarding the estimated fair value of the Company's
freestanding derivatives after considering the effect of master netting
arrangements and collateral.
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Generally, the Company uses derivatives as economic hedges and accounting
hedges. The following table presents the notional value and gross fair value of
derivative instruments, including embedded derivatives:
December 31, 2021 December 31, 2020
Gross Fair Value Gross Fair Value
Liabilities Liabilities
Notional Assets (1) (2)(3) Notional Assets (1) (2)(3)
(in millions)
Derivatives not designated as hedging instruments
Interest rate contracts $ 79,459 $ 1,252 $ 468 $ 77,925 $ 1,755 $ 734
Equity contracts 59,763 4,238 3,711 55,993 3,984 3,511
Credit contracts 1,717 9 - 2,269 1 1
Foreign exchange contracts 2,239 18 1 3,124 18 2
Total non-designated hedges 143,178 5,517 4,180 139,311 5,758
4,248
Embedded derivatives GMWB and GMAB (4) N/A - 1,486 N/A - 2,316 IUL N/A - 905 N/A - 935 Fixed deferred indexed annuities and deposit receivables N/A 59 61 N/A - 52 Structured variable annuity N/A - 406 N/A - 70 Total embedded derivatives N/A 59 2,858 N/A - 3,373 Total derivatives $ 143,178 $ 5,576 $ 7,038 $ 139,311 $ 5,758 $ 7,621 N/A Not applicable. (1) The fair value of freestanding derivative assets is included in Other assets and the fair value of ceded derivative assets related to deposit receivables is included in Receivables. (2) The fair value of freestanding derivative liabilities is included in Other liabilities. The fair value of GMWB and GMAB, IUL, and fixed deferred indexed annuity and structured variable annuity embedded derivatives is included in Policyholder account balances, future policy benefits and claims. (3) The fair value of the Company's derivative liabilities after considering the effects of master netting arrangements, cash collateral held by the same counterparty and the fair value of net embedded derivatives was $3.2 billion and $3.7 billion as of December 31, 2021 and 2020, respectively. See Note 16 for additional information related to master netting arrangements and cash collateral.
(4) The fair value of the GMWB and GMAB embedded derivatives as of
December 31, 2021 included $1.6 billion of individual contracts in a
liability position and $133 million of individual contracts in an asset
position. The fair value of the GMWB and GMAB embedded derivatives as of
December 31, 2020 included $2.4 billion of individual contracts in a liability
position and $67 million of individual contracts in an asset position.
See Note 13 for additional information regarding the Company's fair value
measurement of derivative instruments.
As of December 31, 2021 and 2020, investment securities with a fair value of
$123 million and $325 million, respectively, were received as collateral to meet
contractual obligations under derivative contracts, of which $123 million and
$325 million, respectively, may be sold, pledged or rehypothecated by the
Company. As of both December 31, 2021 and 2020, the Company had sold, pledged,
or rehypothecated none of these securities. In addition, as of both
December 31, 2021 and 2020, non-cash collateral accepted was held in separate
custodial accounts and was not included in the Company's Consolidated Balance
Sheets.
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The following table presents a summary of the impact of derivatives not
designated as hedging instruments, including embedded derivatives, on the
Consolidated Statements of Income:
Benefits, Claims,
Losses and
Net Investment Interest Credited Settlement
Income to Fixed Accounts Expenses
(in millions)
Year Ended December 31, 2021
Interest rate contracts $ - $ - $ (886)
Equity contracts 1 91 (817)
Credit contracts - - 43
Foreign exchange contracts - - 5
GMWB and GMAB embedded derivatives - - 830
IUL embedded derivatives - 30 -
Fixed deferred indexed annuity and deposit receivables
embedded derivatives
- (8) -
Structured variable annuity embedded derivatives - - (393)
Total gain (loss) $ 1 $ 113 $ (1,218)
Year Ended December 31, 2020
Interest rate contracts $ - $ - $ 1,633
Equity contracts - 55 (744)
Credit contracts - - (106)
Foreign exchange contracts - - (8)
GMWB and GMAB embedded derivatives - - (1,553)
IUL embedded derivatives - 7 -
Fixed deferred indexed annuities embedded derivatives - (4) -
Structured variable annuity embedded derivatives - - (91)
Total gain (loss) $ - $ 58 $ (869)
Year Ended December 31, 2019
Interest rate contracts $ - $ - $ 1,100
Equity contracts - 117 (1,501)
Credit contracts - - (73)
Foreign exchange contracts - - (30)
GMWB and GMAB embedded derivatives - - (435)
IUL embedded derivatives - (140) -
Fixed deferred indexed annuities embedded derivatives - (8) -
Total gain (loss) $ - $ (31) $ (939)
The Company holds derivative instruments that either do not qualify or are not
designated for hedge accounting treatment. These derivative instruments are used
as economic hedges of equity, interest rate, credit and foreign currency
exchange rate risk related to various products and transactions of the Company.
Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the
right to make limited partial withdrawals each contract year regardless of the
volatility inherent in the underlying investments or guarantee a minimum
accumulation value of consideration received at the beginning of the contract
period, after a specified holding period, respectively. The indexed portion of
structured variable annuities and the GMAB and non-life contingent GMWB
provisions are considered embedded derivatives, which are bifurcated from their
host contracts for valuation purposes and reported on the Consolidated Balance
Sheets at fair value with changes in fair value reported in earnings. The
Company economically hedges the aggregate exposure related to the indexed
portion of structured variable annuities and the GMAB and non-life contingent
GMWB provisions using options, swaptions, swaps and futures.
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The deferred premium associated with certain of the above options and swaptions
is paid or received semi-annually over the life of the contract or at maturity.
The following is a summary of the payments the Company is scheduled to make and
receive for these options and swaptions as of December 31, 2021:
Premiums Premiums
Payable Receivable
(in millions)
2022 $ 204 $ 204
2023 51 43
2024 137 25
2025 124 22
2026 252 88
2027-2028 18 -
Total $ 786 $ 382
Actual timing and payment amounts may differ due to future settlements,
modifications or exercises of the contracts prior to the full premium being paid
or received.
The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. As a means of economically hedging these risks, the Company may use a combination of futures, options, swaps and swaptions. Certain of the macro hedge derivatives may contain settlement provisions linked to both equity returns and interest rates. The Company's macro hedge derivatives that contain settlement provisions linked to both equity returns and interest rates, if any, are shown in other contracts in the tables above. Structured variable annuity and IUL products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to structured variable annuity and IUL products will positively or negatively impact earnings over the life of these products. The equity component of structured variable annuity and IUL product obligations are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As a means of economically hedging its obligations under the provisions of these products, the Company enters into interest rate swaps, index options and futures contracts.
Cash Flow Hedges
During the years ended December 31, 2021 and 2020, the Company held no
derivatives that were designated as cash flow hedges. During the years ended
December 31, 2021, 2020 and 2019, no hedge relationships were discontinued due
to forecasted transactions no longer being expected to occur according to the
original hedge strategy.
Credit Risk
Credit risk associated with the Company's derivatives is the risk that a
derivative counterparty will not perform in accordance with the terms of the
applicable derivative contract. To mitigate such risk, the Company has
established guidelines and oversight of credit risk through a comprehensive
enterprise risk management program that includes members of senior management.
Key components of this program are to require preapproval of counterparties and
the use of master netting and collateral arrangements whenever practical. See
Note 16 for additional information on the Company's credit exposure related to
derivative assets.
Certain of the Company's derivative contracts contain provisions that adjust the
level of collateral the Company is required to post based on the Company's
financial strength rating (or based on the debt rating of the Company's parent,
Ameriprise Financial). Additionally, certain of the Company's derivative
contracts contain provisions that allow the counterparty to terminate the
contract if the Company does not maintain a specific financial strength rating
or Ameriprise Financial's debt does not maintain a specific credit rating
(generally an investment grade rating). If these termination provisions were to
be triggered, the Company's counterparty could require immediate settlement of
any net liability position. As of December 31, 2021 and 2020, the aggregate fair
value of derivative contracts in a net liability position containing such credit
contingent provisions was $383 million and $324 million, respectively. The
aggregate fair value of assets posted as collateral for such instruments as of
December 31, 2021 and 2020 was $383 million and $324 million, respectively. If
the credit contingent provisions of derivative contracts in a net liability
position as of both December 31, 2021 and 2020 were triggered, the aggregate
fair value of additional assets that would be required to be posted as
collateral or needed to settle the instruments immediately would have been nil
on both December 31, 2021 and 2020.
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18. Shareholder's Equity
The following tables provide the amounts related to each component of OCI:
Year Ended December 31, 2021
Income Tax
Pretax Benefit (Expense) Net of Tax
(in millions)
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the
period (1)
$
(527) $ 111 $ (416)
Reclassification of net (gains) losses on securities included
in net income (2)
(556) 117 (439)
Impact of DAC, DSIC, unearned revenue, benefit reserves and
reinsurance recoverables
333 (70) 263 Net unrealized gains (losses) on securities (750) 158 (592) Total other comprehensive income (loss) $
(750) $ 158 $ (592)
Year Ended December 31, 2020
Income Tax
Benefit
Pretax (Expense) Net of Tax
(in millions)
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the
period (1) $ 811
$ (170) $ 641
Reclassification of net (gains) losses on securities included
in net income (2)
5 (1) 4
Impact of DAC, DSIC, unearned revenue, benefit reserves and
reinsurance recoverables
(379) 80 (299)
Net unrealized gains (losses) on securities 437 (91) 346
Total other comprehensive income (loss) $ 437 $ (91) $ 346
Year Ended December 31, 2019
Income Tax
Benefit
Pretax (Expense) Net of Tax
(in millions)
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the
period (1) $ 1,360
$ (289) $ 1,071
Reclassification of net (gains) losses on securities included
in net income (2)
2 - 2
Impact of DAC, DSIC, unearned revenue, benefit reserves and
reinsurance recoverables
(688) 144 (544) Net unrealized gains (losses) on securities 674 (145) 529 Total other comprehensive income (loss) $ 674
$ (145) $ 529
(1) Includes impairments on Available-for-Sale securities related to factors
other than credit that were recognized in OCI during the period.
(2) Reclassification amounts are recorded in Net realized investment gains
(losses).
Other comprehensive income (loss) related to net unrealized gains (losses) on
securities includes three components: (i) unrealized gains (losses) that arose
from changes in the market value of securities that were held during the period;
(ii) (gains) losses that were previously unrealized, but have been recognized in
current period net income due to sales of Available-for-Sale securities and due
to the reclassification of noncredit other-than-temporary impairment losses to
credit losses; and (iii) other adjustments primarily consisting of changes in
insurance and annuity asset and liability balances, such as DAC, DSIC, unearned
revenue, benefit reserves and reinsurance recoverables, to reflect the expected
impact on their carrying values had the unrealized gains (losses) been realized
as of the respective balance sheet dates.
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The following table presents the changes in the balances of each component of
AOCI, net of tax:
Net
Unrealized
Gains
(Losses) on
Securities Other Total
(in millions)
Balance, January 1, 2019 $ 46 $ (1) $ 45
OCI before reclassifications 527 - 527
Amounts reclassified from AOCI 2 - 2
Total OCI 529 - 529
Balance, December 31, 2019 575 (1) (1) 574
OCI before reclassifications 342 - 342
Amounts reclassified from AOCI 4 - 4
Total OCI 346 - 346
Balance, December 31, 2020 921 (1) (1) 920
OCI before reclassifications (153) - (153)
Amounts reclassified from AOCI (439) - (439)
Total OCI (592) - (592)
Balance, December 31, 2021 $
329 (1) $ (1) $ 328
(1) Includes nil of noncredit related impairments on securities and net
unrealized gains (losses) on previously impaired securities as of December 31,
2021, 2020 and 2019.
19. Income Taxes
The components of income tax provision (benefit) were as follows:
Years Ended December 31,
2021 2020 2019
(in millions)
Current income tax
Federal $ 171 $ 233 $ 210
State 6 - 8
Total current income tax 177 233 218
Deferred income tax
Federal (39) (277) (271)
State (1) (1) (7)
Total deferred income tax (40) (278) (278)
Total income tax provision (benefit) $ 137 $ (45)
$ (60)
The principal reasons that the aggregate income tax provision (benefit) is different from that computed by using theU.S. statutory rate of 21% were as follows: Years Ended December 31, 2021 2020 2019 Tax at U.S. statutory rate 21.0 % 21.0 % 21.0 % Changes in taxes resulting from: Low income housing tax credits (5.6) (20.1)
(15.3)
Dividend received deduction (2.9) (9.7)
(7.6)
Foreign tax credit, net of addback (1.5) (1.9) (9.5) Audit adjustments - - (1.4) Uncertain tax positions - - 1.8 Other, net 0.4 (0.8) (0.4) Income tax provision (benefit) 11.4 % (11.5) %
(11.4) %
The increase in the Company's effective tax rate for the year ended December 31,
2021 compared to 2020 is primarily due to the higher pre-tax income relative to
tax preferred items.
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Deferred income tax assets and liabilities result from temporary differences
between the assets and liabilities measured for GAAP reporting versus income tax
return purposes. Deferred income tax assets and liabilities are measured at the
statutory rate of 21% as of both December 31, 2021 and 2020. The significant
components of the Company's deferred income tax assets and liabilities, which
are included net within Other assets or Other liabilities, were as follows:
December 31,
2021 2020
(in millions)
Deferred income tax assets
Liabilities for policyholder account balances, future policy benefits and
claims $ 1,994 $ 1,617
Other 14 13
Gross deferred income tax assets 2,008 1,630
Less: valuation allowance 11 11
Total deferred income tax assets 1,997 1,619
Deferred income tax liabilities
Investment related 508 216
Deferred acquisition costs 469 424
Net unrealized gains on Available-for-Sale securities 114 274
Deferred sales inducement costs - 44
Other 58 12
Gross deferred income tax liabilities 1,149 970
Net deferred income tax assets
$ 848 $ 649
Included in the Company's deferred income tax assets are tax benefits primarily
related to state net operating losses of $9 million, net of federal benefit,
which will expire beginning December 31, 2022. Based on analysis of the
Company's tax position, management believes it is more likely than not that the
Company will not realize certain state net operating losses of $9 million and
state deferred tax assets of $2 million; therefore, a valuation allowance of $11
million has been established.
A reconciliation of the beginning and ending amount of gross unrecognized tax
benefits was as follows:
2021 2020 2019
(in millions)
Balance at January 1 $ 38 $ 39 $ 19
Additions based on tax positions related to the current year - 1 1
Reductions based on tax positions related to the current year (1) (1) -
Additions for tax positions of prior years - - 34
Reductions for tax positions of prior years - - (4)
Audit settlements - - (11)
Reductions due to lapse of statute of limitations - (1) -
Balance at December 31 $ 37 $ 38 $ 39
If recognized, approximately $20 million, $20 million and $17 million, net of
federal tax benefits, of unrecognized tax benefits as of December 31, 2021, 2020
and 2019, respectively, would affect the effective tax rate.
It is reasonably possible that the total amount of unrecognized tax benefits
will change in the next 12 months. The Company estimates that the total amount
of gross unrecognized tax benefits may decrease by approximately $34 million in
the next 12 months primarily due to Internal Revenue Service ("IRS")
settlements.
The Company recognizes interest and penalties related to unrecognized tax
benefits as a component of the income tax provision. The Company recognized a
net increase of $1 million, nil and a net increase of $1 million in interest and
penalties for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company had a payable of $3 million and $2 million related to accrued
interest and penalties as of December 31, 2021 and 2020, respectively.
The Company files income tax returns as part of its inclusion in the
consolidated federal income tax returns of Ameriprise Financial in the U.S.
federal jurisdiction and various state jurisdictions. The federal statute of
limitations are closed on years through 2015, except for one issue for 2014 and
2015 which was claimed on amended returns. The IRS is currently auditing
Ameriprise Financial's U.S. income tax returns for 2016 through 2020. Ameriprise
Financial's or the Company's state income tax returns are currently under
examination by various jurisdictions for years ranging from 2015 through 2019.
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20. Commitments, Guarantees and Contingencies
Commitments
The following table presents the Company's funding commitments as of December
31:
2021 2020
(in millions)
Commercial mortgage loans $ 48 $ 18
Affordable housing and other real estate partnerships 9 12
Total funding commitments $ 57 $ 30
Guarantees
The Company's annuity and life products all have minimum interest rate
guarantees in their fixed accounts. As of December 31, 2021, these guarantees
range from 1% to 5%.
Contingencies The Company and its affiliates are involved in the normal course of business in legal proceedings which include regulatory inquiries, arbitration and litigation, including class actions, concerning matters arising in connection with the conduct of its activities. These include proceedings specific to the Company as well as proceedings generally applicable to business practices in the industries in which it operates. The Company can also be subject to legal proceedings arising out of its general business activities, such as its investments, contracts, and employment relationships. Uncertain economic conditions, heightened and sustained volatility in the financial markets and significant financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the insurance industry generally. As with other insurance companies, the level of regulatory activity and inquiry concerning the Company's businesses remains elevated. From time to time, the Company and its affiliates, including AFS and RiverSource Distributors, Inc. receive requests for information from, and/or are subject to examination or claims by various state, federal and other domestic authorities. The Company and its affiliates typically have numerous pending matters, which includes information requests, exams or inquiries regarding their business activities and practices and other subjects, including from time to time: sales and distribution of various products, including the Company's life insurance and variable annuity products; supervision of associated persons, including AFS financial advisors and RiverSource Distributors Inc.'s wholesalers; administration of insurance and annuity claims; security of client information; and transaction monitoring systems and controls. The Company and its affiliates have cooperated and will continue to cooperate with the applicable regulators. These legal proceedings are subject to uncertainties and, as such, it is inherently difficult to determine whether any loss is probable or even reasonably possible, or to reasonably estimate the amount of any loss. The Company cannot predict with certainty if, how or when any such proceedings will be initiated or resolved. Matters frequently need to be more developed before a loss or range of loss can be reasonably estimated for any proceeding. An adverse outcome in one or more proceedings could eventually result in adverse judgments, settlements, fines, penalties or other sanctions, in addition to further claims, examinations or adverse publicity that could have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. In accordance with applicable accounting standards, the Company establishes an accrued liability for contingent litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. The Company discloses the nature of the contingency when management believes there is at least a reasonable possibility that the outcome may be material to the Company's consolidated financial statements and, where feasible, an estimate of the possible loss. In such cases, there still may be an exposure to loss in excess of any amounts reasonably estimated and accrued. When a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability, but continues to monitor, in conjunction with any outside counsel handling a matter, further developments that would make such loss contingency both probable and reasonably estimable. Once the Company establishes an accrued liability with respect to a loss contingency, the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established, and any appropriate adjustments are made each quarter.
Guaranty Fund Assessments
RiverSource Life Insurance Company and RiverSource Life of NY are required by law to be a member of the guaranty fund association in every state where they are licensed to do business. In the event of insolvency of one or more unaffiliated insurance companies, the Company could be adversely affected by the requirement to pay assessments to the guaranty fund associations. The Company projects its cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations and the amount of its premiums written relative to the industry-wide premium in each state. The Company accrues the estimated cost of future guaranty fund assessments when it is 90
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considered probable that an assessment will be imposed, the event obligating the Company to pay the assessment has occurred and the amount of the assessment can be reasonably estimated. The Company has a liability for estimated guaranty fund assessments and a related premium tax asset. As of both December 31, 2021 and 2020, the estimated liability was $12 million. As of both December 31, 2021 and 2020, the related premium tax asset was $10 million. The expected period over which guaranty fund assessments will be made and the related tax credits recovered is not known.
As Californians retrofit homes against wildfires, state demands insurers cut them a break [The Sacramento Bee]
UNITED FIRE GROUP INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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