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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, 2020 filed with theSecurities and Exchange Commission ("SEC") onFebruary 24, 2021 ("2020 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 coronavirus disease 2019 (''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. In early 2020, the Company and its affiliates implemented a work-from-home protocol for virtually all of the Company's employee population, restricted business travel, and provided resources for complying with the guidance from theWorld Health Organization , theU.S. Centers for Disease Control and governments. The Company and its affiliates are thoughtfully returning to its office locations, where it is reasonable to do so, while complying with applicable health agencies' guidelines and governmental orders. 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. Given the 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 the Company's 2020 10-K. During the third quarter of 2021, RiverSource Life closed on a transaction withGlobal Atlantic Financial Group's subsidiaryCommonwealth Annuity and Life Insurance Company , 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 4 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. These accounting policies are discussed in detail in "Management's Narrative Analysis - Critical Accounting Estimates" in the Company's 2020 10-K. Recent Accounting Pronouncements For information regarding recent accounting pronouncements and their expected impact on the Company's future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.
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RIVERSOURCE LIFE INSURANCE COMPANY Consolidated Results of Operations for the Nine Months EndedSeptember 30, 2021 and 2020 The following table presents the Company's consolidated results of operations: Nine Months Ended September 30, 2021 2020 Change (in millions) Revenues Premiums$ (945) $ 256 $ (1,201) NM Net investment income 664 647 17 3 % Policy and contract charges 1,715 1,529 186 12 Other revenues 436 357 79 22 Net realized investment gains (losses) 589 (16) 605 NM Total revenues 2,459 2,773 (314) (11) Benefits and expenses Benefits, claims, losses and settlement expenses 337 820 (483) (59) Interest credited to fixed accounts 455 523 (68) (13) Amortization of deferred acquisition costs 69 338 (269) (80) Interest and debt expense 84 - 84 - Other insurance and operating expenses 553 490 63 13 Total benefits and expenses 1,498 2,171 (673) (31) Pretax income 961 602 359 60 Income tax provision 121 35 86 NM Net income$ 840 $ 567 $ 273 48 % NM Not Meaningful. Overall Net income increased$273 million , or 48%, to$840 million for the nine months endedSeptember 30, 2021 compared to$567 million for the prior year period. Pretax income increased$359 million , or 60%, to$961 million for the nine months endedSeptember 30, 2021 compared to$602 million for the prior year period. The following impacts were significant drivers of the period-over-period change in pretax income: •The favorable impact of the block transfer reinsurance transaction was$521 million for the nine months endedSeptember 30, 2021 primarily reflecting the net realized gains on the investments sold to the reinsurer. •The favorable impact of unlocking and long term care ("LTC") loss recognition was$17 million for the nine months endedSeptember 30, 2021 compared to an unfavorable impact of$454 million for the prior year period. •The impact on variable annuity and variable universal life products for the difference between assumed and updated separate account investment performance on deferred acquisition costs ("DAC"), deferred sales inducement costs ("DSIC"), unearned revenue amortization, reinsurance accrual and additional insurance benefit reserves ("mean reversion related impact") was a benefit of$107 million for the nine months endedSeptember 30, 2021 compared to an expense of$30 million for the prior year period. •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$577 million for the nine months endedSeptember 30, 2021 compared to a benefit of$239 million for the prior year period. Variable annuity account balances increased 12% to$89.6 billion as ofSeptember 30, 2021 compared to the prior year period due to market appreciation, partially offset by net outflows of$1.8 billion . During the nine months endedSeptember 30, 2021 , variable annuity sales increased 47% compared to the prior year period reflecting an increase in sales of structured variable annuities. Sales of variable annuities without living benefit guarantees comprised 67.2% of total variable annuity sales for the nine months endedSeptember 30, 2021 compared to 45.9% for the prior year period. 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 4% to$7.7 billion as ofSeptember 30, 2021 compared to the prior year period as policies continue to lapse and the discontinuance of new sales of fixed deferred annuities and fixed index annuities due to the low interest rate environment. During the third quarter of 2021, the Company closed on a transaction to reinsure RiverSource Life's fixed deferred and immediate annuity policies. See Note 1 for more information on the reinsurance transaction.
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RIVERSOURCE LIFE INSURANCE COMPANY In the third quarter, management updates its market-related assumptions and implements model changes related to the living benefit valuation. In addition, management conducts its annual review of insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking. Management also reviews its future policy benefit reserve adequacy for its LTC business in the third quarter. The following table presents the total pretax impacts on the Company's revenues and expenses attributable to unlocking and LTC loss recognition for the nine months endedSeptember 30 : Pretax Increase (Decrease) 2021 2020 (in millions) Policy and contract charges$ 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 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 the third quarter of 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 the third quarter of 2021 compared to the prior year period. •Surrenders assumptions on variable annuities with living benefit guarantees resulted in a lower expense in the third quarter of 2021 compared to the prior year period. The unfavorable LTC unlocking impact of$3 million in the third quarter of 2021 compared to the unfavorable LTC unlocking and loss recognition impact of$141 million in the prior year period is primarily due to updates to our interest rate assumptions in the prior year period. Revenues Total revenues decreased$314 million , or 11%, to$2.5 billion for the nine months endedSeptember 30, 2021 compared to$2.8 billion for the prior year period. Premiums decreased$1.2 billion to$(945) million for the nine months endedSeptember 30, 2021 compared to$256 million for the prior year period primarily reflecting ceded premiums of$1.2 billion associated with the reinsurance transaction for life contingent immediate annuity policies. Net investment income increased$17 million , or 3%, to$664 million for the nine months endedSeptember 30, 2021 compared to$647 million for the prior year period reflecting the consolidation of CIEs, partially offset by a decrease in investment income on fixed maturities due to lower yields as a result of continued low 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. Policy and contract charges increased$186 million , or 12%, to$1.7 billion for the nine months endedSeptember 30, 2021 compared to$1.5 billion for the prior year period primarily due to the unearned revenue amortization and the reinsurance accrual offset to the market impact of IUL benefits, which was a benefit of$25 million for the nine months endedSeptember 30, 2021 compared to an expense of$10 million for the prior year period, as well higher separate account fees from increased account balances due to market appreciation. Other revenues increased$79 million , or 22%, to$436 million for the nine months endedSeptember 30, 2021 compared to$357 million for 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$589 million for the nine months endedSeptember 30, 2021 compared to net realized investment losses of$16 million for the prior year period. The nine months endedSeptember 30, 2021 included net realized gains of$548 million on Available-for-Sale securities and net realized gains of$56 million primarily related to commercial mortgage loans and syndicated loans. These net realized gains are primarily due to 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 2021.
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RIVERSOURCE LIFE INSURANCE COMPANY Also included in net realized investment gains are$15 million of losses in the consolidated CIEs. For the nine months endedSeptember 30, 2020 , net realized gains of$10 million on Available-for-Sale securities due to sales, calls and tenders were more than offset by an increase in the allowance for credit losses of$13 million primarily related to credit losses on corporate debt securities and an increase of$13 million in the provision for commercial mortgage loans and syndicated loans. Benefits and Expenses Total benefits and expenses decreased$673 million , or 31%, to$1.5 billion for the nine months endedSeptember 30, 2021 compared to$2.2 billion for the prior year period. Benefits, claims, losses and settlement expenses decreased$483 million , or 59% , to$337 million for the nine months endedSeptember 30, 2021 compared to$820 million for the prior year period primarily reflecting the following items: •A$1.2 billion decrease in expense associated with the reinsurance transaction for life contingent immediate annuity policies. •A$687 million increase in expense primarily reflecting the impact of 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$157 million for the nine months endedSeptember 30, 2021 was driven by changes in the undiscounted embedded derivative liability compared to a favorable impact of$530 million for the prior year period. As the undiscounted embedded derivative liability on which the nonperformance credit spread is applied increases (decreases), the impact of the nonperformance credit spread is favorable (unfavorable) to expense. 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. •A$342 million increase 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 an unfavorable$3.9 billion change in the market impact on derivatives hedging the variable annuity guaranteed benefits, partially offset by a favorable$3.5 billion change in the market impact on variable annuity guaranteed living benefits reserves. 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 an expense for the nine months endedSeptember 30, 2021 compared to a benefit for the prior year period. •Interest rate impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a lower expense for the nine months endedSeptember 30, 2021 compared to the prior year period. •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 the nine months endedSeptember 30, 2021 compared to the prior year period. •Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various behavioral items, were a net benefit for the nine months endedSeptember 30, 2021 compared to a net expense for the prior year period. •The impact of unlocking excluding LTC was an expense of$59 million for the nine months endedSeptember 30, 2021 compared to an expense of$212 million for the prior year period. •The annual review of LTC future policy benefit reserve in the third quarter of 2021 resulted in unlocking of$3 million compared to unlocking and loss recognition of$141 million in the prior year period. •The mean reversion related impact was a benefit of$65 million for the nine months endedSeptember 30, 2021 compared to an expense of$21 million for the prior year period. Interest credited to fixed accounts decreased$68 million , or 13%, to$455 million for the nine months endedSeptember 30, 2021 compared to$523 million for the prior year period primarily reflecting the following items: •A$39 million increase in expense from the unhedged nonperformance credit spread risk adjustment on IUL benefits. The unfavorable impact of the nonperformance credit spread was$16 million for the nine months endedSeptember 30, 2021 compared to a favorable impact of$23 million for the prior year period. •A$98 million decrease in expense from other market impacts on IUL benefits, net of hedges, which was a benefit of$45 million for the nine months endedSeptember 30, 2021 compared to an expense of$53 million for the prior year period. 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$269 million , or 80%, to$69 million for the nine months endedSeptember 30, 2021 compared to$338 million for the prior year period primarily reflecting the following items: •The impact of unlocking in the third quarter of 2021 was a benefit of$60 million compared to an expense of$100 million in the prior year period.
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RIVERSOURCE LIFE INSURANCE COMPANY •The DAC offset to the market impact on non-traditional long-duration products was a benefit of$42 million for the nine months endedSeptember 30, 2021 compared to an expense of$89 million for the prior year period. •The mean reversion related impact was a benefit of$41 million for the nine months endedSeptember 30, 2021 compared to an expense of$9 million for the prior year period. •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$84 million to$84 million for the nine months endedSeptember 30, 2021 compared to nil for the prior year period 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$63 million , or 13%, to$553 million for the nine months endedSeptember 30, 2021 compared to$490 million for the prior year period primarily reflecting higher expenses from the consolidation of CIEs and higher distribution expenses. Income Taxes The Company's effective tax rate was 12.7% for the nine months endedSeptember 30, 2021 compared to 5.7% for the prior year period. The increase in the effective tax rate for the nine months endedSeptember 30, 2021 compared to the prior year period is the result of a higher pretax income and a decrease in tax preferred items including low income housing tax credits and the dividends received deduction. See Note 16 to the Consolidated Financial Statements for additional discussion on income taxes. 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 insurance, fixed portion of its variable annuities and variable insurance contracts, and the fixed deferred annuities, 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 Company's earnings from fixed insurance, fixed portion of variable annuities and variable insurance contracts, and the 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. 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. 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 total non-structured fixed maturity securities and commercial mortgage loans in the Company's investment portfolio that may generate proceeds to reinvest throughSeptember 30, 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 3.8%, respectively, as ofSeptember 30, 2021 . In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled$2.1 billion and had a weighted average yield of 2.0% as ofSeptember 30, 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 nine months endedSeptember 30, 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.
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RIVERSOURCE LIFE INSURANCE COMPANY
In addition to the fixed rate exposures noted above, the Company also has the
following variable annuity guarantee benefits: guaranteed minimum withdrawal
benefits ("GMWB"), guaranteed minimum accumulation benefits ("GMAB"), guaranteed
minimum death benefits ("GMDB") and guaranteed minimum income benefits ("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 annuities, fixed deferred 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.
The following tables present the Company's estimate of the impact on pretax
income from the above defined hypothetical market movements as of September 30,
2021 :
Equity Price Exposure to Pretax Income
Equity Price Decline 10% Before Hedge Impact Hedge Impact Net Impact
(in millions)
Asset-based fees and expenses $ (71) $ - $ (71)
DAC and DSIC amortization (1) (2) (15) - (15)
Variable annuities:
GMDB and GMIB (2) (4) - (4)
GMWB (2) (391) 318 (73)
GMAB (22) 21 (1)
Structured variable annuities 317 (264) 53
DAC and DSIC amortization (3) N/A N/A -
Total variable annuities (100) 75 (25)
Macro hedge program (4) - 189 189
IUL insurance 54 (53) 1
Total $ (132) $ 211 $ 79
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RIVERSOURCE LIFE INSURANCE COMPANY
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 $ (17) $ - $ (17)
Variable annuities:
GMWB 1,389 (1,706) (317)
GMAB 17 (22) (5)
Structured variable annuities (19) 99
80
DAC and DSIC amortization (3) N/A N/A 31 Total variable annuities 1,387 (1,629) (211) Macro hedge program (4) - (3) (3)
Fixed annuities, fixed insurance and fixed portion of variable
annuities and variable insurance products
63 - 63 IUL insurance 18 2 20 Total$ 1,451 $ (1,630) $ (148) 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 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 interest rate exposure as ofSeptember 30, 2021 compared toDecember 31, 2020 was driven by variable annuity riders, specifically GMWB, primarily due to changes in market rates. 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. The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices. Fair Value Measurements The Company reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale. The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. The Company validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 12 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.
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RIVERSOURCE LIFE INSURANCE COMPANY 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 profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of the Company's nonperformance risk. The nonperformance risk adjustment is based on 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 ofSeptember 30, 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$365 million , net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 21%), based onSeptember 30, 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 Inc. ("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 . 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 ofSeptember 30, 2021 andDecember 31, 2020 , the Company had estimated maximum borrowing capacity of$4.3 billion and$5.7 billion , respectively, under the FHLB facility, of which$200 million was outstanding as of bothSeptember 30, 2021 andDecember 31, 2020 and is collateralized with commercial mortgage backed securities. 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. In 2009, the Company established an agreement to protect its exposure toGenworth Life Insurance Company ("GLIC") for its reinsured long term care ("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 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:
Nine Months Ended
2021 2020
(in millions)
Paid to Ameriprise Financial $
1,675
Received from RiverSource Tax Advantaged Investments, Inc. 50 -
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.
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RIVERSOURCE LIFE INSURANCE COMPANYRegulatory Capital RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities were as follows: Regulatory Capital Actual Capital (1) Requirements (2) December 31, December 31, September 30, 2021 2020 2020 (in millions) RiverSource Life Insurance Company$ 3,626 $ 5,021 $ 993 RiverSource Life Insurance Co. of NY 321 323 42 (1) Actual capital, as defined by theNational Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes 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. Contractual Commitments There have been no material changes to the Company's contractual obligations disclosed in the Company's 2020 10-K. Forward-Looking Statements This report contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include: •statements of the Company's plans, intentions, expectations, objectives, or goals, including those related to the introduction, cessation, terms or pricing of new or existing products and services and the consolidated tax rate; •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 of the retirement product sales business to lower risk products over time, such as products without living benefit 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", "expands" 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 theU.S. and global market conditions, client behavior and 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 economics of changes in the Company's product revenue mix and distribution channels; •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;
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RIVERSOURCE LIFE INSURANCE COMPANY •inadequate reserves for future policy benefits and claims or for future redemptions and maturities; •deviations from our 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; •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 2020 10-K.
AMERIPRISE FINANCIAL INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Hartford to quit tar-sands investments ahead of schedule. The insurer also says it will spend $2.5 billion over 5 years to promote carbon-free energy. [Hartford Courant]
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