Ameriprise Financial, Inc.
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Cash Flows from Operating Activities | | | | | |
Net income | $ | 2,760 | | | $ | 1,534 | | | $ | 1,893 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation, amortization and accretion, net | 98 | | | 207 | | | 183 | |
Deferred income tax expense (benefit) | (87) | | | (321) | | | (308) | |
Share-based compensation | 152 | | | 146 | | | 135 | |
Gain on disposal of business before affinity partner payment | — | | | — | | | (313) | |
Net realized investment (gains) losses | (632) | | | (22) | | | (16) | |
Net trading (gains) losses | 5 | | | (10) | | | (10) | |
Loss from equity method investments | 75 | | | 66 | | | 95 | |
Impairments and provision for loan and credit losses | 4 | | | 24 | | | 22 | |
Net (gains) losses of consolidated investment entities | (20) | | | 7 | | | 9 | |
Changes in operating assets and liabilities, net of effects from acquisitions: | | | | | |
Restricted and segregated investments | 25 | | | (500) | | | 124 | |
Deferred acquisition costs | (156) | | | 49 | | | (112) | |
Policyholder account balances, future policy benefits and claims, net | 2,086 | | | 3,054 | | | 358 | |
Derivatives, net of collateral | (570) | | | (141) | | | 415 | |
Receivables | (520) | | | (648) | | | 324 | |
Brokerage deposits | 26 | | | 346 | | | (519) | |
Accounts payable and accrued expenses | 300 | | | 129 | | | 46 | |
Current income tax, net | (308) | | | 25 | | | 32 | |
Deferred taxes, net | 4 | | | 334 | | | (18) | |
Other operating assets and liabilities of consolidated investment entities, net | 20 | | | (15) | | | (12) | |
Other, net | 63 | | | 359 | | | 13 | |
Net cash provided by (used in) operating activities | 3,325 | | | 4,623 | | | 2,341 | |
| | | | | |
Cash Flows from Investing Activities | | | | | |
Available-for-Sale securities: | | | | | |
Proceeds from sales | 556 | | | 1,708 | | | 242 | |
Maturities, sinking fund payments and calls | 11,501 | | | 9,554 | | | 8,202 | |
Purchases | (14,718) | | | (13,525) | | | (11,911) | |
Proceeds from sales, maturities and repayments of mortgage loans | 299 | | | 217 | | | 272 | |
Funding of mortgage loans | (263) | | | (165) | | | (354) | |
Proceeds from sales, maturities and collections of other investments | 173 | | | 198 | | | 276 | |
Purchase of other investments | (97) | | | (284) | | | (288) | |
Purchase of investments by consolidated investment entities | (1,603) | | | (957) | | | (644) | |
Proceeds from sales, maturities and repayments of investments by consolidated investment entities | 1,047 | | | 606 | | | 684 | |
Purchase of land, buildings, equipment and software | (120) | | | (147) | | | (143) | |
Proceeds from disposal of business, net of cash and cash equivalents sold | — | | | — | | | 934 | |
Cash paid for written options with deferred premiums | (552) | | | (338) | | | (308) | |
Cash received from written options with deferred premiums | 106 | | | 133 | | | 170 | |
Cash paid for acquisition of business, net of cash acquired | (576) | | | — | | | — | |
Cash paid for deposit receivables | (377) | | | (4) | | | (349) | |
Cash received for deposit receivables | 254 | | | 93 | | | 98 | |
Other, net | (10) | | | 17 | | | (115) | |
Net cash provided by (used in) investing activities | $ | (4,380) | | | $ | (2,894) | | | $ | (3,234) | |
See Notes to Consolidated Financial Statements. |
Ameriprise Financial, Inc.
Consolidated Statements of Cash Flows (Continued)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Cash Flows from Financing Activities | | | | | |
Investment certificates: | | | | | |
Proceeds from additions | $ | 2,733 | | | $ | 4,259 | | | $ | 5,110 | |
Maturities, withdrawals and cash surrenders | (4,190) | | | (5,016) | | | (5,489) | |
Policyholder account balances: | | | | | |
Deposits and other additions | 1,553 | | | 1,649 | | | 2,152 | |
Net transfers from (to) separate accounts | (273) | | | (125) | | | (86) | |
Surrenders and other benefits | (1,365) | | | (1,357) | | | (1,728) | |
Change in banking deposits, net | 4,016 | | | 3,616 | | | 3,788 | |
Cash paid for purchased options with deferred premiums | (156) | | | (211) | | | (396) | |
Cash received from purchased options with deferred premiums | 1,350 | | | 40 | | | 206 | |
Issuance of long-term debt, net of issuance costs | 4 | | | 496 | | | 497 | |
Repayments of long-term debt | (9) | | | (762) | | | (313) | |
Dividends paid to shareholders | (511) | | | (497) | | | (504) | |
Repurchase of common shares | (2,030) | | | (1,441) | | | (1,943) | |
Exercise of stock options | 1 | | | 3 | | | 3 | |
Borrowings of consolidated investment entities | 1,756 | | | 382 | | | — | |
Repayments of debt by consolidated investment entities | (1,142) | | | (74) | | | (84) | |
Other, net | (14) | | | (10) | | | 1 | |
Net cash provided by (used in) financing activities | 1,723 | | | 952 | | | 1,214 | |
Effect of exchange rate changes on cash | (2) | | | 9 | | | 9 | |
Net increase (decrease) in cash and cash equivalents, including amounts restricted | 666 | | | 2,690 | | | 330 | |
Cash and cash equivalents, including amounts restricted at beginning of period | 8,903 | | | 6,213 | | | 5,883 | |
Cash and cash equivalents, including amounts restricted at end of period | $ | 9,569 | | | $ | 8,903 | | | $ | 6,213 | |
| | | | | |
Supplemental Disclosures: | | | | | |
Interest paid excluding consolidated investment entities | $ | 113 | | | $ | 168 | | | $ | 272 | |
Interest paid by consolidated investment entities | 90 | | | 55 | | | 84 | |
Income taxes paid, net | 986 | | | 236 | | | 609 | |
Leased assets obtained in exchange for finance lease liabilities | 4 | | | — | | | 13 | |
Leased assets obtained in exchange for operating lease liabilities | 109 | | | 76 | | | 41 | |
Non-cash investing activities: | | | | | |
Partnership commitments not yet remitted | — | | | — | | | 4 | |
Investments transferred in connection with fixed annuity reinsurance transaction | 7,513 | | | — | | | 1,265 | |
Exchange of an investment that resulted in a realized gain and an increase to amortized cost | 17 | | | — | | | — | |
| | December 31, |
| 2021 | | 2020 |
| (in millions) |
Reconciliation of cash and cash equivalents, including amounts restricted: | | | |
Cash and cash equivalents | $ | 7,127 | | | $ | 6,751 | |
Cash of consolidated investment entities | 121 | | | 94 | |
Restricted and segregated cash, cash equivalents and investments | 2,795 | | | 2,558 | |
Less: Restricted and segregated investments | (474) | | | (500) | |
Total cash and cash equivalents, including amounts restricted per consolidated statements of cash flows | $ | 9,569 | | | $ | 8,903 | |
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 Columbia Threadneedle Investments UK International Limited, TAM UK International Holdings Ltd 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.
In the first quarter of 2021, the Company recorded a favorable out-of-period correction of $29 million in other comprehensive income related to defined benefit plans.
In the first quarter of 2020, the Company recorded an unfavorable out-of-period correction of $19 million in management and financial advice fees related to performance fees.
The impacts of the errors were not material to the current and 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.
On June 2, 2021, the Company filed an application to convert Ameriprise Bank, FSB to a state-chartered industrial bank regulated by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. The Company also filed an application to transition the FSB’s personal trust services business to a new limited purpose national trust bank regulated by the Office of the Comptroller of the Currency.
During the third quarter of 2021, RiverSource Life Insurance Company (“RiverSource Life”), one of the Company’s life insurance subsidiaries, closed on a transaction with Global Atlantic Financial Group’s subsidiary Commonwealth Annuity and Life Insurance Company, effective July 1, 2021, to reinsure approximately $7.0 billion of fixed deferred and immediate annuity policies. As part of the transaction, RiverSource Life transferred $7.8 billion in consideration primarily consisting of Available-for-Sale securities, commercial mortgage loans, syndicated loans and cash. The transaction resulted in a net realized gain of approximately $532 million on investments sold. A similar previously announced transaction with RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”) did not receive regulatory approval in time to close by September 30, 2021 and the transaction was terminated by the parties.
On November 8, 2021, the Company completed its acquisition of the European-based asset management business of BMO Financial Group. See Note 9 for more information on this acquisition.
The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. Other than disclosed in Note 21 and 23, no other 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 VIE’s economic performance. In determining whether the Company has this power, it considers whether it is acting in a role that enables it to direct the activities that most significantly impact the economic performance of an entity or if it is acting in an agent role.
In determining whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers an analysis of its rights to receive benefits such as investment returns and its obligation to absorb losses associated with any investment in the VIE in conjunction with other qualitative factors. Management and incentive fees that are at market and commensurate with the level of services provided, and where the Company does not hold other interests in the VIE that would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns, are not considered a variable interest and are excluded from the analysis.
The consolidation guidance has a scope exception for reporting entities with interests in registered money market funds which do not have an explicit support agreement.
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 average 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.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assumptions concerning future events. Among the more significant are those that relate to investment securities valuation and the recognition of credit losses or impairments, deferred acquisition costs (“DAC”) and the corresponding recognition of DAC amortization, valuation of derivative instruments and hedging activities, litigation reserves, future policy benefits and claims reserves and income taxes and the recognition of deferred tax assets and liabilities. These accounting estimates reflect the best judgment of management and actual results could differ.
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. Available-for-Sale securities are recorded within Investments. 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.
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. Available-for-Sale securities are placed on nonaccrual status when the accrued balance becomes 90 days past due or earlier based on management’s evaluation of the facts and circumstances of each security under review. All previously accrued interest is reversed through Net investment income.
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 and advisor loans are recorded within Receivables. 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. Interest income recognized on advisor loans is recorded in Other revenues.
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. Brokerage margin loans and pledged asset lines of credit are recorded within Receivables. 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. Interest income recognized on consumer loans is recorded in Net investment income.
Deposit Receivables
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability related to insurance risk in accordance with applicable accounting standards. If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits made and any related embedded derivatives are included in Receivables. As amounts are received, consistent with the underlying contracts, deposit receivables are adjusted. Deposit receivables are accreted using the interest method and the accretion is reported in Other revenues.
See Note 7 for additional information on financing receivables.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected over the asset’s expected life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Prior 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 through provisions charged to Distribution expenses and is reduced/increased by net charge-offs/recoveries.
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 through provisions charged to Net investment income and is reduced/increased by net charge-offs/recoveries.
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 Receivables
The allowance for credit losses is calculated on an individual reinsurer basis. Deposit receivables are collateralized by underlying trust arrangements. Management evaluates the terms of the reinsurance and trust agreements, the nature of the underlying assets, and the potential for changes in the collateral value when considering the need for an allowance for credit losses.
Nonaccrual Loans
Commercial mortgage loans and syndicated loans are placed on nonaccrual status when either the collection of interest or principal has become 90 days past due or is otherwise considered doubtful of collection. 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 within 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, they 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 Consolidated Statements of Operations. Included in separate account assets and liabilities is the fair value of the pooled pension funds that are offered by Threadneedle. Separate account assets are recorded at fair value and Separate account liabilities are equal to the assets recognized.
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 Consolidated Statements of Cash Flows.
Land, Buildings, Equipment and Software
Land, buildings, equipment and internally developed software are carried at cost less accumulated depreciation or amortization and are reflected within Other assets. The Company uses the straight-line method of depreciation and amortization over periods ranging from three to 39 years.
As of December 31, 2021 and 2020, land, buildings, equipment and software were $590 million and $602 million, respectively, net of accumulated depreciation of $2.0 billion and $1.9 billion, respectively. Depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 was $144 million, $153 million and $147 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”) , DI and life contingent immediate annuities, 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.
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.
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 within the Income tax provision. 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 Ameriprise Auto & Home (“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
Income Taxes – Simplifying the Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) updated the accounting standards to simplify the accounting for income taxes. The update eliminates certain exceptions to: (1) accounting principles related to intra-period tax allocation to be applied on a prospective basis, (2) deferred tax liabilities related to outside basis differences to be applied on a modified retrospective 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 Company adopted the standard on January 1, 2021. The adoption of this standard had no impact on the Company’s consolidated results of operations and financial condition.
Future Adoption of New Accounting Standards
Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB updated the accounting standards to require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue for Contracts with Customers (“Topic 606”). At the acquisition date, an acquirer is required to account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements (if the acquiree prepared financial statements in accordance with GAAP). The amendments apply to all contract assets and contract liabilities acquired in a business combination that result from contracts accounted for under the principals of Topic 606. The standard is effective for interim and annual periods beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of the early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The adoption of the standard is not expected to have a material impact on the Company’s consolidated results of operations and financial condition.
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. The amendments in this update were effective
upon issuance and must be elected prior to December 31, 2022. 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 for margining, discounting or contract price alignment that will be modified due to reference rate reform but did not qualify under the original guidance. The Company has not yet applied any of the optional expedients. The adoption of the standard is not expected to have an impact on the Company’s consolidated results of operations and financial condition.
Financial Services – Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts
In 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 including the following:
•Insurers will be required to review and update the cash flow assumptions used to measure the liability for future policy benefits rather than using assumptions locked in at contract inception. The review of assumptions to measure the liability for all future policy benefits will be required annually at the same time each year, or more frequently if suggested by experience. The effect of updating assumptions will be measured on a retrospective catch-up basis and presented separate from the ongoing policyholder benefit expense in the statement of operations in the period the update is made. This new unlocking process will be required for the Company’s term and whole life insurance, disability income, long term care insurance and immediate annuities with a life contingent feature.
•The discount rate used to measure the liability for future policy benefits will be standardized. The current requirement to use a discount rate reflecting expected investment yields will change to an upper-medium grade (low credit risk) fixed income corporate instrument yield (generally interpreted as an “A” rating) reflecting the duration characteristics of the liability. Entities will be required to update the discount rate at each reporting date with the effect of discount rate changes reflected in OCI.
•The current premium deficiency test is being replaced with a net premium ratio cap of 100%. If the net premium ratio (i.e. the ratio of the present value of total expected benefits and related expenses to the present value of total expected premiums) exceeds 100%, insurers are required to recognize a loss in the statement of operations in the period. Contracts from different issue years will no longer be permitted to be grouped to determine contracts in a loss position.
In addition, the update requires DAC and DSIC relating to all long-duration contracts and most investment contracts to be amortized on a straight-line basis over the expected life of the contract independent of profit emergence. Under the new guidance, interest will not accrue to the deferred balance and DAC and DSIC will not be subject to an impairment test.
The update requires significant additional disclosures, including disaggregated rollforwards of the liability for future policy benefits, policyholder account balances, market risk benefits, DAC and DSIC, as well as qualitative and quantitative information about expected cash flows, estimates and assumptions. The standard is effective for interim and annual periods beginning after December 15, 2022. The standard should be applied to the liability for future policy benefits and DAC and DSIC on a modified retrospective basis and applied to market risk benefits on a retrospective basis with the option to apply full retrospective transition if certain criteria are met. Early adoption is permitted. The Company is currently in the process of implementing the standard, including the implementation of controlled measurement and reporting processes. The Company expects the impact of adopting the standard to be material to its consolidated results of operations and financial condition.
4. Revenue from Contracts with Customers
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, 2021 |
| 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 | $ | — | | | $ | 2,309 | | | $ | — | | | $ | — | | | $ | 2,309 | | | $ | — | | | $ | 2,309 | |
Institutional | — | | | 645 | | | — | | | — | | | 645 | | | — | | | 645 | |
Advisory fees | 4,539 | | | — | | | — | | | — | | | 4,539 | | | — | | | 4,539 | |
Financial planning fees | 386 | | | — | | | — | | | — | | | 386 | | | — | | | 386 | |
Transaction and other fees | 372 | | | 223 | | | 70 | | | — | | | 665 | | | — | | | 665 | |
Total management and financial advice fees | 5,297 | | | 3,177 | | | 70 | | | — | | | 8,544 | | | — | | | 8,544 | |
| | | | | | | | | | | | | |
Distribution fees: | | | | | | | | | | | | | |
Mutual funds | 858 | | | 276 | | | — | | | — | | | 1,134 | | | — | | | 1,134 | |
Insurance and annuity | 994 | | | 195 | | | 409 | | | — | | | 1,598 | | | — | | | 1,598 | |
Other products | 401 | | | — | | | — | | | — | | | 401 | | | — | | | 401 | |
Total distribution fees | 2,253 | | | 471 | | | 409 | | | — | | | 3,133 | | | — | | | 3,133 | |
| | | | | | | | | | | | | |
Other revenues | 196 | | | 4 | | | — | | | — | | | 200 | | | — | | | 200 | |
Total revenue from contracts with customers | 7,746 | | | 3,652 | | | 479 | | | — | | | 11,877 | | | — | | | 11,877 | |
| | | | | | | | | | | | | |
Revenue from other sources (1) | 287 | | | 30 | | | 2,765 | | | 489 | | | 3,571 | | | (414) | | | 3,157 | |
Total segment gross revenues | 8,033 | | | 3,682 | | | 3,244 | | | 489 | | | 15,448 | | | (414) | | | 15,034 | |
Banking and deposit interest expense | (12) | | | — | | | — | | | (2) | | | (14) | | | — | | | (14) | |
Total segment net revenues | 8,021 | | | 3,682 | | | 3,244 | | | 487 | | | 15,434 | | | (414) | | | 15,020 | |
Elimination of intersegment revenues | (1,043) | | | (50) | | | (478) | | | (2) | | | (1,573) | | | (16) | | | (1,589) | |
Total net revenues | $ | 6,978 | | | $ | 3,632 | | | $ | 2,766 | | | $ | 485 | | | $ | 13,861 | | | $ | (430) | | | $ | 13,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
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 | |
Elimination of 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 | |
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 | |
Elimination of 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 | |
(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 $157 million and $146 million as of December 31, 2021 and 2020, 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 $126 million and $117 million as of December 31, 2021 and 2020, 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.
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.
Contract Costs Asset
During the fourth quarter of 2021, the Company recognized an asset of $39 million related to the transition of investment advisory services under an arrangement with BMO Financial Group for clients that elected to transfer U.S. retail and institutional assets to the Company.
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 $668 million and $403 million as of December 31, 2021 and 2020, 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 $27 million and $13 million as of December 31, 2021 and 2020, 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 and highly rated senior notes of certain CLOs. The Company consolidates certain CLOs where it is the primary beneficiary and has the power to direct the activities that most significantly impact the economic performance of the CLO.
The Company's maximum exposure to loss with respect to non-consolidated CLOs is limited to its amortized cost, which was $1 million and $3 million as of December 31, 2021 and 2020, 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 $44 million and $23 million as of December 31, 2021 and 2020, 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, 2021 and 2020.
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 $43 million and $20 million as of December 31, 2021 and 2020, 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 $138 million and $200 million as of December 31, 2021 and 2020, respectively. The Company had a $8 million and a $9 million liability recorded as of December 31, 2021 and 2020, respectively, related to original purchase commitments not yet remitted to the VIEs. The Company has not provided any additional support and is not contractually obligated to provide additional support to the VIEs beyond the funding commitments.
Structured Investments
The Company invests in structured investments which are considered VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, and commercial and residential mortgage backed securities. The Company classifies these investments as Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to the size of the Company’s investment in the entities and position in the capital structure of these entities. The Company's maximum exposure to loss as a result of its investment in these structured investments is limited to its amortized cost. See Note 6 for additional information on these structured investments.
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, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets | | | | | | | |
Investments: | | | | | | | |
| | | | | | | |
Common stocks | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
| | | | | | | |
Syndicated loans | — | | | 2,117 | | | 64 | | | 2,181 | |
Total investments | — | | | 2,120 | | | 64 | | | 2,184 | |
Receivables | — | | | 17 | | | — | | | 17 | |
Other assets | — | | | — | | | 3 | | | 3 | |
Total assets at fair value | $ | — | | | $ | 2,137 | | | $ | 67 | | | $ | 2,204 | |
| | | | | | | |
Liabilities | | | | | | | |
Debt (1) | $ | — | | | $ | 2,164 | | | $ | — | | | $ | 2,164 | |
Other liabilities | — | | | 137 | | | — | | | 137 | |
Total liabilities at fair value | $ | — | | | $ | 2,301 | | | $ | — | | | $ | 2,301 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets | | | | | | | |
Investments: | | | | | | | |
Corporate debt securities | $ | — | | | $ | 8 | | | $ | — | | | $ | 8 | |
Common stocks | — | | | 1 | | | — | | | 1 | |
| | | | | | | |
Syndicated loans | — | | | 1,817 | | | 92 | | | 1,909 | |
Total investments | — | | | 1,826 | | | 92 | | | 1,918 | |
Receivables | — | | | 16 | | | — | | | 16 | |
Other assets | — | | | — | | | 2 | | | 2 | |
Total assets at fair value | $ | — | | | $ | 1,842 | | | $ | 94 | | | $ | 1,936 | |
| | | | | | | |
Liabilities | | | | | | | |
Debt (1) | $ | — | | | $ | 1,913 | | | $ | — | | | $ | 1,913 | |
Other liabilities | — | | | 69 | | | — | | | 69 | |
Total liabilities at fair value | $ | — | | | $ | 1,982 | | | $ | — | | | $ | 1,982 | |
(1) The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $2.2 billion and $2.0 billion as of December 31, 2021 and 2020, 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, 2021 | $ | 92 | | | $ | 2 | | |
Total gains (losses) included in: | | | | |
Net income | 2 | | (1) | 1 | | (1) |
Purchases | 106 | | | — | | |
Sales | (38) | | | — | | |
Settlements | (49) | | | — | | |
Transfers into Level 3 | 119 | | | 2 | | |
Transfers out of Level 3 | (150) | | | (2) | | |
| | | | |
Deconsolidation of consolidated investment entities | (18) | | | — | | |
Balance, December 31, 2021 | $ | 64 | | | $ | 3 | | |
| | | | |
Changes in unrealized gains (losses) included in net income relating to assets held at December 31, 2021 | $ | — | | | $ | 1 | | (1) |
| | | | | | | | | | | | | | | | |
| | | 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 net 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 net income relating to assets held at December 31, 2019 | | | | | $ | (3) | | (1) |
(1) Included in Net investment income.
Securities and loans transferred from Level 3 primarily represent assets with fair values that are now obtained from a third-party pricing service with observable inputs or priced in active markets. Securities and loans transferred to Level 3 represent assets with fair values that are now based on a single non-binding broker quote.
All Level 3 measurements as of December 31, 2021 and 2020 were obtained from non-binding broker quotes where unobservable inputs utilized in the fair value calculation are not reasonably available to the Company.
Determination of Fair Value
Assets
Investments
The fair value of syndicated loans obtained from third-party pricing services using a market approach with observable inputs is classified as Level 2. The fair value of syndicated loans obtained from third-party pricing services with a single non-binding broker quote as the underlying valuation source is classified as Level 3. The underlying inputs used in non-binding broker quotes are not readily available to the Company. See Note 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. Other liabilities also include accrued interest on CLO debt.
Fair Value Option
The Company has elected the fair value option for the financial assets and liabilities of the consolidated CLOs. Management believes that the use of the fair value option better matches the changes in fair value of assets and liabilities related to the CLOs.
The following table presents the fair value and unpaid principal balance of loans and debt for which the fair value option has been elected:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Syndicated loans | | | |
Unpaid principal balance | $ | 2,233 | | | $ | 1,990 | |
Excess unpaid principal over fair value | (52) | | | (81) | |
Fair value | $ | 2,181 | | | $ | 1,909 | |
| | | |
Fair value of loans more than 90 days past due | $ | — | | | $ | 5 | |
Fair value of loans in nonaccrual status | 13 | | | 19 | |
Difference between fair value and unpaid principal of loans more than 90 days past due, loans in nonaccrual status or both | 10 | | | 24 | |
| | | |
Debt | | | |
Unpaid principal balance | $ | 2,296 | | | $ | 2,069 | |
Excess unpaid principal over fair value | (132) | | | (156) | |
Carrying value (1) | $ | 2,164 | | | $ | 1,913 | |
(1) The carrying value of the CLOs’ debt is set equal to the fair value of the CLOs’ assets. The estimated fair value of the CLOs’ debt was $2.2 billion and $2.0 billion as of December 31, 2021 and 2020, respectively.
During the first quarter of 2021, the Company launched two new CLOs and issued debt of $817 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 the changes in fair value of investments the Company owns in the consolidated CLOs where it has elected the fair value option and collateralized financing entity accounting were immaterial for the years ended December 31, 2021, 2020 and 2019.
Debt of the consolidated investment entities and the stated interest rates were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Weighted Average Interest Rate |
December 31, | December 31, |
2021 | | 2020 | 2021 | | 2020 |
(in millions) | |
Debt of consolidated CLOs due 2028-2034 | $ | 2,164 | | | $ | 1,913 | | | 1.7 | % | | 2.1 | % |
The debt of the consolidated CLOs has both fixed and floating interest rates, which range from nil to 9.4%. The interest rates on the debt of CLOs are weighted average rates based on the outstanding principal and contractual interest rates.
6. Investments
The following is a summary of Ameriprise Financial investments:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Available-for-Sale securities, at fair value | $ | 32,050 | | | $ | 36,283 | |
Mortgage loans (allowance for credit losses: 2021, $12; 2020, $29) | 1,953 | | | 2,718 | |
Policy loans | 835 | | | 846 | |
Other investments (allowance for credit losses: 2021, $5; 2020, $12) | 972 | | | 1,184 | |
Total | $ | 35,810 | | | $ | 41,031 | |
Other investments primarily reflect the Company’s interests in affordable housing partnerships, trading securities, equity 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, |
2021 | | 2020 | | 2019 |
(in millions) |
Investment income on fixed maturities | $ | 933 | | | $ | 1,161 | | | $ | 1,378 | |
Net realized gains (losses) | 636 | | | (10) | | | (8) | |
Affordable housing partnerships | (71) | | | (66) | | | (98) | |
Other | 70 | | | 89 | | | 97 | |
Consolidated investment entities | 115 | | | 77 | | | 94 | |
Total | $ | 1,683 | | | $ | 1,251 | | | $ | 1,463 | |
Available-for-Sale securities distributed by type were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description of Securities | December 31, 2021 |
Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
| (in millions) |
Corporate debt securities | $ | 8,737 | | | $ | 1,243 | | | $ | (48) | | | $ | — | | | $ | 9,932 | |
Residential mortgage backed securities | 10,927 | | | 67 | | | (50) | | | — | | | 10,944 | |
Commercial mortgage backed securities | 4,950 | | | 59 | | | (23) | | | — | | | 4,986 | |
Asset backed securities | 3,639 | | | 26 | | | (11) | | | — | | | 3,654 | |
State and municipal obligations | 850 | | | 244 | | | (1) | | | (1) | | | 1,092 | |
U.S. government and agency obligations | 1,301 | | | — | | | — | | | — | | | 1,301 | |
Foreign government bonds and obligations | 88 | | | 5 | | | (1) | | | — | | | 92 | |
Other securities | 49 | | | — | | | — | | | — | | | 49 | |
Total | $ | 30,541 | | | $ | 1,644 | | | $ | (134) | | | $ | (1) | | | $ | 32,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
As of December 31, 2021 and 2020, accrued interest of $140 million and $178 million, respectively, is excluded from the amortized cost basis of Available-for-Sale securities in the tables above and is recorded in Receivables.
As of December 31, 2021 and 2020, investment securities with a fair value of $3.1 billion and $3.6 billion, respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings, of which $314 million and $454 million, respectively, may be sold, pledged or rehypothecated by the counterparty.
As of December 31, 2021 and 2020, fixed maturity securities comprised approximately 89% and 88%, 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, 2021 and 2020, the Company’s internal analysts rated $400 million and $605 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, 2021 | | December 31, 2020 |
Amortized Cost | | Fair Value | | Percent of Total Fair Value | Amortized Cost | | Fair Value | | Percent of Total Fair Value |
| (in millions, except percentages) |
AAA | $ | 20,563 | | | $ | 20,625 | | | 64 | % | | $ | 19,815 | | | $ | 20,253 | | | 56 | % |
AA | 727 | | | 898 | | | 3 | | | 1,082 | | | 1,312 | | | 3 | |
A | 1,775 | | | 2,129 | | | 7 | | | 2,953 | | | 3,534 | | | 10 | |
BBB | 6,495 | | | 7,268 | | | 23 | | | 8,271 | | | 9,542 | | | 26 | |
Below investment grade (1) | 981 | | | 1,130 | | | 3 | | | 1,480 | | | 1,642 | | | 5 | |
Total fixed maturities | $ | 30,541 | | | $ | 32,050 | | | 100 | % | | $ | 33,601 | | | $ | 36,283 | | | 100 | % |
(1) The amortized cost and fair value of below investment grade securities includes interest in non-consolidated CLOs managed by the Company of $1 million and $2 million, respectively, as of December 31, 2021 and $3 million as of December 31, 2020. These securities are not rated but are included in below investment grade due to their risk characteristics.
As of December 31, 2021 and 2020, approximately 30% and 33%, 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 as of both December 31, 2021 and 2020.
The following tables summarize the fair value and gross unrealized losses on Available-for-Sale securities, aggregated by major investment type and the length of time that individual securities have been in a continuous unrealized loss position for which no allowance for credit losses has been recorded:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description of Securities | December 31, 2021 |
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 | | 110 | | | $ | 2,056 | | | $ | (43) | | | 14 | | | $ | 81 | | | $ | (5) | | | 124 | | | $ | 2,137 | | | $ | (48) | |
Residential mortgage backed securities | | 206 | | | 5,808 | | | (48) | | | 56 | | | 191 | | | (2) | | | 262 | | | 5,999 | | | (50) | |
Commercial mortgage backed securities | | 102 | | | 2,184 | | | (22) | | | 9 | | | 139 | | | (1) | | | 111 | | | 2,323 | | | (23) | |
Asset backed securities | | 41 | | | 1,883 | | | (11) | | | 6 | | | 118 | | | — | | | 47 | | | 2,001 | | | (11) | |
State and municipal obligations | | 26 | | | 64 | | | (1) | | | — | | | — | | | — | | | 26 | | | 64 | | | (1) | |
| | | | | | | | | | | | | | | | | | |
Foreign government bonds and obligations | | 5 | | | 6 | | | — | | | 6 | | | 4 | | | (1) | | | 11 | | | 10 | | | (1) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total | | 490 | | | $ | 12,001 | | | $ | (125) | | | 91 | | | $ | 533 | | | $ | (9) | | | 581 | | | $ | 12,534 | | | $ | (134) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) | |
As part of the Company’s ongoing monitoring process, management determined that the change in gross unrealized losses on its Available-for-Sale securities for which an allowance for credit losses has not been recognized during the year ended December 31, 2021 is primarily attributable to higher interest rates. The Company did not recognize these unrealized losses in earnings because it was determined that such losses were due to non-credit factors. The Company does not intend to sell these securities and does not believe that it is more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. As of December 31, 2021 and 2020, approximately 96% and 92%, respectively, of the total of Available-for-Sale securities with gross unrealized losses were considered investment grade.
The following tables present a rollforward of the allowance for credit losses on Available-for-Sale securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Corporate Debt Securities | | Asset Backed Securities | | State and Municipal Obligations | | Total |
(in millions) |
Balance at January 1, 2021 | $ | 10 | | | $ | 1 | | | $ | — | | | $ | 11 | |
Additions for which credit losses were not previously recorded | — | | | — | | | 1 | | | 1 | |
Charge-offs | (10) | | | (1) | | | — | | | (11) | |
Balance at December 31, 2021 | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | |
| Corporate Debt Securities | | Asset Backed Securities | | Total |
(in millions) |
Balance at 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 at 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.
Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in Net investment income were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Gross realized investment gains | $ | 582 | | | $ | 25 | | | $ | 30 | |
Gross realized investment losses | (7) | | | (3) | | | (14) | |
Credit losses | (1) | | | (11) | | | (22) | |
Other impairments | (13) | | | — | | | — | |
Total | $ | 561 | | | $ | 11 | | | $ | (6) | |
Credit losses for the year ended December 31, 2021 primarily related to recording an allowance for credit losses on certain state and municipal securities. For the year ended December 31, 2020, credit losses primarily related to recording an allowance for credit losses on certain corporate debt securities, primarily in the oil and gas industry. Other-than-temporary impairments (“OTTI”) 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. Other impairments for the year ended December 31, 2021 related to Available-for-Sale securities that were impaired when they were classified as held for sale prior to being sold in the reinsurance transaction. See Note 1 for more information on the reinsurance transaction.
See Note 21 for a rollforward of net unrealized investment gains (losses) included in AOCI.
Available-for-Sale securities by contractual maturity as of December 31, 2021 were as follows:
| | | | | | | | | | | |
| Amortized Cost | | Fair Value |
(in millions) |
Due within one year | $ | 1,884 | | | $ | 1,892 | |
Due after one year through five years | 2,125 | | | 2,231 | |
Due after five years through 10 years | 3,283 | | | 3,359 | |
Due after 10 years | 3,733 | | | 4,984 | |
| 11,025 | | | 12,466 | |
Residential mortgage backed securities | 10,927 | | | 10,944 | |
Commercial mortgage backed securities | 4,950 | | | 4,986 | |
Asset backed securities | 3,639 | | | 3,654 | |
Total | $ | 30,541 | | | $ | 32,050 | |
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 deposit receivables. See Note 2 for information regarding the Company’s accounting policies related to financing receivables and the allowance for credit losses.
Allowance for Credit Losses
The following tables present a rollforward of the allowance for credit losses:
| | | | | | | | | | | | | | | | | |
| Commercial Loans | | Consumer Loans | | Total |
(in millions) |
| | | | | |
| | | | | |
Balance, January 1, 2021 | $ | 66 | | | $ | 2 | | | $ | 68 | |
Provisions | (13) | | | 2 | | | (11) | |
Charge-offs | (8) | | | (2) | | | (10) | |
Recoveries | — | | | 1 | | | 1 | |
Other | 2 | | | — | | | 2 | |
Balance, December 31, 2021 | $ | 47 | | | $ | 3 | | | $ | 50 | |
| | | | | | | | | | | | | | | | | |
| 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 | | | | |
(in millions) | | | | |
Balance at January 1, 2019 | $ | 49 | | | | | |
Provisions | 5 | | | | | |
Charge-offs | (4) | | | | | |
Recoveries of amounts previously written off | 1 | | | | | |
Balance at December 31, 2019 | $ | 51 | | | | | |
The decrease in the allowance for credit losses provision for commercial loans reflects the sale of certain commercial mortgage loans and syndicated loans in conjunction with the fixed deferred and immediate annuity reinsurance transaction discussed in Note 1.
Accrued interest on commercial loans was $13 million and $16 million as of December 31, 2021 and 2020, respectively, and is recorded in Receivables and excluded from the amortized cost basis of commercial loans.
Purchases and Sales
During the year ended December 31, 2021, the Company sold $746 million of commercial mortgage loans.
During the years ended December 31, 2021, 2020 and 2019, the Company purchased $37 million, $173 million and $162 million, respectively, of syndicated loans, and sold $354 million, $17 million and $54 million, respectively, of syndicated loans.
During the years ended December 31, 2021 and 2020, the Company purchased $33 million and $22 million, respectively, of residential mortgage loans, and sold $1 million and nil, respectively, of residential mortgage loans. The allowance for credit losses for residential mortgage loans was not material as of both December 31, 2021 and 2020.
The Company has not acquired any loans with deteriorated credit quality as of the acquisition date.
Credit Quality Information
Nonperforming loans were $9 million and $21 million as of December 31, 2021 and 2020, 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, 2021 and 2020. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. Total commercial mortgage loan modifications through December 31, 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. There were no additional modifications during the year ended December 31, 2021. As of December 31, 2021, there were no loans remaining that were modified due to COVID-19. All loans returned to their normal payment schedules. Total commercial mortgage loans past due were nil as of December 31, 2021 and 2020, respectively.
The tables below present the amortized cost basis of commercial mortgage loans by the year of origination and loan-to-value ratio:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Loan-to-Value Ratio | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
> 100% | | $ | — | | | $ | — | | | $ | 20 | | | $ | 10 | | | $ | — | | | $ | 29 | | | $ | 59 | |
80% - 100% | | 9 | | | 2 | | | 9 | | | 2 | | | — | | | 29 | | | 51 | |
60% - 80% | | 142 | | | 80 | | | 60 | | | 23 | | | 61 | | | 138 | | | 504 | |
40% - 60% | | 42 | | | 33 | | | 86 | | | 74 | | | 57 | | | 401 | | | 693 | |
< 40% | | 11 | | | 8 | | | 48 | | | 6 | | | 58 | | | 478 | | | 609 | |
Total | | $ | 204 | | | $ | 123 | | | $ | 223 | | | $ | 115 | | | $ | 176 | | | $ | 1,075 | | | $ | 1,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
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, |
2021 | | 2020 | 2021 | | 2020 |
(in millions) | | | |
East North Central | $ | 194 | | | $ | 259 | | | 10 | % | | 10 | % |
East South Central | 57 | | | 115 | | | 3 | | | 4 | |
Middle Atlantic | 122 | | | 178 | | | 6 | | | 7 | |
Mountain | 119 | | | 247 | | | 6 | | | 9 | |
New England | 28 | | | 54 | | | 2 | | | 2 | |
Pacific | 627 | | | 825 | | | 33 | | | 30 | |
South Atlantic | 497 | | | 681 | | | 26 | | | 25 | |
West North Central | 141 | | | 198 | | | 7 | | | 7 | |
West South Central | 131 | | | 168 | | | 7 | | | 6 | |
| 1,916 | | | 2,725 | | | 100 | % | | 100 | % |
Less: allowance for credit losses | 12 | | | 29 | | | |
Total | $ | 1,904 | | | $ | 2,696 | |
Concentrations of credit risk of commercial mortgage loans by property type were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | Percentage |
December 31, | | December 31, |
2021 | | 2020 | | 2021 | | 2020 |
(in millions) | | | | |
Apartments | $ | 496 | | | $ | 713 | | | 26 | % | | 26 | % |
Hotel | 14 | | | 50 | | | 1 | | | 2 | |
Industrial | 319 | | | 427 | | | 17 | | | 16 | |
Mixed use | 68 | | | 87 | | | 3 | | | 3 | |
Office | 271 | | | 372 | | | 14 | | | 14 | |
Retail | 617 | | | 881 | | | 32 | | | 32 | |
Other | 131 | | | 195 | | | 7 | | | 7 | |
| 1,916 | | | 2,725 | | | 100 | % | | 100 | % |
Less: allowance for credit losses | 12 | | | 29 | | | |
Total | $ | 1,904 | | | $ | 2,696 | |
Syndicated Loans
The recorded investment in syndicated loans as of December 31, 2021 and 2020 was $149 million and $595 million, respectively. The Company’s syndicated loan portfolio is diversified across industries and issuers. Total syndicated loans past due were nil and $3 million as of December 31, 2021 and 2020, respectively. The Company assigns an internal risk rating to each syndicated loan in its portfolio ranging from 1 through 5, with 5 reflecting the lowest quality.
The tables below present the amortized cost basis of syndicated loans by origination year and internal risk rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Internal Risk Rating | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
Risk 5 | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | |
Risk 4 | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | 3 | |
Risk 3 | | — | | | — | | | 4 | | | 5 | | | 5 | | | 6 | | | 20 | |
Risk 2 | | 15 | | | 4 | | | 12 | | | 10 | | | 18 | | | 12 | | | 71 | |
Risk 1 | | 8 | | | 3 | | | 3 | | | 11 | | | 16 | | | 13 | | | 54 | |
Total | | $ | 23 | | | $ | 7 | | | $ | 20 | | | $ | 26 | | | $ | 40 | | | $ | 33 | | | $ | 149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
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 $5 million and $7 million as of December 31, 2021 and December 31, 2020, respectively.
The tables below present the amortized cost basis of advisor loans by origination year and termination status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Termination Status | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
Active | | $ | 136 | | | $ | 147 | | | $ | 119 | | | $ | 89 | | | $ | 116 | | | $ | 113 | | | $ | 720 | |
Terminated | | 1 | | | 1 | | | — | | | — | | | — | | | 6 | | | 8 | |
Total | | $ | 137 | | | $ | 148 | | | $ | 119 | | | $ | 89 | | | $ | 116 | | | $ | 119 | | | $ | 728 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
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 based on the number of days past due. Credit card receivables over 30 days past due were 1% of total credit card receivables as of both December 31, 2021 and December 31, 2020.
The table below presents the amortized cost basis of credit card receivables by FICO score:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(in millions) |
> 800 | $ | 30 | | | $ | 28 | |
750 - 799 | 24 | | | 23 | |
700 - 749 | 25 | | | 25 | |
650 - 699 | 14 | | | 15 | |
< 650 | 5 | | | 5 | |
Total | $ | 98 | | | $ | 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 margin loans balance was $1.2 billion and $1.0 billion as of December 31, 2021 and 2020, respectively. 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, 2021 and 2020, the allowance for credit losses on margin loans was not material.
Pledged Asset Lines of Credit
The pledged asset lines of credit balance was $467 million and $224 million million as of December 31, 2021 and 2020, respectively. The Company monitors collateral supporting pledged asset lines of credit and requests additional collateral when necessary in order to mitigate the risk of loss. As of December 31, 2021 and 2020, there was no allowance for credit losses on pledged asset lines of credit.
Deposit Receivables
Deposit receivables were $7.9 billion and $1.4 billion as of December 31, 2021 and 2020, respectively. Deposit receivables are fully collateralized by the fair value of the assets held in trusts. Based on management’s evaluation of the nature of the underlying assets and the potential for changes in the collateral value, there was no allowance for credit losses for the deposit receivables as of December 31, 2021 and 2020. The increase in deposit receivables is primarily driven by the reinsurance transaction, effective July 1, 2021, to reinsure fixed deferred and non-life contingent immediate annuity policies. See Note 1 for more information on the fixed deferred and immediate annuity reinsurance transaction.
Troubled Debt Restructurings
There were no loans accounted for as a troubled debt restructuring by the Company during the years ended December 31, 2021, 2020 and 2019. There are no commitments to lend additional funds to borrowers whose loans have been restructured.
8. Reinsurance
The Company reinsures a portion of the insurance risks associated with its traditional life, DI and LTC insurance products through reinsurance agreements with unaffiliated reinsurance companies. During the third quarter of 2021, RiverSource Life reinsured 100% of its insurance risk associated with its life contingent immediate annuity policies in force as of July 1, 2021 through a reinsurance agreement with Commonwealth. Policies issued after July 1, 2021 are not subject to this reinsurance agreement. See Note 1 for more information on the fixed deferred and immediate annuity reinsurance transaction.
Reinsurance contracts do not relieve the Company from its primary obligation to policyholders.
The Company generally reinsures 90% of the death benefit liability for new term life insurance policies beginning in 2001 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, 2021 and 2020, traditional life and UL insurance policies in force were $198.6 billion and $195.7 billion, respectively, of which $145.1 billion and $143.6 billion as of December 31, 2021 and 2020 were reinsured at the respective year ends.
The effect of reinsurance on premiums for the Company’s traditional long-duration contracts was as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Direct premiums | $ | 490 | | | $ | 565 | | | $ | 621 | |
Reinsurance ceded | (1,361) | | | (224) | | | (224) | |
Net premiums | $ | (871) | | | $ | 341 | | | $ | 397 | |
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 $152 million, $140 million and $132 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The effect of reinsurance on premiums for the Company’s short-duration contracts was as follows:
| | | | | |
| Year Ended December 31, |
2019 (1) |
(in millions) |
Written premiums | |
Direct | $ | 864 | |
Ceded | (23) | |
Total net written premiums | $ | 841 | |
Earned premiums | |
Direct | $ | 841 | |
Ceded | (24) | |
Total net earned premiums | $ | 817 | |
(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 $404 million, $400 million and $407 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Receivables included $4.5 billion and $3.4 billion of reinsurance recoverables as of December 31, 2021 and 2020, respectively, including $2.6 billion and $2.7 billion related to LTC risk ceded to Genworth, respectively.
Policyholder account balances, future policy benefits and claims include $413 million and $440 million related to previously assumed reinsurance arrangements as of December 31, 2021 and 2020, respectively.
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 nil, $2 million and $5 million of impairments of indefinite-lived intangible assets recorded for the years ended December 31, 2021, 2020 and 2019, respectively.
The changes in the carrying amount of goodwill reported in the Company’s main operating segments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Advice & Wealth Management | | Asset Management | | Retirement & Protection Solutions | | Consolidated |
(in millions) |
Balance at January 1, 2020 | $ | 279 | | | $ | 797 | | | $ | 91 | | | $ | 1,167 | |
| | | | | | | |
Foreign currency translation | — | | | 10 | | | — | | | 10 | |
Other adjustments | — | | | (1) | | | — | | | (1) | |
Balance at December 31, 2020 | 279 | | | 806 | | | 91 | | | 1,176 | |
Acquisitions | — | | | 287 | | | — | | | 287 | |
Foreign currency translation | — | | | (4) | | | — | | | (4) | |
Other adjustments | — | | | (1) | | | — | | | (1) | |
Balance at December 31, 2021 | $ | 279 | | | $ | 1,088 | | | $ | 91 | | | $ | 1,458 | |
On November 8, 2021, the Company completed its acquisition of the European-based asset management business of BMO Financial Group for $973 million, excluding an estimated $7 million reduction due to customary deferred and contingent adjustments. The all-cash transaction added $136 billion of assets under management in EMEA. The acquisition extends our reach in EMEA and accelerates our core strategy of growing fee-based businesses. Acquisition-related costs were $32 million and are included in General and administrative expense.
The fair value of the total consideration paid and the recognized assets and acquired liabilities assumed for this business are included in the table below. Goodwill of $287 million arising from acquisition consists largely of the synergies and economies of scale expected from combining the Company’s EMEA operations. All goodwill was assigned to the Asset Management segment.
The following table summarizes the consideration paid, assets acquired, and liabilities assumed at the acquisition date:
| | | | | |
| November 8, 2021 |
(in millions) |
Consideration paid | |
Cash | $ | 973 | |
Deferred considerations | (35) | |
Contingent considerations | 28 | |
Total fair value | $ | 966 | |
| |
Recognized Assets / Liabilities | |
Assets | |
Cash and cash equivalents | $ | 397 | |
Investments | 77 | |
Receivables | 116 | |
Other assets | 295 | |
Total assets | 885 | |
Liabilities | |
Debt | 2 | |
Accounts payable and accrued expenses | 235 | |
Other liabilities | 190 | |
Total liabilities | 427 | |
Identifiable net assets | $ | 458 | |
| |
Intangible assets | $ | 295 | |
Deferred tax liability | 74 | |
Goodwill | 287 | |
The fair value of the pension plan assets and liabilities, the recognized deferred tax assets and other components of deferred and contingent consideration reflects the provisional valuation of those assets and liabilities.
The carrying amount of indefinite-lived intangible assets consist of the following:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Customer contracts | $ | 848 | | | $ | 640 | |
Trade names | 69 | | | 69 | |
Total | $ | 917 | | | $ | 709 | |
Definite-lived intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
(in millions) |
Customer relationships | $ | 254 | | | $ | (163) | | | $ | 91 | | | $ | 193 | | | $ | (155) | | | $ | 38 | |
Contracts | 235 | | | (217) | | | 18 | | | 223 | | | (211) | | | 12 | |
Other | 272 | | | (188) | | | 84 | | | 226 | | | (168) | | | 58 | |
Total | $ | 761 | | | $ | (568) | | | $ | 193 | | | $ | 642 | | | $ | (534) | | | $ | 108 | |
Definite-lived intangible assets acquired during the year ended December 31, 2021 were $89 million with a weighted average amortization period of 10 years. The aggregate amortization expense for definite-lived intangible assets during the years ended December 31, 2021, 2020 and 2019 was $34 million, $31 million and $37 million, respectively. In 2021, 2020 and 2019, the Company did not record any impairment charges on definite-lived intangible assets.
Estimated intangible amortization expense as of December 31, 2021 for the next five years is as follows:
| | | | | |
| (in millions) |
2022 | $ | 31 | |
2023 | 27 | |
2024 | 16 | |
2025 | 10 | |
2026 | 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, 2021 primarily reflected a favorable impact from lower surrenders on variable annuities with living benefits and UL and VUL insurance products. The impact of unlocking to DAC for the year ended December 31, 2020 primarily reflected updates to interest rate assumptions, partially offset by a favorable impact from lower surrenders on annuity contracts with a withdrawal benefit. The impact of unlocking to DAC for the year ended December 31, 2019 primarily reflected updated mortality assumptions on UL and VUL insurance products and lower surrender rate assumptions on variable annuities, partially offset by an unfavorable impact from updates to assumptions on utilization of guaranteed withdrawal benefits.
The balances of and changes in DAC were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(in millions) |
Balance at January 1 | $ | 2,532 | | | $ | 2,698 | | | $ | 2,776 | |
Capitalization of acquisition costs | 280 | | | 228 | | | 291 | |
Amortization | (184) | | | (177) | | | (165) | |
Amortization, impact of valuation assumptions review | 60 | | | (100) | | | (14) | |
Impact of change in net unrealized (gains) losses on securities | 94 | | | (117) | | | (175) | |
Disposal of business | — | | | — | | | (15) | |
Balance at December 31 | $ | 2,782 | | | $ | 2,532 | | | $ | 2,698 | |
The balances of and changes in DSIC, which is included in Other assets, were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(in millions) |
Balance at January 1 | $ | 189 | | | $ | 218 | | | $ | 251 | |
Capitalization of sales inducement costs | 1 | | | 1 | | | 1 | |
Amortization | (16) | | | (13) | | | (15) | |
Amortization, impact of valuation assumptions review | 2 | | | (16) | | | — | |
Impact of change in net unrealized (gains) losses on securities | 13 | | | (1) | | | (19) | |
Balance at December 31 | $ | 189 | | | $ | 189 | | | $ | 218 | |
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, |
2021 | | 2020 |
(in millions) |
Policyholder account balances | | | |
Fixed annuities(1) | $ | 8,117 | | | $ | 8,531 | |
Variable annuity fixed sub-accounts | 4,990 | | | 5,104 | |
UL/VUL insurance | 3,103 | | | 3,122 | |
IUL insurance | 2,534 | | | 2,269 | |
Structured variable annuities | 4,440 | | | 1,371 | |
Other life insurance | 563 | | | 605 | |
Total policyholder account balances | 23,747 | | | 21,002 | |
| | | |
Future policy benefits | | | |
Variable annuity GMWB | 2,336 | |
| 3,049 | |
Variable annuity GMAB(2) | (23) | |
| 1 | |
Other annuity liabilities | 67 | | | 211 | |
Fixed annuity life contingent liabilities | 1,278 | | | 1,370 | |
Life and DI insurance | 1,139 | | | 1,187 | |
LTC insurance | 5,664 | | | 5,722 | |
UL/VUL and other life insurance additional liabilities | 1,291 | | | 1,259 | |
Total future policy benefits | 11,752 | | | 12,799 | |
Policy claims and other policyholders’ funds | 251 | | | 191 | |
Total policyholder account balances, future policy benefits and claims | $ | 35,750 | | | $ | 33,992 | |
(1) Includes fixed deferred annuities, non-life contingent fixed payout annuities and fixed deferred indexed annuity host contracts.
(2) Includes the fair value of GMAB embedded derivatives that was a net asset as of December 31, 2021 reported as a contra liability.
Fixed Annuities
Fixed annuities include deferred, payout and fixed deferred indexed annuity contracts. In 2020, the Company discontinued sales of fixed deferred and fixed deferred indexed annuities.
Deferred contracts offer a guaranteed minimum rate of interest and security of the principal invested. Payout contracts guarantee a fixed income payment for life or the term of the contract. Liabilities for fixed annuities in a benefit or payout status are based on future estimated payments using established industry mortality tables and interest rates, ranging from 2.23% to 9.38% as of December 31, 2021, depending on year of issue, with an average rate of approximately 3.6%. The Company generally invests the proceeds from the annuity contracts in fixed rate securities.
The Company’s equity indexed annuity (“EIA”) product is a single premium fixed deferred annuity. The Company discontinued new sales of EIAs in 2007. The contract was issued with an initial term of seven years and interest earnings are linked to the performance of the S&P 500® Index. This annuity has a minimum interest rate guarantee of 3% on 90% of the initial premium, adjusted for any surrenders. The Company generally invests the proceeds from the annuity contracts in fixed rate securities and hedges the equity risk with derivative instruments.
The Company’s fixed index annuity product is a fixed annuity that includes an indexed account. The rate of interest credited above the minimum guarantee for funds allocated to the indexed account is linked to the performance of the specific index for the indexed account (subject to a cap). The Company previously offered S&P 500® Index and MSCI® EAFE Index account options. Both options offered two crediting durations, one-year and two-year. The contractholder could allocate all or a portion of the policy value to a fixed or indexed account. The portion of the policy allocated to the indexed account is accounted for as an embedded derivative. The Company hedges the interest credited rate including equity and interest rate risk related to the indexed account with derivative instruments. The contractholder could choose to add a GMWB for life rider for an additional fee.
See Note 17 for additional information regarding the Company’s derivative instruments used to hedge the risk related to indexed annuities.
Variable Annuities
Purchasers of variable annuities can select from a variety of investment options and can elect to allocate a portion to a fixed account. A vast majority of the premiums received for variable annuity contracts are held in separate accounts where the assets are held for the exclusive benefit of those contractholders.
Most of the variable annuity contracts issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB or GGU provisions. The Company previously offered contracts with GMIB provisions. See Note 2 and Note 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 stated account parameters, which include a cap and floor, or a spread ). 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, 2021. Anticipated interest rates for DI policies ranged from 3% to 7.5% as of December 31, 2021 and for LTC policies ranged from 5% to 5.7% as of December 31, 2021.
The liability for unpaid reported claims on DI and LTC policies includes an estimate of the present value of obligations for continuing benefit payments. The discount rates used to calculate present values are based on average interest rates earned on assets supporting the liability for unpaid amounts and were 4.5% and 5.95% for DI and LTC claims, respectively, as of December 31, 2021.
Portions of the Company’s UL and VUL policies have product features that result in profits followed by losses from the insurance component of the policy. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the policy. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.
Separate Account Liabilities
Separate account liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Variable annuity | $ | 82,862 | | | $ | 79,299 | |
VUL insurance | 9,343 | | | 8,226 | |
Other insurance | 33 | | | 31 | |
Threadneedle investment liabilities | 5,253 | | | 5,055 | |
Total | $ | 97,491 | | | $ | 92,611 | |
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
Most of the variable annuity contracts issued by the Company contain one or more guaranteed benefits, including GMWB, GMAB, GMDB or GGU provisions. The Company previously offered contracts containing GMIB provisions. See Note 2 and Note 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 contract issue the guaranteed amount is equal to the amount deposited but the guarantee may be increased annually to the account value (a “step-up”) in the case of favorable market performance or by a benefit credit if the contract includes this provision.
The Company has GMWB riders in force, which contain one or more of the following provisions:
•Withdrawals at a specified rate per year until the amount withdrawn is equal to the guaranteed amount.
•Withdrawals at a specified rate per year for the life of the contractholder (“GMWB for life”).
•Withdrawals at a specified rate per year for joint contractholders while either is alive.
•Withdrawals based on performance of the contract.
•Withdrawals based on the age withdrawals begin.
•Credits are applied annually for a specified number of years to increase the guaranteed amount as long as withdrawals have not been taken.
Variable annuity contractholders age 79 or younger at contract issue can also obtain a principal-back guarantee by purchasing the optional GMAB rider for an additional charge. The GMAB rider guarantees that, regardless of market performance at the end of the 10-year waiting period, the contract value will be no less than the original investment or a specified percentage of the highest anniversary value, adjusted for withdrawals. If the contract value is less than the guarantee at the end of the 10-year period, a lump sum will be added to the contract value to make the contract value equal to the guarantee value.
Certain UL policies provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.
The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variable Annuity Guarantees by Benefit Type (1) | | December 31, 2021 | | December 31, 2020 |
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 | $ | 70,020 | | $ | 68,145 | | $ | 6 | | | 69 | | $ | 66,874 | | $ | 64,932 | | $ | 5 | | | 68 |
Five/six-year reset | 8,309 | | 5,612 | | 6 | | | 68 | | 8,116 | | 5,386 | | 6 | | | 68 |
One-year ratchet | 6,177 | | 5,858 | | 13 | | | 71 | | 6,094 | | 5,763 | | 8 | | | 71 |
Five-year ratchet | 1,438 | | 1,386 | | 1 | | | 68 | | 1,436 | | 1,381 | | — | | | 67 |
Other | 1,302 | | 1,286 | | 38 | | | 74 | | 1,261 | | 1,243 | | 45 | | | 73 |
Total — GMDB | $ | 87,246 | | $ | 82,287 | | $ | 64 | | | 69 | | $ | 83,781 | | $ | 78,705 | | $ | 64 | | | 68 |
| | | | | | | | | | | |
GGU death benefit | $ | 1,260 | | $ | 1,198 | | $ | 184 | | | 72 | | $ | 1,183 | | $ | 1,126 | | $ | 162 | | | 71 |
| | | | | | | | | | | |
GMIB | $ | 184 | | $ | 170 | | $ | 4 | | | 71 | | $ | 187 | | $ | 173 | | $ | 6 | | | 71 |
| | | | | | | | | | | |
GMWB: | | | | | | | | | | | |
GMWB | $ | 1,900 | | $ | 1,895 | | $ | 1 | | | 75 | | $ | 1,972 | | $ | 1,967 | | $ | 1 | | | 74 |
GMWB for life | 52,387 | | 52,334 | | 187 | | | 69 | | 50,142 | | 50,057 | | 185 | | | 69 |
Total — GMWB | $ | 54,287 | | $ | 54,229 | | $ | 188 | | | 69 | | $ | 52,114 | | $ | 52,024 | | $ | 186 | | | 69 |
| | | | | | | | | | | |
GMAB | $ | 2,005 | | $ | 2,005 | | $ | — | | | 62 | | $ | 2,291 | | $ | 2,291 | | $ | — | | | 61 |
(1) Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.
The net amount at risk for GMDB, GGU and GMAB is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB is defined as the greater of the present value of the minimum guaranteed annuity payments less the current contract value or zero. The net amount at risk for GMWB is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero.
The following table provides information related to insurance guarantees for which the Company has established additional liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Net Amount at Risk | | Weighted Average Attained Age | Net Amount at Risk | | Weighted Average Attained Age |
(in millions, except age) |
UL secondary guarantees | $ | 6,564 | | | 68 | | $ | 6,587 | | | 67 |
The net amount at risk for UL secondary guarantees is defined as the current guaranteed death benefit amount in excess of the current policyholder account balance.
Changes in additional liabilities (contra liabilities) for variable annuity and insurance guarantees were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GMDB & GGU | | GMIB | | GMWB (1) | | GMAB (1) | | UL |
(in millions) |
Balance at January 1, 2019 | $ | 19 | | | $ | 8 | | | $ | 875 | | | $ | (19) | | | $ | 659 | |
Incurred claims | 2 | | | (1) | | | 587 | | | (20) | | | 141 | |
Paid claims | (5) | | | — | | | — | | | — | | | (42) | |
Balance at December 31, 2019 | 16 | | | 7 | | | 1,462 | | | (39) | | | 758 | |
Incurred claims | 15 | | | — | | | 1,587 | | | 40 | | | 209 | |
Paid claims | (7) | | | (1) | | | — | | | — | | | (51) | |
Balance at December 31, 2020 | 24 | | | 6 | | | 3,049 | | | 1 | | | 916 | |
Incurred claims | 17 | | | — | | | (713) | | | (24) | | | 140 | |
Paid claims | (5) | | | (1) | | | — | | | — | | | (36) | |
Balance at December 31, 2021 | $ | 36 | | | $ | 5 | | | $ | 2,336 | | | $ | (23) | | | $ | 1,020 | |
(1) The incurred claims for GMWB and GMAB include the change in the fair value of the liabilities (contra liabilities) less paid claims.
The liabilities for guaranteed benefits are supported by general account assets.
The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Mutual funds: | | | |
Equity | $ | 49,183 | | | $ | 45,947 | |
Bond | 24,998 | | | 26,073 | |
Other | 8,316 | | | 6,911 | |
Total mutual funds | $ | 82,497 | | | $ | 78,931 | |
No gains or losses were recognized on assets transferred to separate accounts for the years ended December 31, 2021, 2020 and 2019.
13. Customer Deposits
Customer deposits consisted of the following:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Fixed rate certificates | $ | 4,995 | | | $ | 6,341 | |
Stock market certificates | 287 | | | 389 | |
Stock market embedded derivatives | 4 | | | 8 | |
Other | 15 | | | 22 | |
Less: accrued interest classified in other liabilities | (5) | | | (10) | |
Total investment certificate reserves | 5,296 | | | 6,750 | |
Banking and brokerage deposits | 14,931 | | | 10,891 | |
Total | $ | 20,227 | | | $ | 17,641 | |
Investment Certificates
The Company offers fixed rate investment certificates primarily in amounts ranging from $1 thousand 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 $2.7 billion and $3.2 billion as of December 31, 2021 and 2020, respectively. 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 nil to 2.35%, 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, |
2021 | | 2020 | 2021 | | 2020 |
(in millions) | |
Long-term debt: | | | | | | | |
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 | | | 500 | | | 3.0 | | | 3.0 | |
Senior notes due 2026 | 500 | | | 500 | | | 2.9 | | | 2.9 | |
Finance lease liabilities | 40 | | | 44 | | | N/A | | N/A |
Other (1) | (8) | | | (13) | | | N/A | | N/A |
Total long-term debt | 2,832 | | | 2,831 | | | | | |
| | | | | | | |
Short-term borrowings: | | | | | | | |
Federal Home Loan Bank (“FHLB”) advances | 200 | | | 200 | | | 0.3 | % | | 0.4 | % |
| | | | | | | |
| | | | | | | |
Total | $ | 3,032 | | | $ | 3,031 | | | | | |
(1) Includes adjustments for net unamortized discounts, debt issuance costs and other lease obligations.
N/A Not Applicable
Long-Term Debt
The Company’s senior notes 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 $1.2 billion and $1.3 billion, of commercial mortgage backed securities, and $581 million and $604 million, of residential mortgage backed securities, as of December 31, 2021 and 2020, respectively. The remaining maturity of outstanding FHLB advances was less than three months as of both December 31, 2021 and 2020. 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 June 11, 2021, the Company entered into an amended and restated credit agreement that provides for an unsecured revolving credit facility of up to $1.0 billion that expires in June 2026. Under the terms of the credit agreement for the facility, the Company may increase the amount of this facility up to $1.25 billion upon satisfaction of certain approval requirements. As of both December 31, 2021 and 2020, the Company had no borrowings outstanding and $1 million of letters of credit issued against the facility. 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, 2021 and 2020.
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, 2021 | |
Level 1 | | Level 2 | | Level 3 | | Total | |
(in millions) | |
Assets | | | | | | | | |
Cash equivalents | $ | 2,341 | | | $ | 3,478 | | | $ | — | | | $ | 5,819 | | |
Available-for-Sale securities: | | | | | | | | |
Corporate debt securities | — | | | 9,430 | | | 502 | | | 9,932 | | |
Residential mortgage backed securities | — | | | 10,944 | | | — | | | 10,944 | | |
Commercial mortgage backed securities | — | | | 4,951 | | | 35 | | | 4,986 | | |
Asset backed securities | — | | | 3,647 | | | 7 | | | 3,654 | | |
State and municipal obligations | — | | | 1,092 | | | — | | | 1,092 | | |
U.S. government and agency obligations | 1,301 | | | — | | | — | | | 1,301 | | |
Foreign government bonds and obligations | — | | | 92 | | | — | | | 92 | | |
Other securities | — | | | 49 | | | — | | | 49 | | |
Total Available-for-Sale securities | 1,301 | | | 30,205 | | | 544 | | | 32,050 | | |
| | | | | | | | |
Investments at net asset value (“NAV”) | | | | | | | 11 | | (1) |
Trading and other securities | 217 | | | 25 | | | — | | | 242 | | |
Separate account assets at NAV | | | | | | | 97,491 | | (1) |
Investments and cash equivalents segregated for regulatory purposes | 600 | | | — | | | — | | | 600 | | |
Receivables: | | | | | | | | |
Fixed deferred indexed annuity ceded embedded derivatives | — | | | — | | | 59 | | | 59 | | |
Other assets: | | | | | | | | |
Interest rate derivative contracts | 1 | | | 1,251 | | | — | | | 1,252 | | |
Equity derivative contracts | 158 | | | 4,135 | | | — | | | 4,293 | | |
Credit derivative contracts | — | | | 9 | | | — | | | 9 | | |
Foreign exchange derivative contracts | 1 | | | 19 | | | — | | | 20 | | |
Total other assets | 160 | | | 5,414 | | | — | | | 5,574 | | |
Total assets at fair value | $ | 4,619 | | | $ | 39,122 | | | $ | 603 | | | $ | 141,846 | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Policyholder account balances, future policy benefits and claims: | | | | | | | | |
Fixed deferred indexed annuity embedded derivatives | $ | — | | | $ | 5 | | | $ | 56 | | | $ | 61 | | |
IUL embedded derivatives | — | | | — | | | 905 | | | 905 | | |
GMWB and GMAB embedded derivatives | — | | | — | | | 1,486 | | | 1,486 | | (2) |
Structured variable annuity embedded derivatives | — | | | — | | | 406 | | | 406 | | |
Total policyholder account balances, future policy benefits and claims | — | | | 5 | | | 2,853 | | | 2,858 | | (3) |
Customer deposits | — | | | 4 | | | — | | | 4 | | |
Other liabilities: | | | | | | | | |
Interest rate derivative contracts | 1 | | | 467 | | | — | | | 468 | | |
Equity derivative contracts | 101 | | | 3,653 | | | — | | | 3,754 | | |
| | | | | | | | |
Foreign exchange derivative contracts | 1 | | | — | | | — | | | 1 | | |
Other | 212 | | | 4 | | | 61 | | | 277 | | |
Total other liabilities | 315 | | | 4,124 | | | 61 | | | 4,500 | | |
Total liabilities at fair value | $ | 315 | | | $ | 4,133 | | | $ | 2,914 | | | $ | 7,362 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | (4) |
Structured variable annuity embedded derivatives | — | | | — | | | 70 | | | 70 | | |
Total policyholder account balances, future policy benefits and claims | — | | | 3 | | | 3,370 | | | 3,373 | | (5) |
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 | | |
(1) Amounts are comprised of certain financial instruments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy.
(2) The fair value of the GMWB and GMAB embedded derivatives included $1.6 billion of individual contracts in a liability position and $133 million of individual contracts in an asset position (recorded as a contra liability) as of December 31, 2021.
(3) The Company’s adjustment for nonperformance risk resulted in a $598 million cumulative decrease to the embedded derivatives as of December 31, 2021.
(4) The fair value of the GMWB and GMAB embedded derivatives included $2.4 billion of individual contracts in a liability position and $67 million of individual contracts in an asset position (recorded as a contra liability) as of December 31, 2020.
(5) The Company’s adjustment for nonperformance risk resulted in a $727 million cumulative decrease to the embedded derivatives as of December 31, 2020.
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 | | | | Receivables | |
Corporate Debt Securities | | Residential Mortgage Backed Securities | | Commercial Mortgage Backed Securities | | Asset Backed Securities | | Total | | | Fixed Deferred Indexed Annuity Ceded Embedded Derivatives | |
(in millions) | |
Balance at January 1, 2021 | $ | 772 | | | $ | 9 | | | $ | — | | | $ | 32 | | | $ | 813 | | | | | $ | — | | |
Total gains (losses) included in: | | | | | | | | | | | | | | |
Net income | (1) | | | — | | | — | | | — | | | (1) | | (1) | | | 3 | | |
Other comprehensive income (loss) | (10) | | | — | | | — | | | — | | | (10) | | | | | — | | |
Purchases | 108 | | | 78 | | | 35 | | | — | | | 221 | | | | | — | | |
Sales | — | | | — | | | — | | | (1) | | | (1) | | | | | — | | |
Issues | — | | | — | | | — | | | — | | | — | | | | | 57 | | (5) |
Settlements | (119) | | | — | | | — | | | (2) | | | (121) | | | | | (1) | | |
Transfers into Level 3 | 168 | | | — | | | — | | | 2 | | | 170 | | | | | — | | |
Transfers out of Level 3 | (416) | | | (87) | | | — | | | (24) | | | (527) | | | | | — | | |
Balance at December 31, 2021 | $ | 502 | | | $ | — | | | $ | 35 | | | $ | 7 | | | $ | 544 | | | | | $ | 59 | | |
| | | | | | | | | | | | | | |
Changes in unrealized gains (losses) in net income relating to assets held at December 31, 2021 | $ | (1) | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (2) | | (1) | | | $ | — | | |
Changes in unrealized gains (losses) in other comprehensive income (loss) relating to assets held at December 31, 2021 | $ | (8) | | | $ | — | | | $ | — | | | $ | 1 | | | $ | (7) | | | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 at January 1, 2021 | $ | 49 | | | $ | 935 | | | $ | 2,316 | | | $ | 70 | | | $ | 3,370 | | | $ | 43 | | |
Total (gains) losses included in: | | | | | | | | | | | | |
Net income | 10 | | (2) | 68 | | (2) | (1,344) | | (3) | 393 | | (3) | (873) | | | (13) | | (4) |
Issues | — | | | — | | | 369 | | | (28) | | | 341 | | | 45 | | |
Settlements | (3) | | | (98) | | | 145 | | | (29) | | | 15 | | | (14) | | |
Balance at December 31, 2021 | $ | 56 | | | $ | 905 | | | $ | 1,486 | | | $ | 406 | | | $ | 2,853 | | | $ | 61 | | |
| | | | | | | | | | | | |
Changes in unrealized (gains) losses in net income relating to liabilities held at December 31, 2021 | $ | — | | | $ | 68 | | (2) | $ | (1,299) | | (3) | $ | — | | | $ | (1,231) | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale Securities | |
Corporate Debt Securities | | Residential Mortgage Backed Securities | | | | Asset Backed Securities | | Total |
(in millions) | |
Balance at 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 at December 31, 2020 | $ | 772 | | | $ | 9 | | | | | $ | 32 | | | $ | 813 | | |
| | | | | | | | | | |
Changes in unrealized gains (losses) in net income 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 at 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 at December 31, 2020 | $ | 49 | | | $ | 935 | | | $ | 2,316 | | | $ | 70 | | | $ | 3,370 | | | $ | 43 | | |
| | | | | | | | | | | | |
Changes in unrealized (gains) losses in net income 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 at 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 at December 31, 2019 | $ | 750 | | | $ | 17 | | | $ | — | | | $ | 19 | | | $ | 786 | | | | |
| | | | | | | | | | | | |
Changes in unrealized gains (losses) in net income 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 at 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 at December 31, 2019 | $ | 43 | | | $ | 881 | | | $ | 763 | | | $ | 1,687 | | | $ | 44 | | |
| | | | | | | | | | |
Changes in unrealized (gains) losses in net income relating to liabilities held at December 31, 2019 | $ | — | | | $ | 209 | | (2) | $ | 82 | | (3) | $ | 291 | | | $ | — | | |
(1) Included in Net investment income.
(2) Included in Interest credited to fixed accounts.
(3) Included in Benefits, claims, losses and settlement expenses.
(4) Included in General and administrative expense.
(5) Represents the amount of ceded embedded derivatives associated with fixed deferred annuity products reinsured in the third quarter of 2021. See Note 1 for additional information on the reinsurance transaction.
The increase (decrease) to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $(92) million, $196 million and $(190) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the years ended December 31, 2021, 2020 and 2019, respectively.
Securities transferred from Level 3 primarily represent securities with fair values that are obtained from a third-party pricing service with observable inputs or fair values that were included in an observable transaction with a market participant. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote.
The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
| (in millions) | | | | | | | | | | |
Corporate debt securities (private placements) | $ | 502 | | | Discounted cash flow | | Yield/spread to U.S. Treasuries (1) | 0.8% | – | 2.4% | 1.1% |
Asset backed securities | $ | 2 | | | Discounted cash flow | | Annual short-term default rate (2) | 0.8% | 0.8% |
| | | | | Annual long-term default rate (2) | 3.5% | 3.5% |
| | | | | Discount rate | 12.0% | 12.0% |
| | | | | Constant prepayment rate | 10.0% | 10.0% |
| | | | | Loss recovery | 63.6% | 63.6% |
Fixed deferred indexed annuity ceded embedded derivatives | $ | 59 | | | Discounted cash flow | | Surrender rate (4) | 0.0% | – | 66.8% | 1.4% |
IUL embedded derivatives | $ | 905 | | | Discounted cash flow | | Nonperformance risk (3) | 65 bps | 65 bps |
Fixed deferred indexed annuity embedded derivatives | $ | 56 | | | Discounted cash flow | | Surrender rate (4) | 0.0% | – | 66.8% | 1.4% |
| | | | | Nonperformance risk (3) | 65 bps | 65 bps |
GMWB and GMAB embedded derivatives | $ | 1,486 | | | Discounted cash flow | | Utilization of guaranteed withdrawals (5) (6) | 0.0% | – | 48.0% | 10.6% |
| | | | | Surrender rate (4) | 0.1% | – | 55.7% | 3.6% |
| | | | | Market volatility (7) (8) | 4.3% | – | 16.8% | 10.8% |
| | | | | Nonperformance risk (3) | 65 bps | 65 bps |
Structured variable annuity embedded derivatives | $ | 406 | | | Discounted cash flow | | Surrender rate (4) | 0.8% | – | 40.0% | 0.9% |
| | | | | Nonperformance risk (3) | 65 bps | 65 bps |
Contingent consideration liabilities | $ | 61 | | | Discounted cash flow | | Discount rate (9) | 0.0% | – | 0.0% | | 0.0% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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% |
(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 represents the implied volatility of fund of funds and managed volatility funds.
(8) The weighted average market volatility represents the average volatility across all contracts, weighted by the size of the guaranteed benefit.
(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 the surrender rate used in the fair value measurement of the fixed deferred indexed annuity ceded embedded derivatives in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would have resulted in a significantly lower (higher) fair value measurement.
Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurements of the fixed deferred indexed annuity embedded derivatives and structured variable annuity embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value.
Significant increases (decreases) in utilization and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly higher (lower) liability value.
Significant increases (decreases) in nonperformance risk and surrender rate used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would have resulted in a significantly lower (higher) liability value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution channel and whether the value of the guaranteed benefit exceeds the contract accumulation value.
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 equity securities and 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. The fair value of securities included in an observable transaction with a market participant are also considered Level 2 when the market is not active.
Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities with fair value typically based on a single non-binding broker quote. The underlying inputs used for some of the non-binding broker quotes are not readily available to the Company. The Company’s privately placed 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.
Receivables
During the third quarter of 2021, the Company reinsured its fixed deferred indexed annuity products which have an indexed account that is accounted for as an embedded derivative. The Company uses discounted cash flow models to determine the fair value of these ceded embedded derivatives. The fair value of fixed deferred indexed annuity ceded embedded derivatives includes significant observable interest rates, volatilities and equity index levels and significant unobservable surrender rates. Given the significance of the unobservable surrender rates, these embedded derivatives are classified as Level 3. See Note 1 for more information on the reinsurance transaction.
Other Assets
Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The variation margin on futures contracts is also classified as Level 1. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps, foreign currency forwards and the majority of options. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial as of December 31, 2021 and 2020. See Note 16 and Note 17 for further information on the credit risk of derivative instruments and related collateral.
Liabilities
Policyholder Account Balances, Future Policy Benefits and Claims
There is no active market for the transfer of the Company’s embedded derivatives attributable to the provisions of certain variable annuity riders, fixed deferred indexed annuity, structured variable annuity and IUL products.
The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value as the present value of future expected benefit payments less the present value of future expected rider fees attributable to the embedded derivative feature. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to implied volatility as well as contractholder behavior assumptions that include margins for risk, all of which the Company believes a market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in Policyholder account balances, future policy benefits and claims.
The Company uses a discounted cash flow model to determine the fair value of the embedded derivatives associated with the provisions of its equity index annuity product. The projected cash flows generated by this model are based on significant observable inputs related to interest rates, volatilities and equity index levels and, therefore, are classified as Level 2.
The Company uses discounted cash flow models to determine the fair value of the embedded derivatives associated with the provisions of its fixed deferred indexed annuity, structured variable annuity and IUL products. The structured variable annuity product is a limited flexible purchase payment annuity that offers 45 different indexed account options providing equity market exposure and a fixed account. Each indexed account includes a protection option (a buffer or a floor). If the index has a negative return, contractholder losses will be reduced by a buffer or limited to a floor. The portion allocated to an indexed account is accounted for as an embedded derivative. The fair value of fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and significant unobservable surrender rates and the estimate of the Company’s nonperformance risk. Given the significance of the unobservable surrender rates and the nonperformance risk assumption, the fixed deferred indexed annuity, structured variable annuity and IUL embedded derivatives are classified as Level 3.
The embedded derivatives attributable to these provisions are recorded in Policyholder account balances, future policy benefits and claims.
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, 2021 and 2020. 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 equity securities and 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 utilizing 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 $93 million and $101 million as of December 31, 2021 and 2020, respectively, and is classified as Level 3 in the fair value hierarchy. The Company also measured certain equity-method investments at fair value on a nonrecurring basis using a discounted cash flow model. Inputs to the model include projected cash flows and a market-based discount rate. At December 31, 2021, the fair value of these investments was $7 million and is classified as Level 3 in the fair value hierarchy.
Assets and Liabilities Not Reported at Fair Value
The following tables provide the carrying value and the estimated fair value of financial instruments that are not reported at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Carrying Value | | Fair Value |
Level 1 | | Level 2 | | Level 3 | | Total |
(in millions) |
Financial Assets | | | | | | | | | |
Mortgage loans, net | $ | 1,953 | | | $ | — | | | $ | 49 | | | $ | 1,990 | | | $ | 2,039 | |
Policy loans | 835 | | | — | | | 835 | | | — | | | 835 | |
Receivables | 10,509 | | | 135 | | | 1,669 | | | 9,404 | | | 11,208 | |
Restricted and segregated cash | 2,195 | | | 2,195 | | | — | | | — | | | 2,195 | |
Other investments and assets | 368 | | | — | | | 319 | | | 49 | | | 368 | |
| | | | | | | | | |
Financial Liabilities | | | | | | | | | |
Policyholder account balances, future policy benefits and claims | $ | 12,342 | | | $ | — | | | $ | — | | | $ | 13,264 | | | $ | 13,264 | |
Investment certificate reserves | 5,297 | | | — | | | — | | | 5,290 | | | 5,290 | |
Banking and brokerage deposits | 14,931 | | | 14,931 | | | — | | | — | | | 14,931 | |
Separate account liabilities — investment contracts | 5,657 | | | — | | | 5,657 | | | — | | | 5,657 | |
Debt and other liabilities | 3,214 | | | 206 | | | 3,129 | | | 9 | | | 3,344 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
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 | |
Receivables include deposit receivables, 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 deposit receivables.
Policyholder account balances, future policy benefits 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 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, 2021 |
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 | $ | 5,387 | | | $ | — | | | $ | 5,387 | | | $ | (3,613) | | | $ | (1,637) | | | $ | (114) | | | $ | 23 | |
OTC cleared | 88 | | | — | | | 88 | | | (41) | | | — | | | — | | | 47 | |
Exchange-traded | 99 | | | — | | | 99 | | | (91) | | | — | | | — | | | 8 | |
Total derivatives | 5,574 | | | — | | | 5,574 | | | (3,745) | | | (1,637) | | | (114) | | | 78 | |
Securities borrowed | 135 | | | — | | | 135 | | | (41) | | | — | | | (91) | | | 3 | |
Total | $ | 5,709 | | | $ | — | | | $ | 5,709 | | | $ | (3,786) | | | $ | (1,637) | | | $ | (205) | | | $ | 81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
(1) Represents the amount of assets that could be offset by liabilities with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Liabilities 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 | $ | 4,091 | | | $ | — | | | $ | 4,091 | | | $ | (3,613) | | | $ | (183) | | | $ | (292) | | | $ | 3 | |
OTC cleared | 41 | | | — | | | 41 | | | (41) | | | — | | | — | | | — | |
Exchange-traded | 91 | | | — | | | 91 | | | (91) | | | — | | | — | | | — | |
Total derivatives | 4,223 | | | — | | | 4,223 | | | (3,745) | | | (183) | | | (292) | | | 3 | |
Securities loaned | 207 | | | — | | | 207 | | | (41) | | | — | | | (160) | | | 6 | |
Total | $ | 4,430 | | | $ | — | | | $ | 4,430 | | | $ | (3,786) | | | $ | (183) | | | $ | (452) | | | $ | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Amounts of Liabilities 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 | $ | 4,192 | | | $ | — | | | $ | 4,192 | | | $ | (3,862) | | | $ | (1) | | | $ | (327) | | | $ | 2 | |
OTC cleared | 25 | | | — | | | 25 | | | (25) | | | — | | | — | | | — | |
Exchange-traded | 95 | | | — | | | 95 | | | (91) | | | — | | | — | | | 4 | |
Total derivatives | 4,312 | | | — | | | 4,312 | | | (3,978) | | | (1) | | | (327) | | | 6 | |
Securities loaned | 205 | | | — | | | 205 | | | (43) | | | — | | | (157) | | | 5 | |
| | | | | | | | | | | | | |
Total | $ | 4,517 | | | $ | — | | | $ | 4,517 | | | $ | (4,021) | | | $ | (1) | | | $ | (484) | | | $ | 11 | |
(1) Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.
In the tables above, the amount of assets or liabilities presented are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral. The actual collateral may be greater than amounts presented in the tables.
When the fair value of collateral accepted by the Company is less than the amount due to the Company, there is a risk of loss if the counterparty fails to perform or provide additional collateral. To mitigate this risk, the Company monitors collateral values regularly and requires additional collateral when necessary. When the value of collateral pledged by the Company declines, it may be required to post additional collateral.
Freestanding derivative instruments are reflected in Other assets and Other liabilities. Cash collateral pledged by the Company is reflected in Other assets and cash collateral accepted by the Company is reflected in Other liabilities. Securities borrowing and lending agreements are reflected in Receivables and Other liabilities, respectively. See Note 17 for additional disclosures related to the Company’s derivative instruments and Note 5 for information related to derivatives held by consolidated investment entities.
17. Derivatives and Hedging Activities
Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity, foreign exchange and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.
Certain of the Company’s freestanding derivative instruments are subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 16 for additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.
Generally, the Company uses derivatives as economic hedges and accounting hedges. The following table presents the notional value and gross fair value of derivative instruments, including embedded derivatives:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Notional | | Gross Fair Value | Notional | | Gross Fair Value |
Assets (1) | | Liabilities (2)(3) | Assets (1) | | Liabilities (2)(3) |
(in millions) |
Derivatives designated as hedging instruments | | | | | | | | | | | |
| | | | | | | | | | | |
Equity contracts - cash flow hedges | $ | 19 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Foreign exchange contracts - net investment hedges | 58 | | — | | | — | | | 32 | | — | | | 2 |
Total qualifying hedges | 77 | | | — | | | — | | | 32 | | | — | | | 2 | |
| | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Interest rate contracts | 79,468 | | | 1,252 | | | 468 | | | 77,951 | | | 1,755 | | | 734 | |
Equity contracts | 61,142 | | | 4,293 | | | 3,754 | | | 57,254 | | | 4,090 | | | 3,571 | |
Credit contracts | 1,748 | | | 9 | | | — | | | 2,297 | | | 2 | | | 1 | |
Foreign exchange contracts | 2,380 | | | 20 | | | 1 | | | 3,423 | | | 23 | | | 4 | |
| | | | | | | | | | | |
Total non-designated hedges | 144,738 | | | 5,574 | | | 4,223 | | | 140,925 | | | 5,870 | | | 4,310 | |
| | | | | | | | | | | |
Embedded derivatives | | | | | | | | | | | |
GMWB and GMAB (4) | N/A | | — | | | 1,486 | | | N/A | | — | | | 2,316 | |
IUL | N/A | | — | | | 905 | | | N/A | | — | | | 935 | |
Fixed deferred indexed annuities and deposit receivables | N/A | | 59 | | | 61 | | | N/A | | — | | | 52 | |
Structured variable annuities | N/A | | — | | | 406 | | | N/A | | — | | | 70 | |
SMC | N/A | | — | | | 4 | | | N/A | | — | | | 8 | |
Total embedded derivatives | N/A | | 59 | | | 2,862 | | | N/A | | — | | | 3,381 | |
Total derivatives | $ | 144,815 | | | $ | 5,633 | | | $ | 7,085 | | | $ | 140,957 | | | $ | 5,870 | | | $ | 7,693 | |
N/A Not applicable.
(1) The fair value of freestanding derivative assets is included in Other assets and the fair value of ceded embedded derivative assets related to deposit receivables is included in Receivables.
(2) The fair value of freestanding derivative liabilities is included in Other liabilities. The fair value of GMWB and GMAB, IUL, fixed deferred indexed annuity and structured variable annuity embedded derivatives is included in Policyholder account balances, future policy benefits and claims. The fair value of the SMC embedded derivative liability is included in Customer deposits.
(3) The fair value of the Company’s derivative liabilities after considering the effects of master netting arrangements, cash collateral held by the same counterparty and the fair value of net embedded derivatives was $3.2 billion and $3.7 billion as of December 31, 2021 and 2020, respectively. See Note 16 for additional information related to master netting arrangements and cash collateral.
(4) The fair value of the GMWB and GMAB embedded derivatives as of December 31, 2021 included $1.6 billion of individual contracts in a liability position and $133 million of individual contracts in an asset position. The fair value of the GMWB and GMAB embedded derivatives as of December 31, 2020 included $2.4 billion of individual contracts in a liability position and $67 million of individual contracts in an asset position.
See Note 15 for additional information regarding the Company’s fair value measurement of derivative instruments.
As of December 31, 2021 and 2020, investment securities with a fair value of $123 million and $325 million, respectively, were received as collateral to meet contractual obligations under derivative contracts, of which $123 million and $325 million, respectively, may be sold, pledged or rehypothecated by the Company. As of both December 31, 2021 and 2020, the Company had sold, pledged or rehypothecated none of these securities. In addition, as of both December 31, 2021 and 2020, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.
Derivatives Not Designated as Hedges
The following table presents a summary of the impact of derivatives not designated as hedging instruments, including embedded derivatives, on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Investment Income | | Banking and Deposit Interest Expense | | Distribution Expenses | | Interest Credited to Fixed Accounts | | Benefits, Claims, Losses and Settlement Expenses | | General and Administrative Expense |
| (in millions) |
Year Ended December 31, 2021 | | | | | | | | | | | |
Interest rate contracts | $ | (23) | | | $ | — | | | $ | (1) | | | $ | — | | | $ | (886) | | | $ | — | |
Equity contracts | (4) | | | 1 | | | 116 | | | 91 | | | (817) | | | 17 | |
Credit contracts | — | | | — | | | 1 | | | — | | | 43 | | | — | |
Foreign exchange contracts | 1 | | | — | | | — | | | — | | | 5 | | | 8 | |
| | | | | | | | | | | |
GMWB and GMAB embedded derivatives | — | | | — | | | — | | | — | | | 830 | | | — | |
IUL embedded derivatives | — | | | — | | | — | | | 30 | | | — | | | — | |
Fixed deferred indexed annuity and deposit receivables embedded derivatives | — | | | — | | | — | | | (8) | | | — | | | — | |
Structured variable annuity embedded derivatives | — | | | — | | | — | | | — | | | (393) | | | — | |
SMC embedded derivatives | — | | | (1) | | | — | | | — | | | — | | | — | |
Total gain (loss) | $ | (26) | | | $ | — | | | $ | 116 | | | $ | 113 | | | $ | (1,218) | | | $ | 25 | |
| | | | | | | | | | | |
Year Ended December 31, 2020 | | | | | | | | | | | |
Interest rate contracts | $ | (1) | | | $ | — | | | $ | 2 | | | $ | — | | | $ | 1,633 | | | $ | — | |
Equity contracts | (1) | | | 1 | | | 100 | | | 55 | | | (744) | | | 15 | |
Credit contracts | — | | | — | | | 1 | | | — | | | (106) | | | — | |
Foreign exchange contracts | 1 | | | — | | | — | | | — | | | (8) | | | 10 | |
| | | | | | | | | | | |
GMWB and GMAB embedded derivatives | — | | | — | | | — | | | — | | | (1,553) | | | — | |
IUL embedded derivatives | — | | | — | | | — | | | 7 | | | — | | | — | |
Fixed deferred indexed annuity embedded derivatives | — | | | — | | | — | | | (4) | | | — | | | — | |
Structured variable annuity embedded derivatives | — | | | — | | | — | | | — | | | (91) | | | — | |
SMC embedded derivatives | — | | | (1) | | | — | | | — | | | — | | | — | |
Total gain (loss) | $ | (1) | | | $ | — | | | $ | 103 | | | $ | 58 | | | $ | (869) | | | $ | 25 | |
| | | | | | | | | | | |
Year Ended December 31, 2019 | | | | | | | | | | | |
Interest rate contracts | $ | (34) | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,097 | | | $ | — | |
Equity contracts | — | | | 11 | | | 99 | | | 117 | | | (1,547) | | | 16 | |
Credit contracts | — | | | — | | | — | | | — | | | (73) | | | — | |
Foreign exchange contracts | — | | | — | | | — | | | — | | | (30) | | | (1) | |
| | | | | | | | | | | |
GMWB and GMAB embedded derivatives | — | | | — | | | — | | | — | | | (435) | | | — | |
IUL embedded derivatives | — | | | — | | | — | | | (140) | | | — | | | — | |
Fixed deferred indexed annuity embedded derivatives | — | | | — | | | — | | | (8) | | | — | | | — | |
| | | | | | | | | | | |
SMC embedded derivatives | — | | | (9) | | | — | | | — | | | — | | | — | |
Total gain (loss) | $ | (34) | | | $ | 2 | | | $ | 99 | | | $ | (31) | | | $ | (988) | | | $ | 15 | |
The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to various products and transactions of the Company.
Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The indexed portion of structured variable annuities and the GMAB and non-life contingent GMWB provisions are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with
changes in fair value reported in earnings. The Company economically hedges the aggregate exposure related to the indexed portion of structured variable annuities and the GMAB and non-life contingent GMWB provisions using options, swaptions, swaps and futures.
The deferred premium associated with certain of the above options and swaptions is paid or received semi-annually over the life of the contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options and swaptions as of December 31, 2021:
| | | | | | | | | | | |
| Premiums Payable | | Premiums Receivable |
| (in millions) |
2022 | $ | 204 | | | $ | 204 | |
2023 | 51 | | | 43 | |
2024 | 137 | | | 25 | |
2025 | 124 | | | 22 | |
2026 | 252 | | | 88 | |
2027-2028 | 18 | | | — | |
Total | $ | 786 | | | $ | 382 | |
Actual timing and payment amounts may differ due to future settlements, modifications or exercises of the contracts prior to the full premium being paid or received.
The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. As a means of economically hedging these risks, the Company may use a combination of futures, options, swaps and swaptions. Certain of the macro hedge derivatives may contain settlement provisions linked to both equity returns and interest rates. The Company’s macro hedge derivatives that contain settlement provisions linked to both equity returns and interest rates, if any, are shown in other contracts in the tables above.
Structured variable annuity, IUL and stock market certificate products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to structured variable annuity, IUL and stock market certificate products will positively or negatively impact earnings over the life of these products. The equity component of structured variable annuity, IUL and stock market certificate product obligations are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As a means of economically hedging its obligations under the provisions of these products, the Company enters into interest rate swaps, index options and futures contracts.
The Company enters into futures, credit default swaps, commodity swaps and foreign currency forwards to manage its exposure to price risk arising from seed money investments in proprietary investment products. The Company enters into foreign currency forward contracts to economically hedge its exposure to certain foreign transactions. The Company enters into futures contracts, total return swaps and foreign currency forwards to economically hedge its exposure related to compensation plans. The Company enters into interest rate swaps to offset interest rate changes on unrealized gains or losses for certain investments.
Cash Flow Hedges
The Company has designated derivative instruments as a cash flow hedge for equity exposure of certain compensation-related liabilities and interest rate exposure on forecasted debt interest payments. For derivative instruments that qualify as cash flow hedges, 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 within the same line item as the earnings impact of the hedged item in interest and debt expense.
For the years ended December 31, 2021, 2020 and 2019, the amounts reclassified from AOCI to earnings related to cash flow hedges were immaterial. The estimated net amount recorded in AOCI as of December 31, 2021 that the Company expects to reclassify to earnings as a reduction to interest and debt expense within the next twelve months is $0.5 million. Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 14 years and relates to forecasted debt interest payments. See Note 21 for a rollforward of net unrealized derivative gains (losses) included in AOCI related to cash flow hedges.
Fair Value Hedges
The Company entered into and designated as fair value hedges an interest rate swap to convert senior notes due 2020 from fixed rate debt to floating rate debt. The interest rate swap related to the senior notes due March 2020 was settled during the first quarter of 2020 when the debt was repaid. The swap had identical terms as the underlying debt being hedged. The Company recognized gains and losses on the derivatives and the related hedged items within interest and debt expense.
The Company has not had any fair value hedges since March 2020. The following table is a summary of the impact of derivatives designated as hedges on the Consolidated Statements of Operations:
| | | | | | | | | | | |
| Years Ended December 31, |
2020 | | 2019 |
(in millions) |
Total interest and debt expense per Consolidated Statements of Operations | $ | 162 | | | $ | 214 | |
Gain (loss) on interest rate contracts designated as fair value hedges: | | | |
Hedged items | $ | 1 | | | $ | 5 | |
Derivatives designated as fair value hedges | (1) | | | (5) | |
Gain (loss) on interest rate contracts designated as cash flow hedges: | | | |
Amount of gain (loss) reclassified from AOCI into income | $ | 1 | | | $ | 2 | |
Net Investment Hedges
The Company entered into, and designated as net investment hedges in foreign operations, forward contracts to hedge a portion of the Company’s foreign currency exchange rate risk associated with its investment in Threadneedle. As the Company determined that the forward contracts are effective, the change in fair value of the derivatives is recognized in AOCI as part of the foreign currency translation adjustment. For the years ended December 31, 2021, 2020 and 2019 , the Company recognized a loss of $1 million, a gain of $1 million and loss of $2 million, respectively, in OCI.
Credit Risk
Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting and collateral arrangements whenever practical. See Note 16 for additional information on the Company’s credit exposure related to derivative assets.
Certain of the Company’s derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s debt rating (or based on the financial strength of the Company’s life insurance subsidiaries for contracts in which those subsidiaries are the counterparty). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company’s debt does not maintain a specific credit rating (generally an investment grade rating) or the Company’s life insurance subsidiary does not maintain a specific financial strength rating. If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. As of December 31, 2021 and 2020, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $383 million and $326 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of December 31, 2021 and 2020 was $383 million and $324 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position as of December 31, 2021 and 2020 were triggered, the aggregate fair value of additional assets that would be required to be posted as collateral or needed to settle the instruments immediately would have been nil and $2 million, respectively.
18. Leases
The following table presents the balances for operating and finance ROU assets and lease liabilities:
| | | | | | | | | | | | | | | | | | | | |
Leases | | Balance Sheet Classification | | December 31, 2021 | | December 31, 2020 |
| | | | (in millions) |
Assets | | | | | | |
Operating lease assets | | Other assets | | $ | 291 | | | $ | 215 | |
Finance lease assets | | Other assets | | 38 | | | 44 | |
Total lease assets | | | | $ | 329 | | | $ | 259 | |
| | | | | | |
Liabilities | | | | | | |
Operating lease liabilities | | Other liabilities | | $ | 341 | | | $ | 254 | |
Finance lease liabilities | | Long-term debt | | 40 | | | 44 | |
Total lease liabilities | | | | $ | 381 | | | $ | 298 | |
The following table presents the components of lease expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
Lease cost | | Income Statement Classification | | 2021 | | 2020 | | 2019 |
| | | | (in millions) |
Operating lease cost | | General and administrative expense | | $ | 57 | | | $ | 57 | | | $ | 58 | |
Finance lease costs: | | | | | | | | |
Amortization of ROU assets | | General and administrative expense | | 13 | | | 10 | | | 8 | |
Interest on lease liabilities | | Interest and debt expense | | 2 | | | 2 | | | 2 | |
Total lease cost | | | | $ | 72 | | | $ | 69 | | | $ | 68 | |
The following table presents the weighted-average lease term and weighted-average discount rate related to operating and finance leases:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Lease term and discount rate | | Finance Leases | | Operating Leases | | Finance Leases | | Operating Leases |
Weighted-average remaining lease term (years) | | 3.8 | | 7.2 | | 4.8 | | 5.8 |
Weighted-average discount rate | | 3.4 | % | | 2.1 | % | | 3.4 | % | | 2.6 | % |
The following table presents supplemental cash flow information related to operating and finance leases:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
Supplemental cash flow information | | 2021 | | 2020 | | 2019 |
| | (in millions) |
Operating cash flows: | | | | | | |
Cash paid for amounts included in measurement of operating lease liabilities | | $ | 50 | | | $ | 65 | | | $ | 62 | |
Cash paid for amounts included in measurement of finance lease liabilities | | 2 | | | 2 | | | 2 | |
Financing cash flows: | | | | | | |
Cash paid for amounts included in measurement of finance lease liabilities | | $ | 9 | | | $ | 12 | | | $ | 13 | |
The following table presents the maturities of lease liabilities: | | | | | | | | | | | | | | |
Maturity of Lease Liabilities | | December 31, 2021 |
Finance Leases | | Operating Leases |
| | (in millions) |
2022 | | $ | 11 | | | $ | 68 | |
2023 | | 11 | | | 61 | |
2024 | | 11 | | | 51 | |
2025 | | 10 | | | 45 | |
2026 | | — | | | 38 | |
Thereafter | | — | | | 104 | |
Total lease payments | | 43 | | | 367 | |
Less: Interest | | 3 | | | 26 | |
Present value of lease liabilities | | $ | 40 | | | $ | 341 | |
19. Disposal of Business
On October 1, 2019, the Company completed the sale of AAH to American Family Insurance Mutual Holding Company (American Family Insurance). The Company received gross proceeds of $1.1 billion in cash at closing. After a payment to an affinity partner, the net proceeds were $1.0 billion. The Company recognized a gain on disposal of $213 million in the fourth quarter of 2019, which is net of the $100 million payment to an affinity partner.
20. Share-Based Compensation
The Company’s share-based compensation plans consist of the Amended and Restated Ameriprise Financial 2005 Incentive Compensation Plan (the “2005 ICP”), the Ameriprise Financial 2008 Employment Incentive Equity Award Plan (the “2008 Plan”), the Ameriprise Financial Franchise Advisor Deferred Compensation Plan (“Franchise Advisor Deferral Plan”) and the Ameriprise Advisor Group Deferred Compensation Plan (“Advisor Group Deferral Plan”).
The components of the Company’s share-based compensation expense, net of forfeitures, were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Stock option | $ | 20 | | | $ | 23 | | | $ | 31 | |
Restricted stock | 24 | | | 24 | | | 22 | |
Restricted stock units | 108 | | | 99 | | | 82 | |
Liability awards | 92 | | | 67 | | | 53 | |
Total | $ | 244 | | | $ | 213 | | | $ | 188 | |
For the years ended December 31, 2021, 2020 and 2019, total income tax benefit recognized by the Company related to share-based compensation expense was $51 million, $45 million and $40 million, respectively.
As of December 31, 2021, there was $148 million of total unrecognized compensation cost related to non-vested awards under the Company’s share-based compensation plans, which is expected to be recognized over a weighted-average period of 3.1 years.
Amended and Restated Ameriprise Financial 2005 Incentive Compensation Plan
The 2005 ICP, which was amended and approved by shareholders on April 30, 2014, provides for the grant of cash and equity incentive awards to directors, employees and independent contractors, including stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance shares and similar awards designed to comply with the applicable federal regulations and laws of jurisdiction. Under the 2005 ICP, a maximum of 54.4 million shares may be issued. Of this total, no more than 4.5 million shares may be issued after April 30, 2014 for full value awards, which are awards other than stock options and stock appreciation rights. Shares issued under the 2005 ICP may be authorized and unissued shares or treasury shares.
Ameriprise Financial 2008 Employment Incentive Equity Award Plan
The 2008 Plan is designed to align employees’ interests with those of the shareholders of the Company and attract and retain new employees. The 2008 Plan provides for the grant of equity incentive awards to new employees, primarily those, who became employees in connection with a merger or acquisition, including stock options, restricted stock awards, restricted stock units, and other equity-based awards designed to comply with the applicable federal and foreign regulations and laws of jurisdiction. Under the 2008 Plan, a maximum of 6.0 million shares may be issued.
Stock Options
Stock options granted under the 2005 ICP and the 2008 Plan have an exercise price not less than 100% of the current fair market value of a share of the Company’s common stock on the grant date and a maximum term of 10 years. Stock options granted generally vest ratably over three to four years. Vesting of option awards may be accelerated based on age and length of service. Stock options granted are expensed on a straight-line basis over the vesting period based on the fair value of the awards on the date of grant. The grant date fair value of the options is calculated using a Black-Scholes option-pricing model.
The following weighted average assumptions were used for stock option grants:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Dividend yield | 2.5 | % | | 2.5 | % | | 3.0 | % |
Expected volatility | 36 | % | | 27 | % | | 27 | % |
Risk-free interest rate | 0.4 | % | | 1.4 | % | | 2.4 | % |
Expected life of stock option (years) | 5.0 | | 5.0 | | 5.0 |
The dividend yield assumption represents the Company’s expected dividend yield based on its historical dividend payouts and management’s expectations. The expected volatility is based on the Company’s historical and implied volatilities. The risk-free interest rate for periods within the expected option life is based on the U.S. Treasury yield curve at the grant date. The expected life of the option is based on the Company’s past experience and other considerations.
The weighted average grant date fair value for options granted during 2021, 2020 and 2019 was $48.48, $31.53 and $24.67, respectively.
A summary of the Company’s stock option activity for 2021 is presented below (shares and intrinsic value in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at January 1 | 4.8 | | | $ | 133.75 | | | 6.5 | | $ | 290 | |
Granted | 0.3 | | | 197.97 | | | | | |
Exercised | (1.8) | | | 123.30 | | | | | |
| | | | | | | |
Outstanding at December 31 | 3.3 | | | 145.79 | | | 6.3 | | 518 | |
Exercisable at December 31 | 2.2 | | | 138.35 | | | 5.5 | | 365 | |
The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised was $219 million, $139 million and $61 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Restricted Stock Awards
Restricted stock awards granted under the 2005 ICP and 2008 Plan generally vest ratably over three to four years or at the end of five years. Compensation expense for restricted stock awards is based on the market price of Ameriprise Financial common stock on the date of grant and is amortized on a straight-line basis over the vesting period. Quarterly dividends are paid on restricted stock, as declared by the Company’s Board of Directors, during the vesting period and are not subject to forfeiture.
Restricted Stock Units and Deferred Share Units
The 2005 ICP provides for the grant of deferred share units to non-employee directors of the Company and the 2005 ICP and 2008 Plan provide for the grant of restricted stock units or deferred share units to employees. The director awards are fully vested upon issuance and are settled for Ameriprise Financial common stock upon the director’s termination of service. The employee awards generally vest ratably over three to four years. Compensation expense for deferred share units and restricted stock units is based on the market price of Ameriprise Financial stock on the date of grant. Restricted stock units and deferred stock units granted to employees are expensed on a straight-line basis over the vesting period or on an accelerated basis if certain age and length of service requirements are met. Deferred share units granted to non-employee directors are expensed immediately. Dividends are paid on restricted stock units, as declared by the Company’s Board of Directors, during the vesting period and are not subject to forfeiture. Dividend equivalents are issued on deferred share units, as dividends are declared by the Company's Board of Directors, and are not paid until distribution of the award. Dividend equivalents on the director awards are not subject to forfeiture, but on employee awards they are forfeited if the award is forfeited.
Ameriprise Financial Deferred Compensation Plan
The Ameriprise Financial Deferred Compensation Plan (“DCP”) under the 2005 ICP gives certain employees the choice to defer a portion of their eligible compensation, which can be invested in investment options as provided by the DCP, including the Ameriprise Financial Stock Fund. The DCP is an unfunded non-qualified deferred compensation plan under section 409A of the Internal Revenue Code. The Company provides a match on certain deferrals. Participant deferrals vest immediately and the Company match vests after three years. Distributions are made in shares of the Company’s common stock for the portion of the deferral invested in the Ameriprise Financial Stock Fund and the Company match, for which the Company has recorded in equity. The DCP does allow for accelerated vesting of the share-based awards in cases of death, disability and qualified retirement. Compensation expense related to the Company match is recognized on a straight-line basis over the vesting period or on an accelerated basis if certain age and length of service requirements are met. Dividend equivalents are issued on deferrals into the Ameriprise Financial Stock Fund and the Company match. Dividend equivalents related to deferrals are not subject to forfeiture, whereas dividend equivalents related to the Company match are subject to forfeiture until fully vested.
Ameriprise Financial Franchise Advisor Deferral Plan
The Franchise Advisor Deferral Plan gives certain advisors the choice to defer a portion of their commissions into Ameriprise Financial stock or other investment options. The Franchise Advisor Deferral Plan is an unfunded non-qualified deferred compensation plan under section 409A of the Internal Revenue Code. The Franchise Advisor Deferral Plan allows for the grant of share-based awards of up to 12.5 million shares of common stock. The number of units awarded is based on the performance measures, deferral percentage and the market value of Ameriprise Financial common stock on the deferral date as defined by the plan. Share-based awards are fully vested and are not subject to forfeitures.
In addition to the voluntary deferral, certain advisors are eligible to earn additional deferred stock awards on commissions over a specified threshold or based on the success of the advisors they coach. The awards vest ratably over three or four years. The Franchise Advisor Deferral Plan allows for accelerated vesting of the share-based awards based on age and years as an advisor. Commission expense is recognized on a straight-line basis over the vesting period. Share units receive dividend equivalents, as dividends are declared by the Company’s Board of Directors, until distribution and are subject to forfeiture until vested.
BMO Share Plans
As part of the acquisition of the BMO Global Asset Management (EMEA)business, the Company will maintain certain legacy BMO Financial Group share based awards that were granted prior to the acquisition. All relevant awards are cash settled with the last vesting date in 2023. As of December 31, 2021, the liability related to these awards is $48 million and included in Other liabilities.
Ameriprise Advisor Group Deferred Compensation Plan
The Advisor Group Deferral Plan, which was created in April 2009, allows for employee advisors to receive share-based bonus awards which are subject to future service requirements and forfeitures. The Advisor Group Deferral Plan is an unfunded non-qualified deferred compensation plan under section 409A of the Internal Revenue Code. The Advisor Group Deferral Plan also gives qualifying employee advisors the choice to defer a portion of their base salary or commissions. This deferral can be in the form of Ameriprise Financial stock or other investment options. Deferrals are not subject to future service requirements or forfeitures. Under the Advisor Group Deferral Plan, a maximum of 3.0 million shares may be issued. Awards granted under the Advisor Group Deferral Plan may be settled in cash and/or shares of the Company’s common stock according to the award’s terms. Share units receive dividend equivalents, as dividends are declared by the Company’s Board of Directors, until distribution and are subject to forfeiture until vested.
Full Value Share Award Activity
A summary of activity for the Company’s restricted stock awards, restricted stock units granted to employees (including advisors), compensation and commission deferrals into stock and deferred share units for 2021 is presented below (shares in millions):
| | | | | | | | | | | |
| Shares | | Weighted Average Grant-date Fair Value |
Non-vested shares at January 1 | 1.3 | | | $ | 144.10 | |
Granted | 0.6 | | | 217.47 | |
Deferred | 0.2 | | | 251.99 | |
Vested | (0.7) | | | 177.39 | |
Forfeited | (0.1) | | | 165.98 | |
Non-vested shares at December 31 | 1.3 | | | 170.91 | |
The deferred shares in the table above primarily relate to franchise advisor voluntary deferrals of their commissions into Ameriprise Financial stock under the Franchise Advisor Deferral Plan that are fully vested at the deferral date.
The fair value of full value share awards vested during the years ended December 31, 2021, 2020 and 2019 was $139 million, $124 million and $107 million, respectively.
The weighted average grant date fair value for restricted shares, restricted stock units and deferred share units during 2021, 2020 and 2019 was $207.49, $163.54 and $129.30, respectively. The weighted average grant date fair value for franchise advisor and advisor group deferrals during 2021, 2020 and 2019 was $241.34, $147.96 and $136.81, respectively.
Performance Share Units
Under the 2005 ICP, the Company’s Executive Leadership Team may be awarded a target number of performance share units (“PSUs”). PSUs will be earned only to the extent that the Company attains certain goals relating to the Company’s performance and relative total shareholder returns against peers over a three-year period. The awards also have a three-year service condition with cliff vesting with an accelerated service condition based on age and length of service. The actual number of PSUs ultimately earned could vary from zero, if performance goals are not met, to as much as 200% of the target for awards made prior to 2018 and 175% of the target for awards made in 2018 or later, if performance goals are significantly exceeded. The value of each target PSU is equal to the value of one share of Ameriprise Financial common stock. The total number of target PSUs outstanding at the end of December 31, 2021, 2020 and 2019 was 0.4 million, 0.4 million and 0.4 million, respectively. The PSUs are liability awards. During the years ended December 31, 2021, 2020 and 2019, the value of shares settled for PSU awards was $47 million, $34 million and $19 million, respectively.
21. Shareholders’ Equity
The following tables provide the amounts related to each component of OCI:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
Pretax | | Income Tax Benefit (Expense) | | Net of Tax |
(in millions) |
Net unrealized gains (losses) on securities: | | | | | |
Net unrealized gains (losses) on securities arising during the period (1) | $ | (622) | | | $ | 137 | | | $ | (485) | |
Reclassification of net (gains) losses on securities included in net income (2) | (561) | | | 118 | | | (443) | |
Impact of DAC, DSIC, unearned revenue, benefit reserves and reinsurance recoverables | 333 | | | (70) | | | 263 | |
Net unrealized gains (losses) on securities | (850) | | | 185 | | | (665) | |
Net unrealized gains (losses) on derivatives: | | | | | |
Reclassification of net (gains) losses on derivatives included in net income (3) | (1) | | | — | | | (1) | |
Net unrealized gains (losses) on derivatives | (1) | | | — | | | (1) | |
Defined benefit plans: | | | | | |
Prior service credits and costs | (3) | | | 1 | | | (2) | |
Net gains (losses) | 70 | | | (15) | | | 55 | |
Defined benefit plans | 67 | | | (14) | | | 53 | |
Foreign currency translation | (16) | | | 3 | | | (13) | |
| | | | | |
Total other comprehensive income (loss) | $ | (800) | | | $ | 174 | | | $ | (626) | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
Pretax | | Income Tax Benefit (Expense) | | Net of Tax |
(in millions) |
Net unrealized gains (losses) on securities: | | | | | |
Net unrealized gains (losses) on securities arising during the period (1) | $ | 907 | | | $ | (192) | | | $ | 715 | |
Reclassification of net (gains) losses on securities included in net income (2) | (11) | | | 2 | | | (9) | |
Impact of DAC, DSIC, unearned revenue, benefit reserves and reinsurance recoverables | (379) | | | 80 | | | (299) | |
Net unrealized gains (losses) on securities | 517 | | | (110) | | | 407 | |
Net unrealized gains (losses) on derivatives: | | | | | |
Reclassification of net (gains) losses on derivatives included in net income (3) | (2) | | | 1 | | | (1) | |
Net unrealized gains (losses) on derivatives | (2) | | | 1 | | | (1) | |
Defined benefit plans: | | | | | |
Prior service credits | (2) | | | — | | | (2) | |
Net gains (losses) | (82) | | | 18 | | | (64) | |
Defined benefit plans | (84) | | | 18 | | | (66) | |
Foreign currency translation | 32 | | | (5) | | | 27 | |
| | | | | |
Total other comprehensive income (loss) | $ | 463 | | | $ | (96) | | | $ | 367 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
Pretax | | Income Tax Benefit (Expense) | | Net of Tax |
(in millions) |
Net unrealized gains (losses) on securities: | | | | | |
Net unrealized gains (losses) on securities arising during the period (1) | $ | 1,404 | | | $ | (309) | | | $ | 1,095 | |
Reclassification of net (gains) losses on securities included in net income (2) | 6 | | | (1) | | | 5 | |
Impact of DAC, DSIC, unearned revenue, benefit reserves and reinsurance recoverables | (688) | | | 144 | | | (544) | |
Net unrealized gains (losses) on securities | 722 | | | (166) | | | 556 | |
Net unrealized gains (losses) on derivatives: | | | | | |
Reclassification of net (gains) losses on derivatives included in net income (3) | (3) | | | 1 | | | (2) | |
Net unrealized gains (losses) on derivatives | (3) | | | 1 | | | (2) | |
Defined benefit plans: | | | | | |
Prior service credits | 14 | | | (3) | | | 11 | |
Net gains (losses) | (36) | | | 7 | | | (29) | |
Defined benefit plans | (22) | | | 4 | | | (18) | |
Foreign currency translation | 18 | | | (1) | | | 17 | |
| | | | | |
Total other comprehensive income (loss) | $ | 715 | | | $ | (162) | | | $ | 553 | |
(1) Includes impairments on Available-for-Sale securities related to factors other than credit that were recognized in OCI during the period.
(2) Reclassification amounts are recorded in Net investment income.
(3) Includes a $1 million, $1 million and $2 million pretax gain reclassified to interest and debt expenses and nil pretax loss reclassified to net investment income for the years ended December 31, 2021, 2020 and 2019, respectively.
Other comprehensive income (loss) related to net unrealized gains (losses) on securities includes three components: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit OTTI losses to credit losses; and (iii) other adjustments primarily consisting of changes in insurance and annuity asset and liability balances, such as DAC, DSIC, unearned revenue, benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.
The following table presents the changes in the balances of each component of AOCI, net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Securities | | Net Unrealized Gains (Losses) on Derivatives | | Defined Benefit Plans | | Foreign Currency Translation | | Other | | Total |
(in millions) |
Balance, January 1, 2019 | $ | 20 | | | $ | 8 | | | $ | (120) | | | $ | (198) | | | $ | (1) | | | $ | (291) | |
| | | | | | | | | | | |
OCI before reclassifications | 551 | | | — | | | (28) | | | 17 | | | — | | | 540 | |
Amounts reclassified from AOCI | 5 | | | (2) | | | 10 | | | — | | | — | | | 13 | |
Total OCI | 556 | | | (2) | | | (18) | | | 17 | | | — | | | 553 | |
Balance, December 31, 2019 | 576 | | (1) | 6 | | | (138) | | | (181) | | | (1) | | | 262 | |
| | | | | | | | | | | |
OCI before reclassifications | 416 | | | — | | | (66) | | | 27 | | | — | | | 377 | |
Amounts reclassified from AOCI | (9) | | | (1) | | | — | | | — | | | — | | | (10) | |
Total OCI | 407 | | | (1) | | | (66) | | | 27 | | | — | | | 367 | |
Balance, December 31, 2020 | 983 | | (1) | 5 | | | (204) | | | (154) | | | (1) | | | 629 | |
| | | | | | | | | | | |
OCI before reclassifications | (222) | | | — | | | 36 | | | (13) | | | — | | | (199) | |
Amounts reclassified from AOCI | (443) | | | (1) | | | 17 | | | — | | | — | | | (427) | |
Total OCI | (665) | | | (1) | | | 53 | | | (13) | | | — | | | (626) | |
Balance, December 31, 2021 | $ | 318 | | (1) | $ | 4 | | | $ | (151) | | | $ | (167) | | | $ | (1) | | | $ | 3 | |
(1) Includes nil, nil and $1 million of noncredit related impairments on securities and net unrealized gains (losses) on previously impaired securities as of December 31, 2021, 2020 and 2019, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company repurchased a total of 7.1 million shares, 8.4 million shares and 13.4 million shares, respectively, of its common stock for an aggregate cost of $1.8 billion, $1.3 billion and $1.9 billion, respectively.
In April 2017, the Company's Board of Directors authorized an expenditure of up to $2.5 billion for the repurchase of shares of the Company’s common stock through June 30, 2019, which was exhausted in the second quarter of 2019. In February 2019, the Company’s Board of Directors authorized an additional repurchase up to $2.5 billion of the Company’s common stock through March 31, 2021, which was exhausted in the fourth quarter of 2020. In August 2020, the Company’s Board of Directors authorized an additional expenditure of up to $2.5 billion for the repurchase of shares of the Company’s common stock through September 30, 2022. As of December 31, 2021, the Company had $432 million remaining under this share repurchase authorization. On January 26, 2022, the Company’s Board of Directors authorized an additional $3.0 billion for the repurchase of the Company’s common stock through March 31, 2024.
The Company may also reacquire shares of its common stock under its share-based compensation plans related to restricted stock awards and certain option exercises. The holders of restricted shares may elect to surrender a portion of their shares on the vesting date to cover their income tax obligation. These vested restricted shares are reacquired by the Company and the Company’s payment of the holders’ income tax obligations are recorded as a treasury share purchase.
For the years ended December 31, 2021, 2020 and 2019, the Company reacquired 0.3 million shares, 0.3 million shares and 0.3 million shares, respectively, of its common stock through the surrender of shares upon vesting and paid in the aggregate $69 million, $52 million and $34 million, respectively, related to the holders’ income tax obligations on the vesting date. Option holders may elect to net settle their vested awards resulting in the surrender of the number of shares required to cover the strike price and tax obligation of the options exercised. These shares are reacquired by the Company and recorded as treasury shares. For the years ended December 31, 2021, 2020 and 2019, the Company reacquired 1.3 million shares, 1.5 million shares and 0.7 million shares, respectively, of its common stock through the net settlement of options for an aggregate value of $306 million, $263 million and $106 million, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company reissued 0.4 million, 0.5 million and 0.7 million, respectively, treasury shares for restricted stock award grants, performance share units, and issuance of shares vested under advisor deferred compensation plans.
22. Earnings per Share
The computations of basic and diluted earnings per share is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions, except per share amounts) |
Numerator: | | | | | |
Net income | $ | 2,760 | | | $ | 1,534 | | | $ | 1,893 | |
| | | | | |
Denominator: | | | | | |
Basic: Weighted-average common shares outstanding | 117.3 | | | 123.8 | | | 134.1 | |
Effect of potentially dilutive nonqualified stock options and other share-based awards | 2.7 | | | 1.9 | | | 1.9 | |
Diluted: Weighted-average common shares outstanding | 120.0 | | | 125.7 | | | 136.0 | |
| | | | | |
Earnings per share attributable to Ameriprise Financial, Inc. common shareholders: | | | | | |
Basic | $ | 23.53 | | | $ | 12.39 | | | $ | 14.12 | |
Diluted | $ | 23.00 | | | $ | 12.20 | | | $ | 13.92 | |
The calculation of diluted earnings per share excludes the incremental effect of nil, nil and $1.0 million options as of December 31, 2021, 2020 and 2019, respectively, due to their anti-dilutive effect.
23. Regulatory Requirements
Restrictions on the transfer of funds exist under regulatory requirements applicable to certain of the Company’s subsidiaries. As of December 31, 2021, the aggregate amount of unrestricted net assets was approximately $1.9 billion.
Insurance subsidiaries
The National Association of Insurance Commissioners (“NAIC”) defines Risk-Based Capital (“RBC”) requirements for insurance companies. The RBC requirements are used by the NAIC and state insurance regulators to identify companies that merit regulatory actions designed to protect policyholders. These requirements apply to the Company’s life insurance companies. The Company’s life insurance companies each met their respective minimum RBC requirements.
The Company’s life insurance companies are required to prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of their respective states of domicile, which vary materially from
GAAP. Prescribed statutory accounting practices include publications of the NAIC, as well as state laws, regulations and general administrative rules. The more significant differences from GAAP include charging policy acquisition costs to expense as incurred, establishing annuity and insurance reserves using different actuarial methods and assumptions, valuing investments on a different basis and excluding certain assets from the balance sheet by charging them directly to surplus, such as a portion of the net deferred income tax assets.
RiverSource Life received approval from the Minnesota Department of Commerce to apply a permitted statutory accounting practice, effective July 1, 2017 through June 30, 2019, for certain derivative instruments used to economically hedge the interest rate exposure of certain variable annuity products that do not qualify for statutory hedge accounting. The permitted practice was intended to mitigate the impact to statutory surplus from the misalignment between variable annuity statutory reserves, which are not carried at fair value, and the fair value of derivatives used to economically hedge the interest rate exposure of non-life contingent living benefit guarantees.
The permitted practice allowed RiverSource Life to defer a portion of the change in fair value, net investment income and realized gains or losses generated from designated derivatives to the extent the amounts do not offset the current period interest-rate related change in the variable annuity statutory reserve liability. The deferred amount could be amortized over ten years using the straight-line method with the ability to accelerate amortization at management’s discretion. As of June 30, 2019, RiverSource Life elected to accelerate amortization of the net deferred amount associated with its permitted practice.
State insurance statutes contain limitations as to the amount of dividends that insurers may make without providing prior notification to state regulators. For RiverSource Life, payments in excess of unassigned surplus, as determined in accordance with accounting practices prescribed by the State of Minnesota, require advance notice to the Minnesota Department of Commerce, RiverSource Life’s primary regulator, and are subject to potential disapproval. RiverSource Life’s statutory unassigned surplus aggregated $175 million and $1.3 billion as of December 31, 2021 and 2020, respectively.
In addition, dividends whose fair market value, together with that of other dividends made within the preceding 12 months, exceed the greater of the previous year’s statutory net gain from operations or 10% of the previous year-end statutory capital and surplus are referred to as “extraordinary dividends.” Extraordinary dividends also require advance notice to the Minnesota Department of Commerce, and are subject to potential disapproval. Statutory capital and surplus for RiverSource Life was $3.4 billion and $4.8 billion as of December 31, 2021 and 2020, respectively. On February 23, 2022, RiverSource Life’s Board of Directors declared a cash dividend of $300 million to Ameriprise Financial, Inc., payable on or after March 25, 2022, pending approval by the Minnesota Department of Commerce.
Statutory net gain from operations and net income are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
RiverSource Life | | | | | |
Statutory net gain from operations | $ | 1,366 | | | $ | 1,393 | | | $ | 1,505 | |
Statutory net income | 253 | | | 1,582 | | | 786 | |
Government debt securities of $5 million and $4 million as of December 31, 2021 and 2020, respectively, held by the Company’s life insurance subsidiaries were on deposit with various states as required by law.
Broker-dealer subsidiaries
The Company’s broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. Rule 15c3-1 provides an “alternative net capital requirement” which American Enterprise Investment Services, Inc. (“AEIS”) and Ameriprise Financial Services, LLC (“AFS”) (significant broker dealers) have elected. Regulations require that minimum net capital, as defined, be equal to the greater of $250 thousand or 2% of aggregate debit items arising from client balances. FINRA may impose certain restrictions, such as restricting withdrawals of equity capital, if a member firm were to fall below a certain threshold or fail to meet minimum net capital requirements.
The following table presents the net capital position of both AEIS and AFS:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions, except percentages) |
AEIS | | | |
Net capital as a percent of aggregate debit items | 10.58 | % | | 9.51 | % |
| | | |
Net capital | $ | 155 | | | $ | 122 | |
Less: required net capital | 29 | | | 25 | |
Excess net capital | $ | 126 | | | $ | 97 | |
| | | |
AFS | | | |
Net capital | $ | 103 | | | $ | 134 | |
Less: required net capital | — | | | — | |
Excess net capital | $ | 103 | | | $ | 134 | |
Ameriprise Trust Company is subject to capital adequacy requirements under the laws of the State of Minnesota as enforced by the Minnesota Department of Commerce.
Bank subsidiary
The Company is a savings and loan holding company that is subject to various banking regulations. However, the Company is not currently subject to the risk-based capital requirements of the Federal Reserve Bank because it is substantially engaged in insurance activities.
Ameriprise Bank, FSB (“Ameriprise Bank”) is subject to regulation by the Comptroller of Currency (“OCC”) and the Federal Deposit Insurance Corporation in its role as insurer of its deposits. Ameriprise Bank is required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 Capital to average assets (as defined), and under rules defined under the Basel III capital framework, Common equity Tier 1 capital (“CEIT”) to risk-weighted assets. Ameriprise Bank calculates these ratios under the Basel III standardized approach in order to assess compliance with both regulatory requirements and Ameriprise Bank’s internal capital policies. Ameriprise Bank’s requirements to maintain adequate capital ratios in relation to its risk weighted asset levels could affect its ability to take capital actions, such as the payment of dividends. As of December 31, 2021, Ameriprise Bank’s capital levels exceeded the capital conservation buffer requirement and was categorized as “well-capitalized.” To meet requirements for capital adequacy purposes or to be categorized as “well-capitalized,” Ameriprise Bank must maintain minimum CEIT, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Regulatory Capital | |
Actual | | Requirement for capital adequacy purposes | | To be well capitalized under regulatory provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (in millions, except percentages) |
At December 31, 2021 | | | | | | | | | | | | |
Common equity Tier 1 capital | | $ | 853 | | | 29.54 | % | | $ | 130 | | | 4.50 | % | | $ | 188 | | | 6.50 | % |
Tier 1 capital | | 853 | | | 29.54 | | | 173 | | | 6.00 | | | 231 | | | 8.00 | |
Total capital | | 855 | | | 29.60 | | | 231 | | | 8.00 | | | 289 | | | 10.00 | |
Tier 1 leverage | | 853 | | | 7.24 | | | 471 | | | 4.00 | | | 589 | | | 5.00 | |
| | | | | | | | | | | | |
At December 31, 2020 | | | | | | | | | | | | |
Common equity Tier 1 capital | | $ | 657 | | | 12.08 | % | | $ | 245 | | | 4.50 | % | | $ | 353 | | | 6.50 | % |
Tier 1 capital | | 657 | | | 12.08 | | | 326 | | | 6.00 | | | 435 | | | 8.00 | |
Total capital | | 658 | | | 12.10 | | | 435 | | | 8.00 | | | 543 | | | 10.00 | |
Tier 1 leverage | | 657 | | | 8.36 | | | 314 | | | 4.00 | | | 393 | | | 5.00 | |
Other subsidiaries
Ameriprise Certificate Company (“ACC”) is registered as an investment company under the Investment Company Act of 1940 (the “1940 Act”). ACC markets and sells investment certificates to clients. ACC is subject to various capital requirements under the 1940 Act, laws of the State of Minnesota and understandings with the Securities and Exchange Commission (“SEC”) and the Minnesota Department of Commerce. The terms of the investment certificates issued by ACC and the provisions of the 1940 Act also require the maintenance by ACC of qualified assets. Under the provisions of its certificates and the 1940 Act, ACC was required to have qualified assets (as that term is defined in Section 28(b) of the 1940 Act) in the amount of $5.3 billion and $6.8 billion as of December 31, 2021 and 2020, respectively. ACC had qualified assets of $5.7 billion and $7.2 billion as of December 31, 2021 and 2020, respectively.
Ameriprise Trust Company is subject to capital adequacy requirements under the laws of the State of Minnesota as enforced by the Minnesota Department of Commerce.
Required capital for Threadneedle and BMO Global Asset Management (EMEA) is predominantly based on the requirements specified by its regulator, the Financial Conduct Authority (“FCA”), under its Capital Adequacy Requirements for asset managers.
24. Income Taxes
The components of income tax provision attributable to continuing operations were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
(in millions) |
Current income tax | | | | | |
Federal | $ | 551 | | | $ | 527 | | | $ | 531 | |
State and local | 79 | | | 63 | | | 80 | |
Foreign | 47 | | | 28 | | | 36 | |
Total current income tax | 677 | | | 618 | | | 647 | |
| | | | | |
Deferred income tax | | | | | |
Federal | (62) | | | (309) | | | (297) | |
State and local | (3) | | | (16) | | | (13) | |
Foreign | (22) | | | 4 | | | 2 | |
Total deferred income tax | (87) | | | (321) | | | (308) | |
Total income tax provision | $ | 590 | | | $ | 297 | | | $ | 339 | |
The geographic sources of pretax income from continuing operations were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
United States | $ | 3,126 | | | $ | 1,685 | | | $ | 2,045 | |
Foreign | 224 | | | 146 | | | 187 | |
Total | $ | 3,350 | | | $ | 1,831 | | | $ | 2,232 | |
The principal reasons that the aggregate income tax provision attributable to continuing operations is different from that computed by using the U.S. statutory rates of 21% were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
2021 | | 2020 | | 2019 |
Tax at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Changes in taxes resulting from: | | | | | |
Low income housing tax credits | (2.0) | | | (4.3) | | | (3.6) | |
State taxes, net of federal benefit | 1.8 | | | 2.1 | | | 2.4 | |
Incentive compensation | (1.6) | | | (1.4) | | | — | |
Dividends received deduction | — | | | (2.1) | | | (1.8) | |
Foreign tax credits, net of addback | — | | | — | | | (2.2) | |
| | | | | |
Other, net | (1.6) | | | 0.9 | | | (0.6) | |
| | | | | |
| | | | | |
| | | | | |
Income tax provision | 17.6 | % | | 16.2 | % | | 15.2 | % |
The increase in the Company’s effective tax rate for the year ended December 31, 2021 compared to 2020 is primarily the result of a decrease in the dividends received deduction and low income housing tax credits, partially offset by various other adjustments.
Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. Deferred income tax assets and liabilities are measured at the statutory rate of 21% as of both December 31, 2021 and 2020. The significant components of the Company’s deferred income tax assets and liabilities, which are included net within Other assets or Other liabilities, were as follows:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Deferred income tax assets |
Liabilities for policyholder account balances, future policy benefits and claims | $ | 1,996 | | | $ | 1,618 | |
Deferred compensation | 586 | | | 493 | |
Right of use lease liability | 73 | | | 60 | |
Postretirement benefits | — | | | 65 | |
| | | |
| | | |
Other | 106 | | | 51 | |
Gross deferred income tax assets | 2,761 | | | 2,287 | |
Less: valuation allowance | 32 | | | 15 | |
Total deferred income tax assets | 2,729 | | | 2,272 | |
| | | |
Deferred income tax liabilities | | | |
Investment related | 565 | | | 253 | |
Deferred acquisition costs | 481 | | | 435 | |
Intangible assets | 209 | | | 124 | |
Net unrealized gains on Available-for-Sale securities | 113 | | | 295 | |
Depreciation expense | 89 | | | 99 | |
Goodwill | 77 | | | 70 | |
Right of use lease asset | 62 | | | 54 | |
Deferred sales inducement costs | — | | | 44 | |
Other | 45 | | | 18 | |
Gross deferred income tax liabilities | 1,641 | | | 1,392 | |
Net deferred income tax assets | $ | 1,088 | | | $ | 880 | |
Included in the Company’s deferred income tax assets are tax benefits primarily related to state net operating losses of $12 million, net of federal benefit, which will expire beginning December 31, 2022 and foreign net operating losses of $42 million. Based on analysis of the Company’s tax position, management believes it is more likely than not that the Company will not realize certain state net operating losses of $11 million, state deferred tax assets of $3 million and foreign deferred tax assets of $18 million; therefore, a valuation allowance of $32 million has been established.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| (in millions) |
Balance at January 1 | $ | 110 | | | $ | 100 | | | $ | 92 | |
Additions based on tax positions related to the current year | 21 | | | 11 | | | 15 | |
Reductions based on tax positions related to the current year | (1) | | | (1) | | | — | |
Additions for tax positions of prior years | 5 | | | 10 | | | 39 | |
Reductions for tax positions of prior years | (8) | | | (4) | | | (17) | |
Reductions due to lapse of statute of limitations | (1) | | | (5) | | | — | |
Audit settlements | (1) | | | (1) | | | (29) | |
Balance at December 31 | $ | 125 | | | $ | 110 | | | $ | 100 | |
If recognized, approximately $95 million, $80 million and $67 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2021, 2020, and 2019, respectively, would affect the effective tax rate.
It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits may decrease by $50 million to $60 million in the next 12 months primarily
due to Internal Revenue Service (“IRS”) settlements and state exams.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized nil, a net increase of $2 million, and a net decrease of $2 million, in interest and penalties for the years ended December 31, 2021, 2020, and 2019, respectively. As of both December 31, 2021 and 2020, the Company had a payable of $10 million related to accrued interest and penalties.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The federal statute of limitations are closed on years through 2015, except for one issue for 2014 and 2015 which was claimed on amended returns. The IRS is currently auditing the Company’s U.S. income tax returns for 2016 through 2020. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2015 through 2019.
25. Retirement Plans and Profit Sharing Arrangements
Defined Benefit Plans
Pension Plans and Other Postretirement Benefits
The Company’s U.S. non-advisor employees who were hired prior to April of 2019 are generally eligible for the Ameriprise Financial Retirement Plan (the “Retirement Plan”), a noncontributory defined benefit plan which is a qualified plan under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). However, effective April 2020, the Company no longer enrolled new employees in the Retirement Plan. Funding of costs for the Retirement Plan complies with the applicable minimum funding requirements specified by ERISA and is held in a trust. The Retirement Plan is a cash balance plan by which the employees’ accrued benefits are based on notional account balances, which are maintained for each individual. Each pay period these balances are credited with an amount equal to a percentage of eligible compensation as defined by the Retirement Plan (which includes, but is not limited to, base pay, performance based incentive pay, commissions, shift differential and overtime). The percentage ranges from 2.5% to 10% depending on several factors including years of service as of April 2020 and will no longer increase with more years of service. Employees’ balances are also credited with a fixed rate of interest that is updated each January 1 and is based on the average of the daily five-year U.S. Treasury Note yields for the previous October 1 through November 30, with a minimum crediting rate of 5%. Employees are fully vested after 3 years of service or upon retirement at or after age 65, disability or death while employed. Employees have the option to receive annuity payments or a lump sum payout of vested balance at termination or retirement. The Retirement Plan’s year-end is September 30.
In addition, the Company sponsors the Ameriprise Financial Supplemental Retirement Plan (the “SRP”), an unfunded non-qualified deferred compensation plan subject to Section 409A of the Internal Revenue Code. This plan is for certain highly compensated employees to replace the benefit that cannot be provided by the Retirement Plan due to IRS limits. The SRP generally parallels the Retirement Plan but offers different payment options.
The Company also sponsors unfunded defined benefit postretirement plans that provide health care and life insurance to retired U.S. employees. On December 31, 2016, the access to retiree health care coverage was closed to all active employees who had previously met the qualification requirements. Instead, only existing retirees, as of January 1, 2017, qualifying for the plan and electing coverage will be provided a fixed amount to subsidize health care insurance purchased through other providers. Net periodic postretirement benefit costs were not material for the years ended December 31, 2021, 2020 and 2019.
Most employees outside the U.S. are covered by local retirement plans, some of which are funded, while other employees receive payments at the time of retirement or termination under applicable labor laws or agreements.
As part of the acquisition of the BMO Global Asset Management (EMEA) business, some employees are covered by legacy pension plans. All plans are closed to new participants. The plans provide benefits calculated using salary data of the participants. The plans are based on final salary payments and benefits are adjusted in line with plan rules (e.g. in line with price inflation in the U.K.) once in payment during retirement. The level of benefits provided depends on the member’s length of service and pensionable salary at retirement date or date of termination if earlier.
All components of the net periodic benefit cost are recorded in General and administrative expense and were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
Service cost | $ | 45 | | | $ | 45 | | | $ | 44 | |
Interest cost | 21 | | | 29 | | | 36 | |
Expected return on plan assets | (57) | | | (55) | | | (53) | |
Amortization of prior service credits | (2) | | | (2) | | | — | |
Amortization of net loss | 23 | | | 15 | | | 5 | |
Other | 5 | | | 7 | | | 8 | |
Net periodic benefit cost | $ | 35 | | | $ | 39 | | | $ | 40 | |
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of assets are amortized on a straight-line basis over the expected average remaining service period of active participants.
The following table provides a reconciliation of changes in the benefit obligation:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Plans |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in millions) |
Benefit obligation, January 1 | $ | 1,271 | | | $ | 1,111 | | | $ | 14 | | | $ | 14 | |
Service cost | 45 | | | 45 | | | — | | | — | |
Interest cost | 21 | | | 29 | | | — | | | — | |
Plan change | 7 | | | — | | | — | | | — | |
Benefits paid | (12) | | | (10) | | | (1) | | | (1) | |
Actuarial (gain) loss | 16 | | | 117 | | | — | | | 1 | |
Acquisitions | 498 | | | — | | | — | | | — | |
| | | | | | | |
Settlements | (27) | | | (30) | | | — | | | — | |
Foreign currency rate changes | (4) | | | 9 | | | — | | | — | |
Benefit obligation, December 31 | $ | 1,815 | | | $ | 1,271 | | | $ | 13 | | | $ | 14 | |
The actuarial losses for pension plans for 2021 and 2020 were primarily due to a decrease in the discount rate assumption as of December 31, 2021 and 2020, respectively.
The following table provides a reconciliation of changes in the fair value of assets:
| | | | | | | | | | | |
| Pension Plans |
| 2021 | | 2020 |
| (in millions) |
Fair value of plan assets, January 1 | $ | 905 | | | $ | 838 | |
Actual return on plan assets | 121 | | | 67 | |
Employer contributions | 14 | | | 31 | |
Benefits paid | (12) | | | (10) | |
Acquisitions | 586 | | | — | |
Settlements | (27) | | | (30) | |
Foreign currency rate changes | (4) | | | 9 | |
Fair value of plan assets, December 31 | $ | 1,583 | | | $ | 905 | |
The Company complies with the minimum funding requirements in all countries. The following table provides the amounts recognized in the Consolidated Balance Sheets as of December 31, which equal the funded status of the plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Plans |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in millions) |
Benefit liability | $ | (339) | | | $ | (366) | | | $ | (13) | | | $ | (14) | |
Benefit asset | 107 | | | — | | | — | | | — | |
Net amount recognized | $ | (232) | | | $ | (366) | | | $ | (13) | | | $ | (14) | |
The accumulated benefit obligation for all pension plans as of December 31, 2021 and 2020 was $1.8 billion and $1.2 billion, respectively. The following table provides information for pension plans with benefit obligations in excess of plan assets:
| | | | | | | | | | | |
| December 31, |
2021 | | 2020 |
(in millions) |
Pension plans with accumulated benefit obligations in excess of plan assets | | | |
Accumulated benefit obligation | $ | 1,769 | | | $ | 1,211 | |
Fair value of plan assets | 1,583 | | | 905 | |
Pension plans with projected benefit obligations in excess of plan assets | | | |
Projected benefit obligation | $ | 1,815 | | | $ | 1,271 | |
Fair value of plan assets | 1,583 | | | 905 | |
The weighted average assumptions used to determine benefit obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Plans |
2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
Discount rates | 2.46 | % | | 2.16 | % | | 2.01 | % | | 2.01 | % |
Rates of increase in compensation levels | 3.72 | | | 3.96 | | | N/A | | N/A |
Interest crediting rates for cash balance plans | 5.00 | | | 5.00 | | | N/A | | N/A |
The weighted average assumptions used to determine net periodic benefit cost of pension plans were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
Discount rates | 2.33 | % | | 2.97 | % | | 4.00 | % |
Rates of increase in compensation levels | 5.21 | | | 4.01 | | | 4.25 | |
Expected long-term rates of return on assets | 6.58 | | | 7.14 | | | 7.18 | |
Interest crediting rates for cash balance plans | 5.00 | | | 5.00 | | | 5.00 | |
In developing the expected long-term rate of return on assets, management evaluated input from an external consulting firm, including their projection of asset class return expectations and long-term inflation assumptions. The Company also considered historical returns on the plans’ assets. Discount rates are based on yields available on high-quality corporate bonds that would generate cash flows necessary to pay the benefits when due.
The Company’s pension plans’ assets are invested in an aggregate diversified portfolio to minimize the impact of any adverse or unexpected results from a security class on the entire portfolio. Diversification is interpreted to include diversification by asset type, performance and risk characteristics and number of investments. When appropriate and consistent with the objectives of the plans, derivative instruments may be used to mitigate risk or provide further diversification, subject to the investment policies of the plans. Asset classes and ranges considered appropriate for investment of the plans’ assets are determined by each plan’s investment committee. The target allocations are 70% equity securities, 20% debt securities and 10% all other types of investments, except for the assets in pooled pension funds which are 70% equity securities and 30% debt securities and additional voluntary contribution assets outside the U.S. which are allocated at the discretion of the individual and will be converted at retirement into the defined benefit pension plan. In addition, pension plan assets acquired in the acquisition of the BMO Global Asset Management (EMEA) business include target portfolio allocations of approximately 90% collective funds investing primarily in debt securities, equity securities, and certain derivatives, either directly or through other collective funds and 10% to a growth portfolio primarily investing in private equity hedge fund investments. Actual allocations will generally be within 5% of these targets. As of December 31, 2021, there were no significant holdings of any single issuer and the exposure to derivative instruments was not significant.
The following tables present the Company’s pension plan assets measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset Category | | December 31, 2021 | |
| Level 1 | | Level 2 | | Level 3 | | Total | |
| (in millions) | |
Equity securities: | | | | | | | | |
| | | | | | | | |
U.S. small cap stocks | $ | 102 | | | $ | — | | | $ | — | | | $ | 102 | | |
Non-U.S. large cap stocks | 41 | | | — | | | — | | | 41 | | |
| | | | | | | | |
| | | | | | | | |
Debt securities: | | | | | | | | |
U.S. investment grade bonds | 45 | | | 21 | | | — | | | 66 | | |
| | | | | | | | |
Non-U.S. investment grade bonds | 17 | | | — | | | — | | | 17 | | |
Insurance contracts | — | | | — | | | 41 | | | 41 | | |
Cash equivalents at NAV | | | | | | | 20 | | (1) |
Collective investment funds at NAV | | | | | | | 984 | | (1) |
Real estate investment trusts at NAV | | | | | | | 24 | | (1) |
Hedge funds at NAV | | | | | | | 62 | | (1) |
Pooled pension funds at NAV | | | | | | | 226 | | (1) |
Total | $ | 205 | | | $ | 21 | | | $ | 41 | | | $ | 1,583 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | |
Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total | |
| (in millions) | |
Equity securities: | | | | | | | | |
U.S. large cap stocks | $ | 119 | | | $ | — | | | $ | — | | | $ | 119 | | |
U.S. small cap stocks | 80 | | | — | | | — | | | 80 | | |
Non-U.S. large cap stocks | 36 | | | — | | | — | | | 36 | | |
| | | | | | | | |
| | | | | | | | |
Debt securities: | | | | | | | | |
U.S. investment grade bonds | 47 | | | 21 | | | — | | | 68 | | |
| | | | | | | | |
Non-U.S. investment grade bonds | 18 | | | — | | | — | | | 18 | | |
Cash equivalents at NAV | | | | | | | 25 | | (1) |
Collective investment funds at NAV | | | | | | | 289 | | (1) |
Real estate investment trusts at NAV | | | | | | | 20 | | (1) |
Hedge funds at NAV | | | | | | | 32 | | (1) |
Pooled pension funds at NAV | | | | | | | 218 | | (1) |
Total | $ | 300 | | | $ | 21 | | | $ | — | | | $ | 905 | | |
(1) Amounts are comprised of certain investments 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.
Equity securities are managed to track the performance of common market indices for both U.S. and non-U.S. securities, primarily across large cap, small cap and emerging market asset classes. Debt securities are managed to track the performance of common market indices for both U.S. and non-U.S. investment grade bonds as well as a pool of U.S. high yield bonds. Collective investment funds include equity and debt securities. Real estate funds are managed to track the performance of a broad population of investment grade non-agricultural income producing properties. The Company’s investments in hedge funds include investments in a multi-strategy fund and an off-shore fund managed to track the performance of broad fund of fund indices. Pooled pension funds are managed to track a specific benchmark based on the investment objectives of the fund. Cash equivalents consist of holdings in a money market fund that seeks to equal the return of the three month U.S. Treasury bill.
The fair value of equity securities using quoted prices in active markets is classified as Level 1. Level 1 debt securities include U.S. Treasuries and actively traded mutual funds. Level 2 debt securities include mortgage and asset backed securities, agency securities and corporate debt securities. The fair value of the Level 2 securities is determined based on a market approach using observable inputs. Insurance contracts of $41 million acquired during the year ended December 31, 2021 support certain non-U.S. plans and are classified as Level 3.
The amounts recognized in AOCI, net of tax, as of December 31, 2021 but not recognized as components of net periodic benefit cost included an unrecognized actuarial loss of $160 million, an unrecognized prior service credit of $9 million, and a currency exchange rate adjustment of $2 million related to the Company’s pension plans. The Company’s other postretirement plans included an unrecognized actuarial gain of $2 million and an unrecognized prior service credit of nil as of December 31, 2021. See Note 21 for a rollforward of AOCI related to the Company’s defined benefit plans.
The Company’s pension plans expect to make benefit payments to retirees as follows:
| | | | | | | | | | | |
| Pension Plans | | Other Postretirement Plans |
| (in millions) |
2022 | $ | 64 | | | $ | 2 | |
2023 | 79 | | | 1 | |
2024 | 76 | | | 1 | |
2025 | 79 | | | 1 | |
2026 | 80 | | | 1 | |
2027-2031 | 451 | | | 5 | |
The Company expects to contribute $50 million and nil to its pension plans and other postretirement plans, respectively, in 2022.
Defined Contribution Plans
The Company’s employees are generally eligible to participate in the Ameriprise Financial 401(k) Plan (the “401(k) Plan”). The 401(k) Plan allows eligible employees to make contributions through payroll deductions up to IRS limits and invest their contributions in one or more of the 401(k) Plan investment options, which include the Ameriprise Financial Stock Fund. The Company provides a dollar for dollar match up to the first 5% of eligible compensation an employee contributes on a pretax and/or Roth 401(k) basis for each annual period. Effective April 2020, employees not eligible to participate in the Retirement Plan will receive a 2% company contribution to their 401(k) Plan once they become eligible for contributions.
Under the 401(k) Plan, employees become eligible for contributions under the plan during the pay period they reach 60 days of service. Match contributions are fully vested after five years of service, vesting ratably over the first five years of service, or upon retirement at or after age 65, disability or death while employed. The Company’s defined contribution plan expense was $59 million, $55 million and $56 million in 2021, 2020 and 2019, respectively.
Employees outside the U.S. who are not covered by the 401(k) may be covered by local defined contribution plans which are subject to applicable laws and rules of the country where the plan is administered. The Company’s expense related to defined contribution plans outside the U.S. was $8 million, $7 million and $6 million in 2021, 2020 and 2019, respectively.
26. Commitments, Guarantees and Contingencies
Commitments
The following table presents the Company’s funding commitments as of December 31:
| | | | | | | | | | | |
| 2021 | | 2020 |
| (in millions) |
Commercial mortgage loans | $ | 48 | | | $ | 18 | |
Affordable housing and other real estate partnerships | 9 | | | 12 | |
Property funds | 38 | | | 17 | |
Private funds | — | | | 9 | |
Pledged asset lines of credit | 919 | | | 342 | |
Consumer lines of credit | — | | | 1 | |
Total funding commitments | $ | 1,014 | | | $ | 399 | |
Guarantees
The Company’s annuity and life products all have minimum interest rate guarantees in their fixed accounts. As of December 31, 2021, these guarantees range from 1% to 5%.
Contingencies
The Company and its subsidiaries are involved in the normal course of business in legal proceedings which include regulatory inquiries, arbitration and litigation, including class actions concerning matters arising in connection with the conduct of its activities as a diversified financial services firm. These include proceedings specific to the Company as well as proceedings generally applicable to business practices in the industries in which it operates. The Company can also be subject to legal proceedings arising out of its general business activities, such as its investments, contracts, leases and employment relationships. Uncertain economic conditions,
heightened and sustained volatility in the financial markets and significant financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the financial services industry generally.
As with other financial services firms, the level of regulatory activity and inquiry concerning the Company’s businesses remains elevated. From time to time, the Company receives requests for information from, and/or has been subject to examination or claims by, the SEC, the Financial Industry Regulatory Authority, the OCC, the U.K. Financial Conduct Authority, the Federal Reserve Board, state insurance and securities regulators, state attorneys general and various other domestic or foreign governmental and quasi-governmental authorities on behalf of themselves or clients concerning the Company’s business activities and practices, and the practices of the Company’s financial advisors. The Company typically has numerous pending matters which include information requests, exams or inquiries regarding certain subjects, including from time to time: sales and distribution of mutual funds, exchange traded funds, annuities, equity and fixed income securities, real estate investment trusts, insurance products, and financial advice offerings, including managed accounts; wholesaler activity; supervision of the Company’s financial advisors and other associated persons; administration of insurance and annuity claims; security of client information; trading activity and the Company’s monitoring and supervision of such activity; and transaction monitoring systems and controls. The Company has cooperated and will continue to cooperate with the applicable regulators.
These legal proceedings are subject to uncertainties and, as such, it is inherently difficult to determine whether any loss is probable or even reasonably possible, or to reasonably estimate the amount of any loss. The Company cannot predict with certainty if, how or when any such proceedings will be initiated or resolved. Matters frequently need to be more developed before a loss or range of loss can be reasonably estimated for any proceeding. An adverse outcome in one or more proceedings could eventually result in adverse judgments, settlements, fines, penalties or other sanctions, in addition to further claims, examinations or adverse publicity that could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
In accordance with applicable accounting standards, the Company establishes an accrued liability for contingent litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. The Company discloses the nature of the contingency when management believes there is at least a reasonable possibility that the outcome may be material to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. In such cases, there still may be an exposure to loss in excess of any amounts reasonably estimated and accrued. When a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability, but continues to monitor, in conjunction with any outside counsel handling a matter, further developments that would make such loss contingency both probable and reasonably estimable. Once the Company establishes an accrued liability with respect to a loss contingency, the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established, and any appropriate adjustments are made each quarter.
Guaranty Fund Assessments
RiverSource Life and RiverSource Life of NY are required by law to be a member of the guaranty fund association in every state where they are licensed to do business. In the event of insolvency of one or more unaffiliated insurance companies, the Company could be adversely affected by the requirement to pay assessments to the guaranty fund associations. The Company projects its cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations and the amount of its premiums written relative to the industry-wide premium in each state. The Company accrues the estimated cost of future guaranty fund assessments when it is considered probable that an assessment will be imposed, the event obligating the Company to pay the assessment has occurred and the amount of the assessment can be reasonably estimated.
The Company has a liability for estimated guaranty fund assessments and a related premium tax asset. As of both December 31, 2021 and 2020, the estimated liability was $12 million. As of both December 31, 2021 and 2020, the related premium tax asset was $10 million. The expected period over which guaranty fund assessments will be made and the related tax credits recovered is not known.
27. Related Party Transactions
The Company may engage in transactions in the ordinary course of business with significant shareholders or their subsidiaries, between the Company and its directors and officers or with other companies whose directors or officers may also serve as directors or officers for the Company or its subsidiaries. The Company carries out these transactions on customary terms.
The Company’s executive officers and directors may have transactions with the Company or its subsidiaries involving financial products and insurance services. All obligations arising from these transactions are in the ordinary course of the Company’s business and are on the same terms in effect for comparable transactions with the general public. Such obligations involve normal risks of collection and do not have features or terms that are unfavorable to the Company or its subsidiaries.
These transactions have not had a material impact on the Company’s consolidated results of operations or financial condition.
28. Segment Information
The Company’s four reporting segments are Advice & Wealth Management, Asset Management, Retirement & Protection Solutions and Corporate & Other.
The accounting policies of the segments are the same as those of the Company, except for operating adjustments defined below, the method of capital allocation, the accounting for gains (losses) from intercompany revenues and expenses and not providing for income taxes on a segment basis.
The largest source of intersegment revenues and expenses is retail distribution services, where segments are charged transfer pricing rates that approximate arm’s length market prices for distribution through the Advice & Wealth Management segment. The Advice & Wealth Management segment provides distribution services for affiliated and non-affiliated products and services. The Asset Management segment provides investment management services for the Company’s owned assets and client assets, and accordingly charges investment and advisory management fees to the other segments. All intersegment activity is eliminated in the Company’s consolidated results.
All costs related to shared services are allocated to the segments based on a rate times volume or fixed basis.
The Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage services, primarily to retail clients through the Company’s advisors. These services are centered on long-term, personal relationships between the Company’s advisors and its clients and focus on helping clients achieve their financial goals. The Company’s advisors provide a distinctive approach to financial planning and have access to a broad selection of both affiliated and non-affiliated products to help clients meet their financial needs and goals. A significant portion of revenues in this segment are fee-based and driven by the level of client assets, which is impacted by both market movements and net asset flows. The Company also earns net investment income on owned assets primarily from certificate and banking products. This segment earns revenues (distribution fees) for distributing non-affiliated products and intersegment revenues (distribution fees) for distributing the Company’s affiliated products and services provided to its retail clients. Intersegment expenses for this segment include expenses for investment management services provided by the Asset Management segment.
The Asset Management segment provides investment management, advice and products to retail, high net worth and institutional clients on a global scale through the Columbia Threadneedle Investments® brand (including the newly acquired BMO Global Asset Management (EMEA) business), which represents the combined capabilities, resources and reach of Columbia Management Investment Advisers, LLC (“Columbia Management”) and Threadneedle, which is integrating the newly acquired BMO Global Asset Management (EMEA) business. Columbia Management primarily provides products and services in the U.S. and Threadneedle primarily provides products and services internationally. Additional subsidiaries beyond Columbia Management and Threadneedle are also included in our Asset Management segment. The Company offers U.S. retail clients with a range of products through both unaffiliated third party financial institutions and the Advice & Wealth Management segment. The Company provides institutional products and services through its institutional sales force. Retail products for non-U.S. investors are primarily distributed through third-party financial institutions and unaffiliated financial advisors. Retail products include U.S. mutual funds and their non-U.S. equivalents, exchange-traded funds and variable product funds underlying insurance and annuity separate accounts. Institutional asset management services are designed to meet specific client objectives and may involve a range of products, including those that focus on traditional asset classes, separately managed accounts, individually managed accounts, CLOs, hedge fund or alternative strategies, collective funds and property and infrastructure funds. CLOs, hedge fund or alternative strategies and certain private funds are often classified as alternative assets. Revenues in this segment are primarily earned as fees based on managed asset balances, which are impacted by market movements, net asset flows, asset allocation and product mix. The Company may also earn performance fees from certain accounts where investment performance meets or exceeds certain pre-identified targets. The Asset Management segment also provides intercompany asset management services for Ameriprise Financial subsidiaries. The fees for all such services are reflected within the Asset Management segment results through intersegment transfer pricing. Intersegment expenses for this segment include distribution expenses for services provided by the Advice & Wealth Management and Retirement & Protection Solutions segments.
The Retirement & Protection Solutions segment includes Retirement Solutions (variable annuities and payout annuities) and Protection Solutions (life and disability insurance). Retirement Solutions provides variable annuity products of RiverSource Life companies to individual clients. The Company provides variable annuity products through its advisors. Revenues for the Company’s variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. The Company also earns net investment income on general account assets supporting reserves for immediate annuities with a non-life contingent feature and for certain guaranteed benefits offered with variable annuities and on capital supporting the business. Revenues for the Company’s immediate annuities with a life contingent feature are earned as premium revenue. Protection Solutions offers a variety of products to address the protection and risk management needs of the Company’s retail clients including life and DI insurance. Life and DI products are primarily provided through the Company’s advisors. The Company issues insurance policies through its RiverSource Life insurance subsidiaries. The primary sources of revenues for Protection Solutions are premiums, fees and charges that the Company receives to assume insurance-related risk. The Company earns net investment income on owned assets supporting insurance reserves and capital supporting the business. The Company also receives fees based on the level of the RiverSource Life companies’ separate account assets supporting VUL investment options. Intersegment revenues for
this segment reflect fees paid by the Asset Management segment for marketing support and other services provided in connection with the availability of variable insurance trust funds (“VIT Funds”) under the variable annuity contracts and VUL contracts. Intersegment expenses for this segment include distribution expenses for services provided by the Advice & Wealth Management segment, as well as expenses for investment management services provided by the Asset Management segment.
The Corporate & Other segment consists of net investment income or loss on corporate level assets, including excess capital held in the Company’s subsidiaries and other unallocated equity and other revenues as well as unallocated corporate expenses. The Corporate & Other segment also includes the results of the Company’s closed block long term care business. The Corporate & Other segment also includes revenues and expenses of consolidated investment entities, which are excluded on an operating basis. Beginning in the first quarter of 2019, the results of AAH, which had been reported as part of the Protection segment, were reflected in the Corporate & Other segment. The Company sold AAH on October 1, 2019. Beginning in the third quarter of 2020, the Company moved the fixed annuities and fixed indexed annuities business to the Corporate & Other segment as a closed block. Revenues for the Company’s fixed deferred annuity products are primarily earned as net investment income on the RiverSource Life companies’ general account assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances. Prior periods presented have been restated to reflect the changes from the segment restructuring.
Management uses segment adjusted operating measures in goal setting, as a basis for determining employee compensation and in evaluating performance on a basis comparable to that used by some securities analysts and investors. Consistent with GAAP accounting guidance for segment reporting, adjusted operating earnings is the Company’s measure of segment performance. Adjusted operating earnings should not be viewed as a substitute for GAAP pretax income. The Company believes the presentation of segment adjusted operating earnings, as the Company measures it for management purposes, enhances the understanding of its business by reflecting the underlying performance of its core operations and facilitating a more meaningful trend analysis.
Management excludes mean reversion related impacts from the Company’s adjusted operating measures. The mean reversion related impact is defined as the impact on variable annuity and VUL products for the difference between assumed and updated separate account investment performance on DAC, DSIC, unearned revenue amortization, reinsurance accrual and additional insurance benefit reserves.
Effective in the third quarter of 2021, management has excluded the impacts of block transfer reinsurance transactions from the adjusted operating measures. Prior periods have been updated to reflect this change to be consistent with the current period presentation.
Adjusted operating earnings is defined as adjusted operating net revenues less adjusted operating expenses. Adjusted operating net revenues and adjusted operating expenses exclude net realized investment gains or losses (net of unearned revenue amortization and the reinsurance accrual); the market impact on non-traditional long-duration products (including variable and fixed deferred annuity contracts and UL insurance contracts), net of hedges and the related DSIC and DAC amortization, unearned revenue amortization, and the reinsurance accrual; mean reversion related impacts (the impact on variable annuity and VUL products for the difference between assumed and updated separate account investment performance on DAC, DSIC, unearned revenue amortization, reinsurance accrual and additional insurance benefit reserves); block transfer reinsurance transaction impacts; the market impact of hedges to offset interest rate and currency 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; income (loss) from discontinued operations; and the impact of consolidating CIEs. The market impact on non-traditional long-duration products includes changes in embedded derivative values caused by changes in financial market conditions, net of changes in economic hedge values and unhedged items including the difference between assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and certain policyholder contract elections, net of related impacts on DAC and DSIC amortization. The market impact also includes certain valuation adjustments made in accordance with FASB Accounting Standards Codification 820, Fair Value Measurements and Disclosures, including the impact on embedded derivative values of discounting projected benefits to reflect a current estimate of the Company’s life insurance subsidiary’s nonperformance spread.
The following tables summarize selected financial information by segment and reconcile segment totals to those reported on the consolidated financial statements:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (in millions) |
Advice & Wealth Management | $ | 24,986 | | | $ | 21,266 | |
Asset Management | 10,990 | | | 8,406 | |
Retirement & Protection Solutions | 119,469 | | | 114,850 | |
Corporate & Other | 20,534 | | | 21,361 | |
Total assets | $ | 175,979 | | | $ | 165,883 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
Adjusted operating net revenues: | | | | | |
Advice & Wealth Management | $ | 8,021 | | | $ | 6,675 | | | $ | 6,599 | |
Asset Management | 3,682 | | | 2,891 | | | 2,913 | |
Retirement & Protection Solutions | 3,244 | | | 3,094 | | | 3,123 | |
Corporate & Other | 487 | | | 546 | | | 1,477 | |
Elimination of intersegment revenues (1) | (1,573) | | | (1,377) | | | (1,402) | |
Total segment adjusted operating net revenues | 13,861 | | | 11,829 | | | 12,710 | |
Net realized gains (losses) | 90 | | | (11) | | | (14) | |
Revenue attributable to consolidated investment entities | 107 | | | 71 | | | 88 | |
Market impact on non-traditional long-duration products, net | 38 | | | 10 | | | — | |
Mean reversion related impacts | 1 | | | — | | | — | |
Market impact of hedges on investments | (22) | | | — | | | (35) | |
Block transfer reinsurance transaction impacts | (644) | | | — | | | 8 | |
Integration and restructuring charges | — | | | — | | | (3) | |
Gain on disposal of business | — | | | — | | | 213 | |
Total net revenues per consolidated statements of operations | $ | 13,431 | | | $ | 11,899 | | | $ | 12,967 | |
(1) Represents the elimination of intersegment revenues recognized for the years ended December 31, 2021, 2020 and 2019 in each segment as follows: Advice and Wealth Management ($1,043, $893 and $924, respectively); Asset Management ($50, $53 and $55, respectively); Retirement & Protection Solutions ($478, $433 and $429, respectively); and Corporate & Other ($2, $(2) and $(6), respectively).
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in millions) |
Adjusted operating earnings: | | | | | |
Advice & Wealth Management | $ | 1,743 | | | $ | 1,321 | | | $ | 1,509 | |
Asset Management | 1,096 | | | 697 | | | 661 | |
Retirement & Protection Solutions | 735 | | | 480 | | | 724 | |
Corporate & Other | (270) | | | (369) | | | (286) | |
Total segment adjusted operating earnings | 3,304 | | | 2,129 | | | 2,608 | |
Net realized gains (losses) | 87 | | | (10) | | | (12) | |
Net income (loss) attributable to consolidated investment entities | (4) | | | 4 | | | 1 | |
Market impact on non-traditional long-duration products, net | (656) | | | (375) | | | (591) | |
Mean reversion related impacts | 152 | | | 87 | | | 57 | |
Market impact of hedges on investments | (22) | | | — | | | (35) | |
Block transfer reinsurance transaction impacts | 521 | | | — | | | 8 | |
Integration and restructuring charges | (32) | | | (4) | | | (17) | |
Gain on disposal of business | — | | | — | | | 213 | |
Pretax income per consolidated statements of operations | $ | 3,350 | | | $ | 1,831 | | | $ | 2,232 | |