AMERIPRISE CERTIFICATE CO - FORM 10-Q - May 5, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2014
OR
o
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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1099 Ameriprise Financial Center, Minneapolis, Minnesota
 
55474
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (612) 671-3131
Former name, former address and former fiscal year, if changed since last report:  Not Applicable
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 ý    No o
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 (§ 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 ý No o
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 Filer  o
Accelerated Filer  o
Non-Accelerated Filer  x
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý 
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 May 5, 2014
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
 

2

AMERIPRISE CERTIFICATE COMPANY



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Investment income
$
22,155

 
$
22,394

Investment expenses
7,718

 
6,413

Net investment income before provision for certificate reserves and income taxes
14,437

 
15,981

Net provision for certificate reserves
6,790

 
8,107

Net investment income before income taxes
7,647

 
7,874

Income tax expense
2,898

 
2,917

Net investment income
4,749

 
4,957

 
 
 
 
Net realized gain (loss) on investments
369

 
(1,340
)
Income tax expense (benefit)
129

 
(469
)
Net realized gain (loss) on investments, after-tax
240

 
(871
)
Net income
$
4,989

 
$
4,086

 
 
 
 
Supplemental Disclosures:
 

 
 

Total other-than-temporary impairment losses on securities
$
(14
)
 
$
(4
)
Portion of loss recognized in other comprehensive income (before taxes)
(289
)
 
(1,447
)
Net impairment losses recognized in net realized gain (loss) on investments
$
(303
)
 
$
(1,451
)
 See Notes to Consolidated Financial Statements.


3

AMERIPRISE CERTIFICATE COMPANY



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net income
$
4,989

 
$
4,086

Other comprehensive income, net of tax:
 

 
 

Net unrealized gains on securities:
 

 
 

Net unrealized securities gains arising during the period
3,453

 
3,037

Reclassification of net securities (gains) losses included in net income
(240
)
 
864

Total other comprehensive income, net of tax
3,213

 
3,901

Total comprehensive income
$
8,202

 
$
7,987

See Notes to Consolidated Financial Statements.


4

AMERIPRISE CERTIFICATE COMPANY



CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

 
March 31, 2014
 
December 31, 2013
Assets
(unaudited)
 
 

Qualified Assets
 

 
 

Cash and cash equivalents
$
138,195

 
$
74,526

Investments in unaffiliated issuers
4,177,775

 
4,118,758

Receivables
25,932

 
26,586

Equity options, purchased
55,436

 
72,848

Total qualified assets
4,397,338

 
4,292,718

Deferred taxes, net
1,293

 
1,245

Total assets
$
4,398,631

 
$
4,293,963

 
 
 
 
Liabilities and Shareholder's Equity
 

 
 

Liabilities
 

 
 

Certificate reserves
$
4,072,923

 
$
3,983,707

Current taxes payable to parent
5,983

 
2,924

Equity options, written
49,053

 
65,958

Payable for investment securities purchased
28,707

 
1,566

Due to related party and other liabilities
10,588

 
16,633

Total liabilities
4,167,254

 
4,070,788

 
 
 
 
Shareholder's Equity
 

 
 

Common shares ($10 par value, 150,000 shares authorized and issued)
1,500

 
1,500

Additional paid-in capital
201,517

 
201,517

Total retained earnings
28,288

 
23,299

Accumulated other comprehensive income (loss), net of tax
72

 
(3,141
)
Total shareholder's equity
231,377

 
223,175

Total liabilities and shareholder's equity
$
4,398,631

 
$
4,293,963

See Notes to Consolidated Financial Statements.



5

AMERIPRISE CERTIFICATE COMPANY



CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)
(in thousands, except share data)
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
Number of Outstanding Shares
 
Common Shares
 
Additional Paid-In Capital
 
Appropriated for Pre-Declared Additional Credits and Interest
 
Appropriated for Additional Interest on Advance Payments
 
Unappropriated
 
Accumulated Other Comprehensive Income (Loss), Net of Tax
 
Total
 
Balance at
January 1, 2013
150,000

 
$
1,500

 
$
191,517

 
$
—

 
$
15

 
$
9,137

 
$
5,371

 
$
207,540

Comprehensive income:
Net income
—

 
—

 
—

 
—

 
—

 
4,086

 
—

 
4,086

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
3,901

 
3,901

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
7,987

Receipt of capital from parent
—

 
—

 
5,000

 
—

 
—

 
—

 
—

 
5,000

Balance at
March 31, 2013
150,000

 
$
1,500

 
$
196,517

 
$
—

 
$
15

 
$
13,223

 
$
9,272

 
$
220,527

 
Balance at
January 1, 2014
150,000

 
$
1,500

 
$
201,517

 
$
26

 
$
15

 
$
23,258

 
$
(3,141
)
 
$
223,175

Comprehensive income:
Net income
—

 
—

 
—

 
—

 
—

 
4,989

 
—

 
4,989

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
3,213

 
3,213

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
8,202

Transfer to appropriated/from unappropriated
—

 
—

 
—

 
51

 
—

 
(51
)
 
—

 
—

Balance at
March 31, 2014
150,000

 
$
1,500

 
$
201,517

 
$
77

 
$
15

 
$
28,196

 
$
72

 
$
231,377

See Notes to Consolidated Financial Statements.



6

AMERIPRISE CERTIFICATE COMPANY



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows from Operating Activities
Net income
$
4,989

 
$
4,086

Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums, accretion of discounts, net
7,634

 
7,347

Deferred income tax provision
154

 
447

Net realized gain on Available-for-Sale securities
(672
)
 
(121
)
Other net realized loss
—

 
10

Other-than-temporary impairments and provision for loan loss
303

 
1,451

Changes in operating assets and liabilities:
Dividends and interest receivable
(850
)
 
(844
)
Certificate reserves, net
(312
)
 
1,680

Deferred taxes, net
(2,257
)
 
—

Current taxes payable to/receivable from parent, net
3,059

 
8,964

Derivatives, net of collateral
947

 
(98
)
Other, net
(7,169
)
 
6,595

Net cash provided by operating activities
5,826

 
29,517

Cash Flows from Investing Activities
Available-for-Sale securities:
Sales
11,884

 
252

Maturities, redemptions and calls
252,646

 
220,723

Purchases
(299,734
)
 
(458,242
)
Syndicated loans, commercial mortgage loans and real estate owned:
Sales, maturities and repayments
3,478

 
18,510

Purchases and fundings
—

 
(3,291
)
Certificate loans, net
41

 
169

Net cash used in investing activities
(31,685
)
 
(221,879
)
Cash Flows from Financing Activities
Payments from certificate holders and other additions
617,035

 
598,606

Certificate maturities and cash surrenders
(527,507
)
 
(402,697
)
Capital contribution from parent
—

 
5,000

Net cash provided by financing activities
89,528

 
200,909

Net increase in cash and cash equivalents
63,669

 
8,547

Cash and cash equivalents at beginning of period
74,526

 
89,232

Cash and cash equivalents at end of period
$
138,195

 
$
97,779

Supplemental disclosures including non-cash transactions:
Cash paid (received) for income taxes
$
1,789

 
$
(7,029
)
Cash paid for interest
7,819

 
9,592

See Notes to Consolidated Financial Statements.

7

AMERIPRISE CERTIFICATE COMPANY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.  Basis of Presentation
Ameriprise Certificate Company (“ACC” or the “Company”), 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. The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). ACC uses the consolidation method of accounting for its wholly owned subsidiary, Investors Syndicate Development Corp. 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 consolidated 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 Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Annual Report on Form 10-K of ACC for the year ended December 31, 2013, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2014.
ACC reclassified certain prior period amounts in the Consolidated Statements of Cash Flows, as listed below, to improve the transparency of its cash flows. Total cash flows provided by (used in) operating, investing and financing activities did not materially change as a result of the reclassifications.
Within operating activities, the change in derivatives collateral was reclassified from "Derivatives collateral, net" to “Derivatives, net of collateral”. As a result of this reclassification, changes in all freestanding derivatives and related collateral are included in one line within operating cash flows. Also within operating activities, other-than-temporary impairments were reclassified from "Net realized gain on Available-for-Sale securities" to “Other-than-temporary impairments and provision for loan loss” and the change in open payables and receivables related to ACC's derivatives was reclassified from "Derivatives, net" to "Other, net".
Within investing activities, "Sales of syndicated loans, commercial mortgage loans and real estate owned" was combined with "Maturities, redemptions and calls of syndicated loans, commercial mortgage loans and real estate owned".
Within financing activities, the increase in certificate account balances for interest credited was reclassified from "Certificate maturities and cash surrenders" to "Payments from certificate holders and other additions".
Additionally, for the three months ended March 31, 2013, ACC reclassified $126 thousand out of cash flows provided by operating activities and $91 thousand and $35 thousand into cash flows provided by (used in) investing activities and financing activities, respectively. These changes related to ACC's certificate loans and surrender charges.
ACC evaluated events or transactions that occurred after the consolidated balance sheet date for potential recognition or disclosure through the date the consolidated financial statements were issued.
 
2.  Recent Accounting Pronouncements
Adoption of New Accounting Standards
Income Taxes
 In July 2013, the Financial Accounting Standards Board (“FASB”) updated the accounting standard for income taxes. The update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard is effective for interim and annual periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. ACC adopted the standard in the first quarter of 2014. The adoption of the standard did not have a material impact on the ACC’s consolidated results of operations and financial condition.
Investment Companies
In June 2013, the FASB updated the accounting standard related to investment companies. The standard provides a new two-tiered approach for determining whether a company is an investment company and requires new disclosures for investment companies. The standard is effective for interim and annual periods beginning after December 15, 2013 and is required to be applied prospectively. The adoption of the standard did not have a material impact on ACC’s consolidated results of operations and financial condition.
Future Adoption of New Accounting Standards
Receivables - Troubled Debt Restructuring by Creditors 
In January 2014, the FASB updated the accounting standard related to recognizing residential real estate obtained through a repossession or foreclosure from a troubled debtor. The update clarifies the criteria for derecognition of the loan receivable and recognition of the real estate property. The standard is effective for interim and annual periods beginning after December 15, 2014 and can be applied under a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of the standard is not expected to have a material impact on ACC’s consolidated results of operations and financial condition.


8


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

3.  Investments
Investments in unaffiliated issuers were as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
Available-for-Sale securities:
 

 
 

Fixed maturities, at fair value (amortized cost: 2014, $4,044,719; 2013, $3,987,510)
$
4,040,094

 
$
3,978,248

Common stocks, at fair value (cost: 2014, $2,215; 2013, $2,215)
6,954

 
6,323

Commercial mortgage loans and syndicated loans, at cost (less allowance for loan losses: 2014, $3,464; 2013, $4,461; fair value: 2014, $132,049; 2013, $134,114)
128,522

 
131,241

Certificate loans — secured by certificate reserves, at cost, which approximates fair value
1,178

 
1,219

Real estate owned, at fair value less costs to sell
1,027

 
1,727

Total
$
4,177,775

 
$
4,118,758

Available-for-Sale securities distributed by type were as follows:
 
 
March 31, 2014
Description of Securities
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Noncredit OTTI (1)
 
 
(in thousands)
Residential mortgage backed securities
 
$
2,232,505

 
$
16,124

 
$
(34,878
)
 
$
2,213,751

 
$
(12,502
)
Corporate debt securities
 
972,998

 
9,543

 
(1,187
)
 
981,354

 
3

Commercial mortgage backed securities
 
350,595

 
5,324

 
(482
)
 
355,437

 
—

Asset backed securities
 
488,243

 
3,972

 
(3,079
)
 
489,136

 
—

U.S. government and agencies obligations
 
378

 
38

 
—

 
416

 
—

Common stocks
 
2,215

 
4,740

 
(1
)
 
6,954

 
2,156

Total
 
$
4,046,934

 
$
39,741

 
$
(39,627
)
 
$
4,047,048

 
$
(10,343
)
 
 
December 31, 2013
Description of Securities
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Noncredit OTTI (1)
 
 
(in thousands)
Residential mortgage backed securities
 
$
2,230,983

 
$
15,580

 
$
(38,506
)
 
$
2,208,057

 
$
(14,697
)
Corporate debt securities
 
935,794

 
9,847

 
(1,254
)
 
944,387

 
3

Commercial mortgage backed securities
 
303,071

 
4,273

 
(506
)
 
306,838

 
—

Asset backed securities
 
517,283

 
4,195

 
(2,921
)
 
518,557

 
—

U.S. government and agencies obligations
 
379

 
30

 
—

 
409

 
—

Common stocks
 
2,215

 
4,109

 
(1
)
 
6,323

 
1,839

Total
 
$
3,989,725

 
$
38,034

 
$
(43,188
)
 
$
3,984,571

 
$
(12,855
)
(1) Represents the amount of other-than-temporary impairment (“OTTI”) losses in accumulated other comprehensive income (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.
As of March 31, 2014 and December 31, 2013, investment securities with a fair value of $65 thousand and $67 thousand, respectively, were pledged to meet contractual obligations under derivative contracts.
At March 31, 2014 and December 31, 2013, fixed maturity securities comprised approximately 94% and 95%, respectively, of ACC’s total 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”). ACC 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, as is the case for many private placement securities, ACC may utilize ratings from other NRSROs or rate the securities internally. At March 31, 2014

9


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

and December 31, 2013, approximately $156.3 million and $106.3 million, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC (“CMIA”) using criteria similar to those used by NRSROs. A summary of fixed maturity securities by rating was as follows:
 
 
March 31, 2014
 
December 31, 2013
Ratings
 
Amortized Cost
 
Fair Value
 
Percent of Total Fair Value
 
Amortized Cost
 
Fair Value
 
Percent of Total Fair Value
 
 
(in thousands, except percentages)
AAA
 
$
1,740,212

 
$
1,744,712

 
43
%
 
$
1,763,939

 
$
1,766,688

 
44
%
AA
 
89,526

 
91,664

 
2

 
102,397

 
104,544

 
3

A
 
1,159,746

 
1,156,479

 
29

 
1,125,224

 
1,122,795

 
28

BBB
 
801,086

 
808,486

 
20

 
733,685

 
741,023

 
19

Below investment grade
 
254,149

 
238,753

 
6

 
262,265

 
243,198

 
6

Total fixed maturities
 
$
4,044,719

 
$
4,040,094

 
100
%
 
$
3,987,510

 
$
3,978,248

 
100
%
At March 31, 2014 and December 31, 2013, approximately 60% and 58%, 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:
Description of Securities
 
March 31, 2014
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 thousands, except number of securities)
Residential mortgage backed securities
62

 
$
837,801

 
$
(8,918
)
 
79

 
$
478,462

 
$
(25,960
)
 
141

 
$
1,316,263

 
$
(34,878
)
Corporate debt securities
22

 
197,580

 
(1,093
)
 
2

 
19,629

 
(94
)
 
24

 
217,209

 
(1,187
)
Commercial mortgage backed securities
8

 
84,561

 
(482
)
 
—

 
—

 
—

 
8

 
84,561

 
(482
)
Asset backed securities
19

 
219,365

 
(2,311
)
 
3

 
42,482

 
(768
)
 
22

 
261,847

 
(3,079
)
Common stocks
 
1

 
11

 
(1
)
 
—

 
—

 
—

 
1

 
11

 
(1
)
Total
112

 
$
1,339,318

 
$
(12,805
)
 
84

 
$
540,573

 
$
(26,822
)
 
196

 
$
1,879,891

 
$
(39,627
)
Description of Securities
 
December 31, 2013
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 thousands, except number of securities)
Residential mortgage backed securities
74

 
$
902,004

 
$
(10,923
)
 
70

 
$
365,396

 
$
(27,583
)
 
144

 
$
1,267,400

 
$
(38,506
)
Corporate debt securities
20

 
189,333

 
(997
)
 
2

 
20,084

 
(257
)
 
22

 
209,417

 
(1,254
)
Commercial mortgage backed securities
11

 
103,111

 
(506
)
 
2

 
136

 
—

 
13

 
103,247

 
(506
)
Asset backed securities
24

 
312,094

 
(2,905
)
 
1

 
6,116

 
(16
)
 
25

 
318,210

 
(2,921
)
Common stocks
1

 
11

 
(1
)
 
—

 
—

 
—

 
1

 
11

 
(1
)
Total
130

 
$
1,506,553

 
$
(15,332
)
 
75

 
$
391,732

 
$
(27,856
)
 
205

 
$
1,898,285

 
$
(43,188
)
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 movement in credit spreads primarily related to non-agency residential mortgage backed securities purchased prior to 2008.

10


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Operations for other-than-temporary impairments related to credit losses on Available-for-Sale securities for which a portion of the securities’ total other-than-temporary impairments was recognized in other comprehensive income:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Beginning balance
$
83,122

 
$
79,557

Credit losses for which an other-than-temporary impairment was previously recognized
303

 
1,451

Ending balance
$
83,425

 
$
81,008

The change in net unrealized securities gains (losses) in other comprehensive income (loss) 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 income:
 
Net
Unrealized
Investment
Gains (Losses)
 
Deferred
Income Tax
 
Accumulated Other
Comprehensive Income
(Loss) Related to Net
Unrealized Investment
Gains (Losses)
 
(in thousands)
Balance at January 1, 2013
$
8,426

 
$
(3,055
)
 
$
5,371
 
 
Net unrealized securities gains arising during the period (1)
4,788

 
(1,751
)
 
3,037
 
 
Reclassification of losses included in net income
1,330

 
(466
)
 
864
 
 
Balance at March 31, 2013
$
14,544

 
$
(5,272
)
 
$
9,272
 
(2) 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
(5,154
)
 
$
2,013

 
$
(3,141
)
 
Net unrealized securities gains arising during the period (1)
5,637

 
(2,184
)
 
3,453
 
 
Reclassification of gains included in net income
(369
)
 
129

 
(240
)
 
Balance at March 31, 2014
$
114

 
$
(42
)
 
$
72
 
(2) 
(1) Net unrealized securities gains (losses) arising during the period include other-than-temporary impairment losses on Available-for-Sale securities related to factors other than credit that were recognized in other comprehensive income (loss) during the period.
(2) Includes $6.7 million and $16.1 million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at March 31, 2014 and 2013, respectively.

Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in earnings were as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Gross realized gains
$
675

 
$
121

Gross realized losses
(3
)
 
—

Other-than-temporary impairments
(303
)
 
(1,451
)
Total
$
369

 
$
(1,330
)
Other-than-temporary impairments for the three months ended March 31, 2014 and 2013 related to credit losses on non-agency residential mortgage backed securities.

11


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Available-for-Sale securities by contractual maturity at March 31, 2014 were as follows:
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due within one year
$
236,343

 
$
237,926

Due after one year through five years
736,820

 
743,594

Due after five years through 10 years
—

 
—

Due after 10 years
213

 
250

 
973,376

 
981,770

Residential mortgage backed securities
2,232,505

 
2,213,751

Commercial mortgage backed securities
350,595

 
355,437

Asset backed securities
488,243

 
489,136

Common stocks
2,215

 
6,954

Total
$
4,046,934

 
$
4,047,048

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 stocks, were not included in the maturities distribution.
 
4.  Commercial Mortgage, Syndicated and Certificate Loans
ACC’s financing receivables include commercial mortgage loans, syndicated loans and certificate loans. Certificate loans do not exceed the cash surrender value of the certificate at origination. As there is minimal risk of loss related to certificate loans, ACC does not record an allowance for loan losses for certificate loans.
Allowance for Loan Losses
The following tables present a rollforward of the allowance for loan losses for the three months ended and the ending balance of the allowance for loan losses by impairment method and type of loan:
 
March 31, 2014
 
Commercial
Mortgage Loans
 
Syndicated 
Loans
 
Total
 
(in thousands)
Beginning balance
$
2,341

 
$
2,120

 
$
4,461

Charge-offs
—

 
(997
)
 
(997
)
Ending balance
$
2,341

 
$
1,123

 
$
3,464

Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
2,341

 
1,123

 
3,464

 
March 31, 2013
 
Commercial
Mortgage Loans
 
Syndicated 
Loans
 
Total
 
(in thousands)
Beginning balance
$
2,576

 
$
3,084

 
$
5,660

Charge-offs
—

 
—

 
—

Ending balance
$
2,576

 
$
3,084

 
$
5,660

Individually evaluated for impairment
$
1,000

 
$
—

 
$
1,000

Collectively evaluated for impairment
1,576

 
3,084

 
4,660


12


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The recorded investment in financing receivables by impairment method and type of loan was as follows:
 
March 31, 2014
 
Commercial
Mortgage Loans
 
Syndicated 
Loans
 
Total
 
(in thousands)
Individually evaluated for impairment
$
1,786

 
$
1,859

 
$
3,645

Collectively evaluated for impairment
114,569

 
13,772

 
128,341

Total
$
116,355

 
$
15,631

 
$
131,986

 
December 31, 2013
 
Commercial
Mortgage Loans
 
Syndicated 
Loans
 
Total
 
(in thousands)
Individually evaluated for impairment
$
1,814

 
$
3,374

 
$
5,188

Collectively evaluated for impairment
116,398

 
14,116

 
130,514

Total
$
118,212

 
$
17,490

 
$
135,702

As of March 31, 2014 and December 31, 2013, ACC’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $3.6 million and $5.2 million, respectively. Unearned income, unamortized premiums and discounts, and net unamortized deferred fees and costs are not material to ACC’s total loan balance. During the three months ended March 31, 2014 and 2013, ACC sold nil and $249 thousand, respectively, of syndicated loans. There were no significant purchases of financing receivables during the three months ended March 31, 2014 and 2013.
ACC has not acquired any loans with deteriorated credit quality as of the acquisition date.
Credit Quality Information
Nonperforming loans, which are generally loans 90 days or more past due, were $236 thousand and $1.5 million as of March 31, 2014 and December 31, 2013, respectively. All other loans were considered to be performing.
Commercial Mortgage Loans
ACC 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. Based on this review, the commercial mortgage loans are assigned an internal risk rating, which management updates as necessary. Commercial mortgage loans which management has assigned its highest risk rating were 1.5% of total commercial mortgage loans at both March 31, 2014 and December 31, 2013. Loans with the highest risk rating represent distressed loans which ACC has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. In addition, ACC 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
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
 
 
 
 
East North Central
$
3,254

 
$
3,276

 
3
%
 
3
%
Middle Atlantic
7,946

 
8,148

 
7

 
7

Mountain
9,245

 
9,402

 
8

 
8

New England
10,357

 
10,440

 
9

 
9

Pacific
29,377

 
29,830

 
25

 
25

South Atlantic
33,670

 
34,188

 
29

 
29

West North Central
13,342

 
13,576

 
11

 
11

West South Central
9,164

 
9,352

 
8

 
8

 
116,355

 
118,212

 
100
%
 
100
%
Less: allowance for loan losses
2,341

 
2,341

 
 
Total
$
114,014

 
$
115,871


13


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Concentrations of credit risk of commercial mortgage loans by property type were as follows:
 
Loans
 
Percentage
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
 
 
 
 
Apartments
$
33,813

 
$
34,199

 
29
%
 
29
%
Industrial
22,678

 
23,069

 
19

 
20

Office
11,072

 
11,141

 
10

 
9

Retail
33,438

 
34,099

 
29

 
29

Other
15,354

 
15,704

 
13

 
13

 
116,355

 
118,212

 
100
%
 
100
%
Less: allowance for loan losses
2,341

 
2,341

 
 
Total
$
114,014

 
$
115,871

Syndicated Loans
ACC’s syndicated loan portfolio is diversified across industries and issuers. The primary credit indicator for syndicated loans is whether the loans are performing in accordance with the contractual terms of the syndication. Total nonperforming syndicated loans at March 31, 2014 and December 31, 2013 were $236 thousand and $1.5 million, respectively, which represent 2% and 9% of total syndicated loans at March 31, 2014 and December 31, 2013, respectively.
Troubled Debt Restructurings
During the three months ended March 31, 2014, ACC restructured one syndicated loan and received three loans in exchange with a recorded investment of $288 thousand. There were no loans restructured by ACC during the three months ended March 31, 2013.
The troubled debt restructuring for the three months ended March 31, 2014 resulted in a $997 thousand reduction to ACC’s allowance for loan losses. The troubled debt restructuring did not have a material impact to ACC’s income recognized for the three months ended March 31, 2014. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.
 
5.  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.

14


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:
 
March 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Assets
 

 
 

 
 

 
 

Cash equivalents
$
—

 
$
125,160

 
$
—

 
$
125,160

Available-for-Sale securities:
 

 
 

 
 

 
 

Residential mortgage backed securities
—

 
2,137,478

 
76,273

 
2,213,751

Corporate debt securities
—

 
806,901

 
174,453

 
981,354

Commercial mortgage backed securities
—

 
335,437

 
20,000

 
355,437

Asset backed securities
—

 
431,706

 
57,430

 
489,136

U.S. government and agencies obligations
416

 
—

 
—

 
416

Common stocks
2,719

 
4,054

 
181

 
6,954

Total Available-for-Sale securities
3,135

 
3,715,576

 
328,337

 
4,047,048

Equity options, purchased
—

 
55,436

 
—

 
55,436

Total assets at fair value
$
3,135

 
$
3,896,172

 
$
328,337

 
$
4,227,644

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Certificate reserves
$
—

 
$
6,485

 
$
—

 
$
6,485

Equity options, written
—

 
49,053

 
—

 
49,053

Total liabilities at fair value
$
—

 
$
55,538

 
$
—

 
$
55,538

 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Assets
 

 
 

 
 

 
 

Cash equivalents
$
—

 
$
71,598

 
$
—

 
$
71,598

Available-for-Sale securities:
 

 
 

 
 

 
 

Residential mortgage backed securities
—

 
2,079,151

 
128,906

 
2,208,057

Corporate debt securities
—

 
821,355

 
123,032

 
944,387

Commercial mortgage backed securities
—

 
306,838

 
—

 
306,838

Asset backed securities
—

 
481,405

 
37,152

 
518,557

U.S. government and agencies obligations
409

 
—

 
—

 
409

Common stocks
2,568

 
3,482

 
273

 
6,323

Total Available-for-Sale securities
2,977

 
3,692,231

 
289,363

 
3,984,571

Equity options, purchased
—

 
72,848

 
—

 
72,848

Total assets at fair value
$
2,977

 
$
3,836,677

 
$
289,363

 
$
4,129,017

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Certificate reserves
$
—

 
$
7,160

 
$
—

 
$
7,160

Equity options, written
—

 
65,958

 
—

 
65,958

Total liabilities at fair value
$
—

 
$
73,118

 
$
—

 
$
73,118


15


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED 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
 
 
 
Residential Mortgage
Backed
Securities
 
Corporate
Debt
Securities
 
Commercial Mortgage
Backed
Securities
 
Asset
Backed
Securities
 
Common
Stocks
 
Total
 
(in thousands)
Balance, January 1, 2014
$
128,906

 
$
123,032

 
$
—

 
$
37,152

 
$
273

 
$
289,363

Total gains (losses) included in:
Net income
(42
)
(1) 
(328
)
(1) 
—

 
15

(1) 
—

 
(355
)
Other comprehensive income
23

 
(126
)
 
—

 
(136
)
 
7

 
(232
)
Purchases
70,768

 
51,875

 
20,000

 
21,651

 
—

 
164,294

Settlements
(2,288
)
 
—

 
—

 
(1,252
)
 
—

 
(3,540
)
Transfers into Level 3
—

 
—

 
—

 
—

 
174

 
174

Transfers out of Level 3
(121,094
)
 
—

 
—

 
—

 
(273
)
 
(121,367
)
Balance, March 31, 2014
$
76,273

 
$
174,453

 
$
20,000

 
$
57,430

 
$
181

 
$
328,337

Change in unrealized gains (losses) included in net income related to Level 3 assets held at March 31, 2014
$
(42
)
(1) 
$
(328
)
(1) 
$
—

 
$
15

(1) 
$
—

 
$
(355
)
(1) Included in investment income in the Consolidated Statements of Operations.
 
Available-for-Sale Securities
 
 
 
Residential Mortgage
Backed
Securities
 
Corporate
Debt
Securities
 
Commercial Mortgage
Backed
Securities
 
Asset
Backed
Securities
 
Common
Stocks
 
Total
 
(in thousands)
Balance, January 1, 2013
$
252,598

 
$
110,643

 
$
36,060

 
$
22,223

 
$
824

 
$
422,348

Total gains (losses) included in:
Net income
—

 
(282
)
(1) 
(48
)
(1) 
30

(1) 
—

 
(300
)
Other comprehensive income
—

 
495

 
(90
)
 
286

 
—

 
691

Purchases
—

 
—

 
—

 
138,876

 
—

 
138,876

Settlements
—

 
—

 
—

 
(800
)
 
—

 
(800
)
Transfers out of Level 3
(252,598
)
 
(4
)
 
—

 
—

 
(577
)
 
(253,179
)
Balance, March 31, 2013
$
—

 
$
110,852

 
$
35,922

 
$
160,615

 
$
247

 
$
307,636

Change in unrealized gains (losses) included in net income related to Level 3 assets held at March 31, 2013
$
—

 
$
(282
)
(1) 
$
(48
)
(1) 
$
30

(1) 
$
—

 
$
(300
)
(1) Included in investment income in the Consolidated Statements of Operations.
Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. ACC recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which each transfer occurred. For assets and liabilities held at the end of the reporting periods that are measured at fair value on a recurring basis, there were no transfers between Level 1 and Level 2.

16


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The following tables provide a summary of the significant unobservable inputs used in the fair value measurements developed by ACC or reasonably available to ACC of Level 3 assets and liabilities:
 
March 31, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(in thousands)
 
 
 
 
 
 
Corporate debt securities (private placements)
$
153,865

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9% - 1.6% (1.1%)
 
December 31, 2013
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(in thousands)
 
 
 
 
 
 
Corporate debt securities (private placements)
$
102,187

 
Discounted cash flow
 
Yield/spread to U.S. Treasuries
 
0.9% - 1.3% (1.2%)
Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to ACC.
Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs
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 result in a significantly lower (higher) fair value measurement.
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.
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 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.
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 third party pricing services, non-binding broker quotes, or other model-based valuation techniques. Level 1 securities primarily include U.S. Treasuries and common stocks. Level 2 securities primarily include residential mortgage backed securities, corporate bonds, commercial mortgage backed securities, asset backed securities, U.S. agency securities and common stock. The fair value of these Level 2 securities is based on a market approach with prices obtained from third party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3 securities primarily include certain non-agency residential mortgage backed securities, corporate bonds, commercial mortgage backed securities, asset backed securities and common stocks. The fair value of corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and certain asset backed securities classified as Level 3 is 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 ACC. ACC’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, ACC reviews the broker prices to ensure that the broker quotes are reasonable and, when available, compares prices of privately issued securities to public issues from the same issuer to ensure that the implicit illiquidity premium applied to the privately placed investment is reasonable considering investment characteristics, maturity, and average life of the investment.
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. ACC reviews the exception reporting and resolves the exceptions through reaffirmation of the

17


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

price or recording an appropriate fair value estimate. ACC also performs subsequent transaction testing. ACC performs annual due diligence of third party pricing services. ACC’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. ACC also considers the results of its exception reporting controls and any resulting price challenges that arise.
Derivatives (Equity Options, Purchased and Written)
The fair value 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. The counterparties’ nonperformance risk associated with uncollateralized derivative assets was immaterial at March 31, 2014 and December 31, 2013. See Note 6 and Note 7 for further information on the credit risk of derivative instruments and related collateral.
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.
During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.
The following tables provide 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.
 
March 31, 2014
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

Syndicated loans
$
14,508

 
$
—

 
$
15,105

 
$
—

 
$
15,105

Commercial mortgage loans
114,014

 
—

 
—

 
116,944

 
116,944

Certificate loans
1,178

 
—

 
1,178

 
—

 
1,178

Financial Liabilities
 

 
 

 
 

 
 

 
 

Certificate reserves
$
4,066,438

 
$
—

 
$
—

 
$
4,060,780

 
$
4,060,780

 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

Syndicated loans
$
15,370

 
$
—

 
$
15,834

 
$
94

 
$
15,928

Commercial mortgage loans
115,871

 
—

 
—

 
118,186

 
118,186

Certificate loans
1,219

 
—

 
1,219

 
—

 
1,219

Financial Liabilities
 

 
 

 
 

 
 

 
 

Certificate reserves
$
3,976,547

 
$
—

 
$
—

 
$
3,982,012

 
$
3,982,012

Syndicated Loans
The fair value of syndicated loans is obtained from a third party pricing service or non-binding broker quotes. Syndicated loans that are priced using a market approach with observable inputs are classified as Level 2 and loans priced using a single non-binding broker quote are classified as Level 3.
Commercial Mortgage Loans
The fair value of commercial mortgage loans, except those with significant credit deterioration, is determined by discounting contractual cash flows using discount rates that reflect current pricing for loans with similar remaining maturities, liquidity 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

18


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

with an additional adjustment for ACC’s estimate of the amount recoverable on the loan. Given the significant unobservable inputs to the valuation of commercial mortgage loans, these measurements are classified as Level 3.
Certificate Loans
Certificate loans represent loans made against and collateralized by the underlying certificate balance. These loans do not transfer to third parties separate from the underlying certificate. The outstanding balance of these loans is considered a reasonable estimate of fair value and is classified as Level 2.
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. Given the use of significant unobservable inputs to this valuation, the measurement is classified as Level 3.
 
6. Offsetting Assets and Liabilities
Certain derivative instruments are eligible for offset in the Consolidated Balance Sheets. ACC’s derivative instruments are subject to master netting arrangements 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. ACC’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 ACC’s assets subject to master netting arrangements:
 
March 31, 2014
 
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
 
 
 
 
 
 
Financial Instruments (1)
 
Cash Collateral
 
Net Amount
 
(in thousands)
Equity options, purchased
$
55,436

 
$
—

 
$
55,436

 
$
(49,053
)
 
$
(2,140
)
 
$
4,243

 
December 31, 2013
 
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
 
 
 
 
 
 
Financial Instruments (1)
 
Cash Collateral
 
Net Amount
 
(in thousands)
Equity options, purchased
$
72,848

 
$
—

 
$
72,848

 
$
(65,958
)
 
$
(1,700
)
 
$
5,190

(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 ACC’s liabilities subject to master netting agreements:
 
March 31, 2014
 
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
 
 
 
 
 
 
Financial Instruments (1)
 
Cash Collateral
 
Net Amount
 
(in thousands)
Equity options, written
$
49,053

 
$
—

 
$
49,053

 
$
(49,053
)
 
$
—

 
$
—


19


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
December 31, 2013
 
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
 
 
 
 
 
 
Financial Instruments (1)
 
Cash Collateral
 
Net Amount
 
(in thousands)
Equity options, written
$
65,958

 
$
—

 
$
65,958

 
$
(65,958
)
 
$
—

 
$
—

 (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 amounts of assets or liabilities presented in the Consolidated Balance Sheets 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 amounts of collateral may be greater than amounts presented in the tables.
See Note 7 for additional disclosures related to the Company’s derivative instruments.
 
7.  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.
ACC uses derivatives as economic hedges of equity risk related to stock market certificates. 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:
Derivatives not designated as hedging instruments
 
Balance Sheet
Location
 
Asset
 
Balance Sheet
Location
 
Liability
 
 
March 31, 2014
 
December 31, 2013
 
 
March 31, 2014
 
December 31, 2013
(in thousands)
Equity
 
 
 
 
 
 
 
 
Stock market certificates
 
Equity options, purchased
 
$
55,436

 
$
72,848

 
Equity options, written
 
$
49,053

 
$
65,958

Stock market certificates embedded derivatives
 
N/A
 
—

 
—

 
Certificate reserves
 
6,485

 
7,160

Total
 
 
 
$
55,436

 
$
72,848

 
 
 
$
55,538

 
$
73,118

N/A Not applicable.
See Note 5 for additional information regarding ACC’s fair value measurement of derivative instruments.
The following tables present a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:
Derivatives not designated as hedging instruments
 
Location of Gain (Loss) on Derivatives Recognized in Income
 
Amount of Gain (Loss) on Derivatives Recognized in Income
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
(in thousands)
Equity
 
 
 
 

 
 

Stock market certificates
 
Net provision for certificate reserves
 
$
584

 
$
3,301

Stock market certificates embedded derivatives
 
Net provision for certificate reserves
 
(608
)
 
(3,187
)
Total
 
 
 
$
(24
)
 
$
114

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

20


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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 $1.0 billion at both March 31, 2014 and December 31, 2013. 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 derivative contracts was $373 thousand and $368 thousand at March 31, 2014 and December 31, 2013, respectively.
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. See Note 6 for additional information on ACC’s credit exposure related to derivative assets.
 
8.  Contingencies
The level of regulatory activity and inquiry in the financial services industry remains elevated. From time to time, ACC receives requests for information from, and/or has been subject to examination by, both the SEC and the Minnesota Department of Commerce concerning its business activities and practices. In addition, a number of state and federal regulatory agencies have initiated examinations and other inquiries related to unclaimed property and escheatment practices and procedures.  The Ameriprise organization has cooperated and will continue to cooperate with applicable regulators regarding their inquiries.
ACC may in the normal course of business be a party to legal, regulatory or arbitration proceedings concerning matters arising in connection with the conduct of its business activities. The outcome of any such proceeding cannot be predicted with any certainty. ACC believes that it is not a party to, nor are any of its properties the subject of, any pending legal, regulatory or arbitration proceedings that are reasonably likely to have a material adverse effect on its financial condition or results of operations. However, it is possible that the outcome of any such proceedings could have a material impact on ACC’s financial position or results of operations.

9.  Shareholder’s Equity
The following table provides information related to amounts reclassified from accumulated other comprehensive income (“AOCI”):
 
 
 
 
Amount Reclassified from AOCI
AOCI Reclassification
 
Location of (Gain) Loss Recognized in Income
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
(in thousands)
Unrealized net losses (gains) on Available-for-Sale securities
 
Net investment income
 
$
(369
)
 
$
1,330

Tax expense (benefit)
 
Income tax provision
 
129

 
(466
)
Net of tax
 
 
 
$
(240
)
 
$
864

 

21


AMERIPRISE CERTIFICATE COMPANY 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

10.  Income Taxes
The effective tax rate was 37.8% for the three months ended March 31, 2014, compared to 37.5% for the three months ended March 31, 2013.
ACC is required to establish a valuation allowance for any portion of the 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 including the ability to generate capital gains. 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. Based on analysis of ACC’s tax positions, management believes it is more likely than not that ACC’s results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable ACC to utilize all of the deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of March 31, 2014 and December 31, 2013.
As of March 31, 2014 and December 31, 2013, ACC had $6.0 million and $5.8 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $2.8 million and $2.7 million, net of federal tax benefits, of the unrecognized tax benefits as of March 31, 2014 and December 31, 2013, respectively, would affect the effective tax rate.
It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of ACC, it is estimated that the total amount of gross unrecognized tax benefits may decrease by up to $1.7 million in the next 12 months.
ACC recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. ACC recognized interest and penalties of $17 thousand and $83 thousand for the three months ended March 31, 2014 and 2013, respectively. ACC had $1.6 million for the payment of interest and penalties accrued at both March 31, 2014 and December 31, 2013.
ACC files income tax returns, as part of its inclusion in the consolidated federal income tax returns of Ameriprise Financial, in the U.S. federal jurisdiction, and various states jurisdictions. The Internal Revenue Service (“IRS”) has completed its field examination of the 1997 through 2007 tax returns. However, for federal income tax purposes these years, except for 2007, continue to remain open as a consequence of certain unagreed upon issues. The IRS completed the audits of Ameriprise Financial’s 2008 and 2009 U.S. income tax returns in the first quarter of 2014. The IRS is in the process of completing audits of Ameriprise Financial’s U.S. income tax returns for 2010 and 2011, and these audits are expected to be completed in 2014. ACC’s or its subsidiary’s state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2008 and remain open for all years after 2008. Ameriprise Financial filed its 2012 tax return in the third quarter of 2013, but the IRS has not yet begun its examination of 2012.

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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, 2013, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2014 (“2013 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.
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 2013 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 consolidated financial statements.

Results of Operations for the Three Months Ended March 31, 2014 and 2013
ACC’s net income is derived primarily from the after-tax yield on investments and realized investment gains (losses), less investment expenses and interest credited on certificate reserve liabilities. Net income trends occur largely due to changes in returns on ACC’s investment portfolio, from realization of investment gains (losses) and from changes in interest credited to certificate products. ACC follows U.S. generally accepted accounting principles (“GAAP”).
Net income increased $0.9 million, or 22%, to $5.0 million for the three months ended March 31, 2014, compared to $4.1 million for the prior year period, primarily due to a decrease in the provision for certificate reserves and net realized gains on investments compared to net realized losses in the prior year period as a result of lower other-than-temporary impairments on non-agency residential mortgage backed securities, partially offset by higher investment expenses.
Investment income decreased $0.2 million, or 1%, to $22.2 million for the three months ended March 31, 2014, compared to $22.4 million for the prior year period primarily due to the continued low interest rate environment.
Investment expenses increased $1.3 million, or 20%, to $7.7 million for the three months ended March 31, 2014, compared to $6.4 million for the prior year period primarily due to higher investment advisory and transfer agent fees.
Net provision for certificate reserves decreased $1.3 million, or 16%, to $6.8 million for the three months ended March 31, 2014, compared to $8.1 million for the prior year period as a result of lower client net flows.
Net realized gain on investments before income taxes was $0.4 million for the three months ended March 31, 2014, compared to net realized loss on investments of $1.3 million for the prior year period. For the three months ended March 31, 2014, net realized gains from sales, tenders and calls of Available-for-Sale securities were partially offset by other-than-temporary impairments of $0.3 million. For the three months ended March 31, 2013, net realized loss on investments included other-than-temporary impairments of $1.5 million. The other-than-temporary impairments for both periods related to credit losses on non-agency residential mortgage backed securities.
The effective tax rate was 37.8% for the three months ended March 31, 2014, compared to 37.5% for the three months ended March 31, 2013.


23

AMERIPRISE CERTIFICATE COMPANY



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 prices or observable inputs in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. 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. See Note 5 to the consolidated financial statements for additional information regarding ACC’s fair value measurements.

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 4.  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 March 31, 2014.
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.


24

AMERIPRISE CERTIFICATE COMPANY



PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
The information set forth in Note 8 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

ITEM 1A.  RISK FACTORS
There have been no material changes in the risk factors provided in Part I, Item 1A of ACC’s 2013 10-K.

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.

25

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:
May 5, 2014
/s/ Abu M. Arif
 
 
 
Abu M. Arif
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
 
Date:
May 5, 2014
/s/ Ross P. Palacios
 
 
 
Ross P. Palacios
 
 
 
Chief Financial Officer
 

26

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 August 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)
By-Laws of Ameriprise Certificate Company, filed electronically on or about November 5, 2010 as Exhibit 3(b) to Registrant’s Form 10-Q, are incorporated herein by reference.
10(c)i*
Amendment, dated December 15, 2008, to the Depositary and Custodial Agreement, dated December 31, 2006, between Ameriprise Certificate Company and Ameriprise Trust Company, is filed electronically herewith as Exhibit 10(c)i to Registrant’s Form 10-Q.
10(f)i*
First Amendment, dated April 30, 2014,  to the Capital Support Agreement by and between Ameriprise Financial, Inc. and Ameriprise Certificate Company, dated as of March 2, 2009, is filed electronically herewith as Exhibit 10(f)i to Registrant’s Form 10-Q.
14(b)*
Code of Ethics adopted under Rule 17j-1 for Registrant’s investment adviser, dated May 1, 2014, is filed electronically herewith as Exhibit 14(b) to Registrant’s Form 10-Q.
31.1*
Certification of Abu M. Arif 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 Abu M. Arif 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

AMERIPRISE CERTIFICATE CO Reports