**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-K**

----

 

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |
|-------|-------------------------------------------------------------------------------------------------------|

**Forthe fiscal year ended December 31, 2007**

**OR**

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from                to                **

 

**Commissionfile number 333-114888**

 

**RIVERSOURCELIFE INSURANCE COMPANY**

(Exact name ofregistrant 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** |

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes o No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Act.

Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  [Not Applicable]

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 
| Large  accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x                       |   | Smaller reporting  company o |
|----------------------------|--------|----------------------|--------|------------------------------------------------|--------|------------------------------|
|                       |   |                 |   | (Do not check if  a smaller reporting company) |   |                         |

                                                                                                                            

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                              | ** ** | **Outstanding  at February 29, 2008** |
|----------------------------------------|------------|--------------------------------------------|
| Common Stock (par value $30 per share) |       | 100,000****shares                          |

 

All outstanding shares ofthe registrant are directly owned by Ameriprise Financial, Inc.

 

THE REGISTRANT MEETS THECONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) and (b) OFFORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCEDDISCLOSURE FORMAT.

 

 

----

 

**TABLEOF CONTENTS**

 
| **Form 10-K  Item Number** | ** **                                                                                                          | **Page**   |
|---------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** **                                                                                                          | ** ** |
| **PART I**                 |                                                                                                                |       |
| 1.                              | Business                                                                                                            | 1          |
| 1A.                             | Risk Factors                                                                                                        | 7          |
| 1B.                             | Unresolved Staff  Comments                                                                                          | 15         |
| 2.                              | Properties                                                                                                          | 15         |
| 3.                              | Legal Proceedings                                                                                                   | 15         |
| 4.                              | Submission of  Matters to a Vote of Security Holders                                                                | 15         |
| **PART II**                |                                                                                                                |       |
| 5.                              | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 15         |
| 6.                              | Selected Financial Data                                                                                             | 15         |
| 7.                              | Management’s  Narrative Analysis                                                                               | 16         |
| 7A.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 29         |
| 8.                              | Financial  Statements and Supplementary Data                                                                        | 30         |
| 9.                              | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure                               | 69         |
| 9A(T).                          | Controls and Procedures                                                                                             | 69         |
| 9B.                             | Other Information                                                                                                   | 70         |
| **PART III**               |                                                                                                                |       |
| 10.                             | Directors and Executive Officers of the  Registrant                                                                 | 70         |
| 11.                             | Executive Compensation                                                                                              | 70         |
| 12.                             | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     | 70         |
| 13.                             | Certain Relationships and Related  Transactions, and Director Independence                                          | 70         |
| 14.                             | Principal Accountant Fees and Services                                                                              | 70         |
| **PART IV**                |                                                                                                                |       |
| 15.                             | Exhibits and Financial Statement  Schedules                                                                         | 71         |
|                            | Signatures                                                                                                          | 72         |
|                            | Exhibit Index                                                                                                  | E-1        |

 

 

----

 

**PART I**

 

**ITEM1.  BUSINESS**

 

**Introduction**

 

RiverSource Life Insurance Company is a stock lifeinsurance company with one wholly owned operating subsidiary, RiverSource LifeInsurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is awholly owned subsidiary of Ameriprise Financial, Inc. (“AmeripriseFinancial”).

 

·                  RiverSource Life Insurance Company is domiciled inMinnesota and holds Certificates of Authority in American Samoa, the Districtof Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuityproducts.

 

·                  RiverSource Life of NY is a stock life insurancecompany domiciled in New York, which holds Certificates of Authority in NewYork, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.

 

RiverSource Life Insurance Company and its subsidiaryare referred to collectively in this Form 10-K as “RiverSource Life”.

 

A majority of RiverSourceLife’s business is sold through the retail distribution channel of AmeripriseFinancial Services, Inc., a subsidiary of Ameriprise Financial.  RiverSource Distributors, Inc., asubsidiary of Ameriprise Financial, serves as the principal underwriter anddistributor of variable annuity and life insurance products issued byRiverSource Life.

 

Ameriprise Financial wasformerly a wholly owned subsidiary of American Express Company (“AmericanExpress”).  On February 1, 2005, theAmerican Express Board of Directors announced its intention to pursue thedisposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”)through a tax-free distribution to American Express shareholders.  Effective as of the close of business on September 30,2005, American Express completed the Separation and the distribution ofAmeriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution,Ameriprise Financial entered into certain agreements with American Express toeffect the Separation and to define the responsibility for obligations arisingbefore and after the date of the Distribution, including, among others,obligations relating to transition services, taxes, and employees.  RiverSource Life was allocated certainexpenses incurred as a result of Ameriprise Financial becoming an independentcompany.  The separation from AmericanExpress is now complete.

 

Currently, AmeripriseFinancial uses two brand names for its businesses:  Ameriprise Financial and RiverSource.  The RiverSource brand is used for annuity andlife insurance products.

 

**Annuities:Product Features and Risks**

 

RiverSource Life offersboth deferred variable and fixed annuity products to a broad range of consumersthrough multiple distribution channels. Deferred variable and fixed annuities are products where assetsaccumulate until the contract is surrendered, the contractholder (or in somecontracts, the annuitant) dies, or the contractholder or annuitant beginsreceiving benefits under an annuity payout option. RiverSource Life also offersimmediate annuities in which payments begin within one year of issue andcontinue for life or for a fixed period of time.

 

RiverSource Life is oneof the largest issuers of annuities in the United States.  For the nine months ended September 30,2007, its variable annuity products ranked ninth in new sales of variableannuities according to Morningstar Annuity Research Center.  RiverSource Life had fixed and variableannuity cash sales in 2007 of $11.2 billion, an increase of more than 4% from2006 as a result of an increase in variable annuities sales, partially offsetby a decline in fixed annuity sales.  Therelative proportion between fixed and variable annuity sales is generallydriven by the relative performance of the equity and fixed income markets.  In times of lackluster performance in equitymarkets, fixed sales are generally stronger. In times of superior performance in equity markets, variable sales aregenerally stronger.  The relativeproportion between fixed and variable annuity sales is also influenced byproduct design and other factors.

 

RiverSource Life receivesfees charged on assets allocated to its separate accounts. These fees areimpacted by both market movements and net asset flows.  Profitability of the annuity business issignificantly impacted by the spread between net investment income and interestcredited to fixed accounts.

 

1

----

 

 

**VariableAnnuities**

A variable annuityprovides a contractholder with investment returns linked to underlyinginvestment accounts of the contractholder’s choice.  Most variable annuity products inforce offera fixed account investment option with guaranteed minimum interest creditingrates ranging up to 4.0% as of December 31, 2007.

 

Contract purchasers canchoose to add various optional benefit provisions to their contracts to meettheir needs.  These include enhancedguaranteed minimum death benefit (“GMDB”), guaranteed minimum withdrawalbenefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”)provisions.  In 2007, RiverSource Lifeintroduced a new variable annuity feature called *SecureSource* rider, an updated version of the optional guaranteed lifetimewithdrawal benefit rider that provides for joint as well as singlecoverage.  In general, these provisionscan help protect contractholders and beneficiaries from a shortfall in death orliving benefits due to a decline in the value of their underlying investmentaccounts.

 

The majority of thevariable annuity contracts RiverSource Life offers contain GMDBprovisions.  RiverSource Life’slargest-selling variable annuities are the RiverSource Retirement Advisor PlusSMseries of variable annuities, which include the RiverSource Retirement AdvisorAdvantage PlusSM Variable Annuity and the RiverSource RetirementAdvisor Select PlusSM Variable Annuity (the “Retirement Advisor PlusSMVariable Annuities”).  Under theRetirement Advisor PlusSM Variable Annuities, the standard GMDBprovides that if the contractholder is age 75 or younger on the date thecontract is issued, the beneficiary will receive the greater of (i) contractvalue less any purchase payment credits subject to recapture less a pro-rataportion of any rider fees, or (ii) purchase payments minus adjustedpartial surrenders.  If thecontractholder is age 76 or older at contract issue, the beneficiary willreceive the contract value, less any purchase payment credits subject torecapture and less a pro-rata portion of any rider fees.

 

Additional optional GMDBsare also available.  For example,RiverSource Retirement Advisor Advantage PlusSM Variable Annuitycontractholders age 76 or older at contract issue may purchase the optionalReturn of Purchase Payment Death Benefit for an additional charge which addsthe return of purchase payments less adjusted partial surrenders to thestandard death benefit.

 

Contractholders may alsopurchase a maximum anniversary value death benefit or a five-year maximumanniversary value death benefit for an additional charge.  These death benefit riders guarantee to paythe beneficiary the maximum account value on any contract anniversary or anyfifth contract anniversary, plus subsequent purchase payments less adjustedpartial surrenders.

 

RiverSource Life’scontractholders also may purchase an enhanced earnings death benefit or anenhanced earnings plus death benefit for an additional charge.  These death benefit riders are intended toprovide additional benefits to offset expenses after the contractholder’sdeath.

 

Available features forannuity products also include the GMWB and GMWB for life.  The GMWB is designed to protect the contractholder’s principal byallowing the client to withdraw the principal over a period of time, regardlessof the investment performance of the contract. The GMWB for life is an enhanced benefit that also allows periodicwithdrawals for the life of the policyholder, regardless of the investmentperformance of the contract.

 

Variable annuity contractholders can also obtain a lump sum principal-backguarantee by purchasing the optional GMAB rider for an additional charge.  The GMAB provides a guaranteed contract valueat the end of a ten-year waiting period regardless of the investmentperformance of the contract.  Theguarantee is equal to the greater of the total amount of purchase payments madeor 80% of the highest anniversary value, adjusted for any withdrawals.

 

Certain variable annuity contracts contain a guaranteed minimum income benefit (“GMIB”)feature which, after a stipulated waiting period from contract issuance,guarantees a minimum lifetime annuity based on predetermined annuity purchaserates that may be in excess of what the contract account value can purchase atthen-current annuity purchase rates. RiverSource Life bears the risk that protracted under-performance of thefinancial markets could result in GMIB being higher than what accumulatedcontractholderaccount balances would support. In May 2007, RiverSource Life ceased offeringcontracts with GMIB provisions.

 

RiverSource Life earns fee-based revenue in the form ofmortality and expense risk fees, marketing support and administrative fees,fees charged for optional features elected by the contractholder and anysurrender or withdrawal charges.

 

The general accountassets of RiverSource Life support the contractual obligations under theguaranteed benefit provisions (see “General and Separate Account Assets —General Account” below).  As a result,RiverSource Life bears the risk that protracted under-performance of thefinancial markets could result in guaranteed benefit payments being higher thanwhat current account values would support. RiverSource Life’s exposure to risk from guaranteed benefits generallywill increase when equity markets decline.

 

 

2

----

 

 

**FixedAnnuities**

RiverSource Life’s fixedannuity products provide a contractholder with cash value that increases by afixed or indexed interest rate.  Fixedrates are periodically reset at the discretion of RiverSource Life, subject tocertain policy terms establishing minimum guaranteed interest crediting rates.  RiverSource Life’s earnings from fixed annuitiesare based upon the spread between rates earned on assets purchased with fixedannuity deposits and the rates at which interest is credited to its fixedannuity contracts.  In 2007, RiverSourceLife discontinued new sales of equity indexed annuities.

 

RiverSource Life resetsinterest rates based on a number of factors, including interest rate scenariomodels and risk/return measures.  Thefixed annuity contracts inforce provide guaranteed minimum interest creditingrates ranging from 1.5% to 5.0% as of December 31, 2007.  New contracts issued provide guaranteedminimum interest rates in compliance with state laws providing for indexedguaranteed rates.

 

**Insurance:Product Features and Risks**

 

RiverSource Life issuesboth variable and fixed universal life insurance, traditional whole and termlife insurance and disability income (“DI”) insurance.  Universal life insurance is a form ofpermanent life insurance characterized by its flexible premiums, its flexibledeath benefit amounts and its unbundling of the pricing factors (i.e.,mortality, interest and expenses). Traditional life insurance refers to whole and term life insurancepolicies that pay a specified sum to a beneficiary upon death of the insuredfor a fixed premium.  Variable universallife insurance combines the premium and death benefit flexibility of universallife with underlying fund investment flexibility and the risks associatedtherewith.

 

RiverSource Life’s salesof individual life insurance in 2007, as measured by scheduled annual premiums,lump sum and excess premiums, consisted of 79% variable universal life, 16%fixed universal life and 5% traditional life. RiverSource Life issues only non-participating life insurance policies,which do not pay dividends to policyholders from the insurers’ earnings. One ofthe major risks inherent in life insurance is the risk that mortality will begreater than anticipated. As discussed below, reinsurance is critical forRiverSource Life to mitigate this risk.

 

**VariableUniversal Life Insurance**

RiverSource Life’sbest-selling life insurance products are variable universal life insurancepolicies.  Variable universal lifeinsurance provides life insurance coverage along with investment returns linkedto underlying investment accounts of the policyholder’s choice.  Options include RiverSource VariablePortfolio Funds as well as variable portfolio funds of other companies.  Most variable universal life insuranceproducts inforce offered a fixed account investment option with guaranteedminimum interest crediting rates ranging from 3.0% to 4.5% as of December 31,2007.  RiverSource Life Insurance Companyranked fourth in sales of variable universal life based on total premiums(according to the Tillinghast Towers-Perrin ValueTM Survey, dated September 30,2007, the most recent report available). RiverSource Life’s major source of revenue from variable universal lifeinsurance is cost of insurance and other charges.

 

**Fixed Universal Life Insuranceand Traditional Whole Life Insurance**

Fixed universal life andtraditional whole life insurance policies do not subject the policyholder tothe investment risks associated with variable universal life insurance.

 

RiverSource Life’s fixeduniversal life insurance products provide life insurance coverage and cash valuethat increases by a fixed interest rate. The rate is periodically reset at the discretion of RiverSource Lifesubject to certain policy terms relative to minimum interest crediting rates.  Universal life insurance products inforceprovided guaranteed minimum interest crediting rates ranging from 3.0% to 5.0%as of December 31, 2007.

 

RiverSource Life alsooffers non-participating traditional whole life insurance, which combines adeath benefit with a cash value that generally increases gradually in amountover a period of years and does not pay a dividend.  RiverSource Life has sold very littletraditional whole life insurance in recent years.

 

**Term Life Insurance**

Term life insurance onlyprovides a death benefit, does not build up cash value and does not pay adividend.  The policyholder chooses theterm of coverage with guaranteed premiums at the time of issue.  During the chosen term, RiverSource Lifecannot raise premium rates even if claims experience deteriorates.  At the end of the chosen term, coverage maycontinue with higher premiums until the maximum age is attained, at which pointthe policy expires with no value.

 

**DisabilityIncome Insurance**

DI insurance providesmonthly benefits to individuals who are unable to earn income at either theiroccupation at time of disability (“own occupation”) or at any suitableoccupation (“any occupation”) for premium payments that are guaranteed not to 

 

 

3

----

 

 

change.  Depending upon occupational and medicalunderwriting criteria, applicants for DI insurance can choose “own occupation”and “any occupation” coverage for varying benefit periods.  In 2007, RiverSource Life made available newRiverSource Income Protection and RiverSource Income Protection Plus products,which provide “own occupation” and “any occupation” coverage, respectively,with varying benefit periods up to age 67. In some states, applicants may also choose various benefit provisions tohelp them integrate individual DI insurance benefits with social security orsimilar benefit plans and to help them protect their DI insurance benefits fromthe risk of inflation.  For the ninemonths ended September 30, 2007, RiverSource Life was ranked as theseventh largest provider of individual (non-cancelable) DI insurance based onpremiums (according to LIMRA International®).

 

**LongTerm Care Insurance**

As of December 31,2002, RiverSource Life discontinued underwriting long term care (“LTC”)insurance.  Although new product saleswere discontinued in the fourth quarter of 2002, RiverSource Life generallyretained 50% of the risk on existing contracts and ceded the remaining 50% ofthe risk on a coinsurance basis to affiliates of Genworth Financial, Inc.(“Genworth”).  In addition, in May 2003,RiverSource Life began outsourcing claims administration on its existing blockof LTC policies to Genworth.

 

Beginning in 2004,RiverSource Life Insurance Company and RiverSource Life of NY filed forapproval to implement rate increases on most of their existing block of nursinghome-only indemnity LTC insurance policies. Implementation of these rate increases began in early 2005 and so farapprovals have been received for some or all requested increases in 47 states,with an average approved rate increase of 29.4% of premium on all such policieswhere an increase was requested.

 

Beginning in 2007,RiverSource Life Insurance Company and RiverSource Life of NY filed forapproval to implement rate increases on most of their existing block ofcomprehensive reimbursement LTC insurance policies.  Implementation of these rate increases beganin late 2007 and so far approvals have been received for some or all requestedincreases in 41 states, with an average approved rate increase of 12.4% of premiumon all such policies where an increase was requested.

 

Additional rate increasesmay be sought with respect to these and other existing blocks of LTC insurancepolicies, in each case subject to regulatory approval.

 

**Generaland Separate Account Assets**

 

Depending on the lifeinsurance and annuity product purchased, the assets of RiverSource Life’spolicyholders and contractholders may be placed in the general account ofRiverSource Life (the “general account”) for fixed products and for the fixedaccount options under certain variable products or, in the case of variablelife insurance and variable annuity products, in separate accounts that investin underlying investment options (the “separate accounts”).

 

**General Account**

Assets in the generalaccount support all obligations of RiverSource Life other than those supportedby the separate accounts. RiverSource Life bears the investment risk of thegeneral account assets.

 

In the general account,RiverSource Life, through its investment manager, RiverSource Investments, LLC,primarily invests in fixed maturity securities over a broad range of maturitiesfor the purpose of providing a targeted rate of return on its investments whilecontrolling risk.  The majority of thesefixed maturity securities are interest-bearing investments such as governmentobligations, mortgage-backed obligations and various corporate debtinstruments.  RiverSource Life does notinvest in securities to generate trading profits.

 

In accordance withregulatory investment guidelines, RiverSource Life Insurance Company andRiverSource Life of NY, through their respective boards of directors or boardof directors’ investment committees or staff functions, review modelsprojecting different interest rate scenarios, risk/return measures, and theireffect on profitability in order to guide the management of the general accountassets.  They also review thedistribution of assets in the portfolio by type and credit risk sector.  The objective is to structure the investmentsecurities portfolio in the general account to meet contractual obligationsunder the insurance and annuity products and achieve targeted levels ofprofitability within defined risk parameters.

 

RiverSource Life has thediscretion to set the rate of interest credited to contractholders’ accountssubject to each contract’s guaranteed minimum interest crediting rate.  As of December 31, 2007, this ratevaried among fixed accounts and was as low as 1.5% and as high as 7.4%.  To the extent the yield on RiverSource Life’sinvested general account asset portfolio declines below its target spread plusthe minimum guarantee, RiverSource Life’s profitability would be negativelyaffected.

 

 

4

----

 

 

The interest ratescredited to contractholders’ fixed accounts generally reset towards newbusiness rates; therefore, margins may be negatively impacted by increases inthe general level of interest rates.  Part ofRiverSource Life’s strategy includes the use of derivatives, such as interestrate swaptions, for risk management purposes.  These derivatives help protect margins byincreasing investment returns if there is a sudden and severe rise in interestrates, thereby lessening the impact of an increase in rates credited tocontractholders’ fixed accounts. Conversely, in a low interest rate environment, margins may benegatively impacted as the interest rates available on RiverSource Life’sinvested assets approach guaranteed minimum interest rates on the insurance orannuity contracts inforce.  This negativeimpact may be compounded by the fact that many of these interest-bearinginvestments are callable or pre-payable by the issuer and calls and prepaymentsare more likely to occur in a low interest rate environment.

 

**Separate****Accounts**

Variable annuity andinsurance products offer separate account investment options. In addition, manyof these products offer fixed account options. Under the separate account option, contractholders bear the investmentrisk.  The separate accounts areregistered as unit investment trusts under the Investment Company Act of1940.  State insurance law prescribesthat separate accounts constitute a distinct operation from the general accountand as such are only available to fund the liabilities of the separate accounts.Under the subaccounts of each separate account, RiverSource Life credits orcharges income, capital gains and losses only to that subaccount.

 

Generally, the separateaccounts consist of a number of subaccounts, each of which invests in shares ofa particular fund.  Contractholders canallocate their payments among these separate subaccounts.  The underlying funds are managed both byaffiliated and unaffiliated third-party money managers.  These funds invest in portfolios containing avariety of securities including common stocks, bonds, managed assets and/orshort-term securities.  The value of thesubaccounts fluctuates with the investment return of the underlying funds inwhich the subaccounts invest.

 

RiverSource Life receivespayments from its affiliate, RiverSource Investments, LLC, for providingcertain sponsor and related servicing activity for the RiverSource VariablePortfolio Funds which are available as investment options under the variableannuity and life insurance products.  RiverSourceLife also receives revenues from assets allocated to subaccounts investing inRiverSource Variable Portfolio Funds. These revenues include shareholder services payments as well as paymentsfor marketing, administrative services, training and other services provided byRiverSource Life.

 

In addition to therevenues described above, RiverSource Life receives shareholder servicingpayments from other companies’ funds included as investment options under itsvariable annuity and life insurance products. It also receives marketing and administrative support payments from theaffiliates of other companies’ funds which are included as investment optionsin its variable annuity and life insurance products. These fees are generallybased on the level of separate account assets held in a particular fund and accordinglywill vary based on market conditions.

 

**Competition**

 

RiverSource Life competeswith other insurers and product manufacturers including insurance companies,such as Hartford Life, MetLife, Lincoln National Life and Nationwide Life, aswell as certain banks, securities brokerage firms, independent financialadvisors and other financial intermediaries that market insurance, annuities,mutual funds, retirement accounts and other financial products.

 

Competitive factorsaffecting the sale of RiverSource Life’s annuity and/or insurance productsinclude:

 

·                  financial strength ratings from agenciessuch as A.M. Best;

 

·                  the breadth, quality, design and pricingof products and services offered;

 

·                  guaranteed benefit features;

 

·                  the quality of underwriting;

 

·                  the effectiveness of advertising andpromotion campaigns;

 

·                  reputation and recognition in themarketplace;

 

·                  distribution capabilities andcompensation; and

 

·                  the quality of customer service.

 

 

5

----

 

**Regulation**

 

The Minnesota Departmentof Commerce regulates RiverSource Life Insurance Company, and the New YorkState Insurance Department (together with the Minnesota Department of Commerce,the “Domiciliary Regulators”) regulates RiverSource Life of NY.

 

In addition to beingregulated by their Domiciliary Regulators, RiverSource Life Insurance Companyand RiverSource Life of NY are regulated by each of the insurance regulators inthe states where each is authorized to transact the business of insurance.  Other states also regulate such matters as thelicensing of sales personnel and, in some cases, the underwriting, marketingand contents of insurance policies and annuity contracts.  The primary purpose of such regulation andsupervision is to protect the interests of contractholders andpolicyholders.  Financial regulation ofRiverSource Life is extensive and its financial and intercompany transactions(such as intercompany dividends, capital contributions and investment activity)are often subject to pre-notification and continuing evaluation by theDomiciliary Regulators.  Virtually allstates require participation in insurance guaranty associations which assessfees to insurance companies in order to fund claims of policyholders andcontractholders of insolvent insurance companies.

 

Because RiverSource Lifeissues variable annuity and life insurance products required to be registeredunder federal and state securities laws, many aspects of its business aresubject to extensive regulation and examination by the Securities and ExchangeCommission (“SEC”), the Financial Industry Regulatory Authority, commonlyreferred to as FINRA, and other federal and state regulatory bodies.

 

Insurance companies haverecently been the subject of increasing regulatory, legislative and judicialscrutiny.  Numerous state and federalregulatory agencies have commenced investigations regarding sales and marketingpractices (including sales to older consumers), compensation arrangements andanticompetitive activities, and market timing and late trading in connectionwith insurance, annuity and mutual fund products.  RiverSource Life has been contacted byregulatory agencies for information relating to some of these investigationsand is cooperating with those inquiries.

 

At the federal level,there is periodic interest in enacting new regulations relating to variousaspects of the insurance industry, including taxation of annuities and lifeinsurance policies, accounting procedures, the use of travel in underwriting,and the treatment of persons differently because of gender with respect toterms, conditions, rates or benefits of an insurance policy.  Adoption of any new federal regulation in anyof these or other areas could materially affect RiverSource Life’s financialcondition and results of operations.

 

**FinancialStrength Ratings**

 

RiverSource LifeInsurance Company receives ratings from independent rating agencies.  Ratings are important to maintaining publicconfidence in RiverSource Life.  Loweringof RiverSource Life’s ratings could have a material adverse affect on itsability to market its products and could lead to increased surrenders of itsproducts.  Rating agencies continuallyevaluate the financial soundness and claims-paying ability of insurancecompanies based on a number of different factors.

 

More specifically, theratings assigned are developed from an evaluation of a company’s balance sheetstrength, operating performance and business profile.  Balance sheet strength reflects a company’sability to meet its current and ongoing obligations to its contractholders andpolicyholders and includes analysis of a company’s capital adequacy.  The evaluation of operating performancecenters on the stability and sustainability of a company’s source ofearnings.  The business profile componentof the rating considers a company’s mix of business, market position and depthand experience of management.  Theratings relate to an insurer’s general account and not to the management orperformance of the separate accounts.

 

RiverSource LifeInsurance Company is currently rated “A+” (Superior) by A.M. Best Company, Inc.and its claims-paying ability/financial strength was rated “Aa3” (Excellent) byMoody’s Investors Service, Inc. (Moody’s), “AA-” (Very Strong) by Fitch,and “AA-” (Very Strong) by Standard & Poor’s.  RiverSource Life of NY does not receive anindividual rating, but receives the same rating as RiverSource Life InsuranceCompany.

 

**Reinsurance**

 

RiverSource Lifereinsures a portion of the risks associated with its life, DI and LTC insuranceproducts through reinsurance agreements with unaffiliated reinsurancecompanies.  Reinsurance is used in orderto limit losses, reduce exposure to large risks and provide additional capacityfor future growth.  To manage exposure tolosses from reinsurer insolvencies, RiverSource Life 

 

 

6

----

 

 

evaluates the financialcondition of its reinsurers prior to entering into new reinsurance treaties andon a periodic basis during the terms of the treaties.  RiverSource Life remains primarily liable asthe direct insurer on all risks reinsured.

 

Generally, RiverSourceLife reinsures 90% of the death benefit liability related to individual fixedand variable universal life and term life insurance products.  As a result, RiverSource Life typicallyretains and is at risk for, at most, 10% of each policy’s death benefit fromthe first dollar of coverage for new sales of these policies subject to thereinsurer actually paying.  RiverSourceLife began reinsuring risks at this level beginning in 2001 for term lifeinsurance and 2002 for variable and universal life insurance.  Policies issued prior to these dates are notsubject to these same reinsurance levels. Generally, the maximum amount of life insurance risk retained byRiverSource Life is $750,000 on any policy insuring a single life and $1.5million on any flexible premium survivorship variable life policy.  For existing LTC policies, RiverSource Life(and RiverSource Life of NY for 1996 and later issues) retained 50% of the riskand ceded on a coinsurance basis the remaining 50% of the risk to affiliates ofGenworth Financial, Inc.  Risk onvariable life and universal life policies is reinsured on a yearly renewableterm basis.  Risk on most term life policiesstarting in 2001 is reinsured on a coinsurance basis, a type of reinsurance inwhich the reinsurer participates proportionally in all material risks andpremiums associated with a policy.

 

Generally, RiverSourceLife retains at most $5,000 per month of risk per life on DI policies sold onpolicy forms introduced in October 2007 in most states and reinsures theremainder of the risk on a coinsurance basis with unaffiliated reinsurancecompanies.  RiverSource Life retains allrisk for new claims on DI contracts sold on other policy forms.  RiverSource Life also retains all risk onaccidental death benefit and substantially all risk associated with waiver ofpremium provisions.

 

**Risk-BasedCapital**

 

The National Associationof Insurance Commissioners (“NAIC”) defines risk-based capital (“RBC”)requirements for life insurance companies. The RBC requirements are used by the NAIC and state insurance regulatorsto identify companies that merit regulatory action designed to protectpolicyholders.  The NAIC RBC report iscompleted as of December 31 and filed annually, along with the statutoryfinancial statements.

 

RiverSource LifeInsurance Company would be subject to various levels of regulatory interventionif its total adjusted statutory capital were to fall below the RBCrequirement.  At the “company actionlevel,” defined as total adjusted capital level between 100% and 75% of the RBCrequirement, an insurer must submit a plan for corrective action with itsprimary state regulator.  The “regulatoryaction level,” which is between 75% and 50% of the RBC requirement, subjects aninsurer to examination, analysis and specific corrective action prescribed bythe primary state regulator.  If acompany’s total adjusted capital falls between 50% and 35% of its RBC requirement,referred to as “authorized control level,” the insurer’s primary stateregulator may place the insurer under regulatory control.  Insurers with total adjusted capital below35% of the requirement will be placed under regulatory control.

 

At December 31,2007, RiverSource Life Insurance Company’s company action level RBC was $442million, and the corresponding total adjusted capital was $3.0 billion, whichrepresents 683% of the company action level RBC.

 

As described above,RiverSource Life Insurance Company maintains capital well in excess of thecompany action level required by the Minnesota Department of Commerce, itsprimary regulator.

 

**ITEM1A.               RISK FACTORS**

 

If any of the followingrisks and uncertainties develops into actual events, these events could have amaterial adverse effect on RiverSource Life’s business, financial condition orresults of operations.  Based on currentinformation, the following information identifies the most significant riskfactors affecting RiverSource Life in each of these categories of risk.However, the risks and uncertainties RiverSource Life faces are not limited tothose described below. Additional risks and uncertainties which are notpresently known or which are currently believed to be immaterial may alsoadversely affect RiverSource Life’s business.

 

**RisksRelating to RiverSource Life’s Business**

 

***RiverSource Life’s financial condition and results ofoperations may be adversely affected by interest rate fluctuations and byeconomic and other factors.***

 

RiverSource Life’sfinancial condition and results of operations may be materially affected byinterest rate fluctuations and economic and other factors.  RiverSource Life’s insurance and annuityproducts are sensitive to interest rate fluctuations, and its 

 

 

7

----

 

 

future costs associatedwith such variations may differ from its historical costs.  In addition, interest rate fluctuations couldresult in fluctuations in the valuation of certain minimum guaranteed benefitscontained in some of its variable annuity products. Although RiverSource Lifetypically hedges against such fluctuations, a significant change in interestrates could have a material adverse impact on RiverSource Life’s results ofoperations.

 

During periods ofincreasing market interest rates, RiverSource Life must offer higher creditingrates on interest-sensitive products, such as fixed universal life insuranceand fixed annuities, and it must increase crediting rates on insurance andannuity products to keep these products competitive. Because returns oninvested assets may not increase as quickly as current interest rates,RiverSource Life may have to accept a lower “spread,” or the difference betweenthe returns it earns on the investments that support its obligations underthese products and the amounts that it must pay policyholders andcontractholders, and thus lower profitability or face a decline in sales andgreater loss of existing contracts and related assets.  In addition, increases in market interestrates may cause increased policy surrenders, withdrawals from life insurancepolicies and annuity contracts and requests for policy loans, as policyholdersand contractholders seek to shift assets to products with perceived higherreturns. This process may lead to an earlier than expected flow of cash out ofthe business.  Also, increases in marketinterest rates may result in extension of the maturity of some of RiverSourceLife’s investment assets.  These earlieroutflows and asset maturity extensions may require investment assets to be soldat a time when the prices of those assets are lower because of the increase inmarket interest rates, which may result in realized investment losses.  Increases in crediting rates, as well assurrenders and withdrawals, could have an adverse effect on RiverSource Life’sfinancial condition and results of operations. An increase in policy surrenders and withdrawals also may requireRiverSource Life to accelerate amortization of deferred acquisition costs (“DAC”),which would increase its expenses and reduce its net earnings.

 

During periods of fallinginterest rates, RiverSource Life’s “spread” or the difference between thereturns it earns on the investments that support its obligations under theseproducts and the amounts that it must pay policyholders and contractholders,may be reduced or could become negative, primarily because some of theseproducts have guaranteed minimum crediting rates.  Due to the long term nature of theliabilities associated with RiverSource Life’s fixed annuities and guaranteedbenefits on variable annuities, sustained declines in long term interest ratesmay subject RiverSource Life to reinvestment risks and increased hedging costs.

 

Interest ratefluctuations also could have an adverse effect on the results of RiverSourceLife’s investment portfolio. During periods of declining market interest rates,the interest RiverSource Life receives on variable interest rate investmentsdecreases. In addition, during those periods, RiverSource Life is forced toreinvest the cash it receives as interest or return of principal on itsinvestments in lower-yielding high-grade instruments or in lower-creditinstruments to maintain comparable returns. Issuers of fixed income securitiesalso may decide to prepay their obligations in order to borrow at lower marketrates, which increases the risk that RiverSource Life may have to invest thecash proceeds of these securities in lower-yielding or lower-creditinstruments.

 

The GMAB and the non-lifecontingent benefits associated with GMWB provisions offered with certainRiverSource Life variable annuities create obligations which are carried atfair value separately from the underlying host variable annuity contract.  Changes in the fair value of these GMAB andGMWB obligations are recorded through earnings with fair value calculated byestimating the present value of future benefits less applicable fees chargedfor the rider using actuarial models, which simulate various economicscenarios.  Changes in interest rates mayimpact the fair value of the GMAB and GMWB liabilities.  Although RiverSource Life typically hedgesagainst such changes, a significant change in interest rates may result in somenet adverse impact to current period financial statements.

 

For additionalinformation regarding the sensitivity of the fixed income securities inRiverSource Life’s investment portfolio to interest rate fluctuations, see “Item7 — Management’s Narrative Analysis — Risk Management.”

 

Many factors of a globalor localized nature include: political, economic and market conditions;technological changes and events; inflation; investor sentiment and confidencein the financial markets; terrorism events and armed conflicts; and naturaldisasters such as weather catastrophes and widespread health emergencies.  In addition, during periods of unfavorablemarket or economic conditions, the level of consumer investing and insuringactivity may also decrease, which may negatively impact the results ofRiverSource Life’s businesses.  Moreover,fluctuations in economic and market activity could impact the way then-existingcustomers allocate their available resources, which could affect RiverSourceLife’s persistency, surrender and product cash value loan experience and could negativelyimpact its business.

 

 

8

----

 

 

***Poor investment performance in RiverSource Life’s variableproducts could adversely affect its financial condition and results ofoperations.***

 

RiverSource Life believesthat investment performance is an important factor in the growth of itsvariable annuity and variable life 

insurance business. Poorinvestment performance could impair revenues and earnings, as well asRiverSource Life’s prospects for growth, because:

 

·                    RiverSource Life’s ability to attract funds fromexisting and new clients might diminish; and

 

·                    existing clients might withdraw assets fromRiverSource Life’s variable products in favor of better performing products ofother companies, which would result in lower revenues.

 

***A downgrade or a potential downgrade in RiverSource Life’sfinancial strength ratings could result in a loss of business and adverselyaffect its financial condition and results of operations.***

 

Financial strengthratings, which various ratings organizations publish as a measure of aninsurance company’s ability to meet contractholder and policyholderobligations, are important to maintaining public confidence in RiverSource Life’sproducts, the ability to market its products and its competitive position. Anydowngrade in RiverSource Life’s financial strength ratings, or the announcedpotential for a downgrade, could have a significant adverse effect on itsfinancial condition and results of operations in many ways, including:

 

·                  reducing new sales of insurance and annuity products;

 

·                  adversely affecting RiverSource Life’s relationships with distributorsof its products;

 

·                materially increasing the number or amount of policy surrenders andwithdrawals by contractholders and policyholders;

 

·                  requiring RiverSource Life to reduce prices for many of its products toremain competitive; and

 

·                adversely affecting RiverSource Life’s ability to obtain reinsurance orobtain reasonable pricing on reinsurance.

 

***Intense competition and the economics of changes inRiverSource Life’s product revenue mix and distribution channels couldnegatively affect RiverSource Life’s ability to maintain or increase its marketshare and profitability.***

 

RiverSource Life operatesin an intensely competitive industry. RiverSource Life competes based on anumber of factors including name recognition, service, investment performance,product features, price, perceived financial strength, and claims-payingratings. RiverSource Life’s competitors include insurers and other financialinstitutions. RiverSource Life may face competitors that have greater marketshare, offer a broader range of products, have greater financial resources orhave higher claims-paying ratings than RiverSource Life does.  Some of RiverSource Life’s competitors maypossess or acquire intellectual property rights that could provide acompetitive advantage to them in certain markets or for certain products, whichcould make it more difficult for RiverSource Life to introduce new products andservices.  Some of RiverSource Life’scompetitors’ proprietary products or technology could be similar to its own,and this could result in disputes that could impact RiverSource Life’sfinancial condition or results of operations.

 

Currently, AmeripriseFinancial’s branded advisor network distributes annuity and insurance productsissued almost exclusively by RiverSource Life. If Ameriprise Financial’sbranded advisor network further opened or expanded its distribution of annuityand insurance products of other companies, RiverSource Life could experiencelower sales of its products or other developments, which could have a materialadverse effect on RiverSource Life’s financial condition and results ofoperations.

 

***Downturns and volatility in equity markets could adverselyaffect RiverSource Life’s business and profitability.***

 

Significant downturns andvolatility in equity markets could have an adverse effect on RiverSource Life’sfinancial condition and results of operations. Market downturns and volatilitymay cause potential new purchasers to refrain from purchasing RiverSource Life’svariable annuities and variable universal life insurance products that havereturns linked to the performance of the equity markets. Downturns may alsocause contractholders in annuity products and policyholders in insuranceproducts to withdraw cash values from those products.

 

Additionally, downturnsin equity markets can have an adverse effect on RiverSource Life’s asset-basedrevenues because the value of equity-based separate account assets will bereduced.

 

The GMAB and the non-lifecontingent benefits associated with GMWB provisions offered with certainRiverSource Life variable annuities create obligations which are carried atfair value separately from the underlying host variable annuity contract.  Changes in the fair value of these GMAB andGMWB obligations are recorded through earnings with fair value calculated byestimating the present value of future benefits less applicable fees chargedfor the rider using actuarial models, which simulate various economicscenarios.  Changes in equity pricesand/or equity market volatility may impact the fair value of the GMAB 

 

 

9

----

 

 

and GMWBliabilities.  Although RiverSource Lifetypically hedges against such changes, a significant change in either equityprice levels or equity market volatility may result in some net adverse impactto current period financial statements.

 

A significant marketdecline in equity price levels could also result in guaranteed minimum benefitsunder GMDB and GMIB provisions being higher than current account values, whichcould have an adverse effect on RiverSource Life’s financial condition andresults of operations.  RiverSource Lifedoes not currently hedge or reinsure GMDB or GMIB provisions.

 

For additionalinformation regarding the sensitivity of RiverSource Life’s business results toequity market fluctuations, see “Item 7 — Management’s Narrative Analysis —Risk Management.”

 

***Defaults in RiverSource Life’s fixed maturity securitiesportfolio would adversely affect its earnings.***

 

Issuers of the fixed maturitysecurities that RiverSource Life owns may default on principal and interestpayments. At both December 31, 2007 and 2006, 6% of RiverSource Life’sinvestment portfolio had ratings below investment-grade.  Moreover, economic downturns and corporatemalfeasance can increase the number of companies, including those withinvestment-grade ratings, that default on their debt obligations.  Default-related declines in the value ofRiverSource Life’s fixed maturity securities portfolio could cause its netearnings to decline and could weaken its capital position.

 

***Some of RiverSource Life’s investments are relativelyilliquid.***

 

RiverSource Life investsa portion of its general account assets in certain privately placed fixedincome securities, mortgage loans, policy loans, and collateralized debtobligations, among others, all of which are relatively illiquid. These assetclasses represented 19.0% of the carrying value of RiverSource Life’sinvestment portfolio as of December 31, 2007.  If RiverSource Life requires significantamounts of cash on short notice in excess of its normal cash requirements, itmay have difficulty selling these investments in a timely manner, or be forcedto sell them for an amount less than it would otherwise have been able torealize, or both. For example, if an unexpected number of contractholders ofits annuity products exercise their surrender right and RiverSource Life isunable to access other liquidity sources, it may have to quickly liquidateassets. Any inability to quickly dispose of illiquid investments could have anadverse effect on RiverSource Life’s financial condition and results ofoperations.

 

***RiverSource Life’s affiliated distributor may be unable toattract and retain financial advisors.***

 

RiverSource Life isdependent on the branded financial advisors of its affiliated broker-dealerselling firm for a significant portion of the sales of its annuity andinsurance products. A significant number of its branded financial advisorsoperate as independent contractors under a franchise agreement with itsaffiliated selling firm. There can be no assurance that RiverSource Life’saffiliated selling firm will be successful in its efforts to recruit and retainnew advisors to its network. If RiverSource Life’s affiliated selling firm isunable to attract and retain quality financial advisors, fewer advisors wouldbe available to sell RiverSource Life’s annuity and insurance products andRiverSource Life’s financial condition and results of operations could bematerially adversely affected.

 

***RiverSource Life and its affiliates face intense competitionin attracting and retaining key talent.***

 

RiverSource Life’scontinued success depends to a substantial degree on its, and its affiliates’,ability to attract and retain qualified personnel to conduct its business. Themarket for qualified talent is extremely competitive and has grown more so inrecent periods due to industry growth. There can be no assurance thatRiverSource Life will be successful in its efforts to recruit and retain therequired personnel. If RiverSource Life is unable to attract and retainqualified individuals or its recruiting and retention costs increasesignificantly, its financial condition and results of operations could bematerially adversely affected.

 

***If the counterparties to RiverSource Life’s reinsurancearrangements or to the derivative instruments it uses to hedge its businessrisks default, RiverSource Life may be exposed to risks it had sought tomitigate, which could adversely affect its financial condition and results ofoperations.***

 

RiverSource Life usesreinsurance to mitigate its risks in various circumstances. See “Item 1 —Business — Reinsurance.”  Reinsurancedoes not relieve RiverSource Life of its direct liability to its policyholders,even when the reinsurer is liable to RiverSource Life. Accordingly, RiverSourceLife bears credit risk with respect to its reinsurers. RiverSource Life cannotprovide assurance that its reinsurers will pay the reinsurance recoverable owedto it now or in the future or that they will pay these recoverables on a timelybasis. A reinsurer’s insolvency or its inability or unwillingness to makepayments under the terms of its reinsurance agreement could have an adverseeffect on RiverSource Life’s financial condition and results of operations thatcould be material.  See Note 2 and Note13 to the Consolidated Financial Statements.

 

 

10

----

 

In addition, RiverSourceLife uses derivative instruments to hedge various business risks.  The amount and breadth of exposure toderivative counterparties have increased significantly in connection withRiverSource Life’s strategies to hedge guaranteed benefit obligations under itsvariable annuity products.  IfRiverSource Life’s counterparties fail to honor in a timely manner theirobligations under the derivative instruments, RiverSource Life’s hedges of therelated risk will be ineffective. That failure could have a material adverseeffect on RiverSource Life’s financial condition and results of operations.  This risk of failure of RiverSource Life’shedge transactions may be increased by capital market volatility, such as thevolatility that has been experienced since the second half of 2007.

 

***RiverSource Life’s business is heavily regulated, andchanges in regulation may reduce its profitability and limit its growth.***

 

RiverSource Life operatesin a highly regulated industry, and is required to obtain and maintain licensesfor its business in addition to being subject to regulatory oversight.Financial regulators have significantly increased the level of regulation inrecent years and have several outstanding proposals for additional regulation.Significant discussion and activity by regulators concern the sale andsuitability of financial products and services to persons planning forretirement, as well as to older investors. In addition, RiverSource Life is subject to heightened requirements andassociated costs and risks relating to privacy and the protection of customerdata.  RiverSource Life’s informationsystems, moreover, may be subject to increased efforts of “hackers” by reasonof the customer data it possesses.  Theserequirements, costs and risks, as well as possible legislative or regulatorychanges, may constrain RiverSource Life’s ability to market its products andservices to its target demographic and potential customers, and couldnegatively affect RiverSource Life’s profitability and make it more difficultfor RiverSource Life to pursue its growth strategy.

 

RiverSource Life issubject to state regulation, so must comply with statutory reserve and capitalrequirements.  State regulators arecontinually reviewing and updating these requirements and other requirementsrelating to the business operations of insurance companies, including theirunderwriting and sales practices. Moreover, RiverSource Life is subject to capital requirements forvariable annuity contracts with guaranteed death or living benefits.  These requirements may have an impact onfuture statutory reserves and regulatory capital in the event equity marketvalues fall in the future.  Moreover, thereis active discussion at the National Association of Insurance Commissioners (“NAIC”)of moving to a principles-based reserving system.  This could change statutory reserverequirements significantly and it is not possible to estimate the impact atthis time.  Further, RiverSource Lifecannot predict the effect that proposed federal legislation, such as the optionof federally chartered insurers, may have on RiverSource Life or itscompetitors.

 

Compliance withapplicable laws and regulations is time consuming and personnel-intensive.  Moreover, the evaluation of RiverSource Life’scompliance with these laws and regulations by state insurance regulators, theSEC, and other regulatory organizations is an ongoing feature of RiverSourceLife’s business, the outcomes of which may not be foreseeable. Changes in theselaws and regulations may materially increase RiverSource Life’s direct andindirect compliance and other expenses of doing business.  The costs of the compliance requirementsRiverSource Life faces, and the constraints they impose on its operations,could have a material adverse effect on RiverSource Life’s financial conditionand results of operations. For a further discussion of the regulatory frameworkin which RiverSource Life operates, see “Item 1 — Business — Regulation.” Formore information regarding ongoing investigations, see “Item 3 — LegalProceedings.”

 

***Legal and regulatory actions are inherent in RiverSourceLife’s business and could result in financial losses or harm its business.***

 

RiverSource Life is, andin the future may be, subject to legal and regulatory actions in the ordinarycourse of its operations.  Substantiallegal liability in legal or regulatory actions could have a material financialeffect or cause significant reputational harm, which in turn could seriouslyharm its business prospects.

 

***Competitive and regulatory pressures may require RiverSourceLife to reduce the levels of its fees.***

 

RiverSource Life’s profitmargins and earnings are dependent in part on its ability to maintain currentfee levels for the products and services that it offers.  Competition within the financial servicesindustry could lead RiverSource Life to reduce the fees that it charges itsclients for products and services.  Seethe risk factor entitled “Intense competition and the economics of changes inRiverSource Life’s product revenue mix and distribution channels couldnegatively affect RiverSource Life’s ability to maintain or increase its marketshare and profitability.”  In addition,RiverSource Life may be required to reduce its fee levels, or restructure thefees it charges, as a result of regulatory initiatives or proceedings that areeither industry-wide or specifically targeted at RiverSource Life.  See the risk factor entitled “RiverSourceLife’s business is heavily regulated, and changes in regulation may reduce itsprofitability and limit its growth” and “Item 3 — Legal Proceedings” for moreinformation regarding this and other regulatory matters.  Reductions or other changes in the fees thatRiverSource Life charges for its products and services could reduce its revenuesand earnings.

 

 

11

----

 

 

***Misconduct by RiverSource Life’s employees and agents andits affiliates’ employees and agents is difficult to detect and deter and couldharm RiverSource Life’s business, results of operations or financial condition.***

 

Misconduct by RiverSourceLife’s employees and agents and its affiliates’ employees and agents couldresult in violations of law, regulatory sanctions and/or serious reputationalor financial harm. Misconduct can occur in each of RiverSource Life’sbusinesses and could include:

 

·                  attempting to bind RiverSource Life to transactions that exceedauthorized limits;

 

·                hiding unauthorized or unsuccessful activities resulting in unknown andunmanaged risks or losses;

 

·                improperly using, disclosing, or otherwise compromising confidentialinformation;

 

·                recommending transactions that are not suitable;

 

·                  engaging in fraudulent or otherwise improper activity;

 

·                  engaging in unauthorized or excessive trading to the detriment ofcustomers; or

 

·                  otherwise not complying with laws or RiverSource Life’s controlprocedures.

 

RiverSource Life cannotalways deter misconduct by employees and agents and the precautions RiverSourceLife takes to prevent and detect this activity may not be effective in allcases.  RiverSource Life also cannot provideassurance that misconduct by employees and agents will not lead to a materialadverse effect on its business, financial condition or results of operations.

 

***If RiverSource Life’s reserves for future policy benefitsand claims are inadequate, it may be required to increase its reserveliabilities, which could adversely affect its financial condition and resultsof operations.***

 

RiverSource Lifeestablishes reserves as estimates of its liabilities to provide for futureobligations under its insurance policies and annuities contracts.  Reserves do not represent an exactcalculation of liability, but rather are estimates of contract benefits andrelated expenses RiverSource Life expects to incur over time. The assumptions andestimates RiverSource Life makes in establishing reserves require certainjudgments about future experience and, therefore, are inherentlyuncertain.  RiverSource Life cannotdetermine with precision the actual amounts that it will pay for contractbenefits, the timing of payments, or whether the assets supporting its statedreserves will increase to the levels it estimates before payment of benefits orclaims.  RiverSource Life monitors itsreserve levels continually.  IfRiverSource Life were to conclude that its reserves are insufficient to coveractual or expected contract benefits, it would be required to increase itsreserves and incur income statement charges for the period in which it makesthe determination, which could adversely affect its financial condition andresults of operations. For more information on how RiverSource Life sets itsreserves, see Note 2 to the Consolidated Financial Statements.

 

***RiverSource Life may face losses if morbidity rates ormortality rates differ significantly from its pricing expectations.***

 

RiverSource Life setsprices for its life, DI and LTC insurance and some annuity products based uponexpected claim payment patterns, derived from assumptions RiverSource Lifemakes about the morbidity rates, or likelihood of sickness, and the mortalityrates, or likelihood of death, of its policyholders and contractholders. Thelong-term profitability of these products depends upon how RiverSource Life’sactual experience compares with its pricing assumptions. For example, ifmorbidity rates are higher, or mortality rates are lower, than its pricingassumptions, RiverSource Life could be required to make greater payments underDI and LTC insurance policies and immediate annuity contracts than it hadprojected.  The same holds true for LTCpolicies RiverSource Life previously underwrote to the extent of the risks thatRiverSource Life has retained.  Ifmortality rates are higher than its pricing assumptions, RiverSource Life couldbe required to make greater payments under its life insurance policies andannuity contracts with GMDBs than it had projected.

 

The risk that RiverSourceLife’s claims experience may differ significantly from its pricing assumptionsis particularly significant for its LTC insurance products, notwithstandingRiverSource Life’s ability to implement future price increases.  As with life insurance, LTC insurancepolicies provide for long-duration coverage and, therefore, its actual claimsexperience will emerge over many years. However, as a relatively new product inthe market, LTC insurance does not have the extensive claims experience historyof life insurance, and, as a result, RiverSource Life’s ability to forecastfuture claim rates for LTC insurance is more limited than for lifeinsurance.  RiverSource Life has soughtto moderate these uncertainties to some extent by partially reinsuring LTCpolicies that it had previously underwritten and by limiting its present LTCinsurance offerings to policies underwritten fully by an unaffiliated thirdparty, and RiverSource Life has also implemented rate increases on certaininforce policies as described in Item 1 — Business — Insurance: ProductFeatures and Risks — Long Term Care Insurance. There can be 

 

 

12

----

 

 

no assurance thatRiverSource Life will not be required to implement additional rate increases inthe future or that RiverSource Life will receive regulatory approval to thefull extent and timing of any rate increases that RiverSource Life may seek.

 

***RiverSource Life may face losses if there are significantdeviations from its assumptions regarding the future persistency of itsinsurance policies and annuity contracts.***

 

The prices and expectedfuture profitability of RiverSource Life’s insurance and deferred annuityproducts are based in part upon expected patterns of premiums, expenses andbenefits, using a number of assumptions, including those related topersistency, which is the probability that a policy or contract will remaininforce from one period to the next. The effect of persistency on profitabilityvaries for different products. For most of its life insurance and deferredannuity products, actual persistency that is lower than its persistencyassumptions could have an adverse impact on profitability, especially in theearly years of a policy or contract, primarily because RiverSource Life wouldbe required to accelerate the amortization of expenses it deferred inconnection with the acquisition of the policy or contract.

 

For RiverSource Life’sLTC insurance, actual persistency that is higher than its persistencyassumptions could have a negative impact on profitability. If these policiesremain inforce longer than RiverSource Life assumed, then RiverSource Lifecould be required to make greater benefit payments than it had anticipated whenit priced or partially reinsured these products.  Some of its LTC insurance policies haveexperienced higher persistency and poorer loss experience than RiverSource Lifehad assumed, which led it to increase premium rates on certain of thesepolicies.

 

Because RiverSource Life’sassumptions regarding persistency experience are inherently uncertain, reservesfor future policy benefits and policy claims and other policyholders’ funds mayprove to be inadequate if actual persistency experience is different from thoseassumptions. Although some of its products permit RiverSource Life to increasepremiums during the life of the policy or contract, RiverSource Life cannotguarantee that these increases would be sufficient to maintain profitability.Additionally, some of these pricing changes require regulatory approval, whichmay not be forthcoming. Moreover, many of RiverSource Life’s products do notpermit RiverSource Life to increase premiums or limit those increases duringthe life of the policy or contract while premiums on certain other products(primarily LTC insurance) may not be increased without prior regulatoryapproval. Significant deviations in experience from pricing expectationsregarding persistency could have an adverse effect on the profitability ofRiverSource Life’s products.

 

***RiverSource Life may be required to accelerate theamortization of DAC, which would increase its expenses and reduceprofitability.***

 

DAC represent the costsof acquiring new business, principally direct sales commissions and otherdistribution and underwriting costs that have been deferred on the sale ofannuity, life, DI and LTC insurance. For annuity and universal life products,DAC are amortized based on projections of estimated gross profits overamortization periods equal to the approximate life of the business.  For other insurance products, DAC aregenerally amortized as a percentage of premiums over amortization periods equalto the premium-paying period.

 

RiverSource Life’sprojections underlying the amortization of DAC require the use of certainassumptions, including interest margins, mortality rates, persistency rates,maintenance expense levels and customer asset value growth rates for variableproducts. RiverSource Life periodically reviews and, where appropriate, adjustsits assumptions. When RiverSource Life changes its assumptions, it may berequired to accelerate the amortization of DAC or to record a charge toincrease benefit reserves.

 

As of both December 31,2007 and 2006, RiverSource Life had $4.4 billion of DAC, and it amortized $470million and $356 million of DAC as a current period expense for the years endedDecember 31, 2007 and 2006, respectively. For more information regarding DAC, see “Item 7 — Management’s NarrativeAnalysis — Critical Accounting Policies — Deferred Acquisition Costs” and “—Recent Accounting Pronouncements.”

 

***Changes in U.S. federal income or estate tax law could makesome of RiverSource Life’s products less attractive to clients.***

 

Many of the productsRiverSource Life issues or on which its business is based (including bothinsurance products and non-insurance products) enjoy favorable treatment undercurrent U.S. federal income or estate tax law. Changes in U.S. federal incomeor estate tax law could make some of its products less attractive to clients.

 

 

13

----

 

 

***Breachesof security, or the perception that RiverSource Life’s technologyinfrastructure is not secure, could harm its business.***

 

RiverSource Life’sbusiness requires the appropriate and secure utilization of consumer and othersensitive information.  RiverSource Life’soperations require the secure transmission of confidential information overpublic networks. Security breaches in connection with the delivery of itsproducts and services, including products and services utilizing the Internet,and the trend toward broad consumer and general public notification of suchincidents, could significantly harm RiverSource Life’s business, financialcondition or results of operations.   Even if RiverSource Life successfullyprotected its technology infrastructure and the confidentiality of sensitivedata, RiverSource Life could suffer harm to its business and reputation ifattempted security breaches are publicized. RiverSource Life cannot be certainthat advances in criminal capabilities, discovery of new vulnerabilities,attempts to exploit vulnerabilities in its systems, data thefts, physicalsystem or network break-ins or inappropriate access, or other developments willnot compromise or breach the technology or other security measures protectingthe networks used in connection with its products and services.

 

***Protectionfrom system interruptions is important to RiverSource Life’s business. IfRiverSource Life experienced a sustained interruption to its telecommunicationsor data processing systems, it could harm its business.***

 

System or networkinterruptions could delay and disrupt RiverSource Life’s ability to develop,deliver or maintain its products and services, causing harm to its business andreputation and resulting in loss of customers or revenue. These interruptionscan include fires, floods, earthquakes, power losses, equipment failures,failures of internal or vendor software or systems and other events beyond itscontrol.

 

***RiverSource Life’s risk management policies and proceduresmay not be fully effective in mitigating its risk exposure in all marketenvironments or against all types of risk, including employee and financialadvisor misconduct.***

 

RiverSource Life hasdevoted significant resources toward developing its risk management policiesand procedures and will continue to do so in the future. Nonetheless,RiverSource Life’s policies and procedures to identify, monitor and managerisks may not be fully effective in mitigating its risk exposure in all marketenvironments or against all types of risk. Many of its methods of managing riskand exposures are based upon its use of observed historical market behavior orstatistics based on historical models. During periods of market volatility ordue to unforeseen events, the historically derived correlations upon whichthese methods are based may not be valid. As a result, these methods may not accurately predict future exposures,which could be significantly greater than what its models indicate. This couldcause RiverSource Life to incur investment losses or cause its hedging andother risk management strategies to be ineffective.  Other risk management methods depend upon theevaluation of information regarding markets, clients, catastrophe occurrence orother matters that are publicly available or otherwise accessible toRiverSource Life, which may not always be accurate, complete, up-to-date orproperly evaluated.

 

Moreover, RiverSourceLife is subject to the risks of errors and misconduct by its employees and affiliatedfinancial advisors — such as fraud, non-compliance with policies, recommendingtransactions that are not suitable, and improperly using or disclosingconfidential information — which are difficult to detect in advance and deter,and could harm its business, financial condition or results of operations.  Management of operational, legal andregulatory risks requires, among other things, policies and procedures torecord properly and verify a large number of transactions and events, and thesepolicies and procedures may not be fully effective in mitigating RiverSourceLife’s risk exposure in all market environments or against all types ofrisk.  Insurance and other traditionalrisk-shifting tools may be held by or available to RiverSource Life in order tomanage certain exposures, but they are subject to terms such as deductibles,coinsurance, limits and policy exclusions, as well as risk of counterpartydenial of coverage, default or insolvency.

 

***RiverSource Life is subject to tax contingencies that couldadversely affect the provision for income taxes.***

 

RiverSource Life issubject to the income tax laws of the U.S., its states and municipalities andthose of the foreign jurisdictions in which it has significant businessoperations.  These tax laws are complexand may be subject to different interpretations.  RiverSource Life must make judgments andinterpretations about the application of these inherently complex tax laws whendetermining the provision for income taxes and must also make estimates aboutwhen in the future certain items affect taxable income in the various taxjurisdictions.  Disputes overinterpretations of the tax laws may be settled with the taxing authority uponexamination or audit.

 

 

14

----

 

 

In addition, changes tothe Internal Revenue Code, administrative rulings or court decisions couldincrease RiverSource Life’s provision for income taxes. For example, on August 16,2007, the Internal Revenue Service (“IRS”) issued a revenue ruling whichpurports, among other things, to modify the calculation of the deduction fordividends received by life insurance companies. Subsequently on September 25,2007, the IRS issued another revenue ruling that suspended the August 16ruling and announced a new regulation project on the issue. The income taxbenefit of the separate account dividends received deduction for current yeardividends was approximately $46 million for the fiscal year ended December 31,2007.

 

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.                  PROPERTIES**

 

RiverSource LifeInsurance Company occupies office space in Minneapolis, Minnesota, which isleased or owned by Ameriprise Financial. RiverSource Life Insurance Company reimburses Ameriprise Financial forrent based on direct and indirect allocation methods.  RiverSource Life of NY rents office space inAlbany, New York.  RiverSource Lifebelieves that the facilities occupied suit its needs.

 

**ITEM 3.                  LEGAL PROCEEDINGS**

 

The Securities andExchange Commission, the Financial Industry Regulatory Authority, commonlyreferred to as FINRA, and several state authorities have brought proceedingschallenging several mutual fund and variable product financial practices,generally including suitability, late trading, market timing, compensation anddisclosure of revenue sharing arrangements. RiverSource Life has received requests for information concerning someof these practices and is cooperating fully with these inquiries.

 

RiverSource Life isinvolved in the normal course of business in a number of other legal andarbitration proceedings concerning matters arising in connection with theconduct of its business activities. RiverSource Life believes that it is not a party to, nor are any of itsproperties the subject of, any pending legal, arbitration or regulatoryproceedings that would have a material adverse effect on its consolidatedfinancial condition, results of operations or liquidity.  However, it is possible that the outcome ofany such proceedings could have a material impact on results of operations inany particular reporting period as the proceedings are resolved.

 

**ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Item omitted pursuant toGeneral Instructions I(2) (c) of Form 10-K.

 

**PART II**

 

**ITEM 5.**                  **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND     ISSUER PURCHASES OF EQUITY SECURITIES**

 

All of RiverSource LifeInsurance Company’s outstanding common stock is owned by Ameriprise Financial, Inc.  There is no established public trading marketfor RiverSource Life Insurance Company’s common stock.

 

For discussion regardingRiverSource Life Insurance Company’s payment of dividends and restrictions ondividends, see “Item 7 — Management’s Narrative Analysis — Liquidity andCapital Resources — Capital Activity” and Note 11 of the Notes to ConsolidatedFinancial Statements.

 

**ITEM 6.                  SELECTED FINANCIAL DATA**

 

Item omitted pursuant toGeneral Instructions I(2) (a) of Form 10-K.

 

 

15

----

 

**ITEM 7.****                                                    ****MANAGEMENT’S NARRATIVEANALYSIS**

 

**Overview**

RiverSource Life Insurance Company is a stock lifeinsurance company with one wholly owned operating subsidiary, RiverSource LifeInsurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is awholly owned subsidiary of Ameriprise Financial, Inc. (“AmeripriseFinancial”).

 

·                  RiverSource Life Insurance Company is domiciled inMinnesota and holds Certificates of Authority in American Samoa, the Districtof Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuityproducts.

 

·                  RiverSource Life of NY is a stock life insurancecompany domiciled in New York, which holds Certificates of Authority in NewYork, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.

 

RiverSource Life Insurance Company and its subsidiaryare referred to collectively in this Form 10-K as “RiverSource Life”.

 

The following discussionand management’s narrative analysis of the financial condition and results ofoperations should be read in conjunction with the “Forward-Looking Statements,”“Item 1A - Risk Factors” and the Consolidated Financial Statements andNotes.  Management’s narrative analysisis presented pursuant to General Instructions I(2) (a) of Form 10-Kin lieu of Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

Ameriprise Financial wasformerly a wholly owned subsidiary of American Express Company (“AmericanExpress”).  On February 1, 2005, theAmerican Express Board of Directors announced its intention to pursue thedisposition of 100% of its shareholdings in Ameriprise Financial (the “Separation”)through a tax-free distribution to American Express shareholders.  Effective as of the close of business on September 30,2005, American Express completed the Separation and the distribution ofAmeriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution,Ameriprise Financial entered into certain agreements with American Express toeffect the Separation and to define the responsibility for obligations arisingbefore and after the date of the Distribution, including, among others,obligations relating to transition services, taxes, and employees.  RiverSource Life was allocated certainexpenses incurred as a result of Ameriprise Financial becoming an independentcompany.  The separation from AmericanExpress is now complete.

 

***Resultsof Operations for the Year Ended December 31, 2007 compared to the YearEnded December 31, 2006***

 

*Overview*

 

Consolidated net incomewas $421 million for the year ended December 31, 2007 compared to $486million for the year ended December 31, 2006, a decrease of $65 million.Pretax income decreased $158 million to $520 million for the year ended December 31,2007 from $678 million for the year ended December 31, 2006.  The decrease is driven by an increase inbenefits, claims, losses and settlement expenses due to market volatility onvariable annuity guaranteed living benefit reserves, higher deferredacquisition costs (“DAC”) amortization and higher other insurance and operatingexpenses offset partially by income from hedges for variable annuity guaranteedliving benefits and policy and contract charges.

 

*Revenues*

 

Total revenues for the year ended December 31, 2007 were $3.6billion, an increase of $98 million from the year ended December 31, 2006of $3.5 billion.  The increase in totalrevenues was primarily driven by an increase in cost of insurance charges onvariable universal life products as a result of volume increases and anincrease in rider charges and mortality and expense charges reflecting higheraverage separate account assets.

 

Total premiums decreased $48 million or 9.0% to $485 million for the yearended December 31, 2007.  Thedecrease in premiums was primarily due to a decline in premiums related toimmediate annuities with life contingencies attributable to lower volumes.  There was also a decrease in premiums fordisability income (“DI”) and long term care (“LTC”) insurance of $10 milliondue to a $15 million favorable adjustment as a result of a review ofRiverSource Life’s LTC reinsurance arrangements during the third quarter of2006.

 

Net investment income decreased $102 million or 6.2% to $1.6 billion forthe year ended December 31, 2007 reflecting declining average fixedaccount balances, partially offset by income related to derivatives hedgingguaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimumaccumulation benefit (“GMAB”) provisions.

 

 

16

----

 

 

Policy and contractcharges increased $172 million or 16.5%to $1.2 billion for the year ended December 31, 2007.  The increase reflects higher average valuesof separate account assets due to positive net flows and market appreciationand an increase in the cost of insurance charges on variable universal life (“VUL”)products as a result of volume increases and charges for variable annuityguaranteed living benefit riders.

 

Other revenue increased $66 million or 34.9% to $255 million for the year ended December 31, 2007reflecting higher marketing support and administrative fees due to an increasein underlying assets values.

 

Net realized investmentgains were $61 million for the year ended December 31, 2007 compared to $51 million for the year ended December 31,2006.  Included in net realizedinvestment gains for the year ended December 31, 2007 was a decrease of$21 million to the allowance for loan losses on commercial mortgage loans.  For the year ended December 31, 2007,$64 million of gross realized investment gains were partially offset by $20 million of gross realized losses aswell as $4 million of other-than-temporary impairment losses on investments,classified as Available-for-Sale.  Forthe year ended December 31, 2006, $61 million of gross realized investmentgains were partially offset by $10 million of gross realized investment lossesclassified as Available-for-Sale.

 

*Benefitsand Expenses*

 

Total benefits andexpenses for the year ended December 31, 2007 were $3.1 billion, anincrease of $256 million from the year ended December 31, 2006 total of$2.8 billion.

 

In 2007, RiverSource Liferecorded a net expense from unlocking of $30 million, primarily comprised of$16 million DAC amortization expense and a $14 million increase in benefits,claims, losses and settlement expenses. In 2006, RiverSource Life recorded a net benefit from DAC unlocking of$25 million, primarily comprised of a $38 million benefit in DAC amortizationexpense, a $12 million increase in benefits, claims, losses and settlement expensesand a $1 million decrease in policy and contract charges.  The DAC unlocking net expense of $30 millionin 2007 consisted of a $35 million increase in expense from updating productpersistency assumptions, a $13 million decrease in expense from updatingassumptions related to separate account fee levels and net variable annuityrider charges and an $8 million increase in expense from updating all otherassumptions.  The DAC unlocking netbenefit in 2006 primarily reflected a $25 million benefit from modelingincreased product persistency and a $15 million benefit from modelingimprovements in mortality, offset by negative impacts of $8 million frommodeling lower variable product fund fee revenue and $8 million from modelchanges related to variable life second to die insurance.

 

Benefits, claims, losses and settlementexpenses increased $150 millionor 21.3% to $855 million for the year ended December 31, 2007.  The cost of providing for guaranteed benefitsassociated with the variable annuity living benefits increased $210 million,primarily due to changes in financial market factors.  The increase in variable annuity livingbenefit costs was partially offset by a $6 million related change in deferredsales inducement costs (“DSIC”), $23 million in lower VUL/universal life (“UL”)claims and a $41 million decrease in benefit provisions for life contingentannuities.  The impact of the annualdetailed review of DAC valuation assumptions (“DAC unlocking”) was an increaseof $14 million in 2007, compared to $12 million in 2006.

 

Interest credited tofixed accounts decreased by $118 million or 12.2% to $850 million for the yearended December 31, 2007 primarily due to lower average accumulation valuesof annuities.

 

Amortization of DACincreased $114 million to $470 millionfor the year ended December 31, 2007 from $356 million for the year ended December 31, 2006.  DAC unlocking resulted in an increase of $16million in DAC amortization expense in 2007 compared to a decrease of $38million in 2006.  In addition, underlyingincreases in amortization of DAC in 2007 were due to growth in business volumesand the recurring impact of adopting Statement of Position (“SOP”) 05-1 “Accountingby Insurance Enterprises for Deferred Acquisition Costs in Connection With Modificationsor Exchanges of Insurance Contracts” partially offset by a decrease in theamortization of DAC driven by the mark-to-market impact of variable annuityguaranteed living benefit riders.

 

For the years ended December 31,2007 and 2006, RiverSource Life incurred $97 million and $131million, respectively, in separation costs. Separation costs incurred during 2007 and 2006 primarily related totechnology costs.  Separation costsincurred in 2006 also included costs related to marketing and rebranding.  All separation costs have been incurred as ofDecember 31, 2007.

 

Other insurance andoperating expenses increased $144 millionor 22.6% to $781 million for the year ended December 31, 2007 primarilyreflecting increased sales and marketing expenses and corporate overheadexpenses.

 

 

17

----

 

 

*IncomeTaxes*

 

RiverSource Life’seffective tax rate was 19.0% and28.3% for the years ended December 31, 2007 and 2006, respectively.   The decrease in the effective tax rateprimarily reflects lower pretax income as well as higher levels of taxadvantaged items, including dividends received deduction and foreign taxcredits, relative to pretax income for the year ended December 31, 2007 aswell as a $7 million tax benefit related to the finalization of the prior yeartax return.

 

On September 25,2007, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2007-61 inwhich it announced that it intends to issue regulations with respect to certaincomputational aspects of the Dividends Received Deduction (“DRD”) related toseparate account assets held in connection with variable contracts of lifeinsurance companies and has added the project to the 2007-2008 PriorityGuidance Plan. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007that purported to change accepted industry and IRS interpretations of thestatutes governing these computational questions. Any regulations that the IRSultimately proposes for issuance in this area will be subject to public noticeand comment, at which time insurance companies and other members of the publicwill have the opportunity to raise legal and practical questions about thecontent, scope and application of such regulations. As a result, the ultimatetiming and substance of any such regulations are unknown at this time, but theymay result in the elimination of some or all of the separate account DRD taxbenefit that RiverSource Life receives. Management believes that it is likelythat any such regulations would apply prospectively only. For the twelve monthsended December 31, 2007, RiverSource Life recorded a benefit ofapproximately $46 million related to the current year’s separate account DRD.

 

**CriticalAccounting Policies**

 

The accounting andreporting policies that RiverSource Life uses affect its Consolidated FinancialStatements.  Certain of RiverSource Life’saccounting and reporting policies are critical to an understanding ofRiverSource Life’s financial condition and results of operations and, in somecases, the application of these policies can be significantly affected by theestimates, judgments and assumptions made by management during the preparationof the Consolidated Financial Statements. The accounting and reporting policies RiverSource Life has identified asfundamental to a full understanding of its financial condition and results ofoperations are described below.  See Note2 to the Consolidated Financial Statements for further information aboutRiverSource Life’s accounting policies.

 

***Valuationof Investments***

 

The most significantcomponent of RiverSource Life’s investments is its Available-for-Salesecurities, which RiverSource Life generally carries at fair value within itsConsolidated Balance Sheets. The fair value of****RiverSourceLife’s Available-for-Sale securities at December 31, 2007 was primarilyobtained from third-party pricing sources. RiverSource Life records unrealized securities gains (losses) inaccumulated other comprehensive income (loss), net of income tax provision(benefit) and net of adjustments in other asset and liability balances, such asDAC, to reflect the expected impact on their carrying values had the unrealizedsecurities gains (losses) been realized as of the respective balance sheetdates.  At December 31, 2007, RiverSourceLife had net unrealized pretax losses on Available-for-Sale securities of $229million. RiverSource Life recognizes gains and losses in results of operationsupon disposition of the securities. RiverSource Life also recognizes losses in results of operations whenmanagement determines that a decline in value is other-than-temporary.  This determination requires the exercise ofjudgment regarding the amount and timing of recovery. Indicators ofother-than-temporary impairment for debt securities include issuer downgrade,default or bankruptcy. RiverSource Life also considers the extent to which costexceeds fair value and the duration of that difference and management’sjudgment about the issuer’s current and prospective financial condition, aswell as its ability and intent to hold until recovery.** **As of December 31, 2007,RiverSource Life had $399 million in gross unrealized losses that related to$14.0 billion of Available-for-Sale securities, of which $11.5 billion has beenin a continuous unrealized loss position for 12 months or more.  These investment securities had an overallratio of 97% of fair value to amortized cost at December 31, 2007.  As part of RiverSource Life’s ongoingmonitoring process, management determined that a majority of the grossunrealized losses on these securities were attributable to changes in interestrates and credit spreads across asset classes. Additionally, because RiverSource Life has the ability as well as theintent to hold these securities for a time sufficient to recover its cost,RiverSource Life concluded that none of these securities wereother-than-temporarily impaired at December 31, 2007.

 

***DeferredAcquisition Costs***

 

For RiverSource Life’sannuity and life, DI and LTC insurance products, the DAC balances at anyreporting date are supported by projections that show that management expectsthere to be adequate premiums or estimated gross profits after that date toamortize the remaining DAC balances. These projections are inherently uncertainbecause they require management to make assumptions about financial markets,anticipated mortality and morbidity levels and policyholder behavior overperiods extending well into the future. Projection periods used for RiverSourceLife’s annuity products are typically 10 to 25 years, while 

 

 

18

----

 

 

projection periods forRiverSource Life’s life, DI and LTC insurance products are often 50 years orlonger. Management regularly monitors financial market conditions and actual policyholderbehavior experience and compares them to its assumptions.

 

For annuity and universallife insurance products, the assumptions made in projecting future results andcalculating the DAC balance and DAC amortization expense are management’s bestestimates. Management is required to update these assumptions whenever itappears that, based on actual experience or other evidence, earlier estimatesshould be revised. When assumptions are changed, the percentage of estimatedgross profits used to amortize DAC might also change. A change in the requiredamortization percentage is applied retrospectively; an increase in amortizationpercentage will result in a decrease in the DAC balance and an increase in DACamortization expense, while a decrease in amortization percentage will resultin an increase in the DAC balance and a decrease in DAC amortization expense.The impact on results of operations of changing assumptions can be eitherpositive or negative in any particular period and is reflected in the period inwhich such changes are made.

 

For other life, DI andLTC insurance products, the assumptions made in calculating the DAC balance andDAC amortization expense are consistent with those used in determining theliabilities, and therefore are intended to provide for adverse deviations inexperience and are revised only if management concludes experience will be soadverse that DAC are not recoverable or if premium rates charged for thecontract are changed. If management concludes that DAC are not recoverable, DACare reduced to the amount that is recoverable based on best estimateassumptions and there is a corresponding expense recorded in consolidatedresults of operations.

 

For annuity and life, DIand LTC insurance products, key assumptions underlying these long termprojections include interest rates (both earning rates on invested assets andrates credited to policyholder accounts), equity market performance, mortalityand morbidity rates and the rates at which policyholders are expected to surrendertheir contracts, make withdrawals from their contracts and make additionaldeposits to their contracts. Assumptions about interest rates are the primaryfactor used to project interest margins, while assumptions about rates creditedto policyholder accounts and equity market performance are the primary factorsused to project client asset value growth rates, and assumptions aboutsurrenders, withdrawals and deposits comprise projected persistency rates.Management must also make assumptions to project maintenance expensesassociated with servicing its annuity and insurance business during the DACamortization period.

 

The client asset valuegrowth rate is the rate at which variable annuity and variable universal lifeinsurance contract values are assumed to appreciate in the future. The rate isnet of asset fees and anticipates a blend of equity and fixed incomeinvestments. Management reviews and, where appropriate, adjusts its assumptionswith respect to client asset value growth rates on a regular basis. RiverSourceLife uses a mean reversion method as a guideline in setting near-term clientasset value growth rates based on a long term view of financial marketperformance as well as actual historical performance. In periods when marketperformance results in actual contract value growth at a rate that is differentthan that assumed, RiverSource Life reassesses the near-term rate in order tocontinue to project its best estimate of long term growth. The near-term growthrate is reviewed to ensure consistency with management’s assessment ofanticipated equity market performance. DAC amortization expense recorded in a period when client asset valuegrowth rates exceed our near-term estimate will typically be less than in aperiod when growth rates fall short of our near-term estimate.  The long term client asset value growth rateis based on an equity return assumption of 8%, net of management fees, withadjustments made for fixed income allocations. If RiverSource Life increased or decreased its assumption related tothis growth rate by 100 basis points, the impact on the DAC and DSIC balanceswould be an increase or decrease of approximately $37 million.

 

Management monitors otherprincipal DAC amortization assumptions, such as persistency, mortality, morbidity,interest margin and maintenance expense levels each quarter and, when assessedindependently, each could impact RiverSource Life’s DAC balances.  For example, if RiverSource Life increased ordecreased its interest margin on its universal life insurance and on the fixedportion of its variable universal life insurance products by 10 basis points,the impact on the DAC balance would be an increase or decrease of approximately$4 million.  Additionally, if RiverSourceLife extended or reduced the amortization periods by one year for variableannuities to reflect changes in premium paying persistency and/or surrenderassumptions, the impact on the DAC and DSIC balances would be an increase ordecrease of approximately $24 million. The amortization impact of extending or reducing the amortization periodany additional years is not linear.

 

The analysis of DACbalances and the corresponding amortization is a dynamic process that considersall relevant factors and assumptions described previously. Unless managementidentifies a significant deviation over the course of the quarterly monitoring,management reviews and updates these DAC amortization assumptions annually inthe third quarter of each year.  Anassessment of sensitivity associated with changes in any single assumptionwould not necessarily be an indicator of future results.

 

 

19

----

 

 

RiverSource Life adoptedSOP 05-1 on January 1, 2007.  SeeNote 2 and Note 3 to the Consolidated Financial Statements for additionalinformation about the effect of RiverSource Life’s adoption of SOP 05-1 and theaccounting policies for the amortization and capitalization of DAC.  In periods prior to 2007, RiverSource Life’spolicy had been to treat certain internal replacement transactions ascontinuations and to continue amortization of DAC associated with the existingcontract against revenues from the new contract.  For details regarding the balances of andchanges in DAC for the years ended December 31, 2007 and 2006, see Note 6to the Consolidated Financial Statements.

 

***Liabilitiesfor Future Policy Benefits and Policy Claims and Other Policyholders’ Funds***

 

*Fixed Annuities and VariableAnnuity Guarantees*

 

Future policy benefitsand policy claims and other policyholders’ funds related to fixed annuities andvariable annuity guarantees include liabilities for fixed account values onfixed and variable deferred annuities, guaranteed benefits associated withvariable annuities, equity indexed annuities and fixed annuities in a payoutstatus.

 

Liabilities for fixedaccount values on fixed and variable deferred annuities are equal toaccumulation values, which are the cumulative gross deposits and creditedinterest less withdrawals and various charges.

 

The majority of thevariable annuity contracts offered by RiverSource Life contain guaranteedminimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefitpayable on a contract with a GMDB may exceed the contract accumulation value.  RiverSource Life also offers variableannuities with death benefit provisions that gross up the amount payable by acertain percentage of contract earnings which are referred to as gain gross-up(“GGU”) benefits.  In addition,RiverSource Life offers contracts with GMWB and GMAB provisions and, until May 2007,RiverSource Life offered contracts containing guaranteed minimum income benefit(“GMIB”) provisions.

 

In determining theliabilities for variable annuity death benefits, GMIB and the life contingentbenefits associated with GMWB, RiverSource Life projects these benefits andcontract assessments using actuarial models to simulate various equity marketscenarios. Significant assumptions made in projecting future benefits andassessments relate to customer asset value growth rates, mortality, persistencyand investment margins and are consistent with those used for DAC assetvaluation for the same contracts. As with DAC, management will review, andwhere appropriate, adjust its assumptions each quarter. Unless managementidentifies a material deviation over the course of quarterly monitoring,management will review and update these assumptions annually in the thirdquarter of each year.

 

The variable annuitydeath benefit liability is determined by estimating the expected value of deathbenefits in excess of the projected contract accumulation value and recognizingthe excess over the estimated meaningful life based on expected assessments(e.g., mortality and expense fees, contractual administrative charges andsimilar fees).

 

If elected by thecontract owner and after a stipulated waiting period from contract issuance, aGMIB guarantees a minimum lifetime annuity based on a specified rate ofcontract accumulation value growth and predetermined annuity purchaserates.  The GMIB liability is determinedeach period by estimating the expected value of annuitization benefits inexcess of the projected contract accumulation value at the date ofannuitization and recognizing the excess over the estimated meaningful lifebased on expected assessments.

 

GMAB and the non-lifecontingent benefits associated with GMWB provisions are considered embeddedderivatives and are recorded at fair value. The fair value of these embeddedderivatives is based on the present value of future benefits less applicablefees charged for the provision.  Theliability for the life contingent benefits associated with GMWB provisions aredetermined in the same way as the liability for variable annuity deathbenefits.  The changes in both the fairvalues of the GMWB and GMAB embedded derivatives and the liability for lifecontingent benefits are reflected in benefits, claims, losses and settlementexpenses.

 

Liabilities for equityindexed annuities are equal to the accumulation of host contract valuescovering guaranteed benefits and the market value of embedded equity options.

 

Liabilities for fixedannuities in a benefit or payout status are based on future estimated paymentsusing established industry mortality tables and interest rates, ranging from4.6% to 9.5% at December 31, 2007, depending on year of issue, with anaverage rate of approximately 5.8%.

 

 

20

----

 

*Life, Disability Income and LongTerm Care Insurance*

 

Future policy benefitsand policy claims and other policyholders’ funds related to life, DI and LTCinsurance include liabilities for fixed account values on fixed and variableuniversal life policies, liabilities for unpaid amounts on reported claims,estimates of benefits payable on claims incurred but not yet reported andestimates of benefits that will become payable on term life, whole life, DI andLTC policies as claims are incurred in the future.

 

Liabilities for fixedaccount values on fixed and variable universal life insurance are equal toaccumulation values.   Accumulationvalues are the cumulative gross deposits and credited interest less variouscontractual expense and mortality charges and less amounts withdrawn bypolicyholders.

 

Liabilities for unpaidamounts on reported life insurance claims are equal to the death benefitspayable under the policies. Liabilities for unpaid amounts on reported DI andLTC claims include any periodic or other benefit amounts due and accrued, alongwith estimates of the present value of obligations for continuing benefitpayments. These amounts are calculated based on claim continuance tables whichestimate the likelihood an individual will continue to be eligible forbenefits.  Present values are calculatedat interest rates established when claims are incurred. Anticipated claimcontinuance rates are based on established industry tables, adjusted asappropriate for RiverSource Life’s experience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31,2007, with an average rate of 4.9%. Interest rates used with LTC claims ranged from 4.0% to 7.0% at December 31,2007, with an average rate of 4.2%.

 

Liabilities for estimatedbenefits payable on claims that have been incurred but not yet reported arebased on periodic analysis of the actual time lag between when a claim occursand when it is reported.

 

Liabilities forestimates of benefits that will become payable on future claims on term life,whole life, DI and LTC policies are based on the net level premium method,using anticipated premium payments, mortality and morbidity rates, policypersistency and interest rates earned on assets supporting the liability.Anticipated mortality and morbidity rates are based on established industrymortality and morbidity tables, with modifications based on RiverSource Life’sexperience. Anticipated premium payments and persistency rates vary by policyform, issue age, policy duration and certain other pricing factors. Anticipatedinterest rates for term and whole life ranged from 4.0% to 10.0% at December 31,2007, depending on policy form, issue year and policy duration. Anticipatedinterest rates for DI were 7.5% at policy issue grading to 5.0% over fiveyears. Anticipated discount rates for LTC vary by plan and were 5.4% at December 31,2007 grading up to 6.8% or 9.4% over 40 years.

 

Where applicable, benefitamounts expected to be recoverable from other insurers who share in the riskare separately recorded as reinsurance recoverable within receivables.

 

RiverSource Life issuesonly non-participating life and health insurance policies, which do not paydividends to policyholders from realized policy margins.

 

***Derivative Financial Instruments and HedgingActivities***

 

RiverSource Life uses derivative financial instrumentsto manage its exposure to various market risks. All derivatives are recorded at fair value.  The fair value of RiverSource Life’sderivative financial instruments is determined using either market quotes orvaluation models that are based upon the net present value of estimated futurecash flows and incorporate current market observable inputs to the extentavailable. In certain instances, the fair value includes structuring costsincurred at the inception of the transaction. The accounting for changes in the fair value of a derivative financialinstrument depends on its intended use and the resulting hedge designation, ifany.  RiverSource Life primarily uses derivatives aseconomic hedges that are not designated as accounting hedges or do not qualifyfor hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1) hedgesof changes in the fair value of assets, liabilities, or firm commitments (“fairvalue hedges”) or (2) hedges of a forecasted transaction or of thevariability of cash flows to be received or paid related to a recognized assetor liability (“cash flow hedges”).

 

For derivative financialinstruments that do not qualify for hedge accounting or are not designated ashedges, changes in fair value are recognized in current period earnings,generally as a component of net investment income.  These derivatives primarily provide economichedges to equity market exposures. Examples include structured derivatives and options and futures thateconomically hedge the equity and interest rate components of derivativesembedded in certain annuity liabilities.

 

For derivative financialinstruments that qualify as fair value hedges, changes in the fair value of thederivatives, as well as of the corresponding hedged assets, liabilities or firmcommitments, are recognized in current earnings.  If a fair value hedge designation is 

 

 

21

----

 

 

removed or the hedge is terminatedprior to maturity, previous adjustments to the carrying value of the hedgeditem are recognized into earnings over the remaining life of the hedged item.

 

For derivative financial instruments that qualify ascash flow hedges, the effective portions of the gain or loss on the derivativeinstruments are reported in accumulated other comprehensive income (loss) andreclassified into earnings when the hedged item or transaction impactsearnings.   Any ineffective portion ofthe gain or loss is reported currently in earnings as a component of netinvestment income.  If a hedgedesignation is removed or a hedge is terminated prior to maturity, the amountpreviously recorded in accumulated other comprehensive income (loss) may berecognized into earnings over the period that the hedged item impactsearnings.  For any hedge relationshipsthat are discontinued because the forecasted transaction is not expected tooccur according to the original strategy, any related amounts previouslyrecorded in accumulated other comprehensive income (loss) are recognized inearnings immediately.

 

For further details onthe types of derivatives RiverSource Life uses and how it accounts for them,see Note 14 to the Consolidated Financial Statements.

 

***Income Tax Accounting***

 

Incometaxes, as reported in the Consolidated Financial Statements, represent the netamount of income taxes that RiverSource Life expects to pay to or receive fromvarious taxing jurisdictions in connection with its operations. RiverSourceLife provides for income taxes based on amounts that it believes it willultimately owe taking in to account the recognition and measurement foruncertain tax positions.  Inherent in theprovision for income taxes are estimates and judgments regarding the taxtreatment of certain items.  In the eventthat the ultimate tax treatment of items differs from RiverSource Life’sestimates, it may be required to significantly change the provision for incometaxes recorded in its Consolidated Financial Statements.

 

Inconnection with the provision for income taxes, the Consolidated FinancialStatements reflect certain amounts related to deferred tax assets andliabilities, which result from temporary differences between the assets andliabilities measured for financial statement purposes versus the assets andliabilities measured for tax return purposes. Among RiverSource Life’s deferredtax assets is a significant deferred tax asset relating to capital losses thathave been recognized for financial statement purposes but not yet for taxreturn purposes.  Under current U.S.federal income tax law, capital losses generally must be used against capitalgain income within five years of the year in which the capital losses arerecognized for tax purposes.

 

RiverSourceLife will not be able to file a consolidated U.S. federal income tax returnwith the other members of the Ameriprise Financial affiliated group until 2010which will result in net operating and capital losses, credits and other taxattributes generated by one group not being available to offset income earnedor taxes owed by the other group during the period of non-consolidation. Thislack of consolidation could affect RiverSource Life’s ability to fully realizecertain deferred tax assets, including the capital losses.

 

RiverSourceLife is required to establish a valuation allowance for any portion of deferredtax assets that management believes will not be realized. It is likely thatmanagement will need to identify and implement appropriate planning strategiesto ensure its ability to realize deferred tax assets and avoid theestablishment of a valuation allowance with respect to such assets.  In the opinion of management, it is currentlymore likely than not that RiverSource Life will realize the benefit of deferredtax assets, including capital loss deferred tax assets; therefore, no suchvaluation allowance has been established.

 

**Recent Accounting Pronouncements**

 

For information regardingrecent accounting pronouncements and their expected impact on futureconsolidated financial condition or results of operations, see Note 3 to theConsolidated Financial Statements.

 

**Financial Condition**

 

RiverSource Life’s totalassets and liabilities increased in 2007 primarily due to higher separateaccount assets and liabilities, which increased as a result of positivevariable annuity net flows and market appreciation.

 

Investments primarilyinclude corporate debt securities and mortgage and other asset-backedsecurities.  At December 31, 2007,RiverSource Life’s corporate debt securities comprised a diverse portfolio withthe largest concentrations accounting for approximately 69% of the portfolio inthe following industries: banking and finance, utilities, and communicationsand media. Investments also included $3.7 billion of commercial mortgage loans,policy loans and other investments at December 31, 2007 and 2006.Investments are principally funded by sales of insurance and annuities and byreinvested income.

 

 

22

----

 

 

Investments include $1.6billion and $1.8 billion of below investment grade securities at December 31,2007 and 2006, respectively. These investments represent 6% of RiverSource Life’sinvestment portfolio at both December 31, 2007 and 2006.

 

Separate account assetsprimarily represent funds held for the exclusive benefit of variable annuitycontractholders and variable life insurance policyholders. These assets are generallycarried at market value and separate account liabilities are equal to separateaccount assets. RiverSource Life earns administration and other fees from therelated accounts.  The increase inseparate account assets and liabilities to $58.1 billion as of December 31,2007 compared to $49.3 billion as of December 31, 2006, resulted from netinflows of $5.4 billion and market appreciation of $2.6 billion.

 

RiverSource Life holdsreserves for current and future obligations that are related to fixedannuities, certain guaranteed payments under variable annuities and life, DIand LTC insurance.  Reserves related tofixed annuities, guarantees under variable annuities and life, DI and LTCinsurance are reflected in future policy benefits in the Consolidated BalanceSheets.  Reserves for fixed annuities anduniversal life contracts are equal to the underlying contract accumulationvalues.  Reserves for other life, DI andLTC insurance products are based on various assumptions, including mortalityrates, morbidity rates and policy persistency.

 

**Liquidity and Capital Resources**

 

***LiquidityStrategy***

 

The liquidity requirementsof RiverSource Life are generally met by funds provided by investment income,maturities and periodic repayments of investments, deposits, premiums andproceeds from sales of investments as well as capital contributions fromAmeriprise Financial.  Other liquiditysources RiverSource Life has established are repurchase agreements and anavailable line of credit with Ameriprise Financial aggregating $200million.  The primary uses of funds arepolicy benefits, commissions, other product-related acquisition and salesinducement costs, operating expenses, policy loans, dividends to AmeripriseFinancial and investment purchases. RiverSource Life routinely reviews its sources and uses of funds inorder to meet its ongoing obligations.

 

At December 31, 2007and 2006, RiverSource Life had no securities sold under repurchase agreementsand no amounts were outstanding on the line of credit with AmeripriseFinancial.

 

***CapitalActivity***

 

During 2007, RiverSourceLife Insurance Company paid $900 million of cash dividends to AmeripriseFinancial, a portion of which was considered extraordinary.  During 2006, RiverSource Life InsuranceCompany paid $300 million of dividends to Ameriprise Financial, a portion ofwhich was considered extraordinary. Prior to the payment of the extraordinary cash dividends, RiverSourceLife Insurance Company made the required advance notices to the MinnesotaDepartment of Commerce, its primary state regulator, and received responsesstating there were no objections to the payment of these dividends.  In connection with the Separation,RiverSource Life received a capital contribution of $650 million fromAmeriprise Financial during the third quarter of 2005 to support its currentfinancial strength ratings and to cover the allocated separation costs.  During the fourth quarter of 2005,RiverSource Life Insurance Company paid dividends to Ameriprise Financial of$380 million.  In the second quarter of2007, 2006 and 2005, RiverSource Life of NY paid cash dividends of $83 million,$25 million and $23 million, respectively to RiverSource Life InsuranceCompany.  A portion of the 2007 dividendswas considered extraordinary and was paid only after making the requiredadvance notice to the New York State Insurance Department, RiverSource Life ofNY’s primary state regulator.

 

 

23

----

 

 

***RegulatoryCapital***

 

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

 
| ** **                                 | ** ** | **Actual Capital(a)   December 31,** | ** ** | **Regulatory Capital** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2007**                                  | ** ** | **2006**               | ** ** | **Requirement(b)** | ** ** |
| ** **                                 | ** ** | **(in****millions****)**                  | ** ** |
| RiverSource Life Insurance Company         |       | $                                         | 3,017      |                   | $          | 3,511 |   | $ | 442 |   |
| RiverSource Life Insurance Co. of New York |       | 288                                       |       | 348                    |       | 34 |   |
|                                            |            |                                           |            |                        |            |  |  |  |  |  |

----

(a)          Actual capital,as defined by the National Association of Insurance Commissioners (“NAIC”) forpurposes of meeting regulatory capital requirements, includes statutory capitaland surplus, plus certain statutory valuation reserves.

 

(b)         Regulatorycapital requirement is based on the most recent statutory risk-based capitalfiling as of December 31, 2007.

 

***ContractualCommitments***

 

The contractualobligations identified in the table below include balance sheet transactionsthat represent material expected or contractually committed future obligationsof RiverSource Life.  Payments due byperiod as of December 31, 2007 are as follows:

 
| ** **                  | ** ** | **Payments due in year ending** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Total**                       | ** ** | **2008** | ** ** | **2009-  2010** | ** ** | **2011-  2012** | ** ** | **2013 and thereafter** | ** ** |
| ** **                  | ** ** | **(in millions)**               | ** ** |
| Insurance and annuities (1) |       | $                               | 40,031     |   | $ | 3,442 |   | $ | 5,638 |   | $ | 4,610 |   | $ | 26,341 |   |
|                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)    These scheduledpayments are represented by reserves of approximately $27.0 billion at December 31,2007 and are based on interest credited, mortality, morbidity, lapse, surrenderand premium payment assumptions.  Actualpayment obligations may differ if experience varies from theseassumptions.  Separate accountliabilities have been excluded as associated contractual obligations would bemet by separate account assets.

 

***Off-BalanceSheet Arrangements***

 

*ConsolidatedVariable Interest Entities*

 

During the year ended December 31,2005, RiverSource Life consolidated two secured loan trusts (“SLTs”) whichprovided returns to investors primarily based on the performance of anunderlying portfolio of high-yield loans and which were managed by anaffiliate.  The SLTs were liquidated in2005, resulting in a $14 million pretax gain for the year ended December 31,2005.  There is no remaining exposurerelated to these SLTs as a result of their liquidation.

 

*Retained Interest in AssetsTransferred to Unconsolidated Entities*

 

In 2001, RiverSource Lifeplaced a majority of its rated collateralized debt obligation (“CDO”)securities and related accrued interest, as well as a relatively minor amountof other liquid securities, having an aggregate book value of $675 million,into a securitization trust.  In return,RiverSource Life received $90 million in cash (excluding transaction expenses)relating to sales to unaffiliated investors and retained interests withallocated book amounts aggregating $586 million.  During the second quarter of 2005,RiverSource Life sold all of its retained interest in the CDO-relatedsecuritization trust and realized a net pretax gain of $25 million.

 

**Risk Management**

 

In accordance withregulatory investment guidelines, RiverSource Life Insurance Company and RiverSource Life of NY, through their respective boards of directorsor board of directors’ investment committees or staff functions, review modelsprojecting different interest rate scenarios, risk/return measures, and theireffect on profitability in order to guide the management of the general accountassets.  They also review thedistribution of assets in the portfolio by type and credit risk sector.  The objective is to structure the investmentsecurities portfolio in the general account to meet contractual obligationsunder the insurance and annuity products and achieve targeted levels ofprofitability within defined risk parameters.

 

RiverSource Life hasdeveloped an asset/liability management approach with separate investmentobjectives to support specific product liabilities, such as insurance andannuities.  As part of this approach,RiverSource Life develops specific investment guidelines that are designed tooptimize trade offs between risk and return and help ensure RiverSource Life isable to support 

 

 

24

----

 

 

future benefit paymentsunder its insurance and annuity obligations. These same objectives must be consistent with management’s overallinvestment objectives for the general account investment portfolio.

 

RiverSource Life’s ownedinvestment securities are primarily invested in long-term and intermediate-termfixed maturity securities to provide clients with a competitive rate of returnon their investments while managing risk. Investment in fixed maturitysecurities is designed to provide RiverSource Life with a targeted marginbetween the yield earned on investments and the interest rate credited toclients’ accounts. RiverSource Life does not trade in securities to generateshort-term profits for its own account.

 

As part of RiverSourceLife’s investment process, management, with the assistance of its investmentadvisors, conducts a quarterly review of investment performance.  The review process involves the review ofcertain invested assets which the committee evaluates to determine whether ornot any investments are other-than-temporarily impaired and/or which specificinterest earning investments should be put on an interest non-accrual basis.

 

RiverSource Life has twoprincipal components of market risk: interest rate risk and equity market risk.Interest rate risk results from investing in assets that are somewhat longerand reset less frequently than the liabilities they support.  RiverSource Life manages interest rate riskthrough the use of a variety of tools that include modifying the maturities ofinvestments supporting its fixed annuities and insurance products.  Additionally, RiverSource Life enters intoderivative financial instruments, such as interest rate swaps, caps, floors andswaptions, which change the interest rate characteristics of client liabilitiesor investment assets.  Because certain ofits investment activities are impacted by the value of its managed equity-basedportfolios, from time to time RiverSource Life enters into risk managementstrategies that may include the use of equity derivative financial instruments,such as equity options, to mitigate its exposure to volatility in the equitymarkets.

 

**Quantitativeand Qualitative Disclosures about Market Risks**

** **

Interestrate, equity price and credit risk are the market risks to which RiverSourceLife has material exposure. To evaluate interest rate and equity price risk,RiverSource Life performs sensitivity testing which measures the impact onpretax income from the sources listed below for a 12 month period following a hypothetical100 basis point increase in interest rates and a hypothetical 10% decline inequity markets.

 

At December 31, 2007,aggregating RiverSource Life’s exposure from all sources of interest rate risknet of financial derivatives hedging thatexposure detailed below, RiverSource Life estimates a negative impact of $3million on pretax income for the 12 month period if, hypothetically, interestrates had increased by 100 basis points and remain at that level for 12 months.  This compares with an estimate of a negativeimpact of $23 million made at December 31, 2006 for 12 months following ahypothetical 100 basis point increase in interest rates at December 31,2006.

 

Equity price risk includes absolutemarket level and implied market volatility changes.  The estimates of net equity price riskexposure presented below assume no changes in implied market volatility.  At December 31, 2007, aggregatingRiverSource Life’s exposure from equity price risk net of financial derivativeshedging that exposure detailed below, RiverSource Life estimates a negative impactof $64 million on pretax income for the 12 month period if, hypothetically,equity markets had declined by 10% and remain at that level for 12 months. Thiscompares with an estimate of a negative impact of $79 million made at December 31,2006 for 12 months following a hypothetical 10% drop in equity markets at December 31,2006.

 

The numbers below show RiverSourceLife’s estimate of the pretax impact of these hypothetical market moves, net ofhedging and DAC, as of December 31, 2007. Following the table is adiscussion by source of risk and the portfolio management techniques andderivative financial instruments RiverSource Life uses to mitigate these risks.

 
| ** **                                                                         | ** ** | **Net Risk Exposure to   Pretax Income** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **Sources of Market Risk**                                                         | ** ** | **Interest Rate**                        | ** ** | **Equity Price** | ** ** |
| ** **                                                                         | ** ** | **(in millions)**                        | ** ** |
|                                                                               |       |                                     |       |   |   |
| Asset-based fees                                                                   |       | $                                        | (11        | ) | $ | (55 | ) |
| Variable annuity riders                                                            |       | 14                                       |       | (9 | ) |
| Fixed annuities, fixed portion of variable annuities  and fixed insurance products |       | (6                                       | )          | — |   |
| Total                                                                              |       | $                                        | (3         | ) | $ | (64 | ) |

 

 

25

----

 

Actual results could differmaterially from those illustrated above as they are based on a number ofestimates and assumptions. These include assuming the composition of investedassets and liabilities does not change in the 12 month period following the hypotheticalmarket decline, that there are no changes in implied market volatility and theincrease in interest rates produces a parallel shift in the yield curve. Theselection of a 100 basis point interest rate increase and a 10% equity marketdecline should not be construed as a prediction of future market events.

 

Forannuity and universal life products, DAC are amortized on the basis ofestimated gross profits. Estimated gross profits are a proxy for pretax incomeprior to the recognition of DAC amortization expense. When events occur thatreduce or increase current period estimated gross profits, DAC amortizationexpense is typically reduced or increased as well, somewhat mitigating theimpact of the event on pretax income.

 

***VariableAnnuity Riders***

 

The guaranteed benefits associatedwith the variable annuities are GMWB, GMAB, GMDB and GMIB options. Each of theguaranteed benefits mentioned above guarantees payouts to the annuity holderunder certain specific conditions regardless of the performance of theunderlying investment assets.

 

The total value of all variableannuity contracts has grown from $49.5billion at December 31, 2006 to $57.2 billion at December 31, 2007.These contract values include GMWB and GMAB contracts which have grown from$7.2 billion and $1.4 billion at December 31, 2006 to $13.1 billion and$2.3 billion at December 31, 2007, respectively.  At December 31, 2007, the reserves forthe GMWB and GMAB were a positive $136 million and $33 million compared toreserves of negative $12 million and $5 million at December 31, 2006,respectively. The large increases in the reserves for the GMWB and GMAB reflectthe effects of a substantial increase in long term volatility on themark-to-market value of the guarantees. At December 31, 2007, the reserve for the other variable annuityguaranteed benefits, GMDB and GMIB, was $27 million compared to $31 million at December 31,2006.

 

RiverSource Life manages the marketrisk on the guaranteed benefits by product design and by the use of financialderivatives which hedge the GMWB and GMAB. The design of the GMWB is an exampleof how RiverSource Life uses product design to manage risk.  The GMWB provision requires thatpolicyholders invest their funds in one of five asset allocation models, thusensuring diversification across asset classes and underlying funds, reducingthe likelihood that payouts from the guaranteed benefits will be required tocompensate policyholders for investment losses.

 

As a means of economically hedgingits obligations under GMWB and GMAB provisions, RiverSource Life purchasesequity put and call options, enters into interest rate swaps and trades equityfutures contracts.  The notional amountsand the fair value of assets (liabilities) of derivatives hedging its GMWB andGMAB were as follows:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Notional Amount**   | ** ** | **Fair  Value** | ** ** | **Notional Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                     | ** ** | **(in millions)**     | ** ** |
| Purchased options and futures  |       | $                     | 6,318      |   | $ | 338 |   | $ | 1,410 |   | $ | 171 |   |
| Interest rate swaps            |       | 202                   |       | 2 |   | 359 |   | (1 | ) |
| Written S&P 500 futures(1) |       | (202                  | )          | — |   | (111 | ) | — |   |
|                                |            |                       |            |  |  |  |  |  |  |  |  |  |  |

----

(1) These Standard &Poor’s (“S&P”) 500 futures are cash settled daily and, therefore, have nofair value.

 

***InterestRate Risk — Variable Annuity Riders***

 

The GMAB and the non-life contingentbenefits associated with the GMWB provisions create embedded derivatives whichare carried at fair value separately from the underlying host variable annuitycontract.  Changes in fair value of theGMWB and GMAB are recorded through earnings with fair value calculated based onprojected, discounted cash flows over the life of the contract, includingprojected, discounted benefits and fees. Increases in interest rates reduce the fair value of the GMWB and GMABliabilities.  At December 31, 2007,if interest rates had increased by, hypothetically, 100 basis points and remainat that level for 12 months, RiverSource Life estimates that the fair values ofits GMWB and GMAB liabilities would decrease by $127 million and $23 million,respectively, with a favorable impact to pretax income.  The GMWB and GMAB interest rate exposure ishedged with a portfolio of longer dated put and call derivatives and interestrate swaps.  RiverSource Life beganutilizing the puts and calls as a way to improve effectiveness and reducehedging costs.  These derivatives are analternative to the more 

 

 

26

----

 

 

customized equity puts that werepreviously used.  At December 31,2007, RiverSource Life had equity puts and calls with notional amounts of $5.3billion and $954 million related to GMWB and GMAB, respectively.  The interest rate swaps had notional amountsof $193 million and $9 million related to GMWB and GMAB, respectively.  RiverSource Life entered into interest rate swaps according to risk exposures along maturities,thus creating both fixed rate payor and variable rate payor terms.  If interest rates were to increase,RiverSource Life would have to pay more to the swap counterparty and the fairvalue of its equity puts would decrease, resulting in a negative impact to itspretax income.  For a hypothetical 100basis point increase in interest rates sustained for a 12 month period,RiverSource Life estimates that the negative impact of the derivatives onpretax income would be $114 million.  Ofthe $114 million, $95 million is attributable to its GMWB and $19 million isattributable to its GMAB.  The net impacton pretax income after hedging would be a favorable $14 million which consistsof a $32 million and $4 million favorable impact attributable to its GMWB andGMAB, respectively, and a $22 million negative impact related to DACamortization.

 

Separate account assets areprimarily held for the exclusive benefit of variable annuity contractholders.RiverSource Life does, however, receive asset-based fees on fixed incomeinvestments the annuity contractholders have in the separate accounts. Anincrease in interest rates would decrease fixed rate separate account assetsand decrease related fees with a negative impact to pretax income.  At December 31, 2007, RiverSource Lifeestimates the interest rate risk from this exposure on pretax income if,hypothetically, interest rates had increased by 100 basis points and remain atthat level for 12 months to be a negative $11 million for the 12 month period.RiverSource Life does not hedge this exposure.

 

***EquityPrice Risk — Variable Annuity Riders***

 

The variable annuity guaranteedbenefits guarantee payouts to the annuity holder under certain specificconditions, regardless of the performance of the investment assets. For thisreason, when equity markets decline, the returns from the separate accountassets coupled with guaranteed benefit fees from annuity holders may not besufficient to fund expected payouts. In that case, reserves must be increasedwith a negative impact to earnings. If, hypothetically, equity markets haddeclined by 10% at December 31, 2007 and remain at that level for 12months, RiverSource Life estimates the negative impact on pretax income beforehedging to be $23 million attributable to GMWB, $13 million attributable toGMAB and $11 million attributable to GMDB and GMIB.

 

The core derivative instruments withwhich RiverSource Life hedges the equity price risk of its GMWB and GMAB arelonger dated put and call derivatives; these core instruments are supplementedwith equity futures.  The put and callcontracts had notional amounts of $5.3 billion and $954 million at December 31, 2007for GMWB and GMAB, respectively.  Theequity futures had notional amounts of $174 million and $69 million at December 31,2007 for GMWB and GMAB, respectively. If, hypothetically, equity markets had declined by 10% at December 31,2007 and remain at that level for 12 months, RiverSource Life estimates apositive impact to pretax income of $27 million and $13 million from theoptions and futures for GMWB and GMAB, respectively.  The net equity price exposure to pretaxincome from all of its variable annuity guaranteed benefits after hedging wouldbe a negative $9 million, which includes a $4 million favorable impactattributable to GMWB, an $11 million negative impact attributable to GMDB andGMIB and a $2 million negative impact related to DAC amortization.  The positive impact of RiverSource Life’shedging strategy offsets negative impact attributable to GMAB for an immaterialnet exposure.

 

A decline in equity markets wouldalso reduce the asset-based fees RiverSource Life earns on equity marketinvestments that its annuity contractholders have in separate accounts.  At December 31, 2007, RiverSource Lifeestimates the equity price risk from this exposure on pretax income if,hypothetically, equity markets decreased immediately by 10% and remain at thatlevel for 12 months to be a negative impact of $55 million for the 12 monthperiod.

 

***FixedAnnuities, Fixed Portion of Variable Annuities and Fixed Insurance Products***

 

Interest rate exposures ariseprimarily with respect to the fixed account portion of RiverSource Life’sannuity and insurance products and its investment portfolio. RiverSource Lifeguarantees an interest rate to the holders of these products. Premiums anddeposits collected from clients are primarily invested in fixed rate securitiesto fund the client credited rate with the spread between the rate earned frominvestments and the rate credited to clients recorded as earned income. Clientliabilities and investment assets generally differ as it relates to basis,repricing or maturity characteristics. Rates credited to clients’ accountsgenerally reset at shorter intervals than the yield on the underlyinginvestments.

 

Therefore,in an increasing rate environment, higher interest rates are reflected increditing rates to clients sooner than in rates earned on invested assetsresulting in a reduced spread between the two rates, reduced earned income anda negative impact on pretax income. RiverSource Life had $26.8 billion inreserves in future policy benefits on its Consolidated Balance Sheets at 

 

 

27

----

 

 

December 31,2007 to recognize liabilities created by these products. To hedge against therisk of higher interest rates, RiverSource Life has purchased swaptioncontracts which had the following notional amounts and fair value assets:

 
| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **          | ** ** | **Notional Amount**   | ** ** | **Fair  Value** | ** ** | **Notional Amount** | ** ** | **Fair  Value** | ** ** |
| ** **          | ** ** | **(in millions)**     | ** ** |
| Purchased swaptions |       | $                     | 800        |   | $ | 1 |   | $ | 1,200 |   | $ | 2 |   |
|                     |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

If interest rates had increased by,hypothetically, 100 basis points at December 31, 2007 and remain at thatlevel for 12 months, RiverSource Life estimates the impact on pretax income forthe 12 month period to be a negative $6 million.

 

***EquityIndexed Annuities***

 

RiverSourceLife’s equity indexed annuity product is a single premium annuity issued withan initial term of seven years. The annuity guarantees the contractholder aminimum return of 3% on 90% of the initial premium or end of prior termaccumulation value upon renewal plus a return that is linked to the performanceof the S&P 500 Index.  Theequity-linked return is based on a participation rate initially set at between50% and 90% of the S&P 500 Index which is guaranteed for the initialseven-year term when the contract is held to full term. Of the $27.4 billion infuture policy benefits at December 31, 2007, $306 million relates to theliabilities created by this product.  In2007, RiverSource Life discontinued new sales of equity indexed annuities.  The notional amounts and fair value assets(liabilities) of derivatives hedging this product were as follows:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Notional Amount**   | ** ** | **Fair  Value** | ** ** | **Notional Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                     | ** ** | **(in millions)**     | ** ** |
| Purchased options and futures  |       | $                     | 164        |   | $ | 39 |   | $ | 185 |   | $ | 37 |   |
| Purchased Knock-in-Puts        |       | 73                    |       | 4 |   | 86 |   | 3 |   |
| Written Knock-in-Puts          |       | (57                   | )          | (1 | ) | (67 | ) | (1 | ) |
| Written S&P 500 futures(1) |       | (1                    | )          | — |   | — |   | — |   |
|                                |            |                       |            |  |  |  |  |  |  |  |  |  |  |

----

(1) These S&P 500 futuresare cash settled daily and, therefore, have no fair value.

 

***InterestRate Risk — Equity Indexed Annuities***

 

Most of theproceeds from the sale of equity indexed annuities are invested in fixed incomesecurities with the return on those investments intended to fund the 3%guarantee. RiverSource Life earns income from the difference between the returnearned on invested assets and the 3% guarantee rate credited to customeraccounts. The spread between return earned and amount credited is affected bychanges in interest rates. RiverSource Life estimates that if, hypothetically,interest rates had increased by 100 basis points at December 31, 2007 andremain at that level for 12 months, the unhedged exposure would be a negativeimpact of $1 million on pretax income for the 12 month period offset by apositive impact of $1 million from its hedging strategy for an immaterial netexposure.

 

***EquityPrice Risk — Equity Indexed Annuities***

 

The equity-linked return toinvestors creates equity price risk as the amount credited depends on changesin equity markets. To hedge this exposure, a portion of the proceeds from thesale of equity indexed annuities is used to purchase futures, calls and putswhich generate returns to replicate what RiverSource Life must credit to clientaccounts. In conjunction with purchasing puts, RiverSource Life also writesputs. Pairing purchased puts with written puts allows RiverSource Life tobetter match the characteristics of the liability. For this product,RiverSource Life estimates that if, hypothetically, the equity markets haddeclined by 10% at December 31, 2007 and remain at that level for 12months, the impact to pretax income for the12 month period without hedging would be a positive $15 million. Theimpact of its hedging strategy offsets that gain for an immaterial netexposure.

 

 

28

----

 

 

***CreditRisk***

 

RiverSource Life’s potentialderivative credit exposure to each counterparty is aggregated with all of itsother exposures to the counterparty to determine compliance with establishedcredit and market risk limits at the time RiverSource Life enters into aderivative transaction. Credit exposures may take into account enforceablenetting arrangements. Before executing a new type or structure of derivativecontract, RiverSource Life determines the variability of the contract’spotential market and credit exposures and whether such variability mightreasonably be expected to create exposure to a counterparty in excess ofestablished limits.

 

**Forward-LookingStatements**

This report containsforward-looking statements that reflect RiverSource Life’s plans, estimates andbeliefs.  RiverSource Life’s actualresults could differ materially from those described in these forward-lookingstatements.  The words “believe,” “expect,”“anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,”“would,” “likely” and similar expressions are intended to identifyforward-looking statements but are not the exclusive means of identifying suchstatements.  Forward-looking statementsare subject to risks and uncertainties which could cause actual results todiffer materially from such statements. RiverSource Life cautions the reader that the following list of factorsis not exhaustive.  There may also beother risks that RiverSource Life is unable to predict at this time that maycause actual results to differ materially from those in forward-lookingstatements.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date on which they are made.  RiverSource Life undertakes no obligation to update or revise anyforward-looking statements.

 

Factors that could causeactual results to differ materially from these forward-looking statementsinclude, but are not limited to, the following:

 

·                    changes in interest rates, equity pricelevels, equity market volatility and other financial market factors;

 

·                    changes in the litigation and regulatory environmentand judicial or legislative developments, including the increasing focus oncustomer suitability, sales practices and disclosure, as well as ongoing legalproceedings and regulatory actions;

 

·                    RiverSource Life’s investment management performanceand consumer acceptance of RiverSource Life’s products;

 

·                    effects of competition in the financialservices industry and changes in RiverSource Life’s product distribution mixand distribution channels;

 

·                    RiverSource Life’s capital structure as asubsidiary of Ameriprise Financial, including the ability of its parent tosupport its financial strength and ratings;

 

·                    risks of default by issuers ofinvestments RiverSource Life owns or by counterparties to derivative orreinsurance arrangements;

 

·                    experience deviations from RiverSourceLife’s assumptions regarding morbidity, mortality and persistency in certainannuity and insurance products;

 

·                    successfully cross-selling insurance and annuityproducts and services to Ameriprise Financial’s customer base;

 

·                    RiverSource Life’s ability to effectivelyhedge risks relating to guaranteed benefit riders and certain other products;

 

·                    the impact of intercompany allocations toRiverSource Life from Ameriprise Financial and its affiliates;

 

·                    Ameriprise Financial’s ability toattract, recruit and retain qualified advisors and employees and its ability todistribute RiverSource Life’s products through current and future distributionchannels;

 

·                    the impact of Ameriprise Financial’sefforts to improve distribution economics and of RiverSource Life’s efforts togrow third party distribution and to realize benefits from tax planning;

 

·                    changes in U.S. federal income or estatetax laws potentially making RiverSource Life’s products less attractive toclients;

 

·                    RiverSource Life’s ability to recoverfrom catastrophes, both natural and man-made; and

 

·                     general economic and political factors,including consumer confidence in the economy, and in applicable legislation andregulation, including tax law, tax treaties and regulatory rulings andpronouncements.

 

A further description ofthese and other risks and uncertainties can be found under “Item 1A - RiskFactors”.

 

**ITEM7A.               QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Items required under thissection are included in “Item 7 — Management’s Narrative Analysis - RiskManagement.”

 

 

29

----

 

**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

 
| ** **                                                                                                                    | **Page   Number** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------------------|------------|
|                                                                                                                          |                   |       |
| **Consolidated  Financial Statements:**                                                                                       |                   |       |
|                                                                                                                          |                   |       |
| Report  of Independent Registered Public Accounting Firm                                                                      | 31                     |       |
|                                                                                                                          |                   |       |
| Consolidated  Balance Sheets at December 31, 2007 and 2006                                                               | 32                     |       |
|                                                                                                                          |                   |       |
| Consolidated Statements of Income for each of the  three years ended December 31, 2007, 2006 and 2005                    | 33                     |       |
|                                                                                                                          |                   |       |
| Consolidated Statements of Cash Flows for each of the  three years ended December 31, 2007, 2006 and 2005                | 34 to 35               |       |
|                                                                                                                          |                   |       |
| Consolidated Statements of Shareholder’s Equity for  each of the three years ended December 31, 2007, 2006 and 2005 | 36                     |       |
|                                                                                                                          |                   |       |
| Notes to Consolidated Financial Statements                                                                                    | 37 to 68               |       |

 

 

**Schedules:**

All information onschedules to the Consolidated Financial Statements required by Rule 7-05in Article 7 of Regulation S-X is included in the Consolidated FinancialStatements and Notes thereto or is not required.  Therefore, all schedules have been omitted. 

 

 

30

----

 

 

Reportof IndependentRegistered Public Accounting Firm

 

The Board of Directors RiverSource Life Insurance Company

 

We have audited theaccompanying consolidated balance sheets of RiverSource Life Insurance Company,(a wholly owned subsidiary of Ameriprise Financial, Inc.) (the Company) asof December 31, 2007 and 2006, and the related consolidated statements ofincome, shareholder’s equity, and cash flows for each of the three years in theperiod ended December 31, 2007. These financial statements are the responsibility of RiverSource LifeInsurance Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of RiverSource Life InsuranceCompany at December 31, 2007 and 2006, and the consolidated results of itsoperations and its cash flows for each of the three years in the period ended December 31,2007, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 3 to theconsolidated financial statements, in 2007 the Company adopted FinancialAccounting Standards Board (FASB) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*, and American Institute of Certified PublicAccountants Statement of Position 05-1, *Accounting by InsuranceEnterprises for Deferred Acquisition Costs in Connection With Modification orExchanges of Insurance Contracts*.

 

 
|                   | /s/ Ernst &  Young LLP |
|------------------------|---------------------------------|
|                   |                            |
| Minneapolis, Minnesota |                            |
| February 27, 2008 |                            |

 

 

31

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**CONSOLIDATED BALANCE SHEETS**

(in millions,except share amounts)

 
| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Assets**                                                                                 |       |                  |       |   |   |
| Investments:                                                                               |       |                  |       |   |   |
| Available-for-Sale:                                                                        |       |                  |       |   |   |
| Fixed  maturities, at fair value (amortized cost: 2007, $21,020; 2006, $25,289)            |       | $                     | 20,792     |   | $ | 24,995 |   |
| Common and  preferred stocks, at fair value (cost: 2007 and 2006, $30)                     |       | 29                    |       | 31 |   |
| Commercial mortgage loans, at cost (less allowance  for loan losses: 2007, $16; 2006, $37) |       | 2,892                 |       | 2,790 |   |
| Policy loans                                                                               |       | 697                   |       | 650 |   |
| Trading securities and other investments                                                   |       | 67                    |       | 241 |   |
| Total  investments                                                                         |       | 24,477                |       | 28,707 |   |
|                                                                                       |       |                  |       |   |   |
| Cash and cash equivalents                                                                  |       | 973                   |       | 160 |   |
| Reinsurance recoverables                                                                   |       | 1,290                 |       | 1,137 |   |
| Amounts due from brokers                                                                   |       | 123                   |       | 7 |   |
| Other accounts receivable                                                                  |       | 118                   |       | 90 |   |
| Accrued investment income                                                                  |       | 252                   |       | 301 |   |
| Deferred acquisition costs                                                                 |       | 4,429                 |       | 4,411 |   |
| Deferred sales inducement costs                                                            |       | 511                   |       | 452 |   |
| Other assets                                                                               |       | 539                   |       | 320 |   |
| Separate account assets                                                                    |       | 58,070                |       | 49,287 |   |
|                                                                                       |       |                  |       |   |   |
| Total assets                                                                               |       | $                     | 90,782     |   | $ | 84,872 |   |
|                                                                                       |       |                  |       |   |   |
| **Liabilities and Shareholder’s Equity**                                              |       |                  |       |   |   |
| Liabilities:                                                                               |       |                  |       |   |   |
| Future policy benefits                                                                     |       | $                     | 26,977     |   | $ | 29,561 |   |
| Policy claims and other policyholders’ funds                                          |       | 91                    |       | 89 |   |
| Amounts due to brokers                                                                     |       | 361                   |       | 132 |   |
| Deferred income taxes, net                                                                 |       | 133                   |       | 90 |   |
| Other liabilities                                                                          |       | 430                   |       | 443 |   |
| Separate account liabilities                                                               |       | 58,070                |       | 49,287 |   |
| Total  liabilities                                                                         |       | 86,062                |       | 79,602 |   |
|                                                                                       |       |                  |       |   |   |
| Shareholder’s equity:                                                                 |       |                  |       |   |   |
| Common stock, $30 par value;                                                               |       |                  |       |   |   |
| 100,000 shares  authorized, issued and outstanding                                         |       | 3                     |       | 3 |   |
| Additional paid-in capital                                                                 |       | 2,031                 |       | 2,021 |   |
| Retained earnings                                                                          |       | 2,842                 |       | 3,455 |   |
| Accumulated other comprehensive loss, net of tax:                                          |       |                  |       |   |   |
| Net unrealized  securities losses                                                          |       | (116                  | )          | (168 | ) |
| Net unrealized  derivative losses                                                          |       | (40                   | )          | (41 | ) |
| Total accumulated other comprehensive loss                                                 |       | (156                  | )          | (209 | ) |
| Total  shareholder’s equity                                                           |       | 4,720                 |       | 5,270 |   |
|                                                                                       |       |                  |       |   |   |
| Total  liabilities and shareholder’s equity                                           |       | $                     | 90,782     |   | $ | 84,872 |   |

 

See Notes to Consolidated Financial Statements.

 

 

32

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**CONSOLIDATED STATEMENTS OF INCOME**

 (in millions)

** **
| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues**                                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Premiums                                          |       | $                                 | 485        |   | $ | 533 |   | $ | 521 |   |
| Net investment  income                            |       | 1,555                             |       | 1,657 |   | 1,786 |   |
| Policy and  contract charges                      |       | 1,217                             |       | 1,045 |   | 898 |   |
| Other revenue                                     |       | 255                               |       | 189 |   | 127 |   |
| Net realized  investment gain                     |       | 61                                |       | 51 |   | 48 |   |
|                                              |       |                              |       |   |   |   |   |
| Total revenues                                    |       | 3,573                             |       | 3,475 |   | 3,380 |   |
|                                              |       |                              |       |   |   |   |   |
| **Benefits and expenses**                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefits,  claims, losses and settlement expenses |       | 855                               |       | 705 |   | 697 |   |
| Interest  credited to fixed accounts              |       | 850                               |       | 968 |   | 1,020 |   |
| Amortization of  deferred acquisition costs       |       | 470                               |       | 356 |   | 316 |   |
| Separation costs                                  |       | 97                                |       | 131 |   | 121 |   |
| Other insurance  and operating expenses           |       | 781                               |       | 637 |   | 585 |   |
|                                              |       |                              |       |   |   |   |   |
| Total benefits  and expenses                      |       | 3,053                             |       | 2,797 |   | 2,739 |   |
|                                              |       |                              |       |   |   |   |   |
| Pretax income                                     |       | 520                               |       | 678 |   | 641 |   |
| Income tax provision                              |       | 99                                |       | 192 |   | 182 |   |
|                                              |       |                              |       |   |   |   |   |
| Net income                                        |       | $                                 | 421        |   | $ | 486 |   | $ | 459 |   |

 

See Notes toConsolidated Financial Statements.

 

 

33

----

 

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 (in millions)

** **
| ** **                                                                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash Flows from Operating Activities**                                                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                     |       | $                                 | 421        |   | $ | 486 |   | $ | 459 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:             |       |                              |       |   |   |   |   |
| Amortization of  deferred acquisition costs and deferred sales inducement costs                |       | 523                               |       | 404 |   | 356 |   |
| Capitalization  of deferred acquisition costs and deferred sales inducement costs              |       | (828                              | )          | (813 | ) | (727 | ) |
| Amortization of  premium, net                                                                  |       | 70                                |       | 75 |   | 83 |   |
| Deferred income  taxes                                                                         |       | 83                                |       | 123 |   | 122 |   |
| Contractholder  and policyholder charges, non-cash                                             |       | (206                              | )          | (220 | ) | (232 | ) |
| Net realized  investment gains                                                                 |       | (61                               | )          | (51 | ) | (48 | ) |
| Net realized  gain on trading securities and equity method investments in hedge   funds        |       | (1                                | )          | (16 | ) | (24 | ) |
| Change in operating assets and liabilities:                                                    |       |                              |       |   |   |   |   |
| Trading  securities and equity method investments in hedge funds, net                          |       | 124                               |       | 297 |   | 247 |   |
| Future policy  benefits for traditional life, disability income and long term care   insurance |       | 275                               |       | 274 |   | 230 |   |
| Policy claims  and other policyholders’ funds                                             |       | 2                                 |       | 3 |   | 19 |   |
| Reinsurance  recoverables                                                                      |       | (153                              | )          | (154 | ) | (106 | ) |
| Other accounts  receivable                                                                     |       | (28                               | )          | (27 | ) | (11 | ) |
| Accrued  investment income                                                                     |       | 49                                |       | 21 |   | 23 |   |
| Other assets and  liabilities, net                                                             |       | (32                               | )          | (104 | ) | (31 | ) |
|                                                                                           |       |                              |       |   |   |   |   |
| **Net cash provided by operating activities**                                                  |       | $                                 | 238        |   | $ | 298 |   | $ | 360 |   |
|                                                                                           |       |                              |       |   |   |   |   |

 

See Notes to Consolidated Financial Statements.

 

 

34

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)**

(in millions)

 
| ** **                                                                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash Flows from Investing Activities**                                     | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available-for-Sale securities:                                               |       |                              |       |   |   |   |   |
| Proceeds from  sales                                                         |       | $                                 | 3,020      |   | $ | 1,897 |   | $ | 3,124 |   |
| Maturities,  sinking fund payments and calls                                 |       | 1,908                             |       | 2,014 |   | 2,242 |   |
| Purchases                                                                    |       | (687                              | )          | (1,433 | ) | (5,780 | ) |
| Other investments, excluding policy loans:                                   |       |                              |       |   |   |   |   |
| Proceeds from  sales, maturities, sinking fund payments and calls            |       | 473                               |       | 519 |   | 653 |   |
| Purchases                                                                    |       | (504                              | )          | (441 | ) | (543 | ) |
| Change in policy loans, net                                                  |       | (47                               | )          | (36 | ) | (17 | ) |
| Change in amounts due to and from brokers, net                               |       | 113                               |       | 97 |   | (128 | ) |
| Change in restricted cash                                                    |       | —                            |       | — |   | 536 |   |
| **Net cash provided by investing activities**                                |       | 4,276                             |       | 2,617 |   | 87 |   |
|                                                                         |       |                              |       |   |   |   |   |
| **Cash Flows from Financing Activities**                                     |       |                              |       |   |   |   |   |
| Activity related to investment contracts and  universal life-type insurance: |       |                              |       |   |   |   |   |
| Considerations  received                                                     |       | 1,093                             |       | 1,267 |   | 1,532 |   |
| Net transfers to  separate accounts                                          |       | (50                               | )          | (307 | ) | (13 | ) |
| Surrenders and  other benefits                                               |       | (3,838                            | )          | (3,688 | ) | (2,126 | ) |
| Other                                                                        |       | (8                                | )          | — |   | — |   |
| Tax adjustment of share-based incentive employee  compensation plan          |       | 2                                 |       | 1 |   | — |   |
| Capital contribution from Ameriprise  Financial, Inc.                   |       | —                            |       | — |   | 650 |   |
| Cash dividend to Ameriprise Financial, Inc.                             |       | (900                              | )          | (300 | ) | (380 | ) |
| **Net cash used in financing activities**                                    |       | (3,701                            | )          | (3,027 | ) | (337 | ) |
|                                                                         |       |                              |       |   |   |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                    |       | 813                               |       | (112 | ) | 110 |   |
| Cash and cash equivalents at beginning of year                               |       | 160                               |       | 272 |   | 162 |   |
| **Cash and cash equivalents at end of year**                                 |       | $                                 | 973        |   | $ | 160 |   | $ | 272 |   |
|                                                                         |       |                              |       |   |   |   |   |
| Supplemental disclosures:                                                    |       |                              |       |   |   |   |   |
| Income taxes  paid (received), net                                           |       | $                                 | (4         | ) | $ | 64 |   | $ | 96 |   |
| Interest paid on  borrowings                                                 |       |                              | —     |   |   | 1 |   |   | — |   |

 

See Notes to Consolidated Financial Statements.

 

 

35

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY**

**THREEYEARS ENDED DECEMBER 31, 2007**

(in millions)

 

** **
| ** **                                                          | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| ** **                                                          |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| **Balances at December 31, 2004**                              |       | $                 | 3          |                             | $          | 1,370                  |       | $                                                    | 3,190      |      | $          | 341 |   | $ | 4,904 |   |
| ** **                                                          |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Other comprehensive loss:                                           |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Net income                                                          |       | —            |       | —                           |       | 459                    |       | —                                               |       | 459       |       |
| Change in  unrealized holding losses on securities, net             |       | —            |       | —                           |       | —                 |       | (461                                                 | )          | (461      | )          |
| Change in  unrealized derivative losses, net                        |       | —            |       | —                           |       | —                 |       | (11                                                  | )          | (11       | )          |
| Total other comprehensive loss                                      |       | —            |       | —                           |       | —                 |       | —                                               |       | (13       | )          |
| Capital contribution from Ameriprise  Financial, Inc.          |       | —            |       | 650                              |       | —                 |       | —                                               |       | 650       |       |
| Cash dividend to Ameriprise Financial, Inc.                    |       | —            |       | —                           |       | (380                   | )          | —                                               |       | (380      | )          |
|                                                                |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| **Balances at December 31, 2005**                              |       | $                 | 3          |                             | $          | 2,020                  |       | $                                                    | 3,269      |      | $          | (131 | ) | $ | 5,161 |   |
| ** **                                                          |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Other comprehensive income:                                         |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Net income                                                          |       | —            |       | —                           |       | 486                    |       | —                                               |       | 486       |       |
| Change in  unrealized holding losses on securities, net             |       | —            |       | —                           |       | —                 |       | (77                                                  | )          | (77       | )          |
| Change in  unrealized derivative losses, net                        |       | —            |       | —                           |       | —                 |       | (1                                                   | )          | (1        | )          |
| Total other comprehensive income                                    |       | —            |       | —                           |       | —                 |       | —                                               |       | 408       |       |
| Tax adjustment of share-based incentive employee compensation  plan |       | —            |       | 1                                |       | —                 |       | —                                               |       | 1         |       |
| Cash dividend to Ameriprise Financial, Inc.                    |       | —            |       | —                           |       | (300                   | )          | —                                               |       | (300      | )          |
|                                                                |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| **Balances at December 31, 2006**                              |       | $                 | 3          |                             | $          | 2,021                  |       | $                                                    | 3,455      |      | $          | (209 | ) | $ | 5,270 |   |
|                                                                |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Change in accounting principles                                     |       | —            |       | —                           |       | (134                   | )          | —                                               |       | (134      | )          |
| Other comprehensive income:                                         |       |              |       |                             |       |                   |       |                                                 |       |      |       |
| Net income                                                          |       | —            |       | —                           |       | 421                    |       | —                                               |       | 421       |       |
| Change in  unrealized holding losses on securities, net             |       | —            |       | —                           |       | —                 |       | 52                                                   |       | 52        |       |
| Change in  unrealized derivative losses, net                        |       | —            |       | —                           |       | —                 |       | 1                                                    |       | 1         |       |
| Total other comprehensive income                                    |       | —            |       | —                           |       | —                 |       | —                                               |       | 474       |       |
| Cash dividends to  Ameriprise Financial, Inc.                  |       | —            |       | —                           |       | (900                   | )          | —                                               |       | (900      | )          |
| Non-cash capital contribution from Ameriprise  Financial, Inc. |       | —            |       | 8                                |       | —                 |       | —                                               |       | 8         |       |
| Tax adjustment  of share-based incentive employee compensation plan |       | —            |       | 2                                |       | —                 |       | —                                               |       | 2         |       |
| **Balances at December 31, 2007**                              |       | $                 | 3          |                             | $          | 2,031                  |       | $                                                    | 2,842      |      | $          | (156 | ) | $ | 4,720 |   |

 

See Notes to Consolidated Financial Statements.

 

 

36

----

 

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****Nature of Business and Basis ofPresentation**

 

*Nature ofBusiness*

 

RiverSource Life Insurance Company is a stock lifeinsurance company with one wholly owned operating subsidiary, RiverSource LifeInsurance Co. of New York (“RiverSource Life of NY”).  RiverSource Life Insurance Company is awholly owned subsidiary of Ameriprise Financial, Inc. (“AmeripriseFinancial”).

 

·                  RiverSource Life Insurance Company is domiciled inMinnesota and holds Certificates of Authority in American Samoa, the Districtof Columbia and all states except New York. RiverSource Life Insurance Company issues insurance and annuityproducts.

 

·                  RiverSource Life of NY is a stock life insurancecompany domiciled in New York, which holds Certificates of Authority in NewYork, North Dakota and Delaware. RiverSource Life of NY issues insurance and annuity products.

 

RiverSource Life Insurance Company and its subsidiaryare referred to collectively in this Form 10-K as “RiverSource Life”.

 

Ameriprise Financial was formerly a wholly ownedsubsidiary of American Express Company (“American Express”).  On February 1, 2005, the AmericanExpress Board of Directors announced its intention to pursue the disposition of100% of its shareholdings in Ameriprise Financial (the “Separation”) through atax-free distribution to American Express shareholders.  Effective as of the close of business on September 30,2005, American Express completed the Separation and the distribution ofAmeriprise Financial common shares to American Express shareholders (the “Distribution”).  In connection with the Distribution,Ameriprise Financial entered into certain agreements with American Express toeffect the Separation and to define the responsibility for obligations arisingbefore and after the date of the Distribution, including, among others,obligations relating to transition services, taxes, and employees.  RiverSource Life was allocated certainexpenses incurred as a result of Ameriprise Financial becoming an independentcompany.  The separation from AmericanExpress is now complete.

 

RiverSource Life’s principal products are variabledeferred annuities and variable universal life insurance which are issuedprimarily to individuals.  It also offersfixed annuities where assets accumulate until the contract is surrendered, thecontractholder (or in some contracts, the annuitant) dies, or the contractholderor annuitant begins receiving benefits under an annuity payout option. It alsooffers immediate annuities in which payments begin within one year of issue andcontinue for life or for a fixed period of time.  RiverSource Life’s fixed deferred annuitiesguarantee a relatively low annual interest rate during the accumulation period(the time before annuity payments begin). However, RiverSource Life hasthe option of paying a higher rate set at its discretion.  In addition, persons owning one type ofannuity may have their interest calculated based on an increase in abroad-based stock market index. RiverSource Life issues both variable and fixed universal lifeinsurance, traditional life insurance including whole life and term life anddisability income (“DI”) insurance. Universal life insurance is a form of permanent life insurancecharacterized by its flexible premiums, its flexible death benefit amounts and itsunbundling of the pricing factors (i.e., mortality, interest andexpenses).  Traditional life insurancerefers to whole and term life insurance policies that pay a specified sum to abeneficiary upon death of the insured for a fixed premium.  Variable universal life insurance combinesthe premium and death benefit flexibility of universal life with underlyingfund investment flexibility and the risks associated therewith.  Waiver of premium and accidental deathbenefit riders are generally available with these life insurance products.

 

Under RiverSource Life’svariable life insurance and variable annuity products described above, thepurchaser may choose among investment options that include RiverSource Life’s “generalaccount” as well as from a variety of portfolios including common stocks,bonds, managed assets and/or short-term securities.

 

*Basis ofPresentation*The accompanyingConsolidated Financial Statements include the accounts of RiverSource LifeInsurance Company and its wholly owned subsidiary, RiverSource Life of NY.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

 

37

----

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**1.****             ****Nature of Business and Basis ofPresentation (Continued)**

 

**Reclassifications**

 

The accompanyingConsolidated Financial Statements are prepared in accordance with U.S.generally accepted accounting principles (“U.S. GAAP”) which vary in certainrespects from reporting practices prescribed or permitted by state insuranceregulatory authorities as described in Note 11. Certain reclassifications of prior period amounts have been made toconform to the current presentation, including new income statement captionswhich are described in Note. 2.  Thesereclassifications were made to enhance transparency and to better align thefinancial statement line captions with the key drivers of the business.  RiverSource Life did not change its revenueand expense recognition policies and the reclassifications did not result inany changes to consolidated net income or shareholder’s equity.  The following is a summary of thereclassifications made:

 

***        Income Statement Reclassifications***

 

·                  RiverSource Lifereclassified the portion of 12b-1 fees identified as service fees onproprietary funds and marketing support type payments received fromnon-proprietary fund families for variable annuity and variable universal lifeproducts from other revenue to policy and contract charges to better align withindustry standards.

 

·                  RiverSource Lifereclassified premiums related to immediate annuities with life contingenciesfrom interest credited to fixed accounts to premiums.

 

·                  RiverSource Lifereclassified reinsurance premiums paid for universal life and variableuniversal life products from benefits, claims, losses and settlement expensesto policy and contract charges, where cost of insurance fees are reported.

 

·                  RiverSource Life reclassified benefit expenses related to immediateannuities with life contingencies from interest credited to fixed accounts tobenefits, claims, losses and settlement expenses.

 

·                  RiverSource Life reclassified mortality and expense risk fees topolicy and contract charges.

 

·                  RiverSourceLife reclassified additional investment-related expenses from other insuranceand operating expenses to net investment income.

 

The following tables showthe impact of the new captions and the reclassifications made to RiverSourceLife’s previously reported Consolidated Statements of Income.

 

| ** **                                       | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **Previously  Reported**   | ** ** | **Reclassified**           | ** ** | **Previously  Reported** | ** ** | **Reclassified** | ** ** |
| ** **                                       | ** ** | **(in millions)**          | ** ** | **(in millions)**          | ** ** |
| **Revenues**                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Premiums                                         |       | $                          | 394        |                       | $          | 533 |   | $ | 370 |   | $ | 521 |   |
| Net investment income                            |       | 1,661                      |       | 1,657                      |       | 1,789 |   | 1,786 |   |
| Policy and contract charges                      |       | 637                        |       | 1,045                      |       | 577 |   | 898 |   |
| Other revenue                                    |       | 636                        |       | 189                        |       | 489 |   | 127 |   |
| Net realized investment gain                     |       | 51                         |       | 51                         |       | 48 |   | 48 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |
| Total revenues                                   |       | 3,379                      |       | 3,475                      |       | 3,273 |   | 3,380 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |
| **Benefits and expenses**                        | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefits, claims, losses and settlement expenses |       | 521                        |       | 705                        |       | 496 |   | 697 |   |
| Interest credited to fixed accounts              |       | 1,052                      |       | 968                        |       | 1,111 |   | 1,020 |   |
| Amortization of deferred acquisition costs       |       | 356                        |       | 356                        |       | 316 |   | 316 |   |
| Separation costs                                 |       | 131                        |       | 131                        |       | 121 |   | 121 |   |
| Other insurance and operating expenses           |       | 641                        |       | 637                        |       | 588 |   | 585 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |
| Total benefits  and expenses                     |       | 2,701                      |       | 2,797                      |       | 2,632 |   | 2,739 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |
| Pretax income                                    |       | 678                        |       | 678                        |       | 641 |   | 641 |   |
| Income tax provision                             |       | 192                        |       | 192                        |       | 182 |   | 182 |   |
|                                             |       |                       |       |                       |       |   |   |   |   |
| **Net  income**                                  |       | $                          | 486        |                       | $          | 486 |   | $ | 459 |   | $ | 459 |   |

 

 

38

----

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**1.****             ****Nature of Business and Basis ofPresentation (Continued)**

 

***        Statement of Cash Flows Reclassifications***

 

RiverSource Life hasreclassified certain prior year balances in the Consolidated Statements of CashFlows.

 

·                  RiverSource Lifepreviously classified transfers to and from the fixed account option within itsvariable annuity product as an operating activity in its ConsolidatedStatements of Cash Flows.  RiverSourceLife has reclassified these transfers as a financing activity in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accountingand Reporting by Insurance Enterprises for Certain Long-Duration Contracts andfor Realized Gains and Losses from the Sale of Investments”.

 

·                  RiverSource Lifepreviously classified the net change in annuity policy loans as an operatingactivity and the net change in universal life policy loans as a financingactivity.  RiverSource Life hasreclassified the net change in policy loans as an investing activity inaccordance with the AICPA Audit and Accounting Guide:  Life and Health Insurance Entities.

 

The effect of thesereclassifications on prior year net cash flows related to operating, investingand financing activities is summarized below.

 

| ** **                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(in millions)**                 | ** ** |
| Net cash provided by operating activities, previous  presentation                |       | $                                 | 116        |   | $ | 437 |   |
| Reclassification for annuity transfers                                           |       | 184                               |       | (68 | ) |
| Reclassification for policy loans                                                |       | 4                                 |       | 3 |   |
| Other reclassifications                                                          |       | (6                                | )          | (12 | ) |
| Net cash provided by operating activities, adjusted  for these reclassifications |       | $                                 | 298        |   | $ | 360 |   |
|                                                                             |       |                              |       |   |   |
| Net cash provided by investing activities, previous  presentation                |       | $                                 | 2,654      |   | $ | 104 |   |
| Reclassification for policy loans                                                |       | (36                               | )          | (17 | ) |
| Other reclassifications                                                          |       | (1                                | )          | — |   |
| Net cash provided by investing activities, adjusted  for these reclassifications |       | $                                 | 2,617      |   | $ | 87 |   |
|                                                                             |       |                              |       |   |   |
| Net cash used in financing activities, previous  presentation                    |       | $                                 | (2,882     | ) | $ | (431 | ) |
| Reclassification for annuity transfers                                           |       | (184                              | )          | 68 |   |
| Reclassification for policy loans                                                |       | 32                                |       | 14 |   |
| Other reclassifications                                                          |       | 7                                 |       | 12 |   |
| Net cash used in financing activities, adjusted for  these reclassifications     |       | $                                 | (3,027     | ) | $ | (337 | ) |
|                                                                                  |            |                                   |            |  |  |  |  |  |

 

**2.****             ****Summary of Significant AccountingPolicies**

 

**Principlesof Consolidation****RiverSource Lifeconsolidates all entities in which it holds a greater than 50% voting interestor when certain conditions are met for variable interest entities (“VIEs”) andimmaterial seed money investments in separate accounts, which are accounted foras trading securities.  Entities in whichRiverSource Life holds a greater than 20% but less than 50% voting interest areaccounted for under the equity method. Additionally, other investments in hedge funds in which RiverSource Lifeholds an interest that is less than 50% are accounted for under the equitymethod.  All other investments areaccounted for under the cost method where RiverSource Life owns less than a 20%voting interest and does not exercise significant influence, or as Available-for-Salesecurities, as applicable.

 

RiverSource Life alsoconsolidates all VIEs for which it is considered to be the primarybeneficiary.  The determination as towhether an entity is a VIE is based on the amount and characteristics of theentity’s equity.  The determination as towhether RiverSource Life is considered to be the primary beneficiary is basedon whether RiverSource Life will absorb a majority of the VIE’s expectedlosses, receive a majority of the VIE’s expected residual return, or both.  RiverSource Life liquidated its interest inall consolidated VIEs during 2005. There were no consolidated VIEs as of December 31,2007 and 2006.

 

 

 

39

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

Qualifying SpecialPurpose Entities (“QSPEs”) are not consolidated. Such QSPEs included asecuritization trust containing a majority of RiverSource Life’s ratedcollateralized debt obligations (“CDOs”) for which RiverSource Life sold all ofits retained interests in 2005.

 

**AmountsBased on Estimates and Assumptions**

 

Accounting estimates arean integral part of the Consolidated Financial Statements. In part, they arebased upon assumptions concerning future events. Among the more significant arethose that relate to investment securities valuation and recognition ofother-than-temporary impairments, valuation of deferred acquisition costs (“DAC”)and the corresponding recognition of DAC amortization, derivative financialinstruments and hedging activities, income taxes and the recognition ofdeferred tax assets and liabilities. These accounting estimates reflect thebest judgment of management and actual results could differ.

 

**BalanceSheet**

 

***Investments***

 

Investments consist ofthe following:

 

*Available-for-SaleSecurities*Available-for-Salesecurities are carried at fair value with unrealized gains (losses) recorded inaccumulated other comprehensive income (loss), net of income tax provision(benefit) and net of adjustments in other asset and liability balances, such asDAC, to reflect the expected impact on their carrying values had the unrealizedgains (losses) been realized as of the respective balance sheet date.  Gains and losses are recognized inconsolidated results of operations upon disposition of the securities. Inaddition, losses are also recognized when management determines that a declinein value is other-than-temporary, which requires judgment regarding the amountand timing of recovery. Indicators of other-than-temporary impairment for debtsecurities include issuer downgrade, default or bankruptcy. RiverSource Lifealso considers the extent to which cost exceeds fair value, the duration ofthat difference and management’s judgment about the issuer’s current andprospective financial condition, as well as its ability and intent to holduntil recovery. Other-than-temporary impairment charges are recorded in netrealized gains (losses) on investments within the Consolidated Statements ofIncome.  Fair value is generally obtainedfrom third party pricing sources.

 

*CommercialMortgage Loans, Net*Commercialmortgage loans, net, reflect principal amounts outstanding less the allowancefor loan losses.  The allowance for loanlosses is measured as the excess of the loan’s recorded investment over thepresent value of its expected principal and interest payments discounted at theloan’s effective interest rate, or the fair value of collateral.  Additionally, the level of the allowance forloan losses considers other factors, including historical experience, economicconditions and geographic concentrations. Management regularly evaluates the adequacy of the allowance for loanlosses and believes it is adequate to absorb estimated losses in the portfolio.

 

RiverSource Lifegenerally stops accruing interest on commercial mortgage loans for whichinterest payments are delinquent more than three months.  Based on management’s judgment as to theultimate collectibility of principal, interest payments received are eitherrecognized as income or applied to the recorded investment in the loan.

 

*PolicyLoans*Policy loansinclude life insurance policy and annuity loans.  These loans are carried at the aggregate ofthe unpaid loan balances, which do not exceed the cash surrender values ofunderlying products, plus accrued interest.

 

*TradingSecurities and Other Investments*Included intrading securities and other investments are separate account and mutual fundseed money, equity method investments in hedge funds and syndicated loans.Separate account and mutual fund seed money is carried at fair value withchanges in value recognized within net investment income.  The carrying value of equity methodinvestments in hedge funds reflects RiverSource Life’s original investment andits share of earnings or losses of the hedge funds subsequent to the date ofinvestment and approximates fair value. Syndicated loans reflect amortized cost less allowance for losses.

 

40

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

***Cashand Cash Equivalents***Cashequivalents include highly liquid investments with original maturities of 90days or less.

 

***Reinsurance***RiverSourceLife reinsures a portion of the risks associated with its life, DI and longterm care (“LTC”) insurance products through reinsurance agreements withunaffiliated reinsurance companies. Reinsurance is used in order to limit losses, reduce exposure to largerisks and provide additional capacity for future growth.  To manage exposure to losses from reinsurerinsolvencies, the financial condition of reinsurers is evaluated prior toentering into new reinsurance treaties and on a periodic basis during the termsof the treaties.  RiverSource Liferemains primarily liable as the direct insurer on all risks reinsured.

 

Generally, RiverSourceLife reinsures 90% of the death benefit liability related to individual fixedand variable universal life and term life insurance products.  RiverSource Life began reinsuring risks atthis level beginning in 2001 for term life insurance and 2002 for variable anduniversal life insurance.  Policiesissued prior to these dates are not subject to the same reinsurancelevels.  Generally, the maximum amount oflife insurance risk retained by RiverSource Life is $750,000 on any policyinsuring a single life and $1.5 million on any flexible premium survivorshipvariable life policy. For existing LTC policies, except those sold byRiverSource Life of NY prior to 1996, RiverSource Life retained 50% of the riskand ceded on a coinsurance basis the remaining 50% of the risk to affiliates ofGenworth Financial, Inc. (“Genworth”). Reinsurance recoverable from Genworth related to RiverSource Life’s LTCliabilities was $1.0 billion at December 31, 2007, while amountsrecoverable from each other reinsurer were much smaller. Risk on variable lifeand universal life policies is reinsured on a yearly renewable term basis.  Risk on most term life policies starting in2001 is reinsured on a coinsurance basis.

 

Generally, RiverSourceLife retains at most $5,000 per month of risk per life on DI policy formsintroduced in October 2007 in most states and reinsures the remainder ofthe risk on a coinsurance basis with unaffiliated reinsurance companies.  RiverSource Life retains all risk on DIcontracts sold on other policy forms. RiverSource Life also retains all risk of accidental death benefitclaims and substantially all risk associated with waiver of premium provisions.

 

***DeferredAcquisition Costs*****DAC represent thecosts of acquiring new business, principally direct sales commissions and otherdistribution and underwriting costs that have been deferred on the sale ofannuity and insurance products. These costs are deferred to the extent they arerecoverable from future profits or premiums. The DAC associated with insurance or annuitycontracts that are significantly modified or internally replaced with anothercontract are accounted for as contract terminations.  These transactions are anticipated inestablishing amortization periods and other valuation assumptions.

 

***DeferredSales Inducement Costs***Deferredsales inducement costs (“DSIC”) consist of bonus interest credits and premiumcredits added to certain annuity contract and insurance policy values.  These benefits are capitalized to the extentthey are incremental to amounts that would be credited on similar contractswithout the applicable feature.  Theamounts capitalized are amortized using the same methodology and assumptionsused to amortize DAC.

 

***DerivativeFinancial Instruments and Hedging Activities***Derivativefinancial instruments are recorded at fair value. The fair value of RiverSourceLife’s derivative financial instruments is determined using either marketquotes or valuation models that are based upon the net present value ofestimated future cash flows and incorporate current market observable inputs tothe extent available.  In certaininstances, the fair value includes structuring costs incurred at the inceptionof the transaction.  The accounting forchanges in the fair value of a derivative financial instrument depends on itsintended use and the resulting hedge designation, if any.  RiverSource Life primarily uses derivativesas economic hedges that are not designated as accounting hedges or do notqualify for hedge accounting treatment. RiverSource Life occasionally designates derivatives as (1) hedgesof changes in the fair value of assets, liabilities, or firm commitments (“fairvalue hedges”) or (2) hedges of a forecasted transaction or of thevariability of cash flows to be received or paid related to a recognized assetor liability (“cash flow hedges”).

 

For derivative financial instruments that do not qualify for hedgeaccounting or are not designated as hedges, changes in fair value arerecognized in current period earnings, generally as a component of netinvestment income.

 

41

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

For derivative financialinstruments that qualify as fair value hedges, changes in the fair value of thederivatives, as well as of the corresponding hedged assets, liabilities or firmcommitments, are recognized in current earnings. If a fair value hedgedesignation is removed or the hedge is terminated prior to maturity, previousadjustments to the carrying value of the hedged item are recognized intoearnings over the remaining life of the hedged item.

 

For derivative financialinstruments that qualify as cash flow hedges, the effective portions of thegain or loss on the derivative instruments are reported in accumulated othercomprehensive income (loss) and reclassified into earnings when the hedged itemor transaction impacts earnings.  Theamount that is reclassified into earnings is presented in the ConsolidatedStatements of Income with the hedged instrument or transaction impact.  Any ineffective portion of the gain or lossis reported currently in earnings as a component of net investment income.  If a hedge designation is removed or a hedgeis terminated prior to maturity, the amount previously recorded in accumulatedother comprehensive income (loss) may be recognized into earnings over theperiod that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecastedtransaction is not expected to occur according to the original strategy, anyrelated amounts previously recorded in accumulated other comprehensive income(loss) are recognized in earnings immediately.

 

Derivative financialinstruments that are entered into for hedging purposes are designated as suchat the time RiverSource Life enters into the contract.  For all derivative financial instruments thatare designated for hedging activities, RiverSource Life formally documents allof the hedging relationships between the hedge instruments and the hedged itemsat the inception of the relationships. Management also formally documents its risk management objectives andstrategies for entering into the hedge transactions.  RiverSource Life formally assesses, atinception and on a quarterly basis, whether derivatives designated as hedgesare highly effective in offsetting the fair value or cash flows of hedgeditems.  If it is determined that aderivative is no longer highly effective as a hedge, RiverSource Life willdiscontinue the application of hedge accounting.

 

The equity component ofthe equity indexed annuity obligations are considered embeddedderivatives.  Additionally, certainannuities contain guaranteed minimum accumulation benefit (“GMAB”) andguaranteed minimum withdrawal benefit (“GMWB”) provisions.  The GMAB and the non-life contingent benefitsassociated with GMWB provisions are also considered embedded derivatives.  The fair value of embedded derivatives associatedwith annuities is included in future policy benefits.  The changes in fair value of the equityindexed annuity embedded derivatives are reflected in the interest credited tofixed accounts.  The changes in the fairvalue of the GMWB and GMAB embedded derivatives are reflected in benefits,claims, losses and settlement expenses.

 

***SeparateAccount Assets and Liabilities***Separateaccount assets and liabilities are primarily funds held for the exclusivebenefit of variable annuity and variable life insurance contractholders.  RiverSource Life receives mortality andexpense risk and other fees, guarantee fees and cost of insurance charges fromthe related accounts.

 

***FuturePolicy Benefits and Policy Claims and Other Policyholders’ Funds***

 

*FixedAnnuities and Variable Annuity Guarantees*Future policybenefits and policy claims and other policyholders’ funds related to fixedannuities and variable annuity guarantees include liabilities for fixed accountvalues on fixed and variable deferred annuities, guaranteed benefits associatedwith variable annuities, equity indexed annuities and fixed annuities in apayout status.

 

Liabilities for fixedaccount values on fixed and variable deferred annuities are equal toaccumulation values, which are the cumulative gross deposits and creditedinterest less withdrawals and various charges.

 

The majority of thevariable annuity contracts offered by RiverSource Life contain guaranteedminimum death benefit (“GMDB”) provisions. When market values of the customer’s accounts decline, the death benefitpayable on a contract with a GMDB may exceed the contract accumulationvalue.  RiverSource Life also offersvariable annuities with death benefit provisions that gross up the amount payableby a certain percentage of contract earnings, which are referred to as gaingross-up (“GGU”) benefits.  In addition,RiverSource Life offers contracts with GMWB and GMAB provisions and, until May 2007,RiverSource Life offered contracts containing guaranteed minimum income benefit(“GMIB”) provisions.

 

 

42

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

In determining theliabilities for variable annuity death benefits, GMIB and the life contingentbenefits associated with GMWB, RiverSource Life projects these benefits andcontract assessments using actuarial models to simulate various equity marketscenarios. Significant assumptions made in projecting future benefits andassessments relate to customer asset value growth rates, mortality, persistencyand investment margins and are consistent with those used for DAC assetvaluation for the same contracts. As with DAC, management will review, and whereappropriate, adjust its assumptions each quarter.   Unless management identifies a materialdeviation over the course of quarterly monitoring, management will review andupdate these assumptions annually in the third quarter of each year.

 

The variable annuitydeath benefit liability is determined by estimating the expected value of deathbenefits in excess of the projected contract accumulation value and recognizingthe excess over the estimated meaningful life based on expected assessments(e.g., mortality and expense fees, contractual administrative charges andsimilar fees).

 

If elected by thecontract owner and after a stipulated waiting period from contract issuance, aGMIB guarantees a minimum lifetime annuity based on a specified rate of contractaccumulation value growth and predetermined annuity purchase rates. The GMIBliability is determined each period by estimating the expected value ofannuitization benefits in excess of the projected contract accumulation valueat the date of annuitization and recognizing the excess over the estimatedmeaningful life based on expected assessments.

 

GMAB and the non-lifecontingent benefits associated with GMWB provisions are considered embeddedderivatives and are recorded at fair value. The fair value of these embedded derivatives is based on the presentvalue of future benefits less applicable fees charged for the provision.  The liability for the life contingentbenefits associated with GMWB provisions are determined in the same way as theliability for variable annuity death benefits. The changes in both the fair values of the GMWB and GMAB embeddedderivatives and the liability for life contingent benefits are reflected inbenefits, claims, losses and settlement expenses.

 

Liabilities for equityindexed annuities are equal to the accumulation of host contract valuescovering guaranteed benefits and the market value of embedded equity options.

 

Liabilities for fixedannuities in a benefit or payout status are based on future estimated paymentsusing established industry mortality tables and interest rates, ranging from4.6% to 9.5% at December 31, 2007, depending on year of issue, with anaverage rate of approximately 5.8%.

 

*Life,Disability Income and Long Term Care Insurance*Future policybenefits and policy claims and other policyholders’ funds related to life, DIand LTC insurance include liabilities for fixed account values on fixed andvariable universal life policies, liabilities for unpaid amounts on reportedclaims, estimates of benefits payable on claims incurred but not yet reportedand estimates of benefits that will become payable on term life, whole life, DIand LTC policies as claims are incurred in the future.

 

Liabilities for fixedaccount values on fixed and variable universal life insurance are equal toaccumulation values.  Accumulation valuesare the cumulative gross deposits and credited interest less variouscontractual expense and mortality charges and less amounts withdrawn bypolicyholders.

 

Liabilities for unpaidamounts on reported life insurance claims are equal to the death benefitspayable under the policies. Liabilities for unpaid amounts on reported DI andLTC claims include any periodic or other benefit amounts due and accrued, alongwith estimates of the present value of obligations for continuing benefitpayments. These amounts are calculated based on claim continuance tables whichestimate the likelihood an individual will continue to be eligible forbenefits. Present values are calculated at interest rates established whenclaims are incurred. Anticipated claim continuance rates are based onestablished industry tables, adjusted as appropriate for RiverSource Life’sexperience. Interest rates used with DI claims ranged from 3.0% to 8.0% at December 31,2007, with an average rate of 4.9%. Interest rates used with LTC claims rangedfrom 4.0% to 7.0% at December 31, 2007, with an average rate of 4.2%.

 

Liabilities for estimatedbenefits payable on claims that have been incurred but not yet reported arebased on periodic analysis of the actual time lag between when a claim occursand when it is reported.

 

 

43

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

Liabilities for estimatesof benefits that will become payable on future claims on term life, whole life,DI and LTC policies are based on the net level premium method, usinganticipated premium payments, mortality and morbidity rates, policy persistencyand interest rates earned on assets supporting the liability. Anticipatedmortality and morbidity rates are based on established industry mortality andmorbidity tables, with modifications based on RiverSource Life’s experience.Anticipated premium payments and persistency rates vary by policy form, issueage, policy duration and certain other pricing factors. Anticipated interestrates for term and whole life ranged from 4.0% to 10.0% at December 31,2007, depending on policy form, issue year and policy duration. Anticipatedinterest rates for DI were 7.5% at policy issue grading to 5.0% over fiveyears. Anticipated discount rates for LTC vary by plan and were 5.4% at December 31,2007 grading up to 6.8% or 9.4% over 40 years.

 

Where applicable, benefitamounts expected to be recoverable from other insurers who share in the riskare separately recorded as reinsurance recoverable within receivables.

 

RiverSource Life issuesonly non-participating life and health insurance policies, which do not paydividends to policyholders from realized policy margins.

 

**Revenuesand Expenses**

 

RiverSource Life’sprincipal sources of revenue include premium revenues, net investment income,policy and contract charges and other revenue.

 

*PremiumRevenues*Premium revenuesinclude premiums on traditional life, DI and LTC insurance products andimmediate annuities with a life contingent feature.  Premiums on traditional life, DI and LTCinsurance are net of reinsurance ceded and are recognized as revenue when due.

 

*NetInvestment Income*Net investmentincome primarily includes interest income on fixed maturity securitiesclassified as Available-for-Sale; commercial mortgage loans and policy loans;mark-to-market adjustment on trading securities and certain derivatives,including derivatives hedging variable annuity living benefits; and pro-ratashare of net income or loss of equity method investments in hedge funds.  Interest income is accrued as earned usingthe effective interest method, which makes an adjustment of the yield forsecurity premiums and discounts on all performing fixed maturity securitiesclassified as Available-for-Sale, and commercial mortgage loans so that therelated security or loan recognizes a constant rate of return on the outstandingbalance throughout its term.

 

*Policyand Contract Charges*Policy and contract charges include mortality and expense risk fees and certaincharges assessed on annuities and fixed and variable universal life insurance,such as cost of insurance, net of reinsurance premiums for universal lifeinsurance products, and administrative and surrender charges.  Mortality and expense risk fees include risk,management and administration fees, which are generated directly and indirectlyfrom RiverSource Life’s separate account assets.  Cost of insurance charges on fixed andvariable universal life insurance are recognized as revenue when earned,whereas contract charges and surrender charges on annuities and universal andvariable universal life insurance are recognized as revenue when collected.

 

*OtherRevenue*Other revenueincludes marketing support and administrative fees which are generally computedas a contractual rate based on the underlying asset values and are generallyreceived monthly.

 

*NetRealized Investment Gain*Realized gainsand losses are recognized using the specific identification method, on a tradedate basis, and charges are recorded when securities are determined to beother-than-temporarily impaired.

 

 

44

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

*Benefits,Claims, Losses and Settlement Expenses*Benefits, claims,losses and settlement**expensesconsist of amounts paid and changes in liabilities held for anticipated futurebenefit payments under insurance policies and annuity contracts, includingbenefits paid under optional variable annuity guaranteed benefit riders alongwith costs to process and pay such amounts. Amounts are net of benefit payments recovered or expected to berecovered under reinsurance contracts. Benefits, claims, losses and settlement**expenses also include amortization of DSIC.

 

*InterestCredited to Fixed Accounts*Interest creditedto fixed accounts represents amounts earned by contractholders andpolicyholders on fixed account values associated with fixed and variableuniversal life and annuity contracts and equity indexed annuities in accordancewith contract provisions.

 

*Amortization of Deferred Acquisition Costs*Directsales commissions and other costs associated with the sale of annuity andinsurance products are deferred as DAC and amortized over time.  For annuity and universal life contracts, DACare amortized based on projections of estimated gross profits over amortizationperiods equal to the approximate life of the business.  For other insurance products, DAC aregenerally amortized as a percentage of premiums over amortization periods equalto the premium-paying period.

 

For annuity and universallife insurance products, the assumptions made in projecting future results andcalculating the DAC balance and DAC amortization expense are management’s bestestimates.  Management is required toupdate these assumptions whenever it appears that, based on actual experienceor other evidence, earlier estimates should be revised.  When assumptions are changed, the percentageof estimated gross profits used to amortize DAC might also change.  A change in the required amortizationpercentage is applied retrospectively; an increase in amortization percentagewill result in a decrease in the DAC balance and an increase in DACamortization expense, while a decrease in amortization percentage will resultin an increase in the DAC balance and a decrease in DAC amortizationexpense.  The impact on results ofoperations of changing assumptions can be either positive or negative in anyparticular period and is reflected in the period in which such changes aremade.

 

For other life, DI andLTC insurance products, the assumptions made in calculating the DAC balance andDAC amortization expense are consistent with those used in determining theliabilities and therefore are intended to provide for adverse deviations inexperience and are revised only if management concludes experience will be soadverse that DAC are not recoverable or if premium rates charged for thecontract are changed.  If managementconcludes that DAC are not recoverable, DAC are reduced to the amount that isrecoverable based on best estimate assumptions and there is a correspondingexpense recorded in RiverSource Life’s consolidated results of operations.

 

For annuity, life, DI andLTC insurance products, key assumptions underlying those long term projectionsinclude interest rates (both earning rates on invested assets and ratescredited to policyholder accounts), equity market performance, mortality andmorbidity rates and the rates at which policyholders are expected to surrendertheir contracts, make withdrawals from their contracts and make additionaldeposits to their contracts.  Assumptionsabout interest rates are the primary factor used to project interest margins,while assumptions about rates credited to policyholder accounts and equitymarket performance are the primary factors used to project client asset valuegrowth rates, and assumptions about surrenders, withdrawals and depositscomprise projected persistency rates. Management must also make assumptions to project maintenance expensesassociated with servicing annuity and insurance business during the DACamortization period.

 

The client asset valuegrowth rate is the rate at which variable annuity and variable universal lifeinsurance contract values are assumed to appreciate in the future.  The rate is net of asset fees and anticipatesa blend of equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions withrespect to client asset value growth rates on a regular basis.  RiverSource Life uses a mean reversion methodas a guideline in setting near-term client asset value growth rates based on along term view of financial market performance as well as actual historicalperformance.  In periods when marketperformance results in actual contract value growth at a rate that is differentthan that assumed, RiverSource Life reassesses the near-term rate in order tocontinue to project its best estimate of long term growth.  The near-term growth rate is reviewed toensure consistency with management’s assessment of anticipated equity marketperformance.  DAC amortization expenserecorded in a period when client asset value growth rates exceed near-termestimate will typically be less than in a period when growth rates fall shortof near-term estimate.

 

 

45

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**2.****             ****Summary of Significant AccountingPolicies (Continued)**

 

The analysis of DACbalances and the corresponding amortization is a dynamic process that considersall relevant factors and assumptions described previously.  Unless management identifies a significantdeviation over the course of its quarterly monitoring, management reviews andupdates these DAC amortization assumptions annually in the third quarter ofeach year.

 

*SeparationCosts*Separation costsgenerally consist of allocated financial advisor and employee retention programcosts, re-branding and marketing costs and costs to separate and reestablishtechnology platforms related to the Separation. The separation from American Express was completed in 2007.

 

*Other Insurance and Operating Expenses*Other insuranceand operating**expenses primarily includesexpenses allocated to RiverSource Life from its parent, Ameriprise Financial,for RiverSource Life’s share of compensation, professional and consultant fees,information technology and communications, facilities and equipment,advertising and promotion and legal and regulatory.

 

*                       **Income Taxes*As a result ofthe Separation of Ameriprise Financial from American Express, RiverSource Lifewill not be able to file a consolidated U.S. federal income tax return withother members of Ameriprise Financial’s affiliated group until 2010.RiverSource Life’s provision for income taxes represents the net amount ofincome taxes that it expects to pay or to receive from various taxingjurisdictions in connection with its operations.  RiverSource Life provides for income taxesbased on amounts that it believes it will ultimately owe taking into accountthe recognition and measurement for uncertain tax positions.  Inherent in the provision for income taxesare estimates and judgments regarding the tax treatment of certain items.

 

**3.****             ****Recent****AccountingPronouncements**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007) “Business Combinations” (“SFAS 141(R)”).  SFAS 141(R) establishes principles andrequirements for how an acquirer recognizes and measures the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in anacquiree, and goodwill acquired.  SFAS141(R) also requires an acquirer to disclose information about thefinancial effects of a business combination. SFAS 141(R) is effective prospectively for business combinationswith an acquisition date on or after the beginning of the first annualreporting period beginning on or after December 15, 2008, with earlyadoption prohibited.  RiverSource Lifewill apply the standard to any business combinations within the scope of SFAS141(R) occurring after December 31, 2008.

 

In December 2007,the FASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 establishes the accounting andreporting for ownership interest in subsidiaries not attributable, directly orindirectly, to a parent.  SFAS 160requires that noncontrolling (minority) interests be classified as equity(instead of as a liability) within the Consolidated Balance Sheets, and net incomeattributable to both the parent and the noncontrolling interest be disclosed onthe face of the Consolidated Statements of Income.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008, and interim periods within those yearswith early adoption prohibited.  Theprovisions of SFAS 160 are to be applied prospectively, except for thepresentation and disclosure requirements which are to be appliedretrospectively to all periods presented. RiverSource Life is currently evaluating the impact of SFAS 160 on itsconsolidated financial condition and results of operations.

 

In June 2007, theAmerican Institute of Certified Public Accountants (“AICPA”) issued Statementof Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and AccountingGuide ‘Investment Companies’ and Accounting by Parent Companies and EquityMethod Investors for Investments in Investment Companies” (“SOP 07-1”).  SOP 07-1 provided clarification on thedefinition of an investment company.  In February 2008,the FASB decided to indefinitely defer the effective date of SOP 07-1.** **In May 2007,the FASB issued FASB Staff Position (“FSP”) FASB Interpretation No. (“FIN”)46(R)-7, “Application of FIN 46(R) to Investment Companies” (“FSP 46(R)-7”).  FSP 46(R)-7 is dependent upon clarificationof the definition of an investment company as provided in SOP 07-1 and iseffective upon the adoption of that SOP. With the deferral of SOP 07-1, RiverSource Life will defer the adoptionof both SOP 07-1 and FSP 46(R)-7.

 

 

46

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**3.****             ****Recent****Accounting****Pronouncements (Continued)**

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”(“SFAS 159”).  SFAS 159 gives entitiesthe option to measure certain financial instruments and other items at fairvalue that are not currently permitted to be measured at fair value.  The objective of SFAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 requires entities to reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date.  SFAS 159 also establishes presentation anddisclosure requirements.  SFAS 159 iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. RiverSource Life did not adopt SFAS 159 for any of its existing eligibleassets or liabilities and has no current plans to adopt SFAS 159 for any newfinancial instruments.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements.  SFAS 157 applies underother accounting pronouncements that require or permit fair value measurements.Accordingly, SFAS 157 does not require any new fair value measurements. SFAS157 is effective for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. Early adoption is permitted providedthe entity has not issued financial statements for any period within the yearof adoption. The provisions of SFAS 157 are required to be applied prospectivelyas of the beginning of the fiscal year in which SFAS 157 is initially applied,except for certain financial instruments as defined in SFAS 157 which willrequire retrospective application of SFAS 157. Any retrospective applicationwill be recognized as a cumulative effect adjustment to the opening balance ofretained earnings for the fiscal year of adoption.  RiverSource Life adopted SFAS 157 effective January 1,2008.  As a result of adopting SFAS 157,RiverSource Life will record a cumulative effect after-DAC, DSIC and taxreduction to retained earnings of approximately $35 million related toadjusting the fair value of structured derivatives RiverSource Life uses tohedge its exposure to GMWB provisions. RiverSource Life initially recorded these derivatives in accordance withEmerging Issues Task Force Issue No. 02-3 “Issues Involved in Accounting forDerivative Contracts Held for Trading Purposes and Contracts Involved in EnergyTrading and Risk Management Activities.” SFAS 157 requires these derivatives to be marked to the priceRiverSource Life would receive to sell the derivatives to a market participant(an exit price).  On January 18,2008, the FASB published for comment Proposed FSP FAS 157-c “MeasuringLiabilities under FASB Statement No. 157” (“FSP 157-c”).  FSP 157-c states that in the absence of aquoted price for the identical liability in an active market, a reportingentity may measure the fair value of its liability at the amount it wouldreceive as proceeds if it were to issue that liability at the measurementdate.  FSP 157-c shall be applied on aprospective basis effective on the later of (a) the beginning of theperiod that includes the issuance date of the FSP or (b) the beginning ofthe period in which an entity initially applies SFAS 157.  RiverSource Life is evaluating the impactthat this proposed FSP will have on the valuation of its embeddedderivatives.  Any change to the valuationof RiverSource Life’s embedded derivatives as a result of adopting SFAS 157 andFSP 157-c will be recorded in earnings as of the date of adoption.  In accordance with FSP FAS 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP 157-2”), RiverSource Life will deferthe adoption of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis.

 

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes — an interpretation ofFASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in accordance with FASB Statement No. 109,“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  RiverSource Lifeadopted FIN 48 as of January 1, 2007. The effect of adopting FIN 48 on RiverSource Life’s consolidated financial condition andresults of operations was not material.

 

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities” (“SFAS 140”). SFAS 155: (i) permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; (ii) clarifies whichinterest-only and principal-only strips are not subject to the requirements ofSFAS 133; (iii) establishes a requirement to evaluate interests insecuritized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embedded 

 

 

47

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**3.****             ****Recent****Accounting****Pronouncements (Continued)**

 

derivativerequiring bifurcation; (iv) clarifies that concentrations of credit riskin the form of subordination are not embedded derivatives; and (v) amendsSFAS 140 to eliminate the prohibition on a qualifying special-purpose entityfrom holding a derivative financial instrument that pertains to a beneficialinterest other than another derivative financial instrument. RiverSource Lifeadopted SFAS 155 as of January 1, 2007. The effect of adopting SFAS 155 on RiverSource Life’s consolidatedfinancial condition and results of operations was not material.

 

In September 2005, theAICPA issued SOP 05-1, “Accounting by Insurance Enterprises for DeferredAcquisition Costs in Connection With Modifications or Exchanges of InsuranceContracts,” (“SOP 05-1”).  SOP 05-1provides clarifying guidance on accounting for DAC associated with an insuranceor annuity contract that is significantly modified or is internally replacedwith another contract.  Prior toadoption, RiverSource Life accounted for many of these transactions as contractcontinuations and continued amortizing existing DAC against revenue for the newor modified contract.  Effective January 1,2007, RiverSource Life adopted SOP 05-1 resulting in these transactions beingprospectively accounted for as contract terminations.  Consistent with this, RiverSource Life nowanticipates these transactions in establishing amortization periods and othervaluation assumptions.  As a result of adopting SOP 05-1,RiverSource Life recorded as a cumulative change in accounting principle $206million, reducing DAC by $204 million, DSIC by $11 million and liabilities forfuture policy benefits by $9 million. The after-tax decrease to retained earnings for these changes was $134million.  The adoption of SOP 05-1, amongother things, resulted in an increase to DAC and DSIC amortization in 2007.

 

**4.****             ****Investments**

 

**Available-for-SaleSecurities**

 

The following is asummary of Available-for-Sale securities by type:

 
| **December 31, 2007**                 | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **(in millions)**   | ** ** |
| Fixed maturities:                          |       |                |       |                         |       |                          |       |            |       |
| Corporate debt securities                  |       | $                   | 12,870     |                         | $          | 112                           |       | $               | (307       | ) | $ | 12,675 |   |
| Mortgage and other asset-backed securities |       | 7,637               |       | 33                           |       | (84                           | )          | 7,586           |       |
| U.S. government and agencies obligations   |       | 249                 |       | 7                            |       | (1                            | )          | 255             |       |
| State and municipal obligations            |       | 165                 |       | 3                            |       | (6                            | )          | 162             |       |
| Foreign government bonds and obligations   |       | 97                  |       | 15                           |       | —                        |       | 112             |       |
| Structured investments(a)                  |       | 2                   |       | —                       |       | —                        |       | 2               |       |
| Total fixed maturities                     |       | 21,020              |       | 170                          |       | (398                          | )          | 20,792          |       |
| Common and preferred stocks                |       | 30                  |       | —                       |       | (1                            | )          | 29              |       |
| Total                                      |       | $                   | 21,050     |                         | $          | 170                           |       | $               | (399       | ) | $ | 20,821 |   |

----

(a)                                  Includesunconsolidated collateralized debt obligations.

 

48

----

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

** **
| **December 31, 2006**                 | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **(in millions)**   | ** ** |
| Fixed maturities:                          |       |                |       |                         |       |                          |       |            |       |
| Corporate debt securities                  |       | $                   | 15,312     |                         | $          | 158                           |       | $               | (330       | ) | $ | 15,140 |   |
| Mortgage and other asset-backed securities |       | 9,398               |       | 27                           |       | (175                          | )          | 9,250           |       |
| U.S. government and agencies obligations   |       | 295                 |       | 13                           |       | (5                            | )          | 303             |       |
| State and municipal obligations            |       | 165                 |       | 4                            |       | (4                            | )          | 165             |       |
| Foreign government bonds and obligations   |       | 117                 |       | 18                           |       | —                        |       | 135             |       |
| Structured investments(a)                  |       | 2                   |       | —                       |       | —                        |       | 2               |       |
| Total fixed maturities                     |       | 25,289              |       | 220                          |       | (514                          | )          | 24,995          |       |
| Common and preferred stocks                |       | 30                  |       | 1                            |       | —                        |       | 31              |       |
| Total                                      |       | $                   | 25,319     |                         | $          | 221                           |       | $               | (514       | ) | $ | 25,026 |   |

----

(a)          Includes unconsolidatedcollateralized debt obligations.

 

At December 31, 2007and 2006, fixed maturity securities comprised approximately 85% and 87%,respectively, of RiverSource Life’s total investments.  These securities were rated by Moody’sInvestors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S&P”),except for approximately $1.3 billion and $1.2 billion of securities at December 31,2007 and 2006, respectively, which were rated by RiverSource Investments, LLC’sinternal analysts using criteria similar to Moody’s and S&P.  Ratings on investment grade securities arepresented using S&P’s convention and, if the two agencies’ ratings differ,the lower rating is used.  A summary offixed maturity securities by rating was as follows:

 
| ****                    | ** ** | **December 31, 2007**            | ** ** | **December 31, 2006** | ** ** |
|-------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| **Rating**              | ** ** | **Amortized  Cost**                   | ** ** | **Fair  Value**            | ** ** | **Percent of Total Fair Value** | ** ** | **Amortized Cost** | ** ** | **Fair  Value** | ** ** | **Percent of Total Fair Value** | ** ** |
| ** **              | ** ** | **(in millions, except percentages)** | ** ** |
| AAA                     |       | $                                     | 7,854      |                       | $          | 7,815 |   | 38 | % | $ | 9,638 |   | $ | 9,497 |   | 38 | % |
| AA                      |       | 2,046                                 |       | 2,029                      |       | 10 |   | 2,229 |   | 2,197 |   | 9 |   |
| A                       |       | 3,973                                 |       | 3,938                      |       | 19 |   | 4,893 |   | 4,832 |   | 19 |   |
| BBB                     |       | 5,586                                 |       | 5,514                      |       | 26 |   | 6,831 |   | 6,782 |   | 27 |   |
| Below investment grade  |       | 1,561                                 |       | 1,496                      |       | 7 |   | 1,698 |   | 1,687 |   | 7 |   |
| Total fixed  maturities |       | $                                     | 21,020     |                       | $          | 20,792 |   | 100 | % | $ | 25,289 |   | $ | 24,995 |   | 100 | % |

 

At December 31, 2007and 2006, approximately 45% and 47%, respectively, of the securities rated AAAwere GNMA, FNMA and FHLMC mortgage-backed securities.  No holdings of any other issuer were greaterthan 10% of shareholder’s equity.

 

 

49

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

 

The following tableprovides information about Available-for-Sale securities with gross unrealizedlosses and the length of time that individual securities have been in acontinuous unrealized loss position as of December 31, 2007:

 
| ** **                                 | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------------|------------|
| **Description of securities:**             | ** ** | **Fair  Value**         | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** |
| ** **                                 | ** ** | **(in millions)**       | ** ** |
|                                       |       |                    |       |                  |       |            |       |   |   |   |   |   |   |
| Corporate debt securities                  |       | $                       | 1,477      |                  | $          | (45             | )          | $ | 7,083 |   | $ | (262 | ) | $ | 8,560 |   | $ | (307 | ) |
| Mortgage and other asset-backed securities |       | 888                     |       | (15                   | )          | 4,219           |       | (69 | ) | 5,107 |   | (84 | ) |
| U.S. government and agencies obligations   |       | —                  |       | —                |       | 154             |       | (1 | ) | 154 |   | (1 | ) |
| State and municipal obligations            |       | 47                      |       | (4                    | )          | 63              |       | (2 | ) | 110 |   | (6 | ) |
| Foreign government bonds and obligations   |       | —                  |       | —                |       | 2               |       | — |   | 2 |   | — |   |
| Common and preferred stock                 |       | 29                      |       | (1                    | )          | —          |       | — |   | 29 |   | (1 | ) |
| Total                                      |       | $                       | 2,441      |                  | $          | (65             | )          | $ | 11,521 |   | $ | (334 | ) | $ | 13,962 |   | $ | (399 | ) |

 

The following tableprovides information about Available-for-Sale securities with gross unrealizedlosses and the length of time that individual securities have been in acontinuous unrealized loss position as of December 31, 2006:

 
| ** **                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------------|------------|
| **Description of securities:**              | ** ** | **Fair  Value**         | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** |
| ** **                                  | ** ** | **(in millions)**       | ** ** |
|                                        |       |                    |       |                  |       |            |       |   |   |   |   |   |   |
| Corporate debt securities                   |       | $                       | 1,362      |                  | $          | (19             | )          | $ | 9,514 |   | $ | (311 | ) | $ | 10,876 |   | $ | (330 | ) |
| Mortgage and  other asset-backed securities |       | 862                     |       | (5                    | )          | 6,616           |       | (170 | ) | 7,478 |   | (175 | ) |
| U.S. government  and agencies obligations   |       | 5                       |       | —                |       | 214             |       | (5 | ) | 219 |   | (5 | ) |
| State and municipal obligations             |       | 3                       |       | —                |       | 81              |       | (4 | ) | 84 |   | (4 | ) |
| Foreign  government bonds and obligations   |       | —                  |       | —                |       | 3               |       | — |   | 3 |   | — |   |
| Total                                       |       | $                       | 2,232      |                  | $          | (24             | )          | $ | 16,428 |   | $ | (490 | ) | $ | 18,660 |   | $ | (514 | ) |

 

In evaluating potential other-than-temporary impairments, RiverSource Lifeconsiders the extent to which amortized costs exceeds fair value and the durationof that difference.  A key metric inperforming this evaluation is the ratio of fair value to amortized cost.  The following table summarizes the unrealizedlosses by ratio of fair value to amortized cost as of December 31, 2007:

 
| ** **                                  | ** ** | **Less than 12 months**                        | ** ** | **12 months or more** | ** ** | **Total**                   | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| **Ratio of Fair Value   to Amortized Cost** | ** ** | **Number of Securities**                       | ** ** | **Fair****Value**     | ** ** | **Gross Unrealized Losses** | ** ** | **Number   of Securities** | ** ** | **Fair****Value** | ** ** | **Gross Unrealized Losses** | ** ** | **Number   of Securities** | ** ** | **Fair   Value** | ** ** | **Gross Unrealized Losses** | ** ** |
| ** **                                  | ** ** | **(in millions, except number of securities)** | ** ** |
| ** **                                  | ** ** | ** **                                     | ** ** |
| 95% - 100%                                  |       | 164                                            |       | $                     | 2,015      |                        | $          | (25 | ) | 486 |   | $ | 10,169 |   | $ | (180 | ) | 650 |   | $ | 12,184 |   | $ | (205 | ) |
| 90% - 95%                                   |       | 31                                             |       | 305                   |       | (22                         | )          | 48 |   | 811 |   | (57 | ) | 79 |   | 1,116 |   | (79 | ) |
| 80% - 90%                                   |       | 4                                              |       | 121                   |       | (18                         | )          | 32 |   | 461 |   | (66 | ) | 36 |   | 582 |   | (84 | ) |
| < 80%                                    |       | 1                                              |       | —                |       | —                      |       | 10 |   | 80 |   | (31 | ) | 11 |   | 80 |   | (31 | ) |
| Total                                       |       | 200                                            |       | $                     | 2,441      |                        | $          | (65 | ) | 576 |   | $ | 11,521 |   | $ | (334 | ) | 776 |   | $ | 13,962 |   | $ | (399 | ) |

 

 

50

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

 

As part of RiverSourceLife’s ongoing monitoring process, management determined that a majority of thegross unrealized losses on its Available-for-Sale securities are attributableto changes in interest rates and credit spreads across asset classes.  As noted in the table above, a significantportion of the gross unrealized losses relates to securities that have a fairvalue to amortized cost ratio of 95% or above resulting in an overall 97% ratioof fair value to amortized cost for all securities with an unrealizedloss.  From an overall perspective, thegross unrealized losses were not concentrated in any individual industries orwith any individual securities.  Thesecurities with a fair value to amortized cost ratio of 80%-90% primarilyrelate to the consumer products, financial and home building industries.  The total gross unrealized loss related tothe home building industry was $28 million. The securities with a fair value to cost of less than 80% primarilyrelate to the financial and home building industries.  The largest unrealized loss associated withan individual issuer, excluding GNMA, FNMA and FHLMC mortgage-backedsecurities, was $14 million.  Thesecurities related to this issuer have a fair value to amortized cost ratio of88% and have been in an unrealized loss position for more than 12 months.  RiverSource Life believes that it willcollect all principal and interest due on all investments that have amortizedcost in excess of fair value. In addition, RiverSource Life has the ability andintent to hold these securities until anticipated recovery which may not beuntil maturity.

 

RiverSource Life monitorsthe investments and metrics described previously on a quarterly basis toidentify and evaluate investments that have indications of possibleother-than-temporary impairments. Additionally, RiverSource Life has the ability and intent to hold thesesecurities for a time sufficient to recover its amortized cost and has, therefore,concluded that none had other-than-temporary impairment at December 31,2007.

 

RiverSource Life’s totalmortgage and asset backed exposure at December 31, 2007 was $7.6 billionwhich included $4.1 billion of residential mortgage backed securities and$2.7 billion of commercial mortgage backed securities. At December 31,2007, residential mortgage backed securities included $3.5 billion ofagency-backed securities, $0.4 billion of Alt-A securities, and $0.2 billion ofprime, non-agency securities. With respect to the Alt-A securities, the vastmajority are rated AAA. None of the structures are levered, and the majority ofthe AAA-rated holdings are “super senior” bonds, meaning they have morecollateral support or credit enhancement than required to receive a AAA rating.While overall delinquencies in the market continue to deteriorate, most ofthese positions are performing in-line or better than their vintage. Withregard to asset backed securities, RiverSource Life’s exposure at December 31,2007 was $0.8 billion, which included $115 million of securities backed bysubprime collateral. These securities are predominantly AAA-rated bonds backedby seasoned, traditional, first lien collateral. Holdings include both floatingrate and short-duration, fixed securities. RiverSource Life has no otherstructured or hedge fund investments with exposure to subprime residentialmortgages.

 

The change in netunrealized securities gains (losses) in other comprehensive income includesthree components, net of tax: (i) unrealized gains (losses) that arosefrom changes in the market value of securities that were held during the period(holding gains (losses)); (ii) (gains) losses that were previouslyunrealized, but have been recognized in current period net income due to salesand other-than-temporary impairments of Available-for-Sale securities(reclassification of realized gains (losses)) and (iii) other itemsprimarily consisting of adjustments in asset and liability balances, such asDAC, DSIC and annuity liabilities, to reflect the expected impact on theircarrying values had the unrealized gains (losses) been realized as of therespective balance sheet dates.

 

The following table presents the components of the change in netunrealized securities gains (losses), net of tax, included in accumulated othercomprehensive loss for the years ended December 31:

 
| ** **                                                                        | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                                                        | ** ** | **(in millions)** | ** ** |
| Holding (losses) gains, net of tax of $38, $63 and  $261, respectively            |       | $                 | 70         |     | $          | (116     | )          | $ | (485 | ) |
| Reclassification  of realized gains, net of tax of $16, $17 and $17, respectively |       | (28               | )          | (33      | )          | (32      | )          |
| DAC, net of tax of $5, $15 and $28, respectively                                  |       | (7                | )          | 29       |       | 53       |       |
| DSIC, net of tax of nil, $2 and $5, respectively                                  |       | (1                | )          | 3        |       | 8        |       |
| Fixed annuity liabilities, net of tax of $11, $22  and $3, respectively           |       | 18                |       | 40       |       | (5       | )          |
| Net unrealized securities gains (losses)                                          |       | $                 | 52         |     | $          | (77      | )          | $ | (461 | ) |

 

 

51

----

 

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

 

Available-for-Salesecurities by maturity at December 31, 2007 were as follows:

 

| ** **                                 | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **(in millions)**   | ** ** |
| Due within one year                        |       | $                   | 1,272      |            | $          | 1,277 |   |
| Due after one year through five years      |       | 5,567               |       | 5,537           |       |
| Due after five years through 10 years      |       | 5,339               |       | 5,186           |       |
| Due after 10 years                         |       | 1,203               |       | 1,204           |       |
|                                       |       | 13,381              |       | 13,204          |       |
| Mortgage and other asset-backed securities |       | 7,637               |       | 7,586           |       |
| Structured investments                     |       | 2                   |       | 2               |       |
| Common and preferred stocks                |       | 30                  |       | 29              |       |
| Total                                      |       | $                   | 21,050     |            | $          | 20,821 |   |

 

The expected payments onmortgage and other asset-backed securities and structured investments may notcoincide with their contractual maturities. As such, these securities, as well as common and preferred stocks, werenot included in the maturities distribution.

 

Thetable below includes sales, maturities, and purchases of investments classifiedas Available-for-Sale for the years ended December 31:

 

| ** **                                  | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(in millions)** | ** ** |
| Sales                                       |       | $                 | 3,020      |     | $          | 1,897    |       | $ | 3,124 |   |
| Maturities, sinking fund payments and calls |       | 1,908             |       | 2,014    |       | 2,242    |       |
| Purchases                                   |       | (687              | )          | (1,433   | )          | (5,780   | )          |
|                                             |            |                   |            |          |            |          |            |  |  |  |

 

Net realized gains andlosses on Available-for-Sale securities, determined using the specificidentification method, are noted in the following table for the years ended December 31:

 

| ** **                       | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(in millions)** | ** ** |
| Gross realized gains from sales  |       | $                 | 64         |     | $          | 60       |       | $ | 108 |   |
| Gross realized losses from sales |       | (20               | )          | (10      | )          | (39      | )          |
| Other-than-temporary impairments |       | (4                | )          | —   |       | (19      | )          |
|                                  |            |                   |            |          |            |          |            |  |  |  |

 

The$4 million of other-than-temporary impairments in 2007 related to corporatedebt securities in the publishing and home building industries which weredowngraded in 2007.  The $19 million ofother-than-temporary impairments in 2005 primarily related to corporate debtsecurities within the auto industry which were downgraded in 2005 andsubsequently deteriorated throughout the year in terms of their fair value toamortized cost ratio.

 

During the second quarterof 2005, RiverSource Life sold all of its retained interest in a CDOsecuritization trust and realized a net pretax gain of $25 million.

 

At December 31, 2007and 2006, bonds carried at $7 million and $18 million, respectively, were ondeposit with various states as required by law.

 

 

52

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

 

**Commercialmortgage loans and syndicated loans, net**

 

The following is asummary of commercial mortgage loans and syndicated loans at December 31:

 

| ** **                      | ** ** | **2007**          | ** ** | **2006** | ** ** |
|---------------------------------|------------|-------------------|------------|----------|------------|
| ** **                      | ** ** | **(in millions)** | ** ** |
| Commercial mortgage loans       |       | $                 | 2,908      |     | $          | 2,827 |   |
| Less: allowance for loan losses |       | (16               | )          | (37      | )          |
| Commercial mortgage loans, net  |       | $                 | 2,892      |     | $          | 2,790 |   |
|                            |       |              |       |     |       |
| Syndicated loans                |       | $                 | 62         |     | $          | 112 |   |
| Less: allowance for loan losses |       | (4                | )          | (4       | )          |
| Net syndicated loans            |       | $                 | 58         |     | $          | 108 |   |

 

Commercial mortgage loansare first mortgages on real estate. RiverSource Life holds the mortgage documents, which gives it the rightto take possession of the property if the borrower fails to perform accordingto the terms of the agreements. Commercial mortgage loan fundings are restricted by state insuranceregulatory authorities to 80% or less of the market value of the real estate atthe time of origination of the loan.

 

Syndicated loans, whichare included as a component of other investments, represent loans in which agroup of lenders provide funds to borrowers. There is usually one originatinglender which retains a small percentage and syndicates the remainder.

 

At December 31, 2007and 2006, RiverSource Life had not recorded any investment in impairedcommercial mortgage loans.  RiverSourceLife did not recognize any interest income related to impaired commercial mortgageloans for the years ended December 31, 2007, 2006 and 2005.

 

The balances of andchanges in the allowance for loan losses were as follows:

 

| ** **                              | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                              | ** ** | **(in millions)** | ** ** |
| **Balance at January 1**           |       | $                 | 37         |     | $          | 41       |       | $ | 45 |   |
| Provision for loan losses               |       | (21               | )          | —   |       | —   |       |
| Foreclosures, write-offs and loan sales |       | —            |       | (4       | )          | (4       | )          |
| **Balance at December 31**         |       | $                 | 16         |     | $          | 37       |       | $ | 41 |   |

 

In 2007, RiverSource Liferecorded a $21 million decrease to the allowance for loan losses on commercialmortgage loans.

 

Concentrations of creditrisk of commercial mortgage loans by region at December 31 were:

 

| ** **                                    | ** ** | **2007**              | ** ** | **2006**                 | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| **Commercial mortgage loans by  U.S. region** | ** ** | **On-Balance  Sheet** | ** ** | **Funding  Commitments** | ** ** | **On-Balance  Sheet** | ** ** | **Funding  Commitments** | ** ** |
| ** **                                    | ** ** | **(in millions)**     | ** ** |
| Atlantic                                      |       | $                     | 922        |                     | $          | 22 |   | $ | 859 |   | $ | 40 |   |
| North Central                                 |       | 687                   |       | 33                       |       | 739 |   | 22 |   |
| Pacific                                       |       | 461                   |       | 21                       |       | 397 |   | 15 |   |
| Mountain                                      |       | 343                   |       | 9                        |       | 298 |   | 13 |   |
| South Central                                 |       | 298                   |       | 8                        |       | 337 |   | 2 |   |
| New England                                   |       | 197                   |       | 8                        |       | 197 |   | 2 |   |
|                                          |       | 2,908                 |       | 101                      |       | 2,827 |   | 94 |   |
| Less: allowance for loan losses               |       | (16                   | )          | —                   |       | (37 | ) | — |   |
| Total                                         |       | $                     | 2,892      |                     | $          | 101 |   | $ | 2,790 |   | $ | 94 |   |

 

 

53

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**4.****             ****Investments (Continued)**

 

Concentrations of creditrisk of commercial mortgage loans by property type at December 31 were:

 
| ** **                                      | ** ** | **2007**              | ** ** | **2006**                 | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| **Commercial mortgage loans by  property type** | ** ** | **On-Balance  Sheet** | ** ** | **Funding  Commitments** | ** ** | **On-Balance  Sheet** | ** ** | **Funding  Commitments** | ** ** |
| ** **                                      | ** ** | **(in millions)**     | ** ** |
| Office buildings                                |       | $                     | 874        |                     | $          | 12 |   | $ | 962 |   | $ | 4 |   |
| Shopping centers and retail                     |       | 860                   |       | 66                       |       | 718 |   | 71 |   |
| Apartments                                      |       | 419                   |       | 8                        |       | 470 |   | 2 |   |
| Industrial buildings                            |       | 510                   |       | 9                        |       | 458 |   | 12 |   |
| Hotels and motels                               |       | 78                    |       | —                   |       | 89 |   | 4 |   |
| Medical buildings                               |       | 42                    |       | —                   |       | 45 |   | — |   |
| Mixed use                                       |       | 52                    |       | 1                        |       | 44 |   | — |   |
| Other                                           |       | 73                    |       | 5                        |       | 41 |   | 1 |   |
|                                            |       | 2,908                 |       | 101                      |       | 2,827 |   | 94 |   |
| Less: allowance for loan losses                 |       | (16                   | )          | —                   |       | (37 | ) | — |   |
| Total                                           |       | $                     | 2,892      |                     | $          | 101 |   | $ | 2,790 |   | $ | 94 |   |

 

Commitments to fundcommercial mortgages were made in the ordinary course of business.  The funding commitments at December 31,2007 and 2006 approximate fair value.

 

**Sourcesof investment income and net realized investment gain**

 

Net investment income forthe years ended December 31 is summarized as follows:

 

| ** **                               | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Income on fixed maturities               |       | $                 | 1,187      |     | $          | 1,409    |       | $ | 1,461 |   |
| Income on commercial mortgage loans      |       | 173               |       | 181      |       | 197      |       |
| Trading securities and other investments |       | 213               |       | 86       |       | 156      |       |
|                                     |       | 1,573             |       | 1,676    |       | 1,814    |       |
| Less: investment expenses                |       | 18                |       | 19       |       | 28       |       |
| Total                                    |       | $                 | 1,555      |     | $          | 1,657    |       | $ | 1,786 |   |

 

Net realized investmentgains for the years ended December 31 is summarized as follows:

 

| ** **                                 | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(in millions)** | ** ** |
| Fixed maturities                           |       | $                 | 40         |     | $          | 50       |       | $ | 50 |   |
| Commercial mortgage loans                  |       | —            |       | 1        |       | (2       | )          |
| Reduction in the allowance for loan losses |       | 21                |       | —   |       | —   |       |
| Total                                      |       | $                 | 61         |     | $          | 51       |       | $ | 48 |   |

 

 

54

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**5.****             ****Variable Interest Entities**

 

During the year ended December 31,2005, RiverSource Life consolidated two secured loan trusts (“SLTs”) whichprovided returns to investors primarily based on the performance of anunderlying portfolio of high-yield loans and which were managed by anaffiliate.  The SLTs were liquidated in2005, resulting in a $14 million pretax gain for the year ended December 31,2005.  There is no remaining exposure tothese SLTs as a result of their liquidations.

 

RiverSource Life hasother significant variable interests for which it is not considered the primarybeneficiary and, therefore, does not consolidate.  These interests are represented by carryingvalues of $2 million of CDO residual tranches managed by an affiliate whereRiverSource Life is not the primary beneficiary.  RiverSource Life’s maximum exposure to lossas a result of its investment in the CDO residual tranches is represented bythe carrying value.

 

**6.****             ****Deferred Acquisition Costs andDeferred Sales Inducement Costs**

 

The balances of andchanges in DAC were as follows:

 

| ** **                                                                                  | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(in millions)** | ** ** |
| Balance at January 1                                                                   |       | $                 | 4,411      |     | $          | 4,036    |       | $ | 3,638 |   |
| Impact of SOP 05-1 at adoption                                                              |       | (204              | )          | —   |       | —   |       |
| Capitalization of acquisition costs                                                         |       | 704               |       | 687      |       | 633      |       |
| Amortization,  excluding impact of annual third quarter changes in DAC-related consumptions |       | (454              | )          | (394     | )          | (383     | )          |
| Amortization,  impact of annual third quarter changes in DAC-related assumptions            |       | (16               | )          | 38       |       | 67       |       |
| Impact of changes in net unrealized securities  losses (gains)                              |       | (12               | )          | 44       |       | 81       |       |
| Balance at December 31                                                                 |       | $                 | 4,429      |     | $          | 4,411    |       | $ | 4,036 |   |

 

The balances of andchanges in DSIC were as follows:

 

| ** **                                                     | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                                     | ** ** | **(in millions)** | ** ** |
| Balance at January 1                                      |       | $                 | 452        |     | $          | 370      |       | $ | 303 |   |
| Impact of SOP 05-1 at adoption                                 |       | (11               | )          | —   |       | —   |       |
| Capitalization of sales inducements                            |       | 124               |       | 126      |       | 94       |       |
| Amortization                                                   |       | (53               | )          | (48      | )          | (40      | )          |
| Impact of changes in net unrealized securities  losses (gains) |       | (1                | )          | 4        |       | 13       |       |
| Balance at December 31                                    |       | $                 | 511        |     | $          | 452      |       | $ | 370 |   |

 

**7.****             ****Lines****of Credit**

 

RiverSource Life hasavailable a committed line of credit with Ameriprise Financial aggregating $200million.  The interest rate for anyborrowings is established by reference to LIBOR plus 28 basis points.  There were no amounts outstanding on thisline of credit at December 31, 2007 and 2006.

 

Also, RiverSource Lifehas a collateral loan agreement with Ameriprise Financial aggregating up to $75million.  The interest rate for anyborrowings is equal to the preceding month’s effective new money rate forRiverSource Life’s permanent investments. There were no amounts outstanding at December 31, 2007 and 2006.

 

 

55

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**8.****             ****Variable Annuity Guarantees**

 

The majority of thevariable annuity contracts offered by RiverSource Life contain GMDBprovisions.  RiverSource Life also offersvariable annuities with death benefit provisions that gross up the amountpayable by a certain percentage of contract earnings, which are referred to asGGU benefits.  In addition, RiverSourceLife offers contracts with GMWB and GMAB provisions.  RiverSource Life previously offered contractscontaining GMIB provisions.  RiverSourceLife has established additional liabilities for the variable annuity deathbenefits, GMIB provisions and for life contingent benefits associated with GMWBprovisions.  GMAB and non-life contingentbenefits associated with GMWB provisions are considered embedded derivativesand are recorded at fair value.

 

The variable annuitycontracts with GMWB riders typically have account values that are based on anunderlying portfolio of mutual funds, the values of which fluctuate based onequity market performance.  At issue, theguaranteed amount is equal to the amount deposited but the guarantee may beincreased annually to the account value (a “step-up”) in the case of favorablemarket performance.  The GMWB offeredinitially guarantees that the client can withdraw 7% per year until the amountwithdrawn is equal to the guaranteed amount, regardless of the performance ofthe underlying funds.  In 2006,RiverSource Life began offering an enhanced withdrawal benefit that givespolicyholders a choice to withdraw 6% per year for the life of the policyholderor 7% per year until the amount withdrawn is equal to the guaranteed amount. In2007, RiverSource Life added a new GMWB benefit design that is available in ajoint version that promises 6% withdrawals while either contractholder remainsalive.  In addition, once withdrawalsbegin, the policyholder’s funds are moved to one of the three less aggressiveasset allocation models (of the five that are available prior to withdrawal).

 

Variable annuitycontractholders age 79 or younger at contract issue can also obtain aprincipal-back guarantee by purchasing the optional GMAB rider for anadditional charge.  The GMAB riderguarantees that, regardless of market performance at the end of the 10-yearwaiting period, the contract value will be no less than the original investmentor 80% of the highest anniversary value, adjusted for withdrawals.  If the contract value is less than theguarantee at the end of the 10 year period, a lump sum will be added to thecontract value to make the contract value equal to the guarantee value.

 

 

56

----

** **

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**8.****             ****Variable Annuity Guarantees(Continued)**

 

Thefollowing table provides summary information related to all variable annuityguarantees for which RiverSource Life has established additional liabilities asof December 31:

 

| **Variable Annuity Guarantees  by Benefit Type(1)** | ** ** | **2007**                           | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                              | ** ** | **(in millions, except age)** | ** ** |
| **Contracts with GMDB providing for return of  premium:**               | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 25,804     |       | $          | 17,418 |   |
| Contract value  in separate accounts                                    |       | $                                  | 23,892     |       | $          | 15,859 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 26         |       | $          | 13 |   |
| Weighted average  attained age                                          |       | 60                                 |       | 61         |       |
| **Contracts with GMDB providing for six-year  reset:**                  | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 20,231     |       | $          | 23,544 |   |
| Contract value  in separate accounts                                    |       | $                                  | 17,617     |       | $          | 20,058 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 167        |       | $          | 227 |   |
| Weighted average  attained age                                          |       | 60                                 |       | 61         |       |
| **Contracts with GMDB providing for one-year  ratchet:**                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 7,908      |       | $          | 6,729 |   |
| Contract value  in separate accounts                                    |       | $                                  | 7,143      |       | $          | 5,902 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 81         |       | $          | 26 |   |
| Weighted average  attained age                                          |       | 61                                 |       | 61         |       |
| **Contracts with GMDB providing for five-year  ratchet:**               | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 1,211      |       | $          | 907 |   |
| Contract value  in separate accounts                                    |       | $                                  | 1,163      |       | $          | 870 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 1          |       | $          | — |   |
| Weighted average  attained age                                          |       | 58                                 |       | 57         |       |
| **Contracts with other GMDB:**                                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 693        |       | $          | 586 |   |
| Contract value  in separate accounts                                    |       | $                                  | 639        |       | $          | 530 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 12         |       | $          | 11 |   |
| Weighted average  attained age                                          |       | 65                                 |       | 64         |       |
| **Contracts with GGU death benefit:**                                   |       |                               |       |       |       |
| Total contract  value                                                   |       | $                                  | 950        |       | $          | 811 |   |
| Contract value  in separate accounts                                    |       | $                                  | 873        |       | $          | 730 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 80         |       | $          | 62 |   |
| Weighted average  attained age                                          |       | 62                                 |       | 62         |       |
| **Contracts with GMIB:**                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 927        |       | $          | 928 |   |
| Contract value  in separate accounts                                    |       | $                                  | 859        |       | $          | 853 |   |
| Net amount at  risk(2)                                                  |       | $                                  | 18         |       | $          | 14 |   |
| Weighted average  attained age                                          |       | 62                                 |       | 61         |       |
| **Contracts with GMWB:**                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 5,104      |       | $          | 4,791 |   |
| Contract value  in separate accounts                                    |       | $                                  | 4,980      |       | $          | 4,761 |   |
| Benefit amount  in excess of account value                              |       | $                                  | 22         |       | $          | — |   |
| Weighted average  attained age                                          |       | 62                                 |       | 61         |       |
| **Contracts with GMWB for life:**                                       | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                   |       | $                                  | 7,958      |       | $          | 2,396 |   |
| Contract value  in separate accounts                                    |       | $                                  | 7,685      |       | $          | 2,349 |   |
| Benefit amount  in excess of account value                              |       | $                                  | 33         |       | $          | — |   |
| Weighted average  attained age                                          |       | 62                                 |       | 63         |       |

 

 

 

57

----

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**8.****             ****Variable Annuity Guarantees(Continued)**

 

| **Variable Annuity Guarantees  by Benefit Type(1) (Continued)** | ** ** | **2007**                           | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                                               | ** ** | **(in millions, except age)** | ** ** |
| **Contracts with GMAB:**                                                                 | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Total contract  value                                                                    |       | $                                  | 2,260      |       | $          | 1,350 |   |
| Contract value  in separate accounts                                                     |       | $                                  | 2,205      |       | $          | 1,340 |   |
| Benefit amount  in excess of account value                                               |       | $                                  | 3          |       | $          | — |   |
| Weighted average  attained age                                                           |       | 55                                 |       | 55         |       |

----

 

| (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 always equals account value are not  shown in this table.                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    |   | Represents current death benefit less total contract value for GMDB,  amount of gross up for GGU and accumulated guaranteed minimum benefit base  less total contract value for GMIB and assumes the actuarially remote  scenario that all claims become payable on the same day. |
|   |   |                                                                                                                                                                                                                                                                              |

 

For the year ended December 31,2007, additional liabilities (assets) and incurred claims were:

 

| ** **                                                          | ** ** | **GMDB & GGU** | ** ** | **GMIB** | ** ** | **GMWB** | ** ** | **GMAB** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                          | ** ** | **(in millions)**       | ** ** |
| Liability (asset) balance at January 1                         |       | $                            | 26         |     | $          | 5        |       | $        | (12        | ) | $ | (5 | ) |
| Reported claims                                                     |       | 3                            |       | 2        |       | —   |       | —   |       |
| Liability balance at December 31                               |       | 24                           |       | 3        |       | 136      |       | 33       |       |
| Incurred claims (sum of reported and change in  liability (assets)) |       | 1                            |       | —   |       | 148      |       | 38       |       |
|                                                                     |            |                              |            |          |            |          |            |          |            |  |  |  |  |

 

For the year ended December 31,2006, additional liabilities (assets) and incurred claims (adjustments) were:

 

| ** **                                                                        | ** ** | **GMDB & GGU** | ** ** | **GMIB** | ** ** | **GMWB** | ** ** | **GMAB** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                        | ** ** | **(in millions)**       | ** ** |
| Liability balance at January 1                                               |       | $                            | 16         |     | $          | 4        |       | $        | 9          |   | $ | 1 |   |
| Reported claims                                                                   |       | 8                            |       | —   |       | —   |       | —   |       |
| Liability (asset) balance at December 31                                     |       | 26                           |       | 5        |       | (12      | )          | (5       | )          |
| Incurred claims  (adjustments) (sum of reported and change in liability (assets)) |       | 18                           |       | 1        |       | (21      | )          | (6       | )          |
|                                                                                   |            |                              |            |          |            |          |            |          |            |  |  |  |  |

 

                        The liabilities for guaranteed benefitsare supported by general account assets.  Changes in these liabilities are included in benefits, claims, lossesand settlement expenses.

 

Contract values inseparate accounts were invested in various equity, bond and other funds asdirected by the contractholder.  No gainsor losses were recognized on assets transferred to separate accounts for theperiods presented.

 

 

58

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**9.****             ****Future Policy Benefits, PolicyClaims and Other Policyholders’ Funds and Separate Account Liabilities**

 

Future policy benefitsand policy claims and other policyholders’ funds as of December 31,consisted of the following:

 

| ** **                                                                           | ** ** | **2007**          | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                                                           | ** ** | **(in millions)** | ** ** |
| Fixed annuities                                                                      |       | $                 | 14,382     |     | $          | 16,841 |   |
| Equity indexed annuities accumulated host values                                     |       | 253               |       | 267      |       |
| Equity indexed annuities embedded derivative                                         |       | 53                |       | 50       |       |
| Variable annuities fixed sub-accounts                                                |       | 5,419             |       | 5,975    |       |
| GMWB variable annuity guarantees                                                     |       | 136               |       | (12      | )          |
| GMAB variable annuity guarantees                                                     |       | 33                |       | (5       | )          |
| Other variable annuity guarantees                                                    |       | 27                |       | 31       |       |
| Total annuities                                                                      |       | 20,303            |       | 23,147   |       |
| Variable universal life (“VUL”)/universal life  (“UL”) insurance |       | 2,568             |       | 2,562    |       |
| Other life, DI and LTC insurance                                                     |       | 4,106             |       | 3,852    |       |
| Total future  policy benefits                                                        |       | 26,977            |       | 29,561   |       |
| Policy claims and other policyholders’ funds                                    |       | 91                |       | 89       |       |
| Total future  policy benefits and policy claims and other policyholders’ funds  |       | $                 | 27,068     |     | $          | 29,650 |   |

 

Separate accountliabilities as of December 31 consisted of the following:

 

| ** **                             | ** ** | **2007**          | ** ** | **2006** | ** ** |
|----------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| Variable annuity variable sub-accounts |       | $                 | 51,764     |     | $          | 43,515 |   |
| VUL insurance variable sub-accounts    |       | 6,244             |       | 5,709    |       |
| Other insurance variable sub-accounts  |       | 62                |       | 63       |       |
| Total separate  account liabilities    |       | $                 | 58,070     |     | $          | 49,287 |   |

 

*FixedAnnuities*

 

Fixed annuities includeboth deferred and payout contracts. Deferred contracts offer a guaranteed minimum rate of interest and securityof the principal invested.  Payoutcontracts guarantee a fixed income payment for life or the term of thecontract.  RiverSource Life generallyinvests the proceeds from the annuity payments in fixed rate securities.  The interest rate risks under theseobligations are partially hedged with derivative instruments.  These derivatives were intended to be cashflow hedges of interest credited on forecasted sales rather than a hedge ofinforce risk.  These derivativesconsisted of interest rate swaptions with a notional value of $0.8 billion and$1.2 billion at December 31, 2007 and 2006, respectively.  Effective January 1, 2007, RiverSourceLife removed the cash flow hedged designation from its swaptions because theywere no longer considered highly effective. The fair value of these swaptions was $1 million and $2 million at December 31,2007 and 2006, respectively.

 

 

59

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**9.****             ****Future Policy Benefits, PolicyClaims and Other Policyholders’ Funds and Separate Account Liabilities(Continued)**

 

*EquityIndexed Annuities*

 

The Index 500 Annuity,RiverSource Life’s equity indexed annuity product, is a single premium deferredfixed annuity.  The contract is issuedwith an initial term of seven years and interest earnings are linked to theS&P 500 Index.  This annuity has aminimum interest rate guarantee of 3% on 90% of the initial premium, adjustedfor any surrenders.  RiverSource Lifegenerally invests the proceeds from the annuity deposits in fixed ratesecurities and hedges the equity risk with derivative instruments.  The equity component of these annuities isconsidered an embedded derivative and is accounted for separately.  The change in fair value of the embeddedderivative reserve is reflected in interest credited to fixed accounts.  As a means of economically hedging itsobligation under the stock market return provision, RiverSource Life purchasesand writes index options and enters into futures contracts.  The changes in the fair value of these hedgederivatives are included in net investment income.  The notional amounts and fair value assets(liabilities) of these options and futures as of December 31 were as follows:

 

| ** **                    | ** ** | **2007**             | ** ** | **2006**        | ** ** |
|-------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                    | ** ** | **Notional  Amount** | ** ** | **Fair  Value** | ** ** | **Notional  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                    | ** ** | **(in millions)**    | ** ** |
| Purchased options and futures |       | $                    | 237        |            | $          | 43 |   | $ | 271 |   | $ | 40 |   |
| Written options and futures   |       | (58                  | )          | (1              | )          | (67 | ) | (1 | ) |
|                               |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

*VariableAnnuities*

 

Purchasers of variableannuities can select from a variety of investment options and can elect toallocate a portion to a fixed account.  Avast majority of the premiums received for variable annuity contracts are heldin separate accounts where the assets are held for the exclusive benefit ofthose contractholders.

 

Most of the variableannuity contracts issued by RiverSource Life contain one or more guaranteedbenefits, including GMWB, GMAB, GMDB and GGU provisions.  GMAB and non-life contingent benefitsassociated with GMWB provisions are considered embedded derivatives and arerecorded at fair value.  The changes infair values of these embedded derivatives are reflected in benefits, claims,losses and settlement expenses.  Thenegative fair values for GMWB and GMAB at December 31, 2006 reflected thatunder conditions and expectations at that time, RiverSource Life believed theapplicable fees charged for the rider would more than offset the futurebenefits paid to policyholders under the rider provisions.  RiverSource Life does not currently hedge itsrisk under the GMDB, GGU and GMIB provisions. The total value of variable annuity contracts with GMWB riders increasedfrom $7.2 billion at December 31, 2006 to $13.1 billion at December 31,2007.  The total value of variable annuitycontracts with GMAB riders increased from $1.4 billion at December 31,2006 to $2.3 billion at December 31, 2007. As a means of economically hedging its obligations under GMWB and GMABprovisions, RiverSource Life purchases equity put and call options, enters intointerest rate swaps and trades equity futures contracts.  The changes in the fair value of these hedgederivatives are included in net investment income.  The notional amounts and fair value assets(liabilities) of these options, swaps and futures as of December 31, wereas follows:

 

| ** **                    | ** ** | **2007**             | ** ** | **2006**        | ** ** |
|-------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                    | ** ** | **Notional  Amount** | ** ** | **Fair  Value** | ** ** | **Notional  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                    | ** ** | **(in millions)**    | ** ** |
| Purchased options and futures |       | $                    | 6,318      |            | $          | 338 |   | $ | 1,410 |   | $ | 171 |   |
| Interest rate swaps           |       | 202                  |       | 2               |       | 359 |   | (1 | ) |
| Sold equity futures           |       | (202                 | )          | —          |       | (111 | ) | — |   |
|                               |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

 

60

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**9.****             ****Future Policy Benefits, PolicyClaims and Other Policyholders’ Funds and Separate Account Liabilities(Continued)**

 

*InsuranceLiabilities*

 

VUL/UL is the largestgroup of insurance policies written by RiverSource Life.  Purchasers of VUL can select from a varietyof investment options and can elect to allocate a portion to a fixed account.  A vast majority of the premiums received forVUL contracts are held in separate accounts where the assets are held for theexclusive benefit of those contractholders. RiverSource Life also offers term and whole life insurance as well asdisability products.  RiverSource Life nolonger offers LTC products but has inforce policies from prior years.  Insurance liabilities include accumulationvalues, unpaid reported claims, incurred but not reported claims, andobligations for anticipated future claims.

 

**10.****      ****Income Taxes**

 

RiverSource Lifequalifies as a life insurance company for federal income tax purposes.  As such, RiverSource Life is subject to theInternal Revenue Code provisions applicable to life insurance companies.

 

Provisions for incometaxes were:

 

| ** **                  | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(in millions)** | ** ** |
| Current income tax:         |       |              |       |     |       |     |       |
| Federal                     |       | $                 | 15         |     | $          | 66       |       | $ | 56 |   |
| State                       |       | 1                 |       | 3        |       | 4        |       |
| Total current income tax    |       | 16                |       | 69       |       | 60       |       |
| Deferred federal income tax |       | 83                |       | 123      |       | 122      |       |
| Income tax provision        |       | $                 | 99         |     | $          | 192      |       | $ | 182 |   |

 

The principal reasonsthat the aggregate income tax provision is different from that computed byusing the U.S. statutory rate of 35% are as follows:

 

| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax at U.S. statutory rate               |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Changes in taxes resulting from:         |       |     |       |     |       |     |       |
| Tax-exempt  interest and dividend income |       | (10.3    | )          | (6.5     | )          | (9.4     | )          |
| State taxes, net  of federal benefit     |       | 0.1      |       | 0.3      |       | 0.4      |       |
| Foreign tax  credit, net of addback      |       | (2.1     | )          | (0.7     | )          | (0.5     | )          |
| Taxes applicable  to prior years         |       | (3.7     | )          | 0.1      |       | 2.8      |       |
| Other, net                               |       | —   |       | 0.1      |       | 0.1      |       |
| Income tax provision effective rate      |       | 19.0     | %          | 28.3     | %          | 28.4     | %          |

 

RiverSource Life’seffective tax rate was 19.0% and 28.3% for the years ended December 31,2007 and 2006, respectively.   Thedecrease in the effective tax rate primarily reflects lower pretax income aswell as higher levels of tax advantaged items, including dividends receiveddeduction and foreign tax credits, relative to pretax income for the year endedDecember 31, 2007 as well as a $7 million tax benefit related to thefinalization of the prior year tax return.

 

 

61

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**10.****      ****Income Taxes (Continued)**

 

Deferred income taxassets and liabilities result from temporary differences between the assets andliabilities measured for U.S. GAAP reporting versus income tax returnpurposes.  The significant components ofRiverSource Life’s deferred income tax assets and liabilities as of December 31are reflected in the following table:

 

| ** **                                                              | ** ** | **2007**          | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                                              | ** ** | **(in millions)** | ** ** |
| Deferred income tax assets:                                             |       |              |       |     |       |
| Liabilities for  future policy benefits                                 |       | $                 | 1,212      |     | $          | 1,146 |   |
| Investment  related                                                     |       | 29                |       | 75       |       |
| Net unrealized  losses on Available-for Sale securities and derivatives |       | 87                |       | 115      |       |
| Tax credit  carryforwards                                               |       | 19                |       | —   |       |
| Other                                                                   |       | 44                |       | 45       |       |
| Gross deferred income tax assets                                        |       | 1,391             |       | 1,381    |       |
|                                                                    |       |              |       |     |       |
| Deferred income tax liabilities:                                        |       |              |       |     |       |
| DAC                                                                     |       | 1,253             |       | 1,253    |       |
| DSIC                                                                    |       | 179               |       | 158      |       |
| Other                                                                   |       | 92                |       | 60       |       |
| Gross deferred income tax liabilities                                   |       | 1,524             |       | 1,471    |       |
| Net deferred income tax liabilities                                     |       | $                 | 133        |     | $          | 90 |   |

 

RiverSourceLife is required to establish a valuation allowance for any portion of thedeferred income tax assets that management believes will not be realized.  Included in RiverSource Life’s deferred taxassets is a significant deferred tax asset relating to capital losses that havebeen recognized for financial statement purposes but not yet for tax returnpurposes. Under current U.S. federal income tax law, capital losses generallymust be used against capital gain income within five years of the year in whichthe capital losses are recognized for tax purposes.

 

Additionally,RiverSource Life has $11.9 million in Alternative Minimum Tax (AMT) and $6.9million foreign tax credit carryforwards included in the deferred tax assets asof December 31, 2007.  The AMTcarryforward has no expiration and the foreign tax credit carryforward expireson December 31, 2026.  Based onanalysis of RiverSource Life’s tax position, management believes it is morelikely than not that the results of future operations and implementation of taxplanning strategies will generate sufficient taxable income to enableRiverSource Life to utilize all of its deferred tax assets.  Accordingly, no valuation allowance fordeferred tax assets has been established as of December 31, 2007 and 2006.

 

EffectiveJanuary 1, 2007, RiverSource Life adopted the provisions of FIN 48.  The amount RiverSource Life recognized as aresult of the implementation of FIN 48 was not material.

 

Areconciliation of the beginning and ending amount of unrecognized tax benefitsis as follows:

 

| ** **                                                    | ** ** | **2007**          | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **(in millions)** | ** ** |
| Balance at January 1                                     |       | $                 | 73         |   |
| Additions based on tax positions related to the  current year |       | 34                |       |
| Additions for tax positions of prior years                    |       | 16                |       |
| Reductions for tax positions of prior years                   |       | (26               | )          |
| Balance at December 31                                   |       | $                 | 97         |   |

 

Ifrecognized, approximately $27 million and $49 million, net of federal taxbenefits, of the unrecognized tax benefits as of January 1, 2007 and December 31,2007, respectively, would affect the effective tax rate.

 

 

62

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**10.****      ****Income Taxes (Continued)**

 

RiverSourceLife recognizes interest and penalties related to unrecognized tax benefits asa component of the income tax provision. RiverSource Life recognized a net reduction of $11 million in interestand penalties for the year ended December 31, 2007.  RiverSource Life had $10 million and ($1)million for the payment of interest and penalties accrued at January 1,2007 and December 31, 2007, respectively.

 

It isreasonably possible that the total amounts of unrecognized tax benefits willchange in the next 12 months.  Based onthe current audit position of RiverSource Life, it is estimated that the totalamount of gross unrecognized tax benefits may decrease by $35 million to $40million in the next 12 months.

 

RiverSourceLife or one or more of its subsidiaries files income tax returns in the U.S.federal jurisdiction and various state jurisdictions. With few exceptions,RiverSource Life is no longer subject to U.S. federal or state and local incometax examinations by tax authorities for years before 1997. The Internal RevenueService (“IRS”), as part of the overall examination of the American ExpressCompany consolidated return, commenced an examination of the RiverSource Life’sincome tax returns for 1997 through 2002 in the third quarter of 2005. In thefirst quarter of 2007, the IRS expanded the period of the exam to include 2003through 2004. RiverSource Life or certain of its subsidiaries’ state income taxreturns are currently under examination by various jurisdictions for yearsranging from 1998 through 2005.

 

On September 25,2007, the IRS issued Revenue Ruling 2007-61 in which it announced that itintends to issue regulations with respect to certain computational aspects ofthe Dividends Received Deduction (“DRD”) related to separate account assetsheld in connection with variable contracts of life insurance companies and hasadded the project to the 2007-2008 Priority Guidance Plan. Revenue Ruling2007-61 suspended a revenue ruling issued in August 2007 that purported tochange accepted industry and IRS interpretations of the statutes governingthese computational questions. Any regulations that the IRS ultimately proposesfor issuance in this area will be subject to public notice and comment, atwhich time insurance companies and other members of the public will have theopportunity to raise legal and practical questions about the content, scope andapplication of such regulations. As a result, the ultimate timing and substanceof any such regulations are unknown at this time, but they may result in theelimination of some or all of the separate account DRD tax benefit thatRiverSource Life receives. Management believes that it is likely that any suchregulations would apply prospectively only. For the twelve months ended December 31,2007, RiverSource Life recorded a benefit of approximately $46 million relatedto the current year’s separate account DRD.

 

As aresult of the separation of Ameriprise Financial from American Express,RiverSource Life and subsidiaries will not be able to file a consolidated U.S.federal income tax return with other members of Ameriprise Financial’saffiliated group until 2010.

 

The items comprising other comprehensive loss in the ConsolidatedStatements of Shareholder’s Equity are presented net of the following incometax benefit amounts:

 

| ** **                               | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Net unrealized securities gains (losses) |       | $                 | 28         |     | $          | (41      | )          | $ | (248 | ) |
| Net unrealized derivative gains (losses) |       | —            |       | (1       | )          | (6       | )          |
| Net income tax provision (benefit)       |       | $                 | 28         |     | $          | (42      | )          | $ | (254 | ) |

 

**11.****      ****Statutory Capital and Surplus**

 

State insurance statutescontain limitations as to the amount of dividends or distributions thatinsurers may make without providing prior notification to stateregulators.  For RiverSource LifeInsurance Company, dividends or distributions in excess of unassigned surplus,as determined in accordance with accounting practices prescribed by the Stateof Minnesota, require advance notice to the Minnesota Department of Commerce,RiverSource Life Insurance Company’s primary regulator, and are subject topotential disapproval.  RiverSource LifeInsurance Company’s statutory unassigned surplus aggregated $0.8 billion and$1.2 billion as of December 31, 2007 and 2006, respectively.

 

 

63

----

 

 

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**11.****      ****Statutory Capital and Surplus (Continued)**

 

In addition, dividends ordistributions, whose fair market value, together with that of other dividendsor distributions made within the preceding 12 months, exceed the greater of theprevious year’s statutory net gain from operations or 10% of the previousyear-end statutory capital and surplus are referred to as “extraordinarydividends.” Extraordinary dividends also require advance notice to theMinnesota Department of Commerce, and are subject to potential disapproval.

 

Statutory net gain fromoperations and net income for the years ended December 31 and capital andsurplus as of December 31 are summarized as follows:

 

| ** **                         | ** ** | **2007**          | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **(in millions)** | ** ** |
| ** **                         | ** ** | **(unaudited)**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statutory net gain from operations |       | $                 | 523        |       | $          | 469        |       | $ | 327 |   |
| Statutory net income               |       | 555               |       | 514        |       | 339        |       |
| Statutory capital and surplus      |       | 2,820             |       | 3,258      |       | 2,942      |       |
|                                    |            |                   |            |            |            |            |            |  |  |  |

 

**12.****      ****Related Party Transactions**

 

                        Ameriprise Financial was the investmentmanager for the proprietary mutual funds used as investment options byRiverSource Life’s variable annuity and variable life insurance contractholdersthrough the third quarter of 2005.  Inthe fourth quarter of 2005, RiverSource Investments, LLC replaced AmeripriseFinancial as the investment manager. RiverSource Life provides all fund management services, other thaninvestment management, and is compensated for the administrative services itprovides.  For the years ended December 31,2007 and 2006, RiverSource Life received $97 million and $76 million,respectively, from RiverSource Investments, LLC for administrative servicesprovided by RiverSource Life.  For theyear ended December 31, 2005, RiverSource Life received $56 million fromAmeriprise Financial and $20 million from RiverSource Investments, LLC forservices provided for the periods they each were investment managers.

 

RiverSource Lifeparticipates in the Ameriprise Financial Retirement Plan which covers all permanentemployees age 21 and over who have met certain employment requirements.  RiverSource Life contributions to the planare based on participants’ age, years of service and total compensation for theyear.  Funding of retirement costs forthis plan complies with the applicable minimum funding requirements specifiedby ERISA.  RiverSource Life’s share ofthe total net periodic pension cost was approximately $1 million for each ofthe years ended December 31, 2007, 2006 and 2005.

 

RiverSource Lifeparticipates in the Ameriprise Financial 2005 Incentive Compensation Plan.  Employees, directors and independentcontractors are eligible to receive incentive awards including stock options,restricted stock awards, restricted stock units, performance shares and similarawards designed to comply with the applicable federal regulations and laws ofjurisdiction.  The expense for incentiveawards was $3 million in 2007, $2 million in 2006 and $1 million in 2005.

 

RiverSource Life alsoparticipates in the defined contribution pension plans of Ameriprise Financialwhich cover all employees who have met certain employment requirements.  RiverSource Life contributions to the plansare a percent of either each employee’s eligible compensation or basiccontributions.  Costs of these planscharged to operations in 2007, 2006 and 2005 were $3 million, $3 million and $2million, respectively.

 

RiverSource Lifeparticipates in the defined benefit health care plans of Ameriprise Financialthat provide health care and life insurance benefits to retired employees andretired financial advisors.  The plansinclude participant contributions and service related eligibilityrequirements.  Upon retirement, such employeesare considered to have been employees of Ameriprise Financial.  Ameriprise Financial expenses these benefitsand allocates the expenses to its subsidiaries. The cost of these plans charged to operations in 2007, 2006 and 2005were $2 million, $1 million and $1 million, respectively.

 

Charges by AmeripriseFinancial and affiliated companies to RiverSource Life for use of jointfacilities, technology support, marketing services and other servicesaggregated $909 million, $755 million and $725 million for 2007, 2006 and 2005,respectively.  Certain of these costs areincluded in DAC.  Expenses allocated toRiverSource Life may not be reflective of expenses that would have beenincurred by RiverSource Life on a stand-alone basis.

 

 

64

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**12.****      ****Related Party Transactions (Continued)**

 

During 2007, RiverSourceLife Insurance Company paid $900 million of cash dividends to AmeripriseFinancial, a portion of which is considered extraordinary.  During 2006, RiverSource Life InsuranceCompany paid $300 million of dividends to Ameriprise Financial, a portion ofwhich is considered extraordinary.  Priorto the payment of the extraordinary cash dividends, RiverSource Life InsuranceCompany made the required advance notices to the Minnesota Department ofCommerce, its primary state regulator, and received responses stating therewere no objections to the payment of these dividends.  The ordinary cash dividends did not requireprior notification and response from the Minnesota Department of Commerce.  In connection with the Separation,RiverSource Life received a capital contribution of $650 million fromAmeriprise Financial during the third quarter of 2005 to support its currentfinancial strength ratings and to cover the allocated separation costs.  During the fourth quarter of 2005,RiverSource Life Insurance Company paid dividends to Ameriprise Financial of$380 million.  During 2007, 2006 and2005, RiverSource Life of NY paid cash dividends of $83 million, $25 millionand $23 million, respectively, to RiverSource Life Insurance Company.  A portion of the 2007 dividends wasconsidered extraordinary and was paid only after making the required advancenotice to the New York State Insurance Department, RiverSource Life of NY’sprimary state regulator.

 

Included in otherliabilities at December 31, 2007 and 2006 are nil and $1 million,respectively, payable to Ameriprise Financial for federal income taxes.

 

**13.****      ****Reinsurance**

 

At December 31,2007, 2006 and 2005, traditional life and universal life insurance inforceaggregated $187.3 billion, $174.1 billion and $160.1 billion, respectively, ofwhich $117.4 billion, $102.4 billion and $86.3 billion were reinsured at therespective year ends.  Life insurance inforce is reported on astatutory basis.  RiverSource Lifealso reinsures a portion of the risks assumed under its DI and LTC policies.

 

The effect of reinsuranceon premiums for the years ended December 31 is as follows:

 

| ** **          | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **          | ** ** | **(in millions)** | ** ** |
| Direct premiums     |       | $                 | 621        |     | $          | 645      |       | $ | 643 |   |
| Reinsurance assumed |       | 2                 |       | 3        |       | 2        |       |
| Reinsurance ceded   |       | (138              | )          | (115     | )          | (124     | )          |
| Net premiums        |       | $                 | 485        |     | $          | 533      |       | $ | 521 |   |

 

Policy and contractcharges are presented on the Consolidated Statements of Income net of $57million, $55 million and $52 million of reinsurance ceded for the years ended December 31,2007, 2006 and 2005, respectively.

 

Reinsurance recoveredfrom reinsurers amounted to $126 million, $115 million and $106 million for theyears ended December 31, 2007, 2006 and 2005, respectively.  Reinsurance contracts do not relieveRiverSource Life from its primary obligation to policyholders.

 

**14.****      ****Derivative Financial Instruments and Hedging Activities**

 

Derivative financialinstruments enable RiverSource Life to manage its exposure to various marketrisks. The value of such instruments is derived from an underlying variable ormultiple variables, including equity and interest rate indices or prices.  RiverSource Life does not engage in anyderivative instrument trading activities. Credit risk associated with RiverSource Life’s derivatives is limited tothe risk that a derivative counterparty will not perform in accordance with theterms of the contract.  To mitigate suchrisk, counterparties are all required to be preapproved.  Additionally, RiverSource Life may, from timeto time, enter into master netting agreements wherever practical.  As of December 31, 2007 and 2006, thetotal net fair values, excluding accruals, of derivative assets were $385million and $212 million, respectively, and derivative liabilities were $9million and $7 million, respectively. The net notional amount of derivatives as of December 31, 2007 was$7.3 billion, consisting of $7.6 billion purchased and $0.3 billion written.

 

*Cash Flow Hedges*RiverSource Lifeuses interest rate derivative products, primarily interest rate swaptions, tohedge the risk of increasing interest rates on forecasted fixed premium productsales.

 

 

65

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**14.****      ****Derivative Financial Instruments and Hedging Activities (Continued)**

 

The following is a summary of net unrealized gains (losses) related tocash flow hedging activity, net of tax for the years ended December 31 asfollows:

 

| ** **                                                                              | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                                                              | ** ** | **(in millions)** | ** ** |
| Holding gains (losses), net of tax of $1, $2 and $5,  respectively                      |       | $                 | —     |     | $          | (4       | )          | $ | (10 | ) |
| Reclassification  of realized losses (gains), net of tax of $1, $1 and $1, respectively |       | 1                 |       | 3        |       | (1       | )          |
| Net change in unrealized derivative gains (losses)                                      |       | $                 | 1          |     | $          | (1       | )          | $ | (11 | ) |

 

At December 31, 2007, RiverSource Life expects toreclassify approximately $4 million of net pretax losses on derivativeinstruments from accumulated other comprehensive income (loss) to earningsduring the next 12 months as a result of the amortization of deferred expenserelated to interest rate swaptions that will be recorded in net investmentincome.

 

If a hedge designation is removed or a hedge isterminated prior to maturity, the amount previously recorded in accumulatedother comprehensive income (loss) may be recognized into earnings over theperiod that the hedged item impacts earnings. For any hedge relationships that are discontinued because the forecastedtransaction is not expected to occur according to the original strategy, anyrelated amounts previously recorded in accumulated other comprehensive income(loss) are recognized in earnings immediately. Effective January 1, 2007, RiverSource Life removed the cash flow hedgedesignation from its swaptions because the swaptions were no longer highlyeffective.  Accordingly, all changes inthe fair value of the swaptions are recorded directly to earnings.  The removal of the cash flow designation didnot cause any amounts in accumulated other comprehensive income (loss) to bereclassified into earnings because the forecasted transactions being hedged arestill likely to occur.  There were nocash flow hedges for which hedge accounting was terminated for these reasonsduring 2006 or 2005.  No hedgerelationships were discontinued during the years ended December 31, 2007, 2006and 2005 due to forecasted transactions no longer expected to occuraccording to the original hedge strategy.

 

Currently, the longest period of time over whichRiverSource Life is hedging exposure to the variability in future cash flows is11 years and relates to forecasted fixed annuity sales.  For the years ended December 31, 2007,2006 and 2005, there were $2 million, $4 million and $2 million, respectively,in losses on derivative transactions or portions thereof that were ineffectiveas hedges excluded from the assessment of hedge effectiveness or reclassifiedinto earnings as a result of the discontinuance of cash flow hedges.

 

*Derivatives NotDesignated as Hedges*RiverSource Life has economic hedges that either do not qualify or are notdesignated for hedge accounting treatment. The fair value assets (liabilities) of these purchased and writtenderivatives for the years ended December 31 were as follows:

 

| ** **               | ** ** | **2007**          | ** ** | **2006**    | ** ** |
|--------------------------|------------|-------------------|------------|-------------|------------|
| ** **               | ** ** | **Purchased**     | ** ** | **Written** | ** ** | **Purchased** | ** ** | **Written** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| Equity indexed annuities |       | $                 | 43         |        | $          | (1 | ) | $ | 40 |   | $ | (1 | ) |
| GMWB and GMAB            |       | 340               |       | —      |       | 170 |   | — |   |
| Total                    |       | $                 | 383        |        | $          | (1 | ) | $ | 210 |   | $ | (1 | ) |

 

Futures contracts are settled daily by exchanging cash with thecounterparty and gains and losses are reported in earnings.  Accordingly, there are no amounts on theConsolidated Balance Sheets related to these contracts.

 

Certain annuity products have returns tied to the performance of equitymarkets. As a result of fluctuations in equity markets, the amount of expensesincurred by RiverSource Life related to equity indexed annuities willpositively or negatively impact earnings. As a means of economically hedgingits obligations under the provisions of these products, RiverSource Life writesand purchases index options and occasionally enters into futures contracts. Purchased options used in conjunctionwith these products are reported in other assets and written options areincluded in other liabilities.  Additionally, certain annuity products containGMWB or GMAB provisions, which guarantee the right to make limited partialwithdrawals each contractyearregardless of the volatility inherent in the underlying investments orguarantee a minimum accumulation value of

 

 

66

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**14.****      ****Derivative Financial Instruments and Hedging Activities (Continued)**

 

considerations received at the beginning of the contract period, after aspecified holding period, respectively. RiverSource Life economically hedges the exposure related to the GMWBand GMAB provisions using various equity futures, equity options and interestrate swaps.  The premium associated with certain of these optionsis paid semi-annually over the life of the option contract.  As of December 31, 2007, the remainingpayments RiverSource Life is scheduled to make for these options total $313million through December 31, 2022.

 

RiverSource Lifeearns fees from the management of equity securities in variable annuities andvariable insurance.  The amount of feesis generally based on the value ofthe portfolios, and thus is subject to fluctuation with the general level ofequity market values.  To reduce thesensitivity of RiverSource Life’s fee revenues to the general performance ofequity markets, RiverSource Life from time to time enters into variouscombinations of financial instruments such as equity market put and collar optionsthat mitigate the negative effect on fees that would result from a decline inthe equity markets.

 

*Embedded Derivatives*

 

The equity component of the equity indexed annuity obligations areconsidered embedded derivatives. Additionally, certain annuities contain GMABand non-life contingent GMWB provisions which are also considered embeddedderivatives.  The fair value of the embedded derivatives for annuityrelated products are included in future policy benefits.  The changes in fair value of the equityindexed annuity embedded derivatives are reflected in interest credited tofixed accounts.  The changes in fairvalue of the GMWB and GMAB embedded derivatives are reflected in benefits,claims, losses and settlement expenses. At December 31, 2007 and 2006,the total fair value of these instruments, excluding the host contract and aliability for life contingent GMWB benefits of $2 million and nil,respectively, was a net liability of $220 million and $33 million,respectively.

 

**15.****      ****Fair Value of Financial Instruments**

 

The fair values offinancial instruments are estimates based upon market conditions and perceivedrisks at December 31, 2007 and 2006, and require management judgment toestimate such values. These figures may not be indicative of future fairvalues. Additionally, management believes the value of excluded assets andliabilities is significant.  The fairvalue of RiverSource Life, therefore, cannot be estimated by aggregating theamounts presented herein. The following table discloses carrying values andfair values of financial instruments at December 31:

 

| ** **                                                         | ** ** | **2007**            | ** ** | **2006**        | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                                                         | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
|                                                               | ** ** | **(in  millions)**  | ** ** |
| Financial Assets                                                   |       |                |       |            |       |   |   |   |   |
| Assets for which carrying values approximate fair  values          |       | $                   | 80,946     |            | $          | 80,946 |   | $ | 75,336 |   | $ | 75,336 |   |
| Commercial mortgage loans, net                                     |       | 2,892               |       | 2,868           |       | 2,790 |   | 2,875 |   |
| Other investments                                                  |       | 58                  |       | 59              |       | 108 |   | 112 |   |
|                                                               |       |                |       |            |       |   |   |   |   |
| Financial Liabilities                                              |       |                |       |            |       |   |   |   |   |
| Net liabilities  for which carrying values approximate fair values |       | $                   | 177        |            | $          | 177 |   | $ | (10 | ) | $ | (10 | ) |
| Fixed account reserves                                             |       | 18,622              |       | 18,077          |       | 21,626 |   | 20,981 |   |
| Separate account liabilities                                       |       | 51,764              |       | 49,388          |       | 43,516 |   | 41,623 |   |

 

 

67

----

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

**15.****      ****Fair Value of Financial Instruments (Continued)**

 

***FinancialAssets***Assets forwhich carrying values approximate fair values include cash and cashequivalents, Available-for-Sale securities, policy loans, trading securities,separate account assets and derivative financial instruments. Generally theseassets are either short-term in duration, variable rate in nature or arerecorded at fair value on the Consolidated Balance Sheets.

 

The fair value ofcommercial mortgage loans, except those with significant credit deterioration,was estimated using discounted cash flow analysis, based on current interestrates for loans with similar terms to borrowers of similar credit quality. Forloans with significant credit deterioration, fair values were based onestimates of future cash flows discounted at rates commensurate with the riskinherent in the revised cash flow projections, or for collateral dependentloans, on collateral values.

 

Other investments includeRiverSource Life’s interest in syndicated loans, which are carried at amortizedcost less allowance for losses.  Fairvalues were based on quoted market prices.

 

***FinancialLiabilities***Liabilitiesfor which carrying values approximate fair values include certain otherliabilities and derivative liabilities. Generally these liabilities are either short-term in duration, variablerate in nature or are recorded at fair value on the Consolidated BalanceSheets.

 

Fair values of fixedannuities in deferral status were estimated as the accumulated value lessapplicable surrender charges. For annuities in payout status, fair value wasestimated using discounted cash flows based on current interest rates. The fairvalue of these reserves excluded life insurance-related elements of $1.5billion as of both December 31, 2007 and 2006.  If the fair value of the fixed annuities wererealized, the write-off of DAC and DSIC would be $308 million and $422 millionas of December 31, 2007 and 2006, respectively.

 

Fair values of separateaccount liabilities, excluding life insurance-related elements of $6.3 billionand $5.8 billion as of December 31, 2007 and 2006, respectively, wereestimated as the accumulated value less applicable surrender charges.  If the fair value of the separate accountliabilities were realized, the surrender charges received would be offset bythe write-off of the DAC and DSIC associated with separate account liabilitiesof $2.5 billion and $2.3 billion as of December 31, 2007 and 2006,respectively.

 

**16.****      ****Commitments and Contingencies**

 

At December 31, 2007and 2006, RiverSource Life had no material commitments to purchase investmentsother than mortgage loan fundings (see Note 4).

 

RiverSource Life’sannuity and life products all have minimum interest rate guarantees in theirfixed accounts.  As of December 31,2007, these guarantees range up to 5.0%. To the extent the yield on RiverSource Life’s invested assets portfoliodeclines below its target spread plus the minimum guarantee, RiverSource Life’sprofitability would be negatively affected.

 

The Securities andExchange Commission, the Financial Industry Regulatory Authority, commonlyreferred to as FINRA, and several state authorities have brought proceedingschallenging several mutual fund and variable product financial practices, generallyincluding suitability, late trading, market timing, compensation and disclosureof revenue sharing arrangements. RiverSource Life has received requests for information and has beencontacted by regulatory authorities concerning its practices and is cooperatingfully with these inquiries.

 

RiverSource Life isinvolved in the normal course of business in a number of other legal andarbitration proceedings concerning matters arising in connection with theconduct of its business activities. RiverSource Life believes that it is not a party to, nor are any of itsproperties the subject of, any pending legal, arbitration or regulatoryproceedings that would have a material adverse effect on its consolidatedfinancial condition, results of operations or liquidity.  However, it is possible that the outcome ofany such proceedings could have a material impact on results of operations inany particular reporting period as the proceedings are resolved.

 

 

68

----

 

 

 
| **ITEM  9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL** |
|--------------|--------------------------------------------------------------------------------|
| ** **   | **DISCLOSURE**                                                                 |

 

None.

 
| **ITEM  9A(T).** | **CONTROLS  AND PROCEDURES** |
|------------------|------------------------------|

 

 

 

**Disclosure Controls andProcedures**

 

RiverSource Lifemaintains disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) designed to provide reasonable assurance that the information requiredto be reported in the Exchange Act filings is recorded, processed, summarizedand reported within the time periods specified and pursuant to Securities andExchange Commission (“SEC”) regulations, including controls and proceduresdesigned to ensure that this information is accumulated and communicated toRiverSource Life’s management, including its principal executive officer andchief financial officer, as appropriate, to allow timely decisions regardingthe required disclosure.  It should benoted that, because of inherent limitations, RiverSource Life’s disclosurecontrols and procedures, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the disclosurecontrols and procedures are met.

 

RiverSource Life’smanagement, with the participation of RiverSource Life’s principal executiveofficer and chief financial officer, evaluated the effectiveness of thedisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon that evaluation,RiverSource Life’s principal executive officer and chief financial officer haveconcluded that RiverSource Life’s disclosure controls and procedures wereeffective at a reasonable level of assurance as of December 31, 2007.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

The management of RiverSource Lifeis responsible for establishing and maintaining adequate internal control overfinancial reporting.

 

RiverSource Life’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles in the United States of America, and includesthose policies and procedures that:

 

·                  Pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of RiverSource Life;

 

·                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of RiverSource Lifeare being made only in accordance with authorizations of management anddirectors of RiverSource Life; and

 

·                  Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of RiverSource Life’s assets that could have amaterial effect on the financial statements.

 

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

RiverSource Life’s managementassessed the effectiveness of RiverSource Life’s internal control overfinancial reporting as of December 31, 2007. In making thisassessment, RiverSource Life’s management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in *Internal Control — Integrated Framework*.

 

Based on management’s assessment andthose criteria, RiverSource Life believes that, as of December 31, 2007,RiverSource Life’s internal control over financial reporting is effective.

 

 

69

----

 

This annual report doesnot include an attestation report of River Source Life’s independent registeredpublic accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by RiverSource Life’s independent registered publicaccounting firm pursuant to temporary rules of the SEC that permitRiverSource Life to provide only management’s report in this annual report.

 

**Changes in Internal Control overFinancial Reporting**

 

There have not been anychanges in RiverSource Life’s internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the fourth fiscal quarter of the year to which this reportrelates that have materially affected, or are reasonably likely to materiallyaffect, RiverSource Life’s internal control over financial reporting.

 
| **ITEM  9B.** | **OTHER  INFORMATION** |
|---------------|------------------------|

 

None.

 

**PART III**

 
| **ITEM  10.** | **DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT** |
|---------------|---------------------------------------------------------|

 

Item omitted pursuant toGeneral Instructions I(2) (c) of Form 10-K.

 
| **ITEM  11.** | **EXECUTIVE  COMPENSATION** |
|---------------|-----------------------------|

 

Item omitted pursuant toGeneral Instructions I(2) (c) of Form 10-K.

 
| **ITEM  12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND** |
|---------------|-------------------------------------------------------------------------|
| ** **    | **RELATED  STOCKHOLDER MATTERS**                                        |

 

Item omitted pursuant toGeneral Instructions I(2) (c) of Form 10-K.

 
| **ITEM  13.** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR** |
|---------------|-------------------------------------------------------------------|
| ** **    | **INDEPENDENCE**                                                  |

 

Item omitted pursuant toGeneral Instructions I(2) (c) of Form 10-K.

 
| **ITEM  14.** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES** |
|---------------|---------------------------------------------|

 

TheAudit Committee of the Board of Directors of Ameriprise Financial has appointedErnst & Young LLP (“Ernst & Young”) as independent registeredpublic accounting firm to audit the Consolidated Financial Statements ofRiverSource Life for the years ended December 31, 2007 and 2006.

 

***Fees Paid to theRegistrant’s Independent Auditor***

 

Thefollowing table presents fees for professional services rendered by Ernst &Young for the audit of RiverSource Life’s financial statements for the yearsended December 31, 2007 and 2006 and other fees billed for other servicesrendered by Ernst & Young during those periods.

 

| ** **     | ** ** | **2007**           | ** ** | **2006** | ** ** |
|----------------|------------|--------------------|------------|----------|------------|
| ** **     | ** ** | **(in thousands)** | ** ** |
| Audit Fees(1)  |       | $                  | 1,819      |     | $          | 1,741 |   |
| Tax Fees       |       | —             |       | —   |       |
| All Other Fees |       | —             |       | —   |       |
| Total          |       | $                  | 1,819      |     | $          | 1,741 |   |

 

----

 

| (1) |   | Audit fees included audit work performed in the  review and preparation of the financial statements, as well as services that  generally only the independent auditor can be expected to provide, such as  comfort letters, statutory audits, attest services, consents and assistance  with and review of documents filed with the Securities and Exchange  Commission. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

70

----

 

***Policy onPre-Approval of Services Provided by Independent Registered Public AccountingFirm***

 

Pursuantto the requirements of the Sarbanes-Oxley Act of 2002, the terms of theengagement of Ernst & Young are subject to the specific pre-approvalof the Audit Committee of Ameriprise Financial. All audit and permitted non-audit services to be performed by Ernst &Young for RiverSource Life require pre-approval by the Audit Committee ofAmeriprise Financial in accordance with pre-approval procedures established bythe Audit Committee of Ameriprise Financial. The procedures require all proposed engagements of Ernst &Young for services to RiverSource Life of any kind to be directed to theGeneral Auditor of Ameriprise Financial, and then submitted for approval to theAudit Committee of Ameriprise Financial prior to the beginning of any services.

 

In 2007 and 2006, 100% ofthe services provided by Ernst & Young for RiverSource Life werepre-approved by the Audit Committee of Ameriprise Financial.

 

**PART IV**

 
| **ITEM  15.** | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES** |
|---------------|-------------------------------------------------|

 
|   | (a)    | (1) and (2)                                              | Financial Statements  and Financial Statement Schedules       |
|--------|--------|---------------------------------------------------------------|---------------------------------------------------------------|
|   |   |                                                          |                                                          |   |   |   |
|   |   |                                                          | The information required herein has been provided in  Item 8. |
|   |   |                                                          |                                                          |   |   |   |
|   |   | (3)                                                           | Exhibits                                                      |
|   |   |                                                          |                                                          |   |   |   |
|   |   | See Exhibit Index on pages E-1 through E-2  hereof. |                                                          |

 

 

71

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**RIVERSOURCELIFE INSURANCE COMPANY**

 

Registrant

 
|                                                                                                                                                                                                                  |                                                  |                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------|
| February 29, 2008                                                                                                                                                                                                |                                                  | By                              |  /s/ Timothy V. Bechtold |
| Date                                                                                                                                                                                                                  |                                                  | Timothy V. Bechtold,  President |
|                                                                                                                                                                                                                  |                                                  |                            |
| Pursuant to the  requirements of the Securities Exchange Act of 1934, this report has been  duly signed below by the following persons on behalf of the registrant and in  the capacities and on the dates indicated. |
|                                                                                                                                                                                                                  |                                                  |
| February 29, 2008                                                                                                                                                                                                |                                                  |  /s/ Gumer C. Alvero       |
| Date                                                                                                                                                                                                                  | Gumer C. Alvero,  Director and Executive Vice         |
|                                                                                                                                                                                                                  | President - Annuities                                 |
|                                                                                                                                                                                                                  |                                                  |
| February 29, 2008                                                                                                                                                                                                |                                                  |  /s/ Timothy V. Bechtold   |
| Date                                                                                                                                                                                                                  | Timothy V. Bechtold,  Director and President          |
|                                                                                                                                                                                                                  |                                                  |
| February 29, 2008                                                                                                                                                                                                |                                                  |  /s/ Brian J. McGrane      |
| Date                                                                                                                                                                                                                  | Brian J. McGrane,  Director, Executive Vice President |
|                                                                                                                                                                                                                  | and Chief Financial  Officer                          |
|                                                                                                                                                                                                                  |                                                  |
| February 29, 2008                                                                                                                                                                                                |                                                  |  /s/ David K. Stewart      |
| Date                                                                                                                                                                                                                  | David K. Stewart, Vice  President and Controller      |
|                                                                                                                                                                                                                  |                                                  |
| February 29, 2008                                                                                                                                                                                                |                                                  |  /s/ Kevin E. Palmer       |
| Date                                                                                                                                                                                                                  | Kevin E. Palmer,  Director, Vice President and        |
|                                                                                                                                                                                                                  | Chief Actuary                                         |
|                                                                                                                                                                                                                  |                                                  |
|                                                                                                                                                                                                                       |                                                       |                                 |  |

 

 

72

----

 

**EXHIBIT INDEX**

 

The following exhibitsare filed as part of this Annual Report or, where indicated, were already filedand are hereby incorporated by reference.

 
|   | 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 Jan. 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.                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 4.1    |   | Instruments defining  the rights of security holders, including indentures, are incorporated by  reference to Registration Statement Nos. 333-92297, 333-139763, 333-73958,  333-139759, 333-74865, 333-139760, 333-82149, 333-139761, 333-85567,  333-139762, 33-47302, 333-79311, 333-114888 and 33-28976.                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.1   |   | Copy of  Principal Underwriter Agreement for Variable Annuities and Variable Life  Insurance between RiverSource Life Insurance Company and RiverSource  Distributors, Inc. effective Jan. 1, 2007, filed as  Exhibit 10.1 to Form 10-K filed on Feb. 28, 2007, is  incorporated by reference.          |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.2   |   | Copy of Selling  Agreement by and among RiverSource Life Insurance Company, RiverSource Distributors, Inc.  and Ameriprise Financial Services, Inc. effective Jan. 1, 2007,  filed as Exhibit 10.2 to Form 10-K filed on Feb. 28, 2007, is  incorporated by reference.                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.3   |   | Copy of  Marketing Support Services Agreement between Ameriprise Financial  Services, Inc. and RiverSource Life Insurance Company effective  Jan. 1, 2007, filed as Exhibit 10.3 to Form 10-K filed on  Feb. 28, 2007, is incorporated by reference.                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.4   |   | Copy of  Investment Management and Services Agreement between RiverSource Investments,  LLC and RiverSource Life Insurance Company effective Jan. 1, 2007, filed  as Exhibit 10.4 to Form 10-K filed on Feb. 28, 2007, is  incorporated by reference.                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.5   |   | Form of  Federal Income Tax Sharing Agreement by and among RiverSource Life Insurance  Company, RiverSource Life Insurance Co. of New York and Ameriprise  Financial, Inc. effective Jan. 1, 2007, filed as Exhibit 10.5  to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.       |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.6   |   | Copy of  Agreement by and among RiverSource Life Insurance Company, Ameriprise India  Private Limited, and Ameriprise Financial, Inc. (a/k/a/ Supplementary  Agreement No. 1) effective Jan. 1, 2007, filed as Exhibit 10.6  to Form 10-K filed on Feb. 28, 2007, is incorporated by reference.    |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.7   |   | Copy of  Management, Service & Marketing Support Agreement by and between  RiverSource Investments, LLC, RiverSource Service Corporation and RiverSource  Life Insurance Company effective Jan. 1, 2007, filed as  Exhibit 10.7 to Form 10-K filed on Feb. 28, 2007, is  incorporated by reference. |
|   |   |   |                                                                                                                                                                                                                                                                                                                             |
|   | 10.8   |   | Copy of  RiverSource Variable Portfolio Funds Service Agreement by and between  RiverSource Distributors, Inc. and RiverSource Life Insurance Company  effective Jan. 1, 2007, filed as Exhibit 10.8 to Form 10-K filed  on Feb. 28, 2007, is incorporated by reference.                                |

 

 

 

 

E-1

----

 

**EXHIBITINDEX (Continued)**

 
|   | *31.1  |   | Certification of  Timothy V. Bechtold, 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.                                                 |
|   |   |   |                                                                                                                                                                                                                   |
|   | *32.1  |   | Certification of  Timothy V. Bechtold, 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. |

 

----

* Filed electronicallyherewith.

 

 

E-2

----