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RIVERSOURCE LIFE INSURANCE CO – 10-Q – MANAGEMENT'S NARRATIVE ANALYSIS
Overview
RiverSource Life Insurance Company ("RiverSource Life") and its subsidiaries are referred to collectively in this Form 10-Q 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" that follow, the Consolidated Financial Statements and Notes presented in Item 1 and its Annual Report on Form 10-K for the year endedDecember 31, 2022 filed with theSecurities and Exchange Commission ("SEC") onFebruary 23, 2023 ("2022 10-K"), as well as any current reports on Form 8-K and other publicly available information. 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 H(2)(a) of Form 10-Q in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations.
See Note 1 to the Consolidated Financial Statements for additional information.
The Company operates its business in the broader context of the macroeconomic forces around it, including the global andU.S. economies, the coronavirus disease 2019 ("COVID-19") pandemic, changes in interest and inflation rates, financial market volatility, fluctuations in foreign exchange rates, geopolitical strain, the competitive environment, client and customer activities and preferences, and the various regulatory and legislative developments. Financial markets and macroeconomic conditions have had and will continue to have a significant impact on the Company's operating and performance results. The Company's success may be affected by the factors discussed in Item 1A, "Risk Factors" in the Company's 2022 10-K and other factors as discussed herein. 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.
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 consolidated 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.
Market Risk Benefits
Market risk benefits are contracts or contract features that both provide
protection to the contractholder from other-than-nominal capital market risk and
expose the Company to other-than-nominal capital market risk. Market risk
benefits include certain contract features on variable annuity products that
provide minimum guarantees to policyholders. Guarantees accounted for as market
risk benefits include guaranteed minimum death benefits ("GMDB"), guaranteed
minimum income benefits ("GMIB"), guaranteed minimum withdrawal benefits
("GMWB") and guaranteed minimum accumulation benefits ("GMAB").
Variable Annuities
The Company has approximately $77 billion of variable annuity account value that
has been issued over a period of more than fifty years. The diversified variable
annuity block consists of $33 billion of account value with no living benefit
guarantees and $44 billion of account value with living benefit guarantees,
primarily GMWB provisions. The business is predominately issued through the
Ameriprise Financial® advisor network. The majority of the variable annuity
contracts offered by the Company contain GMDB provisions. The Company
discontinued most new sales of GMWB and GMAB at the end of 2021 and new sales
were completely
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RIVERSOURCE LIFE INSURANCE COMPANY
discontinued as of mid-2022. The Company also previously offered contracts
containing GMIB provisions. See Note 11 to the Company's Consolidated Financial
Statements for further discussion of its variable annuity contracts.
In determining the liabilities for market risk benefits, 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. 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. In addition, the valuation of market risk benefits is impacted by an estimate of the Company's nonperformance risk adjustment. This estimate includes a spread over theU.S. Treasury curve as of the balance sheet date. As the Company's estimate of this spread over theU.S. Treasury curve widens or tightens, the liability will decrease or increase. The change in fair value due to changes in the Company's nonperformance risk is recorded in other comprehensive income. 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, existence of surrender charges, and tax qualifications provide us 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 market risk benefit reserves. 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.
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 insurance, whole life insurance,
disability income ("DI") and long term care ("LTC") insurance and life
contingent payout annuity products.
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 at the reporting date 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. 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. Embedded Derivatives The fair value of embedded derivatives related to structured variable annuities, indexed annuities and IUL fluctuates 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 theU.S. Treasury curve as of the balance sheet date. 60
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RIVERSOURCE LIFE INSURANCE COMPANY
As the Company's estimate of this spread over the
tightens, the liability will decrease or increase.
See Note 13 to the Consolidated Financial Statements for information regarding
the fair value measurement of embedded derivatives.
Traditional Long-Duration Products
The liabilities for traditional long-duration products include cash flows related to 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, LTC, and life contingent payout annuity policies as claims are incurred in the future. Accordingly, the claim liability (also referred to as disabled life reserves) is presented together as one liability for future policy benefits. A liability for future policy benefits, which is the present value of estimated future policy benefits to be paid to or on behalf of policyholders and certain related expenses less the present value of estimated future net premiums to be collected from policyholders, is accrued as premium revenue is recognized. Expected insurance benefits are accrued over the life of the contract in proportion to premium revenue recognized (referred to as the net premium approach). The net premium ratio reflects cash flows from contract inception to contract termination (i.e., through the claim paying period) and cannot exceed 100%. The liability for future policy benefits will be updated for actual experience at least on an annual basis and concurrent with changes to cash flow assumptions. When net premiums are updated for cash flow changes, the estimated cash flows over the entire life of a group of contracts are updated using historical experience and updated future cash flow assumptions. The cash flows used in the calculation are discounted using the forward rate curve on the original contract issue date. The discount rate represents an upper-medium-grade (i.e., low credit risk) fixed-income instrument yield (i.e., an A rating) that reflects the duration characteristics of the liability.
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 15 to the Consolidated Financial Statements. For discussion of the Company's market risk exposures and hedging program and related sensitivity testing, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - 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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RIVERSOURCE LIFE INSURANCE COMPANY
Consolidated Results of Operations for the Three Months Ended
2022
The following table presents the Company's consolidated results of operations:
Three Months Ended March 31,
2023 2022 Change
(in millions)
Revenues
Premiums $ 96 $ 73 $ 23 32%
Net investment income 292 159 133 84
Policy and contract charges 496 534 (38) (7)
Other revenues 150 173 (23) (13)
Net realized investment gains (losses) (3) 18 (21) NM
Total revenues 1,031 957 74 8
Benefits and expenses
Benefits, claims, losses and settlement expenses 300 31 269 NM
Interest credited to fixed accounts 164 141 23 16
Remeasurement gains and losses of future policy benefit
reserves
(5) (6) 1 17 Change in fair value of market risk benefits 489 100 389 NM Amortization of deferred acquisition costs 60 62 (2) (3) Interest and debt expense 45 19 26 NM Other insurance and operating expenses 180 174 6 3 Total benefits and expenses 1,233 521 712 NM Pretax income (loss) (202) 436 (638) NM Income tax provision (benefit) (12) 58 (70) NM Net income (loss)$ (190) $ 378 $ (568) NM NM Not Meaningful. Overall Net income decreased$568 million , for the three months endedMarch 31, 2023 compared to the prior year period. Pretax income decreased$638 million , for the three months endedMarch 31, 2023 compared to the prior year period.
The following impacts were significant drivers of the period-over-period change
in pretax income:
•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 reinsurance accrual was an expense of $475
million for the three months ended March 31, 2023 compared to a benefit of $180
million for the prior year period.
•The favorable impact of the recent trend in rising interest rates on the
investment portfolio yield, including from investment portfolio repositioning in
the fourth quarter of 2022.
Variable annuity account balances decreased 10% to$76.8 billion as ofMarch 31, 2023 compared to the prior year period due to market depreciation and net outflows of$2.2 billion . Variable annuity sales decreased 16% compared to the prior year period reflecting a decrease in sales of variable annuities with living benefit guarantees. Account values with living benefit riders declined to 57% as ofMarch 31, 2023 compared to 60% a year ago reflecting management's actions to optimize the Company's business mix. This trend is expected to continue and meaningfully shift the mix of business away from products with living benefit guarantees over time. Fixed deferred annuity account balances declined 9% to$6.9 billion as ofMarch 31, 2023 compared to the prior year period as policies continue to lapse and the Company previously discontinued new sales of fixed deferred annuities and fixed index annuities.
Revenues
Premiums increased
2023
immediate annuities with a life contingent feature.
Net investment income increased$133 million , or 84%, for the three months endedMarch 31, 2023 compared to the prior year period reflecting the favorable impact of the recent trend in rising interest rates on the investment portfolio yield, including from investment portfolio repositioning in the fourth quarter of 2022, along with higher average balances due to the growth in structured variable annuities. 62
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RIVERSOURCE LIFE INSURANCE COMPANY
Policy and contract charges decreased
ended
lower mortality and expense fees due to market depreciation.
Other revenues decreased$23 million , or 13%, for the three months endedMarch 31, 2023 compared to the prior year period primarily reflecting lower fees from decreased account balances due to market depreciation and a decrease in the yield on deposit receivables arising from reinsurance transactions. Net realized investment losses were$3 million for the three months endedMarch 31, 2023 compared to net realized investment gains of$18 million for the prior year period. The three months endedMarch 31, 2023 included net realized losses of$8 million on investments held by CIEs, partially offset by net realized gains of$5 million on Available-for-Sale securities. The three months endedMarch 31, 2022 included net realized gains of$17 million on Available-for-Sale securities. Benefits and Expenses Benefits, claims, losses and settlement expenses increased$269 million , for the three months endedMarch 31, 2023 compared to the prior year period primarily reflecting the following items: •A$223 million increase in expense from market impacts on structured variable annuities ("SVA") embedded derivative, net of hedges in place to offset those risks. This increase was the result of a favorable$160 million change in the market impact on derivatives hedging the SVA embedded derivative and an unfavorable$383 million change in the market impact on SVA embedded derivative. The main market driver contributing to these changes was the equity market impact on the SVA embedded derivative net of the impact on the corresponding hedge assets resulted in an expense for the three months endedMarch 31, 2023 compared to a benefit for the prior year period.
•The impact of higher sales of immediate annuities with a life contingent
feature.
•The impact of increased volume in structured variable annuities.
Interest credited to fixed accounts increased
months ended
reflecting the following item:
•A$34 million increase in expense from other market impacts on IUL benefits, net of hedges, which was an expense of$46 million for the three months endedMarch 31, 2023 compared to an expense of$12 million for the prior year period. The increase in expense was primarily due to an increase in the IUL embedded derivative in the current period, which reflected less discounting due to higher treasury rates.
Change in fair value of market risk benefits increased
three months ended
reflecting the following item:
•A$405 million increase in expense from market impacts on variable annuity guaranteed benefits, net of hedges in place to offset those risks. This increase was the result of a favorable$519 million change in the market impact on derivatives hedging the variable annuity guaranteed benefits and an unfavorable$924 million change in the market impact on variable annuity guaranteed benefits reserves. The main market drivers contributing to these changes are summarized below: •Equity market impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in a benefit for the three months endedMarch 31, 2023 compared to an expense for the prior year period. •Interest rate and bond impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in an expense for the three months endedMarch 31, 2023 compared to a benefit in the prior year period. •Volatility impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in a lower expense for the three months endedMarch 31, 2023 compared to the prior year period. •Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, transaction costs and various behavioral items, were a lower net expense for the three months endedMarch 31, 2023 compared to the prior year period. Interest and debt expense increased$26 million for the three months endedMarch 31, 2023 compared to the prior year period reflecting higher interest expense of CIEs. Income Taxes The Company's effective tax rate was 5.9% for the three months endedMarch 31, 2023 compared to 13.3% for the prior year period. The decrease in the effective tax rate for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarily the result of pretax losses in the current quarter compared to pretax income in the prior period and the related impact on tax preferred items. See Note 17 to the Consolidated Financial Statements for additional discussion on income taxes.
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RIVERSOURCE LIFE INSURANCE COMPANY
Market Risk
The Company's primary market risk exposures are interest rate, equity price and credit risk. Equity price and interest rate fluctuations can have a significant impact on the Company's results of operations, primarily due to the effects on asset-based fees and expenses, the "spread" income generated on its fixed deferred annuities, fixed insurance, fixed portion of its variable annuities and variable insurance contracts, the value of market risk benefits and other liabilities associated with its variable annuities and the value of derivatives held to hedge related benefits. 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 benefits. 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. 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 annuities, indexed annuities, IUL insurance and the associated hedging instruments, the Company assumed no change in implied market volatility despite the 10% drop in equity prices. The following tables present the Company's estimate of the impact on pretax income from the above defined hypothetical market movements as ofMarch 31, 2023 andDecember 31, 2022 : March 31, 2023 Equity Price Exposure to Pretax Income Equity Price Decline 10% Before Hedge Impact Hedge Impact Net Impact (in millions) Asset-based fees and expenses (1) $ (56) $ -$ (56) Variable annuity and structured variable annuity benefits: Market risk benefits (986) 736 (250) Indexing feature for structured variable annuities 568 (335) 233 Total variable annuity and structured variable annuity benefits (418) 401 (17) IUL insurance 44 (42) 2 Total $ (430) $ 359$ (71) Interest Rate Exposure to Pretax Income Interest Rate Increase 100 Basis Points Before Hedge Impact Hedge Impact Net Impact (in millions) Asset-based fees and expenses (1) $ (12) $ - $
(12)
Variable annuity and structured variable annuity benefits:
Market risk benefits 1,602 (1,171)
431
Indexing feature for structured variable annuities (29) 91
62
Total variable annuity and structured variable annuity benefits 1,573 (1,080)
493
Fixed annuities, fixed insurance and fixed portion of variable
annuities and variable insurance products
18 - 18 IUL insurance 12 2 14 Total$ 1,591 $ (1,078) $ 513 64
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RIVERSOURCE LIFE INSURANCE COMPANY
December 31, 2022
Equity Price Exposure to Pretax Income
Equity Price Decline 10% Before Hedge Impact Hedge Impact Net Impact
(in millions)
Asset-based fees and expenses (1) $ (54) $ - $ (54)
Variable annuity and structured variable annuity
benefits:
Market risk benefits (870) 648 (222)
Indexing feature for structured variable annuities 494 (291) 203
Total variable annuity and structured variable annuity
benefits (376) 357 (19)
IUL insurance 39 (21) 18
Total $ (391) $ 336 $ (55)
Interest Rate Exposure to Pretax Income
Interest Rate Increase 100 Basis Points Before Hedge Impact Hedge Impact
(in millions)
Asset-based fees and expenses (1) $ (12) $ - $
(12)
Variable annuity and structured variable annuity benefits:
Market risk benefits 1,484 (1,028)
456
Indexing feature for structured variable annuities (29) 82
53
Total variable annuity and structured variable annuity benefits 1,455 (946)
509
Fixed annuities, fixed insurance and fixed portion of variable annuities
and variable insurance products
25 - 25 IUL insurance 12 1 13 Total $ 1,480$ (945) $ 535
(1) Excludes incentive income which is impacted by market and fund performance
during the period and cannot be readily estimated.
Net impacts shown in the above tables from market risk benefits 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. The Company's hedging is based on its determination of economic risk, which excludes certain items in the liability valuation. Actual results could and likely will differ materially from those illustrated above as fair values have a number of estimates and assumptions. For example, the illustration above includes 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 the above scenarios. The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices will 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 ofMarch 31, 2023 , the value of these assets was$72.8 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. Market Risk Benefits The total contract value of all variable annuities as ofMarch 31, 2023 was$76.8 billion . See Note 11 for details of the reserves associated with market risk benefits. The changes in the fair value of variable annuity market risk benefits are recorded through earnings, with the exception of the portion of the change in fair value due to a change in the Company's nonperformance risk, which is recognized in other comprehensive income. Fair value is calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees.
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RIVERSOURCE LIFE INSURANCE COMPANY
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 these benefits are longer dated put and call options; these core instruments are supplemented with equity futures and total return swaps. See Note 15 to the Consolidated Financial Statements for further information on the Company's derivative instruments.
Interest Rate Risk
Increases in interest rates reduce the fair value of the liabilities and may result in market risk benefits in an asset position. The interest rate exposure is hedged with a portfolio of interest rate swaps, futures 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 contractholder the ability to allocate account value to either an account that earns fixed interest (fixed account) or an account that is impacted by the performance of various equity indices (indexed account). The Company's earnings are based upon the spread between investment income earned and the credits made to the fixed account and benefits reflected in an indexed account of the structured variable annuities. As ofMarch 31, 2023 , the Company had$7.4 billion in liabilities related to structured variable annuities.
Equity Price Risk
The equity-linked return to contractholders creates equity price risk as the amount paid to contractholders 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 transferred to contractholders is also affected by changes in interest rates. These interest rate risks associated with structured variable annuities are not currently hedged.
Fixed Annuities,
Variable Insurance Contracts
The Company's earnings from fixed insurance, the fixed portion of variable
annuities and variable insurance contracts, and fixed deferred annuities 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. While interest rates under the current
environment have relieved some pressure from the liability guaranteed minimum
interest rates ("GMIRs"), there are still some GMIRs above current levels.
Hence, liability credited rates will move more slowly under a modest rise in
interest 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 $34.9
billion in Policyholder account balances, future policy benefits and claims as
of March 31, 2023 , $17.8 billion is related to liabilities created by these
products. The Company does not hedge this exposure.
As a result of the current market environment, reinvestment yields are becoming
more aligned with the current portfolio yield. The Company would expect the
recent decline in its portfolio income yields to slow and begin to stabilize in
future periods under the current environment. The carrying value and weighted
average yield of total non-structured fixed maturity securities and commercial
mortgage loans in the Company's investment portfolio that may generate proceeds
to reinvest through March 31, 2025 due to prepayment, maturity or call activity
at the option of the issuer, excluding securities with a make-whole provision,
were $0.9 billion and 4.1%, respectively, as of March 31, 2023 . In addition,
residential mortgage-backed securities, which can be subject to prepayment risk
under a low interest rate environment, totaled $3.3 billion and had a weighted
average yield of 3.8% as of March 31, 2023 . 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
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RIVERSOURCE LIFE INSURANCE COMPANY 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 three months endedMarch 31, 2023 was approximately 5.8%. The reinvestment of proceeds from maturities, calls and prepayments at rates near the current portfolio yield will have limited impact to future operating results. In a volatile rate environment could have 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 update the crediting rates on its fixed products when warranted, subject to guaranteed minimums. See Note 9 for more information on 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 ofMarch 31, 2023 andDecember 31, 2022 and the respective guaranteed minimums, as well as the percentage of account values subject to rate reset in the time period indicated.
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 policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. As ofMarch 31, 2023 , the Company had$2.5 billion in liabilities related to the indexed accounts of IUL.
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.
The counterparty risk for centrally cleared over-the-counter derivatives is
transferred to a central clearing party through contract novation. The central
clearing party requires both daily settlement of mark-to-market and initial
margin. Because the central clearing party monitors open positions and adjusts
collateral requirements daily, the Company has minimal credit exposure from such
derivative instruments.
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RIVERSOURCE LIFE INSURANCE COMPANY 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 ofMarch 31, 2023 , the Company's largest reinsurance credit risks are related to coinsurance treaties with Commonwealth and with life insurance subsidiaries of Genworth Financial, Inc. Fair Value Measurements The Company reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, market risk benefits, embedded derivatives, and most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale. The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. The Company validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 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 current 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 theU.S. Treasury curve as ofMarch 31, 2023 . 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 theU.S. Treasury curve, the reduction to future total equity would be approximately$1.2 billion , net of the reinsurance accrual and income taxes (calculated at the statutory tax rate of 21%), based onMarch 31, 2023 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
Inc. ("Ameriprise Financial"). Other liquidity sources the Company has
established are short-term borrowings and available lines of credit with
Ameriprise Financial aggregating $852 million .
The Company enters into short-term borrowings, which may include repurchase
agreements and Federal 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 of Des Moines , which
provides RiverSource Life Insurance Company access to collateralized borrowings.
As of March 31, 2023 and December 31, 2022 , the Company had estimated maximum
borrowing capacity of $4.0 billion and $3.9 billion under the FHLB facility,
respectively, of which $201 million was outstanding as of both March 31, 2023
and December 31, 2022 , respectively, and is collateralized with commercial
mortgage backed securities.
There have been no material changes to the Company's contractual obligations
disclosed in the Company's 2022 10-K.
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, the Company established an agreement to protect its exposure to
("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
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RIVERSOURCE LIFE INSURANCE COMPANY 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 what the Company has with GLIC have been tested and respected inDelaware and elsewhere inthe United States , and as a result the 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, the 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 account the Company's credit protections). Thus, management believes that this agreement and offsetting non LTC legacy arrangements with Genworth will enable the Company to recover on all net exposure in all material respects in the event of a rehabilitation or insolvency of GLIC. Capital Activity Cash dividends or distributions paid and received byRiverSource Life Insurance Company were as follows: Three Months Ended March 31, 2023 2022 (in millions) Paid to Ameriprise Financial $ 200$ 300
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.
RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities were as follows: Regulatory Capital Actual Capital (1) Requirements (2) December 31, December 31, March 31, 2023 2022 2022 (in millions) RiverSource Life Insurance Company$ 3,108 $ 3,103 $ 571 RiverSource Life of NY 324 320 40
(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. The regulatory capital requirement is only required to be calculated annually.
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 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", "appear", "expand" 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:
•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;
•adverse capital and credit market conditions or any downgrade in the Company's
credit ratings;
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RIVERSOURCE LIFE INSURANCE COMPANY
•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;
•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 included in Part I, Item 1A of the Company's 2022 10-K.
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