Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________
COMMISSION FILE NO. 811-00002
AMERIPRISE CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-6009975
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1099 AMERIPRISE FINANCIAL CENTER,
MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.:
Large Accelerated Accelerated Non-Accelerated Smaller reporting company [ ]
Filer [ ] Filer [ ] Filer [X]
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 4, 2010
----- -----------------------------
Common Shares (par value $10 per share) 150,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERIPRISE CERTIFICATE COMPANY
FORM 10-Q
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Statements of Operations - Three months and six months
ended June 30, 2010 and 2009............................... 3
Balance Sheets - June 30, 2010 and December 31, 2009.......... 4
Statements of Cash Flows - Six months ended June 30, 2010
and 2009................................................... 5
Statements of Shareholder's Equity - Six months ended
June 30, 2010 and 2009..................................... 6
Notes to Financial Statements................................. 7
Item 2. Management's Narrative Analysis............................... 19
Item 4T. Controls and Procedures....................................... 22
Part II. Other Information:
Item 1. Legal Proceedings............................................. 23
Item 1A. Risk Factors.................................................. 23
Item 6. Exhibits...................................................... 23
Signatures ............................................................ 24
Exhibit Index.......................................................... E-1
2
AMERIPRISE CERTIFICATE COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
2010 2009 2010 2009
------- -------- -------- --------
Investment income $39,677 $61,795 $ 84,132 $113,279
Investment expenses 7,538 8,863 16,058 19,311
------- ------- -------- --------
Net investment income before provision
for certificate reserves and income taxes 32,139 52,932 68,074 93,968
Net provision for certificate reserves 13,733 33,604 30,729 72,261
------- ------- -------- --------
Net investment income before income taxes 18,406 19,328 37,345 21,707
Income tax expense 6,832 7,042 13,753 7,928
------- ------- -------- --------
Net investment income 11,574 12,286 23,592 13,779
Net realized gain (loss) on investments 1,310 (2,453) 5,121 (4,172)
Income tax expense (benefit) 458 (859) 1,792 (1,460)
------- ------- -------- --------
Net realized gain (loss) on investments 852 (1,594) 3,329 (2,712)
------- ------- -------- --------
NET INCOME $12,426 $10,692 $ 26,921 $ 11,067
======= ======= ======== ========
Supplemental Disclosures:
Net realized gain (loss) on investments:
Net realized gain on investments before
impairment losses on securities $ 1,310 $ 1,527 $ 7,691 $ 4,244
------- ------- -------- --------
Total other-than-temporary impairment losses on
securities -- (8,363) (4,662) (9,674)
Portion of loss recognized in other comprehensive
income -- 4,383 2,092 1,258
------- ------- -------- --------
Net impairment losses recognized in net realized
gain (loss) on investments -- (3,980) (2,570) (8,416)
------- ------- -------- --------
Total net realized gain (loss) on investments $ 1,310 $(2,453) $ 5,121 $ (4,172)
======= ======= ======== ========
See Notes to Financial Statements.
3
AMERIPRISE CERTIFICATE COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2010 2009
---------- -----------
(UNAUDITED)
ASSETS
Qualified Assets
Cash equivalents $ 242,377 $ 309,183
Investments in unaffiliated issuers 3,380,302 3,960,440
Receivables 44,750 39,630
Equity derivatives, purchased 37,296 166,392
---------- ----------
Total qualified assets 3,704,725 4,475,645
Deferred taxes, net 41,444 70,793
Current taxes receivable from parent 5,165 62
---------- ----------
Total other assets 46,609 70,855
---------- ----------
Total assets $3,751,334 $4,546,500
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Certificate reserves $3,481,477 $4,108,272
Current taxes payable to parent -- 18,117
Payable for investment securities purchased 32,318 1,207
Equity derivatives, written 26,654 140,996
Accounts payable and accrued liabilities 24,580 32,710
---------- ----------
Total liabilities 3,565,029 4,301,302
Shareholder's Equity
Common shares ($10 par value, 150,000 shares
authorized and issued) 1,500 1,500
Additional paid-in capital 204,592 297,964
Total retained earnings (accumulated deficit) 3,935 (6,358)
Accumulated other comprehensive loss, net of tax (23,722) (47,908)
---------- ----------
Total shareholder's equity 186,305 245,198
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $3,751,334 $4,546,500
========== ==========
See Notes to Financial Statements.
4
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2010 2009
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 26,921 $ 11,067
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Interest added to certificate loans (93) (105)
Amortization of premiums, acccretion of discounts,
net (1,700) (2,536)
Deferred taxes, net 16,326 (6,149)
Net realized loss on investments 1,000 3,263
Provision for loan loss (6,121) 1,000
Changes in other operating assets and liabilities:
Trading securities, net -- (143,886)
Dividends and interest receivable 5,211 (2,463)
Certificate reserves, net (16,401) 8,882
Due to (from) parent for income taxes (23,220) 16,852
Derivatives, net 14,754 (10,304)
Derivatives collateral, net (12,455) 4,096
Other, net 4,332 17,278
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 8,554 (103,005)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 44,986 261,397
Maturities and redemptions 941,753 639,011
Purchases (402,270) (1,668,880)
Below investment grade syndicated bank loans and
commercial mortgage loans:
Sales 21,255 1,112
Maturities and redemptions 39,396 22,474
Purchases (146) (132)
Certificate loans:
Payments 388 419
Fundings (328) (255)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 645,034 (744,854)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments from certificate owners 479,336 1,706,455
Certificate maturities and cash surrenders (1,089,730) (1,768,395)
Capital contribution from parent -- 35,000
Dividend/return of capital to parent (110,000) --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (720,394) (26,940)
----------- -----------
NET DECREASE IN CASH EQUIVALENTS (66,806) (874,799)
Cash equivalents at beginning of period 309,183 1,164,484
----------- -----------
CASH EQUIVALENTS AT END OF PERIOD $ 242,377 $ 289,685
=========== ===========
SUPPLEMENTAL DISCLOSURES INCLUDING NON-CASH
TRANSACTIONS:
Cash paid (received) for income taxes $ 21,866 $ (6,769)
Certificate maturities and surrenders through
loan reductions 878 902
See Notes to Financial Statements.
5
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
RETAINED EARNINGS (ACCUMULATED DEFICIT)
---------------------------------------
APPROPRIATED APPROPRIATED
FOR FOR ACCUMULATED
PRE-DECLARED ADDITIONAL OTHER
NUMBER OF ADDITIONAL ADDITIONAL INTEREST ON COMPREHENSIVE
OUTSTANDING COMMON PAID-IN CREDITS AND ADVANCE LOSS -
SHARES SHARES CAPITAL INTEREST PAYMENTS UNAPPROPRIATED NET OF TAX TOTAL
----------- ------ ---------- ------------ ----------- -------------- ------------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT JANUARY 1, 2009 150,000 $1,500 $322,964 $ 50 $15 $(81,570) $(152,454) $ 90,505
Change in accounting principle,
net of tax -- -- -- -- -- 31,694 (31,694) --
Comprehensive income:
Net income -- -- -- -- -- 11,067 -- 11,067
Other comprehensive income,
net of tax:
Change in net unrealized
securities losses -- -- -- -- -- -- 101,012 101,012
Change in noncredit related
impairments on securities
and net unrealized
securities losses on prev-
iously impaired securities -- -- -- -- -- -- (376) (376)
---------
Total comprehensive income 111,703
Transfer to unappropriated/
from appropriated -- -- -- (48) -- 48 -- --
Receipt of capital from parent -- -- 35,000 -- -- -- -- 35,000
--------- ------ -------- ---- --- -------- --------- ---------
BALANCE AT JUNE 30, 2009 150,000 $1,500 $357,964 $ 2 $15 $(38,761) $ (83,512) $ 237,208
========= ====== ======== ==== === ======== ========= =========
BALANCE AT JANUARY 1, 2010 150,000 $1,500 $297,964 $ -- $15 $ (6,373) $ (47,908) $ 245,198
Comprehensive income:
Net income -- -- -- -- -- 26,921 -- 26,921
Other comprehensive income,
net of tax:
Change in net unrealized
securities losses -- -- -- -- -- -- 23,584 23,584
Change in noncredit related
impairments on securities
and net unrealized
securities losses on prev-
iously impaired securities -- -- -- -- -- -- 602 602
---------
Total comprehensive income 51,107
Dividend/return of capital to parent -- -- (89,452) -- -- (20,548) -- (110,000)
--------- ------ -------- ---- --- -------- --------- ---------
BALANCE AT JUNE 30, 2010 150,000 $1,500 $208,512 $ -- $15 $ -- $ (23,722) $ 186,305
========= ====== ======== ==== === ======== ========= =========
See Notes to Financial Statements.
6
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
NATURE OF BUSINESS
Ameriprise Certificate Company ("ACC" or the "Company"), is a wholly owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"). The
accompanying Financial Statements have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP"). The interim financial
information in this report has not been audited. In the opinion of management,
all adjustments necessary for a fair presentation of the results of operations
and financial position for the interim periods have been made. All adjustments
made were of a normal, recurring nature. Results of operations reported for
interim periods are not necessarily indicative of results for the entire year.
These Financial Statements and Notes should be read in conjunction with the
Financial Statements and Notes in the Annual Report on Form 10-K of ACC for the
year ended December 31, 2009, filed with the Securities and Exchange Commission
("SEC") on February 23, 2010.
ACC evaluated events or transactions that occurred after the balance sheet date
for potential recognition or disclosure through the date the financial
statements were issued.
2. RECENT ACCOUNTING PRONOUNCEMENTS
ADOPTION OF NEW ACCOUNTING STANDARDS
Subsequent Events
In February 2010, the Financial Accounting Standards Board ("FASB") amended the
accounting standards related to the recognition and disclosure of subsequent
events. The amendments remove the requirement to disclose the date through which
subsequent events are evaluated for SEC filers. The standard is effective upon
issuance, and shall be applied prospectively. ACC adopted the standard in the
first quarter of 2010. The adoption did not have any effect on ACC's results of
operations and financial condition.
Fair Value
In January 2010, the FASB updated the accounting standards related to
disclosures on fair value measurements. The standard expands the current
disclosure requirements to include additional detail about significant transfers
between Levels 1 and 2 within the fair value hierarchy and presents activity in
the rollforward of Level 3 activity on a gross basis. The standard also
clarifies existing disclosure requirements related to the level of
disaggregation to be used for assets and liabilities as well as disclosures on
the inputs and valuation techniques used to measure fair value. The standard is
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosure requirements related to the Level 3 rollforward,
which are effective for interim and annual periods beginning after December 15,
2010. ACC adopted the standard in the first quarter of 2010, except for the
additional disclosures related to the Level 3 rollforward, which ACC will adopt
in the first quarter of 2011. The adoption did not have any effect on ACC's
results of operations and financial condition.
Recognition and Presentation of Other-Than-Temporary Impairment ("OTTI")
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income (loss) when the entity does not intend to sell the security and it is
more likely than not that the entity will not be required to sell the security
prior to recovery of its cost basis. The standard requires separate presentation
of both the credit and noncredit portions of other-than-temporary impairments on
the financial statements and additional disclosures. This standard is effective
for interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. At the date of
adoption, the portion of previously recognized other-than-temporary impairments
that represent the noncredit related loss component shall be recognized as a
cumulative effect of adoption with an adjustment to the opening balance of
accumulated deficit with a corresponding adjustment to accumulated other
comprehensive loss. ACC adopted the standard in the first quarter of 2009 and
recorded a cumulative effect decrease to the opening balance of accumulated
deficit of $32 million, net of income taxes, and a corresponding increase to
accumulated other comprehensive loss, net of income taxes. See Note 3 for the
required disclosures.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
Receivables
In July 2010, the FASB updated the accounting standards for disclosures about
the credit quality of financing receivables and the allowance for credit losses.
The standard requires additional disclosure related to the credit quality of
financing receivables, troubled
7
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
debt restructurings and significant purchases or sales of financing receivables
during the period. The standard requires that these disclosures and existing
disclosures be presented on a disaggregated basis, similar to the manner that
the entity uses to evaluate its credit losses. Disclosures of information as of
the end of a reporting period are effective for interim and annual periods
ending after December 15, 2010 and disclosures of activity that occurred during
a reporting period are effective for interim and annual periods beginning after
December 15, 2010. The Company is currently evaluating the impact of the
standard on its disclosures. The Company's adoption of the standard will not
impact its results of operations and financial condition.
3. INVESTMENTS
Investments in unaffiliated issuers were as follows:
JUNE 30, 2010 DECEMBER 31, 2009
------------- -----------------
(IN THOUSANDS)
Available-for-Sale:
Fixed maturities, at fair value
(amortized cost: 2010, $3,136,756; 2009, $3,697,972) $3,101,822 $3,627,993
Common and preferred stocks, at fair value
(cost: 2010, $19,793; 2009, $19,646) 18,155 15,765
Below investment grade syndicated bank loans and commercial mortgage
loans, at cost (fair value: 2010, $256,923; 2009, $313,021) 253,817 309,459
Certificate loans - secured by certificate reserves, at cost,
which approximates fair value 4,291 5,136
Real estate owned, at fair value less cost to sell 2,217 2,087
---------- ----------
Total $3,380,302 $3,960,440
========== ==========
Available-for-Sale securities distributed by type were as follows:
JUNE 30, 2010
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED NON-CREDIT
DESCRIPTION OF SECURITIES COST GAINS LOSSES FAIR VALUE OTTI (1)
------------------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Residential mortgage backed securities $1,496,054 $32,005 $(112,924) $1,415,135 $(46,411)
Corporate debt securities 790,715 13,390 (1,054) 803,051 (10)
Commercial mortgage backed securities 432,583 14,250 (47) 446,786 --
Asset backed securities 359,088 20,914 (2,286) 377,716 (1,197)
U.S. government and agencies obligations 58,316 818 -- 59,134 --
Common and preferred stocks 19,793 824 (2,462) 18,155 --
---------- ------- --------- ---------- --------
Total $3,156,549 $82,201 $(118,773) $3,119,977 $(47,618)
========== ======= ========= ========== ========
DECEMBER 31, 2009
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED NON-CREDIT
DESCRIPTION OF SECURITIES COST GAINS LOSSES FAIR VALUE OTTI (1)
------------------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Residential mortgage backed securities $1,577,876 $20,736 $(138,277) $1,460,335 $(46,683)
Corporate debt securities 1,026,547 24,668 (976) 1,050,239 850
Commercial mortgage backed securities 538,714 13,247 (759) 551,202 --
Asset backed securities 420,016 17,245 (6,994) 430,267 (2,711)
U.S. government and agencies obligations 134,819 1,131 -- 135,950 --
Common and preferred stocks 19,646 82 (3,963) 15,765 --
---------- ------- --------- ---------- --------
Total $3,717,618 $77,109 $(150,969) $3,643,758 $(48,544)
========== ======= ========= ========== ========
(1) Represents the amount of other-than-temporary impairment losses in
Accumulated Other Comprehensive Loss. Amount includes unrealized gains and
losses on impaired securities subsequent to the initial impairment
measurement date. These amounts are included in gross unrealized gains and
losses as of the end of the period.
8
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
At June 30, 2010 and December 31, 2009, fixed maturity securities comprised
approximately 86% and 85%, respectively, of ACC's total investments. These
securities were rated by Moody's Investors Service ("Moody's"), Standard &
Poor's Ratings Services ("S&P"), and Fitch Ratings Ltd. ("Fitch"), except for
approximately $55.3 million and $18.0 million of securities at June 30, 2010 and
December 31, 2009, respectively, which were rated by ACC's internal analysts
using criteria similar to Moody's, S&P and Fitch. Ratings on fixed maturity
securities are presented using the median of ratings from Moody's, S&P and
Fitch. If only two of the ratings are available, the lower rating is used. A
summary of fixed maturity securities was as follows:
JUNE 30, 2010 DECEMBER 31, 2009
---------------------------------------- ----------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
RATINGS AMORTIZED COST FAIR VALUE FAIR VALUE AMORTIZED COST FAIR VALUE FAIR VALUE
------- -------------- ---------- ---------- -------------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
AAA $1,807,712 $1,866,532 60% $2,026,434 $2,062,670 57%
AA 108,925 108,967 4 189,891 177,780 5
A 218,343 217,338 7 346,183 342,573 9
BBB 615,886 615,156 20 782,389 780,706 22
Below investment grade 385,890 293,829 9 353,075 264,264 7
---------- ---------- --- ---------- ---------- ---
Total fixed maturities $3,136,756 $3,101,822 100% $3,697,972 $3,627,993 100%
========== ========== === ========== ========== ===
At June 30, 2010 and December 31, 2009, approximately 36% and 38%, respectively,
of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed
securities.
The following tables provide information about Available-for-Sale securities
with gross unrealized losses and the length of time that individual securities
have been in a continuous unrealized loss position:
JUNE 30, 2010
---------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------- ------------------------------- -------------------------------
NUMBER NUMBER NUMBER
DESCRIPTION OF OF SEC- FAIR UNREALIZED OF SEC- FAIR UNREALIZED OF SEC- FAIR UNREALIZED
SECURITIES URITIES VALUE LOSSES URITIES VALUE LOSSES URITIES VALUE LOSSES
-------------- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
Residential mortgage
backed securities 9 $ 90,327 $ (418) 76 $311,759 $(112,506) 85 $402,086 $(112,924)
Corporate debt
securities 13 52,077 (472) 12 10,596 (582) 25 62,673 (1,054)
Commercial mortgage
backed securities 6 19,329 (34) 1 4,854 (13) 7 24,183 (47)
Asset backed securities 6 33,363 (1,185) 7 23,261 (1,101) 13 56,624 (2,286)
Common and
preferred stocks -- -- -- 1 17,150 (2,462) 1 17,150 (2,462)
--- -------- ------- --- -------- --------- --- -------- ---------
Total 34 $195,096 $(2,109) 97 $367,620 $(116,664) 131 $562,716 $(118,773)
=== ======== ======= === ======== ========= === ======== =========
DECEMBER 31, 2009
---------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------- ------------------------------- -------------------------------
NUMBER NUMBER NUMBER
DESCRIPTION OF OF SEC- FAIR UNREALIZED OF SEC- FAIR UNREALIZED OF SEC- FAIR UNREALIZED
SECURITIES URITIES VALUE LOSSES URITIES VALUE LOSSES URITIES VALUE LOSSES
-------------- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
Residential mortgage
backed securities 22 $196,113 $ (9,618) 77 $320,859 $(128,659) 99 $516,972 $(138,277)
Corporate debt
securities 5 4,715 (117) 28 56,063 (859) 33 60,778 (976)
Commercial mortgage
backed securities 4 20,315 (321) 9 29,516 (438) 13 49,831 (759)
Asset backed securities 7 34,629 (766) 11 47,960 (6,228) 18 82,589 (6,994)
Common and
preferred stocks -- -- -- 1 15,650 (3,963) 1 15,650 (3,963)
--- -------- -------- --- -------- --------- --- -------- ---------
Total 38 $255,772 $(10,822) 126 $470,048 $(140,147) 164 $725,820 $(150,969)
=== ======== ======== === ======== ========= === ======== =========
9
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
As part of ACC's ongoing monitoring process, management determined that a
majority of the gross unrealized losses on its Available-for-Sale securities are
attributable to credit spreads. The primary driver of lower unrealized losses at
June 30, 2010 was the decline of interest rates during the period.
The following table presents a rollforward of the cumulative amounts recognized
in the Statements of Operations for other-than-temporary impairments related to
credit losses on securities for which a portion of the securities' total
other-than-temporary impairments was recognized in other comprehensive loss:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2010 2009 2010 2009
------- ------- ------- -------
(IN THOUSANDS)
Beginning balance of credit losses on securities held for
which a portion of other-than-temporary impairment
was recognized in other comprehensive loss $59,800 $54,163 $57,446 $50,866
Additional amount related to credit losses for which an other-
than-temporary impairment was not previously recognized -- -- 556 --
Additional increases to the amount related to credit losses
for which an other-than-temporary impairment was
previously recognized -- 3,980 1,798 7,277
------- ------- ------- -------
Ending balance of credit losses on securities held as of
June 30 for which a portion of other-than-temporary
impairment was recognized in other comprehensive income $59,800 $58,143 $59,800 $58,143
======= ======= ======= =======
The change in net unrealized securities gains (losses) in other comprehensive
income includes two components, net of tax:
(i) unrealized gains (losses) that arose from changes in the market value of
securities that were held during the period and
(ii) (gains) losses that were previously unrealized, but have been recognized in
current period net income due to sales of Available-for-Sale securities and due
to the reclassification of noncredit other-than-temporary impairment losses to
credit losses.
The following table presents a rollforward of the net unrealized securities
gains (losses) on Available-for-Sale securities included in accumulated other
comprehensive loss:
ACCUMULATED OTHER
COMPREHENSIVE
LOSS RELATED TO
NET NET
UNREALIZED UNREALIZED
SECURITIES DEFERRED SECURITIES
GAINS (LOSSES) INCOME TAX GAINS (LOSSES)
-------------- -------------- -----------------
(IN THOUSANDS)
Balance at January 1, 2009 $(234,713) $ 82,259 $(152,454)
Cumulative effect of accounting change (48,760) 17,066 (31,694)(1)
Net unrealized securities gains arising during the period (3) 150,650 (51,785) 98,865
Reclassification of losses included in net income 2,725 (954) 1,771
--------- -------- ---------
Balance at June 30, 2009 $(130,098) $ 46,586 $ (83,512)(2)
========= ======== =========
Balance at January 1, 2010 $ (73,860) $ 25,952 $ (47,908)
Net unrealized securities gains arising during the period (3) 38,110 (13,390) 24,720
Reclassification of gains included in net income (822) 288 (534)
--------- -------- ---------
Balance at June 30, 2010 $ (36,572) $ 12,850 $ (23,722)(2)
========= ======== =========
(1) Amount represents the cumulative effect of adopting a new accounting
standard on January 1, 2009. See Note 2 for additional information on the
adoption impact.
(2) At June 30, 2010 and 2009, Accumulated Other Comprehensive Loss Related to
Net Unrealized Securities Losses included $(31.0) million and $(32.1)
million, respectively, of noncredit related impairments on securities and
net unrealized securities losses on previously impaired securities.
(3) Net unrealized investment gains (losses) arising during the period also
include other-than-temporary impairment losses on Available-for-Sale
securities related to factors other than credit that were recognized in
other comprehensive income during the period.
10
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Net realized gains and losses on Available-for-Sale securities, determined using
the specific identification method, were as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- -----------------
2010 2009 2010 2009
---- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
Gross realized gains from sales $806 $ 3,802 $ 3,521 $ 7,300
Gross realized losses from sales -- (1,604) (129) (1,609)
Other-than-temporary impairments related to credit -- (3,980) (2,570) (8,416)
The other-than-temporary impairments for the six months ended June 30, 2010
primarily related to credit losses on non-agency residential mortgage backed
securities. The other-than-temporary impairments for the three months and six
months ended June 30, 2009 related to credit losses on non-agency residential
mortgage backed securities and corporate debt securities primarily in the gaming
industry.
Available-for-Sale securities by contractual maturity as of June 30, 2010 were
as follows:
AMORTIZED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
Due within one year $ 447,354 $ 454,975
Due after one year through five years 378,467 383,607
Due after five years through 10 years 22,995 23,362
Due after 10 years 215 241
---------- ----------
849,031 862,185
Residential mortgage backed securities 1,496,054 1,415,135
Commercial mortgage backed securities 432,583 446,786
Asset backed securities 359,088 377,716
Common and preferred stocks 19,793 18,155
---------- ----------
Total $3,156,549 $3,119,977
========== ==========
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, as well as
common and preferred stocks, were not included in the maturities distribution.
4. 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
ACC categorizes its fair value measurements according to a three-level
hierarchy. The hierarchy prioritizes the inputs used by ACC'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.
11
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DETERMINATION OF FAIR VALUE
ACC uses valuation techniques consistent with the market and income approaches
to measure the fair value of its assets and liabilities. ACC's market approach
uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. ACC's income approach
uses valuation techniques to convert future projected cash flows to a single
discounted present value amount. When applying either approach, ACC 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 highly liquid investments with original maturities of
90 days or less. ACC's cash equivalents are classified as Level 2 and are
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 in Unaffiliated Issuers (Available-for-Sale Securities)
When available, the fair value of securities is based on quoted prices in active
markets. If quoted prices are not available, fair values are obtained from
nationally-recognized pricing services, broker quotes, or other model-based
valuation techniques. Level 1 securities primarily include U.S. Treasuries.
Level 2 securities include agency residential mortgage backed securities,
commercial mortgage backed securities, asset backed securities, municipal and
corporate bonds, U.S. agency securities and common and preferred stock. The fair
value of these Level 2 securities is based on a market approach with prices
obtained from nationally-recognized pricing services. Observable inputs used to
value these securities can include: reported trades, benchmark yields, issuer
spreads and broker/dealer quotes. Level 3 securities include asset backed
securities, corporate bonds and non-agency residential mortgage backed
securities. The fair value of these Level 3 securities is typically based on a
single broker quote, except for the valuation of non-agency residential mortgage
backed securities. ACC believes the market for non-agency residential mortgage
backed securities is inactive and effective March 31, 2010, ACC returned to
using prices from nationally-recognized pricing services to determine the fair
value of non-agency residential mortgage backed securities because the
difference between these prices and the results of ACC's discounted cash flows
was not significant.
Derivatives (Equity Derivatives, Purchased and Written)
The fair values of derivatives that are traded in less active over-the-counter
markets are 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. Derivatives that are
valued using pricing models that have significant unobservable inputs are
classified as Level 3 measurements.
LIABILITIES
Certificate Reserves
ACC uses various Black-Scholes calculations to determine the fair value of the
embedded derivative liability associated with the provisions of its stock market
certificates. 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.
12
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following tables present the balances of assets and liabilities measured at
fair value on a recurring basis:
JUNE 30, 2010
--------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------- ---------- -------- ----------
(IN THOUSANDS)
Assets
Cash equivalents $ -- $ 242,377 $ -- $ 242,377
Available-for-Sale securities:
Residential mortgage backed securities -- 602,768 812,367 1,415,135
Corporate debt securities -- 795,069 7,982 803,051
Commercial mortgage backed securities -- 446,786 -- 446,786
Asset backed securities -- 263,247 114,469 377,716
U.S. government and agencies obligations 427 58,707 -- 59,134
Common and preferred stocks 29 18,126 -- 18,155
---- ---------- -------- ----------
Total Available-for-Sale securities 456 2,184,703 934,818 3,119,977
Equity derivatives, purchased -- 37,292 4 37,296
---- ---------- -------- ----------
Total assets at fair value $456 $2,464,372 $934,822 $3,399,650
==== ========== ======== ==========
Liabilities
Certificate reserves $ -- $ 10,516 $ -- $ 10,516
Equity derivatives, written -- 26,654 -- 26,654
---- ---------- -------- ----------
Total liabilities at fair value $ -- $ 37,170 $ -- $ 37,170
==== ========== ======== ==========
DECEMBER 31, 2009
--------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------- ---------- -------- ----------
(IN THOUSANDS)
Assets
Cash equivalents $ -- $ 309,183 $ -- $ 309,183
Available-for-Sale securities:
Residential mortgage backed securities -- 714,702 745,633 1,460,335
Corporate debt securities -- 1,038,135 12,104 1,050,239
Commercial mortgage backed securities -- 551,202 -- 551,202
Asset backed securities -- 299,683 130,584 430,267
U.S. government and agencies obligations 398 135,552 -- 135,950
Common and preferred stocks -- 15,765 -- 15,765
---- ---------- -------- ----------
Total Available-for-Sale securities 398 2,755,039 888,321 3,643,758
Equity derivatives, purchased -- 166,392 -- 166,392
---- ---------- -------- ----------
Total assets at fair value $398 $3,230,614 $888,321 $4,119,333
==== ========== ======== ==========
Liabilities
Certificate reserves $ -- $ 25,796 $ -- $ 25,796
Equity derivatives, written -- 140,996 -- 140,996
---- ---------- -------- ----------
Total liabilities at fair value $ -- $ 166,792 $ -- $ 166,792
==== ========== ======== ==========
13
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following tables provide a summary of changes in Level 3 assets and
liabilities measured at fair value on a recurring basis:
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
(IN THOUSANDS)
RESIDENTIAL
MORTGAGE CORPORATE ASSET
BACKED DEBT BACKED
SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------- ---------- ---------- ----------- --------
Balance, April 1, 2010 $703,391 $ 8,688 $127,019 $-- $839,098
Total gains (losses) included in:
Net income 1,136(1) -- 1,721(1) 4(1) 2,861
Other comprehensive income 18,948 (25) 574 -- 19,497
Purchases, sales, issuances and
settlements, net 88,892 (681) (14,845) -- 73,366
Transfers in and/or out of Level 3 -- -- -- --
-------- ------- -------- --- --------
Balance, June 30, 2010 $812,367 $ 7,982 $114,469 $ 4 $934,822
======== ======= ======== === ========
Change in unrealized gains (losses) included
in net income related to Level 3 assets
held at June 30, 2010 $ 1,098(1) $ -- $ 1,721(1) $ 4(1) $ 2,823
(1) Included in investment income in the Statements of Operations.
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
(IN THOUSANDS)
RESIDENTIAL
MORTGAGE CORPORATE ASSET OTHER
BACKED DEBT BACKED STRUCTURED
SECURITIES SECURITIES SECURITIES INVESTMENTS TOTAL
----------- ---------- ---------- ----------- --------
Balance, April 1, 2009 $700,156 $30,979 $114,600 $-- $845,735
Total gains (losses) included in:
Net income (3,010)(1) -- 1,448(2) -- (1,562)
Other comprehensive income 25,269 588 3,449 -- 29,306
Purchases, sales, issuances and
settlements, net (72,578) (988) 38,906 -- (34,660)
Transfers in and/or out of Level 3 -- -- -- -- --
-------- ------- -------- --- --------
Balance, June 30, 2009 $649,837 $30,579 $158,403 $-- $838,819
======== ======= ======== === ========
Change in unrealized gains (losses) included
in net income related to Level 3 assets
held at June 30, 2009 $ (1,929)(3) $ -- $ 1,448(2) $-- $ (481)
(1) Represents a $(4,608) loss included in net realized gain (loss) on
investments and a $1,598 gain included in investment income in the
Statements of Operations.
(2) Included in investment income in the Statements of Operations.
(3) Represents a $(3,980) loss included in net realized gain (loss) on
investments and a $2,051 gain included in investment income in the
Statements of Operations.
14
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
(IN THOUSANDS)
RESIDENTIAL
MORTGAGE CORPORATE ASSET
BACKED DEBT BACKED
SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------- ---------- ---------- ----------- --------
Balance, January 1, 2010 $ 745,633 $12,104 $130,584 $-- $888,321
Total gains (losses) included in:
Net income 288(1) -- 2,608(2) 4(4) 2,900
Other comprehensive income 32,539 (42) 6,608 -- 39,105
Purchases, sales, issuances and
settlements, net 33,907 (4,080) (25,331) -- 4,496
Transfers in and/or out of Level 3 -- -- -- --
--------- ------- -------- --- --------
Balance, June 30, 2010 $ 812,367 $ 7,982 $114,469 $ 4 $934,822
========= ======= ======== === ========
Change in unrealized gains (losses) included
in net income related to Level 3 assets
held at June 30, 2010 $ 205(3) $ -- $ 2,608(2) $ 4(4) $ 2,817
(1) Represents a $(2,065) loss included in net realized gain (loss) on
investments and a $2,353 gain included in investment income in the
Statements of Operations.
(2) Represents a $(289) loss included in net realized gain (loss) on
investments and a $2,897 gain included in investment income in the
Statements of Operations.
(3) Represents a $(2,065) loss included in net realized gain (loss) on
investments and a $2,270 gain in investment income in the Statements of
Operations.
(4) Included in investment income in the Statements of Operations.
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
(IN THOUSANDS)
RESIDENTIAL
MORTGAGE CORPORATE ASSET OTHER
BACKED DEBT BACKED STRUCTURED
SECURITIES SECURITIES SECURITIES INVESTMENTS TOTAL
----------- ---------- ---------- ----------- --------
Balance, January 1, 2009 $ 465,234 $33,653 $ 67,552 $-- $566,439
Total gains (losses) included in:
Net income (5,876)(1) -- 2,952(2) 8(4) (2,916)
Other comprehensive income 43,181 1,192 689 -- 45,062
Purchases, sales, issuances and
settlements, net 147,298 (4,266) 87,210 (8) 230,234
Transfers in and/or out of Level 3 -- -- -- --
--------- ------- -------- --- --------
Balance, June 30, 2009 $ 649,837 $30,579 $158,403 $-- $838,819
========= ======= ======== === ========
Change in unrealized gains (losses) included
in net income related to Level 3 assets
held at June 30, 2009 $ (4,903)(3) $ -- $ 2,952(2) $-- $ (1,951)
(1) Represents a $(7,687) loss included in net realized gain (loss) on
investments and a $1,811 gain included in investment income in the
Statements of Operations.
(2) Included in investment income in the Statements of Operations.
(3) Represents a $(7,277) loss included in net realized gain (loss) on
investments and a $2,374 gain included in investment income in the
Statements of Operations.
(4) Included in net realized gain (loss) on investments.
15
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ACC recognizes transfers between levels of the fair value hierarchy as of the
beginning of the quarter in which each transfer occurred. There were no
transfers between Level 1 and Level 2 during the six months ended June 30, 2010.
During the reporting periods, there were no material assets or liabilities
measured at fair value on a nonrecurring basis.
The following table provides the carrying value and the estimated fair value of
financial instruments that are not reported at fair value. All other financial
instruments that are reported at fair value have been included above in the
table with balances of assets and liabilities measured at fair value on a
recurring basis.
JUNE 30, 2010 DECEMBER 31, 2009
---------------------------- --------------------------
CARRYING VALUE FAIR VALUE ARRYING VALUE FAIR VALUE
-------------- ----------- ------------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS
Below investment grade syndicated bank loans $ 135,465 $ 131,439 $ 179,176 $ 179,579
Commercial mortgage loans 118,352 125,484 130,283 133,442
Certificate loans 4,291 4,291 5,136 5,136
FINANCIAL LIABILITIES
Certificate reserves $3,470,961 $3,445,290 $4,082,476 $4,052,657
The fair value of below investment grade syndicated bank loans is obtained from
a nationally-recognized pricing service.
The fair value of commercial mortgage loans, except those with significant
credit deterioration, has been determined by discounting contractual cash flows
using discount rates that reflect current pricing for loans with similar
remaining maturities and characteristics including loan-to-value ratio,
occupancy rate, refinance risk, debt-service coverage, location, and property
condition. For commercial mortgage loans with significant credit deterioration,
fair value is determined using the same adjustments as above with an additional
adjustment for ACC's estimate of the amount recoverable on the loan.
Certificate reserves
The fair value of investment certificate reserves is determined by discounting
cash flows using discount rates that reflect current pricing for assets with
similar terms and characteristics, with adjustments for early withdrawal
behavior, penalty fees, expense margin and ACC's nonperformance risk specific to
these liabilities.
5. DERIVATIVES AND HEDGING ACTIVITIES
Derivative instruments enable ACC to manage its exposure to various market
risks. The value of such instruments is derived from an underlying variable or
multiple variables, including equity and interest rate indices or prices. ACC
primarily enters into derivative agreements for risk management purposes related
to ACC's products and operations.
ACC uses derivatives as economic hedges of equity and interest rate risk related
to various products and transactions of ACC. ACC does not designate any
derivatives for hedge accounting. The following table presents the balance sheet
location and the gross fair value of derivative instruments, including embedded
derivatives, by type of derivative and product:
ASSET LIABILITY
----------------------- -----------------------
DERIVATIVES NOT DESIGNATED AS BALANCE SHEET JUNE 30, DECEMBER 31, BALANCE SHEET JUNE 30, DECEMBER 31,
HEDGING INSTRUMENTS LOCATION 2010 2009 LOCATION 2010 2009
----------------------------- ------------- -------- ------------ ------------- -------- ------------
(IN THOUSANDS) (IN THOUSANDS)
EQUITY
Stock market certificates Equity Equity
derivatives, derivatives,
purchased $37,292 $166,392 written $26,654 $140,996
Equity warrants Equity Equity
derivatives, derivatives,
purchased 4 -- written -- --
Stock market certificates Certificate
embedded derivatives -- -- reserves 10,516 25,796
------- -------- ------- --------
Total $37,296 $166,392 $37,170 $166,792
======= ======== ======= ========
16
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
See note 4 for additional information regarding ACC's fair value measurement of
derivative instruments.
The following table presents a summary of the impact of derivatives not
designated as hedging instruments on the Statements of Operations:
AMOUNT OF GAIN (LOSS) ON
DERIVATIVES RECOGNIZED IN INCOME
-------------------------------------
DERIVATIVES NOT DESIGNATED AS LOCATION OF GAIN (LOSS) ON THREE MONTHS ENDED SIX MONTHS ENDED
HEDGING INSTRUMENTS DERIVATIVES RECOGNIZED IN INCOME JUNE 30, 2010 JUNE 30, 2010
----------------------------- -------------------------------- ------------------ ----------------
(IN THOUSANDS)
EQUITY
Stock market certificates Net provision for certificate
reserves $(5,012) $(2,042)
Equity warrants Investment income 393 393
Stock market certificates embedded derivatives Net provision for certificate
reserves 4,841 1,721
------- -------
Total $ 222 $ 72
======= =======
AMOUNT OF GAIN (LOSS) ON
DERIVATIVES RECOGNIZED IN INCOME
-------------------------------------
DERIVATIVES NOT DESIGNATED AS LOCATION OF GAIN (LOSS) ON THREE MONTHS ENDED SIX MONTHS ENDED
HEDGING INSTRUMENTS DERIVATIVES RECOGNIZED IN INCOME JUNE 30, 2009 JUNE 30, 2009
----------------------------- -------------------------------------- ------------------ ----------------
(IN THOUSANDS)
EQUITY
Stock market certificates Net provision for certificate reserves $ 4,259 $ 1,421
Stock market certificates embedded derivatives Net provision for certificate reserves (4,540) (5,087)
------- -------
Total $ (281) $(3,666)
======= =======
Ameriprise Stock Market Certificates ("SMC") offer a return based upon the
relative change in a major stock market index between the beginning and end of
the SMC's term. The SMC product contains an embedded derivative. The equity
based return of the certificate must be separated from the host contract and
accounted for as a derivative instrument. As a result of fluctuations in equity
markets, and the corresponding changes in value of the embedded derivative, the
amount of expenses incurred by ACC related to the SMC product will positively or
negatively impact reported earnings. As a means of hedging its obligations under
the provisions for these certificates, ACC purchases and writes call options on
the S&P 500 Index. ACC views this strategy as a prudent management of equity
market sensitivity, such that earnings are not exposed to undue risk presented
by changes in equity market levels. The gross notional amount of these
derivative contracts was $1.5 billion at June 30, 2010. ACC also purchases
futures on the S&P 500 Index to economically hedge its obligations. The futures
are marked-to-market daily and exchange traded, exposing ACC to no counterparty
risk. The gross notional amount of these contracts was $0.3 million at June 30,
2010.
Equity warrants were received as part of a syndicated bank loan restructure and
do not constitute a hedge of underlying assets or liabilities.
CREDIT RISK
Credit risk associated with ACC'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, ACC 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 arrangements and collateral arrangements whenever practical. As of June
30, 2010, ACC held $3.1 million in cash and recorded a corresponding liability
in accounts payable and accrued liabilities for collateral ACC is obligated to
return to counterparties. As of June 30, 2010, ACC's maximum credit exposure
related to derivative assets after considering netting arrangements with
counterparties and collateral arrangements was approximately $7.2 million.
6. CONTINGENCIES
ACC is not aware that it is a party to any pending legal, arbitration, or
regulatory proceedings that would have a material adverse effect on its
financial condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material adverse effect on
results of operations in any particular reporting period as the proceedings are
resolved.
17
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. INCOME TAXES
The effective tax rate was 37.0% and 36.6% for the three months and six months
ended June 30, 2010, respectively, compared to 36.6% and 36.9% for the three
months and six months ended June 30, 2009. The effective tax rates for both six
month periods reflected the level of current period tax advantaged items
relative to the level of pretax income.
As of June 30, 2010 and December 31, 2009, ACC had nil and $4.4 million of gross
unrecognized tax benefits, respectively. If recognized, approximately nil and
$1.2 million, net of federal tax benefits, of the unrecognized tax benefits as
of June 30, 2010 and December 31, 2009, respectively, would affect the effective
tax rate.
ACC recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. ACC recognized $0.2 million in interest
for the three months and six months ended June 30, 2010. ACC had $1.6 million
and $1.4 million for the payment of interest and penalties accrued at June 30,
2010 and December 31, 2009, respectively.
It is not expected that the total amounts of unrecognized tax benefits will
change materially in the next 12 months.
ACC files income tax returns in the U.S. federal jurisdiction, and various state
jurisdictions. With few exceptions, ACC is no longer subject to U.S. federal or
state and local income tax examinations by tax authorities for years before
1997. The Internal Revenue Service ("IRS"), as part of the overall examination
of the American Express Company consolidated return, completed its field
examination of ACC's U.S. income tax returns for 1997 through 2002 during 2008
and completed its field examination of 2003 through 2004 in the third quarter of
2009. However, for federal income tax purposes these years continue to remain
open as a consequence of certain issues under appeal. In the fourth quarter of
2008, as part of the overall examination of Ameriprise Financial, Inc's
consolidated return, the IRS commenced an examination of ACC's U.S. income tax
returns for 2005 through 2007. During the second quarter of 2010, the IRS
completed its examination of the second stub period 2005 through 2007, and the
first stub 2005 period is expected to be completed in the third quarter of 2010.
ACC's state income tax returns are currently under examination by various
jurisdictions for years ranging from 1998 through 2008.
18
AMERIPRISE CERTIFICATE COMPANY
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
The following information should be read in conjunction with Ameriprise
Certificate Company's ("ACC") Financial Statements and related notes presented
in Part I, Item 1. This discussion may contain forward-looking statements that
reflect ACC's plans, estimates and beliefs. Actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to these differences include, but are not limited
to, those discussed under "Forward-Looking Statements." ACC believes it is
useful to read its management's narrative analysis in conjunction with its
Annual Report on Form 10-K for the year ended December 31, 2009, filed with the
Securities and Exchange Commission ("SEC") on February 23, 2010 ("2009 10-K"),
as well as its current reports on Form 8-K and other publicly available
information.
ACC is a wholly owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise
Financial"). ACC is registered as an investment company under the Investment
Company Act of 1940 and is in the business of issuing face-amount investment
certificates. Face-amount investment certificates issued by ACC entitle the
certificate owner to receive at maturity a stated amount of money and interest
or credits declared from time to time by ACC, at its discretion. The
certificates issued by ACC are not insured by any government agency. ACC's
certificates are sold primarily by Ameriprise Financial Services, Inc., an
affiliate of ACC. Ameriprise Financial Services, Inc. is registered as a
broker-dealer in all 50 states, the District of Columbia and Puerto Rico. ACC's
investment portfolio is managed by Columbia Management Investment Advisers, LLC
("CMIA"), a wholly owned subsidiary of Ameriprise Financial, pursuant to an
investment management agreement effective as of January 1, 2010. CMIA, formerly
known as RiverSource Investments, LLC, changed its name following Ameriprise
Financial's acquisition of Columbia Management Group's long-term asset
management business.
ACC's future profitability is dependent upon changes in the economic, credit and
equity environments, as well as the competitive environment. Ameriprise
Financial and unaffiliated third parties offer certain competing products which
have demonstrated strong appeal to investors.
Management's narrative analysis of the results of operations is presented in
lieu of management's discussion and analysis of financial condition and results
of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
CRITICAL ACCOUNTING POLICIES
ACC's critical accounting policies are discussed in detail in "Management's
Narrative Analysis -- Critical Accounting Policies" in its 2009 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their expected
impact on ACC's future results of operations or financial condition, see Note 2
to the financial statements.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
Net income for the six months ended June 30, 2010 was $26.9 million compared to
$11.1 million for the six months ended June 30, 2009, an increase of $15.8
million, due primarily to decreased expenses related to certificate reserves
caused by the combination of net outflows due to the run-off of certificate rate
promotions and a decrease in interest crediting rates.
For the six months ended June 30, 2010, investment income decreased $29.1
million, or 26%, to $84.1 million compared to the same period in the prior year.
This decrease is primarily the result of lower asset balances due to net
outflows primarily driven by the run-off of certificate rate promotions.
Investment expenses for the six months ended June 30, 2010 decreased $3.3
million, or 17%, to $16.1 million compared to the same period in 2009. This
decrease is due to lower distribution fees as a result of declining certificate
reserve balances in the first half of 2010 compared to the first half of 2009.
The provision for certificate reserves decreased $41.5 million, or 57%, to $30.7
million for the six months ended June 30, 2010 compared to the same period in
2009. This decrease is a result of lower certificate balances due to net
outflows and lower interest crediting rates compared to the prior year period.
19
AMERIPRISE CERTIFICATE COMPANY
Net realized gain on investments for the six months ended June 30, 2010 was $3.3
million compared to net realized loss on investments of $2.7 million for the six
months ended June 30, 2009. Included in the net investment gains for the six
months ended June 30, 2010 was a $7.7 million decrease in the below investment
grade syndicated bank loans reserve primarily due to improvement of underlying
credit. This was partially offset by an increase in the commercial mortgage loan
reserve and other-than-temporary impairment losses on non-agency residential
mortgage backed securities. Included in net investment losses for the six months
ended June 30, 2009 was $8.4 million of other-than-temporary impairment losses
on investments. These other-than-temporary impairment charges primarily related
to credit losses on non-agency residential mortgage backed securities and
corporate debt securities primarily in the gaming industry.
The effective tax rate was 36.6% for the six months ended June 30, 2010 compared
to 36.9% for the six months ended June 30, 2009.
FAIR VALUE MEASUREMENTS
ACC reports certain assets and liabilities at fair value; specifically
derivatives, embedded derivatives, and most investments and cash equivalents.
Fair value assumes the exchange of assets or liabilities occurs in orderly
transactions. Companies are not permitted to use market prices that are the
result of a forced liquidation or distressed sale. ACC includes actual market
price or observable inputs in its fair value measurements to the extent
available. Broker quotes are obtained when quotes from pricing services are not
available. ACC validates prices obtained from third parties through a variety of
means such as: price variance analysis, subsequent sales testing, stale price
review, price comparison across pricing vendors and due diligence reviews of
vendors.
Non-agency Residential Mortgage Backed Securities Backed by Subprime, Alt-A or
Prime Collateral
Subprime mortgage lending is the origination of residential mortgage loans to
customers with weak credit profiles. Alt-A mortgage lending is the origination
of residential mortgage loans to customers who have credit ratings above
subprime but may not conform to government-sponsored standards. Prime mortgage
lending is the origination of residential mortgage loans to customers with good
credit profiles. ACC has exposure to these types of loans predominantly through
mortgage backed and asset backed securities. The slowdown in the U.S. housing
market, combined with relaxed underwriting standards by some originators, has
led to higher delinquency and loss rates for some of these investments. Market
conditions have increased the likelihood of other-than-temporary impairments for
certain non-agency residential mortgage backed securities. As a part of ACC's
risk management process, an internal rating system is used in conjunction with
market data as the basis for analysis to assess the likelihood that ACC will not
receive all contractual principal and interest payments for these investments.
For the investments that are more at risk for impairment, ACC performs its own
assessment of projected cash flows incorporating assumptions about default
rates, prepayment speeds, loss severity, and geographic concentrations to
determine if an other-than-temporary impairment should be recognized.
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AMERIPRISE CERTIFICATE COMPANY
The following table presents as of June 30, 2010, ACC's non-agency residential
mortgage backed and asset backed securities backed by subprime, Alt-A or prime
mortgage loans by credit rating and vintage year (in thousands):
AAA AA A BBB BB & BELOW TOTAL
------------------ ----------------- ----------------- ----------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- ------- --------- ------- --------- ------- --------- -------- --------- --------
SUBPRIME
2003 & prior $ 1,608 $ 1,610 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,608 $ 1,610
2004 9,476 9,277 -- -- 7,096 6,941 -- -- 8,869 7,672 25,441 23,890
2005 6,832 6,832 29,985 32,594 3,904 3,936 1,049 1,035 5,571 5,536 47,341 49,933
2006 -- -- -- -- -- -- 6,824 6,921 3,628 3,545 10,452 10,466
2007 -- -- -- -- 4,389 4,445 -- -- -- -- 4,389 4,445
2008 -- -- -- -- -- -- -- -- -- -- -- --
Re-Remic(1) -- -- -- -- -- -- 14,722 14,538 -- -- 14,722 14,538
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total Subprime $ 17,916 $ 17,719 $29,985 $32,594 $15,389 $15,322 $22,595 $22,494 $ 18,068 $ 16,753 $103,953 $104,882
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
ALT-A
2003 & prior $ 4,818 $ 4,535 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 4,818 $ 4,535
2004 4,897 4,463 2,658 2,142 16,195 13,785 10,462 5,455 3,321 1,214 37,533 27,059
2005 -- -- -- -- -- -- 2,733 2,069 91,234 61,468 93,967 63,537
2006 -- -- -- -- -- -- -- -- 35,542 26,696 35,542 26,696
2007 -- -- -- -- -- -- -- -- 50,109 26,863 50,109 26,863
2008 -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total Alt-A $ 9,715 $ 8,998 $ 2,658 $ 2,142 $16,195 $13,785 $13,195 $ 7,524 $180,206 $116,241 $221,969 $148,690
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
PRIME
2003 & prior $ 31,072 $ 31,541 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 31,072 $ 31,541
2004 42,383 41,830 26,343 24,109 5,763 5,209 21,028 15,461 22,415 7,454 117,932 94,063
2005 3,635 3,526 13,028 11,751 10,820 9,831 7,380 6,400 79,685 68,640 114,548 100,148
2006 -- -- -- -- -- -- -- -- 3,821 3,423 3,821 3,423
2007 -- -- -- -- -- -- -- -- -- -- -- --
2008 -- -- -- -- -- -- -- -- -- -- -- --
Re-Remic(1) 392,932 400,750 10,513 11,534 -- -- -- -- -- -- 403,445 412,284
-------- -------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total Prime $470,022 $477,647 $49,884 $47,394 $16,583 $15,040 $28,408 $21,861 $105,921 $ 79,517 $670,818 $641,459
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
GRAND TOTAL $497,653 $504,364 $82,527 $82,130 $48,167 $44,147 $64,198 $51,879 $304,195 $212,511 $996,740 $895,031
======== ======== ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
(1) Re-Remics of mortgage backed securities are prior vintages with cash flows
structured into senior and subordinated bonds. Credit enhancement on
senior bonds is increased through the Re-Remic process. ACC did not have
any exposure to subordinate tranches as of June 30, 2010.
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AMERIPRISE CERTIFICATE COMPANY
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect management's plans,
estimates and beliefs. Actual results could differ materially from those
described in these forward-looking statements. The words "believe," "expect,"
"anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should,"
"could," "would," "likely," "forecast," "on pace," "project" and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. Forward-looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from such statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. ACC undertakes no obligation to update or revise any
forward-looking statements.
ITEM 4T. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
ACC maintains disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) designed to provide reasonable assurance that the information required to
be reported in the Exchange Act filings is recorded, processed, summarized and
reported within the time periods specified in and pursuant to SEC regulations,
including controls and procedures designed to ensure that this information is
accumulated and communicated to ACC's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding the required disclosure. It should be noted that, because of inherent
limitations, ACC's disclosure controls and procedures, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
ACC's management, under the supervision and with the participation of its Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
ACC's disclosure controls and procedures as of the end of the period covered by
this report. Based upon that evaluation, ACC's Chief Executive Officer and Chief
Financial Officer have concluded that ACC's disclosure controls and procedures
were effective at a reasonable level of assurance as of June 30, 2010.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in ACC's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, ACC's
internal control over financial reporting.
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AMERIPRISE CERTIFICATE COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 6 to the Financial Statements in Part I, Item
1 is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Part I, Item 1A of ACC's 2009 10-K sets forth information relating to the
material risks and uncertainties that affect our business and common stock. In
addition, the following factors should be read in conjunction with and
supplement and amend the risk factors set forth in our 2009 10-K that may affect
the Company's business, financial condition and results of operations.
CHANGES IN THE SUPERVISION AND REGULATION OF THE FINANCIAL INDUSTRY, INCLUDING
THOSE SET FORTH UNDER THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION
ACT, COULD MATERIALLY IMPACT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND
LIQUIDITY.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Act") into law. The Act calls for sweeping changes
in the supervision and regulation of the financial industry designed to provide
for greater oversight of financial industry participants, reduce risk in banking
practices and in securities and derivatives trading, enhance public company
corporate governance practices and executive compensation disclosures, and
provide greater protections to individual consumers and investors. Certain
elements of the Act became effective immediately, though the details of many
provisions are subject to additional studies and will not be known until final
rules are adopted by applicable regulatory agencies. The impact of the Act on
the Company, the financial industry and the economy cannot be known until all
such rules and regulations called for under the Act have been finalized, and, in
some cases, implemented over time.
Accordingly, while the final contours of these reforms are not yet known, the
Act is expected to impact the manner in which we market our products and
services, manage our Company and its operations and interact with regulators,
all of which could materially impact our results of operations, financial
condition and liquidity. Certain provisions of the Act that may impact our
business include but are not limited to restrictions on proprietary trading, the
imposition of capital requirements on financial holding companies and greater
oversight over derivatives trading. Further, the Company will need to respond to
changes to the framework for the supervision of U.S. financial institutions,
including the creation of the Financial Stability Oversight Counsel. Moreover,
to the extent the Act impacts the operations, financial condition, liquidity and
capital requirements of unaffiliated financial institutions with whom we
transact business, those institutions may seek to pass on increased costs,
reduce their capacity to transact, or otherwise present inefficiencies in their
interactions with us.
ITEM 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed
on page E-1 hereof, under "Exhibit Index," which is incorporated herein by
reference.
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AMERIPRISE CERTIFICATE COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERIPRISE CERTIFICATE COMPANY
(Registrant)
Date: August 4, 2010 /s/ William F. Truscott
----------------------------------------
William F. Truscott
Chief Executive Officer
Date: August 4, 2010 /s/ Ross P. Palacios
----------------------------------------
Ross P. Palacios
Chief Financial Officer
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AMERIPRISE CERTIFICATE COMPANY
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
EXHIBIT DESCRIPTION
------- ----------------------------------------------------------------------
3(a) Amended and Restated Certificate of Incorporation of American Express
Certificate Company, dated Aug. 1, 2005, filed electronically on or
about March 10, 2006 as Exhibit 3(a) to Registrant's Form 10-K is
incorporated by reference.
3(b) Current By-Laws, filed electronically as Exhibit 3(e) to
Post-Effective Amendment No. 19 to Registration Statement No.
33-26844, are incorporated herein by reference.
* 31.1 Certification of William F. Truscott pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 31.2 Certification of Ross P. Palacios pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 32.1 Certification of William F. Truscott and Ross P. Palacios pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
* Filed electronically herewithin.
E-1
