UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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
(Exact name of registrant as specified in its charter)
Indiana 94-2786905
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
829 AXP Financial Center
Minneapolis, Minnesota 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
---------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 Balance Sheets - March 31, 2004 and
December 31, 2003 1
Consolidated Statements of Income - Three months
ended March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows - Three
months ended March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 11
Item 4. Controls and Procedures 12
Part II. Other Information 13
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
March 31, December 31,
2004 2003
------------------- --------------------
(Unaudited)
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value
(amortized cost: 2004, $6,508,706; 2003, $6,545,561) $ 6,749,350 $ 6,650,906
Common stocks, at fair value 6 6
Mortgage loans on real estate, at cost
(less reserves: 2004, $7,862; 2003, $7,362) 514,422 534,812
Other investments 5,889 6,069
------------------- -----------------
Total investments 7,269,667 7,191,793
------------------- -----------------
Cash and cash equivalents 2,422 9,065
Amounts due from brokers 427 161
Other accounts receivable 3,389 3,572
Accrued investment income 72,895 70,591
Deferred policy acquisition costs 281,658 296,722
Deferred sales inducement costs 45,342 49,244
Other assets 8,493 6,335
Separate account assets 1,269,659 1,108,160
------------------- -----------------
Total assets $ 8,953,952 $ 8,735,643
=================== =================
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits:
Fixed annuities $ 6,580,928 $ 6,645,315
Variable annuity guarantees 3,634 -
Universal life insurance 28 27
Policy claims and other policyholders' funds 7,428 3,100
Amounts due to brokers 76,782 75,070
Deferred income taxes, net 53,701 11,618
Other liabilities 59,222 68,674
Separate account liabilities 1,269,659 1,108,160
------------------- -----------------
Total liabilities 8,051,382 7,911,964
------------------- -----------------
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 179,596 177,545
Accumulated other comprehensive income, net of tax:
Net unrealized securities gain 135,818 60,078
Net unrealized derivative losses (7,716) (8,816)
------------------- -----------------
Total accumulated other comprehensive income 128,102 51,262
------------------- -----------------
Total stockholder's equity 902,570 823,679
------------------- -----------------
Total liabilities and stockholder's equity $ 8,953,952 $ 8,735,643
=================== =================
See Notes to Consolidated Financial Statements.
-1-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
March 31,
--------------------------------------
2004 2003
--------------- -----------------
Revenues:
Net investment income $ 94,395 $ 86,335
Contractholder and policyholder charges 2,477 1,817
Mortality and expense risk and other fees 5,010 2,700
Net realized gain on investments 1,767 26,149
--------------- -----------------
Total 103,649 117,001
--------------- -----------------
Benefits and Expenses:
Death and other benefits-investment contracts and
universal life-type insurance 4,334 3,148
Interest credited on investment contracts and
universal life-type insurance 57,763 60,093
Amortization of deferred policy acquisition costs 14,652 13,988
Other insurance and operating expenses 18,420 10,161
--------------- -----------------
Total 95,169 87,390
--------------- -----------------
Pretax income before accounting change 8,480 29,611
Income tax provision 2,867 10,360
--------------- -----------------
Income before accounting change 5,613 19,251
Cumulative effect of accounting change, net of tax (Note 1) (3,562) -
--------------- -----------------
Net income $ 2,051 $ 19,251
=============== =================
See Notes to Consolidated Financial Statements.
-2-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Three months ended
March 31,
---------------------------------------
2004 2003
------------------ ----------------
Cash Flows from Operating Activities
Net income $ 2,051 $ 19,251
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Change in accrued investment income (2,304) 260
Change in other assets and liabilities, net (12,206) (8,486)
Change in deferred policy acquisition costs, net 2,402 (16,906)
Change in policy claims and other
policyholders' funds 4,328 5,009
Deferred income taxes 2,626 12,144
Amortization of premium, net 7,793 3,466
Net realized gain on investments (1,767) (26,149)
Cumulative effect of accounting change, net of tax (Note 1) 3,562 --
------------------ -----------------
Net cash provided by (used in) operating activities 6,485 (11,411)
------------------ -----------------
Cash Flows From Investing Activities
Available-for-Sale securities:
Sales 59,981 1,411,233
Maturities, sinking fund payments and calls 97,801 218,647
Purchases (126,291) (2,144,129)
Other investments:
Sales, maturities, sinking fund payments and calls 21,015 17,780
Purchases (1,168) --
Change in amounts due to and from brokers, net 1,446 (895,664)
----------------- ----------------
Net cash provided by (used in) investing activities 52,784 (1,392,133)
----------------- ---------------
Cash Flows from Financing Activities
Activity related to investment contracts
and universal life-type insurance:
Considerations received 82,640 540,182
Interest credited to account balances 57,763 60,093
Surrenders and other benefits (206,315) (145,166)
----------------- -----------------
Net cash (used in) provided by financing activities (65,912) 455,109
----------------- -----------------
Net decrease in cash and cash equivalents (6,643) (948,435)
Cash and cash equivalents at beginning of period 9,065 1,118,692
----------------- -----------------
Cash and cash equivalents at end of period $ 2,422 $ 170,257
================= =================
See Notes to Consolidated Financial Statements.
-3-
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 ("American Enterprise Life")
for the year ended December 31, 2003. 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 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) effective for fiscal years beginning after
December 15, 2003. SOP 03-1 provides guidance on separate account
presentation and accounting for interests in separate accounts.
Additionally, SOP 03-1 provides clarifying guidance as to the recognition
of bonus interest and other sales inducement benefits and the presentation
of any deferred amounts in the financial statements. Lastly, SOP 03-1
requires insurance enterprises to consider whether to establish additional
liabilities for benefits that may become payable under variable annuity
death benefit guarantees or other insurance or annuity contract provisions.
Where an additional liability is established, the recognition of this
liability will then be considered in amortizing deferred policy acquisition
costs ("DAC") and any deferred sales inducement costs associated with those
insurance or annuity contracts.
The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced first quarter 2004 results by $3.6
million ($5.5 million pretax). The cumulative effect of accounting change
related to establishing additional liabilities for certain variable annuity
guaranteed benefits and from considering these liabilities in valuing DAC
and deferred sales inducement assets associated with those contracts. Prior
to the adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable.
American Enterprise Life's current accounting for separate accounts was
already consistent with the provisions of SOP 03-1 and, therefore, there
was no impact related to this requirement.
-4-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The additional liabilities for guaranteed benefits established under SOP
03-1 are supported by general account assets. Changes in these liabilities
are included in death and other benefits in the Consolidated Statements of
Income.
Variable annuity contracts offered by American Enterprise Life all contain
guaranteed minimum death benefit ("GMDB") provisions. When market values of
the customer's accounts decline, the death benefit payable on a contract
with a GMDB may exceed the contract accumulation value. American Enterprise
Life also offers variable annuities with death benefit provisions that
gross up the amount payable by a certain percentage of contract earnings;
these are referred to as gain gross-up ("GGU") benefits. Certain variable
annuity contracts offered by American Enterprise Life also contain
guaranteed minimum income benefits ("GMIB") provisions. If elected by the
contract owner and after a stipulated waiting period from contract
issuance, a GMIB guarantees a minimum lifetime annuity based on a specified
rate of contract accumulation value growth and predetermined annuity
purchase rates. American Enterprise Life has established additional
liabilities for these variable annuity death and GMIB benefits under SOP
03-1. American Enterprise Life has not established additional liabilities
for other insurance or annuitization guarantees for which the risk is
currently immaterial.
The variable annuity death benefit liability is determined each period by
estimating the expected value of death benefits in excess of the projected
contract accumulation value and recognizing the excess over the estimated
meaningful life based on expected assessments (e.g., mortality and expense
fees, proprietary fund management fees, 12b-1 fees, contractual
administrative charges and similar fees). Similarly, the GMIB liability is
determined each period by estimating the expected value of annuitization
benefits in excess of the projected contract accumulation value at the date
of annuitization and recognizing the excess over the estimated meaningful
life based on expected assessments. Significant assumptions made in
projecting future benefits and assessments relate to customer asset value
growth rates, mortality, persistency and investment margins and are
consistent with those used for DAC asset valuation for the same contracts.
In determining the additional liabilities for variable annuity death
benefits and GMIB, American Enterprise Life projects these benefits and
contract assessments over 200 randomly generated equity market scenarios.
As with DAC, management will review and, where appropriate, adjust its
assumptions each quarter. Unless management identifies a material deviation
over the course of the quarterly monitoring, management will review and
update these assumptions annually in the third quarter of each year.
-5-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following provides summary information related to variable annuity contracts
for which American Enterprise Life has established additional liabilities for
death benefits and guaranteed minimum income benefits:
- ---------------------------------------------------------------------- ------------------ -------------------
Variable Annuity GMDB and GMIB by Benefit Type As of As of
March 31, 2004 December 31, 2003
- ---------------------------------------------------------------------- ------------------ -------------------
(Dollar amounts in millions)
- -------------------------------------------------------------------------------------------------------------
Contracts with GMDB Total Contract Value $ 1,089.0 $ 1,066.7
Providing for Return of -------------------------------------------- ------------------ -------------------
Premium Contract Value in Separate Accounts $ 179.4 $ 142.0
-------------------------------------------- ------------------ -------------------
Net Amount at Risk $ 7.6 $ 7.4
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 66 66
- ------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GMDB Total Contract Value $ 1,560.1 $ 1,467.7
Providing for One Year -------------------------------------------- ------------------ -------------------
Ratchet Contract Value in Separate Accounts $ 892.2 $ 791.3
-------------------------------------------- ------------------ -------------------
Net Amount at Risk $ 72.2 $ 79.1
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 62 62
- ------------------------- -------------------------------------------- ------------------ -------------------
Contracts with Other Total Contract Value $ 272.0 $ 244.6
GMDB -------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 194.3 $ 169.2
-------------------------------------------- ------------------ -------------------
Net Amount at Risk $ 18.6 $ 20.3
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 62 62
- ------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GGU Total Contract Value $ 82.4 $ 77.1
Death Benefit -------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 45.1 $ 38.7
-------------------------------------------- ------------------ -------------------
Net Amount at Risk $ 1.7 $ 1.1
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 63 63
- ------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GMIB Total Contract Value $ 426.2 $ 349.9
-------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 337.0 $ 263.0
-------------------------------------------- ------------------ -------------------
Net Amount at Risk $ 22.1 $ 23.0
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 59 59
- ------------------------- -------------------------------------------- ------------------ -------------------
Net amount at risk under GMDB is current death benefit less total contract value
Net amount at risk under gain gross up death benefit is amount of gross up
Net amount at risk under GMIB is accumulated guaranteed minimum benefit base
less total contract value
- -------------------------------------------------------------------------------------------------------------------
Additional Liabilities and Incurred Benefits GMDB GMIB
- ---------------------------------------------------------------------------- ------------------ -------------------
Three months ended Liability balance at January 1 $ 1.2 $ 2.2
March 31, 2004 -------------------------------------------------- ------------------ -------------------
Reported claims $ 0.4 $ -
-------------------------------------------------- ------------------ -------------------
Liability balance at March 31 $ 1.3 $ 2.3
-------------------------------------------------- ------------------ -------------------
Incurred claims (reported + change in liability) $ 0.5 $ 0.1
- ------------------------- -------------------------------------------------- ------------------ -------------------
Contract values in separate accounts were invested in various equity, bond
or other funds as directed by the contract holder. No gains or losses were
recognized on assets transferred to separate accounts for the periods
presented.
Sales inducement costs include bonus interest credits and premium credits
added to certain annuity contract values. American Enterprise Life
capitalizes these benefit costs to the extent they are incremental to
amounts that would be credited on similar contracts without the applicable
feature. Deferred sales inducement costs are $45.3 million and $49.2 million as
of March 31, 2004
-6-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and December 31, 2003, respectively, and are included separately on the
balance sheet. The amounts capitalized are amortized using the same
methodology and assumptions used to amortize deferred policy acquisition
costs. American Enterprise Life capitalized $4.3 million and $4.4 million
of sales inducement costs during the three months ended March 31, 2004 and
2003, respectively, and amortized $2.3 million and $2.2 million of sales
inducement costs during the three months ended March 31, 2004 and 2003,
respectively.
In November 2003, the Financial Accounting Standards Board ("FASB")
ratified a consensus on the disclosure provisions of Emerging Issues Task
Force ("EITF") Issue 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." American Enterprise Life
complied with the disclosure provisions of this rule in Note 2 to the
Consolidated Financial Statements included in its Annual Report on Form
10-K for the year ended December 31, 2003. In March 2004, the FASB reached
a consensus regarding the application of a three-step impairment model to
determine whether cost method investments are other-than-temporarily
impaired. The provisions of this rule are required to be applied
prospectively to all current and future investments accounted for in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities," and other cost method investments for reporting
periods beginning after June 15, 2004. Assuming no market changes, American
Enterprise Life does not expect EITF 03-1 to have a material impact on its
results of operations at the time of adoption.
2. Investment Securities
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three months ended March 31, 2004 and 2003:
Three Months Ended March 31,
--------------------------------------
2004 2003
---------------- ------------------
(Millions)
Gross realized gains on sales $ 3.0 $ 40.7
Gross realized (losses) on sales $ (0.6) $ (8.1)
Realized (losses) recognized for other-than-temporary
impairments $ -- $ (6.3)
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in stockholder's
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 income was $78.9 million and $13.8 million for the
three months ended March 31, 2004 and 2003, 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.
4. Taxes and interest
Cash received for income taxes during the three months ended March 31, 2004
was $3.7 million. Net income taxes paid during the three months ended March
31, 2003 was $0.5
-7-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
million. Interest paid on borrowings during the three months ended March
31, 2004 and 2003, was $0.3 million and nil, respectively.
5. Commitments and contingencies
Commitments to fund mortgage loans on real estate at March 31, 2004 and
March 31, 2003 were $2.2 million and nil, respectively.
The maximum amount of life insurance risk retained by American Enterprise
Life is $750,000 on any single life. Risk not retained is reinsured with
other life insurance companies on a yearly renewable term basis. American
Enterprise Life retains all accidental death benefit and waiver of premium
risk. Reinsurance contracts do not relieve American Enterprise Life from
its primary obligation to policyholders.
Substantially all of American Enterprise Life's annuity products have
minimum interest rate guarantees in their fixed accounts. As of March 31,
2004, these minimum interest rate guarantees ranged from 1.5% to 5%. To the
extent the yield on American Enterprise Life's investment portfolio
declines below its target spread plus the minimum guarantee, American
Enterprise Life's profitability would be negatively affected.
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable product financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements, and inappropriate sales.
American Enterprise Life has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.
American Enterprise Life and its affiliates are involved in other legal and
arbitration proceedings concerning matters arising in connection with the
conduct of their respective business activities. American Enterprise Life
believes it has meritorious defenses to each of these actions and intends
to defend them vigorously. In addition, American Enterprise Life is subject
to periodic state insurance department regulatory action, through
examinations or other proceedings. American Enterprise Life believes that
it is not a party to, nor are any of its properties the subject of, any
pending legal, arbitration or regulatory proceedings that would have a
material adverse effect on American Enterprise Life's consolidated
financial condition, results of operations or liquidity. However, it is
possible that the outcome of any such proceedings could have a material
impact on results of operations in any particular reporting period as the
proceedings are resolved.
The IRS routinely examines American Enterprise Life'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 American Enterprise Life's consolidated financial position as a
result of these audits.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
American Enterprise Life Insurance Company ("American Enterprise Life") is a
stock life insurance company organized under the laws of the State of Indiana.
American Enterprise Life 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. American Enterprise Life provides
financial institution clients American Express branded financial products and
services to support their retail insurance and annuity operations. American
Enterprise Life 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
American Enterprise Life. This subsidiary holds real estate investments and/or
mortgage loans on real estate.
American Enterprise Life follows accounting principles generally accepted in the
United States (GAAP), and the following discussion is presented on a
consolidated basis consistent with GAAP.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See the Forward-Looking
Statements section.
Results of Operations for the Three Months Ended March 31, 2004 and 2003
Net income for the three months ended 2004 reflects the $3.6 million ($5.5
million pretax) impact of American Enterprise Life's adoption the American
Institute of Certified Public Accountants (AICPA) Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprise for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1). The impact of the
adoption is discussed in detail Note 1 to the Consolidated Financial Statements.
Revenues
Net investment income increased 9 percent to $94.4 million, reflecting higher
levels of invested assets partially offset by lower average yields on the
investment portfolio.
Net realized gain on investments was $1.8 million for the three months ended
March 31, 2004 compared to $26.1 million for the three months ended March 31,
2003. For the three months ended March 31, 2004, $3.0 million of gross realized
gains on securities classified as Available-for-Sale were partially offset by
$1.2 million of impairments and losses. Included in these total investment
losses are $0.6 million of gross realized losses from sales of securities
classified as Available-for-Sale.
For the three months ended March 31, 2003, $40.7 million of gross realized gains
on securities classified as Available-for-Sale were partially offset by $14.6
million of impairments and losses. Included in these total investment losses are
$8.1 million of gross realized losses from sales of securities, as well as $6.3
million of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Mortality and expense risk and other fees increased $2.3 million or 86%,
reflecting higher average values of separate account assets.
-9-
Benefits and Expenses
Interest credited on investment contracts and universal life-type insurance
decreased $2.3 million or 4 percent reflecting lower interest crediting rates
from the lower interest rate environment compared to the same period a year ago.
Other insurance and operating expenses increased by $8.3 million or 81 percent,
primarily due to unfavorable market value changes on interest rate swaps for the
three months ended March 31, 2004, compared to favorable market value changes
during the same period a year ago. Interest rates were on average slightly lower
during the first quarter of 2004 compared to the same period a year ago.
American Enterprise Life enters into pay-fixed, receive-variable interest rate
swaps with IDS Life to protect the spread between yields earned on investments
and interest rates credited to fixed annuity products. The interest rate swaps
are economic hedges that are not designated for hedge accounting treatment under
SFAS No. 133.
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 changes are made.
DAC of $281.7 million and $296.7 million related to annuities was on American
Enterprise Life's consolidated balance sheet at March 31, 2004 and 2003,
respectively. In addition to these DAC balances, and in conjunction with
American Enterprise Life's adoption of SOP 03-1, American
-10-
Enterprise Life had $45.3 million and $49.2 million of deferred sales
inducements costs at March 31, 2004 and December 31, 2003, respectively,
primarily related to American Enterprise Life's fixed and variable annuity
products. Sales inducement costs include bonus interest credits and premium
credits added to certain annuity contract values. American Enterprise Life
capitalizes these benefit costs to the extent they are incremental to amounts
that would be credited on similar contracts without the applicable feature. The
amounts capitalized are amortized using the same methodology and assumptions
used to amortize deferred acquisition costs.
Impact of Recent Market Volatility on Results of Operations
Various aspects of American Enterprise Life's business are impacted by equity
market levels and other market-based events. Several areas in particular involve
DAC and deferred sales inducements , recognition of benefits under GMBD and
certain other variable annuity benefits, mortality and expense risk and other
fees and structured investments. The direction and magnitude of the changes in
equity markets can increase or decrease amortization of DAC and deferred sales
inducement benefits, incurred benefit amounts under GMBD and other variable
annuity benefit provisions, and mortality and expense risk and other fees and
correspondingly affect results of operations in any particular period.
Similarly, the value of American Enterprise Life'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.
Liquidity and Capital Resources
American Enterprise Life's liquidity requirements are generally met by funds
provided by annuity considerations, investment income, proceeds from sales of
investments as well as maturities and periodic repayments of investment
principal and capital contributions received from IDS Life. The primary uses of
funds are annuity obligations, commissions and operating expenses and investment
purchases. American Enterprise Life routinely reviews its sources and uses of
funds in order to meet its ongoing obligations.
American Enterprise Life has an available line of credit with AEFC aggregating
$50 million. No borrowings were outstanding under the line of credit at March
31, 2004. American Enterprise Life had outstanding reverse repurchase agreements
totaling $70.0 million at March 31, 2004. Both the line of credit and the
reverse repurchase agreements are used strictly as short-term sources of funds.
Investments include $493.7 million, $467.6 million and $237.1 million of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at March 31, 2004, December 31, 2003 and March 31, 2003,
respectively. These investments represent 7.0 percent, 6.6 percent and 3.8
percent of IDS Life's investment portfolio at March 31, 2004, December 31, 2003
and March 31, 2003, respectively.
OTHER REPORTING MATTERS
Accounting Developments
See "Future Application of Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.
-11-
ITEM 4. CONTROLS AND PROCEDURES
The American Enterprise Life's management, with the participation of American
Enterprise Life's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of American Enterprise Life'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, American
Enterprise Life's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, its disclosure controls and
procedures are effective.
Forward-Looking Statements
This report includes forward-looking statements which are subject to risks and
uncertainties that could cause results to differ materially from such
statements. The words "believe," "expect," "anticipate," "optimistic," "intend,"
"plan," "aim," "will," "may," "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. American Enterprise Life
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: fluctuations in
external markets, which can affect the amount and types of investment products
sold, the market value of its separate account assets, and related mortality and
expense risk and other fees and the amount of amortization of DAC; potential
deterioration in high-yield and other investments, which could result in further
losses in American Enterprise Life's investment portfolio; changes in
assumptions relating to DAC which also could impact the amount of DAC
amortization; the ability to sell certain high-yield investments at expected
values and within anticipated time frames 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 American Enterprise Life against losses;
negative changes in IDS Life's and American Enterprise Life's credit ratings;
increasing competition in all American Enterprise Life's major businesses; the
adoption of recently issued rules related to the consolidation of variable
interest entities, including those involving CDOs that American Enterprise Life
may from time-to-time invest in and reserves required pursuant to SOP 03-1 which
could affect both American Enterprise Life's balance sheet and results of
operations; and outcomes of litigation. A further description of these and other
risks and uncertainties can be found in American Enterprise Life's Annual Report
on Form 10-K for the year ended December 31, 2003 and its other reports filed
with the SEC.
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PART II. OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Securities and Exchange Commission (SEC), the National
Association of Securities Dealers (NASD) and several state
attorneys general have brought proceedings challenging several
mutual fund and variable product financial practices,
including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements, and inappropriate
sales. American Enterprise Life has received requests for
information and has been contacted by regulatory authorities
concerning its practices and is cooperating fully with these
inquiries.
American Enterprise Life and its affiliates are involved in
other legal and arbitration proceedings concerning matters
arising in connection with the conduct of their respective
business activities. American Enterprise Life believes it has
meritorious defenses to each of these actions and intends to
defend them vigorously. American Enterprise Life believes that
it is not a party to, nor are any of its properties the
subject of, any pending legal or arbitration proceedings that
would have a material adverse effect on American Enterprise
Life's consolidated financial condition, results of operations
or liquidity. However, it is possible that the outcome of any
such proceedings could have a material impact on results of
operations in any particular reporting period as the
proceedings are resolved.
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
American Enterprise Life during the quarterly
period ended March 31, 2004.
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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: May 10, 2004 By /s/ Mark E. Schwarzmann
--------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: May 10, 2004 By /s/ Arthur H. Berman
--------------------------------
Arthur H. Berman
Director and 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 Mark E. Schwarzmann pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Arthur H. Berman pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Mark E. Schwarzmann and Arthur H. Berman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1