UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-65080
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
INDIANA 94-2786905
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _____ No __X__
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations - Three
months ended September 30, 2003 and 2002 1
Consolidated Statements of Operations - Nine
months ended September 30, 2003 and 2002 2
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 3
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial 9 - 14
Condition and Results of Operations
Item 4. Controls and Procedures 15
Part II. Other Information 17
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(unaudited)
Three months ended
September 30,
-------------------------------------
2003 2002
-------------- -------------
Revenues:
Contractholder charges $ 1,798 $ 1,890
Mortality and expense risk fees 3,478 2,925
Net investment income 97,578 74,178
Net realized (loss) gain on investments (3,728) 2,785
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Total revenues 99,126 81,778
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Benefits and expenses:
Interest credited on investment contracts and
universal life-type insurance 68,178 52,884
Amortization of deferred policy acquisition costs 10,267 16,142
Other insurance and operating expenses 11,009 34,506
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Total benefits and expenses 89,454 103,532
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Income (loss) before income tax provision (benefit) 9,672 (21,754)
Income tax provision (benefit) 2,842 (7,965)
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Net income (loss) $ 6,830 $ (13,789)
============== =============
See Notes to Consolidated Financial Statements.
-1-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(unaudited)
Nine months ended
September 30,
-------------------------------------
2003 2002
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Revenues:
Contractholder charges $ 5,584 $ 4,778
Mortality and expense risk fees 9,241 9,738
Net investment income 276,107 214,028
Net realized gain (loss) on investments 21,529 (775)
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Total revenues 312,461 227,769
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Benefits and expenses:
Interest credited on investment contracts and
universal life-type insurance 194,612 151,879
Amortization of deferred policy acquisition costs 38,572 36,848
Other insurance and operating expenses 43,461 77,818
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Total benefits and expenses 276,645 266,545
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Income (loss) before income tax provision (benefit) 35,816 (38,776)
Income tax provision (benefit) 11,987 (13,842)
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Net income (loss) $ 23,829 $ (24,934)
============= =============
See Notes to Consolidated Financial Statements.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except par value and share amounts)
September 30, December 31,
2003 2002
------------------- -----------------
(unaudited)
Assets
Investments:
Fixed maturity Available-for-Sale securities, at fair value
(amortized cost: 2003, $6,480,762; 2002, $5,105,431) $ 6,644,968 $ 5,288,855
Mortgage loans on real estate
(less reserves: 2003, $7,927; 2002, $6,082) 553,083 587,535
Other investments 5,324 2,381
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Total investments 7,203,375 5,878,771
Cash and cash equivalents 58,863 1,118,692
Amounts due from brokers 58,769 2,775
Accrued investment income 65,611 53,673
Deferred policy acquisition costs 330,288 260,577
Other assets 11,078 17,471
Separate account assets 913,789 694,771
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Total assets $ 8,641,773 $ 8,026,730
=============== ==============
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits for fixed annuities and
universal life-type insurance $ 6,725,621 $ 5,411,954
Policy claims and other
policyholders' funds 9,599 9,050
Amounts due to brokers 63,303 985,081
Deferred income taxes 26,048 17,608
Other liabilities 61,227 82,453
Separate account liabilities 913,789 694,771
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Total liabilities 7,799,587 7,200,917
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Stockholder's equity:
Capital stock, $150 par value per share;
100,000 shares authorized, 20,000 shares
issued and outstanding 3,000 3,000
Additional paid-in capital 591,872 591,872
Retained earnings 163,745 139,916
Other comprehensive income (loss), net of tax:
Net unrealized securities gains 93,486 104,259
Net unrealized derivative losses (9,917) (13,234)
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Accumulated other comprehensive income 83,569 91,025
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Total stockholder's equity 842,186 825,813
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Total liabilities and stockholder's equity $ 8,641,773 $ 8,026,730
=============== ==============
See Notes to Consolidated Financial Statements.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine months ended
September 30,
2003 2002
---------------- ----------------
Cash Flows from Operating Activities
Net income (loss) $ 23,829 $ (24,934)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Change in accrued investment income (11,938) (415)
Change in other assets 6,393 8,774
Change in deferred policy acquisition costs, net (67,072) (42,583)
Change in policy claims and other
policyholders' funds 549 58,201
Deferred income taxes 12,455 (7,814)
Change in other liabilities (21,226) 1,898
Amortization of premium, net 17,374 169
Net realized (gain) loss on investments (21,529) 775
Other 5,235 8,920
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Net cash (used in) provided by operating activities (55,930) 2,991
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Cash Flows from Investing Activities
Fixed maturity Available-for-Sale securities:
Sales 2,411,140 741,768
Maturities, sinking fund payments and calls 740,832 345,274
Purchases (4,522,086) (1,733,730)
Other investments:
Sales, maturities, sinking fund payments and calls 53,545 50,437
Purchases (23,227) (2,691)
Change in amounts due to and from brokers, net (977,772) (140,686)
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Net cash used in investing activities (2,317,568) (739,628)
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Cash Flows from Financing Activities
Activity related to investment contracts
and universal life-type insurance:
Considerations received 1,636,948 1,465,983
Interest credited to account balances 194,612 151,879
Surrenders and death benefits (517,891) (439,789)
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Net cash provided by financing activities 1,313,669 1,178,073
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Net (decrease) increase in cash and cash equivalents (1,059,829) 441,436
Cash and cash equivalents at beginning of period 1,118,692 260,214
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Cash and cash equivalents at end of period $ 58,863 $ 701,650
============= =============
See Notes to Consolidated Financial Statements.
-4-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of American Enterprise Life Insurance Company (the Company) for
the year ended December 31, 2002. Certain reclassifications of prior
period amounts have been made to conform to the current presentation.
The interim financial information in this report has not been audited.
In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the
consolidated results of operations for the interim periods have been
made. All adjustments made were of a normal, recurring nature. Results
of operations reported for interim periods are not necessarily
indicative of results for the entire year.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46), which addresses consolidation by business enterprises of
variable interest entities (VIEs). In October 2003, the FASB issued a
statement delaying the effective date of the consolidation provisions
of FIN 46 from July 1, 2003 to December 31, 2003. The adoption of FIN
46 is not expected to have a material impact on the Company's financial
statements. However, the Company continues to evaluate all
relationships and interests in entities that may be considered VIEs as
detailed interpretations of FIN 46 continue to emerge.
In July 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (SOP 03-1). The Company is
currently evaluating its impact, which, among other provisions,
requires reserves related to guaranteed minimum death benefits
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(GMDBs) and guaranteed minimum income benefits (GMIBs) included within
the variable annuity contracts offered by the Company. SOP 03-1 is
required to be adopted on January 1, 2004.
2. Investment Securities
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $6.5
million and $11.5 million for the three months ended September 30, 2003
and 2002, respectively. Gross realized losses on sales of securities
classified as Available-for-Sale were $10.2 million and $5.7 million
for the three months ended September 30, 2003 and 2002, respectively.
The Company also recognized other-than-temporary impairment losses on
Available-for-Sale securities of $1.6 million for the three months
ended September 30, 2002.
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were
$51.2 million and $23.6 million for the nine months ended September 30,
2003 and 2002, respectively. Gross realized losses on sales of
securities classified as Available-for-Sale were $19.3 million and
$10.3 million for the nine months ended September 30, 2003 and 2002,
respectively. The Company also recognized other-than-temporary
impairment losses on Available-for-Sale securities of $9.3 million and
$9.5 million for the nine months ended September 30, 2003 and 2002.
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in
stockholders' equity, excluding changes in ownership interests. It is
the sum of net income and changes in unrealized gains or losses on
Available-for-Sale securities and applicable deferred policy
acquisition costs, net of related tax and unrealized gains or losses on
derivatives, net of related tax.
Total comprehensive (loss) income was a loss of $38.8 million and
income of $56.1 million for the three months ended September 30, 2003
and 2002, respectively. Total comprehensive income was $16.4 million
and $76.8 million for the nine months ended September 30, 2003 and
2002, respectively. The difference between net income and total
comprehensive income for these periods primarily reflects the change in
net unrealized gains on Available-for-Sale securities.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Taxes and interest
Cash received for income taxes during the nine months ended September
30, 2003 was $2.4 million. Net income taxes paid during the nine months
ended September 30, 2002 was $19.4 million. Interest paid on borrowings
during the nine months ended September 30, 2003 was $253,000.
5. Commitments and contingencies
Commitments to fund mortgage loans on real estate at September 30, 2003
were $1.2 million.
The maximum amount of life insurance risk retained by the Company is
$750,000 on any single life. Risk not retained is reinsured with other
life insurance companies on a yearly renewable term basis. The Company
retains all accidental death benefit and waiver of premium risk.
Reinsurance contracts do not relieve the Company from its primary
obligation to policyholders.
The variable annuity contracts offered by the Company contain
guaranteed minimum death benefit (GMDB) provisions. To the extent that
the GMDB is higher than the current account value at the time of death,
a cost is incurred by the issuer of the policy. Current accounting
literature does not prescribe advance recognition of the projected
future net costs associated with these guarantees, and accordingly, the
Company currently does not record a liability corresponding to these
future obligations for death benefits in excess of annuity account
value. At present, the amount paid in excess of contract value is
expensed when payable. Amounts expensed for the three months ended
September 30, 2003 and 2002, were $500,000 and $1 million,
respectively. Amounts expensed for the nine months ended September 30,
2003 and 2002, were $2.5 million and $2.0 million, respectively. The
Company also issues certain variable annuity contracts that contain a
guaranteed minimum income benefit (GMIB) feature which, if elected by
the contract owner and after a stipulated waiting period from contract
issuance, guarantees a minimum lifetime annuity based on predetermined
annuity purchase rates. To date, the Company has not expensed any
amount related to GMIBs as all terms on GMIB features are within the
stipulated waiting periods. As discussed in Note 1, SOP 03-1, which was
issued by the AICPA in July 2003 with a required adoption date of
January 1, 2004, will require reserves related to GMDBs and GMIBs. The
impact of that requirement, as well as other provisions of SOP 03-1, is
being evaluated.
-7-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's annuity products all have minimum interest rate
guarantees in their fixed accounts. These guarantees range from 3
percent to 4.5 percent. To the extent the yield on the Company's
invested asset portfolio declines below its target spread plus the
minimum guarantee, the Company's profitability would be negatively
affected.
The IRS routinely examines the Company's federal income tax information
and is currently conducting an audit for the 1993 through 1996 tax
years. Management does not believe there will be a material adverse
effect on the Company's consolidated financial position as a result of
these audits.
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business. The outcome of any litigation or
threatened litigation cannot be predicted with any certainty. However,
in the aggregate, the Company does not consider any lawsuits in which
it is named as a defendant to have a material impact on the Company's
financial position or operating results.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Enterprise Life Insurance Company (the "Company") is a stock life
insurance company organized under the laws of the State of Indiana. The Company
is a wholly owned subsidiary of IDS Life Insurance Company ("IDS Life"), a
Minnesota corporation. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation ("AEFC"). AEFC is a wholly owned subsidiary of American
Express Company. The Company provides financial institution clients with
American Express branded financial products and services to support their retail
insurance and annuity operations. The Company issues variable life insurance and
fixed and variable annuity contracts, primarily through regional and national
financial institutions and regional and/or independent broker-dealers, in all
states except New York and New Hampshire. American Enterprise REO 1, LLC is a
wholly owned subsidiary of the Company. This subsidiary holds real estate
investments and/or mortgage loans on real estate.
The Company follows accounting principles generally accepted in the United
States (GAAP).
Results of Operations for the Three Months Ended September 30, 2003 and 2002
Net income was $6.8 million for the three months ended September 30, 2003,
compared to a net loss of $13.8 million for the three months ended September 30,
2002, and reflects increased investment income due to higher investment levels
partially offset by lower investment yields and a decrease in other insurance
and operating expense, partially offset by an increase in interest credited on
investment contracts and universal life-type insurance.
Net investment income increased 32 percent reflecting a higher average level of
investments, partially offset by lower average yields on the investment
portfolio.
Net realized loss on investments was $3.7 million for the three months ended
September 30, 2003 compared to net realized gain on investments of $2.8 million
for the three months ended September 30, 2002.
For the three months ended September 30, 2003, $6.5 million of gross realized
gains were more than offset by $10.2 million of gross realized losses from sales
of securities classified as Available-for-Sale. For the three months ended
September 30, 2002, $11.5 million of gross realized gains from sales of
securities classified as Available-for-Sale were partially offset by $8.7
million of impairments and losses. Included in these impairments and losses are
$5.7 million of gross realized losses from sales of securities, as well as $1.6
million of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Total benefits and expenses were $89.5 million, a decrease of 14 percent from
the three months ended September 30, 2002. This decrease reflects lower other
insurance and operating expenses, lower DAC amortization and lower crediting
rates as a result of the relatively low interest rate environment, partially
offset by increased interest credited expenses as a result of higher average
levels of fixed annuities in force. Other insurance
-9-
and operating expenses decreased 68 percent to $11 million, partially reflecting
favorable market value changes on interest rate swaps in 2003 compared to
unfavorable market value changes in 2002. The relatively low and stable interest
rate environment in the third quarter 2003 compared to declining interest rates
during the third quarter of 2002 is the primary driver behind the favorable
market value changes to the interest rate swaps. The Company enters into
pay-fixed, receive-variable interest rate swaps with its parent company (IDS
Life) to protect the spread between yields earned on investments and crediting
rates on fixed-annuity products. The interest rate swaps are economic hedges
that are not designated for hedge accounting treatment under SFAS No. 133.
Amortization of deferred policy acquisition costs (DAC) decreased 36 percent
reflecting a $4.6 million increase in DAC amortization expense in the third
quarter 2002 together with a $3.2 million decrease in DAC amortization expense
in the third quarter of 2003, both as a result of the Company's annual third
quarter review of various DAC assumptions and practices. See the DAC section
below for further discussion of DAC and related adjustments.
The change in the income tax provision (benefit) quarter over quarter reflects
pre-tax income of $9.7 million in the 2003 period as opposed to a pre-tax loss
of $21.8 million in the same period a year ago.
Results of Operations for the Nine Months Ended September 30, 2003 and 2002
Net income was $23.8 million for the nine months ended September 30, 2003,
compared to a net loss of $24.9 million for the nine months ended September 30,
2002. The favorable change in net income primarily reflects increased net
investment income and net realized gains on investments versus a slight loss in
the 2002 period, as well as decreased other insurance and operating expense,
partially offset by increased interest credited on investment contracts and
universal life-type insurance.
Net investment income increased 29 percent reflecting a higher average level of
investments partially offset by lower average yields on the investment
portfolio.
Net realized gain on investments was $21.5 million for the nine months ended
September 30, 2003 compared to a net loss of $775,000 for the nine months ended
September 30, 2002. For the nine months ended September 30, 2003, $51.2 million
of gross realized gains from sales of securities classified as
Available-for-Sale were partially offset by $29.7 million of impairments and
losses. Included in these total impairments and losses are $19.3 million of
gross realized losses from sales of securities, as well as $9.3 million of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
For the nine months ended September 30, 2002, $23.6 million of gross realized
gains from sales of securities classified as Available-for-Sale were slightly
more than offset by $24.4 million of impairments and losses. Included in these
impairments and losses are $10.3 million of gross realized losses from sales of
securities, as well as $9.5 million of other-than-temporary investment
impairment losses, classified as Available-for-Sale.
Total benefits and expenses were $276.6 million, an increase of 4 percent from
the nine months ended September 30, 2002. This increase reflects higher interest
credited on
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investment contracts and universal life-type insurance and slightly higher DAC
amortization expense, partially offset by a substantial decrease in other
insurance and operating expenses. Interest credited on investment contracts and
universal-type insurance increased 28 percent reflecting higher average levels
of fixed annuities in force, partially offset by lower crediting rates as a
result of the relatively low interest rate environment. Other insurance and
operating expenses decreased 44 percent, partially reflecting favorable market
value changes on interest rate swaps during 2003.
DAC amortization expense increased 5 percent reflecting the third quarter 2003
and 2002 DAC related adjustments as a result of the Company's annual third
quarter review of various DAC assumptions and practices, which were more than
offset by a relative increase in DAC amortization expense during the first two
quarters of 2003 as a result of the third quarter 2002 changes in assumed
customer asset value growth rates.
The year-to-date 2003 versus 2002 change in the income tax provision (benefit)
reflects year-to-date pre-tax income of $35.8 million during the nine months
ended September 30, 2003, while during the same period a year ago, the Company
incurred a year-to-date pre-tax loss of $38.8 million.
Deferred policy acquisition costs
The costs of acquiring new business, including, for example, direct sales
commissions, policy issue costs and other related costs have been deferred on
the sale of annuity contracts. Deferred policy acquisition costs (DAC) for
certain annuities are amortized as a percentage of the estimated gross profits
expected to be realized on the policies. DAC for other annuities are amortized
using the interest method.
Amortization of DAC requires the use of certain assumptions including interest
margins, persistency rates, maintenance expense levels and customer asset value
growth rates for variable annuities. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. This rate
is net of asset fees, and anticipates a blend of equity and fixed income
investments. Management routinely monitors a wide variety of trends in the
business including comparisons of actual and assumed experience. Management
reviews and, where appropriate, adjusts its assumptions with respect to customer
asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring process, management reviews and updates these DAC
assumptions annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change in
the required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization while
a decrease in amortization percentage will result in a deceleration of DAC
amortization. The impact on results of operations of changing assumptions with
respect to the amortization of DAC can be either positive or negative in any
particular period, and is reflected in the period that such
-11-
changes are made. As a result of these reviews, the Company took actions in both
2003 and 2002 that impacted the DAC balance and expenses.
In the third quarter of 2003, the Company improved its modeling of certain
variable annuity contract revenues and unlocked estimated gross profits
retrospectively to reflect actual interest margins and death and other benefits.
The Company also adjusted its assumptions to reflect lower than previously
assumed spreads on fixed account values and adjusted the near-term rate and
period used in projecting growth in customer asset values on variable annuities.
These actions resulted in a $3.2 million reduction in DAC amortization expense.
In the third quarter of 2002, the Company reset its customer asset value growth
rate assumptions for variable annuity products to anticipate near-term and
long-term growth at an annual rate of 7%. This action resulted in a $4.6 million
increase in DAC amortization expense.
DAC of $330.3 million related to annuities was on the Company's consolidated
balance sheet at September 30, 2003. The DAC balance was $260.6 million at
December 31, 2002, and was also related to annuities.
Impact of Market-Volatility on Results of Operations
Various aspects of the Company business are impacted by equity market levels and
other market-based events. Three areas in particular involve DAC, mortality and
expense risk fees and structured investments. The direction and magnitude of the
changes in equity markets can increase or decrease DAC expense levels and
mortality and expense risk fees and correspondingly affect results of operations
in any particular period. Similarly, the value of the Company's structured
investment portfolio is impacted by various market factors. Persistency of, or
increases in, bond and loan default rates, among other factors, could result in
negative adjustments to the market values of these investments in the future,
which would adversely impact results of operations.
Another area impacted by market-based events is guaranteed minimum death
benefits (GMDBs). The variable annuity contracts offered by the Company contain
guaranteed minimum death benefit (GMDB) provisions. To the extent that the GMDB
is higher than the current account value at the time of death, a cost is
incurred by the issuer of the policy. Current accounting literature does not
prescribe advance recognition of the projected future net costs associated with
these guarantees, and accordingly, the Company currently does not record a
liability corresponding to these future obligations for death benefits in excess
of annuity account value. At present, the amount paid in excess of contract
value is expensed when payable. Amounts expensed for the three months ended
September 30, 2003 and 2002, were $500,000 and $1 million, respectively. Amounts
expensed for the nine months ended September 30, 2003 and 2002, were $2.5
million and $2 million, respectively. The Company also issues certain variable
annuity contracts that contain a guaranteed minimum income benefit (GMIB)
feature which, if elected by the contract owner and after a stipulated waiting
period from contract issuance, guarantees a minimum lifetime annuity based on
predetermined annuity purchase rates. To date, the Company has not expensed any
amount related to GMIBs as all terms on GMIB features are within the stipulated
waiting periods. In July 2003, the American Institute of
-12-
Certified Public Accountants (AICPA) issued Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1) which requires
reserves related to GMDBs and GMIBs. The impact of that requirement as well as
other provisions of SOP 03-1 is currently being evaluated.
The Company's annuity products all have minimum interest rate guarantees in
their fixed accounts. These guarantees range from 3 percent to 4.5 percent. To
the extent the yield on the Company's invested asset portfolio declines below
its target spread plus the minimum guarantee, the Company's profitability would
be negatively affected.
Liquidity and Capital Resources
The liquidity requirements of the Company are generally met by funds provided by
annuity considerations, capital contributions, investment income, proceeds from
sales of investments as well as maturities and periodic repayments of investment
principal. The primary uses of funds are annuity obligations, commissions and
operating expenses and investment purchases. The Company routinely reviews its
sources and uses of funds in order to meet its ongoing obligations.
The Company has an available line of credit with AEFC aggregating $50 million.
The line of credit is used strictly as a short-term source of funds. No
borrowings were outstanding under the line of credit at September 30, 2003. The
Company also, from time to time, uses reverse repurchase agreements for
short-term liquidity needs. There were no reverse repurchase agreements
outstanding at September 30, 2003.
At September 30, 2003, based on amortized cost, approximately 5 percent of the
Company's investments in fixed maturities were below investment grade bonds.
These investments may be subject to a higher degree of risk than the investment
grade issues because of the borrower's generally greater sensitivity to adverse
economic conditions, such as recession or increasing interest rates, and in
certain instances, the lack of an active secondary market. Expected returns on
below investment grade bonds reflect consideration of such factors. The Company
has identified those fixed maturities for which a decline in fair value is
determined to be other than temporary, and has written them down to fair value
with a charge to earnings. Additionally, the Company had a reserve for losses on
mortgage loans of $8 million at September 30, 2003.
During 2001, the Company placed its rated collateralized debt obligation (CDO)
securities and related accrued interest, (collectively referred to as
transferred assets), having an aggregate book value of $54 million, into a
securitization trust. In return, the Company received $7 million in cash
(excluding transaction expenses) relating to sales to unaffiliated investors and
retained interests in the trust with allocated book amounts aggregating $47
million. As of September 30, 2003, the retained interests had a carrying value
of $43 million, of which $33 million is considered investment grade. The Company
has no obligations, contingent or otherwise, to such unaffiliated investors. One
of the results of this transaction is that increases or decreases in future cash
flows of the individual CDOs are combined into one overall cash flow for
purposes of determining the carrying value of the retained interests and related
impact on results of operations.
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OTHER REPORTING MATTERS
Accounting Developments
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which addresses consolidation by business enterprises of variable interest
entities (VIEs). In October 2003, the FASB issued a statement delaying the
effective date of the consolidation provisions of FIN 46 from July 1, 2003 to
December 31, 2003. Certain disclosures are required for financial statements
issued after January 31, 2003 and are addressed in Note 1 to the Consolidated
Financial Statements. The impact of adopting FIN 46 on the Consolidated
Financial Statements is dependent upon further FASB interpretations of FIN 46.
In July 2003, the AICPA issued Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (SOP 03-1). The Company is currently
evaluating its impact, which, among other provisions, requires reserves related
to guaranteed minimum death benefits (GMDBs) and guaranteed minimum income
benefits (GMIBs) included within its variable annuity contracts. SOP 03-1 is
required to be adopted on January 1, 2004. See Impact of Recent
Market-Volatility on Results of Operations section of MD&A for further
discussion.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, the Company's disclosure controls and procedures
are effective.
(b) Internal Control Over Financial Reporting.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Forward-Looking Statements
This report includes forward-looking statements, which are subject to risks and
uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "likely," and similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company undertakes no
obligation to update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from these forward-looking
statements include, but are not limited to: the Company's ability to
successfully implement a business model that allows for significant earnings
growth based on revenue growth that is lower than historical levels, including
the ability to improve its operating expense to revenue ratio both in the
short-term and over time, which will depend in part on the effectiveness of
reengineering and other cost control initiatives, as well as factors impacting
the Company's revenues; the Company's ability to grow its business over time,
which will depend on the Company's ability to manage its capital needs and the
effect of business mix, and rating agency requirements; the ability to increase
investment spending, which will depend in part on the equity markets and other
factors affecting revenues, and the ability to capitalize on such investments to
improve business metrics; the accuracy of certain critical accounting estimates,
including, the fair value of the assets in the Company's investment portfolio
(including those investments that are not readily marketable); fluctuation in
the equity and fixed income markets, which can affect the amount and types of
investment products sold, the market value of its managed assets, management,
distribution and other fees received based on the value of those assets, the
Company's ability to recover DAC as well as the timing of such DAC amortization,
in connection with the sale of annuity and insurance products, and the level of
guaranteed minimum death benefits paid to clients; changes in assumptions
relating to DAC, which
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could impact the amount of DAC amortization; potential deterioration in the
Company's high-yield and other investments, which could result in further losses
in the investment portfolio; the ability to sell certain high-yield investments
at expected values and within anticipated timeframes and to maintain its
high-yield portfolio at certain levels in the future; the types and value of
certain death benefit features on variable annuity contracts; the affect of
assessments and other surcharges for guaranty funds; the response of reinsurance
companies under reinsurance contracts; the impact of reinsurance rates and the
availability and adequacy of reinsurance to protect the Company against losses;
a downturn in the Company's business and/or negative changes in the Company's
and its subsidiaries' claims-paying ability and other ratings, which could
negatively impact sales; increasing competition in all of the Company's major
lines of business; fluctuations in interest rates, which impact the Company's
spreads, credit trends and the rate of bankruptcies, which can affect returns on
the Company's investment portfolios; changes in laws or government regulations,
including tax laws affecting the Company's business or that may affect the sales
of the Company's products, and regulatory activity in the areas of customer
privacy, consumer protection, business continuity and data protection; the
adoption of recently issued accounting rules related to the consolidation of
variable interest entities, including those involving CDOs that the Company
invests in, which could affect both the Company's balance sheet and results of
operations; and outcomes and costs associated with litigation and compliance and
regulatory matters.
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PART II - OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business. The outcome of any litigation or
threatened litigation cannot be predicted with any certainty. However,
in the aggregate, the Company does not consider any lawsuits in which
it is named as a defendant to have a material impact on the Company's
financial position or operating results.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company
during the quarterly period ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Registrant)
Date: November 14, 2003 By /s/ Carol A. Holton
-------------------
Carol A. Holton
Chief Executive Officer
Date: November 14, 2003 By /s/ John T. Sweeney
-------------------
John T. Sweeney
Executive Vice President - Finance
and Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
31.1 Certification of Carol A. Holton pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of John T. Sweeney pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Carol A. Holton and John T. Sweeney pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1