RIVERSOURCE LIFE INSURANCE CO - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - RIVERSOURCE LIFE INSURANCE CO	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - RIVERSOURCE LIFE INSURANCE CO	rli09302014-exhibit312.htm
EX-32 - EXHIBIT 32 - RIVERSOURCE LIFE INSURANCE CO	rli09302014-exhibit32.htm
EX-31.1 - EXHIBIT 31.1 - RIVERSOURCE LIFE INSURANCE CO	rli09302014-exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - RIVERSOURCE LIFE INSURANCE CO	rli09302014-exhibit101.htm

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 September 30, 2014

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. 033-28976

RIVERSOURCE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)



Minnesota		41-0823832
(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 x 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 x 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 the 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 (Do not check if a smaller reporting company)	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 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 November 3, 2014
Common Stock (par value $30 per share)		100,000 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.

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RIVERSOURCE LIFE INSURANCE COMPANY

FORM 10-Q

INDEX



Part I.	Financial Information:
	Item 1.	Financial Statements
		Consolidated Balance Sheets — September 30, 2014 and December 31, 2013	1
		Consolidated Statements of Income — Three months and nine months ended September 30, 2014 and 2013	2
		Consolidated Statements of Comprehensive Income — Three months and nine months ended September 30, 2014 and 2013	2
		Consolidated Statements of Shareholder’s Equity — Nine months ended September 30, 2014 and 2013	3
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2014 and 2013	4
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Narrative Analysis	36
	Item 4.	Controls and Procedures	45
Part II.	Other Information:
	Item 1.	Legal Proceedings	46
	Item 1A.	Risk Factors	46
	Item 6.	Exhibits	46
	Signatures		47
	Exhibit Index		E-1

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RIVERSOURCE LIFE INSURANCE COMPANY

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)



	September 30, 2014		December 31, 2013
	(unaudited)
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2014, $21,660; 2013, $22,902)	$	23,569	$	24,387
Common stocks, at fair value (cost: 2014 and 2013, $2)	8		6
Mortgage loans, at amortized cost (less allowance for loan losses: 2014, $22; 2013, $24)	3,300		3,326
Policy loans	804		773
Other investments	968		915
Total investments	28,649		29,407
Cash and cash equivalents	286		344
Reinsurance recoverables	2,233		2,177
Other receivables	254		195
Accrued investment income	256		275
Deferred acquisition costs	2,573		2,633
Other assets	4,378		4,357
Separate account assets	78,313		77,616
Total assets	$	116,942	$	117,004
Liabilities and Shareholder’s Equity
Liabilities:
Policyholder account balances, future policy benefits and claims	$	29,312	$	29,149
Short-term borrowings	200		500
Line of credit with Ameriprise Financial, Inc.	—		150
Other liabilities	4,582		5,431
Separate account liabilities	78,313		77,616
Total liabilities	112,407		112,846
Shareholder’s equity:
Common stock, $30 par value; 100,000 shares authorized, issued and outstanding	3		3
Additional paid-in capital	2,464		2,463
Retained earnings	1,307		1,042
Accumulated other comprehensive income, net of tax	761		650
Total shareholder’s equity	4,535		4,158
Total liabilities and shareholder’s equity	$	116,942	$	117,004

See Notes to Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues
Premiums	$	105		$	106		$	319		$	320
Net investment income	319			350			975			1,067
Policy and contract charges	445			424			1,357			1,274
Other revenues	98			90			292			266
Net realized investment gains	7			5			12			3
Total revenues	974			975			2,955			2,930
Benefits and expenses
Benefits, claims, losses and settlement expenses	262			297			750			839
Interest credited to fixed accounts	168			204			529			600
Amortization of deferred acquisition costs	94			(32		)	226			102
Other insurance and operating expenses	188			182			560			555
Total benefits and expenses	712			651			2,065			2,096
Pretax income	262			324			890			834
Income tax provision	38			59			125			143
Net income	$	224		$	265		$	765		$	691

Supplemental Disclosures:
Total other-than-temporary impairment losses on securities	$	(5	)	$	(7	)	$	(6	)	$	(10	)
Portion of loss recognized in other comprehensive income (loss) (before taxes)	1			5			1			6
Net impairment losses recognized in net realized investment gains	$	(4	)	$	(2	)	$	(5	)	$	(4	)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income	$	224		$	265		$	765		$	691
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:
Net unrealized securities gains (losses) arising during the period	(137		)	(67		)	285			(811		)
Reclassification of net securities gains included in net income	(6		)	(3		)	(9		)	(2		)
Impact of deferred acquisition costs, deferred sales inducement costs, benefit reserves and reinsurance recoverables	(1		)	18			(168		)	283
Total net unrealized gains (losses) on securities	(144		)	(52		)	108			(530		)
Net unrealized losses on derivatives:
Reclassification of net derivative losses included in net income	1			1			3			4
Total net unrealized losses on derivatives	1			1			3			4
Total other comprehensive income (loss), net of tax	(143		)	(51		)	111			(526		)
Total comprehensive income	$	81		$	214		$	876		$	165

See Notes to Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (UNAUDITED)

(in millions)



	Common Shares		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at January 1, 2013	$	3	$	2,462	$	1,000		$	1,234		$	4,699
Comprehensive income:
Net income	—		—		691			—			691
Other comprehensive loss, net of tax	—		—		—			(526		)	(526		)
Total comprehensive income											165
Tax adjustment on share-based incentive compensation plan	—		1		—			—			1
Cash dividends to Ameriprise Financial, Inc.	—		—		(675		)	—			(675		)
Balances at September 30, 2013	$	3	$	2,463	$	1,016		$	708		$	4,190

Balances at January 1, 2014	$	3	$	2,463	$	1,042		$	650		$	4,158
Comprehensive income:
Net income	—		—		765			—			765
Other comprehensive income, net of tax	—		—		—			111			111
Total comprehensive income											876
Tax adjustment on share-based incentive compensation plan	—		1		—			—			1
Cash dividends to Ameriprise Financial, Inc.	—		—		(500		)	—			(500		)
Balances at September 30, 2014	$	3	$	2,464	$	1,307		$	761		$	4,535

See Notes to Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)



	Nine Months Ended September 30,
	2014			2013
Cash Flows from Operating Activities
Net income	$	765		$	691
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net	6			(17		)
Deferred income tax benefit	(96		)	(60		)
Contractholder and policyholder charges, non-cash	(246		)	(211		)
Loss from equity method investments	20			11
Net realized investment gains	(20		)	(7		)
Other-than-temporary impairments and provision for loan losses recognized in net realized investment gains	8			4
Changes in operating assets and liabilities:
Deferred acquisition costs	30			(98		)
Policyholder account balances, future policy benefits and claims, net	735			(837		)
Derivatives, net of collateral	(483		)	1,129
Reinsurance recoverables	(70		)	(86		)
Other receivables	(23		)	10
Accrued investment income	19			18
Other, net	(61		)	28
Net cash provided by operating activities	584			575

Cash Flows from Investing Activities
Available-for-Sale securities:
Proceeds from sales	280			171
Maturities, sinking fund payments and calls	1,843			2,773
Purchases	(827		)	(2,668		)
Proceeds from maturities and repayments of mortgage loans	407			534
Funding of mortgage loans	(373		)	(467		)
Proceeds from sales and collections of other investments	103			89
Purchase of other investments	(267		)	(178		)
Purchase of land, buildings, equipment and software	(6		)	(6		)
Change in policy loans, net	(31		)	(16		)
Advance on line of credit to Ameriprise Financial, Inc.	(15		)	—
Repayment from Ameriprise Financial, Inc. on line of credit	15			—
Other, net	10			30
Net cash provided by investing activities	1,139			262

See Notes to Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

(in millions)



	Nine Months Ended September 30,
	2014			2013
Cash Flows from Financing Activities
Policyholder account balances:
Deposits and other additions	$	1,526		$	1,589
Net transfers to separate accounts	(167		)	(54		)
Surrenders and other benefits	(1,896		)	(1,479		)
Change in short-term borrowings, net	(301		)	(2		)
Proceeds from line of credit with Ameriprise Financial, Inc.	42			—
Payments on line of credit with Ameriprise Financial, Inc.	(192		)	—
Tax adjustment on share-based incentive compensation plan	1			1
Cash received for purchased options with deferred premiums	8			—
Cash paid for purchased options with deferred premiums	(302		)	(312		)
Cash dividends to Ameriprise Financial, Inc.	(500		)	(675		)
Net cash used in financing activities	(1,781		)	(932		)
Net decrease in cash and cash equivalents	(58		)	(95		)
Cash and cash equivalents at beginning of period	344			336
Cash and cash equivalents at end of period	$	286		$	241

Supplemental Disclosures:
Income taxes paid, net	$	393		$	110
Interest paid on borrowings	1			3
Non-cash investing activity:
Affordable housing partnership commitments not yet remitted	—			26

See Notes to Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	Basis of Presentation

RiverSource Life Insurance Company is a stock life insurance company with two wholly owned subsidiaries, RiverSource Life Insurance Co. of New York and RiverSource Tax Advantaged Investments, Inc. (“RTA”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).

The accompanying Consolidated Financial Statements include the accounts of RiverSource Life Insurance Company and companies in which it directly or indirectly has a controlling financial interest (collectively, the “Company”). All intercompany transactions and balances have been eliminated in consolidation.

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 financial position and results of operations for the interim periods have been made. All adjustments made were of a normal recurring nature.

The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 27, 2014.

In the Consolidated Statements of Cash Flows, within financing activities, the Company reclassified the increase in policyholder account balances for interest credited from “Policyholder account balances: Surrenders and other benefits” to “Policyholder account balances: Deposits and other additions” to improve the transparency of its cash flows. Total cash flows used in financing activities did not change as a result of this reclassification.

The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued.


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. The Company adopted the standard in the first quarter of 2014. The adoption of the standard did not have any effect on the Company’s consolidated financial condition and results of operations.

Future Adoption of New Accounting Standards

Presentation of Financial Statements - Going Concern

In August 2014, the FASB updated the accounting standard related to an entity’s assessment of its ability to continue as a going concern. The standard requires that management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. In situations where there is substantial doubt about an entity’s ability to continue as a going concern, disclosure should be made so that a reader can understand the conditions that raise substantial doubt, management’s assessment of those conditions and any plan management has to mitigate those conditions. The standard is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

Transfers and Servicing

In June 2014, the FASB updated the accounting standards related to transfers and servicing. The update requires repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. The standard requires disclosures related to transfers of financial assets accounted for as sales in transactions that are similar to repurchase agreements. The standard also requires disclosures on the remaining contractual maturity of the agreements, disaggregation of the gross obligation by class of collateral pledged and potential risks associated with the agreements and the related collateral pledged in repurchase agreements, securities lending transactions, and

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

repurchase-to-maturity transactions accounted for as secured borrowings. The standard is effective for interim and annual periods beginning after December 15, 2014, except for the disclosure requirements for repurchase-to-maturity transactions accounted for as secured borrowings which are effective for interim periods beginning after March 15, 2015. Early adoption of the standard is prohibited. The standard requires entities to present changes in accounting for transactions outstanding at the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. As the Company does not have repurchase-to-maturity transactions, the adoption of the standard is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

Revenue from Contracts with Customers

In May 2014, the FASB updated the accounting standards for revenue from contracts with customers. The update provides a five step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other standards). The standard also updates the accounting for certain costs associated with obtaining and fulfilling a customer contract. In addition, the standard requires disclosure of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard is effective for interim and annual periods beginning after December 15, 2016 and early adoption is prohibited. The standard may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.

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 the Company’s consolidated financial condition and results of operations.

Investments - Equity Method and Joint Ventures

In January 2014, the FASB updated the accounting standard related to investments in qualified affordable housing projects. The update allows for an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the investment in a qualified affordable housing project is amortized in proportion to the tax credits and other tax benefits received. The net investment performance is recognized as a component of income tax expense (benefit). The standard is effective for interim and annual periods beginning after December 15, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial condition and results of operations.


3.	Variable Interest Entities

RTA, a subsidiary of RiverSource Life Insurance Company, has variable interests in affordable housing partnerships for which it is not the primary beneficiary and, therefore, does not consolidate.

RTA’s maximum exposure to loss as a result of its investments in the affordable housing partnerships is limited to the carrying values of these investments. The carrying values are reflected in other investments and were $471 million and $495 million as of September 30, 2014 and December 31, 2013, respectively. RTA has no obligation to provide financial or other support to the affordable housing partnerships in addition to liabilities already recorded for future funding commitments nor has it provided any additional support to the affordable housing partnerships. The Company had liabilities of $96 million and $137 million recorded in other liabilities as of September 30, 2014 and December 31, 2013, respectively, related to the future funding commitments for affordable housing partnerships.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)


4.	Investments

Available-for-Sale securities distributed by type were as follows:



	September 30, 2014
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Noncredit OTTI⁽¹⁾
	(in millions)
Fixed maturities:
Corporate debt securities	$	13,962	$	1,539	$	(31	)	$	15,470	$	3
Residential mortgage backed securities	3,466		135		(44		)	3,557		(9		)
Commercial mortgage backed securities	2,121		115		(4		)	2,232		—
State and municipal obligations	942		159		(28		)	1,073		—
Asset backed securities	896		49		(1		)	944		—
Foreign government bonds and obligations	237		21		(5		)	253		—
U.S. government and agencies obligations	36		4		—			40		—
Total fixed maturities	21,660		2,022		(113		)	23,569		(6		)
Common stocks	2		6		—			8		3
Total	$	21,662	$	2,028	$	(113	)	$	23,577	$	(3	)



	December 31, 2013
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Noncredit OTTI⁽¹⁾
	(in millions)
Fixed maturities:
Corporate debt securities	$	14,658	$	1,311	$	(96	)	$	15,873	$	3
Residential mortgage backed securities	3,773		133		(95		)	3,811		(18		)
Commercial mortgage backed securities	2,309		136		(11		)	2,434		—
State and municipal obligations	950		87		(39		)	998		—
Asset backed securities	938		48		(5		)	981		—
Foreign government bonds and obligations	234		19		(8		)	245		—
U.S. government and agencies obligations	40		5		—			45		—
Total fixed maturities	22,902		1,739		(254		)	24,387		(15		)
Common stocks	2		4		—			6		2
Total	$	22,904	$	1,743	$	(254	)	$	24,393	$	(13	)


(1)	Represents the amount of other-than-temporary impairment (“OTTI”) losses in accumulated other comprehensive income. 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 September 30, 2014 and December 31, 2013, investment securities with a fair value of $1.6 billion and $2.3 billion, respectively, were pledged to meet contractual obligations under derivative contracts and short-term borrowings.

At September 30, 2014 and December 31, 2013, fixed maturity securities comprised approximately 82% and 83%, respectively, of the Company’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”). The Company uses the median of available ratings from Moody’s, S&P and Fitch, or if fewer than three ratings are available, the lower rating is used. When ratings from Moody’s, S&P and Fitch are unavailable, the Company may utilize ratings from other NRSROs or rate the securities internally. At September 30, 2014 and December 31, 2013, approximately $1.1 billion and $1.3 billion, respectively, of securities were internally rated by Columbia Management Investment Advisers, LLC, an affiliate of the Company, using criteria similar to those used by NRSROs.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

A summary of fixed maturity securities by rating was as follows:



	September 30, 2014						December 31, 2013
Ratings	Amortized Cost		Fair Value		Percent of Total Fair Value		Amortized Cost		Fair Value		Percent of Total Fair Value
	(in millions, except percentages)
AAA	$	5,183	$	5,410	23	%	$	5,557	$	5,738	23	%
AA	988		1,155		5		1,055		1,171		5
A	4,395		4,963		21		4,687		5,062		21
BBB	9,527		10,475		44		10,062		10,897		45
Below investment grade	1,567		1,566		7		1,541		1,519		6
Total fixed maturities	$	21,660	$	23,569	100	%	$	22,902	$	24,387	100	%

At September 30, 2014 and December 31, 2013, approximately 44% and 41%, respectively, of the securities rated AAA were GNMA, FNMA and FHLMC mortgage backed securities. No holdings of any other issuer were greater than 10% of total equity.

The following tables provide information about Available-for-Sale securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position:



	September 30, 2014
	Less than 12 months						12 months or more						Total
Description of Securities	Number of Securities	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses
	(in millions, except number of securities)
Corporate debt securities	83	$	760	$	(10	)	43	$	736	$	(21	)	126	$	1,496	$	(31	)
Residential mortgage backed securities	14	140		(2		)	59	822		(42		)	73	962		(44		)
Commercial mortgage backed securities	5	41		—			9	96		(4		)	14	137		(4		)
State and municipal obligations	1	5		—			2	100		(28		)	3	105		(28		)
Asset backed securities	5	42		—			4	38		(1		)	9	80		(1		)
Foreign government bonds and obligations	4	18		—			14	27		(5		)	18	45		(5		)
Total	112	$	1,006	$	(12	)	131	$	1,819	$	(101	)	243	$	2,825	$	(113	)



	December 31, 2013
	Less than 12 months						12 months or more						Total
Description of Securities	Number of Securities	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses			Number of Securities	Fair Value		Unrealized Losses
	(in millions, except number of securities)
Corporate debt securities	156	$	2,567	$	(82	)	10	$	160	$	(14	)	166	$	2,727	$	(96	)
Residential mortgage backed securities	52	1,411		(54		)	45	295		(41		)	97	1,706		(95		)
Commercial mortgage backed securities	27	323		(9		)	3	22		(2		)	30	345		(11		)
State and municipal obligations	4	38		(2		)	2	92		(37		)	6	130		(39		)
Asset backed securities	17	219		(4		)	3	26		(1		)	20	245		(5		)
Foreign government bonds and obligations	23	77		(8		)	—	—		—			23	77		(8		)
Total	279	$	4,635	$	(159	)	63	$	595	$	(95	)	342	$	5,230	$	(254	)

As part of the Company’s ongoing monitoring process, management determined that a majority of the change in gross unrealized losses on its Available-for-Sale securities is attributable to movement in interest rates.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table presents a rollforward of the cumulative amounts recognized in the Consolidated Statements of Income 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 (loss):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
	(in millions)
Beginning balance	$	54		$	66	$	54		$	87
Credit losses for which an other-than-temporary impairment was not previously recognized	—			1		—			1
Credit losses for which an other-than-temporary impairment was previously recognized	1			—		1			2
Reductions for securities sold during the period (realized)	(22		)	—		(22		)	(23		)
Ending balance	$	33		$	67	$	33		$	67

The change in net unrealized securities gains (losses) in other comprehensive income (loss) includes three components, net of tax: (i) unrealized gains (losses) that arose from changes in the market value of securities that were held during the period; (ii) (gains) losses that were previously unrealized, but have been recognized in current period net income due to sales of Available-for-Sale securities and due to the reclassification of noncredit other-than-temporary impairment losses to credit losses; and (iii) other items primarily consisting of adjustments in asset and liability balances, such as deferred acquisition costs (“DAC”), deferred sales inducement costs (“DSIC”), benefit reserves and reinsurance recoverables, to reflect the expected impact on their carrying values had the unrealized gains (losses) been realized as of the respective balance sheet dates.

The following table presents a rollforward of the net unrealized securities gains on Available-for-Sale securities included in accumulated other comprehensive income (“AOCI”):



	Net Unrealized Securities Gains			Deferred Income Tax			AOCI Related to Net Unrealized Securities Gains
	(in millions)
Balance at January 1, 2013	$	1,930		$	(675	)	$	1,255
Net unrealized securities losses arising during the period⁽¹⁾	(1,234		)	423			(811		)
Reclassification of net securities gains included in net income	(3		)	1			(2		)
Impact of DAC, DSIC, benefit reserves and reinsurance recoverables	436			(153		)	283
Balance at September 30, 2013	$	1,129		$	(404	)	$	725		⁽²⁾

Balance at January 1, 2014	$	1,033		$	(366	)	$	667
Net unrealized securities gains arising during the period⁽¹⁾	441			(156		)	285
Reclassification of net securities gains included in net income	(15		)	6			(9		)
Impact of DAC, DSIC, benefit reserves and reinsurance recoverables	(258		)	90			(168		)
Balance at September 30, 2014	$	1,201		$	(426	)	$	775		⁽²⁾


(1)	Includes 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 $2 million and $10 million of noncredit related impairments on securities and net unrealized securities losses on previously impaired securities at September 30, 2014 and 2013, respectively.

Net realized gains and losses on Available-for-Sale securities, determined using the specific identification method, recognized in net realized investment gains were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Gross realized investment gains	$	15		$	6		$	24		$	8
Gross realized investment losses	(1		)	—			(4		)	(1		)
Other-than-temporary impairments	(4		)	(2		)	(5		)	(4		)
Total	$	10		$	4		$	15		$	3

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Other-than-temporary impairments for the three months and nine months ended September 30, 2014 primarily related to credit losses on non-agency residential mortgage backed securities and corporate debt securities. Other-than-temporary impairments for the three months and nine months ended September 30, 2013 primarily related to credit losses on non-agency residential mortgage backed securities.

Available-for-Sale securities by contractual maturity at September 30, 2014 were as follows:



	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	965	$	984
Due after one year through five years	5,938		6,521
Due after five years through 10 years	4,701		4,941
Due after 10 years	3,573		4,390
	15,177		16,836
Residential mortgage backed securities	3,466		3,557
Commercial mortgage backed securities	2,121		2,232
Asset backed securities	896		944
Common stocks	2		8
Total	$	21,662	$	23,577

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.

Net investment income is summarized as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Fixed maturities	$	277	$	301	$	841	$	913
Mortgage loans	46		50		137		153
Other investments	3		8		20		25
	326		359		998		1,091
Less: investment expenses	7		9		23		24
Total	$	319	$	350	$	975	$	1,067


5.	Financing Receivables

The Company’s financing receivables include commercial and residential mortgage loans, syndicated loans and policy loans. Syndicated loans are reflected in other investments.

Allowance for Loan Losses

Policy loans do not exceed the cash surrender value of the policy at origination. As there is minimal risk of loss related to policy loans, the Company does not record an allowance for loan losses for policy loans. The Company does not currently have an allowance for loan losses for residential mortgage loans.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table presents a rollforward of the allowance for loan losses for the nine months ended and the ending balance of the allowance for loan losses by impairment method and type of loan:



	September 30, 2014									September 30, 2013
	Commercial Mortgage Loans			Syndicated Loans			Total			Commercial Mortgage Loans			Syndicated Loans		Total
	(in millions)
Beginning balance	$	24		$	4		$	28		$	26		$	4	$	30
Charge-offs	(2		)	(1		)	(3		)	(2		)	—		(2		)
Provisions	—			2			2			—			—		—
Ending balance	$	22		$	5		$	27		$	24		$	4	$	28

Individually evaluated for impairment	$	8		$	—		$	8		$	7		$	—	$	7
Collectively evaluated for impairment	14			5			19			17			4		21

The recorded investment in financing receivables by impairment method and type of loan was as follows:



	September 30, 2014
	Commercial Mortgage Loans		Residential Mortgage Loans		Syndicated Loans		Total
	(in millions)
Individually evaluated for impairment	$	34	$	—	$	3	$	37
Collectively evaluated for impairment	2,572		716		451		3,739
Total	$	2,606	$	716	$	454	$	3,776



	December 31, 2013
	Commercial Mortgage Loans		Residential Mortgage Loans		Syndicated Loans		Total
	(in millions)
Individually evaluated for impairment	$	40	$	—	$	5	$	45
Collectively evaluated for impairment	2,524		786		356		3,666
Total	$	2,564	$	786	$	361	$	3,711

As of September 30, 2014 and December 31, 2013, the Company’s recorded investment in financing receivables individually evaluated for impairment for which there was no related allowance for loan losses was $9 million and $12 million, respectively.

Residential mortgage loans are presented net of unamortized discount of $39 million and $53 million as of September 30, 2014 and December 31, 2013, respectively.

During the three months ended September 30, 2014 and 2013, the Company purchased $71 million and $8 million, respectively, and sold $2 million and nil, respectively of syndicated loans. During the nine months ended September 30, 2014 and 2013, the Company purchased $161 million and $67 million, respectively, and sold $12 million and $1 million, respectively, of syndicated loans.

Credit Quality Information

Nonperforming loans, which are generally loans 90 days or more past due, were $10 million and $20 million as of September 30, 2014 and December 31, 2013, respectively. All other loans were considered to be performing.

Commercial Mortgage Loans

The Company reviews the credit worthiness of the borrower and the performance of the underlying properties in order to determine the risk of loss on commercial mortgage loans. 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% and 2% of total commercial mortgage loans at September 30, 2014 and December 31, 2013, respectively. Loans with the highest risk rating represent distressed loans which the Company has identified as impaired or expects to become delinquent or enter into foreclosure within the next six months. In addition, the Company reviews the concentrations of credit risk by region and property type.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Concentrations of credit risk of commercial mortgage loans by U.S. region were as follows:



	Loans				Percentage
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
	(in millions)
South Atlantic	$	703	$	679	27	%	26	%
Pacific	653		631		25		25
Mountain	252		248		10		10
East North Central	232		248		9		10
Middle Atlantic	213		202		8		8
West North Central	204		194		8		7
West South Central	153		153		6		6
New England	131		138		5		5
East South Central	65		71		2		3
	2,606		2,564		100	%	100	%
Less: allowance for loan losses	22		24
Total	$	2,584	$	2,540

Concentrations of credit risk of commercial mortgage loans by property type were as follows:



	Loans				Percentage
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
	(in millions)
Retail	$	944	$	917	36	%	36	%
Office	545		548		21		21
Industrial	460		431		18		17
Apartments	445		454		17		18
Mixed use	45		36		2		1
Hotel	33		32		1		1
Other	134		146		5		6
	2,606		2,564		100	%	100	%
Less: allowance for loan losses	22		24
Total	$	2,584	$	2,540

Residential Mortgage Loans

The Company considers the credit worthiness of borrowers (FICO score), collateral characteristics such as loan-to-value (“LTV”) and geographic concentration to determine when an amount for an allowance for loan losses for residential mortgage loans is appropriate. At a minimum, management updates FICO scores and LTV ratios semiannually. As of September 30, 2014 and December 31, 2013, no allowance for loan losses was recorded.

As of both September 30, 2014 and December 31, 2013, approximately 4% of residential mortgage loans had FICO scores below 640. As of both September 30, 2014 and December 31, 2013, approximately 1% of the Company’s residential mortgage loans had LTV ratios greater than 90%. The Company’s most significant geographic concentration for residential mortgage loans is in California representing 37% and 38% of the portfolio as of September 30, 2014 and December 31, 2013, respectively. No other state represents more than 10% of the total residential mortgage loan portfolio.

Syndicated Loans

The Company’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 both September 30, 2014 and December 31, 2013 were $3 million.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Troubled Debt Restructurings

The following table presents the number of loans restructured by the Company during the period and their recorded investment at the end of the period:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(in millions, except number of loans)
Commercial mortgage loans	1	$	6	3	$	12	3	$	14	6	$	21
Residential mortgage loans	—	—		—	—		2	—		2	—
Syndicated loans	—	—		—	—		1	—		—	—
Total	1	$	6	3	$	12	6	$	14	8	$	21

The troubled debt restructurings did not have a material impact to the Company’s allowance for loan losses or income recognized for the three months and nine months ended September 30, 2014 and 2013. There are no material commitments to lend additional funds to borrowers whose loans have been restructured.


6.	Deferred Acquisition Costs and Deferred Sales Inducement Costs

In the third quarter of the year, management conducts its annual review of insurance and annuity valuation assumptions relative to current experience and management expectations. To the extent that expectations change as a result of this review, management updates valuation assumptions. The impact in the third quarter of 2014 primarily reflected the difference between the Company’s previously assumed interest rates versus the continued low interest rate environment, partially offset by favorable persistency and mortality experience and a benefit from updating the Company's variable annuity living benefit withdrawal utilization assumption. The impact in the third quarter of 2013 primarily reflected the impact of assumed interest rates and changes in assumed policyholder behavior.

The balances of and changes in DAC were as follows:



	2014			2013
	(in millions)
Balance at January 1	$	2,633		$	2,373
Capitalization of acquisition costs	196			200
Amortization, excluding the impact of valuation assumptions review	(219		)	(180		)
Amortization, impact of valuation assumptions review	(7		)	78
Impact of change in net unrealized securities losses (gains)	(30		)	112
Balance at September 30	$	2,573		$	2,583

The balances of and changes in DSIC, which is included in other assets, were as follows:



	2014			2013
	(in millions)
Balance at January 1	$	409		$	404
Capitalization of sales inducement costs	4			4
Amortization, excluding the impact of valuation assumptions review	(40		)	(39		)
Amortization, impact of valuation assumptions review	(2		)	25
Impact of change in net unrealized securities losses (gains)	(3		)	18
Balance at September 30	$	368		$	412

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)


7.	Policyholder Account Balances, Future Policy Benefits and Claims and Separate Account Liabilities

Policyholder account balances, future policy benefits and claims consisted of the following:



	September 30, 2014			December 31, 2013
	(in millions)
Policyholder account balances
Fixed annuities	$	12,922		$	13,826
Variable annuity fixed sub-accounts	4,869			4,926
Variable universal life (“VUL”)/universal life (“UL”) insurance	2,841			2,790
Indexed universal life (“IUL”) insurance	475			315
Other life insurance	846			878
Total policyholder account balances	21,953			22,735
Future policy benefits
Variable annuity guaranteed minimum withdrawal benefits (“GMWB”)⁽¹⁾	145			(383		)
Variable annuity guaranteed minimum accumulation benefits (“GMAB”)⁽¹⁾	(55		)	(62		)
Other annuity liabilities	118			76
Fixed annuities life contingent liabilities	1,518			1,523
Equity indexed annuities (“EIA”)	29			29
Life, disability income and long term care insurance	5,041			4,739
VUL/UL and other life insurance additional liabilities	403			336
Total future policy benefits	7,199			6,258
Policy claims and other policyholders’ funds	160			156
Total policyholder account balances, future policy benefits and claims	$	29,312		$	29,149


(1)	Includes the value of GMWB and GMAB embedded derivatives that was a net asset at both September 30, 2014 and December 31, 2013 reported as a contra liability.

Separate account liabilities consisted of the following:



	September 30, 2014		December 31, 2013
	(in millions)
Variable annuity	$	71,345	$	70,687
VUL insurance	6,925		6,885
Other insurance	43		44
Total	$	78,313	$	77,616


8.	Variable Annuity and Insurance Guarantees

The majority of the variable annuity contracts offered by the Company contain guaranteed minimum death benefit (“GMDB”) provisions. The Company also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings, which are referred to as gain gross-up (“GGU”) benefits. In addition, the Company offers contracts with GMWB and GMAB provisions. The Company previously offered contracts containing guaranteed minimum income benefit (“GMIB”) provisions.

Certain UL policies offered by the Company provide secondary guarantee benefits. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table provides information related to variable annuity guarantees for which the Company has established additional liabilities:



	September 30, 2014							December 31, 2013
Variable Annuity Guarantees by Benefit Type⁽¹⁾	Total Contract Value		Contract Value in Separate Accounts		Net Amount at Risk		Weighted Average Attained Age	Total Contract Value		Contract Value in Separate Accounts		Net Amount at Risk		Weighted Average Attained Age
	(in millions, except age)
GMDB:
Return of premium	$	54,378	$	52,566	$	39	64	$	52,616	$	50,790	$	28	64
Five/six-year reset	10,465		7,925		36		64	11,220		8,663		42		64
One-year ratchet	7,424		7,030		64		66	7,676		7,261		38		65
Five-year ratchet	1,770		1,715		3		62	1,781		1,725		1		62
Other	965		947		40		70	1,015		996		36		69
Total — GMDB	$	75,002	$	70,183	$	182	64	$	74,308	$	69,435	$	145	64

GGU death benefit	$	1,058	$	1,006	$	121	67	$	1,052	$	998	$	121	64

GMIB	$	359	$	336	$	9	67	$	413	$	389	$	8	66

GMWB:
GMWB	$	3,702	$	3,689	$	1	68	$	3,936	$	3,921	$	1	67
GMWB for life	35,967		35,853		92		65	34,069		33,930		77		64
Total — GMWB	$	39,669	$	39,542	$	93	65	$	38,005	$	37,851	$	78	64

GMAB	$	4,188	$	4,177	$	3	58	$	4,194	$	4,181	$	2	58


(1)	Individual variable annuity contracts may have more than one guarantee and therefore may be included in more than one benefit type. Variable annuity contracts for which the death benefit equals the account value are not shown in this table.

The net amount at risk for GMDB, GGU and GMAB guarantees is defined as the current guaranteed benefit amount in excess of the current contract value. The net amount at risk for GMIB and GMWB guarantees is defined as the greater of the present value of the minimum guaranteed withdrawal payments less the current contract value or zero. The present value is calculated using a discount rate that is consistent with assumptions embedded in the Company’s annuity pricing models.

The following table provides information related to insurance guarantees for which the Company has established additional liabilities:



	September 30, 2014			December 31, 2013
	Net Amount at Risk		Weighted Average Attained Age	Net Amount at Risk		Weighted Average Attained Age
	(in millions, except age)
UL secondary guarantees	$	5,943	62	$	5,674	62

The net amount at risk for UL secondary guarantees is defined as the current guaranteed death benefit amount in excess of the current policyholder value.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Changes in additional liabilities (contra liabilities) for variable annuity and insurance guarantees were as follows:



	GMDB & GGU			GMIB			GMWB⁽¹⁾			GMAB⁽¹⁾			UL
	(in millions)
Balance at January 1, 2013	$	4		$	9		$	799		$	103		$	155
Incurred claims	2			(2		)	(908		)	(127		)	45
Paid claims	(3		)	—			—			—			(11		)
Balance at September 30, 2013	$	3		$	7		$	(109	)	$	(24	)	$	189

Balance at January 1, 2014	$	4		$	6		$	(383	)	$	(62	)	$	206
Incurred claims	8			1			528			7			46
Paid claims	(3		)	—			—			—			(5		)
Balance at September 30, 2014	$	9		$	7		$	145		$	(55	)	$	247


(1)	The incurred claims for GMWB and GMAB represent the total change in the liabilities (contra liabilities).

The liabilities for guaranteed benefits are supported by general account assets.

The following table summarizes the distribution of separate account balances by asset type for variable annuity contracts providing guaranteed benefits:



	September 30, 2014		December 31, 2013
	(in millions)
Mutual funds:
Equity	$	40,751	$	39,195
Bond	25,218		26,519
Other	4,149		3,764
Total mutual funds	$	70,118	$	69,478


9.	Lines of Credit

RiverSource Life Insurance Company, as the borrower, had an outstanding balance at September 30, 2014 and December 31, 2013 of nil and $150 million, respectively, under a revolving credit agreement with Ameriprise Financial as the lender. The aggregate amount outstanding under the line of credit may not exceed $800 million at any time. The interest rate for any borrowing under the agreement is established by reference to LIBOR plus 90 basis points, subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. Amounts borrowed may be repaid at any time with no prepayment penalty.

RiverSource Life Insurance Company, as the lender, has a revolving credit agreement with Ameriprise Financial as the borrower. This line of credit is not to exceed 3% of RiverSource Life Insurance Company’s statutory admitted assets as of the prior year end. The interest rate for any borrowing is established by reference to LIBOR plus 90 basis points, subject to adjustment based on debt ratings of the senior unsecured debt of Ameriprise Financial. In the event of default, an additional 1% interest will accrue during such period of default. There were no amounts outstanding on this revolving credit agreement as of September 30, 2014 and December 31, 2013.


10.	Short-term Borrowings

The Company enters into repurchase agreements in exchange for cash which it accounts for as secured borrowings. The Company has pledged Available-for-Sale securities consisting of agency residential mortgage backed securities and commercial mortgage backed securities to collateralize its obligation under the repurchase agreements. The fair value of the securities pledged is recorded in investments and was $52 million at both September 30, 2014 and December 31, 2013. The amount of the Company’s liability including accrued interest as of both September 30, 2014 and December 31, 2013 was $50 million. The weighted average annualized interest rate on the repurchase agreements held as of both September 30, 2014 and December 31, 2013 was 0.3%.

RiverSource Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines which provides access to collateralized borrowings. In 2013, the Company began to borrow short-term funds under these FHLB borrowings. The Company has pledged Available-for-Sale securities consisting of commercial mortgage backed securities to collateralize its obligation under these borrowings. The fair value of the securities pledged is recorded in investments and was $456 million and $574 million at September 30, 2014 and December 31, 2013, respectively. The amount of the Company’s liability including accrued interest as of September 30, 2014 and December 31, 2013 was $150 million and $450 million, respectively. The

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

weighted average annualized interest rate on the FHLB advances held as of both September 30, 2014 and December 31, 2013 was 0.3%.


11.	Fair Values of Assets and Liabilities

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; that is, an exit price. The exit price assumes the asset or liability is not exchanged subject to a forced liquidation or distressed sale.

Valuation Hierarchy

The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:


Level 1	Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.


Level 2	Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities.


Level 3	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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RIVERSOURCE LIFE INSURANCE 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:



	September 30, 2014
	Level 1		Level 2		Level 3			Total
	(in millions)
Assets
Available-for-Sale securities: Fixed maturities:
Corporate debt securities	$	—	$	14,092	$	1,378		$	15,470
Residential mortgage backed securities	—		3,547		10			3,557
Commercial mortgage backed securities	—		2,139		93			2,232
State and municipal obligations	—		1,073		—			1,073
Asset backed securities	—		796		148			944
Foreign government bonds and obligations	—		253		—			253
U.S. government and agencies obligations	4		36		—			40
Total Available-for-Sale securities: Fixed maturities	4		21,936		1,629			23,569
Common stocks	3		5		—			8
Cash equivalents	2		261		—			263
Other assets:
Interest rate derivative contracts	—		1,512		—			1,512
Equity derivative contracts	314		1,512		—			1,826
Credit derivative contracts	—		4		—			4
Foreign exchange derivative contracts	—		4		—			4
Other derivative contracts	—		—		1			1
Total other assets	314		3,032		1			3,347
Separate account assets	—		78,313		—			78,313
Total assets at fair value	$	323	$	103,547	$	1,630		$	105,500

Liabilities
Policyholder account balances, future policy benefits and claims:
EIA embedded derivatives	$	—	$	6	$	—		$	6
IUL embedded derivatives	—		—		202			202
GMWB and GMAB embedded derivatives	—		—		(77		)	(77		)	⁽²⁾
Total policyholder account balances, future policy benefits and claims	—		6		125			131			⁽¹⁾
Other liabilities:
Interest rate derivative contracts	—		1,208		—			1,208
Equity derivative contracts	472		2,171		—			2,643
Other derivative contracts	—		13		—			13
Total other liabilities	472		3,392		—			3,864
Total liabilities at fair value	$	472	$	3,398	$	125		$	3,995


(1)	The Company’s adjustment for nonperformance risk resulted in a $238 million cumulative decrease to the embedded derivatives.


(2)	The fair value of the GMWB and GMAB embedded derivatives was a net asset at September 30, 2014 and the amount is reported as a contra liability.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)



	December 31, 2013
	Level 1		Level 2		Level 3			Total
	(in millions)
Assets
Available-for-Sale securities: Fixed maturities:
Corporate debt securities	$	—	$	14,357	$	1,516		$	15,873
Residential mortgage backed securities	—		3,753		58			3,811
Commercial mortgage backed securities	—		2,404		30			2,434
State and municipal obligations	—		998		—			998
Asset backed securities	—		763		218			981
Foreign government bonds and obligations	—		245		—			245
U.S. government and agencies obligations	9		36		—			45
Total Available-for-Sale securities: Fixed maturities	9		22,556		1,822			24,387
Common stocks	3		3		—			6
Cash equivalents	1		320		—			321
Other assets:
Interest rate derivative contracts	—		1,484		—			1,484
Equity derivative contracts	265		1,503		—			1,768
Credit derivative contracts	—		3		—			3
Foreign exchange derivative contracts	—		2		—			2
Other derivative contracts	—		4		—			4
Total other assets	265		2,996		—			3,261
Separate account assets	—		77,616		—			77,616
Total assets at fair value	$	278	$	103,491	$	1,822		$	105,591

Liabilities
Policyholder account balances, future policy benefits and claims:
EIA embedded derivatives	$	—	$	5	$	—		$	5
IUL embedded derivatives	—		—		125			125
GMWB and GMAB embedded derivatives	—		—		(575		)	(575		)	⁽²⁾
Total policyholder account balances, future policy benefits and claims	—		5		(450		)	(445		)	⁽¹⁾
Other liabilities:
Interest rate derivative contracts	—		1,672		—			1,672
Equity derivative contracts	549		2,382		—			2,931
Other derivative contracts	—		29		—			29
Total other liabilities	549		4,083		—			4,632
Total liabilities at fair value	$	549	$	4,088	$	(450	)	$	4,187


(1)	The Company’s adjustment for nonperformance risk resulted in a $150 million cumulative increase to the embedded derivatives.


(2)	The fair value of the GMWB and GMAB embedded derivatives was a net asset at December 31, 2013 and the amount is reported as a contra liability.

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RIVERSOURCE LIFE INSURANCE 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: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities		Commercial Mortgage Backed Securities		Asset Backed Securities			Total				Common Stocks			Other Assets: Other Derivatives Contracts
	(in millions)
Balance, July 1, 2014	$	1,376		$	10	$	15	$	149		$	1,550			$	1		$	1
Total gains (losses) included in:
Net income	—			—		—		1			1			⁽¹⁾	—			(1		)	⁽²⁾
Other comprehensive income	(11		)	—		—		(1		)	(12		)		—			—
Purchases	37			—		—		—			37				—			1
Settlements	(24		)	—		—		(1		)	(25		)		—			—
Transfers into Level 3	—			—		78		—			78				—			—
Transfers out of Level 3	—			—		—		—			—				(1		)	—
Balance, September 30, 2014	$	1,378		$	10	$	93	$	148		$	1,629			$	—		$	1
Changes in unrealized gains (losses) relating to assets held at September 30, 2014 included in:
Net investment income	$	—		$	—	$	—	$	1		$	1			$	—		$	—
Benefits, claims, losses and settlement expenses	—			—		—		—			—				—			(1		)


(1)	Included in net investment income in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.




	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives			GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, July 1, 2014	$	184		$	(347	)		$	(163	)
Total losses included in:
Net income	—			207			⁽¹⁾	207
Issues	21			65				86
Settlements	(3		)	(2		)		(5		)
Balance, September 30, 2014	$	202		$	(77	)		$	125
Changes in unrealized losses relating to liabilities held at September 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—		$	208			$	208


(1)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)



	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total
	(in millions)
Balance, July 1, 2013	$	1,558		$	50		$	164		$	154		$	1,926
Total gains (losses) included in:
Other comprehensive loss	2			—			—			(2		)	—
Purchases	—			45			—			29			74
Settlements	(37		)	(5		)	—			—			(42		)
Transfers out of Level 3	—			—			(149		)	—			(149		)
Balance, September 30, 2013	$	1,523		$	90		$	15		$	181		$	1,809
Changes in unrealized gains (losses) relating to assets held at September 30, 2013 included in:
Net investment income	$	—		$	—		$	—		$	—		$	—



	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives			GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, July 1, 2013	$	76		$	11			$	87
Total (gains) losses included in:
Net income	2		⁽¹⁾	(322		)	⁽²⁾	(320		)
Issues	17			60				77
Settlements	1			(5		)		(4		)
Balance, September 30, 2013	$	96		$	(256	)		$	(160	)
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2013 included in:
Benefits, claims, losses and settlement expenses	$	—		$	(321	)		$	(321	)
Interest credited to fixed accounts	2			—				2


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)




	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total				Common Stocks			Other Assets: Other Derivatives Contracts
	(in millions)
Balance, January 1, 2014	$	1,516		$	58		$	30		$	218		$	1,822			$	—		$	—
Total gains (losses) included in:
Net income	1			—			—			1			2			⁽¹⁾	—			(1		)	⁽²⁾
Other comprehensive income	3			—			—			—			3				—			—
Purchases	94			11			39			—			144				1			2
Sales	(11		)	—			—			—			(11		)		—			—
Settlements	(225		)	(2		)	—			(2		)	(229		)		—			—
Transfers into Level 3	—			—			78			—			78				—			—
Transfers out of Level 3	—			(57		)	(54		)	(69		)	(180		)		(1		)	—
Balance, September 30, 2014	$	1,378		$	10		$	93		$	148		$	1,629			$	—		$	1
Changes in unrealized gains (losses) relating to assets held at September 30, 2014 included in:
Net investment income	$	(1	)	$	—		$	—		$	1		$	—			$	—		$	—
Benefits, claims, losses and settlement expenses	—			—			—			—			—				—			(1		)


(1)	Included in net investment income in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.




	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives				GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, January 1, 2014	$	125			$	(575	)		$	(450	)
Total losses included in:
Net income	14			⁽¹⁾	327			⁽²⁾	341
Issues	69				184				253
Settlements	(6		)		(13		)		(19		)
Balance, September 30, 2014	$	202			$	(77	)		$	125
Changes in unrealized losses relating to liabilities held at September 30, 2014 included in:
Benefits, claims, losses and settlement expenses	$	—			$	327			$	327
Interest credited to fixed accounts	14				—				14


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)



	Available-for-Sale Securities: Fixed Maturities
	Corporate Debt Securities			Residential Mortgage Backed Securities			Commercial Mortgage Backed Securities			Asset Backed Securities			Total
	(in millions)
Balance, January 1, 2013	$	1,654		$	23		$	170		$	156		$	2,003
Total gains (losses) included in:
Net income	(1		)	—			—			1			—			⁽¹⁾
Other comprehensive loss	(34		)	—			(6		)	5			(35		)
Purchases	74			87			—			29			190
Settlements	(170		)	(5		)	—			(1		)	(176		)
Transfers out of Level 3	—			(15		)	(149		)	(9		)	(173		)
Balance, September 30, 2013	$	1,523		$	90		$	15		$	181		$	1,809
Changes in unrealized gains (losses) relating to assets held at September 30, 2013 included in:
Net investment income	$	(1	)	$	—		$	—		$	1		$	—


(1)	Included in net investment income in the Consolidated Statements of Income.



	Policyholder Account Balances, Future Policy Benefits and Claims
	IUL Embedded Derivatives			GMWB and GMAB Embedded Derivatives				Total
	(in millions)
Balance, January 1, 2013	$	45		$	833			$	878
Total (gains) losses included in:
Net income	8		⁽¹⁾	(1,246		)	⁽²⁾	(1,238		)
Issues	42			163				205
Settlements	1			(6		)		(5		)
Balance, September 30, 2013	$	96		$	(256	)		$	(160	)
Changes in unrealized (gains) losses relating to liabilities held at September 30, 2013 included in:
Benefits, claims, losses and settlement expenses	$	—		$	(1,229	)		$	(1,229	)
Interest credited to fixed accounts	8			—				8


(1)	Included in interest credited to fixed accounts in the Consolidated Statements of Income.


(2)	Included in benefits, claims, losses and settlement expenses in the Consolidated Statements of Income.

The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $59 million and $(14) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the three months ended September 30, 2014 and 2013, respectively. The impact to pretax income of the Company’s adjustment for nonperformance risk on the fair value of its embedded derivatives was $68 million and $(104) million, net of DAC, DSIC, unearned revenue amortization and the reinsurance accrual, for the nine months ended September 30, 2014 and 2013, respectively.

Securities transferred from Level 3 primarily represent securities with fair values that are now obtained from a third party pricing service with observable inputs. Securities transferred to Level 3 represent securities with fair values that are now based on a single non-binding broker quote. The Company 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.

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RIVERSOURCE LIFE INSURANCE 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 the Company or reasonably available to the Company of Level 3 assets and liabilities:



	September 30, 2014
	Fair Value			Valuation Technique	Unobservable Input	Range				Weighted Average
	(in millions)
Corporate debt securities (private placements)	$	1,341		Discounted cash flow	Yield/spread to U.S. Treasuries	0.9	%	-	3.5%	1.3	%
Other derivative contracts	$	1		Option pricing model	Correlation⁽¹⁾	(3.0	)%	-	(84.0)%	(60.0	)%
IUL embedded derivatives	$	202		Discounted cash flow	Nonperformance risk⁽²⁾	69			bps
GMWB and GMAB embedded derivatives	$	(77	)	Discounted cash flow	Utilization of guaranteed withdrawals⁽³⁾	0.0	%	-	51.1%
					Surrender rate	0.0	%	-	59.1%
					Market volatility⁽⁴⁾	4.9	%	-	19.4%
					Nonperformance risk⁽²⁾	69			bps
					Elective contractholder strategy allocations⁽⁵⁾	0.0	%	-	31.0%



	December 31, 2013
	Fair Value			Valuation Technique	Unobservable Input	Range				Weighted Average
	(in millions)
Corporate debt securities (private placements)	$	1,487		Discounted cash flow	Yield/spread to U.S. Treasuries	0.9	%	-	5.3%	1.6%
IUL embedded derivatives	$	125		Discounted cash flow	Nonperformance risk⁽²⁾	74			bps
GMWB and GMAB embedded derivatives	$	(575	)	Discounted cash flow	Utilization of guaranteed withdrawals⁽³⁾	0.0	%	-	51.1%
					Surrender rate	0.1	%	-	57.9%
					Market volatility⁽⁴⁾	4.9	%	-	18.8%
					Nonperformance risk⁽²⁾	74			bps
					Elective contractholder strategy allocations⁽⁵⁾	0.0	%	-	50.0%


(1)	Represents the correlation between equity returns and interest rates used in the valuation of the derivative contract.


(2)	The nonperformance risk is the spread added to the observable interest rates used in the valuation of the embedded derivatives.


(3)	The utilization of guaranteed withdrawals represents the percentage of contractholders that will begin withdrawing in any given year.


(4)	Market volatility is implied volatility of fund of funds and managed volatility funds.


(5)	The elective allocation represents the percentage of contractholders that are assumed to electively switch their investment allocation to a different allocation model.

Level 3 measurements not included in the table above are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to the Company.

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.

Significant (decreases) increases in the correlation used in the fair value measurement of Level 3 derivatives in isolation would result in a significantly higher (lower) fair value measurement.

Significant increases (decreases) in nonperformance risk used in the fair value measurement of the IUL embedded derivatives in isolation would result in a significantly lower (higher) fair value measurement.

Significant increases (decreases) in utilization, surrender rate and volatility used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly lower (higher) asset value, possibly creating a liability. Significant increases (decreases) in nonperformance risk and elective investment allocation model used in the fair value measurement of the GMWB and GMAB embedded derivatives in isolation would result in a significantly higher (lower) asset value. Utilization of guaranteed withdrawals and surrender rates vary with the type of rider, the duration of the policy, the age of the contractholder, the distribution system and whether the value of the guaranteed benefit exceeds the contract accumulation value.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Determination of Fair Value

The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company’s market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Assets

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value (“NAV”) and classified as Level 1. The Company’s remaining cash equivalents are classified as Level 2 and measured at amortized cost, which is a reasonable estimate of fair value because of the short time between the purchase of the instrument and its expected realization.

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 include U.S. Treasuries. Level 2 securities include corporate bonds, residential mortgage backed securities, commercial mortgage backed securities, state and municipal obligations, asset backed securities and U.S. agency and foreign government securities. The fair value of these Level 2 securities is based on a market approach with prices obtained from third party pricing services. Observable inputs used to value these securities can include, but are not limited to, reported trades, benchmark yields, issuer spreads and non-binding broker quotes. Level 3 securities primarily include certain corporate bonds, non-agency residential mortgage backed securities, commercial mortgage backed securities and asset backed securities. 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 the Company. The Company’s privately placed corporate bonds are typically based on a single non-binding broker quote. In addition to the general pricing controls, the Company 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. The Company reviews the exception reporting and resolves the exceptions through reaffirmation of the price or recording an appropriate fair value estimate. The Company also performs subsequent transaction testing. The Company performs annual due diligence of third party pricing services. The Company’s due diligence procedures include assessing the vendor’s valuation qualifications, control environment, analysis of asset-class specific valuation methodologies, and understanding of sources of market observable assumptions and unobservable assumptions, if any, employed in the valuation methodology. The Company also considers the results of its exception reporting controls and any resulting price challenges that arise.

Separate Account Assets

The fair value of assets held by separate accounts is determined by the NAV of the funds in which those separate accounts are invested. The NAV represents the exit price for the separate account. Separate account assets are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information.

Other Assets

Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active over-the-counter (“OTC”) markets is generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy and include swaps and the majority of the Company's options. The fair value of certain derivatives measured using pricing models which include significant unobservable inputs are classified as Level 3 within the fair value hierarchy. Other derivative contracts consist of the Company's macro hedge program. See Note 13 for further information on the macro hedge program. The counterparties’ nonperformance risk associated with

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

uncollateralized derivative assets was immaterial at September 30, 2014 and December 31, 2013. See Note 12 and Note 13 for further information on the credit risk of derivative instruments and related collateral.

Liabilities

Policyholder Account Balances, Future Policy Benefits and Claims

The Company values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. These models calculate fair value by discounting expected cash flows from benefits plus margins for profit, risk and expenses less embedded derivative fees. The projected cash flows used by these models include observable capital market assumptions and incorporate significant unobservable inputs related to contractholder behavior assumptions, implied volatility, and margins for risk, profit and expenses that the Company believes an exit market participant would expect. The fair value also reflects a current estimate of the Company’s nonperformance risk specific to these embedded derivatives. Given the significant unobservable inputs to this valuation, these measurements are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.

The Company uses various Black-Scholes calculations to determine the fair value of the embedded derivatives associated with the provisions of its EIA and IUL products. Significant inputs to the EIA calculation include observable interest rates, volatilities and equity index levels and, therefore, are classified as Level 2. The fair value of the IUL embedded derivatives includes significant observable interest rates, volatilities and equity index levels and the significant unobservable estimate of the Company’s nonperformance risk. Given the significance of the nonperformance risk assumption to the fair value, the IUL embedded derivatives are classified as Level 3. The embedded derivatives attributable to these provisions are recorded in policyholder account balances, future policy benefits and claims.

The Company’s Corporate Actuarial Department calculates the fair value of the embedded derivatives on a monthly basis. During this process, control checks are performed to validate the completeness of the data. Actuarial management approves various components of the valuation along with the final results. The change in the fair value of the embedded derivatives is reviewed monthly with senior management. The Level 3 inputs into the valuation are consistent with the pricing assumptions and updated as experience develops. Significant unobservable inputs that reflect policyholder behavior are reviewed quarterly along with other valuation assumptions.

Other Liabilities

Derivatives that are measured using quoted prices in active markets, such as derivatives that are exchange-traded, are classified as Level 1 measurements. The fair value of derivatives that are traded in less active OTC 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 and include swaps and the majority of options. Other derivative contracts consist of the Company's macro hedge program. See Note 13 for further information on the macro hedge program. The Company’s nonperformance risk associated with uncollateralized derivative liabilities was immaterial at September 30, 2014 and December 31, 2013. See Note 12 and Note 13 for further information on the credit risk of derivative instruments and related collateral.

During the reporting periods, there were no material assets or liabilities measured at fair value on a nonrecurring basis.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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.



	September 30, 2014
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,300	$	—	$	—	$	3,386	$	3,386
Policy loans	804		—		—		788		788
Other investments	465		—		419		45		464

Financial Liabilities
Policyholder account balances, future policy benefits and claims	$	13,203	$	—	$	—	$	13,819	$	13,819
Short-term borrowings	200		—		200		—		200
Other liabilities	96		—		—		95		95
Separate account liabilities	394		—		394		—		394



	December 31, 2013
	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
	(in millions)
Financial Assets
Mortgage loans, net	$	3,326	$	—	$	—	$	3,372	$	3,372
Policy loans	773		—		—		765		765
Other investments	385		—		346		42		388

Financial Liabilities
Policyholder account balances, future policy benefits and claims	$	14,106	$	—	$	—	$	14,724	$	14,724
Short-term borrowings	500		—		500		—		500
Line of credit with Ameriprise Financial	150		—		—		150		150
Other liabilities	137		—		—		134		134
Separate account liabilities	400		—		400		—		400

Mortgage Loans, Net

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 LTV 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 the Company’s estimate of the amount recoverable on the loan.

The fair value of residential mortgage loans is determined by discounting estimated cash flows and incorporating adjustments for prepayment, administration expenses, loss severity and credit loss estimates, with discount rates based on the Company’s estimate of current market conditions.

Given the significant unobservable inputs to the valuation of mortgage loans, these measurements are classified as Level 3.

Policy Loans

Policy loans represent loans made against the cash surrender value of the underlying life insurance or annuity product. These loans and the related interest are usually realized at death of the policyholder or contractholder or at surrender of the contract and are not transferable without the underlying insurance or annuity contract. The fair value of policy loans is determined by estimating expected cash flows discounted at rates based on the U.S. Treasury curve. Policy loans are classified as Level 3 as the discount rate used may be adjusted for the underlying performance of individual policies.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Other Investments

Other investments primarily consist of syndicated loans and an investment in FHLB. 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 syndicated loans priced using a single non-binding broker quote are classified as Level 3. The fair value of the investment in FHLB is approximated by the carrying value and classified as Level 3 due to restrictions on transfer and lack of liquidity in the primary market for this asset.

Policyholder Account Balances, Future Policy Benefits and Claims

The fair value of fixed annuities, in deferral status, is determined by discounting cash flows using a risk neutral discount rate with adjustments for profit margin, expense margin, early policy surrender behavior, a margin for adverse deviation from estimated early policy surrender behavior and the Company’s nonperformance risk specific to these liabilities. The fair value of non-life contingent fixed annuities in payout status, EIA host contracts and the fixed portion of a small number of variable annuity contracts classified as investment contracts is determined in a similar manner. Given the use of significant unobservable inputs to these valuations, the measurements are classified as Level 3.

Short-term Borrowings

The fair value of short-term borrowings is obtained from a third party pricing service. A nonperformance adjustment is not included as collateral requirements for these borrowings minimize the nonperformance risk. The fair value of short-term borrowings is classified as Level 2.

Line of Credit with Ameriprise Financial

The fair value of the line of credit is determined by discounting cash flows with an adjustment for the Company’s nonperformance risk specific to this liability. The fair value of the line of credit is classified as Level 3.

Other Liabilities

Other liabilities consist of future funding commitments to affordable housing partnerships. The fair value of these future funding commitments is determined by discounting cash flows. The fair value of these commitments includes an adjustment for the Company’s nonperformance risk and is classified as Level 3 due to the use of the significant unobservable input.

Separate Account Liabilities

Certain separate account liabilities are classified as investment contracts and are carried at an amount equal to the related separate account assets. The NAV of the related separate account assets represents the exit price for the separate account liabilities. Separate account liabilities are classified as Level 2 as they are traded in principal-to-principal markets with little publicly released pricing information. A nonperformance adjustment is not included as the related separate account assets act as collateral for these liabilities and minimize nonperformance risk.


12.	Offsetting Assets and Liabilities

Certain financial instruments and derivative instruments are eligible for offset in the Consolidated Balance Sheets. The Company’s derivative instruments and repurchase agreements 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. The Company’s policy is to recognize amounts subject to master netting arrangements on a gross basis in the Consolidated Balance Sheets.

The following tables present the gross and net information about the Company’s assets subject to master netting arrangements:



	September 30, 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			Securities Collateral			Net Amount
							Financial Instruments⁽¹⁾			Cash Collateral			Securities Collateral			Net Amount
	(in millions)
Derivatives:
OTC	$	3,131	$	—	$	3,131	$	(2,834	)	$	(107	)	$	(176	)	$	14
OTC cleared	145		—		145		(92		)	(53		)	—			—
Exchange-traded	71		—		71		—			—			—			71
Total derivatives	$	3,347	$	—	$	3,347	$	(2,926	)	$	(160	)	$	(176	)	$	85

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)



	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			Securities Collateral			Net Amount
							Financial Instruments⁽¹⁾			Cash Collateral			Securities Collateral			Net Amount
	(in millions)
Derivatives:
OTC	$	3,180	$	—	$	3,180	$	(3,134	)	$	(17	)	$	(16	)	$	13
OTC cleared	21		—		21		(20		)	(1		)	—			—
Exchange-traded	60		—		60		—			—			—			60
Total derivatives	$	3,261	$	—	$	3,261	$	(3,154	)	$	(18	)	$	(16	)	$	73


(1)	Represents the amount of assets that could be offset by liabilities with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.

The following tables present the gross and net information about the Company’s liabilities subject to master netting arrangements:



	September 30, 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
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments⁽¹⁾			Cash Collateral		Securities Collateral			Net Amount
	(in millions)
Derivatives:
OTC	$	3,772	$	—	$	3,772	$	(2,834	)	$	—	$	(938	)	$	—
OTC cleared	92		—		92		(92		)	—		—			—
Total derivatives	3,864		—		3,864		(2,926		)	—		(938		)	—
Repurchase agreements	50		—		50		—			—		(50		)	—
Total	$	3,914	$	—	$	3,914	$	(2,926	)	$	—	$	(988	)	$	—



	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
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments⁽¹⁾			Cash Collateral			Securities Collateral			Net Amount
	(in millions)
Derivatives:
OTC	$	4,610	$	—	$	4,610	$	(3,134	)	$	—		$	(1,465	)	$	11
OTC cleared	22		—		22		(20		)	(2		)	—			—
Total derivatives	4,632		—		4,632		(3,154		)	(2		)	(1,465		)	11
Repurchase agreements	50		—		50		—			—			(50		)	—
Total	$	4,682	$	—	$	4,682	$	(3,154	)	$	(2	)	$	(1,515	)	$	11


(1)	Represents the amount of liabilities that could be offset by assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets.

In the tables above, the 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 collateral may be greater than amounts presented in the tables.

The Company’s freestanding derivative instruments are reflected in other assets and other liabilities. Repurchase agreements are reflected in short-term borrowings. See Note 13 for additional disclosures related to the Company’s derivative instruments and Note 10 for additional disclosures related to the Company’s repurchase agreements.


13.	Derivatives and Hedging Activities

Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The Company’s freestanding derivatives are recorded at fair value and are reflected in other assets or other liabilities. The Company’s freestanding derivative instruments are all subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 12 for additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.

The Company currently uses derivatives as economic hedges and accounting hedges. The following table presents the balance sheet location and the gross fair value of derivative instruments, including embedded derivatives:



		Assets					Liabilities
Derivatives not designated as hedging instruments	Balance Sheet Location	September 30, 2014		December 31, 2013		Balance Sheet Location	September 30, 2014			December 31, 2013
		(in millions)					(in millions)
GMWB and GMAB
Interest rate contracts	Other assets	$	1,512	$	1,484	Other liabilities	$	1,208		$	1,672
Equity contracts	Other assets	1,798		1,741		Other liabilities	2,636			2,918
Credit contracts	Other assets	4		3		Other liabilities	—			—
Foreign exchange contracts	Other assets	4		2		Other liabilities	—			—
Embedded derivatives⁽¹⁾	N/A	—		—		Policyholder account balances, future policy benefits and claims⁽²⁾	(77		)	(575		)
Total GMWB and GMAB		3,318		3,230			3,767			4,015
Other derivatives:
Equity
EIA embedded derivatives	N/A	—		—		Policyholder account balances, future policy benefits and claims	6			5
IUL	Other assets	28		27		Other liabilities	7			13
IUL embedded derivatives	N/A	—		—		Policyholder account balances, future policy benefits and claims	202			125
Other
Macro hedge program	Other assets	1		4		Other liabilities	13			29
Total other derivatives		29		31			228			172
Total derivatives		$	3,347	$	3,261		$	3,995		$	4,187


N/A	Not applicable.


(1)	The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.


(2)	The fair value of the GMWB and GMAB embedded derivatives was a net asset at September 30, 2014 and December 31, 2013 and the amount is reported as a contra liability.

See Note 11 for additional information regarding the Company’s fair value measurement of derivative instruments.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table presents a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Income:



		Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives not designated as hedging instruments	Location of Gain (Loss) on Derivatives Recognized in Income	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives not designated as hedging instruments	Location of Gain (Loss) on Derivatives Recognized in Income	2014			2013			2014			2013
		(in millions)
GMWB and GMAB
Interest rate contracts	Benefits, claims, losses and settlement expenses	$	100		$	(63	)	$	609		$	(575	)
Equity contracts	Benefits, claims, losses and settlement expenses	143			(323		)	(244		)	(803		)
Credit contracts	Benefits, claims, losses and settlement expenses	(1		)	(3		)	(23		)	5
Foreign exchange contracts	Benefits, claims, losses and settlement expenses	(13		)	8			(14		)	15
Embedded derivatives⁽¹⁾	Benefits, claims, losses and settlement expenses	(270		)	267			(498		)	1,089
Total GMWB and GMAB		(41		)	(114		)	(170		)	(269		)
Other derivatives:
Interest rate
Tax hedge	Net investment income	—			—			3			—
Equity
EIA	Interest credited to fixed accounts	—			1			1			2
EIA embedded derivatives	Interest credited to fixed accounts	—			—			(1		)	(1		)
IUL	Interest credited to fixed accounts	2			2			13			8
IUL embedded derivatives	Interest credited to fixed accounts	(2		)	3			9			8
Other
Macro hedge program	Benefits, claims, losses and settlement expenses	(1		)	—			2			—
Total other derivatives		(1		)	6			27			17
Total derivatives		$	(42	)	$	(108	)	$	(143	)	$	(252	)


(1)	The fair values of GMWB and GMAB embedded derivatives fluctuate based on changes in equity, interest rate and credit markets.

The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to various products and transactions of the Company.

Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The Company economically hedges the exposure related to non-life contingent GMWB and GMAB provisions primarily using various futures, options, interest rate swaptions, interest rate swaps, total return swaps and variance swaps. At September 30, 2014 and December 31, 2013, the gross notional amount of derivative contracts for the Company’s GMWB and GMAB provisions was $135.8 billion and $142.4 billion, respectively.

The deferred premium associated with certain of the above options is paid or received semi-annually over the life of the option contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options:



	Premiums Payable		Premiums Receivable
	(in millions)
2014⁽¹⁾	$	109	$	49
2015	349		69
2016	316		53
2017	240		69
2018	190		68
2019-2026	526		132
Total	$	1,730	$	440


(1)	2014 amounts represent the amounts payable and receivable for the period from October 1, 2014 to December 31, 2014.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.

During 2013, the Company transferred net derivative liabilities with a fair value of $94 million, consisting of long-dated options, along with cash payment of the same amount to Ameriprise Financial. The transaction improves the risk management profile of statutory tail scenario risk for the Company’s variable annuities.

The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. As a means of economically hedging these risks, the Company uses a combination of options and/or swaps. Certain of the macro hedge derivatives used contain settlement provisions linked to both equity returns and interest rates; the remaining are interest rate contracts or equity contracts. The gross notional amount of these derivative contracts was $1.2 billion and $710 million at September 30, 2014 and December 31, 2013, respectively.

EIA and IUL products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to EIA and IUL products will positively or negatively impact earnings over the life of these products. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and futures contracts. The gross notional amount of these derivative contracts was $804 million and $512 million at September 30, 2014 and December 31, 2013, respectively.

Embedded Derivatives

Certain annuities contain GMAB and non-life contingent GMWB provisions, which are considered embedded derivatives. In addition, the equity component of the EIA and IUL product obligations are also considered embedded derivatives. These embedded derivatives are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As discussed above, the Company uses derivatives to mitigate the financial statement impact of these embedded derivatives.

Cash Flow Hedges

The Company has amounts classified in AOCI related to gains and losses associated with the effective portion of previously designated cash flow hedges. The Company reclassifies these amounts into income as the forecasted transactions impact earnings. During the nine months ended September 30, 2014, the Company held no derivatives that were designated as cash flow hedges.

At September 30, 2014, the Company expects to reclassify $6 million of deferred loss on derivative instruments from AOCI to earnings during the next 12 months that will be recorded in net investment income. These were originally losses on derivative instruments related to interest rate swaptions. During the nine months ended September 30, 2014 and 2013, no hedge relationships were discontinued due to forecasted transactions no longer being expected to occur according to the original hedge strategy. For the nine months ended September 30, 2014 and 2013, amounts recognized in earnings on derivative transactions that were ineffective were not material.

The following table presents a rollforward of unrealized derivative losses related to cash flow hedges included in accumulated other comprehensive income (loss):



	2014			2013
	(in millions)
Net unrealized derivative losses at January 1	$	(17	)	$	(21	)
Reclassification of realized losses⁽¹⁾	5			6
Income tax benefit	(2		)	(2		)
Net unrealized derivative losses at September 30	$	(14	)	$	(17	)


(1)	Loss reclassified from AOCI to net investment income on the Consolidated Statements of Income.

Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is four years and relates to interest credited on forecasted fixed premium product sales.

Credit Risk

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

arrangements and collateral arrangements whenever practical. See Note 12 for additional information on the Company’s credit exposure related to derivative assets.

Certain of the Company’s derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s financial strength rating (or based on the debt rating of the Company’s parent, Ameriprise Financial). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company does not maintain a specific financial strength rating or Ameriprise Financial’s debt does not maintain a specific credit rating (generally an investment grade rating). If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. At September 30, 2014 and December 31, 2013, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $494 million and $950 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of September 30, 2014 and December 31, 2013 was $494 million and $940 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position at September 30, 2014 and December 31, 2013 were triggered, the aggregate fair value of additional assets that would be required to be posted as collateral or needed to settle the instruments immediately would have been nil and $10 million, respectively.


14.	Shareholder’s Equity

The following table provides information related to amounts reclassified from AOCI:



		Three Months Ended September 30,						Nine Months Ended September 30,
AOCI Reclassification	Location of (Gain) Loss Recognized in Income	2014			2013			2014			2013
		(in millions)
Net unrealized gains on Available-for-Sale securities	Net realized investment gains	$	(10	)	$	(4	)	$	(15	)	$	(3	)
Tax expense	Income tax provision	4			1			6			1
Net of tax		$	(6	)	$	(3	)	$	(9	)	$	(2	)
Losses on cash flow hedges:
Swaptions	Net investment income	$	2		$	2		$	5		$	6
Tax benefit	Income tax provision	(1		)	(1		)	(2		)	(2		)
Net of tax		$	1		$	1		$	3		$	4

See Note 4 for additional information related to the impact of DAC, DSIC, benefit reserves and reinsurance recoverable on net unrealized securities gains/losses included in AOCI. See Note 13 for additional information regarding the Company’s cash flow hedges.


15.	Income Taxes

The Company’s effective tax rate was 14.5% and 18.2% for the three months ended September 30, 2014 and 2013, respectively. The Company’s effective tax rate was 14.0% and 17.1% for the nine months ended September 30, 2014 and 2013, respectively. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing tax credits. The decrease in the effective tax rate for the three months ended September 30, 2014 compared to the prior year period was primarily due to lower pretax income. The decrease in the effective tax rate for the nine months ended September 30, 2014 compared to the prior year period was the result of an $18 million benefit in the first quarter of 2014 related to the completion of an Internal Revenue Service (“IRS”) audit.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $6 million which will expire beginning December 31, 2014.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in deferred tax assets is a significant deferred tax asset relating to capital losses that have been recognized for financial statement purposes but not yet for tax return purposes as well as future deductible capital losses realized for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. 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 the Company’s tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will not

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

allow the Company to realize certain state deferred tax assets and state net operating losses and therefore a valuation allowance of $6 million was established as of both September 30, 2014 and December 31, 2013.

As of September 30, 2014 and December 31, 2013, the Company had $155 million and $144 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $6 million and $23 million, net of federal tax benefits, of unrecognized tax benefits as of September 30, 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 the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $140 million to $150 million in the next 12 months due to resolution of IRS examinations.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $1 million and $3 million in interest and penalties for the three months and nine months ended September 30, 2014, respectively. The Company recognized a net increase of $2 million and $5 million in interest and penalties for the three months and nine months ended September 30, 2013, respectively. As of September 30, 2014 and December 31, 2013, the Company had a payable of $39 million and $36 million, respectively, related to accrued interest and penalties.

The Company or one or more of its subsidiaries 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 state jurisdictions. The IRS had previously completed its field examination of the 1997 through 2007 tax returns in recent years. 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 the Company’s 2008 and 2009 tax returns in the first quarter of 2014. The IRS is in the process of completing the audits of the Company’s income tax returns for 2010 through 2011 and expects these audits to be completed in 2014. The Company or certain of its subsidiaries’ state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2011 and remain open for the years after 2011.


16.	Guarantees and Contingencies

Guarantees

The Company is required by law to be a member of the guaranty fund association in every state where it is licensed to do business. In the event of insolvency of one or more unaffiliated insurance companies, the Company could be adversely affected by the requirement to pay assessments to the guaranty fund associations. Uncertainty and volatility in the U.S. economy and financial markets in recent years have weakened the financial condition of numerous insurers, including insurers currently in receiverships, increasing the risk of triggering guaranty fund assessments.

The Company projects its cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) and the amount of its premiums written relative to the industry-wide premium in each state. The Company accrues the estimated cost of future guaranty fund assessments when it is considered probable that an assessment will be imposed, the event obligating the Company to pay the assessment has occurred and the amount of the assessment can be reasonably estimated.

The Company has a liability for estimated guaranty fund assessments and a related premium tax asset. At September 30, 2014 and December 31, 2013, the estimated liability was $13 million and $14 million, respectively. At both September 30, 2014 and December 31, 2013, the related premium tax asset was $11 million. The expected period over which guaranty fund assessments will be made and the related tax credits recovered is not known.

Contingencies

Insurance companies have been the subject of increasing regulatory, legislative and judicial scrutiny. Numerous state and federal regulatory agencies have commenced examinations and other inquiries of insurance companies regarding sales and marketing practices (including sales to older consumers and disclosure practices), claims handling, and unclaimed property and escheatment practices and procedures. With regard to an industry-wide investigation of unclaimed property and escheatment practices and procedures, the Company is responding to regulatory audits, market conduct examinations and other inquiries (including inquiries from the State of Minnesota and a multistate insurance department examination). The Company has cooperated and will continue to cooperate with the applicable regulators regarding their inquiries.

The Company is involved in the normal course of business in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory investigation, examination or proceeding that is likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity.

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RIVERSOURCE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Notwithstanding the foregoing, it is possible that the outcome of any current or future legal, arbitration or regulatory proceeding could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.

Uncertain economic conditions, heightened and sustained volatility in the financial markets and significant financial reform legislation may increase the likelihood that clients and other persons or regulators may present or threaten legal claims or that regulators increase the scope or frequency of examinations of the Company or the insurance industry generally.

In September 2010, the California Department of Insurance (“CA DOI”) issued an Order to Show Cause administrative action against RiverSource Life Insurance Company alleging that certain claims handling practices reviewed in connection with a 2007-2008 market conduct exam did not comply with applicable law. In August 2014, RiverSource Life Insurance Company and the CA DOI reached agreement in principle to settle all pending allegations for $800,000, with the exception of a single allegation related to certain coverage determinations made under long term care insurance policies issued between 1989-1992. An administrative hearing on this remaining allegation is scheduled to conclude in November 2014. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter given the procedural status of the matter, the lack of specific penalty allegations, and the difficulty of predicting outcomes in these administrative proceedings which involve multiple phases and appellate procedures.


ITEM 2.	MANAGEMENT’S NARRATIVE ANALYSIS

The following narrative analysis of RiverSource Life Insurance Company’s consolidated financial condition and results of operations should be read in conjunction with the “Forward-Looking Statements” that follow and RiverSource Life Insurance Company’s Consolidated Financial Statements and Notes presented in Item 1. RiverSource Life Insurance Company and its subsidiaries are referred to collectively in this From 10-Q as the “Company”. The Company’s narrative analysis should be read in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on February 27, 2014 (“2013 10-K”), as well as any current reports on Form 8-K and other publicly available information.

The Company follows U.S. generally accepted accounting principles (“GAAP”), and the following discussion is presented on a consolidated basis consistent with GAAP.

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.

Overview

RiverSource Life Insurance Company is a stock life insurance company with one wholly owned stock life insurance company subsidiary, RiverSource Life Insurance Co. of New York (“RiverSource Life of NY”). RiverSource Life Insurance Company is a wholly owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”).


•	RiverSource Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuity products.


•	RiverSource Life of NY is domiciled and holds a Certificate of Authority in New York. RiverSource Life of NY issues insurance and annuity products.

RiverSource Life Insurance Company also wholly owns RiverSource Tax Advantaged Investments, Inc. (“RTA”). RTA is a stock company domiciled in Delaware and is a limited partner in affordable housing partnership investments.

Critical Accounting Policies

The accounting and reporting policies that the Company uses affect its Consolidated Financial Statements. Certain of the Company’s accounting and reporting policies are critical to an understanding of the Company’s financial condition and results of operations. In some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of the Consolidated Financial Statements. These accounting policies are discussed in detail in “Management’s Narrative Analysis — Critical Accounting Policies” in the Company’s 2013 10-K.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements and their expected impact on the Company’s future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements.

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RIVERSOURCE LIFE INSURANCE COMPANY

Consolidated Results of Operations for the Nine Months Ended September 30, 2014 and 2013

The following table presents the Company’s consolidated results of operations:



	Nine Months Ended September 30,
	2014		2013		Change
	(in millions, except percentages)
Revenues
Premiums	$	319	$	320	$	(1	)	—	%
Net investment income	975		1,067		(92		)	(9	)
Policy and contract charges	1,357		1,274		83			7
Other revenues	292		266		26			10
Net realized investment gains	12		3		9			NM
Total revenues	2,955		2,930		25			1
Benefits and expenses
Benefits, claims, losses and settlement expenses	750		839		(89		)	(11	)
Interest credited to fixed accounts	529		600		(71		)	(12	)
Amortization of deferred acquisition costs	226		102		124			NM
Other insurance and operating expenses	560		555		5			1
Total benefits and expenses	2,065		2,096		(31		)	(1	)
Pretax income	890		834		56			7
Income tax provision	125		143		(18		)	(13	)
Net income	$	765	$	691	$	74		11	%

NM Not Meaningful.

Overview

In the third quarter of the year, management conducts its annual review of insurance and annuity valuation assumptions, relative to current experience and management expectations. To the extent that expectations change as a result of this review, management updates valuation assumptions and the impact is reflected as part of its annual review of insurance and annuity valuation assumptions and modeling changes (“unlocking”). The unlocking impact in the third quarter of 2014 primarily reflected the difference between the Company’s previously assumed interest rates versus the continued low interest rate environment, partially offset by a benefit from updating the Company's variable annuity living benefit withdrawal utilization assumption. The unlocking impact in the prior year period primarily reflected the impact of assumed interest rates and changes in assumed policyholder behavior.

Net income increased $74 million or 11% to $765 million for the nine months ended September 30, 2014 compared to $691 million for the prior year period. Pretax income increased $56 million or 7% to $890 million for the nine months ended September 30, 2014 compared to $834 million for the prior year period primarily reflecting the impact of market appreciation, a $40 million benefit from policyholder movement of investments in Portfolio Navigator (traditional asset allocation) funds under certain in force variable annuities with living benefit guarantees to the Portfolio Stabilizer (managed volatility) funds, and the market impact on variable annuity guaranteed benefits (net of hedges and the related deferred acquisition costs (“DAC”) and deferred sales inducement costs (“DSIC”) amortization) partially offset by a $109 million decrease from unlocking and the negative impact from spread compression in the Company’s fixed insurance and the fixed portion of variable annuities and variable insurance contracts. The market impact on variable annuity guaranteed benefits (net of hedges and the related DAC and DSIC amortization) was an expense of $51 million for the nine months ended September 30, 2014, which included a $2 million expense associated with policyholder movement of investments in Portfolio Navigator funds under certain in force variable annuities with living benefit guarantees to the Portfolio Stabilizer funds, compared to an expense of $68 million for the prior year period which included a $17 million benefit associated with unlocking.

The Company’s variable annuity account balances increased 5% to $76.1 billion at September 30, 2014 compared to the prior year period due to market appreciation, partially offset by net outflows of $1.6 billion. The Company’s fixed annuity account balances declined 8% to $12.4 billion at September 30, 2014 compared to the prior year period reflecting expected elevated surrenders on products sold through third parties where crediting rates have reset. This decline was offset by the change in crediting rates, which decreased the level of spread compression for the nine months ended September 30, 2014. Approximately 98% of the five-year guarantee block totaling $4.1 billion has been re-priced as of September 30, 2014.

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The following table presents the total pretax impacts on the Company’s revenues and expenses attributable to unlocking and model changes for the nine months ended September 30:



Pretax Increase (Decrease)	2014			2013
	(in millions)
Policy and contract charges	$	(29	)	$	(18	)

Benefits, claims, losses and settlement expenses	6			(5		)
Amortization of DAC	8			(79		)
Total benefits and expenses	14			(84		)
Total⁽¹⁾	$	(43	)	$	66


(1)	Includes a $17 million net benefit related to the market impact on variable annuity guaranteed living benefits for the nine months ended September 30, 2013.

Revenues

Total revenues increased $25 million or 1% for the nine months ended September 30, 2014 compared to the prior year period.

Net investment income decreased $92 million or 9% to $975 million for the nine months ended September 30, 2014 compared to $1.1 billion for the prior year period reflecting a decrease in investment income on fixed maturities primarily due to lower invested assets and continued low interest rates.

Policy and contract charges increased $83 million or 7% to $1.4 billion for the nine months ended September 30, 2014 compared to $1.3 billion for the prior year period. The increase is primarily due to higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date as well as higher average fee rates. Also, the increase reflects higher separate account fees driven by higher average separate account balances due to positive market performance. Policy and contract charges for the nine months ended September 30, 2014 included a $29 million negative impact from unlocking compared to an $18 million negative impact in the prior year period. The primary driver of the unlocking impact in both periods was lower projected gains on reinsurance contracts resulting from favorable mortality experience.

Other revenues increased $26 million or 10% to $292 million for the nine months ended September 30, 2014 compared to $266 million for the prior year period reflecting higher marketing support due to higher average separate account balances driven by positive market performance.

Net realized investment gains were $12 million for the nine months ended September 30, 2014 compared to net realized investment gains of $3 million for the prior year period. In the nine months ended September 30, 2014, net realized gains of $20 million on Available-for-Sale securities due to sales, calls and tenders were partially offset by other-than-temporary impairments recognized in earnings of $5 million which primarily related to credit losses on non-agency residential mortgage backed securities and corporate debt securities. In the nine months ended September 30, 2014, there was a $2 million increase in the provision for loan losses on syndicated loans. In the nine months ended September 30, 2013, net realized gains on Available-for-Sale securities due to sales, calls and tenders were $7 million partially offset by other-than-temporary impairments recognized in earnings of $4 million which primarily related to credit losses on non-agency residential mortgage backed securities.

Benefits and Expenses

Total benefits and expenses decreased $31 million or 1% for the nine months ended September 30, 2014 compared to the prior year period primarily due to a decrease in benefits, claims, losses and settlement expenses and interest credited to fixed accounts partially offset by an increase in amortization of DAC.

Benefits, claims, losses and settlement expenses decreased $89 million or 11% to $750 million for the nine months ended September 30, 2014 compared to $839 million for the prior year period primarily reflecting the following items:

•

The nine months ended September 30, 2014 included a $6 million expense from unlocking, which included nil related to the market impact on variable annuity guaranteed benefits. The prior year period included a $5 million benefit from unlocking, which included a $22 million benefit related to the market impact on variable annuity guaranteed benefits. The market impact on variable annuity guaranteed benefits is discussed below. The unlocking impact for the nine months ended September 30, 2014 reflected the difference between the Company’s previously assumed interest rates versus the continued low interest rate environment, partially offset by a benefit from updating the Company's variable annuity living benefit withdrawal utilization assumption. The unlocking impact for the prior year period reflected the impact of assumed interest rates and changes in assumed policyholder behavior, partially offset by the impact of variable annuity model changes.

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•

A $48 million decrease in expenses from policyholder movement of investments in Portfolio Navigator funds under certain in force variable annuities with living benefit guarantees to the Portfolio Stabilizer funds, which included a $2 million expense related to the market impact on variable annuity guaranteed benefits. During the fourth quarter of 2013, the Company added Portfolio Stabilizer fund options for its in force variable annuities with living benefit guarantees.


•	A decrease in expense compared to the prior year period due to an $8 million increase in disability income reserves in the second quarter of 2013 related to prior periods.


•	A $21 million increase in expense related to higher reserve funding driven by the impact of higher fees from variable annuity guarantee sales in the prior year where the fees start on the first anniversary date.


•	A $248 million decrease in expense compared to the prior year period from the unhedged nonperformance credit spread risk adjustment on variable annuity guaranteed benefits.

•

A $221 million increase in expense from other market impacts on variable annuity guaranteed benefits, net of hedges in place to offset those risks and the related DSIC amortization. The $221 million increase was the result of an unfavorable $1.9 billion change in the market impact on variable annuity guaranteed living benefits reserves, a favorable $1.7 billion change in the market impact on derivatives hedging the variable annuity guaranteed benefits and no difference in the DSIC offset. The main market drivers contributing to these changes are summarized below:


•	Interest rates were down in 2014 and up in 2013 resulting in an unfavorable change in the variable annuity guaranteed living benefits liability, partially offset by a favorable change in the related hedge assets.


•	Equity market and volatility impacts on the hedge assets resulted in a smaller increase in expense in 2014 compared to 2013. This benefit was partially offset by an unfavorable change in 2014 compared to 2013 from equity market and volatility impacts on the related variable annuity guaranteed living benefits liability.


•	Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and various behavioral items, were a net favorable impact compared to the prior year period.

Interest credited to fixed accounts decreased $71 million or 12% to $529 million for the nine months ended September 30, 2014 compared to $600 million for the prior year period driven by lower average fixed annuity account balances and a lower average crediting rate on interest sensitive fixed annuities. Average fixed annuity account balances decreased $827 million or 6% to $12.8 billion for the nine months ended September 30, 2014 compared to the prior year period due to net outflows reflecting expected elevated surrenders on products sold through third parties where rates have been reset. The average fixed annuity crediting rate excluding capitalized interest decreased to 3.1% for the nine months ended September 30, 2014 compared to 3.6% for the prior year period reflecting the re-pricing of the five-year guarantee block.

Amortization of DAC increased $124 million to $226 million for the nine months ended September 30, 2014 compared to $102 million for the prior year period primarily reflecting the following items:

•

Amortization of DAC for the nine months ended September 30, 2014 included an $8 million expense from unlocking primarily driven by the difference between the Company’s previously assumed interest rates versus the continued low interest rate environment, partially offset by favorable persistency and mortality experience and a benefit from updating the Company's variable annuity living benefit withdrawal utilization assumption. Amortization of DAC for the prior year period included a $79 million benefit from unlocking, which included a $5 million expense related to the DAC offset to the market impact on variable annuity guaranteed living benefits, primarily driven by the impact of assumed interest rates and changes in assumed policyholder behavior.


•	An $8 million expense related to the DAC offset to the benefit from policyholder movement of investments in Portfolio Navigator funds under certain in force variable annuities with living benefit guarantees to the Portfolio Stabilizer funds.


•	The DAC offset to the market impact on variable annuity guaranteed living benefits (net of hedges and the related DSIC amortization) was a benefit of $2 million for the nine months ended September 30, 2014, compared to a benefit of $12 million in the prior year period.

Income Taxes

The Company’s effective tax rate was 14.0% for the nine months ended September 30, 2014, compared to 17.1% for the nine months ended September 30, 2013. The effective tax rates are lower than the statutory rate as a result of tax preferred items including the dividends received deduction and low income housing tax credits. The decrease in the effective tax rate for the nine months ended September 30, 2014 compared to the prior year period was the result of an $18 million benefit in the first quarter of 2014 related to the completion of an Internal Revenue Service (“IRS”) audit.

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In July 2014, the IRS issued a Large Business & International Directive (“Directive”) with respect to the hedging of variable annuity guaranteed minimum benefits. The Directive provides an elective safe harbor method of tax accounting for hedge gains and losses related to variable annuity guaranteed benefits. On October 8, 2014, the Company filed with the IRS an application for a change in accounting method, to conform, in part, to the Directive. If accepted by the IRS, the change in accounting method could have a material impact on the Company’s current and deferred income tax balances.

Market Risk

The Company’s primary market risk exposures are interest rate, equity price and credit risk. Equity price and interest rate fluctuations can have a significant impact on the Company’s results of operations, primarily due to the effects on asset-based fees and expenses, the “spread” income generated on its fixed annuities, fixed life insurance and fixed portion of its variable annuities and variable insurance contracts, the value of DAC and DSIC assets, the value of liabilities for guaranteed benefits associated with its variable annuities and the value of derivatives held to hedge these benefits.

The Company’s earnings from fixed annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts are based upon the spread between rates earned on assets held and the rates at which interest is credited to accounts. The Company primarily invests in fixed rate securities to fund the rate credited to clients. The Company guarantees an interest rate to the holders of these products. Investment assets and client liabilities generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments. Therefore, in an increasing interest rate environment, higher interest rates may be reflected in crediting rates to clients sooner than in rates earned on invested assets, which could result in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. However, the current low interest rate environment is resulting in interest rates below the level of some of the Company’s liability guaranteed minimum interest rates (“GMIRs”). Hence, a modest rise in interest rates would not necessarily result in changes to all the liability credited rates while projected asset purchases would capture the full increase in interest rates. This dynamic would result in widening spreads under a modestly rising rate scenario given the current relationship between the current level of interest rates and the underlying GMIRs on the business.

As a result of the low interest rate environment, the Company’s current reinvestment yields are generally lower than the current portfolio yield. The Company expects its portfolio income yields to continue to decline in future periods if interest rates remain low. The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans that may generate proceeds to reinvest through 2015 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, were $1.5 billion and 4.7%, respectively, as of September 30, 2014. In addition, residential mortgage-backed securities, which are subject to prepayment risk as a result of the low interest rate environment, totaled $3.6 billion and had a weighted average yield of 4.1% as of September 30, 2014. While these amounts represent investments that could be subject to reinvestment risk, it is also possible that these investments will be used to fund liabilities or may not be prepaid and will remain invested at their current yields. In addition to the interest rate environment, the mix of benefit payments versus product sales as well as the timing and volumes associated with such mix may impact the Company’s investment yield. Furthermore, reinvestment activities and the associated investment yield may also be impacted by corporate strategies implemented at management’s discretion. The average yield for investment purchases during the nine months ended September 30, 2014 was approximately 3.9%.

The reinvestment of proceeds from maturities, calls and prepayments at rates below the current portfolio yield, which may be below the level of some liability guaranteed minimum interest rates, will have a negative impact to future operating results. To mitigate the unfavorable impact that the low interest rate environment has on the Company’s spread income, it assesses reinvestment risk in its investment portfolio and monitors this risk in accordance with its asset/liability management framework. In addition, the Company may reduce the crediting rates on its fixed products when warranted, subject to guaranteed minimums. In the first nine months of 2014, the Company continued the process of setting lower renewal interest rates for a portion of its fixed annuities that are above the guaranteed minimum interest rates, which helps relieve some of the spread compression caused by low rates. Approximately 98% of the five-year guarantee block totaling $4.1 billion has been re-priced as of September 30, 2014.

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The following table presents the account values of fixed annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts by range of guaranteed minimum crediting rates and the range of the difference between rates credited to contractholders as of September 30, 2014 and the respective guaranteed minimums, as well as the percentage of account values subject to rate reset in the time period indicated. Rates are reset at the Company’s discretion, subject to guaranteed minimums.



	Account Values with Crediting Rates
	At Guaranteed Minimum			1-49 bps above Guaranteed Minimum			50-99 bps above Guaranteed Minimum			100-150 bps above Guaranteed Minimum			Greater Than 150 bps above Guaranteed Minimum			Total
Range of Guaranteed Minimum Crediting Rates	(in billions, except percentages)
Range of Guaranteed Minimum Crediting Rates
1% - 1.99%	$	0.3		$	3.1		$	0.4		$	0.3		$	0.1		$	4.2
2% - 2.99%	0.5			0.1			—			—			—			0.6
3% - 3.99%	9.4			0.1			—			—			—			9.5
4% - 5.00%	5.6			—			—			—			—			5.6
Total	$	15.8		$	3.3		$	0.4		$	0.3		$	0.1		$	19.9

Percentage of Account Values That Reset In:
Next 12 months⁽¹⁾	99		%	95		%	32		%	54		%	94		%	97		%
> 12 months to 24 months⁽²⁾	—			1			25			18			6			1
> 24 months⁽²⁾	1			4			43			28			—			2
Total	100		%	100		%	100		%	100		%	100		%	100		%


(1)	Includes contracts with annual discretionary crediting rate resets and contracts with twelve or less months until the crediting rate becomes discretionary on an annual basis.


(2)	Includes contracts with more than twelve months remaining until the crediting rate becomes an annual discretionary rate.

In addition to the fixed rate exposures noted above, the Company also has the following variable annuity guarantee benefits: guaranteed minimum withdrawal benefits (“GMWB”), guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”). Each of these guaranteed benefits guarantees payouts to the annuity holder under certain specific conditions regardless of the performance of the underlying invested assets.

The variable annuity guarantees continue to be managed by utilizing a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the liabilities. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. The Company’s comprehensive hedging program focuses mainly on first order sensitivities of assets and liabilities; Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. The Company uses various index options across the term structure, interest rate swaps and swaptions, total return swaps and futures to manage the risk exposures. The exposures are measured and monitored daily and adjustments to the hedge portfolio are made as necessary.

The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. The Company assesses the residual risk under a range of scenarios in creating and executing the macro hedge program. As a means of economically hedging these risks, the Company uses a combination of options and/or swaps. Certain of the macro hedge derivatives used contain settlement provisions linked to both equity returns and interest rates; the remaining are interest rate contracts or equity contracts. The macro hedge program could result in additional earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory capital volatility, may not be closely aligned to changes in the variable annuity guarantee embedded derivatives.

To evaluate interest rate and equity price risk, the Company performs sensitivity testing which measures the impact on pretax income from the sources listed below for a 12-month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuity riders, equity indexed annuities, indexed universal life insurance and the associated hedge assets, the Company assumed no change in implied market volatility despite the 10% drop in equity prices.

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RIVERSOURCE LIFE INSURANCE COMPANY

The following tables present the Company’s estimate of the impact on pretax income from the above defined hypothetical market movements as of September 30, 2014:



	Equity Price Exposure to Pretax Income
Equity Price Decline 10%	Before Hedge Impact			Hedge Impact			Net Impact
	(in millions)
Asset-based fees and expenses	$	(82	)	$	—		$	(82	)
DAC and DSIC amortization^(1) (2)	(99		)	—			(99		)
Variable annuity riders:
GMDB and GMIB⁽²⁾	(100		)	—			(100		)
GMWB	(229		)	216			(13		)
GMAB	(35		)	32			(3		)
DAC and DSIC amortization⁽³⁾	N/A			N/A			3
Total variable annuity riders	(364		)	248			(113		)
Macro hedge program⁽⁴⁾	—			4			4
Equity indexed annuities	1			(1		)	—
Indexed universal life insurance	14			(18		)	(4		)
Total	$	(530	)	$	233		$	(294	)



	Interest Rate Exposure to Pretax Income
Interest Rate Increase 100 Basis Points	Before Hedge Impact			Hedge Impact			Net Impact
	(in millions)
Asset-based fees and expenses	$	(24	)	$	—		$	(24	)
Variable annuity riders:
GMDB and GMIB	—			—			—
GMWB	653			(722		)	(69		)
GMAB	24			(27		)	(3		)
DAC and DSIC amortization⁽³⁾	N/A			N/A			7
Total variable annuity riders	677			(749		)	(65		)
Macro hedge program⁽⁴⁾	—			—			—
Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products	45			—			45
Indexed universal life insurance	23			1			24
Total	$	721		$	(748	)	$	(20	)


N/A	Not Applicable.


(1)	Market impact on DAC and DSIC amortization resulting from lower projected profits.

(2)

In estimating the impact on DAC and DSIC amortization resulting from lower projected profits, the Company has not changed its assumed equity asset growth rates. This is a significantly more conservative estimate than if the Company assumed management follows its mean reversion guideline and increased near-term rates to recover the drop in equity values over a five-year period. The Company makes this same conservative assumption in estimating the impact from GMDB and GMIB riders.


(3)	Market impact on DAC and DSIC amortization related to variable annuity riders is modeled net of hedge impact.


(4)	The market impact of the macro hedge program is modeled net of any related impact to DAC and DSIC amortization.

The above results compare to an estimated negative net impact to pretax income of $252 million related to a 10% equity price decline and an estimated negative net impact to pretax income of $55 million related to a 100 basis point increase in interest rates as of December 31, 2013.

Net impacts shown in the above table from GMWB and GMAB riders result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with risk margins incorporated in contractholder behavior assumptions and with discount rates increased to reflect a current market estimate of the Company’s risk of nonperformance specific to these liabilities. The nonperformance spread risk is not hedged.

Actual results could differ materially from those illustrated above as they are based on a number of estimates and assumptions. These include assuming that implied market volatility does not change when equity prices fall by 10%, that management does not increase assumed equity asset growth rates to anticipate recovery of the drop in equity values when valuing DAC, DSIC and GMDB and GMIB liability values and that the 100 basis point increase in interest rates is a parallel shift of the yield curve.

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Furthermore, the Company has not tried to anticipate changes in client preferences for different types of assets or other changes in client behavior, nor has the Company tried to anticipate actions management might take to increase revenues or reduce expenses in these scenarios.

The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices may not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.

Fair Value Measurements

The Company reports certain assets and liabilities at fair value; specifically, separate account assets, derivatives, embedded derivatives, most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale. The Company includes actual market prices, or observable inputs, in its fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. The Company validates prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 11 to the Consolidated Financial Statements for additional information on the Company’s fair value measurements.

Fair Value of Liabilities and Nonperformance Risk

Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for the Company’s obligations of its variable annuity riders and indexed universal life insurance, the Company considers the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, the Company adjusts the valuation of variable annuity riders and indexed universal life insurance by updating certain contractholder assumptions, adding explicit margins to provide for profit, risk and expenses, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of the Company’s nonperformance risk. The nonperformance risk adjustment is based on broker quotes for credit default swaps that are adjusted to estimate the risk of the Company not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the LIBOR swap curve as of September 30, 2014. As the Company’s estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the LIBOR swap curve, the reduction to net income would be approximately $120 million, net of DAC, DSIC, unearned revenue amortization, the reinsurance accrual and income taxes (calculated at the statutory tax rate of 35%), based on September 30, 2014 credit spreads.

Liquidity and Capital Resources

Liquidity Strategy

The liquidity requirements of the Company are generally met by funds provided by investment income, maturities and periodic repayments of investments, fixed annuity and fixed insurance deposits, premiums and proceeds from sales of investments as well as capital contributions from Ameriprise Financial. Other liquidity sources the Company has established are short-term borrowings and available lines of credit with Ameriprise Financial aggregating $1 billion.

The Company enters into short-term borrowings, which may include repurchase agreements and Federal Home Loan Bank (“FHLB”) advances to reduce reinvestment risk from higher levels of expected annuity net cash flows. Short-term borrowings allow the Company to receive cash to reinvest in longer-duration assets, while paying back the short-term debt with cash flows generated by the fixed income portfolio. The balance of repurchase agreements at both September 30, 2014 and December 31, 2013 was $50 million which is collateralized with agency residential mortgage backed securities and commercial mortgage backed securities from the Company’s investment portfolio. RiverSource Life Insurance Company is a member of the FHLB of Des Moines, which provides RiverSource Life Insurance Company access to collateralized borrowings. At September 30, 2014 and December 31, 2013, the Company had borrowings of $150 million and $450 million, respectively, from the FHLB which is collateralized with commercial mortgage backed securities.

The outstanding balance under the lines of credit with Ameriprise Financial was nil and $150 million at September 30, 2014 and December 31, 2013, respectively. See Note 9 to the Consolidated Financial Statements for additional information on the lines of credit.

The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.

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Capital Activity

Dividends paid and received by RiverSource Life Insurance Company were as follows:



	Nine Months Ended September 30,
	2014		2013
	(in millions)
Cash dividends paid to Ameriprise Financial	$	500	$	675
Cash dividends received from RiverSource Life of NY	24		25

During the nine months ended September 30, 2014 and 2013, RiverSource Life Insurance Company made a cash contribution to RTA of $15 million and $30 million, respectively, for ongoing funding commitments related to affordable housing partnership investments.

Regulatory Capital

RiverSource Life Insurance Company and RiverSource Life of NY are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements for each of the life insurance entities are as follows:



	Actual Capital^(a)				Regulatory Capital Requirement^(b)
	September 30, 2014		December 31, 2013		December 31, 2013
			(in millions)
RiverSource Life Insurance Company	$	3,412	$	2,747	$	591
RiverSource Life Insurance Co. of New York	297		251		49


(a)	Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves.


(b)	Regulatory capital requirement is based on the statutory risk-based capital filing.

Contractual Commitments

There have been no material changes to the Company’s contractual obligations disclosed in the Company’s 2013 10-K.

Forward-Looking Statements

This report contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:


•	statements of the Company’s plans, intentions, expectations, objectives, or goals, including those related to the introduction, cessation, terms or pricing of new or existing products and services and the consolidated tax rate;


•	other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and


•	statements of assumptions underlying such statements.

The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on 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.

Such factors include, but are not limited to:


•	conditions in the interest rate, credit default, equity market and foreign exchange environments, including changes in valuations, liquidity and volatility;

•

changes in and the adoption of relevant accounting standards and securities rating agency standards and processes, as well as changes in the litigation and regulatory environment, including ongoing legal proceedings and regulatory actions, the frequency and extent of legal claims threatened or initiated by clients, other persons and regulators, and developments in regulation and legislation, including the rules and regulations implemented or to be implemented in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act;


•	the Company’s investment management performance and consumer acceptance of the Company’s products;


•	effects of competition in the financial services industry, including pricing pressure, the introduction of new products and services and changes in product distribution mix and distribution channels;

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•	changes to the Company’s reputation that may arise from employee or Ameriprise Financial Services, Inc. advisor misconduct, legal or regulatory actions, improper management of conflicts of interest or otherwise;


•	the Company’s capital structure as a subsidiary of Ameriprise Financial, including the ability of its parent to support its financial strength and ratings, as well as the opinions of rating agencies and other analysts or the Company’s regulators distributors or policyholders and contractholders in response to any change or prospect of change in any such opinion;

•

risks of default, capacity constraints or repricing by issuers or guarantors of investments the Company owns or by counterparties to hedge derivative, insurance or reinsurance arrangements, experience deviations from the Company’s assumptions regarding such risks, the evaluations or the prospect of changes in evaluations of any such third parties published by rating agencies or other analysts and the reactions of other market participants or the Company’s regulators, distribution partners or customers in response to any such evaluation or prospect of changes in evaluation;


•	experience deviations from the Company’s assumptions regarding morbidity, mortality and persistency in certain annuity and insurance products, or from assumptions regarding market returns assumed in valuing or unlocking DAC and DSIC or market volatility underlying the Company’s valuation and hedging of guaranteed benefit annuity riders;


•	successfully cross-selling insurance and annuity products and services to Ameriprise Financial’s customer base;


•	the Company’s ability to effectively hedge risks relating to guaranteed benefit riders and certain other products;


•	the impact of intercompany allocations to the Company from Ameriprise Financial and its affiliates;


•	Ameriprise Financial’s ability to attract, recruit and retain qualified advisors and employees and its ability to distribute the Company’s products through current and future distribution channels;


•	changes in capital requirements that may be indicated, required or advised by regulators or rating agencies;


•	the impacts of Ameriprise Financial’s efforts to improve distribution economics and realize benefits from reengineering and tax planning;


•	interruptions or other failures in the Company’s communications, technology and other operating systems, including errors or failures caused by third party service providers, interference or failures caused by third party attacks on the Company’s systems, or the failure to safeguard the privacy or confidentiality of sensitive information and data on such systems; and

•

general economic and political factors, including consumer confidence in the economy, the ability and inclination of consumers generally to invest, as well as their ability and inclination to invest in financial instruments and products other than cash and cash equivalents, the costs of products and services the Company consumes in the conduct of its business, and applicable legislation and regulation and changes therein, including tax laws, tax treaties, fiscal and central government treasury policy, and policies regarding the financial services industry and regulatory rulings and pronouncements.

The Company cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that the Company is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statements. The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion included in Part I, Item 1A of the Company’s 2013 10-K.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company 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 Securities and Exchange Commission regulations, including controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its principal 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, the Company’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.

The Company’s management, under the supervision and with the participation of the Company’s principal executive officer and chief financial officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable level of assurance as of September 30, 2014.

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RIVERSOURCE LIFE INSURANCE COMPANY

Changes in Internal Control over Financial Reporting

There have not been any changes in RiverSource Life Insurance Company’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, RiverSource Life Insurance Company’s internal control over financial reporting.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

The information set forth in Note 16 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 RiverSource Life Insurance Company’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.

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RIVERSOURCE LIFE INSURANCE 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.



		RIVERSOURCE LIFE INSURANCE COMPANY
		(Registrant)

Date:	November 3, 2014	By	/s/ John R. Woerner
			John R. Woerner
			Chairman and President


Date:	November 3, 2014	By	/s/ Brian J. McGrane
			Brian J. McGrane
			Executive Vice President and
			Chief Financial Officer

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RIVERSOURCE LIFE INSURANCE COMPANY

EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report:



Exhibit		Description


3.1	Copy of Certificate of Incorporation of IDS Life Insurance Company, filed as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976, is incorporated by reference.


3.1.1	Copy of Certificate of Amendment of Certificate of Incorporation of IDS Life Insurance Company dated June 22, 2006, filed as Exhibit 3.1 to Form 8-K filed on January 5, 2007, is incorporated by reference.


3.2	Copy of Amended and Restated By-Laws of RiverSource Life Insurance Company dated June 22, 2006, filed as Exhibit 27(f)(2) to Post-Effective Amendment No. 28 to Registration Statement No. 333-69777, is incorporated by reference.


10.1*	Copy of Amendment No. 1 to the Amended and Restated Management, Service & Marketing Support Agreement by and between Columbia Management Investments Advisers, LLC, Columbia Management Investment Services Corp. and RiverSource Life Insurance Company effective October 1, 2014.


31.1*	Certification of John R. Woerner, Chairman and President, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.


31.2*	Certification of Brian J. McGrane, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.


32*	Certification of John R. Woerner, Chairman and President, and Brian J. McGrane, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

The following materials from RiverSource Life Insurance Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three months and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Shareholder’s Equity for the nine months ended September 30, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (vi) Notes to the Consolidated Financial Statements.

______________________________________


*	Filed electronically herewith.

E-1

RIVERSOURCE LIFE INSURANCE CO - FORM 10-Q - November 3, 2014

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RIVERSOURCE LIFE INSURANCE CO Reports