Retirement & Protection Solutions
The following table presents the results of operations of our Retirement & Protection Solutions segment on an adjusted operating basis:
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Years Ended December 31,
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Change
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2020
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2019
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(in millions)
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Revenues
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Management and financial advice fees
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$
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831
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$
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827
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$
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4
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—
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%
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Distribution fees
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437
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438
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(1)
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—
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Net investment income
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508
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528
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(20)
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(4)
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Premiums, policy and contract charges
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1,315
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1,330
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(15)
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(1)
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Other revenues
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3
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—
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3
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—
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Total revenues
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3,094
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3,123
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(29)
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(1)
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Banking and deposit interest expense
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—
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—
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—
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—
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Total net revenues
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3,094
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3,123
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(29)
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(1)
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Expenses
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Distribution expenses
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455
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469
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(14)
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(3)
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Interest credited to fixed accounts
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394
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387
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7
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2
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Benefits, claims, losses and settlement expenses
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1,131
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988
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143
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14
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Amortization of deferred acquisition costs
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300
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230
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70
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30
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Interest and debt expense
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39
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31
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8
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26
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General and administrative expense
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295
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294
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1
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—
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Total expenses
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2,614
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2,399
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215
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9
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Adjusted operating earnings
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$
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480
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$
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724
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$
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(244)
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(34)
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%
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Our Retirement & Protection Solutions segment pretax adjusted operating earnings, which excludes net realized investment gains or losses (net of the related DSIC and DAC amortization, unearned revenue amortization and the reinsurance accrual), the market impact on non-traditional long-duration products (including variable annuity contracts and IUL contracts, net of hedges and the related DSIC and DAC amortization, unearned revenue amortization and the reinsurance accrual) and mean reversion related impacts, decreased $244 million, or 34%, to $480 million for the year ended December 31, 2020 compared to $724 million for the prior year.
RiverSource variable annuity account balances increased 7% to $85.8 billion as of December 31, 2020 compared to the prior year due to market appreciation, partially offset by net outflows of $2.1 billion. Variable annuity sales increased 7% to $4.4 billion for the year ended December 31, 2020 compared to the prior year reflecting a decrease in sales of variable annuities with living benefit guarantees that was more than offset by sales of structured variable annuities launched earlier in 2020. Sales of variable annuities without living benefit guarantees comprised 49% of total variable annuity sales in 2020 compared to 25% in 2019. This trend is expected to continue and meaningfully shift the mix of business away from products with living benefit guarantees over time.
Net Revenues
Net revenues, which exclude net realized investment gains or losses (net of unearned revenue amortization and the reinsurance accrual) and the unearned revenue amortization and reinsurance accrual offset to the market impact on IUL contracts, decreased $29 million, or 1%, for the year ended December 31, 2020 compared to the prior year.
Net investment income, which excludes net realized investment gains or losses, decreased $20 million, or 4%, to $508 million for the year ended December 31, 2020 compared to $528 million for the prior year reflecting lower fixed maturity investment yields.
Premiums, policy and contract charges, which exclude the unearned revenue amortization and reinsurance accrual offset to net realized investment gains or losses and the market impact on IUL contracts, decreased $15 million, or 1%, for the year ended December 31, 2020 compared to the prior year primarily due to lower sales of immediate annuities with a life contingent feature, partially offset by higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date and higher average fee rates.
Expenses
Total expenses, which exclude the market impact on non-traditional long-duration products (including variable annuity contracts and IUL contracts), (net of hedges and the related DSIC and DAC amortization), mean reversion related impacts and the DAC and DSIC offset to net realized investment gains or losses, increased $215 million, or 9%, to $2.6 billion for the year ended December 31, 2020 compared to $2.4 billion for the prior year.
Distribution expenses decreased $14 million, or 3%, to $455 million for the year ended December 31, 2020 compared to $469 million for the prior year primarily reflecting lower insurance sales and annuity product mix.
Benefits, claims, losses and settlement expenses, which exclude the market impact on variable annuity contracts (net of hedges and the related DSIC amortization), mean reversion related impacts and the DSIC offset to net realized investment gains or losses, increased $143 million, or 14%, to $1.1 billion for the year ended December 31, 2020 compared to $988 million for the prior year primarily due to the impact of unlocking, partially offset by lower sales of immediate annuities with a life contingent feature. The unlocking impact for 2020 was an expense of $189 million compared to an expense of $6 million for the prior year and primarily reflected a higher unfavorable impact from updates to our interest rate assumptions and lower surrenders on variable annuities with living benefit guarantees, partially offset by a lower benefit from changes in equity market volatility and correlation assumptions on variable annuities with living benefit guarantees compared to the prior year.
Amortization of DAC, which excludes mean reversion related impacts, the DAC offset to the market impact on variable annuity contracts and IUL contracts and the DAC offset to net realized investment gains or losses, increased $70 million, or 30%, to $300 million for the year ended December 31, 2020 compared to $230 million for the prior year primarily reflecting the impact of unlocking, partially offset by a lower DAC amortization rate which is the result of lower surrenders on variable annuities. The impact of unlocking for 2020 was an expense of $108 million compared to an expense of $15 million in the prior year. The unlocking impact for 2020 primarily reflected a higher unfavorable impact from updates to our interest rate assumptions and lower surrenders on variable annuities with living benefit guarantees compared to the prior year.
Corporate & Other
The following table presents the results of operations of our Corporate & Other segment on an adjusted operating basis:
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Years Ended December 31,
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Change
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2020
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2019
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(in millions)
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Revenues
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Management and financial advice fees
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$
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—
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$
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4
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$
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(4)
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NM
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Distribution fees
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—
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6
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(6)
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NM
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Net investment income
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377
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479
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(102)
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(21)
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%
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Premiums, policy and contract charges
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102
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931
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(829)
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(89)
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Other revenues
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70
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65
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5
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8
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Total revenues
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549
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1,485
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(936)
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(63)
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Banking and deposit interest expense
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3
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8
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(5)
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(63)
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Total net revenues
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546
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1,477
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(931)
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(63)
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Expenses
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Distribution expenses
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(7)
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4
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(11)
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NM
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Interest credited to fixed accounts
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261
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270
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(9)
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(3)
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Benefits, claims, losses and settlement expenses
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344
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965
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(621)
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(64)
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Amortization of deferred acquisition costs
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6
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55
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(49)
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(89)
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Interest and debt expense
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66
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78
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(12)
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(15)
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General and administrative expense
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245
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391
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(146)
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(37)
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Total expenses
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915
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1,763
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(848)
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(48)
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Adjusted operating loss
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$
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(369)
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$
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(286)
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$
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(83)
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(29)
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%
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NM Not Meaningful.
Our Corporate & Other segment pretax adjusted operating loss excludes net realized investment gains or losses, the market impact on fixed deferred annuity contracts (net of hedges and the related DAC amortization), the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments, gain or loss on disposal of a business that is not considered discontinued operations, integration and restructuring charges, and the impact of consolidating CIEs. Our Corporate & Other segment pretax adjusted operating loss increased $83 million, or 29%, to $369 million for the year ended December 31, 2020 compared to $286 million for the prior year primarily reflecting the unfavorable impact from unlocking and loss recognition, partially offset by disciplined expense management and the favorable impacts from COVID-19 on LTC insurance.
Our Corporate & Other segment includes our closed blocks of LTC insurance and FA business. See below for more details on our closed block of LTC insurance.
Auto and Home pretax adjusted operating earnings were $13 million for the year ended December 31, 2019. We sold AAH on October 1, 2019.
Net Revenues
Net revenues, which exclude net realized investment gains or losses, the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments, gain on disposal of business that is not considered discontinued operations, integration and restructuring charges and revenues attributable to CIEs, decreased $931 million, or 63%, to $546 million for the year ended December 31, 2020 compared to $1.5 billion for the prior year. Net revenues for the year ended December 31, 2019 included $881 million from Auto and Home, which was sold in 2019.
Net investment income, which excludes net realized investment gains or losses, the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments and net investment income attributable to CIEs, decreased $102 million, or 21%, to $377 million for the year ended December 31, 2020 compared to $479 million for the prior year primarily reflecting the sale of AAH and lower average invested assets due to fixed annuity net outflows and lower asset earned rates, partially offset by lower impairments of our investments in affordable housing partnerships.
Premiums, policy and contract charges decreased $829 million, or 89%, to $102 million for the year ended December 31, 2020 compared to $931 million for the prior year primarily due to the sale of AAH.
Expenses
Total expenses, which exclude the market impact on fixed deferred annuity contracts (net of hedges and the related DAC amortization), integration and restructuring charges and expenses attributable to CIEs, decreased $848 million, or 48%, to $915 million for the year ended December 31, 2020 compared to $1.8 billion for the prior year. Total expenses for the year ended December 31, 2019 included $868 million from Auto and Home reflecting the prior year sale of AAH.
Distribution expenses decreased $11 million to a benefit of $7 million for the year ended December 31, 2020 compared to an expense of $4 million for the prior year reflecting the prior year sale of AAH.
Interest credited to fixed accounts, which exclude the market impact on fixed deferred annuity contracts (net of hedges), decreased $9 million, or 3%, to $261 million for the year ended December 31, 2020 compared to $270 million for the prior year due to lower average fixed deferred annuity account balances.
Benefits, claims, losses and settlement expenses decreased $621 million, or 64%, to $344 million for the year ended December 31, 2020 compared to $965 million for the prior year primarily reflecting the sale of AAH and the impact of COVID-19 on LTC insurance, partially offset by the impact of LTC unlocking and loss recognition and the FA unlocking impact. The impact of COVID-19 resulted in fewer LTC clients entering nursing homes as well as increased mortality-related client terminations. Our annual review of LTC active life future policy benefit reserve adequacy resulted in unlocking and loss recognition of $141 million in 2020 compared to $8 million in the prior year. The unlocking and loss recognition in 2020 was primarily due to a higher unfavorable impact from updates to our interest rates assumptions, a lower unfavorable impact from lesser changes to assumptions regarding morbidity, mortality and persistency and a lower benefit from approved and expected premium rate increases and benefit reductions compared to the prior year.
Amortization of DAC, which excludes the DAC offset to the market impact on fixed deferred annuity contracts, decreased $49 million, or 89%, to $6 million for the year ended December 31, 2020 compared to $55 million for the prior year reflecting the prior year sale of AAH.
General and administrative expense, which excludes integration and restructuring charges and expenses attributable to CIEs, decreased $146 million, or 37%, to $245 million for the year ended December 31, 2020 compared to $391 million for the prior year primarily due to the prior year sale of AAH and lower project expenses.
Closed Block LTC Insurance
As of December 31, 2020, our nursing home indemnity LTC block had approximately $79 million in gross in force annual premium and future policyholder benefits and claim reserves of approximately $1.3 billion, net of reinsurance, which was 53% of GAAP reserves. This block has been shrinking over the last few years given the average attained age is 82 and the average attained age of policyholders on claim is 88. Fifty-four percent of daily benefits in force in this block come from policies that have a lifetime benefit period.
As of December 31, 2020, our comprehensive reimbursement LTC block had approximately $116 million in gross in force annual premium and future policyholder benefits and claim reserves of approximately $1.2 billion, net of reinsurance. This block has higher premiums per policy than the nursing home indemnity LTC policies. The average attained age is 77 and the average attained age of policyholders on claim is 84. Thirty-six percent of daily benefits in force in this block come from policies that have a lifetime benefit period.
We utilize three primary levers to manage our LTC business. First, we have taken an active approach of steadily increasing rates since 2005, with cumulative rate increases of 190% on our nursing home indemnity LTC block and 107% on our comprehensive reimbursement LTC block as of December 31, 2020. Second, we have a reserving process that reflects the policy features and risk characteristics of our blocks. As of December 31, 2020, we had 35,000 policies that were closed with claim activity, as well as 8,000 open claims. We apply this experience to our in force policies, which were 97,000 as of December 31, 2020, at a very granular
level by issue year, attained age and benefit features. Our statutory reserves are $313 million higher than our GAAP reserves and include margins on key assumptions for morbidity and mortality, as well as $288 million in asset adequacy reserves as of December 31, 2020. Lastly, we have prudently managed our investment portfolio primarily through a liquid, investment grade portfolio that is currently in a net unrealized gain position.
We undertake an extensive review of active life future policy benefit reserve adequacy annually during the third quarter of each year, or more frequently if appropriate, using current best estimate assumptions as of the date of the review. Our annual review process includes an analysis of our key reserve assumptions, including those for morbidity, terminations (mortality and lapses), premium rate increases and investment yields.
Consolidated Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents our consolidated results of operations:
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Years Ended December 31,
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Change
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2019
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2018
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(in millions)
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Revenues
|
|
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Management and financial advice fees
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$
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7,015
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$
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6,776
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$
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239
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4
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%
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Distribution fees
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1,919
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|
1,877
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|
42
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|
2
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|
Net investment income
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1,463
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1,596
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(133)
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(8)
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Premiums, policy and contract charges
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2,224
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2,467
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(243)
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(10)
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Other revenues
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269
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|
208
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61
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29
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Gain on disposal of business
|
213
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—
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|
213
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NM
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Total revenues
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13,103
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12,924
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|
|
179
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1
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Banking and deposit interest expense
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136
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|
89
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|
|
47
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|
|
53
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Total net revenues
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12,967
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12,835
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|
|
132
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|
|
1
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|
Expenses
|
|
|
|
|
|
|
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Distribution expenses
|
3,810
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|
|
3,637
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|
|
173
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|
|
5
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|
Interest credited to fixed accounts
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669
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|
|
674
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(5)
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|
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(1)
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|
Benefits, claims, losses and settlement expenses
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2,576
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|
|
2,302
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|
|
274
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|
|
12
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|
Amortization of deferred acquisition costs
|
179
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|
|
322
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|
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(143)
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|
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(44)
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Interest and debt expense
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214
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|
245
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(31)
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|
|
(13)
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General and administrative expense
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3,287
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|
|
3,171
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|
|
116
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|
|
4
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|
Total expenses
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10,735
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|
|
10,351
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|
|
384
|
|
|
4
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|
Pretax income
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2,232
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|
|
2,484
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|
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(252)
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|
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(10)
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Income tax provision
|
339
|
|
|
386
|
|
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(47)
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|
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(12)
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|
Net income
|
$
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1,893
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|
|
$
|
2,098
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|
|
$
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(205)
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(10)
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%
|
NM Not Meaningful.
Overall
Pretax income decreased $252 million, or 10%, to $2.2 billion for the year ended December 31, 2019 compared to $2.5 billion for the prior year. The following impacts were significant drivers of the year-over-year change in pretax income:
•The market impact on variable annuity guaranteed benefits (net of hedges and the related DSIC and DAC amortization) was an expense of $579 million for the year ended December 31, 2019 compared to an expense of $31 million for the prior year.
•The market impact of hedges on investments was an expense of $35 million for the year ended December 31, 2019 compared to a benefit of $11 million for the prior year.
•A $49 million unfavorable change in the mark-to-market impact on share-based compensation expenses.
•Higher mark-to-market impact on advisor deferred compensation expense and investments in recruiting experienced advisors.
•An increase in general and administrative expenses for our Advice & Wealth Management segment related to investments in business growth.
•An increase in impairments of our investment in affordable housing partnerships, which was $35 million for the year ended December 31, 2019 compared to $7 million for the prior year.
•The cumulative impact of asset management net outflows, partially offset by wrap account net inflows.
•A gain of $213 million recognized on the sale of AAH on October 1, 2019.
•A positive impact from higher average equity markets and higher average short-term interest rates.
•The mean reversion related impact was a benefit of $57 million for the year ended December 31, 2019 compared to an expense of $33 million for the prior year.
•The unfavorable impact of unlocking and LTC loss recognition was $16 million for the year ended December 31, 2019 compared to $53 million for the prior year.
The following table presents the total pretax impacts on our revenues and expenses attributable to unlocking and LTC loss recognition for the years ended December 31:
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Pretax Increase (Decrease)
|
|
2019
|
|
2018
|
|
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(in millions)
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Premiums, policy and contract charges
|
|
$
|
5
|
|
|
$
|
78
|
|
Total revenues
|
|
5
|
|
|
78
|
|
|
|
|
|
|
Benefits, claims, losses and settlement expenses:
|
|
|
|
|
LTC unlocking and loss recognition
|
|
8
|
|
|
52
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|
Unlocking impact, excluding LTC
|
|
(1)
|
|
|
112
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|
Total benefits, claims, losses and settlement expenses
|
|
7
|
|
|
164
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Amortization of DAC
|
|
14
|
|
|
(33)
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|
Total expenses
|
|
21
|
|
|
131
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|
Pretax income (1)
|
|
$
|
(16)
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|
|
$
|
(53)
|
|
(1) Includes a $4 million and $5 million net benefit related to the market impact on variable annuity guaranteed benefits for the years ended December 31, 2019 and 2018, respectively, which is excluded from adjusted operating earnings. Refer to Results of Operations by Segment for the impact to pretax adjusted operating earnings attributable to unlocking and LTC loss recognition.
The unfavorable unlocking impact in 2019 primarily reflected the impact from updates to our interest rate assumptions and lower surrenders on annuity contracts with a withdrawal benefit partially offset by a benefit from changes in equity market volatility and correlation assumptions on variable annuities. The unfavorable unlocking impact in the prior year primarily reflected unfavorable mortality experience on UL and VUL insurance products and lower surrender rate assumptions on variable annuities partially offset by the impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
The unfavorable LTC unlocking and loss recognition in 2019 was primarily due to the impact from updates to our interest rates assumptions and changes in morbidity experience partially offset by higher approved and expected premium rate increases and benefit reductions. The unfavorable LTC unlocking and loss recognition in the prior year was primarily due to changes in morbidity experience partially offset by approved, pending and future expected premium rate increases.
The unfavorable impact of updates to our interest rate assumptions noted above for unlocking and LTC loss recognition was $118 million. Based on the significant interest rate dislocation, we extended the grading period one year to reach our ultimate 10-year treasury rate of 5% by assuming rates remain flat for six months and then grade to our long-term rate over the next three years.
Net Revenues
Net revenues increased $132 million, or 1%, to $13.0 billion for the year ended December 31, 2019 compared to $12.8 billion for the prior year.
Management and financial advice fees increased $239 million, or 4%, to $7.0 billion for the year ended December 31, 2019 compared to $6.8 billion for the prior year primarily due to higher average equity markets, wrap account net inflows and a $57 million increase in performance fees, partially offset by asset management net outflows and a $27 million negative foreign currency translation impact.
Distribution fees increased $42 million, or 2%, to $1.9 billion for the year ended December 31, 2019 compared to the prior year reflecting higher average equity markets and higher earnings on brokerage cash due to an increase in average short-term interest rates, partially offset by asset management net outflows.
Net investment income decreased $133 million, or 8%, to $1.5 billion for the year ended December 31, 2019 compared to $1.6 billion for the prior year primarily due to the following impacts:
•A $46 million unfavorable change in the market impact of hedges on investments.
•A $43 million decrease in net investment income of CIEs.
•Net realized investment losses of $3 million for the year ended December 31, 2019 compared to net realized investment gains of $10 million for the prior year.
•Impairments of our investment in affordable housing partnerships of $35 million for the year ended December 31, 2019 compared to $7 million for the prior year.
•The unfavorable impact of fixed annuity net outflows and the fixed annuities reinsurance transaction.
•The favorable impact of higher average invested assets related to the bank and certificates and higher average investment yields related to certificates.
Premiums, policy and contract charges decreased $243 million, or 10%, to $2.2 billion for the year ended December 31, 2019 compared to $2.5 billion for the prior year primarily due to the sale of AAH and unlocking, partially offset by an increase in variable annuity guaranteed benefit rider charges and a $7 million expense in the prior year related to a modification of costs within a reinsurance contract. Premiums for the year ended December 31, 2019 included $827 million from Auto and Home for the nine months prior to sale on October 1, 2019 compared to $1.0 billion for the prior year. The impact from unlocking was a $5 million favorable impact compared to a $78 million favorable impact in the prior year. The unlocking impact for 2019 reflected updates to our interest rate assumptions. The primary driver of the unlocking impact for the prior year was higher projected gains on reinsurance contracts resulting from unfavorable mortality experience on UL and VUL insurance products.
Other revenues increased $61 million, or 29%, to $269 million for the year ended December 31, 2019 compared to $208 million for the prior year primarily due to accretion on our fixed annuities reinsurance deposit receivable and a $7 million gain on the sale of real estate in the third quarter of 2019.
Gain on disposal of business of $213 million for the year ended December 31, 2019 was recognized on the sale of AAH, net of an affinity partner payment of $100 million.
Banking and deposit interest expense increased $47 million, or 53%, to $136 million for the year ended December 31, 2019 compared to $89 million for the prior year due to interest expense on banking deposits, higher average certificate balances and higher average crediting rates on certificates.
Expenses
Total expenses increased $384 million, or 4%, to $10.7 billion for the year ended December 31, 2019 compared to $10.4 billion for the prior year.
Distribution expenses increased $173 million, or 5%, to $3.8 billion for the year ended December 31, 2019 compared to $3.6 billion for the prior year reflecting higher advisor compensation due to wrap account net inflows, higher average markets, higher mark-to-market impact on advisor deferred compensation expense and investments in recruiting experienced advisors, partially offset by the impact of asset management net outflows.
Benefits, claims, losses and settlement expenses increased $274 million, or 12%, to $2.6 billion for the year ended December 31, 2019 compared to $2.3 billion for the prior year primarily reflecting the following items:
•A $425 million increase in expense from the unhedged nonperformance credit spread risk adjustment on variable annuity guaranteed benefits. The unfavorable impact of the nonperformance credit spread was $175 million for the year ended December 31, 2019 compared to a favorable impact of $250 million for the prior year. As the estimate of the nonperformance credit spread over the LIBOR swap curve tightens or widens, the embedded derivative liability will increase or decrease. As the 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.
•A $228 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 a favorable $315 million change in the market impact on variable annuity guaranteed living benefits reserves, an unfavorable $549 million change in the market impact on derivatives hedging the variable annuity guaranteed benefits and a favorable $6 million change in the DSIC offset. The main market drivers contributing to these changes are summarized below:
•Equity market impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a higher expense for the year ended December 31, 2019 compared to the prior year.
•Interest rate impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a higher expense for the year ended December 31, 2019 compared to the prior year.
•Volatility impact on the variable annuity guaranteed living benefits liability net of the impact on the corresponding hedge assets resulted in a higher expense for the year ended December 31, 2019 compared to the prior year.
•Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various contractholder behavioral items, were a net favorable impact compared to the prior year.
•The impact of unlocking excluding LTC was a benefit of $1 million for the year ended December 31, 2019 compared to an expense of $112 million for the prior year. The unlocking impact for 2019 primarily reflected a benefit from changes in equity market volatility and correlation assumptions on variable annuities, partially offset by updates to our interest rate assumptions and lower surrenders on annuity contracts with a withdrawal benefit. The unlocking impact for the prior year primarily reflected unfavorable mortality experience on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by a favorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
•Our annual review of LTC active life future policy benefit reserve adequacy in 2019 resulted in unlocking and loss recognition of $8 million compared to $52 million in the prior year. The unlocking and loss recognition in 2019 was primarily due to the impact from updates to our interest rates assumptions and changes in morbidity experience, partially offset by higher approved and expected premium rate increases and benefit reductions. The unlocking and loss recognition in the prior year was primarily due to changes in morbidity experience, partially offset by approved, pending and future expected premium rate increases.
•A $204 million decrease in auto and home expenses primarily reflecting the sale of AAH.
•The mean reversion related impact was a benefit of $26 million for the year ended December 31, 2019 compared to an expense of $12 million for the prior year.
Amortization of DAC decreased $143 million, or 44%, to $179 million for the year ended December 31, 2019 compared to $322 million for the prior year primarily reflecting the following items:
•The DAC offset to the market impact on variable annuity guaranteed benefits was a benefit of $82 million for the year ended December 31, 2019 compared to an expense of $23 million for the prior year.
•The mean reversion related impact was a benefit of $31 million for the year ended December 31, 2019 compared to an expense of $21 million for the prior year.
•A $10 million decrease in auto and home expenses primarily reflecting the sale of AAH.
•A favorable impact from normal year over year experience differences for variable annuities.
•The impact of unlocking in 2019 was an expense of $14 million and reflected updates to our interest rate assumptions, partially offset by a favorable impact from lower surrenders on annuity contracts with a withdrawal benefit. The impact of unlocking in the prior year was a benefit of $33 million and primarily reflected updated mortality assumptions on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by an unfavorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
Interest and debt expense decreased $31 million, or 13%, to $214 million for the year ended December 31, 2019 compared to $245 million for the prior year primarily due to a decrease in interest expense of CIEs.
General and administrative expense increased $116 million, or 4%, to $3.3 billion for the year ended December 31, 2019 compared to $3.2 billion for the prior year primarily due to a $49 million unfavorable change in the mark-to-market impact on share-based compensation expenses, a $28 million increase in compensation related to higher performance fees, bank-related expenses, investments in business growth and a $13 million increase in severance, partially offset by a $15 million positive foreign currency translation impact and a $25 million decrease in auto and home expenses primarily reflecting the sale of AAH.
Income Taxes
Our effective tax rate was 15.2% for the year ended December 31, 2019 compared to 15.5% for the prior year. Net excess tax benefits related to employee share-based payments was a benefit of $15 million for the year ended December 31, 2019 compared to $25 million for the prior year. See Note 24 to our Consolidated Financial Statements for additional discussion on income taxes.
Results of Operations by Segment
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents summary financial information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2019
|
|
2018
|
(in millions)
|
Advice & Wealth Management
|
|
|
|
Net revenues
|
$
|
6,599
|
|
|
$
|
6,189
|
|
Expenses
|
5,090
|
|
|
4,800
|
|
Adjusted operating earnings
|
$
|
1,509
|
|
|
$
|
1,389
|
|
Asset Management
|
|
|
|
Net revenues
|
$
|
2,913
|
|
|
$
|
3,011
|
|
Expenses
|
2,252
|
|
|
2,283
|
|
Adjusted operating earnings
|
$
|
661
|
|
|
$
|
728
|
|
Retirement & Protection Solutions
|
|
|
|
Net revenues
|
$
|
3,123
|
|
|
$
|
3,166
|
|
Expenses
|
2,399
|
|
|
2,445
|
|
Adjusted operating earnings
|
$
|
724
|
|
|
$
|
721
|
|
Corporate & Other
|
|
|
|
Net revenues
|
$
|
1,477
|
|
|
$
|
1,742
|
|
Expenses
|
1,763
|
|
|
2,016
|
|
Adjusted operating loss
|
$
|
(286)
|
|
|
$
|
(274)
|
|
The following table presents the segment pretax adjusted operating impacts on our revenues and expenses attributable to unlocking and LTC loss recognition for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Pretax Adjusted Operating Increase (Decrease)
|
|
2019
|
|
2018
|
Retirement & Protection Solutions
|
|
Corporate
|
Retirement & Protection Solutions
|
|
Corporate
|
|
|
(in millions)
|
Premiums, policy and contract charges
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
—
|
|
Total revenues
|
|
5
|
|
|
—
|
|
|
78
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, losses and settlement expenses
|
|
|
|
|
|
|
|
|
LTC unlocking and loss recognition
|
|
—
|
|
|
8
|
|
|
—
|
|
|
52
|
|
Unlocking impact, excluding LTC
|
|
6
|
|
|
(2)
|
|
|
118
|
|
|
1
|
|
Total benefits, claims, losses and settlement expenses
|
|
6
|
|
|
6
|
|
|
118
|
|
|
53
|
|
Amortization of DAC
|
|
15
|
|
|
(2)
|
|
|
(40)
|
|
|
5
|
|
Total expenses
|
|
21
|
|
|
4
|
|
|
78
|
|
|
58
|
|
Pretax income (loss)
|
|
$
|
(16)
|
|
|
$
|
(4)
|
|
|
$
|
—
|
|
|
$
|
(58)
|
|
Advice & Wealth Management
The following table presents the changes in wrap account assets and average balances for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
(in billions)
|
Beginning balance
|
$
|
251.5
|
|
|
$
|
248.2
|
|
Net flows
|
17.6
|
|
|
21.1
|
|
Market appreciation (depreciation) and other
|
48.4
|
|
|
(17.8)
|
|
Ending balance
|
$
|
317.5
|
|
|
$
|
251.5
|
|
|
|
|
|
Advisory wrap account assets ending balance (1)
|
$
|
314.3
|
|
|
$
|
249.1
|
|
Average advisory wrap account assets (2)
|
$
|
282.9
|
|
|
$
|
255.5
|
|
(1) Advisory wrap account assets represent those assets for which clients receive advisory services and are the primary driver of revenue earned on wrap accounts. Clients may hold non-advisory investments in their wrap accounts that do not incur an advisory fee. Beginning in the fourth quarter of 2019, all advisory fee billing is calculated in advance on a monthly basis using point-in-time assets. Prior to the fourth quarter of 2019, some advisory accounts billed in arrears on a quarterly or monthly basis using average daily assets.
(2) Average ending balances are calculated using an average of the prior period’s ending balance and all months in the current period.
Wrap account assets increased $66.0 billion, or 26%, during the year ended December 31, 2019 due to net inflows of $17.6 billion and market appreciation and other of $48.4 billion. Average advisory wrap account assets increased $27.4 billion, or 11%, compared to the prior year reflecting net inflows and market appreciation.
The following table presents the results of operations of our Advice & Wealth Management segment on an adjusted operating basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
2019
|
|
2018
|
(in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Management and financial advice fees
|
$
|
3,841
|
|
|
$
|
3,538
|
|
|
$
|
303
|
|
|
9
|
%
|
Distribution fees
|
2,281
|
|
|
2,241
|
|
|
40
|
|
|
2
|
|
Net investment income
|
411
|
|
|
316
|
|
|
95
|
|
|
30
|
|
Other revenues
|
202
|
|
|
183
|
|
|
19
|
|
|
10
|
|
Total revenues
|
6,735
|
|
|
6,278
|
|
|
457
|
|
|
7
|
|
Banking and deposit interest expense
|
136
|
|
|
89
|
|
|
47
|
|
|
53
|
|
Total net revenues
|
6,599
|
|
|
6,189
|
|
|
410
|
|
|
7
|
|
Expenses
|
|
|
|
|
|
|
|
Distribution expenses
|
3,714
|
|
|
3,521
|
|
|
193
|
|
|
5
|
|
Interest and debt expense
|
11
|
|
|
10
|
|
|
1
|
|
|
10
|
|
General and administrative expense
|
1,365
|
|
|
1,269
|
|
|
96
|
|
|
8
|
|
Total expenses
|
5,090
|
|
|
4,800
|
|
|
290
|
|
|
6
|
|
Adjusted operating earnings
|
$
|
1,509
|
|
|
$
|
1,389
|
|
|
$
|
120
|
|
|
9
|
%
|
Our Advice & Wealth Management segment pretax adjusted operating earnings, which exclude net realized investment gains or losses, increased $120 million, or 9%, to $1.5 billion for the year ended December 31, 2019 compared to $1.4 billion for the prior year reflecting wrap account net inflows, average equity market appreciation and higher earnings on brokerage cash, partially offset by higher expenses from continued investments for growth and higher mark-to-market impact on advisor deferred compensation expenses. Pretax adjusted operating margin was 22.9% for the year ended December 31, 2019 compared to 22.4% for the prior year.
We launched Ameriprise Bank, FSB in the second quarter of 2019 and continued to add deposits during the year, with $3.8 billion of cash sweep balances as of December 31, 2019. In the third quarter of 2019, we purchased the existing Ameriprise portfolio of credit card accounts from a third party bank.
Net Revenues
Net revenues exclude net realized investment gains or losses. Net revenues increased $410 million, or 7%, to $6.6 billion for the year ended December 31, 2019 compared to $6.2 billion for the prior year. Adjusted operating net revenue per advisor increased to $664,000 for the year ended December 31, 2019, up 6%, from $624,000 for the prior year.
Management and financial fees increased $303 million, or 9%, to $3.8 billion for the year ended December 31, 2019 compared to $3.5 billion for the prior year primarily due to growth in wrap account assets. Average advisory wrap account assets increased $29.8 billion, or 12%, compared to the prior year reflecting net inflows and market appreciation.
Distribution fees increased $40 million, or 2%, to $2.3 billion for the year ended December 31, 2019 compared to $2.2 billion for the prior year reflecting higher earnings on brokerage cash due to an increase in average short-term interest rates, partially offset by decreased transactional activity and lower sales of variable annuities. We earned 198 basis points on brokerage cash balances for the year ended December 31, 2019 compared to 164 basis points for the prior year.
Net investment income increased $95 million, or 30%, to $411 million for the year ended December 31, 2019 compared to $316 million for the prior year primarily due to higher average invested assets due to the bank and certificates and higher average investment yields.
Banking and deposit interest expense increased $47 million, or 53%, to $136 million for the year ended December 31, 2019 compared to $89 million for the prior year due to interest expense on banking deposits, higher average certificate balances and higher average crediting rates on certificates.
Expenses
Total expenses increased $290 million, or 6%, to $5.1 billion for the year ended December 31, 2019 compared to $4.8 billion for the prior year.
Distribution expenses increased $193 million, or 5%, to $3.7 billion for the year ended December 31, 2019 compared to $3.5 billion for the prior year reflecting higher advisor compensation due to wrap account net inflows and market appreciation, higher mark-to-market impact on advisor deferred compensation expense and investments in recruiting experienced advisors, partially offset by decreased transactional activity.
General and administrative expense increased $96 million, or 8%, to $1.4 billion for the year ended December 31, 2019 compared to $1.3 billion for the prior year primarily due to bank-related expenses and investments in business growth.
Asset Management
The following table presents managed assets by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Change
|
|
Average (1)
|
|
|
|
Change
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
|
(in billions)
|
Equity
|
$
|
271.1
|
|
|
$
|
229.0
|
|
|
|
|
$
|
42.1
|
|
|
18
|
%
|
|
$
|
251.5
|
|
|
$
|
266.4
|
|
|
|
|
$
|
(14.9)
|
|
|
(6)
|
%
|
Fixed income
|
179.2
|
|
|
160.9
|
|
|
|
|
18.3
|
|
|
11
|
|
|
171.2
|
|
|
168.9
|
|
|
|
|
2.3
|
|
|
1
|
|
Money market
|
5.6
|
|
|
5.1
|
|
|
|
|
0.5
|
|
|
10
|
|
|
5.1
|
|
|
5.7
|
|
|
|
|
(0.6)
|
|
|
(11)
|
|
Alternative
|
3.1
|
|
|
3.1
|
|
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
|
4.4
|
|
|
|
|
(1.3)
|
|
|
(30)
|
|
Hybrid and other
|
35.2
|
|
|
32.6
|
|
|
|
|
2.6
|
|
|
8
|
|
|
33.9
|
|
|
34.2
|
|
|
|
|
(0.3)
|
|
|
(1)
|
|
Total managed assets
|
$
|
494.2
|
|
|
$
|
430.7
|
|
|
|
|
$
|
63.5
|
|
|
15
|
%
|
|
$
|
464.8
|
|
|
$
|
479.6
|
|
|
|
|
$
|
(14.8)
|
|
|
(3)
|
%
|
(1) Average ending balances are calculated using an average of the prior period’s ending balance and all months in the current period.
The following tables present the changes in global managed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2019
|
|
2018
|
(in billions)
|
Global Retail Funds
|
|
|
|
Beginning assets
|
$
|
247.9
|
|
|
$
|
287.8
|
|
Inflows
|
46.9
|
|
|
53.0
|
|
Outflows
|
(53.8)
|
|
|
(67.2)
|
|
Net VP/VIT fund flows
|
(2.7)
|
|
|
(3.0)
|
|
Net new flows
|
(9.6)
|
|
|
(17.2)
|
|
Reinvested dividends
|
9.7
|
|
|
11.6
|
|
Net flows
|
0.1
|
|
|
(5.6)
|
|
Distributions
|
(11.3)
|
|
|
(13.8)
|
|
Market appreciation (depreciation) and other
|
50.3
|
|
|
(18.2)
|
|
Foreign currency translation (1)
|
0.5
|
|
|
(2.3)
|
|
Total ending assets
|
287.5
|
|
|
247.9
|
|
|
|
|
|
Global Institutional
|
|
|
|
Beginning assets
|
182.8
|
|
|
206.8
|
|
Inflows
|
22.7
|
|
|
21.6
|
|
Outflows
|
(29.9)
|
|
|
(37.2)
|
|
Net flows
|
(7.2)
|
|
|
(15.6)
|
|
Market appreciation (depreciation) and other (2)
|
29.7
|
|
|
(4.5)
|
|
Foreign currency translation (1)
|
1.4
|
|
|
(3.9)
|
|
Total ending assets
|
206.7
|
|
|
182.8
|
|
Total managed assets
|
$
|
494.2
|
|
|
$
|
430.7
|
|
Total net flows
|
$
|
(7.1)
|
|
|
$
|
(21.2)
|
|
|
|
|
|
Former Parent Company Related (3)
|
|
|
|
Retail net new flows
|
$
|
(0.9)
|
|
|
$
|
(2.8)
|
|
Institutional net new flows
|
(3.4)
|
|
|
(5.2)
|
|
Total net new flows
|
$
|
(4.3)
|
|
|
$
|
(8.0)
|
|
(1) Amounts represent local currency to US dollar translation for reporting purposes.
(2) Includes $4.6 billion and $0.6 billion for the total change in Affiliated General Account Assets during the years ended December 31, 2019 and 2018, respectively.
(3) Former parent company related assets and net new flows are included in the rollforwards above.
Total segment AUM increased $63.5 billion, or 15%, during the year ended December 31, 2019 driven by market appreciation, partially offset by net outflows and retail fund distributions. Europe, Middle East and Africa (“EMEA”) retail net outflows were $3.1 billion for the year ended December 31, 2019 reflecting negative consumer sentiment associated with Brexit and geopolitical concerns in Europe. North America retail net inflows, which include reinvested dividends, were $3.2 billion for the year ended December 31, 2019, a $5.8 billion improvement compared to the prior year. Global institutional net outflows of $7.2 billion included $3.4 billion of outflows from former parent-related assets.
The following table presents the results of operations of our Asset Management segment on an adjusted operating basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
2019
|
|
2018
|
(in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Management and financial advice fees
|
$
|
2,488
|
|
|
$
|
2,540
|
|
|
$
|
(52)
|
|
|
(2)
|
%
|
Distribution fees
|
408
|
|
|
433
|
|
|
(25)
|
|
|
(6)
|
|
Net investment income
|
15
|
|
|
19
|
|
|
(4)
|
|
|
(21)
|
|
Other revenues
|
2
|
|
|
19
|
|
|
(17)
|
|
|
(89)
|
|
Total revenues
|
2,913
|
|
|
3,011
|
|
|
(98)
|
|
|
(3)
|
|
Banking and deposit interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net revenues
|
2,913
|
|
|
3,011
|
|
|
(98)
|
|
|
(3)
|
|
Expenses
|
|
|
|
|
|
|
|
Distribution expenses
|
928
|
|
|
961
|
|
|
(33)
|
|
|
(3)
|
|
Amortization of deferred acquisition costs
|
9
|
|
|
13
|
|
|
(4)
|
|
|
(31)
|
|
Interest and debt expense
|
25
|
|
|
24
|
|
|
1
|
|
|
4
|
|
General and administrative expense
|
1,290
|
|
|
1,285
|
|
|
5
|
|
|
—
|
|
Total expenses
|
2,252
|
|
|
2,283
|
|
|
(31)
|
|
|
(1)
|
|
Adjusted operating earnings
|
$
|
661
|
|
|
$
|
728
|
|
|
$
|
(67)
|
|
|
(9)
|
%
|
Our Asset Management segment pretax adjusted operating earnings, which exclude net realized investment gains or losses, decreased $67 million, or 9%, to $661 million for the year ended December 31, 2019 compared to $728 million for the prior year primarily due to the cumulative impact of net outflows and a vendor credit of $14 million in the prior year, partially offset by higher average markets and a $29 million increase in net performance fees.
Net Revenues
Net revenues, which exclude net realized investment gains or losses, decreased $98 million, or 3%, to $2.9 billion for the year ended December 31, 2019 compared to $3.0 billion for the prior year.
Management and financial advice fees decreased $52 million, or 2%, to $2.5 billion for the year ended December 31, 2019 compared to the prior year driven by cumulative net outflows and a $27 million negative foreign currency translation impact, partially offset by a $57 million increase in performance fees and higher average markets. Our average weighted equity index, which is a proxy for equity movements on AUM, increased 4% for the year ended December 31, 2019 compared to the prior year.
Distribution fees decreased $25 million, or 6%, to $408 million for the year ended December 31, 2019 compared to $433 million for the prior year due to the cumulative impact of net outflows, partially offset by higher average markets.
Other revenues decreased $17 million, or 89%, to $2 million for the year ended December 31, 2019 compared to $19 million for the prior year due to a $14 million vendor credit in the prior year related to the completion of our front, middle and back-office integration.
Expenses
Total expenses decreased $31 million, or 1%, to $2.3 billion for the year ended December 31, 2019 compared to the prior year.
Distribution expenses decreased $33 million, or 3%, to $928 million for the year ended December 31, 2019 compared to $961 million for the prior year primarily due to the cumulative impact of net outflows, partially offset by higher average markets.
Retirement & Protection Solutions
The following table presents the results of operations of our Retirement & Protection Solutions segment on an adjusted operating basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
2019
|
|
2018
|
(in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Management and financial advice fees
|
$
|
827
|
|
|
$
|
839
|
|
|
$
|
(12)
|
|
|
(1)
|
%
|
Distribution fees
|
438
|
|
|
439
|
|
|
(1)
|
|
|
—
|
|
Net investment income
|
528
|
|
|
528
|
|
|
—
|
|
|
—
|
|
Premiums, policy and contract charges
|
1,330
|
|
|
1,360
|
|
|
(30)
|
|
|
(2)
|
|
Other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total revenues
|
3,123
|
|
|
3,166
|
|
|
(43)
|
|
|
(1)
|
|
Banking and deposit interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net revenues
|
3,123
|
|
|
3,166
|
|
|
(43)
|
|
|
(1)
|
|
Expenses
|
|
|
|
|
|
|
|
Distribution expenses
|
469
|
|
|
476
|
|
|
(7)
|
|
|
(1)
|
|
Interest credited to fixed accounts
|
387
|
|
|
379
|
|
|
8
|
|
|
2
|
|
Benefits, claims, losses and settlement expenses
|
988
|
|
|
1,060
|
|
|
(72)
|
|
|
(7)
|
|
Amortization of deferred acquisition costs
|
230
|
|
|
196
|
|
|
34
|
|
|
17
|
|
Interest and debt expense
|
31
|
|
|
29
|
|
|
2
|
|
|
7
|
|
General and administrative expense
|
294
|
|
|
305
|
|
|
(11)
|
|
|
(4)
|
|
Total expenses
|
2,399
|
|
|
2,445
|
|
|
(46)
|
|
|
(2)
|
|
Adjusted operating earnings
|
$
|
724
|
|
|
$
|
721
|
|
|
$
|
3
|
|
|
—
|
%
|
Our Retirement & Protection Solutions segment pretax adjusted operating earnings, which exclude net realized investment gains or losses (net of the related DSIC and DAC amortization, unearned revenue amortization and the reinsurance accrual), the market impact on non-traditional long-duration products (including variable annuity contracts and IUL contracts, net of hedges and the related DSIC and DAC amortization, unearned revenue amortization and the reinsurance accrual) and mean reversion related impacts, increased $3 million to $724 million for the year ended December 31, 2019 compared to $721 million for the prior year.
RiverSource variable annuity account balances increased 11% to $80.1 billion as of December 31, 2019 compared to the prior year due to equity market appreciation, partially offset by net outflows of $3.2 billion. Variable annuity sales decreased 8% compared to the prior year.
Net Revenues
Net revenues, which exclude net realized investment gains or losses (net of unearned revenue amortization and the reinsurance accrual) and the unearned revenue amortization and reinsurance accrual offset to the market impact on IUL contracts, decreased $43 million, or 1%, to $3.1 billion for the year ended December 31, 2019 compared to $3.2 billion for the prior year.
Premiums, policy and contract charges, which exclude the unearned revenue amortization and reinsurance accrual offset to net realized investment gains or losses and the market impact on IUL contracts, decreased $30 million, or 2% to $1.3 billion for the year ended December 31, 2019 compared to $1.4 billion for the prior year due to the impact of unlocking, partially offset by higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date, higher average fee rates and a $7 million expense in the prior year related to a modification of costs within a reinsurance contract.
Expenses
Total expenses, which exclude the market impact on non-traditional long-duration products (including variable annuity contracts and IUL contracts, net of hedges and the related DSIC and DAC amortization), mean reversion related impacts and the DAC and DSIC offset to net realized investment gains or losses, decreased $46 million, or 2%, for the year ended December 31, 2019 compared to the prior year.
Benefits, claims, losses and settlement expenses, which exclude the market impact on variable annuity contracts (net of hedges and the related DSIC amortization), mean reversion related impacts and the DSIC offset to net realized investment gains or losses, decreased $72 million, or 7%, to $988 million for the year ended December 31, 2019 compared to $1.1 billion for the prior year primarily due to the impact of unlocking, partially offset by higher reserve funding driven by the impact of higher variable annuity guaranteed benefit rider charges. The unlocking impact for 2019 was an expense of $6 million and primarily reflected updates to our interest rate assumptions and lower surrenders on annuity contracts with a withdrawal benefit, partially offset by a benefit from changes in equity market volatility and correlation assumptions on variable annuities. The unlocking impact for the prior year was an expense of
$118 million and primarily reflected unfavorable mortality experience on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by a favorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
Amortization of DAC, which excludes mean reversion related impacts, the DAC offset to the market impact on variable annuity contracts and IUL contracts and the DAC offset to net realized investment gains or losses, increased $34 million, or 17%, to $230 million for the year ended December 31, 2019 compared to $196 million for the prior year primarily reflecting the impact of unlocking, partially offset by a favorable impact from normal year over year experience differences for variable annuities. The impact of unlocking for 2019 was an expense of $15 million and reflected updates to our interest rate assumptions, partially offset by a favorable impact from lower surrenders on annuity contracts with a withdrawal benefit. The impact of unlocking in the prior year was a benefit of $40 million and primarily reflected updated mortality assumptions on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by an unfavorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
Corporate & Other
The following table presents the results of operations of our Corporate & Other segment on an adjusted operating basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
2019
|
|
2018
|
(in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Management and financial advice fees
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
(1)
|
|
|
(20)
|
%
|
Distribution fees
|
6
|
|
|
7
|
|
|
(1)
|
|
|
(14)
|
|
Net investment income
|
479
|
|
|
582
|
|
|
(103)
|
|
|
(18)
|
|
Premiums, policy and contract charges
|
931
|
|
|
1,148
|
|
|
(217)
|
|
|
(19)
|
|
Other revenues
|
65
|
|
|
6
|
|
|
59
|
|
|
NM
|
Total revenues
|
1,485
|
|
|
1,748
|
|
|
(263)
|
|
|
(15)
|
|
Banking and deposit interest expense
|
8
|
|
|
6
|
|
|
2
|
|
|
33
|
|
Total net revenues
|
1,477
|
|
|
1,742
|
|
|
(265)
|
|
|
(15)
|
|
Expenses
|
|
|
|
|
|
|
|
Distribution expenses
|
4
|
|
|
14
|
|
|
(10)
|
|
|
(71)
|
|
Interest credited to fixed accounts
|
270
|
|
|
282
|
|
|
(12)
|
|
|
(4)
|
|
Benefits, claims, losses and settlement expenses
|
965
|
|
|
1,235
|
|
|
(270)
|
|
|
(22)
|
|
Amortization of deferred acquisition costs
|
55
|
|
|
72
|
|
|
(17)
|
|
|
(24)
|
|
Interest and debt expense
|
78
|
|
|
62
|
|
|
16
|
|
|
26
|
|
General and administrative expense
|
391
|
|
|
351
|
|
|
40
|
|
|
11
|
|
Total expenses
|
1,763
|
|
|
2,016
|
|
|
(253)
|
|
|
(13)
|
|
Operating loss
|
$
|
(286)
|
|
|
$
|
(274)
|
|
|
$
|
(12)
|
|
|
(4)
|
%
|
NM Not Meaningful.
Our Corporate & Other segment pretax adjusted operating loss excludes net realized investment gains or losses, the market impact on fixed deferred annuity contracts (net of hedges and the related DAC amortization), the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments, gain or loss on disposal of a business that is not considered discontinued operations, integration and restructuring charges, and the impact of consolidating CIEs. Our Corporate & Other segment pretax adjusted operating loss increased $12 million, or 4%, to $286 million for the year ended December 31, 2019 compared to $274 million for the prior year.
Our LTC insurance pretax adjusted operating earnings were nil for the year ended December 31, 2019 compared to a pretax adjusted operating loss of $61 million for the prior year. Our annual review of LTC active life future policy benefit reserve adequacy resulted in unlocking and loss recognition of $8 million for the year ended December 31, 2019 compared to $52 million in the prior year.
FA business had a pretax adjusted operating earnings of $34 million for the year ended December 31, 2019 compared to $30 million for the prior year.
RiverSource fixed deferred annuity account balances declined 5% to $8.3 billion as of December 31, 2019 compared to the prior year as older policies continue to lapse and new sales are limited due to low interest rates. We reinsured approximately 20% of our fixed annuities block during the first quarter of 2019. The reinsurance transaction generated $200 million of excess capital and had a marginal impact on fixed annuity adjusted pretax operating earnings.
Auto and Home pretax adjusted operating earnings were $13 million for the year ended December 31, 2019 compared to a pretax adjusted operating loss of $10 million for the prior year. We sold AAH on October 1, 2019.
Net Revenues
Net revenues, which exclude net realized investment gains or losses, the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments, gain on disposal of business that is not considered discontinued operations, integration and restructuring charges and revenues attributable to CIEs, decreased $265 million, or 15%, to $1.5 billion for the year ended December 31, 2019 compared to $1.7 billion for the prior year. Net revenues for the year ended December 31, 2019 included $881 million from Auto and Home compared to $1.1 billion for the prior year reflecting the sale of AAH.
Net investment income, which excludes net realized investment gains or losses, the market impact of hedges to offset interest rate changes on unrealized gains or losses for certain investments and net investment income attributable to CIEs, decreased $103 million, or 18%, to $479 million for the year ended December 31, 2019 compared to $582 million for the prior year primarily due to a $47 million unfavorable impact related to the fixed annuities reinsurance transaction, approximately $30 million from lower average invested assets due to fixed annuity net outflows and impairments of our investment in affordable housing partnerships. Impairments of our investment in affordable housing partnerships were $35 million for the year ended December 31, 2019 compared to $7 million for the prior year.
Premiums, policy and contract charges decreased $217 million, or 19%, to $931 million for the year ended December 31, 2019 compared to $1.1 billion for the prior year primarily due to the sale of AAH.
Other revenues increased $59 million to $65 million for the year ended December 31, 2019 compared to $6 million for the prior year primarily due to accretion on our fixed annuities reinsurance deposit receivable and a $7 million gain on the sale of real estate in the third quarter of 2019.
Expenses
Total expenses, which exclude the market impact on fixed deferred annuity contracts (net of hedges and the related DAC amortization), integration and restructuring charges and expenses attributable to CIEs, decreased $253 million, or 13%, to $1.8 billion for the year ended December 31, 2019 compared to $2.0 billion for the prior year. Total expenses for the year ended December 31, 2019 included $868 million from Auto and Home reflecting the sale of AAH.
Distribution expenses decreased $10 million, or 71%, to $4 million for the year ended December 31, 2019 compared to $14 million for the prior year reflecting the sale of AAH.
Interest credited to fixed accounts, which excludes the market impact on fixed deferred annuity contracts (net of hedges), decreased $12 million, or 4%, to $270 million for the year ended December 31, 2019 compared to $282 million for the prior year due to lower average fixed deferred annuity account balances.
Benefits, claims, losses and settlement expenses decreased $270 million, or 22%, to $965 million for the year ended December 31, 2019 compared to $1.2 billion for the prior year reflecting a decrease in LTC unlocking and loss recognition and the sale of AAH.
Amortization of DAC, which excludes the DAC offset to the market impact on fixed deferred annuity contracts, decreased $17 million, or 24%, to $55 million for the year ended December 31, 2019 compared to $72 million for the prior year primarily reflecting the sale of AAH and the impact of unlocking.
Interest and debt expense, which excludes interest expense attributable to CIEs, increased $16 million, or 26%, to $78 million for the year ended December 31, 2019 compared to $62 million for the prior year primarily due to interest expense on asset backed securities issued by one of our subsidiaries in the fourth quarter of 2018. This interest expense is eliminated on a consolidated basis.
General and administrative expense, which excludes integration and restructuring charges and expenses attributable to CIEs, increased $40 million, or 11%, to $391 million for the year ended December 31, 2019 compared to $351 million for the prior year primarily due to a $33 million unfavorable change in the mark-to-market impact on share-based compensation expenses, investments in growth initiatives and a $13 million increase in severance, partially offset by a $25 million decrease in auto and home expenses primarily reflecting the sale of AAH.
Fair Value Measurements
We report certain assets and liabilities at fair value; specifically, separate account assets, derivatives, 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. We include actual market prices, or observable inputs, in our fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. We validate 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 15 to the Consolidated Financial Statements for additional information on our 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 our obligations of our variable annuity riders, fixed deferred indexed annuities, structured variable annuities, and IUL insurance, we consider the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, we adjust the valuation of variable annuity riders, fixed deferred indexed annuities, structured variable annuities, and IUL insurance by updating certain contractholder assumptions, adding explicit margins to provide for risk, and adjusting the rates used to discount expected cash flows to reflect a market estimate of our nonperformance risk. The nonperformance risk adjustment is based on observable market data adjusted to estimate the risk of our life insurance company subsidiaries not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of December 31, 2020. As our 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 $467 million, net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 21%), based on December 31, 2020 credit spreads.
Liquidity and Capital Resources
Overview
We maintained substantial liquidity during the year ended December 31, 2020. At December 31, 2020 and 2019, we had $6.8 billion and $3.7 billion, respectively, in cash and cash equivalents excluding CIEs and other restricted cash on a consolidated basis.
At December 31, 2020 and 2019, the parent company had $1.1 billion and $1.8 billion, respectively, in cash, cash equivalents, and unencumbered liquid securities. Liquid securities predominantly include U.S. government agency mortgage back securities. Additional sources of liquidity include a line of credit with an affiliate up to $867 million and an unsecured revolving committed credit facility for up to $750 million that expires in October 2022. Management’s estimate of liquidity available to the parent company in a volatile and uncertain economic environment as of December 31, 2020 was $2.3 billion which includes cash, cash equivalents, unencumbered liquid securities, the line of credit with an affiliate and a portion of the committed credit facility.
Under the terms of the committed credit facility, we can increase the availability to $1.0 billion upon satisfaction of certain approval requirements. Available borrowings under this facility are reduced by any outstanding letters of credit. At December 31, 2020, we had no outstanding borrowings under this credit facility and had $1 million of outstanding letters of credit. Our credit facility contains various administrative, reporting, legal and financial covenants. Compliance with these covenants is not currently impaired by the COVID-19 pandemic, and we remain in compliance with all such covenants at December 31, 2020.
On April 2, 2020, we issued $500 million of unsecured 3.0% senior notes due April 2, 2025 and incurred debt issuance costs of $4 million. Interest payments are due semi-annually in arrears on April 2 and October 2, commencing on October 2, 2020.
The Company repaid $750 million principal amount of its 5.3% senior notes at maturity on March 16, 2020.
In addition, we have access to collateralized borrowings, which may include repurchase agreements and Federal Home Loan Bank (“FHLB”) advances. Our subsidiaries, RiverSource Life Insurance Company (“RiverSource Life”), and Ameriprise Bank, FSB are members of the FHLB of Des Moines, which provides access to collateralized borrowings. We had $200 million and $201 million of borrowings from the FHLB, which is collateralized with commercial mortgage backed securities and residential mortgage backed securities, as of December 31, 2020 and 2019. We believe cash flows from operating activities, available cash balances and our availability of revolver borrowings will be sufficient to fund our operating liquidity needs and stress requirements.
On November 3, 2020, S&P Global lowered our issuer credit and senior unsecured debt rating from A with a negative outlook to A-with a stable outlook due to gradual expansion in our non-insurance businesses driving a S&P ratings methodology change. We do not believe this rating change will have a material impact on our access to or cost of capital or otherwise materially impact our liquidity.
We continue to monitor and respond to the ongoing COVID-19 pandemic. Our risk management strategy is designed to provide proactive protection during stress events such as the current pandemic. We believe our process is working as intended, and our liquidity and capital resources have remained a source of balance sheet strength during the twelve months ended December 31, 2020.
Dividends from Subsidiaries
Ameriprise Financial is primarily a parent holding company for the operations carried out by our wholly-owned subsidiaries. Because of our holding company structure, our ability to meet our cash requirements, including the payment of dividends on our common stock, substantially depends upon the receipt of dividends or return of capital from our subsidiaries, particularly our life insurance subsidiary, RiverSource Life, our face-amount certificate subsidiary, Ameriprise Certificate Company (“ACC”), AMPF Holding Corporation, which is the parent company of our retail introducing broker-dealer subsidiary, Ameriprise Financial Services, LLC (“AFS”) and our clearing broker-dealer subsidiary, American Enterprise Investment Services, Inc. (“AEIS”), our transfer agent subsidiary, Columbia Management Investment Services Corp., our investment advisory company, Columbia Management Investment Advisers, LLC, and Ameriprise International Holdings GmbH, which is the parent company of Threadneedle Asset Management Holdings Sàrl. The payment of dividends by many of our subsidiaries is restricted and certain of our subsidiaries are subject to regulatory capital requirements.
Actual capital and regulatory capital requirements for our wholly owned subsidiaries subject to regulatory capital requirements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Capital
|
|
Regulatory
Capital Requirements
|
December 31,
|
December 31,
|
2020
|
2019
|
2020
|
2019
|
(in millions)
|
RiverSource Life (1)(2)
|
$
|
5,021
|
|
$
|
2,924
|
|
|
$
|
993
|
|
$
|
601
|
|
RiverSource Life of NY (1)(2)
|
323
|
|
235
|
|
|
42
|
|
38
|
|
ACC (4)(5)
|
387
|
|
430
|
|
|
362
|
|
402
|
|
Threadneedle Asset Management Holdings Sàrl (6)
|
445
|
|
287
|
|
|
204
|
|
183
|
|
Ameriprise Bank, FSB (4)(7)
|
658
|
|
300
|
|
|
543
|
|
180
|
|
AFS (3)(4)
|
134
|
|
94
|
|
|
#
|
#
|
Ameriprise Captive Insurance Company (3)
|
41
|
|
48
|
|
|
8
|
|
9
|
|
Ameriprise Trust Company (3)
|
42
|
|
35
|
|
|
37
|
32
|
|
AEIS (3)(4)
|
122
|
|
133
|
|
|
25
|
22
|
|
RiverSource Distributors, Inc. (3)(4)
|
12
|
|
13
|
|
|
#
|
#
|
Columbia Management Investment Distributors, Inc. (3)(4)
|
16
|
|
16
|
|
|
#
|
#
|
N/A Not applicable.
# Amounts are less than $1 million.
(1) Actual capital is determined on a statutory basis.
(2) Regulatory capital requirement is the company action level and is based on the statutory risk-based capital filing.
(3) Regulatory capital requirement is based on the applicable regulatory requirement, calculated as of December 31, 2020 and 2019.
(4) Actual capital is determined on an adjusted GAAP basis.
(5) ACC is required to hold capital in compliance with the Minnesota Department of Commerce and SEC capital requirements.
(6) Actual capital and regulatory capital requirements are determined in accordance with U.K. regulatory legislation. The regulatory capital requirements at December 31, 2020 represent calculations at September 30, 2020 of the rule based requirements, as specified by FCA regulations.
(7) Regulatory capital requirement is based on minimum requirements for well capitalized banks in accordance with the Office of the Comptroller of the Currency (“OCC”).
In addition to the particular regulations restricting dividend payments and establishing subsidiary capitalization requirements, we take into account the overall health of the business, capital levels and risk management considerations in determining a strategy for payments to our parent holding company from our subsidiaries, and in deciding to use cash to make capital contributions to our subsidiaries.
During the year ended December 31, 2020, the parent holding company received cash dividends or a return of capital from its subsidiaries of $2.1 billion and contributed cash to its subsidiaries of $416 million. During the year ended December 31, 2019, the parent holding company received cash dividends or a return of capital from its subsidiaries of $2.7 billion and contributed cash to its subsidiaries of $368 million.
The table below presents the historical subsidiary capacity for dividends and other distributions to the parent holding company in each of the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
RiverSource Life (1)
|
$
|
1,505
|
|
|
$
|
1,676
|
|
|
$
|
958
|
|
Ameriprise Bank, FSB
|
74
|
|
|
20
|
|
|
4
|
|
ACC (2)
|
97
|
|
|
96
|
|
|
25
|
|
CMIA
|
381
|
|
|
368
|
|
|
395
|
|
CMIS
|
14
|
|
|
48
|
|
|
39
|
|
Ameriprise International Holdings GmbH
|
254
|
|
|
231
|
|
|
446
|
|
Ameriprise Trust Company
|
—
|
|
|
3
|
|
|
6
|
|
Ameriprise Captive Insurance Company
|
48
|
|
|
54
|
|
|
64
|
|
RiverSource Distributors, Inc.
|
12
|
|
|
12
|
|
|
12
|
|
AMPF Holding Corporation
|
1,116
|
|
|
1,092
|
|
|
1,027
|
|
Total capacity
|
$
|
3,501
|
|
|
$
|
3,600
|
|
|
$
|
2,976
|
|
(1) For RiverSource Life payments in excess of statutory unassigned funds require advance notice to the Minnesota Department of Commerce, RiverSource Life’s primary regulator, and are subject to potential disapproval. In addition, dividends and other distributions whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (1) the previous year’s statutory net gain from operations or (2) 10% of the previous year-end statutory capital and surplus are referred to as “extraordinary dividends.” Extraordinary dividends also require advance notice to the Minnesota Department of Commerce, and are subject to potential disapproval. For dividends exceeding these thresholds, RiverSource Life provided notice to the Minnesota Department of Commerce and received responses indicating that it did not object to the payment of these dividends. Total dividend capacity for RiverSource Life represents dividends paid during year ended December 31 along with any unpaid ordinary dividend capacity, subject to unassigned funds limitation.
(2) The dividend capacity for ACC is based on capital held in excess of regulatory requirements.
The following table presents cash dividends paid or return of capital to the parent holding company, net of cash capital contributions made by the parent holding company for the following subsidiaries for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
RiverSource Life
|
$
|
800
|
|
|
$
|
1,350
|
|
|
$
|
750
|
|
Ameriprise Bank, FSB
|
(300)
|
|
|
(260)
|
|
|
—
|
|
ACC
|
72
|
|
|
69
|
|
|
(33)
|
|
CMIA
|
324
|
|
|
286
|
|
|
308
|
|
CMIS
|
—
|
|
|
40
|
|
|
—
|
|
Ameriprise International Holdings GmbH (1)
|
—
|
|
|
116
|
|
|
393
|
|
Ameriprise Advisor Capital, LLC (2)
|
(102)
|
|
|
(84)
|
|
|
401
|
|
Ameriprise Captive Insurance Company
|
15
|
|
|
15
|
|
|
10
|
|
AMPF Holding Corporation
|
924
|
|
|
920
|
|
|
840
|
|
Ameriprise Trust Company
|
(4)
|
|
|
—
|
|
|
—
|
|
Ameriprise India
|
4
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,733
|
|
|
$
|
2,452
|
|
|
$
|
2,669
|
|
(1) Includes forgiveness of parent holding company debt of $81 million and $195 million for the years ended December 31, 2019 and 2018, respectively.
(2) In 2018, the amount includes $351 million from a securitized portfolio of advisor loans which were previously held at Ameriprise Advisor Capital, LLC. The securitization transaction eliminated in consolidation.
In 2009, RiverSource Life established an agreement to protect its exposure to Genworth Life Insurance Company (“GLIC”) for its reinsured LTC. In 2016, substantial enhancements to this reinsurance protection agreement were finalized. The terms of these confidential provisions within the agreement have been shared, in the normal course of regular reviews, with our domiciliary regulator and rating agencies. GLIC is domiciled in Delaware, 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 we have with GLIC have been tested and respected in Delaware and elsewhere in the United States, and as a result we believe our credit protections would be respected even in the unlikely event that GLIC becomes subject to rehabilitation or insolvency proceedings in Delaware. Accordingly, while no credit protections are perfect, we believe the correct way to think about the risks represented by our 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 our credit protections). Thus, management believes that our agreement and
offsetting non LTC legacy arrangements with Genworth will enable RiverSource Life to recover on all net exposure in all material respects in the event of a rehabilitation or insolvency of GLIC.
Dividends Paid to Shareholders and Share Repurchases
We paid regular quarterly dividends to our shareholders totaling $512 million and $518 million for the years ended December 31, 2020 and 2019, respectively. On January 27, 2021, we announced a quarterly dividend of $1.04 per common share. The dividend will be paid on February 26, 2021 to our shareholders of record at the close of business on February 12, 2021.
In February 2019, our Board of Directors authorized us to repurchase up to $2.5 billion of our common stock through March 31, 2021, which was exhausted in the fourth quarter of 2020. In August 2020, our Board of Directors authorized an additional repurchase up to $2.5 billion of our common stock through September 30, 2022. As of December 31, 2020, we had $2.3 billion remaining under this share repurchase authorization. We intend to fund share repurchases through existing working capital, future earnings and other customary financing methods. The share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and other factors, these purchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means. During the year ended December 31, 2020, we repurchased a total of 8.4 million shares of our common stock at an average price of $158.17 per share.
Cash Flows
Cash flows of CIEs and restricted and segregated cash are reflected in our cash flows provided by (used in) operating activities, investing activities and financing activities. Cash held by CIEs is not available for general use by Ameriprise Financial, nor is Ameriprise Financial cash available for general use by its CIEs. Cash segregated under federal and other regulations is held for the exclusive benefit of our brokerage customers and is not available for general use by Ameriprise Financial.
Operating Activities
Net cash provided by operating activities increased $2.3 billion to $4.6 billion for the year ended December 31, 2020 compared to $2.3 billion for the prior year primarily reflecting a $865 million increase in cash from changes in brokerage deposits, a $373 million decrease in income taxes paid and an increase in cash collateral related to derivatives, partially offset $624 million decrease in cash from changes in restricted and segregated investments.
Net cash provided by operating activities decreased $256 million to $2.3 billion for the year ended December 31, 2019 compared to $2.6 billion for the prior year primarily reflecting a $375 million decrease in cash from changes in restricted and segregated investments, a $264 million decrease in cash from changes in brokerage deposits and a $100 million payment to an affinity partner in connection with the sale of AAH, partially offset by changes in receivables.
Investing Activities
Our investing activities primarily relate to our Available-for-Sale investment portfolio. This activity is significantly affected by the net flows of our investment certificate, banking, fixed annuity and universal life products reflected in financing activities.
Net cash used in investing activities decreased $340 million to $2.9 billion for the year ended December 31, 2020 compared to $3.2 billion for the prior year primarily reflecting a $1.5 billion increase in proceeds from sales of Available-for-Sale securities, a $1.4 billion increase in proceeds from maturities, sinking fund payments and calls of Available-for-Sale securities, a $391 million decrease in net cash flows related to investments of consolidated investment entities partially offset by a $1.6 billion increase in cash used for purchases of Available-for-Sale securities, $934 million in proceeds from the sale of AAH, net of cash and cash equivalents sold of $204 million, in 2019, a $340 million increase in net cash flows related to deposit receivable and a $134 million increase in net cash flows related to mortgage loans.
Net cash used in investing activities increased $2.6 billion to $3.2 billion for the year ended December 31, 2019 compared to $587 million for the prior year primarily due to a $3.6 billion increase in cash used for purchases of Available-for-Sale securities, a $193 million decrease in proceeds from sales of Available-for-Sale securities, a $635 million decrease in net cash flows related to investments of consolidated investment entities, a $251 million decrease in cash related to the fixed annuities reinsurance arrangement and a $138 million decrease to cash related to written options with deferred premiums, partially offset by a $1.5 billion increase in proceeds from maturities, sinking fund payments and calls of Available-for-Sale securities and $934 million in proceeds from the sale of AAH, net of cash and cash equivalents sold of $204 million. See Note 19 to our Consolidated Financial Statements for additional information on the sale of AAH.
Financing Activities
Net cash provided by financing activities decreased $262 million to $952 million for the year ended December 31, 2020 compared to $1.2 billion for the prior year primarily reflecting a $172 million decrease in net cash inflows from banking deposits, a $378 million decrease in cash related to investment certificates due to certificate net outflows, a $450 million increase in senior note repayments, partially offset by a $502 million decrease in share repurchases and a $382 million increase in borrowings by consolidated investment entities.
Net cash provided by financing activities was $1.2 billion for the year ended December 31, 2019 compared to net cash used in financing activities of $1.3 billion for the prior year primarily reflecting a $3.8 billion increase in net cash inflows from banking deposits, proceeds of $497 million from issuance of debt and a $508 million decrease in net cash outflows related to CIE debt, partially offset by a $1.9 billion decrease in cash related to investment certificates due to certificate net outflows, repayment of $300 million of our senior notes in June 2019 and a $313 million increase in share repurchases.
Contractual Commitments
The contractual obligations identified in the table below include both our on and off-balance sheet transactions that represent material expected or contractually committed future obligations. The table excludes obligations of CIEs as they are not direct obligations of the Company and have recourse only to the assets of the CIEs. Estimated cash payments due by period as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2021
|
|
2022-2023
|
|
2024-2025
|
|
2026 and Thereafter
|
(in millions)
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Senior notes (1)
|
$
|
2,800
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
1,050
|
|
|
$
|
500
|
|
Insurance and annuities (2)
|
52,892
|
|
|
2,127
|
|
|
4,140
|
|
|
3,962
|
|
|
42,663
|
|
Investment certificates (3)
|
6,760
|
|
|
6,521
|
|
|
239
|
|
|
—
|
|
|
—
|
|
Deferred premium options (4)
|
932
|
|
|
153
|
|
|
258
|
|
|
267
|
|
|
254
|
|
Lease obligations
|
298
|
|
|
66
|
|
|
104
|
|
|
73
|
|
|
55
|
|
Affordable housing and other real estate partnerships (5)
|
12
|
|
|
6
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
|
|
|
|
|
|
Purchase obligations (6)
|
812
|
|
|
292
|
|
|
304
|
|
|
137
|
|
|
79
|
|
Interest on senior notes (7)
|
325
|
|
|
95
|
|
|
156
|
|
|
64
|
|
|
10
|
|
Interest on lease obligations
|
25
|
|
|
7
|
|
|
10
|
|
|
5
|
|
|
3
|
|
Total
|
$
|
64,856
|
|
|
$
|
9,267
|
|
|
$
|
6,463
|
|
|
$
|
5,560
|
|
|
$
|
43,566
|
|
(1) See Note 14 to our Consolidated Financial Statements for more information about our long-term debt.
(2) These scheduled payments are represented by reserves of approximately $34.0 billion at December 31, 2020 and are based on interest credited, mortality, morbidity, lapse, surrender and premium payment assumptions. The estimated payments are presented gross before reinsurance. The scheduled payments are undiscounted and exceed the corresponding liability at December 31, 2020. Actual payment obligations may differ if experience varies from these assumptions. As of December 31, 2020, the projected period for which cash payments will be made is 40 years. Separate account liabilities have been excluded as associated contractual obligations would be met by separate account assets.
(3) The payments due by year are based on contractual term maturities. However, contractholders have the right to redeem the investment certificates earlier and at their discretion subject to surrender charges, if any. Redemptions are most likely to occur in periods of substantial increases in interest rates.
(4) The fair value of these commitments included on the Consolidated Balance Sheets was $900 million as of December 31, 2020. See Note 17 to our Consolidated Financial Statements for more information about our deferred premium options.
(5) Call dates for the obligations presented are either date or event specific. For date specific obligations, we are required to fund a specific amount on a stated date provided there are no defaults under the agreement. For event specific obligations, we are required to fund a specific amount of its capital commitment when properties in a fund become fully stabilized. For event specific obligations, the estimated call date of these commitments is used in the table above.
(6) Purchase obligations include the minimum contractual amounts by period under contracts that were in effect at December 31, 2020. Many of the purchase agreements giving rise to these purchase obligations include termination clauses that may require payment of termination fees if the agreements are terminated by us without cause prior to their stated expiration; however, the table reflects the amounts to be paid assuming the contracts are not terminated.
(7) Interest on senior notes was estimated based on rates in effect as of December 31, 2020.
In addition to the contractual commitments outlined in the table above, we periodically fund the employees’ defined benefit plans. In 2021, we expect to contribute $15 million to our pension plans and $1 million to our defined benefit postretirement plans. See Note 25 to our Consolidated Financial Statements for additional information.
Total funding commitments related to loans and private funds, which are not included in the table above due to uncertainty with respect to timing of future cash flows, were $18 million and $9 million, respectively, at December 31, 2020. For additional information relating to these contractual commitments, see Note 26 to our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We provide asset management services to investment entities which are considered to be VIEs, such as CLOs, hedge funds, property funds and other private funds, which are sponsored by us. We consolidate certain CLOs. We have determined that consolidation is not required for hedge funds, property funds and other private funds, which are sponsored by us. Our maximum exposure to loss with respect to our investment in these non-consolidated entities is limited to our carrying value and future funding commitments that are legally binding. Other than future funding commitments that are legally binding, we have no obligation to provide further financial or other support to these investment entities nor have we provided any support to these investment entities. See Note 5 and Note 26 to our Consolidated Financial Statements for additional information on our arrangements with these investment entities.
Forward-Looking Statements
This report contains forward-looking statements that reflect management’s plans, estimates and beliefs. 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, positioning, expectations, objectives or goals, including those relating to asset flows, mass affluent and affluent client acquisition strategy, client retention and growth of our client base, financial advisor productivity, retention, recruiting and enrollments, the introduction, cessation, terms or pricing of new or existing products and services, acquisition integration, benefits and claims expenses, general and administrative costs, consolidated tax rate, return of capital to shareholders, debt repayment and excess capital position and financial flexibility to capture additional growth opportunities;
•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 variable annuity sales business away from products with living benefit guarantees over time;
•other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and
•statements of assumptions underlying such statements.
The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on track,” “project,” “continue,” “able to remain,” “resume,” “deliver,” “develop,” “evolve,” “drive,” “enable,” “flexibility,” “scenario,” “case” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements.
Such factors include, but are not limited to:
•the impacts on our business of the COVID-19 pandemic and the related economic, client, governmental and healthcare system responses;
•market fluctuations and general economic and political factors, including volatility in the U.S. and global market conditions, client behavior and volatility in the markets for our products;
•changes in interest rates and periods of low interest rates;
•adverse capital and credit market conditions or any downgrade in our credit ratings;
•effects of competition and the economics of changes in our product revenue mix and distribution channels;
•declines in our investment management performance;
•our ability to compete in attracting and retaining talent, including financial advisors;
•impairment, negative performance or default by financial institutions or other counterparties;
•the ability to maintain our unaffiliated third-party distribution channels and the impacts of sales of unaffiliated products;
•changes in valuation of securities and investments included in our assets;
•the determination of the amount of allowances taken on loans and investments;
•the illiquidity of our investments;
•effects of the elimination of LIBOR on, and value of, securities and other assets and liabilities tied to LIBOR;
•failures by other insurers that lead to higher assessments we owe to state insurance guaranty funds;
•failures or defaults by counterparties to our reinsurance arrangements;
•inadequate reserves for future policy benefits and claims or for future redemptions and maturities;
•deviations from our assumptions regarding morbidity, mortality and persistency affecting our insurance profitability;
•changes to our reputation arising from employee or advisor misconduct or otherwise;
•interruptions or other failures in our operating systems and networks, including errors or failures caused by third-party service providers, interference or third-party attacks;
•interruptions or other errors in our telecommunications or data processing systems;
• identification and mitigation of risk exposure in market environments, new products, vendors and other types of risk;
• ability of our subsidiaries to transfer funds to us to pay dividends;
• changes in exchange rates and other risks in connection with our international operations and earnings and income generated overseas;
• occurrence of natural or man-made disasters and catastrophes;
• legal and regulatory actions brought against us;
• changes to laws and regulations that govern operation of our business;
• supervision by bank regulators and related regulatory and prudential standards as a savings and loan holding company that may limit our activities and strategies;
• changes in corporate tax laws and regulations and interpretations and determinations of tax laws impacting our products; and
• protection of our intellectual property and claims we infringe the intellectual property of others.
Management cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that management 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. Management undertakes no obligation to update publicly or revise any forward-looking statements.
Ameriprise Financial announces financial and other information to investors through the Company’s investor relations website at ir.ameriprise.com, as well as SEC filings, press releases, public conference calls and webcasts. Investors and others interested in the company are encouraged to visit the investor relations website from time to time, as information is updated and new information is posted. The website also allows users to sign up for automatic notifications in the event new materials are posted. The information found on the website is not incorporated by reference into this report or in any other report or document the Company furnishes or files with the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Our primary market risk exposures are interest rate, equity price, foreign currency exchange rate and credit risk. Equity price and interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset management and other asset-based fees we earn, the spread income generated on our fixed deferred annuities, fixed insurance, brokerage client cash balances, banking deposits, face-amount certificate products and the fixed portion of our variable annuities and variable insurance contracts, the value of deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) assets, the value of liabilities for guaranteed benefits associated with our variable annuities and the value of derivatives held to hedge these benefits.
RiverSource Life 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. Our 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. We use 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.
We have a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on our statutory surplus and to cover some of the residual risks not covered by other hedging activities. We assess the residual risk under a range of scenarios in creating and executing the macro hedge program. As a means of economically hedging these risks, we 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 we perform sensitivity testing which measures the impact on pretax income from the sources listed below for a 12-month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, indexed annuities, stock market certificates, indexed universal life (“IUL”) insurance and the associated hedge assets, we assume no change in implied market volatility despite the 10% drop in equity prices.
The following tables present our estimate of the impact on pretax income from the above defined hypothetical market movements as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Price Decline 10%
|
|
Equity Price Exposure to Pretax Income
|
|
Before Hedge Impact
|
|
Hedge Impact
|
|
Net Impact
|
|
|
(in millions)
|
Asset-based management and distribution fees (1)
|
|
$
|
(306)
|
|
|
$
|
3
|
|
|
$
|
(303)
|
|
|
DAC and DSIC amortization (2)(3)
|
|
(49)
|
|
|
—
|
|
|
(49)
|
|
|
Variable annuity riders and structured variable annuities:
|
|
|
|
|
|
|
|
GMDB and GMIB (3)
|
|
(9)
|
|
|
—
|
|
|
(9)
|
|
|
GMWB (3)
|
|
(210)
|
|
|
167
|
|
|
(43)
|
|
|
GMAB
|
|
(15)
|
|
|
15
|
|
|
—
|
|
|
Structured variable annuities
|
|
107
|
|
|
(89)
|
|
|
18
|
|
|
DAC and DSIC amortization (4)
|
|
N/A
|
|
N/A
|
|
5
|
|
|
Variable annuity riders and structured variable annuities:
|
|
(127)
|
|
|
93
|
|
|
(29)
|
|
|
Macro hedge program (5)
|
|
—
|
|
|
296
|
|
|
296
|
|
|
Indexed annuities
|
|
5
|
|
|
(4)
|
|
|
1
|
|
|
Certificates
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
IUL insurance
|
|
58
|
|
|
(47)
|
|
|
11
|
|
|
Total
|
|
$
|
(418)
|
|
|
$
|
340
|
|
|
$
|
(73)
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Increase 100 Basis Points
|
|
Interest Rate Exposure to Pretax Income
|
|
Before Hedge Impact
|
|
Hedge Impact
|
|
Net Impact
|
|
|
(in millions)
|
Asset-based management and distribution fees (1)
|
|
$
|
(58)
|
|
|
$
|
—
|
|
|
$
|
(58)
|
|
|
|
|
|
|
|
|
|
|
Variable annuity riders and structured variable annuities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB
|
|
1,656
|
|
|
(2,047)
|
|
|
(391)
|
|
|
GMAB
|
|
25
|
|
|
(32)
|
|
|
(7)
|
|
|
Structured variable annuities
|
|
(11)
|
|
|
34
|
|
|
23
|
|
|
DAC and DSIC amortization (4)
|
|
N/A
|
|
N/A
|
|
61
|
|
|
Total variable annuity riders and structured variable annuities
|
|
1,670
|
|
|
(2,045)
|
|
|
(314)
|
|
|
Macro hedge program (5)
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
|
Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products
|
|
68
|
|
|
—
|
|
|
68
|
|
|
Banking deposits
|
|
50
|
|
|
—
|
|
|
50
|
|
|
Brokerage client cash balances
|
|
230
|
|
|
—
|
|
|
230
|
|
|
Indexed annuities
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
Certificates
|
|
15
|
|
|
—
|
|
|
15
|
|
|
IUL insurance
|
|
17
|
|
|
1
|
|
|
18
|
|
|
Total
|
|
$
|
1,991
|
|
|
$
|
(2,050)
|
|
|
$
|
2
|
|
|
N/A Not Applicable.
(1) Excludes incentive income which is impacted by market and fund performance during the period and cannot be readily estimated.
(2) Market impact on DAC and DSIC amortization resulting from lower projected profits.
(3) In estimating the impact to pretax income on DAC and DSIC amortization and additional insurance benefit reserves, our assumed equity asset growth rates reflect what management would follow in its mean reversion guidelines.
(4) Market impact on DAC and DSIC amortization related to variable annuity riders and structured variable annuities is modeled net of hedge impact.
(5) The market impact of the macro hedge program is modeled net of any related impact to DAC and DSIC amortization.
(6) Represents the net impact to pretax income. The estimated net impact to pretax adjusted operating income is $(302) million.
The above results compare to an estimated negative net impact to pretax income of $90 million related to a 10% equity price decline and an estimated positive net impact to pretax income of $37 million related to a 100 basis point increase in interest rates as of December 31, 2019. The change in equity price exposure as of December 31, 2020 compared to prior year-end 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 our risk of nonperformance specific to these liabilities. Our hedging is based on our 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, we have not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor have we 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.
Asset-Based Management and Distribution Fees
We earn asset-based management fees and distribution fees on our assets under management. As of December 31, 2020, the value of our assets under management was $886.0 billion. These sources of revenue are 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. We currently only hedge certain equity price risk for this exposure, primarily using futures and swaps. We currently do not hedge any of the interest rate risk for this exposure.
DAC and DSIC Amortization
For annuity and UL/variable universal life (“VUL”) products, DAC and DSIC are amortized on the basis of estimated gross profits (“EGPs”). EGPs are a proxy for pretax income prior to the recognition of DAC and DSIC amortization expense. When events occur that reduce or increase current period EGPs, DAC and DSIC amortization expense is typically reduced or increased as well, somewhat mitigating the impact of the event on pretax income.
Variable Annuity Riders
The total contract value of all variable annuities as of December 31, 2020 was $85.8 billion. These contract values include GMWB and GMAB contracts which were $52.1 billion and $2.3 billion, respectively, as of December 31, 2020. As of December 31, 2020, reserves for GMWB were net liabilities of $3.0 billion and reserves for GMAB were net liabilities of $1 million. The GMWB and GMAB reserves include the fair value of embedded derivatives, which fluctuates based on equity, interest rate and credit markets which can cause these embedded derivatives to be either an asset or a liability. As of December 31, 2020, the reserve for GMDB and GMIB was a net liability of $23 million.
Equity Price Risk
The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions regardless of the performance of the investment assets. For this reason, when equity prices decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to earnings.
The core derivative instruments with which we hedge the equity price risk of our GMWB and GMAB provisions are longer dated put and call options; these core instruments are supplemented with equity futures and total return swaps. See Note 17 to our Consolidated Financial Statements for further information on our derivative instruments.
Interest Rate Risk
The GMAB and the non-life contingent benefits associated with the GMWB provisions create embedded derivatives which are carried at fair value separately from the underlying host variable annuity contract. Changes in the fair value of the GMWB and GMAB liabilities are recorded through earnings with fair value calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB and GMAB liabilities. The GMWB and GMAB interest rate exposure is hedged with a portfolio of longer dated put and call options, futures, interest rate swaps and swaptions. We have 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, we would have to pay more to the swap counterparty, and the fair value of our equity puts would decrease, resulting in a negative impact to our pretax income.
Structured Variable Annuities
Structured Variable Annuities offer the contract-holder the ability to allocate premiums to either an account that earns fixed interest (fixed account) or an account that credits interest based on the performance of various equity indices (indexed account) subject to a cap, floor, or buffer. Our earnings are based upon the spread between investment income earned and the credits made to the fixed and indexed accounts of the structured variable annuities. As of December 31, 2020, we had $1.4 billion in liabilities related to structured variable annuities.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. The equity price risk for structured variable annuities is evaluated together with the variable annuity riders as part of a hedge program using the derivative instruments consistent with our hedging on variable annuity riders.
Interest Rate Risk
The fair value of the embedded derivative associated with structured variable annuities is based on a discounted cash flow approach. Changes in interest rates impact the discounting of the embedded derivative liability. The spread between the investment income earned and amounts credited to contract-holders is also affected by changes in interest rates. These interest rate risks associated with structured variable annuities are not currently hedged.
Fixed Annuities, Fixed Insurance and Fixed Portion of Variable Annuities and Variable Insurance Contracts
Our earnings from fixed deferred annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts are based upon the spread between rates earned on assets held and the rates at which interest is credited to accounts. We primarily invest in fixed rate securities to fund the rate credited to clients. We guarantee 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 our liability guaranteed minimum interest rates (“GMIRs”). Hence, a modest rise in interest rates would not necessarily result in changes to all the liability credited rates while projected asset purchases would capture the full increase in interest rates. This dynamic would result in widening spreads under a modestly rising rate scenario given the current relationship between the current level of interest rates and the underlying GMIRs on the business. Of the $34.0 billion in policyholder account balances, future policy benefits and claims on our Consolidated Balance Sheets as of December 31, 2020, $21.4 billion is related to liabilities created by these products. We do not hedge this exposure.
As a result of the low interest rate environment, our current reinvestment yields are generally lower than the current portfolio yield. We expect our portfolio income yields to continue to decline in future periods if interest rates remain low. The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans that may generate proceeds to reinvest through 2021 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, were $4.4 billion and 2.4%, respectively, as of December 31, 2020. In addition, residential mortgage backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled $10.0 billion and had a weighted average yield of 1.7% as of December 31, 2020. 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 our investment yield. Furthermore, reinvestment activities and the associated investment yield may also be impacted by corporate strategies implemented at management’s discretion. The average yield for investment purchases during the year ended December 31, 2020 was approximately 1.6%.
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 our spread income, we assess reinvestment risk in our investment portfolio and monitor this risk in accordance with our asset/liability management framework. In addition, we may reduce the crediting rates on our fixed products when warranted, subject to guaranteed minimums.
The following table presents the account values of fixed deferred annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts by range of GMIRs and the range of the difference between rates credited to policyholders and contractholders as of December 31, 2020 and the respective guaranteed minimums, as well as the percentage of account values subject to rate reset in the time period indicated. Rates are reset at our discretion, subject to guaranteed minimums.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Values with Crediting Rates
|
At Guaranteed Minimum
|
|
1-49 bps above Guaranteed Minimum
|
|
50-99 bps above Guaranteed Minimum
|
|
100-150 bps above Guaranteed Minimum
|
|
Total
|
(in billions, except percentages)
|
Range of Guaranteed Minimum Crediting Rates
|
|
|
|
|
|
|
|
|
|
1% - 1.99%
|
$
|
1.3
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
2% - 2.99%
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
3% - 3.99%
|
7.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.8
|
|
4% - 5.00%
|
5.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
Total
|
$
|
15.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Account Values That Reset In:
|
|
|
|
|
|
|
|
|
|
Next 12 months (1)
|
100
|
%
|
|
86
|
%
|
|
64
|
%
|
|
7
|
%
|
|
98
|
%
|
> 12 months to 24 months (2)
|
—
|
|
|
2
|
|
|
26
|
|
|
3
|
|
|
1
|
|
> 24 months (2)
|
—
|
|
|
12
|
|
|
10
|
|
|
90
|
|
|
1
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
(1) Includes contracts with annual discretionary crediting rate resets and contracts with 12 or less months until the crediting rate becomes discretionary on an annual basis.
(2) Includes contracts with more than 12 months remaining until the crediting rate becomes an annual discretionary rate.
Equity Indexed Annuities
Our equity indexed annuity (“EIA”) product is a single premium annuity issued with an initial term of seven years. The annuity guarantees the contractholder a minimum return of 3% on 90% of the initial premium or end of prior term accumulation value upon renewal plus a return that is linked to the performance of the S&P 500® Index. The equity-linked return is based on a participation rate initially set at between 50% and 90% of the S&P 500® Index, which is guaranteed for the initial seven-year term when the contract is held to full term. As of December 31, 2020, we had $18 million in liabilities related to EIAs. We discontinued new sales of EIAs in 2007.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. To hedge this exposure, we purchase futures, which generate returns to replicate what we must credit to client accounts.
Interest Rate Risk
Most of the proceeds received from EIAs are invested in fixed income securities with the return on those investments intended to fund the 3% guarantee. We earn income from the difference between the return earned on invested assets and the 3% guarantee rate credited to customer accounts. The spread between return earned and amount credited is affected by changes in interest rates. This risk is not currently hedged and was immaterial as of December 31, 2020.
Fixed Index Annuities
The Company’s fixed index annuity product is a fixed annuity that includes an indexed account. The rate of interest credited above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the specific index for the indexed account (subject to a cap). We previously offered S&P 500® Index and MSCI® EAFE Index account options. Both options offered two crediting durations, one-year and two-year. The contractholder could allocate all or a portion of the policy value to a fixed or indexed account. The contractholder could choose to add a GMWB for life rider for an additional fee. As of December 31, 2020, we had $327 million in liabilities related to fixed index annuities.
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 fixed index annuities 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, options and futures which generate returns to replicate what we must credit to client accounts.
Interest Rate Risk
As mentioned above, most of the proceeds received from fixed index annuities are invested in fixed income securities with the return on those investments intended to fund the purchase of call spreads. There are two risks relating to interest rates. First, we have the risk that investment returns are such that we do not have enough investment income to purchase the needed call spreads. Second, in the event the policy is surrendered, we pay out a book value surrender amount and there is a risk that we 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.
Banking Deposits and Brokerage Client Cash Balances
We pay interest on banking deposits and certain brokerage client cash balances and have the ability to reset these rates from time to time based on prevailing economic and business conditions. We earn revenue to fund the interest paid from interest-earning assets or fees from off-balance sheet deposits at FDIC insured institutions, which are indexed to short-term interest rates. In general, the change in interest paid lags the change in revenues earned.
Certificate Products
Fixed Rate Certificates
We have interest rate risk from our investment certificates generally ranging in amounts from $1,000 to $2 million with interest crediting rate terms ranging from three to 36 months. We guarantee an interest rate to the holders of these products. Payments collected from clients are primarily invested in fixed income securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients generally reset at shorter intervals than the yield on underlying investments. This exposure is not currently hedged although we monitor our investment strategy and make modifications based on our changing liabilities and the expected interest rate environment. Of the $17.6 billion in customer deposits as of December 31, 2020, $6.3 billion related to reserves for our fixed rate certificate products.
Stock Market Certificates
Stock market certificates are purchased for amounts generally from $1,000 to $2 million for terms of 52 weeks, 104 weeks or 156 weeks, which can be extended to a maximum of 15 years depending on the term. For each term the certificate holder can choose to participate 100% in any percentage increase in the S&P 500® Index up to a maximum return or choose partial participation in any increase in the S&P 500 Index plus a fixed rate of interest guaranteed in advance. If partial participation is selected, the total of equity-linked return and guaranteed rate of interest cannot exceed the maximum return. Liabilities for our stock market certificates are included in customer deposits on our Consolidated Balance Sheets. As of December 31, 2020, we had $397 million in reserves related to stock market certificates. The equity-linked return to investors creates equity price risk exposure. We seek to minimize this exposure with purchased futures and call spreads that replicate what we must credit to client accounts. This risk continues to be fully hedged. Stock market certificates have some interest rate risk as changes in interest rates affect the fair value of the payout to be made to the certificate holder. This risk is not currently hedged and was immaterial as of December 31, 2020.
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 a cap and floor). We offer an S&P 500® Index account option and a blended multi-index account option comprised of the S&P 500 Index, the MSCI® EAFE Index and the MSCI EM Index. Both options offer two crediting durations, one-year and two-year. The policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. As of December 31, 2020, we had $2.2 billion in liabilities related to the indexed accounts of IUL, with the vast majority in the S&P 500® Index account option.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. Most of the proceeds received from IUL insurance are invested in fixed income securities. To hedge the equity exposure, a portion of the investment earnings received from the fixed income securities is used to purchase call spreads which generate returns to replicate what we 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, we have the risk that investment returns are such that we do not have enough investment income to purchase the needed call spreads. Second, in the event the policy is surrendered we pay out a book value surrender amount and there is a risk that we 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.
Foreign Currency Risk
We have foreign currency risk through our net investment in foreign subsidiaries and our operations in foreign countries. We are primarily exposed to changes in British Pounds (“GBP”) related to our net investment in Threadneedle, which was 624 million GBP as of December 31, 2020. Our primary exposure related to operations in foreign countries is to the GBP, the Euro and the Indian Rupee. We monitor the foreign exchange rates that we have exposure to and enter into foreign currency forward contracts to mitigate risk when economically prudent. As of December 31, 2020, the notional value of outstanding contracts and our remaining foreign currency risk related to operations in foreign countries were not material.
Interest Rate Risk on External Debt
The stated interest rate on the $2.8 billion of our senior unsecured notes is fixed. We did not enter into interest rate swap agreements to effectively convert the fixed interest rate on any of the senior unsecured notes to floating interest rates.
Credit Risk
We are exposed to credit risk within our investment portfolio, including our loan portfolio, and through our 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. We consider our total potential credit exposure to each counterparty and its affiliates to ensure compliance with pre-established credit guidelines at the time we enter into a transaction which would potentially increase our credit risk. These guidelines and oversight of credit risk are managed through a comprehensive enterprise risk management program that includes members of senior management.
We manage 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. We remain exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing.
We manage our 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, our 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. Because the central clearing party monitors open positions and adjusts collateral requirements daily, we have minimal credit exposure from such derivative instruments.
Exchange-traded derivatives are effected through regulated exchanges that require contract standardization and initial margin to transact through the exchange. Because exchange-traded futures are marked to market and generally cash settled on a daily basis, we have 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.
We manage our credit risk related to reinsurance treaties by evaluating the financial condition of reinsurance counterparties prior to entering into new reinsurance treaties. In addition, we regularly evaluate their financial strength during the terms of the treaties. As of December 31, 2020, our largest reinsurance credit risk is related to a LTC coinsurance treaty with life insurance subsidiaries of Genworth Financial, Inc. See Note 8 to our Consolidated Financial Statements for additional information on reinsurance.
Ameriprise Financial, Inc.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
Consolidated Statements of Operations — Years ended December 31, 2020, 2019 and 2018
|
|
Consolidated Statements of Comprehensive Income — Years ended December 31, 2020, 2019 and 2018
|
|
Consolidated Balance Sheets — December 31, 2020 and 2019
|
|
Consolidated Statements of Equity — Years ended December 31, 2020, 2019 and 2018
|
|
Consolidated Statements of Cash Flows — Years ended December 31, 2020, 2019 and 2018
|
|
Notes to Consolidated Financial Statements
|
|
1.
|
Basis of Presentation
|
|
2.
|
Summary of Significant Accounting Policies
|
|
3.
|
Recent Accounting Pronouncements
|
|
4.
|
Revenue from Contracts with Customers
|
|
5.
|
Variable Interest Entities
|
|
6.
|
Investments
|
|
7.
|
Financing Receivables
|
|
8.
|
Reinsurance
|
|
9.
|
Goodwill and Other Intangible Assets
|
|
10.
|
Deferred Acquisition Costs and Deferred Sales Inducement Costs
|
|
11.
|
Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities
|
|
12.
|
Variable Annuity and Insurance Guarantees
|
|
13.
|
Customer Deposits
|
|
14.
|
Debt
|
|
15.
|
Fair Values of Assets and Liabilities
|
|
16.
|
Offsetting Assets and Liabilities
|
|
17.
|
Derivatives and Hedging Activities
|
|
18.
|
Leases
|
|
19.
|
Disposal of Business
|
|
20.
|
Share-Based Compensation
|
|
21.
|
Shareholders’ Equity
|
|
22.
|
Earnings per Share
|
|
23.
|
Regulatory Requirements
|
|
24.
|
Income Taxes
|
|
25.
|
Retirement Plans and Profit Sharing Arrangements
|
|
26.
|
Commitments, Guarantees and Contingencies
|
|
27.
|
Related Party Transactions
|
|
28.
|
Segment Information
|
|
29.
|
Quarterly Financial Data (Unaudited)
|
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ameriprise Financial, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ameriprise Financial, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index appearing under Item 15 (a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of the reserves for long term care policies
As described in Note 2 and Note 11 to the consolidated financial statements, the total reserves for long term care policies was $5,722 million as of December 31, 2020, which is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. Liabilities for estimates of benefits that will become payable on future claims on long term care policies are based on a gross premium valuation reflecting management’s current best estimate assumptions. Management utilizes best estimate assumptions as of the date the policy is issued with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, management performs premium deficiency tests, using current best estimate assumptions. If a premium deficiency is recognized, the assumptions as of the date of the loss recognition are locked in and used in subsequent periods. In 2020, the Company recognized a premium deficiency and losses of $141 million that were recorded through benefits, claims, losses and settlement expenses, which were based on management’s best estimate assumptions including expected premium rate increases, benefit reductions, morbidity rates, policy persistency and interest rates earned on assets supporting the liability.
The principal considerations for our determination that performing procedures relating to the valuation of the reserves for long term care policies is a critical audit matter are the significant judgment by management when developing the estimate of the long term care reserves, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates and interest rates earned on assets supporting the liability. Also, the audit effort included the involvement of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s valuation of reserves for long term care policies, including controls over management’s development of the current best estimate assumptions. These procedures also included, among others, evaluating and testing management’s process for developing the estimate of the long term care reserves, testing the completeness and accuracy of underlying data used by management and testing that assumptions are accurately reflected in the models. Evaluating and testing management’s process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates and interest rates earned on assets supporting the liability, and (ii) evaluating the appropriateness of management’s models.
Valuation of the embedded derivatives in certain variable annuity riders
As described in Note 2, Note 11, Note 12, and Note 15 to the consolidated financial statements, management values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. As there is no active market for the transfer of these embedded derivatives, such internal valuation models estimate fair value by discounting expected cash flows. As of December 31, 2020, the net embedded derivative liability in certain variable annuity riders was $2,316 million, and is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. Management’s discounted cash flow model for estimating fair value includes observable capital market assumptions and incorporates significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk, all of which management believes a market participant would expect.
The principal considerations for our determination that performing procedures relating to the valuation of the embedded derivatives in certain variable annuity riders is a critical audit matter are the significant judgment by management to estimate the fair value of the embedded derivatives in certain variable annuity riders; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls related to the Company’s estimate of the fair value of embedded derivatives in certain variable annuity riders, including controls over the significant unobservable inputs. These procedures also included, among others, evaluating and testing management’s process for developing the fair value estimate. Testing management’s process included evaluating the reasonableness of the significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk, and testing the completeness and accuracy of underlying data used by management in the development of the significant unobservable inputs. Professionals with specialized skill and knowledge were used to assist in (i) evaluating the reasonableness of certain significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk, and (ii) evaluating the appropriateness of management’s models.
Valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities
As described in Note 2, Note 11 and Note 12 to the consolidated financial statements, the Company issues universal life, variable universal life and variable annuity policies that have product features that are accounted for as insurance liabilities. As disclosed by management, the liability for these policies, which is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet, is determined using actuarial models to estimate the present value of the projected benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments. Significant assumptions used by management in projecting the present value of future benefits and assessments include customer asset value growth rates, mortality, persistency, and investment margins, and additionally for variable annuity policies, benefit utilization.
The principal considerations for our determination that performing procedures relating to the valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities is a critical audit matter are the significant judgment by management when developing the estimate of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the significant assumptions related to customer asset value growth rates, persistency, investment margins, and , for variable annuity policies, benefit utilization. Also, the audit effort included the involvement of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, including controls over management’s development of the significant assumptions. These procedures also included, among others, evaluating and testing management’s process for developing the estimate of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, testing the completeness and accuracy of underlying data used by management and testing that assumptions are accurately reflected in the models. Evaluating and testing management’s process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the significant assumptions related to customer asset value growth rates, persistency, benefit utilization and investment margins, and (ii) evaluating the appropriateness of management’s models.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 24, 2021
We have served as the Company’s auditor since 2010.
Ameriprise Financial, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions, except per share amounts)
|
Revenues
|
|
|
|
|
|
Management and financial advice fees
|
$
|
7,368
|
|
|
$
|
7,015
|
|
|
$
|
6,776
|
|
Distribution fees
|
1,661
|
|
|
1,919
|
|
|
1,877
|
|
Net investment income
|
1,251
|
|
|
1,463
|
|
|
1,596
|
|
Premiums, policy and contract charges
|
1,395
|
|
|
2,224
|
|
|
2,467
|
|
Other revenues
|
283
|
|
|
269
|
|
|
208
|
|
Gain on disposal of business
|
—
|
|
|
213
|
|
|
—
|
|
Total revenues
|
11,958
|
|
|
13,103
|
|
|
12,924
|
|
Banking and deposit interest expense
|
59
|
|
|
136
|
|
|
89
|
|
Total net revenues
|
11,899
|
|
|
12,967
|
|
|
12,835
|
|
Expenses
|
|
|
|
|
|
Distribution expenses
|
4,059
|
|
|
3,810
|
|
|
3,637
|
|
Interest credited to fixed accounts
|
644
|
|
|
669
|
|
|
674
|
|
Benefits, claims, losses and settlement expenses
|
1,806
|
|
|
2,576
|
|
|
2,302
|
|
Amortization of deferred acquisition costs
|
277
|
|
|
179
|
|
|
322
|
|
Interest and debt expense
|
162
|
|
|
214
|
|
|
245
|
|
General and administrative expense
|
3,120
|
|
|
3,287
|
|
|
3,171
|
|
Total expenses
|
10,068
|
|
|
10,735
|
|
|
10,351
|
|
Pretax income
|
1,831
|
|
|
2,232
|
|
|
2,484
|
|
Income tax provision
|
297
|
|
|
339
|
|
|
386
|
|
Net income
|
$
|
1,534
|
|
|
$
|
1,893
|
|
|
$
|
2,098
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
Basic
|
$
|
12.39
|
|
|
$
|
14.12
|
|
|
$
|
14.41
|
|
Diluted
|
$
|
12.20
|
|
|
$
|
13.92
|
|
|
$
|
14.20
|
|
See Notes to Consolidated Financial Statements.
Ameriprise Financial, Inc.
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Net income
|
$
|
1,534
|
|
|
$
|
1,893
|
|
|
$
|
2,098
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation adjustment
|
27
|
|
|
17
|
|
|
(31)
|
|
Net unrealized gains (losses) on securities
|
407
|
|
|
556
|
|
|
(465)
|
|
Net unrealized gains (losses) on derivatives
|
(1)
|
|
|
(2)
|
|
|
—
|
|
Defined benefit plans
|
(66)
|
|
|
(18)
|
|
|
(23)
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
367
|
|
|
553
|
|
|
(519)
|
|
Total comprehensive income
|
$
|
1,901
|
|
|
$
|
2,446
|
|
|
$
|
1,579
|
|
See Notes to Consolidated Financial Statements.
Ameriprise Financial, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions, except share amounts)
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
6,751
|
|
|
$
|
3,709
|
|
Cash of consolidated investment entities
|
94
|
|
|
118
|
|
Investments (net of allowance for credit losses: 2020, $52; 2019, $24(1) )
|
41,031
|
|
|
37,915
|
|
Investments of consolidated investment entities, at fair value
|
1,918
|
|
|
1,606
|
|
Separate account assets
|
92,611
|
|
|
87,488
|
|
Receivables (net of allowance for credit losses: 2020, $49; 2019, $39)
|
7,819
|
|
|
7,202
|
|
Receivables of consolidated investment entities, at fair value
|
16
|
|
|
8
|
|
Deferred acquisition costs
|
2,532
|
|
|
2,698
|
|
Restricted and segregated cash, cash equivalents and investments
|
2,558
|
|
|
2,386
|
|
Other assets
|
10,551
|
|
|
8,698
|
|
Other assets of consolidated investment entities, at fair value
|
2
|
|
|
—
|
|
Total assets
|
$
|
165,883
|
|
|
$
|
151,828
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Liabilities:
|
|
|
|
Policyholder account balances, future policy benefits and claims
|
$
|
33,992
|
|
|
$
|
30,512
|
|
Separate account liabilities
|
92,611
|
|
|
87,488
|
|
Customer deposits
|
17,641
|
|
|
14,430
|
|
Short-term borrowings
|
200
|
|
|
201
|
|
Long-term debt
|
2,831
|
|
|
3,097
|
|
Debt of consolidated investment entities, at fair value
|
1,913
|
|
|
1,628
|
|
Accounts payable and accrued expenses
|
1,998
|
|
|
1,884
|
|
Other liabilities
|
8,761
|
|
|
6,775
|
|
Other liabilities of consolidated investment entities, at fair value
|
69
|
|
|
84
|
|
Total liabilities
|
160,016
|
|
|
146,099
|
|
|
|
|
|
Equity:
|
|
|
|
Common shares ($0.01 par value; shares authorized, 1,250,000,000; shares issued, 332,390,132 and 329,842,827, respectively)
|
3
|
|
|
3
|
|
Additional paid-in capital
|
8,822
|
|
|
8,461
|
|
Retained earnings
|
15,292
|
|
|
14,279
|
|
Treasury shares, at cost (215,624,519 and 205,903,593 shares, respectively)
|
(18,879)
|
|
|
(17,276)
|
|
Accumulated other comprehensive income (loss), net of tax
|
629
|
|
|
262
|
|
Total equity
|
5,867
|
|
|
5,729
|
|
Total liabilities and equity
|
$
|
165,883
|
|
|
$
|
151,828
|
|
(1) Prior to January 1, 2020, the allowance for credit losses is not applicable to Available-for-Sale securities. See Notes 2, 3, 6 and 7 for more information.
See Notes to Consolidated Financial Statements.
Ameriprise Financial, Inc.
Consolidated Statements of Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Outstanding Shares
|
Common Shares
|
Additional Paid-In Capital
|
Retained Earnings
|
Treasury Shares
|
Accumulated Other
Comprehensive Income (Loss)
|
Total
|
|
(in millions, except share data)
|
Balances at January 1, 2018
|
146,634,664
|
|
$
|
3
|
|
$
|
8,085
|
|
$
|
11,326
|
|
$
|
(13,648)
|
|
$
|
229
|
|
$
|
5,995
|
|
Cumulative effect of adoption of equity securities guidance
|
—
|
|
—
|
|
—
|
|
1
|
|
—
|
|
(1)
|
|
—
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
2,098
|
|
—
|
|
—
|
|
2,098
|
|
Other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(519)
|
|
(519)
|
|
Total comprehensive income
|
|
|
|
|
|
|
1,579
|
|
Dividends to shareholders
|
—
|
|
—
|
|
—
|
|
(516)
|
|
—
|
|
—
|
|
(516)
|
|
Repurchase of common shares
|
(12,124,840)
|
|
—
|
|
—
|
|
—
|
|
(1,705)
|
|
—
|
|
(1,705)
|
|
Share-based compensation plans
|
1,820,923
|
|
—
|
|
175
|
|
—
|
|
60
|
|
—
|
|
235
|
|
Balances at December 31, 2018
|
136,330,747
|
|
3
|
|
8,260
|
|
12,909
|
|
(15,293)
|
|
(291)
|
|
5,588
|
|
Cumulative effect of adoption of premium amortization on purchased callable debt securities guidance
|
—
|
|
—
|
|
—
|
|
(5)
|
|
—
|
|
—
|
|
(5)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
1,893
|
|
—
|
|
—
|
|
1,893
|
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
553
|
|
553
|
|
Total comprehensive income
|
|
|
|
|
|
|
2,446
|
|
Dividends to shareholders
|
—
|
|
—
|
|
—
|
|
(518)
|
|
—
|
|
—
|
|
(518)
|
|
Repurchase of common shares
|
(14,396,367)
|
|
—
|
|
—
|
|
—
|
|
(2,039)
|
|
—
|
|
(2,039)
|
|
Share-based compensation plans
|
2,004,854
|
|
—
|
|
201
|
|
—
|
|
56
|
|
—
|
|
257
|
|
Balances at December 31, 2019
|
123,939,234
|
|
3
|
|
8,461
|
|
14,279
|
|
(17,276)
|
|
262
|
|
5,729
|
|
Cumulative effect of adoption of current expected credit losses guidance
|
—
|
|
—
|
|
—
|
|
(9)
|
|
—
|
|
—
|
|
(9)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
1,534
|
|
—
|
|
—
|
|
1,534
|
|
Other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
367
|
|
367
|
|
Total comprehensive income
|
|
|
|
|
|
|
1,901
|
|
Dividends to shareholders
|
—
|
|
—
|
|
—
|
|
(512)
|
|
—
|
|
—
|
|
(512)
|
|
Repurchase of common shares
|
(10,241,160)
|
|
—
|
|
—
|
|
—
|
|
(1,647)
|
|
—
|
|
(1,647)
|
|
Share-based compensation plans
|
3,067,539
|
|
—
|
|
361
|
|
—
|
|
44
|
|
—
|
|
405
|
|
Balances at December 31, 2020
|
116,765,613
|
|
$
|
3
|
|
$
|
8,822
|
|
$
|
15,292
|
|
$
|
(18,879)
|
|
$
|
629
|
|
$
|
5,867
|
|
See Notes to Consolidated Financial Statements.
Ameriprise Financial, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net income
|
$
|
1,534
|
|
|
$
|
1,893
|
|
|
$
|
2,098
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation, amortization and accretion, net
|
207
|
|
|
183
|
|
|
198
|
|
Deferred income tax expense (benefit)
|
(321)
|
|
|
(308)
|
|
|
25
|
|
Share-based compensation
|
146
|
|
|
135
|
|
|
144
|
|
Gain on disposal of business before affinity partner payment
|
—
|
|
|
(313)
|
|
|
—
|
|
Net realized investment (gains) losses
|
(22)
|
|
|
(16)
|
|
|
(9)
|
|
Net trading (gains) losses
|
(10)
|
|
|
(10)
|
|
|
(12)
|
|
Loss from equity method investments
|
66
|
|
|
95
|
|
|
63
|
|
Impairments and provision for loan and credit losses
|
24
|
|
|
22
|
|
|
—
|
|
Net (gains) losses of consolidated investment entities
|
7
|
|
|
9
|
|
|
(47)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Restricted and segregated investments
|
(500)
|
|
|
124
|
|
|
499
|
|
Deferred acquisition costs
|
49
|
|
|
(112)
|
|
|
4
|
|
Policyholder account balances, future policy benefits and claims, net
|
3,054
|
|
|
358
|
|
|
528
|
|
Derivatives, net of collateral
|
(141)
|
|
|
415
|
|
|
(144)
|
|
Receivables
|
(648)
|
|
|
324
|
|
|
(398)
|
|
Brokerage deposits
|
346
|
|
|
(519)
|
|
|
(255)
|
|
Accounts payable and accrued expenses
|
129
|
|
|
46
|
|
|
(100)
|
|
Current income tax expense (benefit)
|
25
|
|
|
32
|
|
|
(57)
|
|
Deferred taxes, net
|
334
|
|
|
(18)
|
|
|
(196)
|
|
Other operating assets and liabilities of consolidated investment entities, net
|
(15)
|
|
|
(12)
|
|
|
29
|
|
Other, net
|
359
|
|
|
13
|
|
|
227
|
|
Net cash provided by (used in) operating activities
|
4,623
|
|
|
2,341
|
|
|
2,597
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Available-for-Sale securities:
|
|
|
|
|
|
Proceeds from sales
|
1,708
|
|
|
242
|
|
|
435
|
|
Maturities, sinking fund payments and calls
|
9,554
|
|
|
8,202
|
|
|
6,738
|
|
Purchases
|
(13,525)
|
|
|
(11,911)
|
|
|
(8,346)
|
|
Proceeds from sales, maturities and repayments of mortgage loans
|
217
|
|
|
272
|
|
|
295
|
|
Funding of mortgage loans
|
(165)
|
|
|
(354)
|
|
|
(235)
|
|
Proceeds from sales, maturities and collections of other investments
|
198
|
|
|
276
|
|
|
722
|
|
Purchase of other investments
|
(284)
|
|
|
(288)
|
|
|
(653)
|
|
Purchase of investments by consolidated investment entities
|
(957)
|
|
|
(644)
|
|
|
(411)
|
|
Proceeds from sales, maturities and repayments of investments by consolidated investment entities
|
606
|
|
|
684
|
|
|
1,086
|
|
Purchase of land, buildings, equipment and software
|
(147)
|
|
|
(143)
|
|
|
(162)
|
|
Proceeds from disposal of business, net of cash and cash equivalents sold
|
—
|
|
|
934
|
|
|
—
|
|
Cash paid for written options with deferred premiums
|
(338)
|
|
|
(308)
|
|
|
(133)
|
|
Cash received from written options with deferred premiums
|
133
|
|
|
170
|
|
|
133
|
|
Cash paid for deposit receivable
|
(4)
|
|
|
(349)
|
|
|
—
|
|
Cash received for deposit receivable
|
93
|
|
|
98
|
|
|
—
|
|
Other, net
|
17
|
|
|
(115)
|
|
|
(56)
|
|
Net cash provided by (used in) investing activities
|
$
|
(2,894)
|
|
|
$
|
(3,234)
|
|
|
$
|
(587)
|
|
See Notes to Consolidated Financial Statements.
|
Ameriprise Financial, Inc.
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Investment certificates:
|
|
|
|
|
|
Proceeds from additions
|
$
|
4,259
|
|
|
$
|
5,110
|
|
|
$
|
6,238
|
|
Maturities, withdrawals and cash surrenders
|
(5,016)
|
|
|
(5,489)
|
|
|
(4,745)
|
|
Policyholder account balances:
|
|
|
|
|
|
Deposits and other additions
|
1,649
|
|
|
2,152
|
|
|
1,933
|
|
Net transfers from (to) separate accounts
|
(125)
|
|
|
(86)
|
|
|
(75)
|
|
Surrenders and other benefits
|
(1,357)
|
|
|
(1,728)
|
|
|
(1,904)
|
|
Change in banking deposits, net
|
3,616
|
|
|
3,788
|
|
|
—
|
|
Cash paid for purchased options with deferred premiums
|
(211)
|
|
|
(396)
|
|
|
(228)
|
|
Cash received from purchased options with deferred premiums
|
40
|
|
|
206
|
|
|
254
|
|
Issuance of long-term debt, net of issuance costs
|
496
|
|
|
497
|
|
|
—
|
|
Repayments of long-term debt
|
(762)
|
|
|
(313)
|
|
|
(13)
|
|
Dividends paid to shareholders
|
(497)
|
|
|
(504)
|
|
|
(506)
|
|
Repurchase of common shares
|
(1,441)
|
|
|
(1,943)
|
|
|
(1,630)
|
|
Exercise of stock options
|
3
|
|
|
3
|
|
|
2
|
|
Borrowings of consolidated investment entities
|
382
|
|
|
—
|
|
|
936
|
|
Repayments of debt by consolidated investment entities
|
(74)
|
|
|
(84)
|
|
|
(1,528)
|
|
Other, net
|
(10)
|
|
|
1
|
|
|
3
|
|
Net cash provided by (used in) financing activities
|
952
|
|
|
1,214
|
|
|
(1,263)
|
|
Effect of exchange rate changes on cash
|
9
|
|
|
9
|
|
|
(8)
|
|
Net increase (decrease) in cash and cash equivalents, including amounts restricted
|
2,690
|
|
|
330
|
|
|
739
|
|
Cash and cash equivalents, including amounts restricted at beginning of period
|
6,213
|
|
|
5,883
|
|
|
5,144
|
|
Cash and cash equivalents, including amounts restricted at end of period
|
$
|
8,903
|
|
|
$
|
6,213
|
|
|
$
|
5,883
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
Interest paid excluding consolidated investment entities
|
$
|
168
|
|
|
$
|
272
|
|
|
$
|
221
|
|
Interest paid by consolidated investment entities
|
55
|
|
|
84
|
|
|
120
|
|
Income taxes paid, net
|
236
|
|
|
609
|
|
|
538
|
|
Leased assets obtained in exchange for finance lease liabilities
|
—
|
|
|
13
|
|
|
—
|
|
Leased assets obtained in exchange for operating lease liabilities
|
76
|
|
|
41
|
|
|
—
|
|
Non-cash investing activities:
|
|
|
|
|
|
Partnership commitments not yet remitted
|
—
|
|
|
4
|
|
|
1
|
|
Investments transferred in connection with fixed annuity reinsurance transaction
|
—
|
|
|
1,265
|
|
|
—
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Reconciliation of cash and cash equivalents, including amounts restricted:
|
|
|
|
Cash and cash equivalents
|
$
|
6,751
|
|
|
$
|
3,709
|
|
Cash of consolidated investment entities
|
94
|
|
|
118
|
|
Restricted and segregated cash, cash equivalents and investments
|
2,558
|
|
|
2,386
|
|
Less: Restricted and segregated investments
|
(500)
|
|
|
—
|
|
Total cash and cash equivalents, including amounts restricted per consolidated statements of cash flows
|
$
|
8,903
|
|
|
$
|
6,213
|
|
See Notes to Consolidated Financial Statements.
Ameriprise Financial, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
Ameriprise Financial, Inc. is a holding company, which primarily conducts business through its subsidiaries to provide financial planning, products and services that are designed to be utilized as solutions for clients’ cash and liquidity, asset accumulation, income, protection and estate and wealth transfer needs. The foreign operations of Ameriprise Financial, Inc. are conducted primarily through Threadneedle Asset Management Holdings Sàrl and Ameriprise Asset Management Holdings Singapore (Pte.) Ltd and their respective subsidiaries (collectively, “Threadneedle”).
The accompanying Consolidated Financial Statements include the accounts of Ameriprise Financial, Inc., companies in which it directly or indirectly has a controlling financial interest and variable interest entities (“VIEs”) in which it is the primary beneficiary (collectively, the “Company”). All intercompany transactions and balances have been eliminated in consolidation.
During 2020, changes to the Company’s reportable segments were made. See Note 28 for further discussion about the changes to reportable segments.
Certain prior period amounts have been revised to conform to current period presentation. These changes have no impact on previously reported consolidated balance sheets or statements of operations, comprehensive income, stockholders equity, or cash flows.
In the first quarter of 2020, the Company recorded an out-of-period correction of $19 million to management and financial advice fees related to performance fees. The impact of the error was not material to the prior period financial statements.
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain reclassifications of prior period amounts have been made to conform with the current presentation.
The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. No subsequent events or transactions requiring recognition or disclosure were identified.
2. Summary of Significant Accounting Policies
The Company adopted accounting standard, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The significant accounting policies for Available-for-Sale securities, Financing Receivables, and Reinsurance were updated as a result of adopting the new accounting standard.
Principles of Consolidation
A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest (including substantive voting rights, the obligation to absorb the entity’s losses, or the rights to receive the entity’s returns) or has equity investors that do not provide sufficient financial resources for the entity to support its activities.
Voting interest entities (“VOEs”) are those entities that do not qualify as a VIE. The Company consolidates VOEs in which it holds a greater than 50% voting interest. The Company generally accounts for entities using the equity method when it holds a greater than 20% but less than 50% voting interest or when the Company exercises significant influence over the entity. All other investments that are not reported at fair value as trading or Available-for-Sale securities are accounted for using the measurement alternative method when the Company owns less than a 20% voting interest and does not exercise significant influence. Under the measurement alternative, the investment is recorded at the cost basis, less impairments, if any, plus or minus observable price changes of identical or similar investments of the same issuer.
A VIE is consolidated by the reporting entity that determines it has both:
•the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and
•the obligation to absorb potentially significant losses or the right to receive potentially significant benefits to the VIE.
All VIEs are assessed for consolidation under this framework. When evaluating entities for consolidation, the Company considers its contractual rights in determining whether it has the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. In determining whether the Company has this power, it considers whether it is acting in a role that enables it to direct the activities that most significantly impact the economic performance of an entity or if it is acting in an agent role.
In determining whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers an analysis of its rights to receive benefits such as investment returns and its obligation to absorb losses associated with any investment in the VIE in conjunction with other qualitative factors. Management and incentive fees that are at market and commensurate with the level of services provided, and where the Company does not hold other interests in the VIE that would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns, are not considered a variable interest and are excluded from the analysis.
The consolidation guidance has a scope exception for reporting entities with interests in registered money market funds which do not have an explicit support agreement.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, whose functional currency is other than the U.S. dollar, are translated into U.S. dollars based upon exchange rates prevailing at the end of each period. Revenues and expenses are translated at daily exchange rates during the period. The resulting translation adjustment, along with any related hedge and tax effects, are included in accumulated other comprehensive income (“AOCI”). The determination of the functional currency is based on the primary economic environment in which the entity operates. Gains and losses from foreign currency transactions are included in General and administrative expenses in the consolidated results of operations.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and recognition of other-than-temporary impairments, deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, valuation of derivative instruments and hedging activities, litigation reserves, future policy benefits and claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.
Cash and Cash Equivalents
Cash equivalents include time deposits and other highly liquid investments with original or remaining maturities at the time of purchase of 90 days or less.
Investments
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value with unrealized gains (losses) recorded in AOCI, net of impacts to DAC, deferred sales inducement costs (“DSIC”), unearned revenue, benefit reserves, reinsurance recoverables and income taxes which is consistent with prior periods before January 1, 2020. Available-for-Sale securities are recorded within investments on the Consolidated Balance Sheets. Gains and losses are recognized on a trade date basis in the Consolidated Statements of Operations upon disposition of the securities.
Available-for-Sale securities are impaired when the fair value of an investment is less than its amortized cost. When an Available-for-Sale security is impaired, the Company first assesses whether or not: (i) it has the intent to sell the security (made a decision to sell) or (ii) it is more likely than not that the Company will be required to sell the security before its anticipated recovery. If either of these conditions exist, the Company recognizes an impairment by reducing the book value of the security for the difference between the investment’s amortized cost and its fair value with a corresponding charge to earnings. Subsequent increases in fair value of Available-for-Sale securities that occur in periods after a write-down has occurred are recorded as unrealized gains in other comprehensive income (“OCI”), while subsequent decreases in fair value would continue to be recorded as reductions of book value with a charge to earnings.
For securities that do not meet the above criteria, the Company determines whether the decrease in fair value is due to a credit loss or due to other factors. The amount of impairment due to credit-related factors, if any, is recognized as an allowance for credit losses with a related charge to net investment income. The allowance for credit losses is limited to the amount by which the security’s amortized cost basis exceeds its fair value. The amount of the impairment related to other factors is recognized in OCI which is consistent with prior periods before January 1, 2020.
Factors the Company considers in determining whether declines in the fair value of fixed maturity securities due to credit-related factors include: (i) the extent to which the market value is below amortized cost; (ii) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer; and (iii) market events that could impact credit ratings, economic and business climate, litigation and government actions, and similar external business factors.
If through subsequent evaluation there is a sustained increase in cash flows expected, both the allowance and related charge to earnings may be reversed to reflect the increase in expected principal and interest payments. However, for Available-for-Sale securities that recognized an impairment prior to January 1, 2020 by reducing the book value of the security, the difference between the new amortized cost basis and the improved cash flows expected to be collected is accreted as interest income.
In order to determine the amount of the credit loss component for corporate debt securities, a best estimate of the present value of cash flows expected to be collected discounted at the security’s effective interest rate is compared to the amortized cost basis of the security. The significant inputs to cash flow projections consider potential debt restructuring terms, projected cash flows available to pay creditors and the Company’s position in the debtor’s overall capital structure. When assessing potential credit-related impairments for structured investments (e.g., residential mortgage backed securities, commercial mortgage backed securities, asset backed securities and other structured investments), the Company also considers credit-related factors such as overall deal structure and its
position within the structure, quality of underlying collateral, delinquencies and defaults, loss severities, recoveries, prepayments and cumulative loss projections.
Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for Available-for-Sale securities. Accrued interest on Available-for-Sale securities is recorded as earned in receivables on the Consolidated Balance Sheets. Available-for-Sale securities are placed on nonaccrual status when the accrued balance becomes 90 days past due or earlier based on management’s evaluation of the facts and circumstances of each security under review. At this time all previously accrued interest is reversed through net investment income.
Financing Receivables
Commercial Loans
Commercial loans include commercial mortgage loans, syndicated loans, and advisor loans and are recorded at amortized cost less the allowance for loan losses. Commercial mortgage loans and syndicated loans are recorded within investments on the Consolidated Balance Sheets. Advisor loans are recorded within receivables on the Consolidated Balance Sheets. Commercial mortgage loans are loans on commercial properties that are originated by the Company. Syndicated loans represent the Company’s investment in loan syndications originated by unrelated third parties.
The Company offers loans to financial advisors primarily for recruiting, transitional cost assistance and retention purposes. These advisor loans are generally repaid over a five- to ten-year period. If the financial advisor is no longer affiliated with the Company, any unpaid balance of such loan becomes immediately due.
Interest income is accrued as earned on the unpaid principal balances of the loans. Interest income recognized on commercial mortgage loans and syndicated loans is recorded in net investment income on the Consolidated Statements of Operations. Interest income recognized on advisor loans is recorded in other revenues on the Consolidated Statements of operations.
Consumer Loans
Consumer loans consist of credit card receivables, policy loans, brokerage margin loans and pledged asset lines of credit and are recorded at amortized cost less the allowance for loan losses. Credit card receivables and policy loans are recorded within investments on the Consolidated Balance Sheets. Brokerage margin loans and pledged asset lines of credit are recorded within receivables on the Consolidated Balance Sheets. Credit card receivables are related to Ameriprise-branded credit cards issued to the Company’s customers by a third party. When originated, policy loan balances do not exceed the cash surrender value of the underlying products. The Company’s broker dealer subsidiaries enter into lending arrangements with clients through the normal course of business, which are primarily based on customer margin levels. Ameriprise Bank, FSB, enters into revolving lines of credit with customers of the Company’s broker dealer subsidiaries, where certain of the customer’s assets held in brokerage accounts serve as collateral.
Interest income is accrued as earned on the unpaid principal balances of the loans which is consistent with prior periods before January 1, 2020. Interest income recognized on consumer loans is recorded in net investment income on the Consolidated Statements of Operations.
Deposit Receivable
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability related to insurance risk in accordance with applicable accounting standards. If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits made are included in receivables. As amounts are received, consistent with the underlying contracts, the deposit receivable is adjusted. The deposit receivable is accreted using the interest method and the accretion is reported in other revenues.
See Note 7 for additional information on financing receivables.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected over the asset’s expected life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Prior to January 1, 2020, the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset. Estimates of expected credit losses consider both historical charge-off and recovery experience as well as current economic conditions and management’s expectation of future charge-off and recovery levels. Expected losses related to risks other than credit risk are excluded from the allowance for credit losses. The allowance for credit losses is measured and recorded upon initial recognition of the loan, regardless of whether it is originated or purchased. The methods and information used to develop the allowance for credit losses for each class of financing receivable are discussed below.
Commercial Loans
The allowance for credit losses for commercial mortgage loans and syndicated loans utilizes a probability of default and loss severity approach to estimate lifetime expected credit losses. Actual historical default and loss severity data for each type of commercial loan is
adjusted for current conditions and reasonable and supportable forecasts of future economic conditions to develop the probability of default and loss severity assumptions that are applied to the amortized cost basis of the loans over the expected life of each portfolio. The allowance for credit losses on commercial mortgage loans and syndicated loans is recorded through provisions charged to net investment income and is reduced/increased by net charge-offs/recoveries.
Management determines the adequacy of the allowance for credit losses based on the overall loan portfolio composition, recent and historical loss experience, and other pertinent factors, including when applicable, internal risk ratings, loan-to-value (“LTV”) ratios, and occupancy rates, along with reasonable and supportable forecasts of economic and market conditions. This evaluation is inherently subjective as it requires estimates, which may be susceptible to significant change.
While the Company may attribute portions of the allowance to specific loan pools as part of the allowance estimation process, the entire allowance is available to absorb losses expected over the life of the portfolio.
When determining the allowance for credit losses for advisor loans, the Company considers its actual historical collection experience and advisor termination experience as well as other factors including amounts due at termination, the reasons for the terminated relationship, length of time since termination, and the former financial advisor’s overall financial position. Management may identify certain pools of advisors at higher risk of termination based on production metrics or other factors. Management uses its best estimate of future termination and collection rates to estimate expected credit losses over the expected life of the loans. The allowance for credit losses on advisor loans is recorded in distribution expenses.
Consumer Loans
The allowance for loan losses for credit card receivables is based on a model that projects the Company’s receivable exposure over the expected life of the loans using cohorts based on the age of the receivable, geographic location, and credit scores. The model utilizes industry data to derive probability of default and loss given default assumptions, adjusted for current and future economic conditions. Management evaluates actual historical charge-off experience and monitors risk factors including FICO scores and past-due status within the credit card portfolio to ensure the allowance for loan losses based on industry data appropriately reserves for risks specific to the Company’s portfolio. The allowance for credit losses for credit card receivables is recorded in net investment income.
The Company monitors the market value of collateral supporting the margin loans and pledged asset lines of credit and requests additional collateral when necessary in order to mitigate the risk of loss. Due to these ongoing monitoring procedures, the allowance for credit losses is only measured for the margin loan balances and pledged asset line of credit balances that are uncollateralized at the balance sheet date.
Policy loans do not exceed the cash surrender value at origination. As there is minimal risk of loss related to policy loans, there is no allowance for credit losses.
Deposit Receivable
The allowance for credit losses is calculated on an individual reinsurer basis. The deposit receivable is collateralized by an underlying trust arrangement. Management evaluates the terms of the reinsurance and trust agreements, the nature of the underlying assets, and the potential for changes in the collateral value when considering the need for an allowance for credit losses.
Nonaccrual Loans
Commercial mortgage loans and syndicated loans are placed on nonaccrual status when either the collection of interest or principal has become 90 days past due or is otherwise considered doubtful of collection. Advisor loans are placed on nonaccrual status upon the advisor’s termination. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Interest payments received on loans on nonaccrual status are generally applied to principal unless the remaining principal balance has been determined to be fully collectible. Management has elected to exclude accrued interest in its measurement of the allowance for credit losses for commercial mortgage loans, syndicated loans, and consumer loans.
Restructured Loans
A loan is classified as a restructured loan when the Company makes certain concessionary modifications to contractual terms for borrowers experiencing financial difficulties. When the interest rate, minimum payments, and/or due dates have been modified in an attempt to make the loan more affordable to a borrower experiencing financial difficulties, the modification is considered a troubled debt restructuring. Modifications to loan terms do not automatically result in troubled debt restructurings (“TDRs”). Per the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, modifications made on a good faith basis in response to the coronavirus disease 2019 (“COVID-19”) pandemic to borrowers who were not more than 30 days past due as of December 31, 2019, such as payment deferrals, extensions of repayment terms, fee waivers, or delays in payment that are not significant to the unpaid principal value of the loan, are not considered TDRs. Generally, performance prior to the restructuring or significant events that coincide with the restructuring are considered in assessing whether the borrower can meet the new terms which may result in the loan being returned to accrual status at the time of the restructuring or after a performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status.
Charge-off and Foreclosure
Commercial Loans
Charge-offs are recorded when the Company concludes that all or a portion of the commercial mortgage loan or syndicated loan is uncollectible. Factors used by the Company to determine whether all amounts due on commercial mortgage loans will be collected, include but are not limited to, the financial condition of the borrower, performance of the underlying properties, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on property type and geographic location. Factors used by the Company to determine whether all amounts due on syndicated loans will be collected, include but are not limited to the borrower’s financial condition, industry outlook, and internal risk ratings based on rating agency data and internal analyst expectations.
If it is determined that foreclosure on a commercial mortgage loan is probable and the fair value is less than the current loan balance, expected credit losses are measured as the difference between the amortized cost basis of the asset and fair value less estimated selling costs. Upon foreclosure, the commercial mortgage loan and related allowance are reversed, and the foreclosed property is recorded as real estate owned in other assets.
Concerns regarding the recoverability of loans to advisors primarily arise in the event that the financial advisor is no longer affiliated with the Company. When the review of these factors indicates that further collection activity is highly unlikely, the outstanding balance of the loan is written-off and the related allowance is reduced.
Consumer Loans
Credit card receivables are not placed on nonaccrual status at 90 days past due, however, are fully charged off upon reaching 180 days past due.
Separate Account Assets and Liabilities
Separate account assets represent funds held for the benefit of and separate account liabilities represent the obligation to the variable annuity contractholders and variable life insurance policyholders who have a contractual right to receive the benefits of their contract or policy and bear the related investment risk. Gains and losses on separate account assets accrue directly to the contractholder or policyholder and are not reported in the Company’s Consolidated Statements of Operations. Separate account assets are recorded at fair value and separate account liabilities are equal to the assets recognized.
Included in separate account assets and liabilities is the fair value of the pooled pension funds that are offered by Threadneedle.
Restricted and Segregated Cash, Cash Equivalents and Investments
Amounts segregated under federal and other regulations are held in special reserve bank accounts for the exclusive benefit of the Company’s brokerage customers. Cash and cash equivalents included in restricted and segregated cash, cash equivalents and investments are presented as part of cash balances in the Company’s Consolidated Statements of Cash Flows.
Land, Buildings, Equipment and Software
Land, buildings, equipment and internally developed or purchased software are carried at cost less accumulated depreciation or amortization and are reflected within other assets. The Company uses the straight-line method of depreciation and amortization over periods ranging from three to 39 years. As of December 31, 2020 and 2019, land, buildings, equipment and software were $602 million and $610 million, respectively, net of accumulated depreciation of $1.9 billion and $1.8 billion, respectively. Depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 was $153 million, $147 million and $146 million, respectively.
Leases
The Company has operating and finance leases for corporate and field offices. The Company determines if an arrangement is a lease at inception or modification. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and corresponding lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate to determine the present value of the future lease payments. The incremental borrowing rate is determined at lease commencement date using a secured rate for a similar term as the period of the lease. Certain lease incentives such as free rent periods are recorded as a reduction of the ROU asset. Lease costs for operating ROU assets is recognized on a straight-line basis over the lease term.
Certain leases include one or more options to renew with terms that can extend the lease from one year to 20 years. The exercise of any lease renewal option is at the sole discretion of the Company. Renewal options are included in the ROU assets and lease liabilities when they either provide an economic incentive to renew or when the costs related to the termination of a lease outweigh the benefits of signing a new lease.
Operating and finance ROU assets are reflected in other assets. Operating lease liabilities and finance lease liabilities are reflected in other liabilities and long-term debt, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the amount of an acquired company’s acquisition cost in excess of the fair value of assets acquired and liabilities assumed. The Company evaluates goodwill for impairment annually on the measurement date of July 1 and whenever events and circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting unit. Impairment is the amount carrying value exceeds fair value and is evaluated at the reporting unit level. The Company assesses various qualitative factors to determine whether impairment is likely to have occurred. If impairment were to occur, the Company would use the discounted cash flow method, a variation of the income approach.
Intangible assets are amortized over their estimated useful lives unless they are deemed to have indefinite useful lives. The Company evaluates the definite lived intangible assets remaining useful lives annually and tests for impairment whenever events and circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate. For definite lived intangible assets, impairment to fair value is recognized if the carrying amount is not recoverable. Indefinite lived intangibles are also tested for impairment annually or whenever circumstances indicate an impairment may have occurred.
Goodwill and other intangible assets are reflected in other assets.
Derivative Instruments and Hedging Activities
Freestanding derivative instruments are recorded at fair value and are reflected in other assets or other liabilities. The Company’s policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting hedge designation, if any. The Company primarily uses derivatives as economic hedges that are not designated as accounting hedges or do not qualify for hedge accounting treatment. The Company occasionally designates derivatives as (i) hedges of changes in the fair value of assets, liabilities, or firm commitments (“fair value hedges”), (ii) hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedges”), or (iii) hedges of foreign currency exposures of net investments in foreign operations (“net investment hedges in foreign operations”).
Derivative instruments that are entered into for hedging purposes are designated as such at the time the Company enters into the contract. For all derivative instruments that are designated for hedging activities, the Company documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also documents its risk management objectives and strategies for entering into the hedge transactions. The Company assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, the Company will discontinue the application of hedge accounting.
For derivative instruments that do not qualify for hedge accounting or are not designated as accounting hedges, changes in fair value are recognized in current period earnings. Changes in fair value of derivatives are presented in the Consolidated Statements of Operations based on the nature and use of the instrument. Changes in fair value of derivatives used as economic hedges are presented in the Consolidated Statements of Operations with the corresponding change in the hedged asset or liability.
For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as changes in the fair value of the hedged assets, liabilities or firm commitments, are recognized on a net basis in current period earnings. The carrying value of the hedged item is adjusted for the change in fair value from the designated hedged risk. If a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings over the remaining life of the hedged item.
For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported in AOCI and reclassified into earnings when the hedged item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Operations with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is reported in current period earnings as a component of net investment income. If a hedge designation is removed or a hedge is terminated prior to maturity, the amount previously recorded in AOCI is reclassified to earnings over the period that the hedged item impacts earnings. For hedge relationships that are discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.
For derivative instruments that qualify as net investment hedges in foreign operations, the effective portion of the change in fair value of the derivatives is recorded in AOCI as part of the foreign currency translation adjustment. Any ineffective portion of the net investment hedges in foreign operations is recognized in net investment income during the period of change.
The equity component of indexed annuity, structured variable annuity, indexed universal life (“IUL”) and stock market certificate (“SMC”) obligations are considered embedded derivatives. Additionally, certain annuities contain guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”) provisions. The GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives.
See Note 15 for information regarding the Company’s fair value measurement of derivative instruments and Note 17 for the impact of derivatives on the Consolidated Statements of Operations.
Deferred Acquisition Costs
The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of these costs which are incremental and direct to the acquisition of a new or renewal insurance policy or annuity contract are deferred. Significant costs capitalized include sales based compensation related to the acquisition of new and renewal insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation paid to advisors and employees and third-party distributors is capitalized. Employee compensation and benefits costs which are capitalized relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct costs of acquiring an insurance policy or annuity contract are expensed as incurred. The DAC associated with insurance policies or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as contract terminations. These transactions are anticipated in establishing amortization periods and other valuation assumptions.
The Company monitors other DAC amortization assumptions, such as persistency, mortality, morbidity, interest margin, variable annuity benefit utilization and maintenance expense levels each quarter and, when assessed independently, each could impact the Company’s DAC balances.
The analysis of DAC balances and the corresponding amortization is a dynamic process that considers all relevant factors and assumptions described previously. Unless the Company’s management identifies a significant deviation over the course of the quarterly monitoring, management reviews and updates these DAC amortization assumptions annually in the third quarter of each year.
Non-Traditional Long-Duration Products
For non-traditional long-duration products (including variable, structured variable and fixed deferred annuity contracts, universal life (“UL”) and variable universal life (“VUL”) insurance products), DAC are amortized based on projections of estimated gross profits (“EGPs”) over amortization periods equal to the approximate life of the business.
EGPs vary based on persistency rates (assumptions at which contractholders and policyholders are expected to surrender, make withdrawals from and make deposits to their contracts), mortality levels, client asset value growth rates (based on equity and bond market performance), variable annuity benefit utilization and interest margins (the spread between earned rates on invested assets and rates credited to contractholder and policyholder accounts) and are management’s best estimates. Management regularly monitors financial market conditions and actual contractholder and policyholder behavior experience and compares them to its assumptions. These assumptions are updated whenever it appears that earlier estimates should be revised. When assumptions are changed, the percentage of EGPs used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made. At each balance sheet date, the DAC balance is adjusted for the effect that would result from the realization of unrealized gains or losses on securities impacting EGPs, with the related change recognized through AOCI.
The client asset value growth rates are the rates at which variable annuity and VUL insurance contract values invested in separate accounts are assumed to appreciate in the future. The rates used vary by equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to client asset value growth rates on a regular basis. The Company typically uses a five-year mean reversion process as a guideline in setting near-term equity fund growth rates based on a long-term view of financial market performance as well as recent actual performance. The suggested near-term equity fund growth rate is reviewed quarterly to ensure consistency with management’s assessment of anticipated equity market performance. DAC amortization expense recorded in a period when client asset value growth rates exceed management’s near-term estimate will typically be less than in a period when growth rates fall short of management’s near-term estimate.
Traditional Long-Duration Products
For traditional long-duration products (including traditional life and disability income (“DI”) insurance products), DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium paying period. The assumptions made in calculating the DAC balance and DAC amortization expense are consistent with those used in determining the liabilities.
For traditional life and DI insurance products, the assumptions provide for adverse deviations in experience and are revised only if management concludes experience will be so adverse that DAC are not recoverable. If management concludes that DAC are not recoverable, DAC are reduced to the amount that is recoverable based on best estimate assumptions and there is a corresponding expense recorded in the Consolidated Statements of Operations.
Deferred Sales Inducement Costs
Sales inducement costs consist of bonus interest credits and premium credits added to certain annuity contract and insurance policy values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. DSIC is recorded in other assets, and amortization of DSIC is recorded in benefits, claims, losses and settlement expenses.
Reinsurance
The Company cedes insurance risk to other insurers under reinsurance agreements.
Reinsurance premiums paid and benefits received are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Reinsurance premiums for traditional life, long term care (“LTC”) and DI, net of the change in any prepaid reinsurance asset, are reported as a reduction of premiums, policy and contract charges. UL and VUL reinsurance premiums are reported as a reduction of premiums, policy and contract charges. In addition, for UL and VUL insurance policies, the net cost of reinsurance ceded, which represents the discounted amount of the expected cash flows between the reinsurer and the Company, is classified as an asset or contra asset and amortized over the estimated life of the policies in proportion to the estimated gross profits and is subject to retrospective adjustment in a manner similar to retrospective adjustment of DAC. The assumptions used to project the expected cash flows are consistent with those used for DAC valuation for the same contracts. Changes in the net cost of reinsurance are reflected as a component of premiums, policy and contract charges. Reinsurance recoveries are reported as components of benefits, claims, losses and settlement expenses.
Insurance liabilities are reported before the effects of reinsurance. Policyholder account balances, future policy benefits and claims recoverable under reinsurance contracts are recorded within receivables, net of the allowance for credit losses. The Company evaluates the financial condition of its reinsurers prior to entering into new reinsurance contracts and on a periodic basis during the contract term. The allowance for credit losses related to reinsurance recoverable is based on applying observable industry data including insurer ratings, default and loss severity data to the Company’s reinsurance recoverable balances. Management evaluates the results of the calculation and considers differences between the industry data and the Company’s data. Such differences include the fact the Company has no actual history of losses and the fact that industry data may contain non-life insurers. This evaluation is inherently subjective as it requires estimates, which may be susceptible to significant change given the long-term nature of these receivables. In addition, the Company has a reinsurance protection agreement that provides credit protections for its reinsured long-term care business. The allowance for credit losses on reinsurance recoverable is recorded through provisions charged to benefits, claims, losses and settlement expenses on the Consolidated Statements of Operations.
The Company also assumes life insurance and fixed annuity risk from other insurers in limited circumstances. Reinsurance premiums received and benefits paid are accounted for consistently with the basis used in accounting for the policies from which risk is reinsured and consistently with the terms of the reinsurance contracts. Liabilities for assumed business are recorded within policyholder account balances, future policy benefits and claims.
See Note 8 for additional information on reinsurance.
Policyholder Account Balances, Future Policy Benefits and Claims
The Company establishes reserves to cover the benefits associated with non-traditional and traditional long-duration products and short-duration products. Non-traditional long-duration products include variable and structured variable annuity contracts, fixed annuity contracts and UL and VUL policies. Traditional long-duration products include term life, whole life, DI and LTC insurance products. Prior to the sale of Ameriprise Auto & Home (“AAH”), reserves for short-duration products were established to provide adequately for incurred losses primarily related to auto and home policies.
Guarantees accounted for as insurance liabilities include guaranteed minimum death benefit (“GMDB”), gain gross-up (“GGU”), guaranteed minimum income benefit (“GMIB”) and the life contingent benefits associated with GMWB. In addition, UL and VUL policies with product features that result in profits followed by losses are accounted for as insurance liabilities.
Guarantees accounted for as embedded derivatives include GMAB and the non-life contingent benefits associated with GMWB. In addition, the portion of structured variable annuities, indexed annuities and IUL policies allocated to the indexed account is accounted for as an embedded derivative.
Changes in future policy benefits and claims are reflected in earnings in the period adjustments are made. Where applicable, benefit amounts expected to be recoverable from reinsurance companies who share in the risk are separately recorded as reinsurance recoverable within receivables.
Non-Traditional Long-Duration Products
The liabilities for non-traditional long-duration products include fixed account values on variable and fixed annuities and UL and VUL policies, liabilities for guaranteed benefits associated with variable annuities and embedded derivatives for variable and structured variable annuities, indexed annuities and IUL products.
Liabilities for fixed account values on variable, structured variable and fixed deferred annuities and UL and VUL policies are equal to accumulation values, which are the cumulative gross deposits and credited interest less withdrawals and various charges.
A portion of the Company’s UL and VUL policies have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. The liability for these future losses is determined by estimating the death benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). See Note 12 for information regarding the liability for contracts with secondary guarantees.
Liabilities for fixed deferred indexed annuity, structured variable annuity and IUL products are equal to the accumulation of host contract values covering guaranteed benefits and the fair value of embedded equity options.
The GMDB and GGU liability is determined by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).
If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. The GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated life based on expected assessments.
The liability for the life contingent benefits associated with GMWB provisions is determined by estimating the expected value of benefits that are contingent upon survival after the account value is equal to zero and recognizing the benefits over the estimated life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees).
In determining the liabilities for GMDB, GGU, GMIB and the life contingent benefits associated with GMWB, the Company projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency, benefit utilization and investment margins and are consistent with those used for DAC valuation for the same contracts. As with DAC, unless the Company’s management identifies a significant deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.
See Note 12 for information regarding variable annuity guarantees.
Liabilities for fixed annuities in a benefit or payout status utilize assumptions established as of the date the payout phase is initiated. The liabilities are the present value of future estimated payments reduced for mortality (which is based on industry mortality tables with modifications based on the Company’s experience) and discounted with interest rates.
Embedded Derivatives
The fair value of embedded derivatives related to GMAB and the non-life contingent benefits associated with GMWB provisions fluctuate based on equity, interest rate and credit markets and the estimate of the Company’s nonperformance risk, which can cause these embedded derivatives to be either an asset or a liability. The fair value of embedded derivatives related to structured variable annuities, indexed annuities and IUL fluctuate based on equity markets and interest rates and the estimate of the Company’s nonperformance risk and is a liability. See Note 15 for information regarding the fair value measurement of embedded derivatives.
Traditional Long-Duration Products
The liabilities for traditional long-duration products include liabilities for unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI and LTC policies as claims are incurred in the future.
Liabilities for unpaid amounts on reported life insurance claims are equal to the death benefits payable under the policies.
Liabilities for unpaid amounts on reported DI and LTC claims include any periodic or other benefit amounts due and accrued, along with estimates of the present value of obligations for continuing benefit payments. These unpaid amounts are calculated using anticipated claim continuance rates based on established industry tables, adjusted as appropriate for the Company’s experience. The discount rates used to calculate present values are based on average interest rates earned on assets supporting the liability for unpaid amounts.
Liabilities for estimated benefits payable on claims that have been incurred but not yet reported are based on periodic analysis of the actual time lag between when a claim occurs and when it is reported.
Liabilities for estimates of benefits that will become payable on future claims on term life, whole life and DI insurance policies are based on the net level premium and LTC policies are based on a gross premium valuation reflecting management’s current best estimate assumptions. Net level premium includes anticipated premium payments, mortality and morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Gross premium valuation includes expected premium rate increases, benefit reductions, morbidity rates, policy persistency and interest rates earned on assets supporting the liability. Anticipated mortality and
morbidity rates are based on established industry mortality and morbidity tables, with modifications based on the Company’s experience. Anticipated premium payments and persistency rates vary by policy form, issue age, policy duration and certain other pricing factors.
For term life, whole life, DI and LTC policies, the Company utilizes best estimate assumptions as of the date the policy is issued with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, management performs premium deficiency tests using current best estimate assumptions without provisions for adverse deviation annually in the third quarter of each year unless management identifies a material deviation over the course of quarterly monitoring. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., GAAP reserves net of any DAC balance), the existing net reserves are adjusted by first reducing the DAC balance by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than the DAC balance, then the net reserves are increased by the excess through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the date of the loss recognition are locked in and used in subsequent periods. The assumptions for LTC insurance products are management’s best estimate as of the date of loss recognition and thus no longer provide for adverse deviations in experience.
See Note 11 for information regarding the liabilities for traditional long-duration products.
Unearned Revenue Liability
The Company’s UL and VUL policies require payment of fees or other policyholder assessments in advance for services to be provided in future periods. These charges are deferred as unearned revenue and amortized using EGPs, similar to DAC. The unearned revenue liability is recorded in other liabilities and the amortization is recorded in premiums, policy and contract charges.
For clients who pay financial planning fees prior to the advisor’s delivery of the financial plan, the financial planning fees received in advance are deferred as unearned revenue until the plan is delivered to the client.
Share-Based Compensation
The Company measures and recognizes the cost of share-based awards granted to employees and directors based on the grant-date fair value of the award and recognizes the expense (net of estimated forfeitures) on a straight-line basis over the vesting period. Excess tax benefits or deficiencies are created upon distribution or exercise of awards and are recognized as income tax expense or benefit in the income statement. The fair value of each option is estimated on the grant date using a Black-Scholes option-pricing model. The Company recognizes the cost of performance share units granted to the Company’s Executive Leadership Team on a fair value basis until fully vested.
Income Taxes
The Company’s provision for income taxes represents the net amount of income taxes that the Company expects to pay or to receive from various taxing jurisdictions in connection with its operations. The Company provides for income taxes based on amounts that the Company believes it will ultimately owe taking into account the recognition and measurement for uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items.
In connection with the provision for income taxes, the Consolidated Financial Statements reflect certain amounts related to deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for financial statement purposes versus the assets and liabilities measured for tax return purposes.
The Company is required to establish a valuation allowance for any portion of its deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. Consideration is given to, among other things in making this determination: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies. Management may need to identify and implement appropriate planning strategies to ensure its ability to realize deferred tax assets and reduce the likelihood of the establishment of a valuation allowance with respect to such assets. See Note 24 for additional information on the Company’s valuation allowance.
Changes in tax rates and tax law are accounted for in the period of enactment. Deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates and the effect is included in income.
Revenue Recognition
Mortality and expense risk fees are generally calculated as a percentage of the fair value of assets held in separate accounts and recognized when assessed.
Interest income is accrued as earned using the effective interest method, which makes an adjustment of the yield for security premiums and discounts on all performing fixed maturity securities classified as Available-for-Sale so that the related security or loan recognizes a constant rate of return on the outstanding balance throughout its term. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and updated future payment assumptions and a catch-up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated
future payments, is used prospectively. Realized gains and losses on securities, other than trading securities and equity method investments, are recognized using the specific identification method on a trade date basis.
Prior to the sale of AAH, premiums on auto and home insurance were net of reinsurance premiums and recognized ratably over the coverage period. Premiums on traditional life, health insurance and immediate annuities with a life contingent feature are net of reinsurance ceded and are recognized as revenue when due.
Variable annuity guaranteed benefit rider charges and cost of insurance charges on UL and VUL insurance (net of reinsurance premiums and cost of reinsurance for universal life insurance products) are recognized as revenue when assessed.
See Note 4 for further discussion of accounting policies on revenue from contracts with customers.
3. Recent Accounting Pronouncements
Adoption of New Accounting Standards
Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) updated the accounting standards related to accounting for credit losses on certain types of financial instruments. The update replaces the current incurred loss model for estimating credit losses with a new model that requires an entity to estimate the credit losses expected over the life of the asset. At adoption, the initial estimate of the expected credit losses will be recorded through retained earnings and subsequent changes in the estimate will be reported in current period earnings and recorded through an allowance for credit losses on the balance sheet. The credit loss model for Available-for-Sale debt securities did not change; however, the credit loss calculation and subsequent recoveries are required to be recorded through an allowance. The standard is effective for interim and annual periods beginning after December 15, 2019. A modified retrospective cumulative adjustment to retained earnings should be recorded as of the first reporting period in which the guidance is effective for loans, receivables, and other financial instruments subject to the new expected credit loss model. Prospective adoption is required for establishing an allowance related to Available-for-Sale debt securities, certain beneficial interests, and financial assets purchased with a more-than-insignificant amount of credit deterioration since origination. The Company adopted the standard on January 1, 2020. The adoption of this update did not have a material impact on the Company’s consolidated results of operations or financial condition.
Intangibles – Goodwill and Other – Internal-Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB updated the accounting standards related to customer’s accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. The update requires implementation costs for a CCA to be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. The update also addresses presentation, measurement and impairment of capitalized implementation costs in a CCA that is a service contract. The update requires new disclosures on the nature of hosting arrangements that are service contracts, significant judgements made when applying the guidance and quantitative disclosures, including amounts capitalized, amortized and impaired. The update is effective for interim and annual periods beginning after December 15, 2019, and can be applied either prospectively or retrospectively. The Company adopted the standard using a prospective approach on January 1, 2020. The adoption of this update did not have a material impact on the Company’s consolidated results of operations or financial condition.
Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment
In January 2017, the FASB updated the accounting standards to simplify the accounting for goodwill impairment. The update removes the hypothetical purchase price allocation (Step 2) of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The standard is effective for interim and annual periods beginning after December 15, 2019, and should be applied prospectively with early adoption permitted for any impairment tests performed after January 1, 2017. The Company adopted the standard on January 1, 2020. The adoption of this update did not have a material impact on the Company’s consolidated results of operations or financial condition.
Leases – Recognition of Lease Assets and Liabilities on Balance Sheet
In February 2016, the FASB updated the accounting standards for leases. The update was issued to increase transparency and comparability for the accounting of lease transactions. The standard requires most lease transactions for lessees to be recorded on the balance sheet as lease assets and lease liabilities and both quantitative and qualitative disclosures about leasing arrangements. The standard was effective for interim and annual periods beginning after December 15, 2018. Entities had the option to adopt the standard using a modified retrospective approach at either the beginning of the earliest period presented or as of the date of adoption. The Company adopted the standard using a modified retrospective approach as of January 1, 2019. The Company also elected the package of practical expedients permitted under the transition guidance within the accounting standard that allows entities to carryforward their historical lease classification and to not reassess contracts for embedded leases among other things. The Company recorded a right-of-use asset of $274 million and a corresponding lease liability of $295 million substantially related to real estate leases. The amount the lease liability exceeds the right-of-use asset primarily reflects lease incentives recorded as a reduction of the right-of-use asset that were previously recorded as a liability. The adoption of the standard did not have other material impacts on the Company’s consolidated results of operations or financial condition. See Note 18 for additional disclosures on leases.
Income Statement – Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB updated the accounting standards related to the presentation of tax effects stranded in AOCI. The update allows a reclassification from AOCI to retained earnings for tax effects stranded in AOCI resulting from the Tax Act. The election of the update was optional. The update was effective for fiscal years beginning after December 15, 2018. Entities could record the impacts either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company adopted the standard on January 1, 2019 and elected not to reclassify the stranded tax effects in AOCI.
Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB updated the accounting standards to amend the hedge accounting recognition and presentation requirements. The objectives of the update are to better align the financial reporting of hedging relationships to the economic results of an entity’s risk management activities and simplify the application of the hedge accounting guidance. The update also adds new disclosures and amends existing disclosure requirements. The standard was effective for interim and annual periods beginning after December 15, 2018, and was required to be applied on a modified retrospective basis. The Company adopted the standard on January 1, 2019. The adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.
Receivables – Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB updated the accounting standards to shorten the amortization period for certain purchased callable debt securities held at a premium. Under previous guidance, premiums were generally amortized over the contractual life of the security. The amendments require the premium to be amortized to the earliest call date. The update applies to securities with explicit, non-contingent call features that are callable at fixed prices and on preset dates. The standard was effective for interim and annual periods beginning after December 15, 2018, and was required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the standard on January 1, 2019. The adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.
In October 2020, the FASB issued amendments clarifying that, at each reporting date if a security contains additional future call dates, an entity must reevaluate whether the amortized cost basis exceeds the amount repayable by the issuer at the next call date. If so, the excess should be amortized to the next call date. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. All entities should apply this update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company currently accounts for the additional call dates in accordance with this amendment.
Compensation – Retirement Benefits – Defined Benefit Plans – General – Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB updated the accounting standards related to disclosures for sponsors of defined benefit plans. The update requires disclosure of the weighted-average interest crediting rate for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also eliminates the disclosure of the amounts in AOCI expected to be recognized as components of net period benefit cost over the next fiscal year. The update is effective for annual periods ending after December 15, 2020, and should be applied retrospectively. The Company early adopted the standard in the fourth quarter of 2018 on a retrospective basis. The adoption did not have an impact on the Company’s consolidated results of operations or financial condition.
Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB updated the accounting standards related to disclosures for fair value measurements. The update eliminates the following disclosures: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy of timing of transfers between levels of the fair value hierarchy, and (3) the valuation processes for Level 3 fair value measurements. The new disclosures include changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated. The new disclosures are required on a prospective basis; all other provisions should be applied retrospectively. The update is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for the entire standard or only the provisions to eliminate or modify disclosure requirements. The Company early adopted the provisions of the standard to eliminate or modify disclosure requirements in the fourth quarter of 2018. The update does not have an impact on the Company’s consolidated results of operations or financial condition.
Future Adoption of New Accounting Standards
Reference Rate Reform – Expedients for Contract Modifications
In March 2020, the FASB updated the accounting standards to provide optional expedients and exceptions for applying GAAP to contracts, hedging or other transactions that are affected by reference rate reform (i.e., the elimination of LIBOR). The following
expedients are provided for modified contracts whose reference rate is changed: (1) receivables and debt contracts are accounted for prospectively by adjusting the effective interest rate, (2) leases are accounted for as a continuation of the existing contracts with no reassessments of the lease classification and discount rate or remeasurements of lease payments that otherwise would be required, and (3) an entity is not required to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract. When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions. In January 2021, FASB updated the standard to allow an entity to elect to apply the treatment under the original guidance to derivative instruments that use an interest rate that for margining, discounting or contract price alignment that will be modified due to reference rate reform but did not qualify under the original guidance The adoption of the standard is not expected to have an impact on the Company’s consolidated results of operations and financial condition.
Income Taxes – Simplifying the Accounting for Income Taxes
In December 2019, the FASB updated the accounting standards to simplify the accounting for income taxes. The update eliminates certain exceptions to: (1) accounting principles related to intraperiod tax allocation to be applied on a prospective basis, (2) deferred tax liabilities related to outside basis differences to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, and (3) year-to-date losses in interim periods to be applied on a prospective basis. The update also amends existing guidance related to situations when an entity receives: (1) a step-up in the tax basis of goodwill to be applied on a prospective basis, (2) an allocation of income tax expense when members of a consolidated tax filing group issue separate financial statements to be applied on a retrospective basis for all periods presented, (3) interim recognition of enactment of tax laws or rate changes to be applied on a prospective basis, and (4) franchise taxes and other taxes partially based on income to be applied on a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of the standard is not expected to have an impact on the Company’s consolidated results of operations and financial condition.
Financial Services – Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB updated the accounting standard related to long-duration insurance contracts. The guidance revises key elements of the measurement models and disclosure requirements for long-duration insurance contracts issued by insurers and reinsurers.
The guidance establishes a significant new category of benefit features called market risk benefits that protect the contractholder from other-than-nominal capital market risk and expose the insurer to that risk. Insurers will have to measure market risk benefits at fair value. Market risk benefits include variable annuity guaranteed benefits (i.e. guaranteed minimum death, withdrawal, withdrawal for life, accumulation and income benefits). The portion of the change in fair value attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position will be recorded in OCI.
Significant changes also relate to the measurement of the liability for future policy benefits for nonparticipating traditional long-duration insurance contracts and immediate annuities with a life contingent feature include the following:
•Insurers will be required to review and update the cash flow assumptions used to measure the liability for future policy benefits rather than using assumptions locked in at contract inception. The review of assumptions to measure the liability for all future policy benefits will be required annually at the same time each year, or more frequently if suggested by experience. The effect of updating assumptions will be measured on a retrospective catch-up basis and presented separate from the ongoing policyholder benefit expense in the statement of operations in the period the update is made. This new unlocking process will be required for the Company’s term and whole life insurance, disability income, long term care insurance and immediate annuities with a life contingent feature.
•The discount rate used to measure the liability for future policy benefits will be standardized. The current requirement to use a discount rate reflecting expected investment yields will change to an upper-medium grade (low credit risk) fixed income corporate instrument yield (generally interpreted as an “A” rating) reflecting the duration characteristics of the liability. Entities will be required to update the discount rate at each reporting date with the effect of discount rate changes reflected in OCI.
•The current premium deficiency test is being replaced with a net premium ratio cap of 100%. If the net premium ratio (i.e. the ratio of the present value of total expected benefits and related expenses to the present value of total expected premiums) exceeds 100%, insurers are required to recognize a loss in the statement of operations in the period. Contracts from different issue years will no longer be permitted to be grouped to determine contracts in a loss position.
In addition, the update requires DAC and DSIC relating to all long-duration contracts and most investment contracts to be amortized on a straight-line basis over the expected life of the contract independent of profit emergence. Under the new guidance, interest will not accrue to the deferred balance and DAC and DSIC will not be subject to an impairment test.
The update requires significant additional disclosures, including disaggregated rollforwards of the liability for future policy benefits, policyholder account balances, market risk benefits, DAC and DSIC, as well as qualitative and quantitative information about expected cash flows, estimates and assumptions. On November 5, 2020, the FASB released an updated ASU to defer the effective date of the standard to interim and annual periods beginning after December 15, 2022, and interim periods within those years. The standard
should be applied to the liability for future policy benefits and DAC and DSIC on a modified retrospective basis and applied to market risk benefits on a retrospective basis with the option to apply full retrospective transition if certain criteria are met. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated results of operations, financial condition and disclosures.
4. Revenue from Contracts with Customers
During the third quarter of 2020, the composition of the Company’s reportable segments changed from five to four segments. The Retirement & Protection Solutions segment includes Retirement Solutions (Variable Annuities and Payout Annuities) and Protection Solutions (Life and Disability Insurance). In addition, the Company moved the Fixed Annuities and Fixed Indexed Annuities business to the Corporate & Other segment as a closed block. Certain prior period amounts have been revised to conform to the current presentation. See Note 28 for additional information on this change.
The following tables present revenue disaggregated by segment on an adjusted operating basis with a reconciliation of segment revenues to those reported on the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Advice & Wealth Management
|
|
Asset Management
|
|
Retirement & Protection Solutions
|
|
Corporate
&
Other
|
|
Total Segments
|
|
Non-operating Revenue
|
|
Total
|
|
(in millions)
|
Management and financial advice fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
—
|
|
|
$
|
1,822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,822
|
|
|
$
|
—
|
|
|
$
|
1,822
|
|
Institutional
|
—
|
|
|
442
|
|
|
—
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
442
|
|
Advisory fees
|
3,511
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,511
|
|
|
—
|
|
|
3,511
|
|
Financial planning fees
|
348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
—
|
|
|
348
|
|
Transaction and other fees
|
352
|
|
|
190
|
|
|
62
|
|
|
—
|
|
|
604
|
|
|
—
|
|
|
604
|
|
Total management and financial advice fees
|
4,211
|
|
|
2,454
|
|
|
62
|
|
|
—
|
|
|
6,727
|
|
|
—
|
|
|
6,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
737
|
|
|
237
|
|
|
—
|
|
|
—
|
|
|
974
|
|
|
—
|
|
|
974
|
|
Insurance and annuity
|
835
|
|
|
174
|
|
|
363
|
|
|
—
|
|
|
1,372
|
|
|
—
|
|
|
1,372
|
|
Other products
|
430
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
430
|
|
|
—
|
|
|
430
|
|
Total distribution fees
|
2,002
|
|
|
411
|
|
|
363
|
|
|
—
|
|
|
2,776
|
|
|
—
|
|
|
2,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
182
|
|
|
2
|
|
|
6
|
|
|
3
|
|
|
193
|
|
|
—
|
|
|
193
|
|
Total revenue from contracts with customers
|
6,395
|
|
|
2,867
|
|
|
431
|
|
|
3
|
|
|
9,696
|
|
|
—
|
|
|
9,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from other sources (1)
|
339
|
|
|
24
|
|
|
2,663
|
|
|
546
|
|
|
3,572
|
|
|
77
|
|
|
3,649
|
|
Total segment gross revenues
|
6,734
|
|
|
2,891
|
|
|
3,094
|
|
|
549
|
|
|
13,268
|
|
|
77
|
|
|
13,345
|
|
Less: Banking and deposit interest expense
|
59
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Total segment net revenues
|
6,675
|
|
|
2,891
|
|
|
3,094
|
|
|
546
|
|
|
13,206
|
|
|
77
|
|
|
13,283
|
|
Less: Intersegment revenues
|
893
|
|
|
53
|
|
|
433
|
|
|
(2)
|
|
|
1,377
|
|
|
7
|
|
|
1,384
|
|
Total net revenues
|
$
|
5,782
|
|
|
$
|
2,838
|
|
|
$
|
2,661
|
|
|
$
|
548
|
|
|
$
|
11,829
|
|
|
$
|
70
|
|
|
$
|
11,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Advice & Wealth Management
|
|
Asset Management
|
|
Retirement & Protection Solutions
|
|
Corporate
&
Other
|
|
Total Segments
|
|
Non-operating Revenue
|
|
Total
|
|
(in millions)
|
Management and financial advice fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
—
|
|
|
$
|
1,783
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,783
|
|
|
$
|
—
|
|
|
$
|
1,783
|
|
Institutional
|
—
|
|
|
495
|
|
|
—
|
|
|
—
|
|
|
495
|
|
|
—
|
|
|
495
|
|
Advisory fees
|
3,156
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,156
|
|
|
—
|
|
|
3,156
|
|
Financial planning fees
|
330
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
330
|
|
|
—
|
|
|
330
|
|
Transaction and other fees
|
355
|
|
|
189
|
|
|
63
|
|
|
—
|
|
|
607
|
|
|
—
|
|
|
607
|
|
Total management and financial advice fees
|
3,841
|
|
|
2,467
|
|
|
63
|
|
|
—
|
|
|
6,371
|
|
|
—
|
|
|
6,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
726
|
|
|
237
|
|
|
—
|
|
|
—
|
|
|
963
|
|
|
—
|
|
|
963
|
|
Insurance and annuity
|
875
|
|
|
171
|
|
|
357
|
|
|
6
|
|
|
1,409
|
|
|
—
|
|
|
1,409
|
|
Other products
|
680
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
680
|
|
|
—
|
|
|
680
|
|
Total distribution fees
|
2,281
|
|
|
408
|
|
|
357
|
|
|
6
|
|
|
3,052
|
|
|
—
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
177
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
—
|
|
|
181
|
|
Total revenue from contracts with customers
|
6,299
|
|
|
2,879
|
|
|
420
|
|
|
6
|
|
|
9,604
|
|
|
—
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from other sources (1)
|
436
|
|
|
34
|
|
|
2,703
|
|
|
1,479
|
|
|
4,652
|
|
|
265
|
|
|
4,917
|
|
Total segment gross revenues
|
6,735
|
|
|
2,913
|
|
|
3,123
|
|
|
1,485
|
|
|
14,256
|
|
|
265
|
|
|
14,521
|
|
Less: Banking and deposit interest expense
|
136
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
144
|
|
|
—
|
|
|
144
|
|
Total segment net revenues
|
6,599
|
|
|
2,913
|
|
|
3,123
|
|
|
1,477
|
|
|
14,112
|
|
|
265
|
|
|
14,377
|
|
Less: Intersegment revenues
|
924
|
|
|
55
|
|
|
429
|
|
|
(6)
|
|
|
1,402
|
|
|
8
|
|
|
1,410
|
|
Total net revenues
|
$
|
5,675
|
|
|
$
|
2,858
|
|
|
$
|
2,694
|
|
|
$
|
1,483
|
|
|
$
|
12,710
|
|
|
$
|
257
|
|
|
$
|
12,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Advice & Wealth Management
|
|
Asset Management
|
|
Retirement & Protection Solutions
|
|
Corporate
&
Other
|
|
Total Segments
|
|
Non-operating Revenue
|
|
Total
|
|
(in millions)
|
Management and financial advice fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
—
|
|
|
$
|
1,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,874
|
|
|
$
|
—
|
|
|
$
|
1,874
|
|
Institutional
|
—
|
|
|
453
|
|
|
—
|
|
|
—
|
|
|
453
|
|
|
—
|
|
|
453
|
|
Advisory fees
|
2,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,865
|
|
|
—
|
|
|
2,865
|
|
Financial planning fees
|
318
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
318
|
|
|
—
|
|
|
318
|
|
Transaction and other fees
|
355
|
|
|
190
|
|
|
65
|
|
|
—
|
|
|
610
|
|
|
—
|
|
|
610
|
|
Total management and financial advice fees
|
3,538
|
|
|
2,517
|
|
|
65
|
|
|
—
|
|
|
6,120
|
|
|
—
|
|
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
729
|
|
|
260
|
|
|
—
|
|
|
—
|
|
|
989
|
|
|
—
|
|
|
989
|
|
Insurance and annuity
|
890
|
|
|
173
|
|
|
360
|
|
|
7
|
|
|
1,430
|
|
|
—
|
|
|
1,430
|
|
Other products
|
622
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
622
|
|
|
—
|
|
|
622
|
|
Total distribution fees
|
2,241
|
|
|
433
|
|
|
360
|
|
|
7
|
|
|
3,041
|
|
|
—
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
171
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
175
|
|
|
—
|
|
|
175
|
|
Total revenue from contracts with customers
|
5,950
|
|
|
2,953
|
|
|
426
|
|
|
7
|
|
|
9,336
|
|
|
—
|
|
|
9,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from other sources (1)
|
328
|
|
|
58
|
|
|
2,741
|
|
|
1,740
|
|
|
4,867
|
|
|
158
|
|
|
5,025
|
|
Total segment gross revenues
|
6,278
|
|
|
3,011
|
|
|
3,167
|
|
|
1,747
|
|
|
14,203
|
|
|
158
|
|
|
14,361
|
|
Less: Banking and deposit interest expense
|
89
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
95
|
|
|
—
|
|
|
95
|
|
Total segment net revenues
|
6,189
|
|
|
3,011
|
|
|
3,167
|
|
|
1,741
|
|
|
14,108
|
|
|
158
|
|
|
14,266
|
|
Less: Intersegment revenues
|
952
|
|
|
50
|
|
|
417
|
|
|
(5)
|
|
|
1,414
|
|
|
17
|
|
|
1,431
|
|
Total net revenues
|
$
|
5,237
|
|
|
$
|
2,961
|
|
|
$
|
2,750
|
|
|
$
|
1,746
|
|
|
$
|
12,694
|
|
|
$
|
141
|
|
|
$
|
12,835
|
|
(1) Revenues not included in the scope of the revenue from contracts with customers standard. The amounts primarily consist of revenue associated with insurance and annuity products or financial instruments.
The following discussion describes the nature, timing, and uncertainty of revenues and cash flows arising from the Company’s contracts with customers on a consolidated basis.
Management and Financial Advice Fees
Asset Management Fees
The Company earns revenue for performing asset management services for retail and institutional clients. The revenue is earned based on a fixed or tiered rate applied, as a percentage, to assets under management. Assets under management vary with market fluctuations and client behavior. The asset management performance obligation is considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. Asset management fees are accrued, invoiced and collected on a monthly or quarterly basis.
The Company’s asset management contracts for Open Ended Investment Companies (“OEICs”) in the United Kingdom (“U.K.”) and Société d'Investissement à Capital Variable (“SICAVs”) in Europe include performance obligations for asset management and fund distribution services. The amounts received for these services are reported as management and financial advice fees. The revenue recognition pattern is the same for both performance obligations as the fund distribution services revenue is variably constrained due to factors outside the Company’s control including market volatility and client behavior (such as how long clients hold their investment) and not recognized until assets under management are known.
The Company may also earn performance-based management fees on institutional accounts, hedge funds, collateralized loan obligations (“CLOs”), OEICs, SICAVs and property and other funds based on a percentage of account returns in excess of either a benchmark index or a contractually specified level. This revenue is variable and impacted primarily by the performance of the assets being managed compared to the benchmark index or contractually specified level. The revenue is not recognized until it is probable that a significant reversal will not occur. Performance-based management fees are invoiced on a quarterly or annual basis.
Advisory Fees
The Company earns revenue for performing investment advisory services for certain brokerage customer’s discretionary and non-discretionary managed accounts. The revenue is earned based on a contractual fixed rate applied, as a percentage, to the market value of assets held in the account. The investment advisory performance obligation is considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. Advisory fees are billed on a monthly basis on the prior month end assets. Prior to the fourth quarter of 2019, advisory fees were primarily based on average assets for a monthly or quarterly period.
Financial Planning Fees
The Company earns revenue for providing financial plans to its clients. The revenue earned for each financial plan is either a fixed fee (received monthly, quarterly or annually) or a variable fee (received monthly) based on a contractual fixed rate applied, as a percentage, to the prior month end assets held in a client’s investment advisory account. The financial planning fee is based on the complexity of a client’s financial and life situation and his or her advisor’s experience. The performance obligation is satisfied at the time the financial plan is delivered to the customer. The Company records a contract liability for the unearned revenue when cash is received before the plan is delivered. The financial plan contracts with clients are annual contracts. Amounts recorded as a contract liability are recognized as revenue when the financial plan is delivered, which occurs within the annual contract period.
For fixed fee arrangements, revenue is recognized when the financial plan is delivered. The Company accrues revenue for any amounts that have not been received at the time the financial plan is delivered.
For variable fee arrangements, revenue is recognized for cash that has been received when the financial plan is delivered. The amount received after the plan is delivered is variably constrained due to factors outside the Company’s control including market volatility and client behavior. The revenue is recognized when it is probable that a significant reversal will not occur that is generally each month end as the advisory account balance uncertainty is resolved.
Contract liabilities for financial planning fees, which are included in other liabilities in the Consolidated Balance Sheets, were $146 million and $143 million as of December 31, 2020 and 2019, respectively.
The Company pays sales commissions to advisors when a new financial planning contract is obtained or when an existing contract is renewed. The sales commissions paid to the advisors prior to financial plan delivery are considered costs to obtain a contract with a customer and are initially capitalized. When the performance obligation to deliver the financial plan is satisfied, the commission is recognized as distribution expense. Capitalized costs to obtain these contracts are reported in other assets in the Consolidated Balance Sheets, and were $117 million and $116 million as of December 31, 2020 and 2019, respectively.
Transaction and Other Fees
The Company earns revenue for providing customer support, shareholder and administrative services (including transfer agent services) for affiliated mutual funds and networking, sub-accounting and administrative services for unaffiliated mutual funds. The Company also receives revenue for providing custodial services and account maintenance services on brokerage and retirement accounts that are not included in an advisory relationship. Transfer agent and administrative revenue is earned based on either a fixed rate applied, as a percentage, to assets under management or an annual fixed fee for each fund position. Networking and sub-accounting revenue is earned based on either an annual fixed fee for each account or an annual fixed fee for each fund position. Custodial and account maintenance revenue is generally earned based on a quarterly or annual fixed fee for each account. Each of the customer support and administrative services performance obligations are considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. Transaction and other fees (other than custodial service fees) are invoiced or charged to brokerage accounts on a monthly or quarterly basis. Custodial service fees are invoiced or charged to brokerage accounts on an annual basis. Contract liabilities for custodial service fees, which are included in other liabilities in the Consolidated Balance Sheets, were nil as of both December 31, 2020 and 2019.
The Company earns revenue for providing trade execution services to franchise advisors. The trade execution performance obligation is satisfied at the time of each trade and the revenue is primarily earned based on a fixed fee per trade. These fees are invoiced and collected on a semi-monthly basis.
Distribution Fees
Mutual Funds and Insurance and Annuity Products
The Company earns revenue for selling affiliated and unaffiliated mutual funds, fixed and variable annuities and insurance products. The performance obligation is satisfied at the time of each individual sale. A portion of the revenue is based on a fixed rate applied, as a percentage, to amounts invested at the time of sale. The remaining revenue is recognized over the time the client owns the investment or holds the contract and is generally earned based on a fixed rate applied, as a percentage, to the net asset value of the fund, or the value of the insurance policy or annuity contract. The ongoing revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company’s control including market volatility and client behavior (such as how long clients hold their investment, insurance policy or annuity contract). This ongoing revenue may be recognized for many years after the initial sale. The revenue will not be recognized until it is probable that a significant reversal will not occur.
The Company earns revenue for providing unaffiliated partners an opportunity to educate the Company’s advisors or to support availability and distribution of their products on the Company’s platforms. These payments allow the outside parties to train and support the advisors, explain the features of their products and distribute marketing and educational materials, and support trading and operational systems necessary to enable the Company’s client servicing and production distribution efforts. The Company earns revenue for placing and maintaining unaffiliated fund partners and insurance companies’ products on the Company’s sales platform (subject to the Company’s due diligence standards). The revenue is primarily earned based on a fixed fee or a fixed rate applied, as a percentage, to the market value of assets invested. These performance obligations are considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. These fees are invoiced and collected on monthly basis.
Other Products
The Company earns revenue for selling unaffiliated alternative products. The performance obligation is satisfied at the time of each individual sale. A portion of the revenue is based on a fixed rate applied, as a percentage, to amounts invested at the time of sale. The remaining revenue is recognized over the time the client owns the investment and is earned generally based on a fixed rate applied, as a percentage, to the market value of the investment. The ongoing revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company’s control including market volatility and client behavior (such as how long clients hold their investment). The revenue will not be recognized until it is probable that a significant reversal will not occur.
The Company earns revenue from brokerage clients for the execution of requested trades. The performance obligation is satisfied at the time of trade execution and amounts are received on the settlement date. The revenue varies for each trade based on various factors that include the type of investment, dollar amount of the trade and how the trade is executed (online or broker assisted).
The Company earns revenue for placing clients’ deposits in its brokerage sweep program with third-party banks. The amount received from the third-party banks is impacted by short-term interest rates. The performance obligation with the financial institutions that participate in the sweep program is considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. The revenue is earned daily and settled monthly based on a rate applied, as a percentage, to the deposits placed.
Other Revenues
The Company earns revenue from fees charged to franchise advisors for providing various services the advisors need to manage and grow their practices. The primary services include: licensing of intellectual property and software, compliance supervision, insurance coverage, technology services and support, consulting and other services. The services are either provided by the Company or third- party providers. The Company controls the services provided by third parties as it has the right to direct the third parties to perform the services, is primarily responsible for performing the services and sets the prices the advisors are charged. The Company recognizes revenue for the gross amount of the fees received from the advisors. The fees are primarily collected monthly as a reduction of commission payments.
Intellectual property and software licenses, along with compliance supervision, insurance coverage, and technology services and support are primarily earned based on a monthly fixed fee. These services are considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. The consulting and other services performance obligations are satisfied as the services are delivered and revenue is earned based upon the level of service requested.
Receivables
Receivables for revenue from contracts with customers are recognized when the performance obligation is satisfied and the Company has an unconditional right to the revenue. Receivables related to revenues from contracts with customers were $403 million and $400 million as of December 31, 2020 and 2019, respectively.
5. Variable Interest Entities
The Company provides asset management services to investment entities which are considered to be VIEs, such as CLOs, hedge funds and other private funds, property funds, and certain non-U.S. series funds (such as OEICs and SICAVs) (collectively, “investment entities”), which are sponsored by the Company. In addition, the Company invests in structured investments other than CLOs and certain affordable housing partnerships which are considered VIEs. The Company consolidates certain investment entities (collectively, “consolidated investment entities”) if the Company is deemed to be the primary beneficiary. The Company has no obligation to provide financial or other support to the non-consolidated VIEs beyond its initial investment and existing future funding commitments, and the Company has not provided any other support to these entities. The Company has unfunded commitments related to consolidated CLOs of $13 million and $21 million as of December 31, 2020 and 2019, respectively. See Note 26 for information on future funding commitments of other VIEs.
See Note 2 for further discussion of the Company’s accounting policy on consolidation.
CLOs
CLOs are asset backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by a CLO, offering investors various maturity and credit risk characteristics. The debt securities issued by the CLOs are non-recourse to the Company. The CLO’s debt holders have recourse only to the assets of the CLO. The assets of the CLOs cannot be used by the Company. Scheduled debt payments are based on the
performance of the CLO’s collateral pool. The Company earns management fees from the CLOs based on the value of the CLO’s collateral pool and, in certain instances, may also receive incentive fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company has invested in a portion of the unrated, junior subordinated notes of certain CLOs. The Company consolidates certain CLOs where it is the primary beneficiary and has the power to direct the activities that most significantly impact the economic performance of the CLO.
The Company's maximum exposure to loss with respect to non-consolidated CLOs is limited to its amortized cost, which was $3 million and $4 million as of December 31, 2020 and 2019, respectively. The Company classifies these investments as Available-for-Sale securities. See Note 6 for additional information on these investments.
Property Funds
The Company provides investment advice and related services to property funds, some of which are considered VIEs. For investment management services, the Company generally earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company does not have a significant economic interest and is not required to consolidate any of the property funds. The Company’s maximum exposure to loss with respect to its investment in these entities is limited to its carrying value. The carrying value of the Company’s investment in property funds is reflected in other investments and was $23 million and $12 million as of December 31, 2020 and 2019, respectively.
Hedge Funds and other Private Funds
The Company does not consolidate hedge funds and other private funds which are sponsored by the Company and considered VIEs. For investment management services, the Company earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services and the Company does not have a significant economic interest in any fund. The Company's maximum exposure to loss with respect to its investment in these entities is limited to its carrying value. The carrying value of the Company’s investment in these entities is reflected in other investments and was nil as of both December 31, 2020 and 2019.
Non-U.S. Series Funds
The Company manages non-U.S. series funds, which are considered VIEs. For investment management services, the Company earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The fee arrangement is at market and commensurate with the level of effort required to provide those services. The Company does not consolidate these funds and its maximum exposure to loss is limited to its carrying value. The carrying value of the Company’s investment in these funds is reflected in other investments and was $20 million and $15 million as of December 31, 2020 and 2019, respectively.
Affordable Housing Partnerships and Other Real Estate Partnerships
The Company is a limited partner in affordable housing partnerships that qualify for government-sponsored low income housing tax credit programs and partnerships that invest in multi-family residential properties that were originally developed with an affordable housing component. The Company has determined it is not the primary beneficiary and therefore does not consolidate these partnerships.
A majority of the limited partnerships are VIEs. The Company’s maximum exposure to loss as a result of its investment in the VIEs is limited to the carrying value. The carrying value is reflected in other investments and was $200 million and $270 million as of December 31, 2020 and 2019, respectively. The Company had a $9 million and a $15 million liability recorded as of December 31, 2020 and 2019, respectively, related to original purchase commitments not yet remitted to the VIEs. The Company has not provided any additional support and is not contractually obligated to provide additional support to the VIEs beyond the funding commitments.
Structured Investments
The Company invests in structured investments which are considered VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, commercial and residential mortgage backed securities. The Company classifies these investments as Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to the size of the Company’s investment in the entities and position in the capital structure of these entities. The Company's maximum exposure to loss as a result of its investment in these structured investments is limited to its amortized cost. See Note 6 for additional information on these structured investments.
Fair Value of Assets and Liabilities
The Company categorizes its fair value measurements according to a three-level hierarchy. See Note 15 for the definition of the three levels of the fair value hierarchy.
The following tables present the balances of assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
Assets
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Common stocks
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Syndicated loans
|
—
|
|
|
1,817
|
|
|
92
|
|
|
1,909
|
|
Total investments
|
—
|
|
|
1,826
|
|
|
92
|
|
|
1,918
|
|
Receivables
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
Other assets
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Total assets at fair value
|
$
|
—
|
|
|
$
|
1,842
|
|
|
$
|
94
|
|
|
$
|
1,936
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Debt (1)
|
$
|
—
|
|
|
$
|
1,913
|
|
|
$
|
—
|
|
|
$
|
1,913
|
|
Other liabilities
|
—
|
|
|
69
|
|
|
—
|
|
|
69
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
1,982
|
|
|
$
|
—
|
|
|
$
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
Assets
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Common stocks
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Syndicated loans
|
—
|
|
|
1,454
|
|
|
143
|
|
|
1,597
|
|
Total investments
|
1
|
|
|
1,462
|
|
|
143
|
|
|
1,606
|
|
Receivables
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Total assets at fair value
|
$
|
1
|
|
|
$
|
1,470
|
|
|
$
|
143
|
|
|
$
|
1,614
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Debt (1)
|
$
|
—
|
|
|
$
|
1,628
|
|
|
$
|
—
|
|
|
$
|
1,628
|
|
Other liabilities
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
1,712
|
|
|
$
|
—
|
|
|
$
|
1,712
|
|
(1) The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $2.0 billion and $1.7 billion as of December 31, 2020 and 2019, respectively.
The following tables provide a summary of changes in Level 3 assets held by consolidated investment entities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans
|
|
Other Assets
|
|
(in millions)
|
|
Balance, January 1, 2020
|
$
|
143
|
|
|
$
|
—
|
|
|
Total gains (losses) included in:
|
|
|
|
|
Net income
|
(16)
|
|
(1)
|
—
|
|
|
Purchases
|
111
|
|
|
2
|
|
|
Sales
|
(29)
|
|
|
—
|
|
|
Settlements
|
(33)
|
|
|
—
|
|
|
Transfers into Level 3
|
438
|
|
|
—
|
|
|
Transfers out of Level 3
|
(522)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
$
|
92
|
|
|
$
|
2
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) included in income relating to assets held at December 31, 2020
|
$
|
(2)
|
|
(1)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Loans
|
|
|
|
(in millions)
|
|
Balance, January 1, 2019
|
|
|
$
|
226
|
|
|
Total gains (losses) included in:
|
|
|
|
|
Net income
|
|
|
(2)
|
|
(1)
|
Purchases
|
|
|
91
|
|
|
Sales
|
|
|
(11)
|
|
|
Settlements
|
|
|
(68)
|
|
|
Transfers into Level 3
|
|
|
272
|
|
|
Transfers out of Level 3
|
|
|
(365)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
$
|
143
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) included in income relating to assets held at December 31, 2019
|
|
|
$
|
(3)
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
Syndicated Loans
|
|
|
|
(in millions)
|
|
Balance, January 1, 2018
|
|
|
$
|
4
|
|
|
$
|
180
|
|
|
Total gains (losses) included in:
|
|
|
|
|
|
|
Net income
|
|
|
6
|
|
(1)
|
(1)
|
|
(1)
|
Purchases
|
|
|
—
|
|
|
97
|
|
|
Sales
|
|
|
(10)
|
|
|
(41)
|
|
|
Settlements
|
|
|
—
|
|
|
(52)
|
|
|
Transfers into Level 3
|
|
|
4
|
|
|
173
|
|
|
Transfers out of Level 3
|
|
|
(2)
|
|
|
(160)
|
|
|
Consolidation of consolidated investment entities
|
|
|
—
|
|
|
54
|
|
|
Deconsolidation of consolidated investment entities
|
|
|
(2)
|
|
|
(24)
|
|
|
Balance, December 31, 2018
|
|
|
$
|
—
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) included in income relating to assets held at December 31, 2018
|
|
|
$
|
—
|
|
|
$
|
(4)
|
|
(1)
|
(1) Included in net investment income in the Consolidated Statements of Operations.
Securities and loans transferred from Level 3 primarily represent assets with fair values that are now obtained from a third-party pricing service with observable inputs or priced in active markets. Securities and loans transferred to Level 3 represent assets with fair values that are now based on a single non-binding broker quote.
All Level 3 measurements as of December 31, 2020 and 2019 were obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to the Company.
Determination of Fair Value
Assets
Investments
The fair value of syndicated loans obtained from third-party pricing services using a market approach with observable inputs is classified as Level 2. The fair value of syndicated loans obtained from third-party pricing services with a single non-binding broker quote as the underlying valuation source is classified as Level 3. The underlying inputs used in non-binding broker quotes are not readily available to the Company. See Note 15 for a description of the Company’s determination of the fair value of corporate debt securities, common stocks and other investments.
Receivables
For receivables of the consolidated CLOs, the carrying value approximates fair value as the nature of these assets has historically been short term and the receivables have been collectible. The fair value of these receivables is classified as Level 2.
Liabilities
Debt
The fair value of the CLOs’ assets, typically syndicated bank loans, is more observable than the fair value of the CLOs’ debt tranches for which market activity is limited and less transparent. As a result, the fair value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets and is classified as Level 2.
Other Liabilities
Other liabilities consist primarily of securities purchased but not yet settled held by consolidated CLOs. The carrying value approximates fair value as the nature of these liabilities has historically been short term. The fair value of these liabilities is classified as Level 2.
Fair Value Option
The Company has elected the fair value option for the financial assets and liabilities of the consolidated CLOs. Management believes that the use of the fair value option better matches the changes in fair value of assets and liabilities related to the CLOs.
The following table presents the fair value and unpaid principal balance of loans and debt for which the fair value option has been elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Syndicated loans
|
|
|
|
Unpaid principal balance
|
$
|
1,990
|
|
|
$
|
1,678
|
|
Excess unpaid principal over fair value
|
(81)
|
|
|
(81)
|
|
Fair value
|
$
|
1,909
|
|
|
$
|
1,597
|
|
|
|
|
|
Fair value of loans more than 90 days past due
|
$
|
5
|
|
|
$
|
4
|
|
Fair value of loans in nonaccrual status
|
19
|
|
|
42
|
|
Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both
|
24
|
|
|
18
|
|
|
|
|
|
Debt
|
|
|
|
Unpaid principal balance
|
$
|
2,069
|
|
|
$
|
1,761
|
|
Excess unpaid principal over fair value
|
(156)
|
|
|
(133)
|
|
Carrying value (1)
|
$
|
1,913
|
|
|
$
|
1,628
|
|
(1) The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $2.0 billion and $1.7 billion as of December 31, 2020 and 2019, respectively.
During the third quarter of 2020, the Company launched a new CLO and issued debt of $394 million.
Interest income from syndicated loans, bonds and structured investments is recorded based on contractual rates in net investment income. Gains and losses related to changes in the fair value of investments and gains and losses on sales of investments are also recorded in net investment income. Interest expense on debt is recorded in interest and debt expense with gains and losses related to changes in the fair value of debt recorded in net investment income.
Total net gains (losses) recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $(7) million, $(9) million and $47 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Debt of the consolidated investment entities and the stated interest rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Weighted Average
Interest Rate
|
December 31,
|
December 31,
|
2020
|
|
2019
|
2020
|
|
2019
|
(in millions)
|
|
Debt of consolidated CLOs due 2025-2031
|
$
|
1,913
|
|
|
$
|
1,628
|
|
|
2.1
|
%
|
|
3.5
|
%
|
The debt of the consolidated CLOs has both fixed and floating interest rates, which range from 0.0% to 8.9%. The interest rates on the debt of CLOs are weighted average rates based on the outstanding principal and contractual interest rates.
6. Investments
The following is a summary of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Available-for-Sale securities, at fair value
|
$
|
36,283
|
|
|
$
|
33,129
|
|
Mortgage loans, net (net of allowance for credit losses: 2020, $29; 2019, $19)
|
2,718
|
|
|
2,778
|
|
Policy loans
|
846
|
|
|
868
|
|
Other investments, net (net of allowance for credit losses: 2020, $12; 2019, $5)
|
1,184
|
|
|
1,140
|
|
Total
|
$
|
41,031
|
|
|
$
|
37,915
|
|
Other investments primarily reflect the Company’s interests in affordable housing partnerships, trading securities, seed money investments, syndicated loans, credit card receivables and certificates of deposit with original or remaining maturities at the time of purchase of more than 90 days.
The following is a summary of net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Investment income on fixed maturities
|
$
|
1,161
|
|
|
$
|
1,378
|
|
|
$
|
1,353
|
|
Net realized gains (losses)
|
(10)
|
|
(1)
|
(8)
|
|
|
10
|
|
Affordable housing partnerships
|
(66)
|
|
|
(98)
|
|
|
(58)
|
|
Other
|
89
|
|
|
97
|
|
|
154
|
|
Consolidated investment entities
|
77
|
|
|
94
|
|
|
137
|
|
Total
|
$
|
1,251
|
|
|
$
|
1,463
|
|
|
$
|
1,596
|
|
(1) Includes the change in the allowance for credit losses of $(27) million for the year ended December 31, 2020.
Available-for-Sale securities distributed by type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
December 31, 2020
|
Amortized
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Allowance for Credit Losses
|
|
Fair Value
|
|
(in millions)
|
Corporate debt securities
|
$
|
11,762
|
|
|
$
|
1,924
|
|
|
$
|
(2)
|
|
|
$
|
(10)
|
|
|
$
|
13,674
|
|
Residential mortgage backed securities
|
9,845
|
|
|
188
|
|
|
(4)
|
|
|
—
|
|
|
10,029
|
|
Commercial mortgage backed securities
|
5,867
|
|
|
242
|
|
|
(21)
|
|
|
—
|
|
|
6,088
|
|
Asset backed securities
|
3,283
|
|
|
52
|
|
|
(5)
|
|
|
(1)
|
|
|
3,329
|
|
State and municipal obligations
|
1,088
|
|
|
297
|
|
|
(1)
|
|
|
—
|
|
|
1,384
|
|
U.S. government and agency obligations
|
1,456
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,456
|
|
Foreign government bonds and obligations
|
241
|
|
|
22
|
|
|
(1)
|
|
|
—
|
|
|
262
|
|
Other securities
|
59
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
61
|
|
Total
|
$
|
33,601
|
|
|
$
|
2,727
|
|
|
$
|
(34)
|
|
|
$
|
(11)
|
|
|
$
|
36,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
December 31, 2019
|
Amortized
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
(in millions)
|
Corporate debt securities
|
$
|
10,847
|
|
|
$
|
1,344
|
|
|
$
|
(4)
|
|
|
$
|
12,187
|
|
Residential mortgage backed securities
|
9,954
|
|
|
94
|
|
|
(19)
|
|
|
10,029
|
|
Commercial mortgage backed securities
|
5,473
|
|
|
96
|
|
|
(6)
|
|
|
5,563
|
|
Asset backed securities
|
1,968
|
|
|
42
|
|
|
(4)
|
|
|
2,006
|
|
State and municipal obligations
|
1,131
|
|
|
238
|
|
|
(2)
|
|
|
1,367
|
|
U.S. government and agency obligations
|
1,679
|
|
|
1
|
|
|
—
|
|
|
1,680
|
|
Foreign government bonds and obligations
|
254
|
|
|
19
|
|
|
(2)
|
|
|
271
|
|
Other securities
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Total
|
$
|
31,332
|
|
|
$
|
1,834
|
|
|
$
|
(37)
|
|
|
$
|
33,129
|
|
As of December 31, 2020 and 2019, accrued interest of $178 million and $177 million, respectively, is excluded from the amortized cost basis of Available-for-Sale securities in the tables above and is recorded in receivables on the Consolidated Balance Sheets.
As of December 31, 2020 and 2019, investment securities with a fair value of $3.6 billion and $2.2 billion, respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings, of which $454 million and $576 million, respectively, may be sold, pledged or rehypothecated by the counterparty.
As of December 31, 2020 and 2019, fixed maturity securities comprised approximately 88% and 87%, respectively, of Ameriprise Financial investments. Rating agency designations are based on the availability of ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”), including Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings Ltd. (“Fitch”). The Company uses the median of available ratings from Moody’s, S&P and Fitch, or, if fewer than three ratings are available, the lower rating is used. When ratings from Moody’s, S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. As of December 31, 2020 and 2019, the Company’s internal analysts rated $605 million and $624 million, respectively, of securities using criteria similar to those used by NRSROs.
A summary of fixed maturity securities by rating was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratings
|
December 31, 2020
|
|
December 31, 2019
|
Amortized
Cost
|
|
Fair Value
|
|
Percent of Total Fair Value
|
Amortized
Cost
|
|
Fair Value
|
|
Percent of Total Fair Value
|
|
(in millions, except percentages)
|
AAA
|
$
|
19,815
|
|
|
$
|
20,253
|
|
|
56
|
%
|
|
$
|
18,256
|
|
|
$
|
18,437
|
|
|
56
|
%
|
AA
|
1,082
|
|
|
1,312
|
|
|
3
|
|
|
1,113
|
|
|
1,304
|
|
|
4
|
|
A
|
2,953
|
|
|
3,534
|
|
|
10
|
|
|
3,008
|
|
|
3,474
|
|
|
10
|
|
BBB
|
8,271
|
|
|
9,542
|
|
|
26
|
|
|
8,178
|
|
|
9,102
|
|
|
28
|
|
Below investment grade (1)
|
1,480
|
|
|
1,642
|
|
|
5
|
|
|
777
|
|
|
812
|
|
|
2
|
|
Total fixed maturities
|
$
|
33,601
|
|
|
$
|
36,283
|
|
|
100
|
%
|
|
$
|
31,332
|
|
|
$
|
33,129
|
|
|
100
|
%
|
(1) The amortized cost and fair value of below investment grade securities includes interest in CLOs managed by the Company of $3 million, as of December 31, 2020, and $5 million and $6 million, respectively, as of December 31, 2019. These securities are not rated but are included in below investment grade due to their risk characteristics.
As of December 31, 2020 and 2019, approximately 33% and 45%, respectively, of securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. No holdings of any issuer were greater than 10% of total equity.
The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
December 31, 2020
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in millions, except number of securities)
|
Corporate debt securities
|
|
26
|
|
|
$
|
228
|
|
|
$
|
(1)
|
|
|
11
|
|
|
$
|
19
|
|
|
$
|
(1)
|
|
|
37
|
|
|
$
|
247
|
|
|
$
|
(2)
|
|
Residential mortgage backed securities
|
|
72
|
|
|
833
|
|
|
(2)
|
|
|
71
|
|
|
391
|
|
|
(2)
|
|
|
143
|
|
|
1,224
|
|
|
(4)
|
|
Commercial mortgage backed securities
|
|
35
|
|
|
781
|
|
|
(11)
|
|
|
19
|
|
|
393
|
|
|
(10)
|
|
|
54
|
|
|
1,174
|
|
|
(21)
|
|
Asset backed securities
|
|
17
|
|
|
344
|
|
|
(3)
|
|
|
13
|
|
|
231
|
|
|
(2)
|
|
|
30
|
|
|
575
|
|
|
(5)
|
|
State and municipal obligations
|
|
2
|
|
|
4
|
|
|
—
|
|
|
1
|
|
|
4
|
|
|
(1)
|
|
|
3
|
|
|
8
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds and obligations
|
|
1
|
|
|
3
|
|
|
—
|
|
|
7
|
|
|
8
|
|
|
(1)
|
|
|
8
|
|
|
11
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
153
|
|
|
$
|
2,193
|
|
|
$
|
(17)
|
|
|
122
|
|
|
$
|
1,046
|
|
|
$
|
(17)
|
|
|
275
|
|
|
$
|
3,239
|
|
|
$
|
(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
December 31, 2019
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
(in millions, except number of securities)
|
Corporate debt securities
|
|
13
|
|
|
$
|
66
|
|
|
$
|
(1)
|
|
|
23
|
|
|
$
|
173
|
|
|
$
|
(3)
|
|
|
36
|
|
|
$
|
239
|
|
|
$
|
(4)
|
|
Residential mortgage backed securities
|
|
150
|
|
|
4,328
|
|
|
(10)
|
|
|
118
|
|
|
1,164
|
|
|
(9)
|
|
|
268
|
|
|
5,492
|
|
|
(19)
|
|
Commercial mortgage backed securities
|
|
52
|
|
|
1,622
|
|
|
(3)
|
|
|
31
|
|
|
314
|
|
|
(3)
|
|
|
83
|
|
|
1,936
|
|
|
(6)
|
|
Asset backed securities
|
|
34
|
|
|
598
|
|
|
(3)
|
|
|
16
|
|
|
213
|
|
|
(1)
|
|
|
50
|
|
|
811
|
|
|
(4)
|
|
State and municipal obligations
|
|
5
|
|
|
23
|
|
|
—
|
|
|
4
|
|
|
57
|
|
|
(2)
|
|
|
9
|
|
|
80
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds and obligations
|
|
1
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
15
|
|
|
(2)
|
|
|
11
|
|
|
15
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
255
|
|
|
$
|
6,637
|
|
|
$
|
(17)
|
|
|
202
|
|
|
$
|
1,936
|
|
|
$
|
(20)
|
|
|
457
|
|
|
$
|
8,573
|
|
|
$
|
(37)
|
|
As part of the Company’s ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities during the twelve months ended December 31, 2020 is primarily attributable to lower interest rates as well as credit spread tightening. Consistent with the accounting policy described in Note 2, the Company did not recognize any of the total unrealized losses in earnings because it was determined that such losses were due to non-credit factors. The Company does not intend to sell these securities and does not believe that it is more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. As of December 31, 2020, 92% of the total of Available-for-Sale securities with gross unrealized losses were considered investment grade.
The following table presents a rollforward of the allowance for credit losses on Available-for-Sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
Asset Backed Securities
|
|
Total
|
(in millions)
|
Balance, January 1, 2020 (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions for which credit losses were not previously recorded
|
13
|
|
|
1
|
|
|
14
|
|
Additional increases (decreases) on securities that had an allowance recorded in a previous period
|
(3)
|
|
|
—
|
|
|
(3)
|
|
Balance, December 31, 2020
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
11
|
|
(1) Prior to January 1, 2020, credit losses on Available-for-Sale securities were not recorded in an allowance but were recorded as a reduction of the book value of the security if the security was other-than-temporarily impaired. There is no adoption impact due to the prospective transition for Available-for-Sale securities.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Gross realized investment gains
|
$
|
25
|
|
|
$
|
30
|
|
|
$
|
18
|
|
Gross realized investment losses
|
(3)
|
|
|
(14)
|
|
|
(9)
|
|
Credit losses
|
(11)
|
|
|
(22)
|
|
|
—
|
|
Total
|
$
|
11
|
|
|
$
|
(6)
|
|
|
$
|
9
|
|
Credit losses for the year ended December 31, 2020 primarily related to credit losses on corporate debt securities, primarily in the oil and gas industry. Other-than-temporary impairments for the year ended December 31, 2019 primarily related to corporate debt securities and investments held by AAH. The Company recognized an impairment of $5 million in the first quarter of 2019 on investments held by AAH as the Company no longer intended to hold the securities until the recovery of fair value to book value.
See Note 21 for a rollforward of net unrealized investment gains (losses) included in AOCI.
Available-for-Sale securities by contractual maturity as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
(in millions)
|
Due within one year
|
$
|
2,569
|
|
|
$
|
2,584
|
|
Due after one year through five years
|
4,717
|
|
|
5,057
|
|
Due after five years through 10 years
|
2,908
|
|
|
3,213
|
|
Due after 10 years
|
4,412
|
|
|
5,983
|
|
|
14,606
|
|
|
16,837
|
|
Residential mortgage backed securities
|
9,845
|
|
|
10,029
|
|
Commercial mortgage backed securities
|
5,867
|
|
|
6,088
|
|
Asset backed securities
|
3,283
|
|
|
3,329
|
|
Total
|
$
|
33,601
|
|
|
$
|
36,283
|
|
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities, commercial mortgage backed securities and asset backed securities are not due at a single maturity date. As such, these securities were not included in the maturities distribution.
7. Financing Receivables
Financing receivables are comprised of commercial loans, consumer loans, and the deposit receivable. See Note 2 for information regarding the Company’s accounting policies related to financing receivables and the allowance for credit losses.
Allowance for Credit Losses
The following tables present a rollforward of the allowance for credit losses for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans
|
|
Consumer Loans
|
|
Total
|
(in millions)
|
Balance, December 31, 2019 (1)
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
Cumulative effect of adoption of current expected credit losses guidance
|
2
|
|
|
3
|
|
|
5
|
|
Balance, January 1, 2020
|
53
|
|
|
3
|
|
|
56
|
|
Provisions
|
19
|
|
|
2
|
|
|
21
|
|
Charge-offs
|
(6)
|
|
|
(3)
|
|
|
(9)
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
$
|
66
|
|
|
$
|
2
|
|
|
$
|
68
|
|
(1) Prior to January 1, 2020, the allowance for credit losses was based on an incurred loss model that did not require estimating expected credit losses over the expected life of the asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
(in millions)
|
Balance at January 1
|
$
|
49
|
|
|
$
|
49
|
|
|
|
|
|
Provisions
|
5
|
|
|
6
|
|
|
|
|
|
Charge-offs
|
(4)
|
|
|
(6)
|
|
|
|
|
|
Recoveries of amounts previously written off
|
1
|
|
|
—
|
|
|
|
|
|
Balance at December 31
|
$
|
51
|
|
|
$
|
49
|
|
|
|
|
|
Accrued interest on commercial loans was $16 million and $14 million as of December 31, 2020 and 2019, respectively, and is recorded in receivables on the Consolidated Balance Sheets and excluded from the amortized cost basis of commercial loans.
Purchases and Sales
During the years ended December 31, 2020, 2019 and 2018, the Company purchased $173 million, $162 million and $221 million, respectively, of syndicated loans, and sold $17 million, $54 million and $51 million, respectively, of syndicated loans.
During the year ended December 31, 2020, the Company purchased $22 million of residential loans from a third-party originator shortly after origination. The allowance for credit losses for residential mortgage loans was not material as of December 31, 2020.
During the year ended December 31, 2020, the Company acquired $224 million of pledged asset lines of credit that are a 50% participation interest with a third party bank.
The Company has not acquired any loans with deteriorated credit quality as of the acquisition date.
Credit Quality Information
Nonperforming loans were $21 million and $25 million as of December 31, 2020 and 2019, respectively. All other loans were considered to be performing.
Commercial Loans
Commercial Mortgage Loans
The Company reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. Loan-to-value ratio is the primary credit quality indicator included in this review. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates when credit risk changes. Commercial mortgage loans which management has assigned its highest risk rating were less than 1% of total commercial mortgage loans as of both December 31, 2020 and 2019. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. Total commercial mortgage loan modifications in 2020 due to the COVID-19 pandemic consisted of 93 loans with a total unpaid balance of $369 million. Modifications primarily consisted of short-term forbearance and interest only payments. As of December 31, 2020, there was one loan with interest only payments with an unpaid balance of $10 million. All other loans returned to their normal payment schedules. Total commercial mortgage loans past due were nil as of December 31, 2020 and 2019, respectively.
The table below presents the amortized cost basis of commercial mortgage loans as of December 31, 2020 by the year of origination and loan-to-value ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratio
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
|
(in millions)
|
> 100%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
12
|
|
80% - 100%
|
|
15
|
|
|
16
|
|
|
12
|
|
|
3
|
|
|
7
|
|
|
15
|
|
|
68
|
|
60% - 80%
|
|
89
|
|
|
166
|
|
|
27
|
|
|
32
|
|
|
46
|
|
|
144
|
|
|
504
|
|
40% - 60%
|
|
23
|
|
|
57
|
|
|
74
|
|
|
155
|
|
|
113
|
|
|
551
|
|
|
973
|
|
< 40%
|
|
7
|
|
|
23
|
|
|
80
|
|
|
99
|
|
|
64
|
|
|
895
|
|
|
1,168
|
|
Total
|
|
$
|
134
|
|
|
$
|
262
|
|
|
$
|
195
|
|
|
$
|
289
|
|
|
$
|
230
|
|
|
$
|
1,615
|
|
|
$
|
2,725
|
|
Loan-to-value ratio is based on income and expense data provided by borrowers at least annually and long-term capitalization rate assumptions based on property type.
In addition, the Company reviews the concentrations of credit risk by region and property type. Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Percentage
|
December 31,
|
December 31,
|
2020
|
|
2019
|
2020
|
|
2019
|
(in millions)
|
|
|
|
East North Central
|
$
|
259
|
|
|
$
|
239
|
|
|
10
|
%
|
|
9
|
%
|
East South Central
|
115
|
|
|
121
|
|
|
4
|
|
|
4
|
|
Middle Atlantic
|
178
|
|
|
182
|
|
|
7
|
|
|
6
|
|
Mountain
|
247
|
|
|
251
|
|
|
9
|
|
|
9
|
|
New England
|
54
|
|
|
54
|
|
|
2
|
|
|
2
|
|
Pacific
|
825
|
|
|
831
|
|
|
30
|
|
|
30
|
|
South Atlantic
|
681
|
|
|
723
|
|
|
25
|
|
|
26
|
|
West North Central
|
198
|
|
|
214
|
|
|
7
|
|
|
8
|
|
West South Central
|
168
|
|
|
182
|
|
|
6
|
|
|
6
|
|
|
2,725
|
|
|
2,797
|
|
|
100
|
%
|
|
100
|
%
|
Less: allowance for loan losses
|
29
|
|
|
19
|
|
|
|
Total
|
$
|
2,696
|
|
|
$
|
2,778
|
|
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Percentage
|
December 31,
|
|
December 31,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(in millions)
|
|
|
|
|
Apartments
|
$
|
713
|
|
|
$
|
692
|
|
|
26
|
%
|
|
25
|
%
|
Hotel
|
50
|
|
|
51
|
|
|
2
|
|
|
2
|
|
Industrial
|
427
|
|
|
429
|
|
|
16
|
|
|
15
|
|
Mixed use
|
87
|
|
|
78
|
|
|
3
|
|
|
3
|
|
Office
|
372
|
|
|
419
|
|
|
14
|
|
|
15
|
|
Retail
|
881
|
|
|
931
|
|
|
32
|
|
|
33
|
|
Other
|
195
|
|
|
197
|
|
|
7
|
|
|
7
|
|
|
2,725
|
|
|
2,797
|
|
|
100
|
%
|
|
100
|
%
|
Less: allowance for loan losses
|
29
|
|
|
19
|
|
|
|
Total
|
$
|
2,696
|
|
|
$
|
2,778
|
|
Syndicated Loans
The recorded investment in syndicated loans as of December 31, 2020 and 2019 was $595 million and $543 million, respectively. The Company’s syndicated loan portfolio is diversified across industries and issuers. Total syndicated loans past due were $3 million and $1 million as of December 31, 2020 and 2019, respectively. The Company assigns an internal risk rating to each syndicated loan in its portfolio ranging from 1 through 5, with 5 reflecting the lowest quality.
The table below present the amortized cost basis of syndicated loans as of December 31, 2020 by origination year and internal risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Risk Rating
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
|
(in millions)
|
Risk 5
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Risk 4
|
|
—
|
|
|
—
|
|
|
4
|
|
|
9
|
|
|
—
|
|
|
10
|
|
|
23
|
|
Risk 3
|
|
—
|
|
|
9
|
|
|
8
|
|
|
25
|
|
|
13
|
|
|
25
|
|
|
80
|
|
Risk 2
|
|
30
|
|
|
57
|
|
|
62
|
|
|
69
|
|
|
14
|
|
|
41
|
|
|
273
|
|
Risk 1
|
|
17
|
|
|
32
|
|
|
47
|
|
|
58
|
|
|
22
|
|
|
40
|
|
|
216
|
|
Total
|
|
$
|
47
|
|
|
$
|
98
|
|
|
$
|
121
|
|
|
$
|
161
|
|
|
$
|
49
|
|
|
$
|
119
|
|
|
$
|
595
|
|
Financial Advisor Loans
The Company offers loans to financial advisors for transitional cost assistance. Repayment of the loan is highly dependent on the retention of the financial advisor. In the event a financial advisor is no longer affiliated with the Company, any unpaid balances become immediately due. Accordingly, the primary risk factor for advisor loans is termination status. The allowance for credit losses related to loans to advisors that have terminated their relationship with the Company was $7 million and $10 million as of December 31, 2020 and December 31, 2019, respectively.
The table below presents the amortized cost basis of advisor loans as of December 31, 2020 by origination year and termination status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Status
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
|
(in millions)
|
Active
|
|
$
|
171
|
|
|
$
|
137
|
|
|
$
|
101
|
|
|
$
|
127
|
|
|
$
|
83
|
|
|
$
|
86
|
|
|
$
|
705
|
|
Terminated
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
8
|
|
|
10
|
|
Total
|
|
$
|
171
|
|
|
$
|
137
|
|
|
$
|
101
|
|
|
$
|
128
|
|
|
$
|
84
|
|
|
$
|
94
|
|
|
$
|
715
|
|
Consumer Loans
Credit Card Receivables
The credit cards are co-branded with Ameriprise Financial, Inc. and issued to the Company’s customers by a third party. FICO scores and delinquency rates are the primary credit quality indicators for the credit card portfolio. Delinquency rates are measured as based on the number of days past due. Credit card receivables over 30 days past due were 1% and 2% as of December 31, 2020 and December 31, 2019, respectively.
The table below presents the amortized cost basis of credit card receivables by FICO score as of December 31, 2020:
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Total
|
(in millions)
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> 800
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$
|
28
|
|
750 - 799
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23
|
|
700 - 749
|
25
|
|
650 - 699
|
15
|
|
< 650
|
5
|
|
Total
|
$
|
96
|
|
Policy Loans
Policy loans do not exceed the cash surrender value at origination. As there is minimal risk of loss related to policy loans, there is no allowance for credit losses.
Margin Loans
The Company monitors collateral supporting margin loans and requests additional collateral when necessary in order to mitigate the risk of loss. As of both December 31, 2020 and December 31, 2019, the allowance for credit losses on margin loans was not material.
Pledged Asset Lines of Credit
During the year ended December 31, 2020, the Company acquired a $224 million interest in an existing portfolio of brokerage client pledged asset lines of credit. The Company monitors collateral supporting pledged assets lines of credit and requests additional collateral when necessary in order to mitigate the risk of loss. As of December 31, 2020, there was no allowance for credit losses on pledged asset lines of credit.
Deposit Receivable
The deposit receivable was $1.4 billion and $1.5 billion as of December 31, 2020 and 2019. The deposit receivable is fully collateralized by the fair value of the assets held in a trust. Based on management’s evaluation of the nature of the underlying assets and the potential for changes in the collateral value, the Company did not have an allowance for credit losses for the deposit receivable as of both December 31, 2020 and 2019.
Troubled Debt Restructurings
There were no loans accounted for as a troubled debt restructuring by the Company during the years ended December 31, 2020, 2019 and 2018. There are no commitments to lend additional funds to borrowers whose loans have been restructured.
8. Reinsurance
The Company reinsures a portion of the insurance risks associated with its traditional life, DI and LTC insurance products through reinsurance agreements with unaffiliated reinsurance companies. Reinsurance contracts do not relieve the Company from its primary obligation to policyholders.
The Company generally reinsures 90% of the death benefit liability for new term life insurance policies beginning in 2001 and new individual UL and VUL insurance policies beginning in 2002. Policies issued prior to these dates are not subject to these same reinsurance levels.
However, for IUL policies issued after September 1, 2013 and VUL policies issued after January 1, 2014, the Company generally reinsures 50% of the death benefit liability. Similarly, the Company reinsures 50% of the death benefit and morbidity liabilities related to its UL product with LTC benefits.
The maximum amount of life insurance risk the Company will retain is $10 million on a single life and $10 million on any flexible premium survivorship life policy; however, reinsurance agreements are in place such that retaining more than $1.5 million of insurance risk on a single life or a flexible premium survivorship life policy is very unusual. Risk on UL and VUL policies is reinsured on a yearly renewable term basis. Risk on most term life policies starting in 2001 is reinsured on a coinsurance basis, a type of reinsurance in which the reinsurer participates proportionally in all material risks and premiums associated with a policy.
For existing LTC policies, the Company has continued ceding 50% of the risk on a coinsurance basis to subsidiaries of Genworth Financial, Inc. (“Genworth”) and retains the remaining risk. For RiverSource Life of NY, this reinsurance arrangement applies for 1996 and later issues only. Under these agreements, the Company has the right, but never the obligation, to recapture some, or all, of the risk ceded to Genworth.
Generally, the Company retains at most $5,000 per month of risk per life on DI policies sold on policy forms introduced in most states starting in 2007 and reinsures the remainder of the risk on a coinsurance basis with unaffiliated reinsurance companies. The Company retains all risk for new claims on DI contracts sold on other policy forms introduced prior to 2007. The Company also retains all risk on accidental death benefit claims and substantially all risk associated with waiver of premium provisions.
As of December 31, 2020 and 2019, traditional life and UL insurance policies in force were $195.7 billion and $195.1 billion, respectively, of which $143.6 billion and $142.8 billion as of December 31, 2020 and 2019 were reinsured at the respective year ends.
The effect of reinsurance on premiums for the Company’s traditional long-duration contracts was as follows:
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|
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|
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Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Direct premiums
|
$
|
565
|
|
|
$
|
621
|
|
|
$
|
621
|
|
Reinsurance ceded
|
(224)
|
|
|
(224)
|
|
|
(225)
|
|
Net premiums
|
$
|
341
|
|
|
$
|
397
|
|
|
$
|
396
|
|
Cost of insurance and administrative charges for non-traditional long-duration products are reflected in premiums, policy and contract charges and were net of reinsurance ceded of $140 million, $132 million and $126 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The effect of reinsurance on premiums for the Company’s short-duration contracts was as follows:
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|
|
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|
|
|
|
Years Ended December 31,
|
2019 (1)
|
|
2018
|
(in millions)
|
Written premiums
|
|
|
|
Direct
|
$
|
864
|
|
|
$
|
1,101
|
|
Ceded
|
(23)
|
|
|
(55)
|
|
Total net written premiums
|
$
|
841
|
|
|
$
|
1,046
|
|
Earned premiums
|
|
|
|
Direct
|
$
|
841
|
|
|
$
|
1,124
|
|
Ceded
|
(24)
|
|
|
(94)
|
|
Total net earned premiums
|
$
|
817
|
|
|
$
|
1,030
|
|
(1) 2019 amounts include AAH premiums as of September 30, 2019 prior to the sale.
The amount of claims recovered through reinsurance on all contracts was $400 million, $407 million and $402 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Receivables included $3.4 billion and $3.2 billion of reinsurance recoverables as of December 31, 2020 and 2019, respectively, including $2.7 billion and $2.5 billion related to LTC risk ceded to Genworth, respectively.
Policyholder account balances, future policy benefits and claims include $440 million and $466 million related to previously assumed reinsurance arrangements as of December 31, 2020 and 2019, respectively.
9. Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are instead subject to impairment tests. There were $2 million and $5 million of impairments of indefinite-lived intangible assets recorded for the years ended December 31, 2020 and 2019. There was no impairment for the year ended December 31, 2018.
The changes in the carrying amount of goodwill reported in the Company’s main operating segments were as follows:
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|
|
|
|
Advice & Wealth Management
|
|
Asset
Management
|
|
Retirement & Protection Solutions
|
|
Consolidated
|
(in millions)
|
Balance at January 1, 2019
|
$
|
279
|
|
|
$
|
788
|
|
|
$
|
91
|
|
|
$
|
1,158
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Other adjustments
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Balance at December 31, 2019
|
279
|
|
|
797
|
|
|
91
|
|
|
1,167
|
|
Foreign currency translation
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Other adjustments
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Balance at December 31, 2020
|
$
|
279
|
|
|
$
|
806
|
|
|
$
|
91
|
|
|
$
|
1,176
|
|
As of December 31, 2020 and 2019, the carrying amount of indefinite-lived intangible assets included $640 million and $641 million, respectively, of investment management contracts. As of both December 31, 2020 and 2019, the carrying amount of indefinite-lived intangible assets included $69 million of trade names.
Definite-lived intangible assets consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
(in millions)
|
Customer relationships
|
$
|
193
|
|
|
$
|
(155)
|
|
|
$
|
38
|
|
|
$
|
192
|
|
|
$
|
(146)
|
|
|
$
|
46
|
|
Contracts
|
223
|
|
|
(211)
|
|
|
12
|
|
|
219
|
|
|
(202)
|
|
|
17
|
|
Other
|
226
|
|
|
(168)
|
|
|
58
|
|
|
197
|
|
|
(147)
|
|
|
50
|
|
Total
|
$
|
642
|
|
|
$
|
(534)
|
|
|
$
|
108
|
|
|
$
|
608
|
|
|
$
|
(495)
|
|
|
$
|
113
|
|
Definite-lived intangible assets acquired during the year ended December 31, 2020 were $25 million with a weighted average amortization period of 5 years. The aggregate amortization expense for definite-lived intangible assets during the years ended December 31, 2020, 2019 and 2018 was $31 million, $37 million and $30 million, respectively. In 2020, 2019 and 2018, the Company did not record any impairment charges on definite-lived intangible assets.
Estimated intangible amortization expense as of December 31, 2020 for the next five years is as follows:
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|
|
|
|
|
|
(in millions)
|
2021
|
$
|
32
|
|
2022
|
28
|
|
2023
|
24
|
|
2024
|
11
|
|
2025
|
7
|
|
10. Deferred Acquisition Costs and Deferred Sales Inducement Costs
Management updates market-related inputs on a quarterly basis and implements model changes related to the living benefit valuation. In addition, management conducts its annual review of life insurance and annuity valuation assumptions relative to current experience and management expectations including modeling changes. These aforementioned changes are collectively referred to as unlocking. The impact of unlocking to DAC for the year ended December 31, 2020 primarily reflected updates to interest rate assumptions, partially offset by a favorable impact from lower surrenders on annuity contracts with a withdrawal benefit. The impact of unlocking to DAC for the year ended December 31, 2019 primarily reflected updated mortality assumptions on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by an unfavorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits. The impact of unlocking to DAC for the year ended December 31, 2018 primarily reflected improved persistency and mortality on UL and VUL insurance products and a correction related to a variable annuity model assumption partially offset by updates to market-related inputs to the living benefit valuation.
The balances of and changes in DAC were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Balance at January 1
|
$
|
2,698
|
|
|
$
|
2,776
|
|
|
$
|
2,676
|
|
Capitalization of acquisition costs
|
228
|
|
|
291
|
|
|
318
|
|
Amortization
|
(177)
|
|
|
(165)
|
|
|
(355)
|
|
Amortization, impact of valuation assumptions review
|
(100)
|
|
|
(14)
|
|
|
33
|
|
Impact of change in net unrealized (gains) losses on securities
|
(117)
|
|
|
(175)
|
|
|
104
|
|
Disposal of business
|
—
|
|
|
(15)
|
|
|
—
|
|
Balance at December 31
|
$
|
2,532
|
|
|
$
|
2,698
|
|
|
$
|
2,776
|
|
The balances of and changes in DSIC, which is included in other assets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(in millions)
|
Balance at January 1
|
$
|
218
|
|
|
$
|
251
|
|
|
$
|
276
|
|
Capitalization of sales inducement costs
|
1
|
|
|
1
|
|
|
2
|
|
Amortization
|
(13)
|
|
|
(15)
|
|
|
(43)
|
|
Amortization, impact of valuation assumptions review
|
(16)
|
|
|
—
|
|
|
—
|
|
Impact of change in net unrealized (gains) losses on securities
|
(1)
|
|
|
(19)
|
|
|
16
|
|
Balance at December 31
|
$
|
189
|
|
|
$
|
218
|
|
|
$
|
251
|
|
11. Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities
Policyholder account balances, future policy benefits and claims consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Policyholder account balances
|
|
|
|
Fixed annuities(1)
|
$
|
8,531
|
|
|
$
|
8,909
|
|
Variable annuity fixed sub-accounts
|
5,104
|
|
|
5,103
|
|
UL/VUL insurance
|
3,122
|
|
|
3,110
|
|
IUL insurance
|
2,269
|
|
|
2,025
|
|
Structured variable annuities
|
1,371
|
|
|
—
|
|
Other life insurance
|
605
|
|
|
646
|
|
Total policyholder account balances
|
21,002
|
|
|
19,793
|
|
|
|
|
|
Future policy benefits
|
|
|
|
Variable annuity GMWB
|
3,049
|
|
|
1,462
|
|
Variable annuity GMAB(2)
|
1
|
|
|
(39)
|
|
Other annuity liabilities
|
211
|
|
|
139
|
|
Fixed annuity life contingent liabilities
|
1,370
|
|
|
1,444
|
|
Life and DI insurance
|
1,187
|
|
|
1,212
|
|
LTC insurance
|
5,722
|
|
|
5,302
|
|
UL/VUL and other life insurance additional liabilities
|
1,259
|
|
|
1,033
|
|
Total future policy benefits
|
12,799
|
|
|
10,553
|
|
Policy claims and other policyholders’ funds
|
191
|
|
|
166
|
|
Total policyholder account balances, future policy benefits and claims
|
$
|
33,992
|
|
|
$
|
30,512
|
|
(1) Includes fixed deferred annuities, non-life contingent fixed payout annuities and fixed deferred indexed annuity host contracts.
(2) Includes the fair value of GMAB embedded derivatives that was a net asset as of both December 31, 2020 and 2019 reported as a contra liability.
Fixed Annuities
Fixed annuities include deferred, payout and fixed deferred indexed annuity contracts. In 2020, the Company discontinued sales of fixed deferred and fixed deferred indexed annuities.
Deferred contracts offer a guaranteed minimum rate of interest and security of the principal invested. Payout contracts guarantee a fixed income payment for life or the term of the contract. Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 2.27% to 9.38% as of December 31, 2020, depending on year of issue, with an average rate of approximately 3.7%. The Company generally invests the proceeds from the annuity contracts in fixed rate securities.
The Company’s equity indexed annuity (“EIA”) product is a single premium fixed deferred annuity. The Company discontinued new sales of EIAs in 2007. The contract was issued with an initial term of seven years and interest earnings are linked to the performance of the S&P 500® Index. This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders. The Company generally invests the proceeds from the annuity contracts in fixed rate securities and hedges the equity risk with derivative instruments.
The Company’s fixed index annuity product is a fixed annuity that includes an indexed account. The rate of interest credited above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the specific index for the indexed account (subject to a cap). The Company previously offered S&P 500® Index and MSCI® EAFE Index account options. Both options offered two crediting durations, one-year and two-year. The contractholder could allocate all or a portion of the policy value to a fixed or indexed account. The portion of the policy allocated to the indexed account is accounted for as an embedded derivative. The Company hedges the interest credited rate including equity and interest rate risk related to the indexed account with derivative instruments. The contractholder could choose to add a GMWB for life rider for an additional fee.
See Note 17 for additional information regarding the Company’s derivative instruments used to hedge the risk related to indexed annuities.
Variable Annuities
Purchasers of variable annuities can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for variable annuity contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders.
Most of the variable annuity contracts currently issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB and GGU provisions. The Company previously offered contracts with GMIB provisions. See Note 2 and Note 12 for additional information regarding the Company’s variable annuity guarantees. The Company does not currently hedge its risk under the GGU and GMIB provisions. See Note 15 and Note 17 for additional information regarding the Company’s derivative instruments used to hedge risks related to GMWB, GMAB and GMDB provisions.
Structured Variable Annuities
In 2020, the Company began offering structured variable annuities which gives contractholders the option to allocate a portion of their account value to an indexed account with the contractholder’s rate of return, which may be positive or negative, tied to selected indices.
Insurance Liabilities
UL/VUL is the largest group of insurance policies written by the Company. Purchasers of UL accumulate cash value that increases by a fixed interest rate. Purchasers of VUL can select from a variety of investment options and can elect to allocate a portion to a fixed account or a separate account. A vast majority of the premiums received for VUL policies are held in separate accounts where the assets are held for the exclusive benefit of those policyholders.
IUL is a UL policy that includes an indexed account. The rate of credited interest above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the specific index for the indexed account (subject to a cap and floor). The Company offers an S&P 500® Index account option and a blended multi-index account option comprised of the S&P 500 Index, the MSCI® EAFE Index and the MSCI EM Index. Both options offer two crediting durations, one-year and two-year. The policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. The portion of the policy allocated to the indexed account is accounted for as an embedded derivative at fair value. The Company hedges the interest credited rate including equity and interest rate risk related to the indexed account with derivative instruments. See Note 17 for additional information regarding the Company’s derivative instruments used to hedge the risk related to IUL.
The Company also offers term life insurance as well as DI products. The Company no longer offers standalone LTC products and whole life insurance but has in force policies from prior years.
Insurance liabilities include accumulation values, incurred but not reported claims, obligations for anticipated future claims, unpaid reported claims and claim adjustment expenses.
The liability for estimates of benefits that will become payable on future claims on term life, whole life and DI policies is based on the net level premium and LTC policies is based on a gross premium valuation reflecting management’s current best estimate assumptions. Both include the anticipated interest rates earned on assets supporting the liability. Anticipated interest rates for term and whole life ranged from 2.25% to 10% as of December 31, 2020. Anticipated interest rates for DI policies ranged from 2.25% to 7.5% as of December 31, 2020 and for LTC policies ranged from 5% to 5.7% as of December 31, 2020.
The liability for unpaid reported claims on DI and LTC policies includes an estimate of the present value of obligations for continuing benefit payments. The discount rates used to calculate present values are based on average interest rates earned on assets supporting the liability for unpaid amounts and were 4.5% and 6% for DI and LTC claims, respectively, as of December 31, 2020.
Portions of the Company’s UL and VUL policies have product features that result in profits followed by losses from the insurance component of the policy. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the policy. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.
Separate Account Liabilities
Separate account liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Variable annuity
|
$
|
79,299
|
|
|
$
|
74,965
|
|
VUL insurance
|
8,226
|
|
|
7,429
|
|
Other insurance
|
31
|
|
|
31
|
|
Threadneedle investment liabilities
|
5,055
|
|
|
5,063
|
|
Total
|
$
|
92,611
|
|
|
$
|
87,488
|
|
Threadneedle Investment Liabilities
Threadneedle provides a range of unitized pooled pension funds, which invest in property, stocks, bonds and cash. The investments are selected by the clients and are based on the level of risk they are willing to assume. All investment performance, net of fees, is passed through to the investors. The value of the liabilities represents the fair value of the pooled pension funds.
12. Variable Annuity and Insurance Guarantees
The majority of the variable annuity contracts offered by the Company contain GMDB provisions. The Company also offers variable annuities with GGU, GMWB and GMAB provisions. The Company previously offered contracts containing GMIB provisions. See Note 2 and Note 11 for additional information regarding the Company’s variable annuity guarantees.
The GMDB and GGU provisions provide a specified minimum return upon death of the contractholder. The death benefit payable is the greater of (i) the contract value less any purchase payment credits subject to recapture less a pro-rata portion of any rider fees, or (ii) the GMDB provisions specified in the contract. The Company has the following primary GMDB provisions:
•Return of premium — provides purchase payments minus adjusted partial surrenders.
•Reset — provides that the value resets to the account value every sixth contract anniversary minus adjusted partial surrenders. This provision was often provided in combination with the return of premium provision and is no longer offered.
•Ratchet — provides that the value ratchets up to the maximum account value at specified anniversary intervals, plus subsequent purchase payments less adjusted partial surrenders.
The variable annuity contracts with GMWB riders typically have account values that are based on an underlying portfolio of mutual funds, the values of which fluctuate based on fund performance. At issue the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance or by a benefit credit if the contract includes this provision.
The Company has GMWB riders in force, which contain one or more of the following provisions:
•Withdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.
•Withdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).
•Withdrawals at a specified rate per year for joint contractholders while either is alive.
•Withdrawals based on performance of the contract.
•Withdrawals based on the age withdrawals begin.
•Credits are applied annually for a specified number of years to increase the guaranteed amount as long as withdrawals have not been taken.
Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or a specified percentage of the highest anniversary value, adjusted for withdrawals. If the contract value is less than the guarantee at the end of the 10-year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
Certain UL policies offered by the Company provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.
The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuity Guarantees by Benefit Type (1)
|
|
December 31, 2020
|
|
December 31, 2019
|
Total Contract Value
|
Contract Value in Separate Accounts
|
Net Amount at Risk
|
|
Weighted Average Attained Age
|
Total Contract Value
|
|
Contract Value in Separate Accounts
|
Net Amount at Risk
|
|
Weighted Average Attained Age
|
|
(in millions, except age)
|
GMDB:
|
|
|
|
|
|
|
|
|
|
|
|
Return of premium
|
$
|
66,874
|
|
$
|
64,932
|
|
$
|
5
|
|
|
68
|
|
$
|
62,909
|
|
$
|
60,967
|
|
$
|
5
|
|
|
67
|
Five/six-year reset
|
8,116
|
|
5,386
|
|
6
|
|
|
68
|
|
7,983
|
|
5,263
|
|
7
|
|
|
67
|
One-year ratchet
|
6,094
|
|
5,763
|
|
8
|
|
|
71
|
|
5,935
|
|
5,600
|
|
7
|
|
|
70
|
Five-year ratchet
|
1,436
|
|
1,381
|
|
—
|
|
|
67
|
|
1,396
|
|
1,340
|
|
—
|
|
|
66
|
Other
|
1,261
|
|
1,243
|
|
45
|
|
|
73
|
|
1,192
|
|
1,174
|
|
65
|
|
|
73
|
Total — GMDB
|
$
|
83,781
|
|
$
|
78,705
|
|
$
|
64
|
|
|
68
|
|
$
|
79,415
|
|
$
|
74,344
|
|
$
|
84
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
GGU death benefit
|
$
|
1,183
|
|
$
|
1,126
|
|
$
|
162
|
|
|
71
|
|
$
|
1,115
|
|
$
|
1,063
|
|
$
|
133
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB
|
$
|
187
|
|
$
|
173
|
|
$
|
6
|
|
|
71
|
|
$
|
186
|
|
$
|
172
|
|
$
|
6
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB:
|
|
|
|
|
|
|
|
|
|
|
|
GMWB
|
$
|
1,972
|
|
$
|
1,967
|
|
$
|
1
|
|
|
74
|
|
$
|
1,999
|
|
$
|
1,993
|
|
$
|
1
|
|
|
73
|
GMWB for life
|
50,142
|
|
50,057
|
|
185
|
|
|
69
|
|
46,799
|
|
46,691
|
|
272
|
|
|
68
|
Total — GMWB
|
$
|
52,114
|
|
$
|
52,024
|
|
$
|
186
|
|
|
69
|
|
$
|
48,798
|
|
$
|
48,684
|
|
$
|
273
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAB
|
$
|
2,291
|
|
$
|
2,291
|
|
$
|
—
|
|
|
61
|
|
$
|
2,528
|
|
$
|
2,524
|
|
$
|
—
|
|
|
60
|
(1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.
The net amount at risk for GMDB, GGU and GMAB is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB is defined as the greater of the present value of the minimum guaranteed annuity payments less the current contract value or zero. The net amount at risk for GMWB is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero.
The following table provides information related to insurance guarantees for which the Company has established additional liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Net Amount at Risk
|
|
Weighted Average Attained Age
|
Net Amount at Risk
|
|
Weighted Average Attained Age
|
(in millions, except age)
|
UL secondary guarantees
|
$
|
6,587
|
|
|
67
|
|
$
|
6,550
|
|
|
67
|
The net amount at risk for UL secondary guarantees is defined as the current guaranteed death benefit amount in excess of the current policyholder account balance.
Changes in additional liabilities (contra liabilities) for variable annuity and insurance guarantees were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB & GGU
|
|
GMIB
|
|
GMWB (1)
|
|
GMAB (1)
|
|
UL
|
(in millions)
|
Balance at January 1, 2018
|
$
|
17
|
|
|
$
|
6
|
|
|
$
|
463
|
|
|
$
|
(80)
|
|
|
$
|
489
|
|
Incurred claims
|
8
|
|
|
2
|
|
|
412
|
|
|
61
|
|
|
201
|
|
Paid claims
|
(6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31)
|
|
Balance at December 31, 2018
|
19
|
|
|
8
|
|
|
875
|
|
|
(19)
|
|
|
659
|
|
Incurred claims
|
2
|
|
|
(1)
|
|
|
587
|
|
|
(20)
|
|
|
141
|
|
Paid claims
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42)
|
|
Balance at December 31, 2019
|
16
|
|
|
7
|
|
|
1,462
|
|
|
(39)
|
|
|
758
|
|
Incurred claims
|
15
|
|
|
—
|
|
|
1,587
|
|
|
40
|
|
|
209
|
|
Paid claims
|
(7)
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(51)
|
|
Balance at December 31, 2020
|
$
|
24
|
|
|
$
|
6
|
|
|
$
|
3,049
|
|
|
$
|
1
|
|
|
$
|
916
|
|
(1) The incurred claims for GMWB and GMAB include the change in the fair value of the liabilities (contra liabilities) less paid claims.
The liabilities for guaranteed benefits are supported by general account assets.
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Mutual funds:
|
|
|
|
Equity
|
$
|
45,947
|
|
|
$
|
44,739
|
|
Bond
|
26,073
|
|
|
23,374
|
|
Other
|
6,911
|
|
|
6,471
|
|
Total mutual funds
|
$
|
78,931
|
|
|
$
|
74,584
|
|
No gains or losses were recognized on assets transferred to separate accounts for the years ended December 31, 2020, 2019 and 2018.
13. Customer Deposits
Customer deposits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2020
|
|
2019
|
(in millions)
|
Fixed rate certificates
|
$
|
6,341
|
|
|
$
|
7,032
|
|
Stock market certificates
|
389
|
|
|
456
|
|
Stock market embedded derivative
|
8
|
|
|
7
|
|
Other
|
22
|
|
|
27
|
|
Less: accrued interest classified in other liabilities
|
(10)
|
|
|
(21)
|
|
Total investment certificate reserves
|
6,750
|
|
|
7,501
|
|
Banking and brokerage deposits
|
10,891
|
|
|
6,929
|
|
Total
|
$
|
17,641
|
|
|
$
|
14,430
|
|
Investment Certificates
The Company offers fixed rate investment certificates primarily in amounts ranging from $1,000 to $2 million with interest crediting rate terms ranging from 3 to 36 months. Investment certificates may be purchased either with a lump sum payment or installment payments. Certificate owners are entitled to receive a fixed sum at either maturity or upon demand depending on the type of certificate. Payments from certificate owners are credited to investment certificate reserves, which generally accumulate interest at specified percentage rates. Certain investment certificates allow for a surrender charge on premature surrenders. Reserves for certificates that do not allow for a surrender charge were $3.2 billion as of December 31, 2020. The Company generally invests the proceeds from investment certificates in fixed and variable rate securities.
Certain investment certificate products have returns tied to the performance of equity markets. The Company guarantees the principal for purchasers who hold the certificate for the full term and purchasers may participate in increases in the stock market based on the S&P 500® Index, up to a maximum return. Purchasers can choose 100% participation in the market index up to the cap or 25% participation plus fixed interest with a combined total up to the cap. Current first term certificates have maximum returns of 1.10% to 7.50%, depending on the term length. The equity component of these certificates is considered an embedded derivative and is accounted for separately. See Note 17 for additional information about derivative instruments used to economically hedge the equity price risk related to the Company’s stock market certificates.
Banking and Brokerage Deposits
Banking and brokerage deposits are amounts due on demand to customers related to free credit balances, funds deposited by customers and funds accruing to customers as a result of trades or contracts. The Company pays interest on certain customer credit balances and the interest is included in banking and deposit interest expense.
14. Debt
The balances and the stated interest rates of outstanding debt of Ameriprise Financial were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance
|
|
Stated Interest Rate
|
December 31,
|
December 31,
|
2020
|
|
2019
|
2020
|
|
2019
|
(in millions)
|
|
Long-term debt:
|
|
|
|
|
|
|
|
Senior notes due 2020
|
$
|
—
|
|
|
$
|
750
|
|
|
—
|
%
|
|
5.3
|
%
|
Senior notes due 2022
|
500
|
|
|
500
|
|
|
3.0
|
|
|
3.0
|
|
Senior notes due 2023
|
750
|
|
|
750
|
|
|
4.0
|
|
|
4.0
|
|
Senior notes due 2024
|
550
|
|
|
550
|
|
|
3.7
|
|
|
3.7
|
|
Senior notes due 2025
|
500
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
Senior notes due 2026
|
500
|
|
|
500
|
|
|
2.9
|
|
|
2.9
|
|
Finance lease liabilities
|
44
|
|
|
57
|
|
|
N/A
|
|
N/A
|
Other (1)
|
(13)
|
|
|
(10)
|
|
|
N/A
|
|
N/A
|
Total long-term debt
|
2,831
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
Federal Home Loan Bank (“FHLB”) advances
|
200
|
|
|
201
|
|
|
0.4
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,031
|
|
|
$
|
3,298
|
|
|
|
|
|
N/A Not Applicable
(1) Amounts include adjustments for fair value hedges on the Company’s long-term debt and unamortized discount and debt issuance costs. See Note 17 for information on the Company’s fair value hedges.
Long-Term Debt
On April 2, 2020, the Company issued $500 million of unsecured 3.0% senior notes due April 2, 2025 and incurred debt issuance costs of $4 million. Interest payments are due semi-annually in arrears on April 2 and October 2, commencing on October 2, 2020.
The Company repaid $750 million principal amount of its 5.3% senior notes at maturity on March 16, 2020.
The Company’s senior notes due 2022, 2023, 2024, 2025 and 2026 may be redeemed, in whole or in part, at any time prior to maturity at a price equal to the greater of the principal amount and the present value of remaining scheduled payments, discounted to the redemption date, plus accrued interest.
Short-term Borrowings
The Company’s life insurance and bank subsidiaries are members of the FHLB of Des Moines which provides access to collateralized borrowings. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities and residential mortgage backed securities as collateral to access these borrowings. The fair value of the securities pledged is recorded in investments and was $1.3 billion and $905 million, of commercial mortgage backed securities, and $604 million and $184 million, of residential mortgage backed securities, as of December 31, 2020 and 2019, respectively. The remaining maturity of outstanding FHLB advances was less than three months as of December 31, 2020 and less than two months as of December 31, 2019. The stated interest rate of the FHLB advances is a weighted average annualized interest rate on the outstanding borrowings as of the balance sheet date.
On October 12, 2017, the Company entered into an amended and restated credit agreement that provides for an unsecured revolving credit facility of up to $750 million that expires in October 2022. Under the terms of the credit agreement for the facility, the Company may increase the amount of this facility up to $1.0 billion upon satisfaction of certain approval requirements. As of both December 31, 2020 and 2019, the Company had no borrowings outstanding and $1 million of letters of credit issued against these facilities. The Company’s credit facility contains various administrative, reporting, legal and financial covenants. The Company was in compliance with all such covenants as of both December 31, 2020 and 2019.
15. Fair Values of Assets and Liabilities
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.
Valuation Hierarchy
The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
Level 2 Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The following tables present the balances of assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2,935
|
|
|
$
|
2,506
|
|
|
$
|
—
|
|
|
$
|
5,441
|
|
|
Available-for-Sale securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
12,902
|
|
|
772
|
|
|
13,674
|
|
|
Residential mortgage backed securities
|
—
|
|
|
10,020
|
|
|
9
|
|
|
10,029
|
|
|
Commercial mortgage backed securities
|
—
|
|
|
6,088
|
|
|
—
|
|
|
6,088
|
|
|
Asset backed securities
|
—
|
|
|
3,297
|
|
|
32
|
|
|
3,329
|
|
|
State and municipal obligations
|
—
|
|
|
1,384
|
|
|
—
|
|
|
1,384
|
|
|
U.S. government and agency obligations
|
1,456
|
|
|
—
|
|
|
—
|
|
|
1,456
|
|
|
Foreign government bonds and obligations
|
—
|
|
|
262
|
|
|
—
|
|
|
262
|
|
|
Other securities
|
—
|
|
|
61
|
|
|
—
|
|
|
61
|
|
|
Total Available-for-Sale securities
|
1,456
|
|
|
34,014
|
|
|
813
|
|
|
36,283
|
|
|
|
|
|
|
|
|
|
|
|
Investments at NAV
|
|
|
|
|
|
|
8
|
|
(1)
|
Trading and other securities
|
61
|
|
|
27
|
|
|
—
|
|
|
88
|
|
|
Separate account assets at NAV
|
|
|
|
|
|
|
92,611
|
|
(1)
|
Investments and cash equivalents segregated for regulatory purposes
|
600
|
|
|
—
|
|
|
—
|
|
|
600
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
1
|
|
|
1,754
|
|
|
—
|
|
|
1,755
|
|
|
Equity derivative contracts
|
408
|
|
|
3,682
|
|
|
—
|
|
|
4,090
|
|
|
Credit derivative contracts
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Foreign exchange derivative contracts
|
1
|
|
|
22
|
|
|
—
|
|
|
23
|
|
|
Total other assets
|
410
|
|
|
5,460
|
|
|
—
|
|
|
5,870
|
|
|
Total assets at fair value
|
$
|
5,462
|
|
|
$
|
42,007
|
|
|
$
|
813
|
|
|
$
|
140,901
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Policyholder account balances, future policy benefits and claims:
|
|
|
|
|
|
|
|
|
Fixed deferred indexed annuity embedded derivatives
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
49
|
|
|
$
|
52
|
|
|
IUL embedded derivatives
|
—
|
|
|
—
|
|
|
935
|
|
|
935
|
|
|
GMWB and GMAB embedded derivatives
|
—
|
|
|
—
|
|
|
2,316
|
|
|
2,316
|
|
(2)
|
Structured variable annuity embedded derivatives
|
—
|
|
|
—
|
|
|
70
|
|
|
70
|
|
|
Total policyholder account balances, future policy benefits and claims
|
—
|
|
|
3
|
|
|
3,370
|
|
|
3,373
|
|
(3)
|
Customer deposits
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
—
|
|
|
734
|
|
|
—
|
|
|
734
|
|
|
Equity derivative contracts
|
183
|
|
|
3,388
|
|
|
—
|
|
|
3,571
|
|
|
Credit derivative contracts
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Foreign exchange derivative contracts
|
2
|
|
|
4
|
|
|
—
|
|
|
6
|
|
|
Other
|
2
|
|
|
3
|
|
|
43
|
|
|
48
|
|
|
Total other liabilities
|
187
|
|
|
4,130
|
|
|
43
|
|
|
4,360
|
|
|
Total liabilities at fair value
|
$
|
187
|
|
|
$
|
4,141
|
|
|
$
|
3,413
|
|
|
$
|
7,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
267
|
|
|
$
|
2,924
|
|
|
$
|
—
|
|
|
$
|
3,191
|
|
|
Available-for-Sale securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
11,437
|
|
|
750
|
|
|
12,187
|
|
|
Residential mortgage backed securities
|
—
|
|
|
10,012
|
|
|
17
|
|
|
10,029
|
|
|
Commercial mortgage backed securities
|
—
|
|
|
5,563
|
|
|
—
|
|
|
5,563
|
|
|
Asset backed securities
|
—
|
|
|
1,987
|
|
|
19
|
|
|
2,006
|
|
|
State and municipal obligations
|
—
|
|
|
1,367
|
|
|
—
|
|
|
1,367
|
|
|
U.S. government and agency obligations
|
1,680
|
|
|
—
|
|
|
—
|
|
|
1,680
|
|
|
Foreign government bonds and obligations
|
—
|
|
|
271
|
|
|
—
|
|
|
271
|
|
|
Other securities
|
—
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
Total Available-for-Sale securities
|
1,680
|
|
|
30,663
|
|
|
786
|
|
|
33,129
|
|
|
Equity securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Investments at NAV
|
|
|
|
|
|
|
6
|
|
(1)
|
Trading and other securities
|
12
|
|
|
26
|
|
|
—
|
|
|
38
|
|
|
Separate account assets at NAV
|
|
|
|
|
|
|
87,488
|
|
(1)
|
Investments and cash equivalents segregated for regulatory purposes
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
—
|
|
|
1,455
|
|
|
—
|
|
|
1,455
|
|
|
Equity derivative contracts
|
162
|
|
|
2,722
|
|
|
—
|
|
|
2,884
|
|
|
Credit derivative contracts
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
Foreign exchange derivative contracts
|
1
|
|
|
17
|
|
|
—
|
|
|
18
|
|
|
Total other assets
|
163
|
|
|
4,198
|
|
|
—
|
|
|
4,361
|
|
|
Total assets at fair value
|
$
|
2,137
|
|
|
$
|
37,811
|
|
|
$
|
786
|
|
|
$
|
128,228
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Policyholder account balances, future policy benefits and claims:
|
|
|
|
|
|
|
|
|
Fixed deferred indexed annuity embedded derivatives
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
43
|
|
|
$
|
46
|
|
|
IUL embedded derivatives
|
—
|
|
|
—
|
|
|
881
|
|
|
881
|
|
|
GMWB and GMAB embedded derivatives
|
—
|
|
|
—
|
|
|
763
|
|
|
763
|
|
(4)
|
Total policyholder account balances, future policy benefits and claims
|
—
|
|
|
3
|
|
|
1,687
|
|
|
1,690
|
|
(5)
|
Customer deposits
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
—
|
|
|
418
|
|
|
—
|
|
|
418
|
|
|
Equity derivative contracts
|
36
|
|
|
3,062
|
|
|
—
|
|
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
|
1
|
|
|
8
|
|
|
—
|
|
|
9
|
|
|
Other
|
6
|
|
|
4
|
|
|
44
|
|
|
54
|
|
|
Total other liabilities
|
43
|
|
|
3,492
|
|
|
44
|
|
|
3,579
|
|
|
Total liabilities at fair value
|
$
|
43
|
|
|
$
|
3,509
|
|
|
$
|
1,731
|
|
|
$
|
5,283
|
|
|
(1) Amounts are comprised of certain financial instruments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy.
(2) The fair value of the GMWB and GMAB embedded derivatives included $2.4 billion of individual contracts in a liability position and $67 million of individual contracts in an asset position (recorded as a contra liability) as of December 31, 2020.
(3) The Company’s adjustment for nonperformance risk resulted in a $727 million cumulative decrease to the embedded derivatives as of December 31, 2020.
(4) The fair value of the GMWB and GMAB embedded derivatives included $981 million of individual contracts in a liability position and $218 million of individual contracts in an asset position (recorded as a contra liability) as of December 31, 2019.
(5) The Company’s adjustment for nonperformance risk resulted in a $502 million cumulative decrease to the embedded derivatives as of December 31, 2019.
The following tables provide a summary of changes in Level 3 assets and liabilities of Ameriprise Financial measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
Corporate Debt Securities
|
|
Residential Mortgage Backed Securities
|
|
|
|
Asset Backed Securities
|
|
Total
|
|
(in millions)
|
Balance, January 1, 2020
|
$
|
750
|
|
|
$
|
17
|
|
|
|
|
$
|
19
|
|
|
$
|
786
|
|
|
|
Total gains (losses) included in:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
(1)
|
|
|
—
|
|
|
|
|
—
|
|
|
(1)
|
|
(1)
|
|
Other comprehensive income (loss)
|
15
|
|
|
1
|
|
|
|
|
(1)
|
|
|
15
|
|
|
|
Purchases
|
62
|
|
|
220
|
|
|
|
|
—
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
(54)
|
|
|
—
|
|
|
|
|
—
|
|
|
(54)
|
|
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
|
|
14
|
|
|
14
|
|
|
|
Transfers out of Level 3
|
—
|
|
|
(229)
|
|
|
|
|
—
|
|
|
(229)
|
|
|
|
Balance, December 31, 2020
|
$
|
772
|
|
|
$
|
9
|
|
|
|
|
$
|
32
|
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) relating to assets held at December 31, 2020
|
$
|
(1)
|
|
|
$
|
—
|
|
|
|
|
$
|
(1)
|
|
|
$
|
(2)
|
|
(1)
|
|
Changes in unrealized gains (losses) in other comprehensive income (loss) relating to assets held at December 31, 2020
|
$
|
16
|
|
|
$
|
1
|
|
|
|
|
$
|
(1)
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder Account Balances, Future Policy Benefits and Claims
|
|
Other Liabilities
|
|
Fixed Deferred Indexed Annuity Embedded Derivatives
|
|
IUL
Embedded
Derivatives
|
|
GMWB and GMAB Embedded Derivatives
|
|
Structured Variable Annuity Embedded Derivatives
|
|
Total
|
(in millions)
|
|
Balance, January 1, 2020
|
$
|
43
|
|
|
$
|
881
|
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
1,687
|
|
|
$
|
44
|
|
|
Total (gains) losses included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
4
|
|
(2)
|
76
|
|
(2)
|
1,152
|
|
(3)
|
91
|
|
(3)
|
1,323
|
|
|
(12)
|
|
(4)
|
Issues
|
3
|
|
|
61
|
|
|
362
|
|
|
(21)
|
|
|
405
|
|
|
20
|
|
|
Settlements
|
(1)
|
|
|
(83)
|
|
|
39
|
|
|
—
|
|
|
(45)
|
|
|
(9)
|
|
|
Balance, December 31, 2020
|
$
|
49
|
|
|
$
|
935
|
|
|
$
|
2,316
|
|
|
$
|
70
|
|
|
$
|
3,370
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized (gains) losses relating to liabilities held at December 31, 2020
|
$
|
—
|
|
|
$
|
76
|
|
(2)
|
$
|
1,206
|
|
(3)
|
$
|
—
|
|
|
$
|
1,282
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
Corporate Debt Securities
|
|
Residential Mortgage Backed Securities
|
|
Commercial Mortgage Backed Securities
|
|
Asset Backed Securities
|
|
Total
|
(in millions)
|
|
Balance, January 1, 2019
|
$
|
913
|
|
|
$
|
136
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
1,075
|
|
|
Total gains (losses) included in:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
(1)
|
Other comprehensive income (loss)
|
31
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
30
|
|
|
Purchases
|
55
|
|
|
477
|
|
|
—
|
|
|
18
|
|
|
550
|
|
|
Settlements
|
(248)
|
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
(260)
|
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
|
Transfers out of Level 3
|
—
|
|
|
(584)
|
|
|
(20)
|
|
|
(18)
|
|
|
(622)
|
|
|
Balance, December 31, 2019
|
$
|
750
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) relating to assets held at December 31, 2019
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder Account Balances, Future Policy Benefits and Claims
|
|
Other Liabilities
|
|
Fixed Deferred Indexed Annuity Embedded Derivatives
|
|
IUL
Embedded
Derivatives
|
|
GMWB and GMAB Embedded Derivatives
|
|
Total
|
|
(in millions)
|
Balance, January 1, 2019
|
$
|
14
|
|
|
$
|
628
|
|
|
$
|
328
|
|
|
$
|
970
|
|
|
$
|
30
|
|
|
Total (gains) losses included in:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
8
|
|
(2)
|
209
|
|
(2)
|
80
|
|
(3)
|
297
|
|
|
(3)
|
|
(4)
|
Issues
|
21
|
|
|
113
|
|
|
361
|
|
|
495
|
|
|
18
|
|
|
Settlements
|
—
|
|
|
(69)
|
|
|
(6)
|
|
|
(75)
|
|
|
(1)
|
|
|
Balance, December 31, 2019
|
$
|
43
|
|
|
$
|
881
|
|
|
$
|
763
|
|
|
$
|
1,687
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized (gains) losses relating to liabilities held at December 31, 2019
|
$
|
—
|
|
|
$
|
209
|
|
(2)
|
$
|
82
|
|
(3)
|
$
|
291
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
Other Derivative Contracts
|
|
Corporate Debt Securities
|
|
Residential Mortgage Backed Securities
|
|
Commercial Mortgage Backed Securities
|
|
Asset Backed Securities
|
|
Total
|
(in millions)
|
Balance, January 1, 2018
|
$
|
1,139
|
|
|
$
|
155
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
1,301
|
|
|
$
|
—
|
|
|
Total gains (losses) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
(1)
|
(3)
|
|
(3)
|
Other comprehensive income (loss)
|
(26)
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
(24)
|
|
|
—
|
|
|
Purchases
|
15
|
|
|
70
|
|
|
72
|
|
|
32
|
|
|
189
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
(214)
|
|
|
(29)
|
|
|
—
|
|
|
(1)
|
|
|
(244)
|
|
|
—
|
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
Transfers out of Level 3
|
—
|
|
|
(61)
|
|
|
(52)
|
|
|
(35)
|
|
|
(148)
|
|
|
—
|
|
|
Balance, December 31, 2018
|
$
|
913
|
|
|
$
|
136
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
1,075
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) relating to assets held at December 31, 2018
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
(1)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder Account Balances, Future Policy Benefits and Claims
|
|
Other Liabilities
|
|
Fixed Deferred Indexed Annuity Embedded Derivatives
|
|
IUL
Embedded
Derivatives
|
|
GMWB and GMAB Embedded Derivatives
|
|
Total
|
(in millions)
|
|
Balance, January 1, 2018
|
$
|
—
|
|
|
$
|
601
|
|
|
$
|
(49)
|
|
|
$
|
552
|
|
|
$
|
28
|
|
|
Total (gains) losses included in:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
(3)
|
|
(2)
|
(9)
|
|
(2)
|
49
|
|
(3)
|
37
|
|
|
2
|
|
(4)
|
Issues
|
17
|
|
|
90
|
|
|
350
|
|
|
457
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
(54)
|
|
|
(22)
|
|
|
(76)
|
|
|
—
|
|
|
Balance, December 31, 2018
|
$
|
14
|
|
|
$
|
628
|
|
|
$
|
328
|
|
|
$
|
970
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized (gains) losses relating to liabilities held at December 31, 2018
|
$
|
—
|
|
|
$
|
(9)
|
|
(2)
|
$
|
47
|
|
(3)
|
$
|
38
|
|
|
$
|
—
|
|
|
(1) Included in net investment income in the Consolidated Statements of Operations.
(2) Included in interest credited to fixed accounts in the Consolidated Statements of Operations.
(3) Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Operations.
(4) Included in general and administrative expense in the Consolidated Statements of Operations.
The increase (decrease) to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $196 million, $(190) million and $281 million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the years ended December 31, 2020, 2019 and 2018, respectively.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third-party pricing service with observable inputs.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Weighted
Average
|
|
(in millions)
|
Corporate debt securities (private placements)
|
$
|
772
|
|
|
Discounted cash flow
|
|
Yield/spread to U.S. Treasuries (1)
|
1.0%
|
–
|
3.3%
|
1.5
|
%
|
Asset backed securities
|
$
|
3
|
|
|
Discounted cash flow
|
|
Annual short-term default rate (2)
|
2.9%
|
–
|
3.0%
|
|
2.9
|
%
|
|
|
|
|
|
Annual long-term default rate (2)
|
3.5%
|
–
|
4.5%
|
3.8
|
%
|
|
|
|
|
|
Discount rate
|
13.0%
|
13.0
|
%
|
|
|
|
|
|
Constant prepayment rate
|
10.0%
|
10.0
|
%
|
|
|
|
|
|
Loss recovery
|
63.6%
|
63.6
|
%
|
IUL embedded derivatives
|
$
|
935
|
|
|
Discounted cash flow
|
|
Nonperformance risk (3)
|
65 bps
|
65
|
bps
|
Fixed deferred indexed annuity embedded derivatives
|
$
|
49
|
|
|
Discounted cash flow
|
|
Surrender rate (4)
|
0.0%
|
–
|
50.0%
|
1.2
|
%
|
|
|
|
|
|
Nonperformance risk (3)
|
65 bps
|
65
|
bps
|
GMWB and GMAB embedded derivatives
|
$
|
2,316
|
|
|
Discounted cash flow
|
|
Utilization of guaranteed withdrawals (5) (6)
|
0.0%
|
–
|
48.0%
|
10.6
|
%
|
|
|
|
|
|
Surrender rate (4)
|
0.1%
|
–
|
73.5%
|
3.8
|
%
|
|
|
|
|
|
Market volatility (7) (8)
|
4.3%
|
–
|
17.1%
|
11.0
|
%
|
|
|
|
|
|
Nonperformance risk (3)
|
65 bps
|
65
|
bps
|
Structured variable annuity embedded derivatives
|
$
|
70
|
|
|
Discounted cash flow
|
|
Surrender rate (4)
|
0.8%
|
–
|
40.0%
|
0.9
|
%
|
|
|
|
|
|
Nonperformance risk (3)
|
65 bps
|
65
|
bps
|
Contingent consideration liabilities
|
$
|
43
|
|
|
Discounted cash flow
|
|
Discount rate (9)
|
0.0%
|
–
|
9.0%
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Weighted
Average
|
|
(in millions)
|
Corporate debt securities (private placements)
|
$
|
749
|
|
|
Discounted cash flow
|
|
Yield/spread to U.S. Treasuries
|
|
0.8%
|
–
|
2.8%
|
1.2
|
%
|
Asset backed securities
|
$
|
5
|
|
|
Discounted cash flow
|
|
Annual short-term default rate
|
|
3.3%
|
|
|
|
|
|
|
Annual long-term default rate
|
|
3.0%
|
|
|
|
|
|
|
Discount rate
|
|
12.0%
|
|
|
|
|
|
|
Constant prepayment rate
|
|
5.0%
|
–
|
10.0%
|
10.0
|
%
|
|
|
|
|
|
Loss recovery
|
|
36.4%
|
–
|
63.6%
|
63.6
|
%
|
IUL embedded derivatives
|
$
|
881
|
|
|
Discounted cash flow
|
|
Nonperformance risk (3)
|
|
65 bps
|
|
Fixed deferred indexed annuity embedded derivatives
|
$
|
43
|
|
|
Discounted cash flow
|
|
Surrender rate
|
|
0.0%
|
–
|
50.0%
|
|
|
|
|
|
|
Nonperformance risk (3)
|
|
65 bps
|
|
GMWB and GMAB embedded derivatives
|
$
|
763
|
|
|
Discounted cash flow
|
|
Utilization of guaranteed withdrawals (5)
|
|
0.0%
|
–
|
36.0%
|
|
|
|
|
|
|
Surrender rate
|
|
0.1%
|
–
|
73.5%
|
|
|
|
|
|
|
Market volatility (7)
|
|
3.7%
|
–
|
15.9%
|
|
|
|
|
|
|
Nonperformance risk (3)
|
|
65 bps
|
|
Contingent consideration liabilities
|
$
|
44
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
9.0%
|
|
(1) The weighted average for the spread to U.S. Treasuries for corporate debt securities (private placements) is weighted based on the security’s market value as a percentage of the aggregate market value of the securities.
(2) The weighted average annual default rates of asset backed securities is weighted based on the security’s market value as a percentage of the aggregate market value of the securities.
(3) The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.
(4) The weighted average surrender rate is weighted based on the benefit base of each contract and represents the average assumption in the current year including the effect of a dynamic surrender formula.
(5) The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year.
(6) The weighted average utilization rate represents the average assumption for the current year, weighting each policy evenly. The calculation excludes policies that have already started taking withdrawals.
(7) Market volatility is implied volatility of fund of funds and managed volatility funds.
(8) The weighted average market volatility represents the average volatility across all contracts, weighted by the size of the guaranteed benefit.
(9) The weighted average discount rate represents the average discount rate across all contingent consideration liabilities, weighted based on the size of the contingent consideration liability.
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to the Company.
Uncertainty of Fair Value Measurements
Significant increases (decreases) in the yield/spread to U.S. Treasuries used in the fair value measurement of Level 3 corporate debt securities in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in the annual default rate and discount rate used in the fair value measurement of Level 3 asset backed securities in isolation, generally, would have resulted in a significantly lower (higher) fair value measurement and significant increases (decreases) in loss recovery in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in the constant prepayment rate in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurements of the fixed deferred indexed annuity embedded derivatives and structured variable annuity embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value.
Significant increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly higher (lower) liability value.
Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution channel and whether the value of the guaranteed benefit exceeds the contract accumulation value.
Significant increases (decreases) in the discount rate used in the fair value measurement of the contingent consideration liability in isolation would have resulted in a significantly lower (higher) fair value measurement.
Determination of Fair Value
The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.
Assets
Cash Equivalents
Cash equivalents include time deposits and other highly liquid investments with original or remaining maturities at the time of purchase of 90 days or less. Actively traded money market funds are measured at their NAV and classified as Level 1. U.S. Treasuries are also classified as Level 1. The Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.
Investments (Available-for-Sale Securities, Equity Securities and Trading Securities)
When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from third-party pricing services, non-binding broker quotes, or other model-based valuation techniques.
Level 1 securities primarily include U.S. Treasuries.
Level 2 securities primarily include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, asset backed securities, state and municipal obligations and foreign government securities. The fair value of these Level 2 securities is
based on a market approach with prices obtained from third-party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes.
Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities with fair value typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. The fair value of certain asset backed securities is determined using a discounted cash flow model. Inputs used to determine the expected cash flows include assumptions about discount rates and default, prepayment and recovery rates of the underlying assets. Given the significance of the unobservable inputs to this fair value measurement, the fair value of the investment in certain asset backed securities is classified as Level 3.
In consideration of the above, management is responsible for the fair values recorded on the financial statements. Prices received from third-party pricing services are subjected to exception reporting that identifies investments with significant daily price movements as well as no movements. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third-party pricing services. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.
Separate Account Assets
The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV is used as a practical expedient for fair value and represents the exit price for the separate account. Separate account assets are excluded from classification in the fair value hierarchy.
Investments and Cash Equivalents Segregated for Regulatory Purposes
Investments and cash equivalents segregated for regulatory purposes includes U.S. Treasuries that are classified as Level 1.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded are classified as Level 1 measurements. The variation margin on futures contracts is also classified as Level 1. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps, foreign currency forwards and the majority of options. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial as of December 31, 2020 and 2019. See Note 16 and Note 17 for further information on the credit risk of derivative instruments and related collateral.
Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
There is no active market for the transfer of the Company’s embedded derivatives attributable to the provisions of certain variable annuity riders, fixed deferred indexed annuity, structured variable annuity and IUL products.
The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value as the present value of future expected benefit payments less the present value of future expected rider fees attributable to the embedded derivative feature. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to implied volatility as well as contractholder behavior assumptions that include margins for risk, all of which the Company believes a market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
The Company uses a discounted cash flow model to determine the fair value of the embedded derivatives associated with the provisions of its equity index annuity product. The projected cash flows generated by this model are based on significant observable inputs related to interest rates, volatilities and equity index levels and, therefore, are classified as Level 2.
The Company uses discounted cash flow models including Black-Scholes calculations to determine the fair value of the embedded derivatives associated with the provisions of its fixed deferred indexed annuity, structured variable annuity and IUL products. The structured variable annuity product is a limited flexible purchase payment annuity that offers 45 different indexed account options providing equity market exposure and a fixed account. Each indexed account includes a protection option (a buffer or a floor). If the index has a negative return, contractholder losses will be reduced by buffer or limited to a floor. The portion allocated to an indexed account is accounted for as an embedded derivative. The fair value of fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the
fair value, the fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives are classified as Level 3.
The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.
Customer Deposits
The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivative liability associated with the provisions of its stock market certificates (“SMC”). The inputs to these calculations are primarily market observable and include interest rates, volatilities and equity index levels. As a result, these measurements are classified as Level 2.
Other Liabilities
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded are classified as Level 1 measurements. The variation margin on futures contracts is also classified as Level 1. The fair value of derivatives that are traded in less active OTC markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps, foreign currency forwards and the majority of options. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial as of December 31, 2020 and 2019. See Note 16 and Note 17 for further information on the credit risk of derivative instruments and related collateral.
Securities sold but not yet purchased represent obligations of the Company to deliver specified securities that it does not yet own, creating a liability to purchase the security in the market at prevailing prices. When available, the fair value of securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognized pricing services, or other model-based valuation techniques such as the present value of cash flows. Level 1 securities sold but not yet purchased primarily include U.S Treasuries traded in active markets. Level 2 securities sold but not yet purchased primarily include corporate bonds.
Contingent consideration liabilities consist of earn-outs and/or deferred payments related to the Company’s acquisitions. Contingent consideration liabilities are recorded at fair value using a discounted cash flow model using an unobservable input (discount rate). Given the use of a significant unobservable input, the fair value of contingent consideration liabilities is classified as Level 3 within the fair value hierarchy.
Fair Value on a Nonrecurring Basis
The Company assesses its investment in affordable housing partnerships for impairment. The investments that are determined to be impaired are written down to their fair value. The Company uses a discounted cash flow model to measure the fair value of these investments. Inputs to the discounted cash flow model are estimates of future net operating losses and tax credits available to the Company and discount rates based on market condition and the financial strength of the syndicator (general partner). The balance of affordable housing partnerships measured at fair value on a nonrecurring basis was $101 million and $158 million as of December 31, 2020 and 2019, respectively, and is classified as Level 3 in the fair value hierarchy.
Asset and Liabilities Not Reported at Fair Value
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
$
|
2,718
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
2,852
|
|
|
$
|
2,874
|
|
|
Policy loans
|
846
|
|
|
—
|
|
|
846
|
|
|
—
|
|
|
846
|
|
(1)
|
Receivables
|
3,563
|
|
|
147
|
|
|
1,258
|
|
|
2,398
|
|
|
3,803
|
|
|
Restricted and segregated cash
|
1,958
|
|
|
1,958
|
|
|
—
|
|
|
—
|
|
|
1,958
|
|
|
Other investments and assets
|
732
|
|
|
—
|
|
|
672
|
|
|
62
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances, future policy benefits and claims
|
$
|
9,990
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,686
|
|
|
$
|
11,686
|
|
|
Investment certificate reserves
|
6,752
|
|
|
—
|
|
|
—
|
|
|
6,752
|
|
|
6,752
|
|
|
Banking and brokerage deposits
|
10,891
|
|
|
10,891
|
|
|
—
|
|
|
—
|
|
|
10,891
|
|
|
Separate account liabilities — investment contracts
|
5,406
|
|
|
—
|
|
|
5,406
|
|
|
—
|
|
|
5,406
|
|
|
Debt and other liabilities
|
3,214
|
|
|
205
|
|
|
3,253
|
|
|
11
|
|
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
$
|
2,778
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,833
|
|
|
$
|
2,833
|
|
|
Policy loans
|
868
|
|
|
—
|
|
|
868
|
|
|
—
|
|
|
868
|
|
(1)
|
Receivables
|
3,168
|
|
|
102
|
|
|
934
|
|
|
2,229
|
|
|
3,265
|
|
|
Restricted and segregated cash
|
2,372
|
|
|
2,372
|
|
|
—
|
|
|
—
|
|
|
2,372
|
|
|
Other investments and assets
|
671
|
|
|
—
|
|
|
626
|
|
|
46
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances, future policy benefits and claims
|
$
|
9,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,061
|
|
|
$
|
10,061
|
|
|
Investment certificate reserves
|
7,508
|
|
|
—
|
|
|
—
|
|
|
7,497
|
|
|
7,497
|
|
|
Brokerage deposits
|
6,929
|
|
|
6,929
|
|
|
—
|
|
|
—
|
|
|
6,929
|
|
|
Separate account liabilities — investment contracts
|
5,403
|
|
|
—
|
|
|
5,403
|
|
|
—
|
|
|
5,403
|
|
|
Debt and other liabilities
|
3,374
|
|
|
104
|
|
|
3,372
|
|
|
21
|
|
|
3,497
|
|
|
(1) During the third quarter of 2020, management changed the fair value methodology for policy loans from estimating future expected cash flows and discounting the cash flows at a rate based on the U.S. Treasury curve to using the carrying value as an approximation of fair value as the policy loans are fully collateralized by the cash surrender value of the underlying policies. As a result, policy loans were reclassified from Level 3 to Level 2 in the valuation hierarchy. For comparability and consistency purposes, prior period amounts were revised to reflect the current methodology and classification.
Receivables include the deposit receivable, brokerage margin loans, securities borrowed, pledged asset lines of credit, and loans to financial advisors. Restricted and segregated cash includes cash segregated under federal and other regulations held in special reserve bank accounts for the exclusive benefit of the Company’s brokerage customers. Other investments and assets primarily include syndicated loans, credit card receivables, certificate of deposits with original or remaining maturities at the time of purchase of more than 90 days, the Company’s membership in the FHLB and investments related to the Community Reinvestment Act. See Note 7 for additional information on mortgage loans, policy loans, syndicated loans, credit card receivables and the deposit receivable.
Policyholder account balances, future policy benefit and claims include fixed annuities in deferral status, non-life contingent fixed annuities in payout status, indexed and structured variable annuity host contracts, and the fixed portion of a small number of variable annuity contracts classified as investment contracts. See Note 11 for additional information on these liabilities. Investment certificate reserves represent customer deposits for fixed rate certificates and stock market certificates. Banking and brokerage deposits are amounts payable to customers related to free credit balances, funds deposited by customers and funds accruing to customers as a result of trades or contracts. Separate account liabilities are primarily investment contracts in pooled pension funds offered by Threadneedle. Debt and other liabilities include the Company’s long-term debt, short-term borrowings, securities loaned and future funding commitments to affordable housing partnerships and other real estate partnerships. See Note 14 for further information on the Company’s long-term debt and short-term borrowings.
16. Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets. The Company’s derivative instruments, repurchase agreements and securities borrowing and lending agreements are subject to master netting and collateral arrangements and qualify for offset. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. Securities borrowed and loaned result from transactions between the Company’s broker dealer subsidiary and other financial institutions and are recorded at the amount of cash collateral advanced or received. Securities borrowed and securities loaned are primarily equity securities. The Company’s securities borrowed and securities loaned transactions generally do not have a fixed maturity date and may be terminated by either party under customary terms.
The Company’s policy is to recognize amounts subject to master netting arrangements on a gross basis in the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company’s assets subject to master netting arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Amounts of Assets Presented in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the
Consolidated Balance Sheets
|
|
Net Amount
|
Financial Instruments (1)
|
|
Cash Collateral
|
|
Securities Collateral
|
(in millions)
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC
|
$
|
5,501
|
|
|
$
|
—
|
|
|
$
|
5,501
|
|
|
$
|
(3,862)
|
|
|
$
|
(1,287)
|
|
|
$
|
(315)
|
|
|
$
|
37
|
|
OTC cleared
|
58
|
|
|
—
|
|
|
58
|
|
|
(25)
|
|
|
—
|
|
|
—
|
|
|
33
|
|
Exchange-traded
|
311
|
|
|
—
|
|
|
311
|
|
|
(91)
|
|
|
(165)
|
|
|
—
|
|
|
55
|
|
Total derivatives
|
5,870
|
|
|
—
|
|
|
5,870
|
|
|
(3,978)
|
|
|
(1,452)
|
|
|
(315)
|
|
|
125
|
|
Securities borrowed
|
147
|
|
|
—
|
|
|
147
|
|
|
(43)
|
|
|
—
|
|
|
(103)
|
|
|
1
|
|
Total
|
$
|
6,017
|
|
|
$
|
—
|
|
|
$
|
6,017
|
|
|
$
|
(4,021)
|
|
|
$
|
(1,452)
|
|
|
$
|
(418)
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Amounts of Assets Presented in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the
Consolidated Balance Sheets
|
|
Net Amount
|
Financial Instruments (1)
|
|
Cash Collateral
|
|
Securities Collateral
|
(in millions)
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC
|
$
|
4,258
|
|
|
$
|
—
|
|
|
$
|
4,258
|
|
|
$
|
(2,933)
|
|
|
$
|
(1,244)
|
|
|
$
|
(73)
|
|
|
$
|
8
|
|
OTC cleared
|
21
|
|
|
—
|
|
|
21
|
|
|
(21)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exchange-traded
|
82
|
|
|
—
|
|
|
82
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
77
|
|
Total derivatives
|
4,361
|
|
|
—
|
|
|
4,361
|
|
|
(2,959)
|
|
|
(1,244)
|
|
|
(73)
|
|
|
85
|
|
Securities borrowed
|
102
|
|
|
—
|
|
|
102
|
|
|
(14)
|
|
|
—
|
|
|
(85)
|
|
|
3
|
|
Total
|
$
|
4,463
|
|
|
$
|
—
|
|
|
$
|
4,463
|
|
|
$
|
(2,973)
|
|
|
$
|
(1,244)
|
|
|
$
|
(158)
|
|
|
$
|
88
|
|