UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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 NO. 2-23772
AMERIPRISE CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-6009975
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1099 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
Former name, former address and former fiscal year, if changed
since last report: NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 4, 2008
- --------------------------------------- -------------------------------
Common Shares (par value $10 per share) 150,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERIPRISE CERTIFICATE COMPANY
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements
Statements of Operations -- Three months and nine
months ended September 30, 2008 and 2007........ 1
Balance Sheets -- September 30, 2008 and December
31, 2007....................................... 2
Statements of Cash Flows -- Nine months ended
September 30, 2008 and 2007.................... 3
Statements of Comprehensive (Loss) Income -- Three
months and nine months ended September 30, 2008
and 2007....................................... 4
Notes to Financial Statements..................... 5-11
Item 2. Management's Narrative Analysis................... 12-15
Item 4T. Controls and Procedures........................... 15
Part II. Other Information:
Item 1. Legal Proceedings................................. 16
Item 1A. Risk Factors...................................... 16-19
Item 6. Exhibits.......................................... 19
Signatures................................................. 20
Exhibit Index.............................................. E-1
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Investment income .................................................... $ 51,539 $50,301 $142,815 $164,297
Investment expenses .................................................. 8,950 8,719 25,667 27,545
-------- ------- -------- --------
Net investment income before provision for certificate reserves and
income taxes ...................................................... 42,589 41,582 117,148 136,752
Provision for certificate reserves ................................... 37,560 41,392 113,658 136,126
-------- ------- -------- --------
Net investment income before income taxes ............................ 5,029 190 3,490 626
Income tax provision (benefit) ....................................... 1,300 455 981 (835)
-------- ------- -------- --------
Net investment income (loss) ......................................... 3,729 (265) 2,509 1,461
-------- ------- -------- --------
Net realized investment (losses) gains before income taxes ........... (35,955) 1,730 (46,188) 1,095
Income tax (benefit) provision ....................................... (12,584) 605 (16,166) 383
-------- ------- -------- --------
Net realized (losses) gains on investments ........................... (23,371) 1,125 (30,022) 712
-------- ------- -------- --------
Net (loss) income .................................................... $(19,642) $ 860 $(27,513) $ 2,173
======== ======= ======== ========
See Notes to Financial Statements.
1
AMERIPRISE CERTIFICATE COMPANY
BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------- ------------
(UNAUDITED)
ASSETS
Qualified Assets
Cash equivalents ..................................................... $ 613,589 $ 76,079
Investments in unaffiliated issuers .................................. 3,953,190 3,769,068
Receivables .......................................................... 30,858 29,118
Equity index options, purchased ...................................... 17,582 58,575
---------- ----------
Total qualified assets .................................................. 4,615,219 3,932,840
---------- ----------
Other Assets
Deferred income taxes, net ........................................... 95,167 40,434
Current taxes receivable ............................................. 512 9,416
Due from related party ............................................... 1,500 3
---------- ----------
Total other assets ...................................................... 97,179 49,853
---------- ----------
Total assets ............................................................ $4,712,398 $3,982,693
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Certificate reserves ................................................. $4,522,280 $3,757,494
Payable for investment securities purchased .......................... 4,033 1,263
Equity index options, written ........................................ 10,016 26,796
Accounts payable and accrued liabilities ............................. 21,761 20,516
---------- ----------
Total liabilities ....................................................... 4,558,090 3,806,069
---------- ----------
Shareholder's equity
Common shares ($10 par value, 150,000 shares authorized and issued) .. 1,500 1,500
Additional paid-in capital ........................................... 256,261 207,964
Retained earnings .................................................... 154 964
Accumulated other comprehensive loss, net of tax ..................... (103,607) (33,804)
---------- ----------
Total shareholder's equity .............................................. 154,308 176,624
---------- ----------
Total liabilities and shareholder's equity .............................. $4,712,398 $3,982,693
========== ==========
See Notes to Financial Statements.
2
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ......................................................................... $ (27,513) $ 2,173
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Interest added to certificate loans .................................................... (188) (241)
Amortization of premiums, accretion of discounts, net .................................. 4,587 7,398
Deferred income taxes, net ............................................................. (58,956) 9,486
Net realized loss on investments before income tax provision ........................... 46,188 605
Provision for loan loss ................................................................ -- (1,700)
Changes in other operating assets and liabilities:
Equity index options purchased and written, net ........................................ 24,213 2,785
Dividends and interest (payable) receivable ............................................ (2,798) 5,080
Due to (from) parent for income taxes .................................................. 8,904 (154)
Other assets and liabilities, net ...................................................... 24,943 (18,111)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................. 19,380 7,321
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales .................................................................................. 14,381 206,804
Maturities and redemptions ............................................................. 770,424 574,087
Purchases .............................................................................. (1,089,051) (78,051)
Syndicated bank loans and first mortgage loans on real estate:
Sales .................................................................................. 2,329 6,040
Maturities and redemptions ............................................................. 64,237 103,140
Purchases .............................................................................. (103,756) (61,326)
Certificate loans:
Payments ............................................................................... 588 749
Fundings ............................................................................... (424) (814)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ....................................... (341,272) 750,629
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments from certificate owners ....................................................... 1,808,975 638,120
Certificate maturities and cash surrenders ............................................. (1,024,573) (1,442,333)
Capital contribution from parent ....................................................... 75,000 --
Dividend/return of capital to parent ................................................... -- (55,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ....................................... 859,402 (859,213)
----------- -----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS ............................................... 537,510 (101,263)
Cash equivalents beginning of period ...................................................... 76,079 174,247
----------- -----------
CASH EQUIVALENTS END OF PERIOD ............................................................ $ 613,589 $ 72,984
=========== ===========
SUPPLEMENTAL DISCLOSURES INCLUDING NON-CASH TRANSACTIONS:
Cash received for income taxes ......................................................... $ (11,589) $ (11,564)
Certificate maturities and surrenders through loan reductions .......................... 1,093 1,564
See Notes to Financial Statements.
3
AMERIPRISE CERTIFICATE COMPANY
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2008 2007 2008 2007
-------- ------- --------- -------
Net (loss) income ............................................... $(19,642) $ 860 $ (27,513) $ 2,173
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized (losses) gains on Available-for-Sale securities:
Unrealized holding (losses) gains arising during
the period ............................................. (76,449) 19,151 (155,582) 16,045
Income tax (benefit) expense .............................. (26,985) 6,851 (55,909) 5,871
-------- ------- --------- -------
Net unrealized holding (losses) gains arising during
the period .......................................... (49,464) 12,300 (99,673) 10,174
-------- ------- --------- -------
Reclassification adjustment for losses (gains) included
in net (loss) income ................................... 35,754 (47) 45,954 608
Income tax benefit (expense) .............................. 12,514 (15) 16,084 213
-------- ------- --------- -------
Net reclassification adjustment for losses (gains)
included in net (loss) income ....................... 23,240 (32) 29,870 395
-------- ------- --------- -------
Net unrealized (losses) gains on Available-for-Sale securities .. (26,224) 12,268 (69,803) 10,569
-------- ------- --------- -------
NET OTHER COMPREHENSIVE (LOSS) INCOME ........................... (26,224) 12,268 (69,803) 10,569
-------- ------- --------- -------
TOTAL COMPREHENSIVE (LOSS) INCOME ............................... $(45,866) $13,128 $ (97,316) $12,742
======== ======= ========= =======
See Notes to Financial Statements.
4
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Ameriprise Certificate Company ("ACC" or the "Company") is a wholly owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"). The
accompanying Financial Statements have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP"). 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 results of operations
and financial position for the interim periods have been made. All adjustments
made were of a normal, recurring nature. Results of operations reported for
interim periods are not necessarily indicative of results for the entire year.
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform to
the current presentation. In the second quarter of 2008, ACC reclassified the
mark-to-market adjustment on certain derivatives from investment income to
provision for certificate reserves. This reclassification was made to enhance
transparency and to better align the financial statement captions with the key
drivers of the business. Results of operations reported for interim periods are
not necessarily indicative of results for the entire year. These Financial
Statements and Notes should be read in conjunction with the Financial Statements
and Notes in the Annual Report on Form 10-K of ACC for the year ended December
31, 2007, filed with the Securities and Exchange Commission ("SEC") on February
29, 2008.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") FAS 157-3, "Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active" ("FSP 157-3"), which was
effective upon issuance, including prior periods for which financial statements
have not been issued. FSP 157-3 clarifies the application of SFAS No. 157 "Fair
Value Measurements" ("SFAS 157") in a market that is not active and provides an
example of key considerations to determine the fair value of financial assets
when the market for those assets is not active. The adoption of FSP 157-3 did
not have a material effect on ACC's results of operations and financial
condition.
In March 2008, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 161 "Disclosures about Derivative Instruments and Hedging
Activities--an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161
intends to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures about their impact on an entity's
financial position, financial performance, and cash flows. SFAS 161 requires
disclosures regarding the objectives for using derivative instruments, the fair
values of derivative instruments and their related gains and losses, and the
accounting for derivatives and related hedged items. SFAS 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with early
adoption permitted. ACC is currently evaluating the impact of SFAS 161 on its
disclosures. ACC's adoption of SFAS 161 will not impact its results of
operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. The provisions of SFAS 157 are required
to be applied prospectively as of the beginning of the fiscal year in which SFAS
157 is initially applied, except for certain financial instruments as defined in
SFAS 157 that require retrospective application. Any retrospective application
will be recognized as a cumulative effect adjustment to the opening balance of
retained earnings for the fiscal year of adoption. ACC adopted SFAS 157
effective January 1, 2008. The adoption of SFAS 157 did not have a material
effect on ACC's results of operations and financial condition.
In accordance with FSP FAS 157-2, "Effective Date of FASB Statement No. 157"
("FSP 157-2"), ACC will defer the adoption of SFAS 157 until January 1, 2009 for
all nonfinancial assets and nonfinancial liabilities, except for those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. In January 2008, the FASB published for comment Proposed FSP FAS 157-c
"Measuring Liabilities under FASB Statement No. 157" ("FSP 157-c"). FSP 157-c
would amend SFAS 157 to clarify the accounting principles on the fair value
measurement of liabilities. ACC is monitoring the impact that this proposed FSP
could have on its results of operations and financial condition. See Note 4 for
additional information regarding the fair value of ACC's assets and liabilities.
See Note 4 for additional information regarding the fair value of ACC's assets
and liabilities.
5
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. ACC adopted FIN 48 as of January 1, 2007. The effect
of adopting FIN 48 on ACC's results of operations and financial condition was
not material.
3. INVESTMENTS IN UNAFFILIATED ISSUERS
Investments in unaffiliated issuers were:
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------- ------------
(IN THOUSANDS)
Available-for-Sale securities, at fair value
(amortized cost: 2008, $3,725,639; 2007, $3,472,672) ........ $3,562,539 $3,419,201
Syndicated bank loans and first mortgage loans on real estate,
at cost (fair value: 2008, $367,519; 2007, $341,925) ........ 383,797 341,944
Certificate loans - secured by certificate reserves, at cost,
which approximates fair value ............................... 6,854 7,923
---------- ----------
Total .......................................................... $3,953,190 $3,769,068
========== ==========
Gross realized investment gains and losses on Available-for-Sale securities and
other-than-temporary impairment losses on Available-for-Sale securities included
in net realized investment losses before income taxes were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2008 2007 2008 2007
--------- ----- -------- -------
(IN THOUSANDS) (IN THOUSANDS)
Gross realized investment gains .... $ 149 $ 268 $ 836 $ 1,380
Gross realized investment losses ... (4,717) (221) (4,819) (1,803)
Other-than-temporary impairments ... (31,186) -- (41,971) (185)
ACC regularly reviews Available-for-Sale securities for impairments in value
considered to be other-than-temporary. The cost basis of securities that are
determined to be other-than-temporarily impaired is written down to current fair
value with a corresponding charge to net income. A write-down for impairment can
be recognized for both credit-related events and for change in fair value due to
changes in interest rates. Once a security is written down to fair value through
net income, any subsequent recovery in value cannot be recognized in net income
until the principal is returned.
Factors ACC considers in determining whether declines in the fair value of
fixed-maturity securities are other-than-temporary include: 1) the extent to
which the market value is below amortized cost; 2) ACC's ability and intent to
hold the investment for a sufficient period of time for it to recover to an
amount at least equal to its carrying value; 3) the duration of time in which
there has been a significant decline in value; 4) fundamental analysis of the
liquidity, business prospects and overall financial condition of the issuer; and
5) market events that could impact credit ratings, economic and business
climate, litigation and government actions, and similar external business
factors. For structured investments (e.g., mortgage-backed securities), ACC also
considers factors such as overall deal structure and its position within the
structure, quality of underlying collateral, delinquencies and defaults, loss
severities, recoveries, prepayments, cumulative loss projections, and discounted
cash flows in assessing potential other-than-temporary impairment of these
investments. Based upon these factors, securities that have indicators of
potential other-than-temporary impairment are subject to detailed review by
management. Securities for which declines are considered temporary continue to
be carefully monitored by management.
6
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
For the three months and nine months ended September 30, 2008,
other-than-temporary impairments of $31.2 million primarily related to
credit-related losses in Lehman Brothers securities and non-agency residential
mortgage-backed securities.
Available-for-Sale securities distributed by type were as follows:
SEPTEMBER 30, 2008
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION OF SECURITIES COST GAINS LOSSES VALUE
- ------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Mortgage and other asset-backed securities ... $2,033,163 $2,770 $(122,958) $1,912,975
Corporate debt securities .................... 1,663,908 1,191 (39,870) 1,625,229
U.S. government and agencies obligations ..... 4,956 15 (42) 4,929
Common and preferred stocks .................. 19,612 -- (4,202) 15,410
State and municipal obligations .............. 4,000 -- (4) 3,996
---------- ------ --------- ----------
Total ..................................... $3,725,639 $3,976 $(167,076) $3,562,539
========== ====== ========= ==========
DECEMBER 31, 2007
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION OF SECURITIES COST GAINS LOSSES VALUE
- ------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Mortgage and other asset-backed securities ... $2,159,248 $4,055 $(37,189) $2,126,114
Corporate debt securities .................... 1,264,467 1,043 (20,979) 1,244,531
U.S. government and agencies obligations ..... 20,345 43 (12) 20,376
Common and preferred stocks .................. 19,612 -- (355) 19,257
State and municipal obligations .............. 9,000 -- (77) 8,923
---------- ------ -------- ----------
Total ..................................... $3,472,672 $5,141 $(58,612) $3,419,201
========== ====== ======== ==========
The following table provides information about Available-for-Sale securities
with gross unrealized losses and the length of time that individual securities
have been in a continuous unrealized loss position:
SEPTEMBER 30, 2008
-------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- --------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ------------------------- ---------- ---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
Corporate debt securities ........ $1,162,924 $(22,968) $211,451 $(16,902) $1,374,375 $ (39,870)
Mortgage and other
asset-backed securities ....... 985,524 (54,826) 570,896 (68,132) 1,556,420 (122,958)
Common and preferred stocks ...... 15,411 (4,202) -- -- 15,411 (4,202)
U.S. government and
agencies obligations .......... 4,527 (42) -- -- 4,527 (42)
State and municipal obligations .. -- -- 3,996 (4) 3,996 (4)
---------- -------- -------- -------- ---------- ---------
Total ......................... $2,168,386 $(82,038) $786,343 $(85,038) $2,954,729 $(167,076)
========== ======== ======== ======== ========== =========
7
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 2007
--------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
-------------------- ---------------------- ----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ---------------------------------- -------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Corporate debt securities......... $ 63,658 $ (728) $1,051,911 $(20,251) $1,115,569 $(20,979)
Mortgage and other
asset-backed securities........ 296,515 (16,389) 1,495,484 (20,800) 1,791,999 (37,189)
Common and preferred stocks....... 19,257 (355) -- -- 19,257 (355)
U.S. government and
agencies obligations........... -- -- 14,986 (12) 14,986 (12)
State and municipal obligations... -- -- 8,924 (77) 8,924 (77)
-------- -------- ---------- -------- ---------- --------
Total.......................... $379,430 $(17,472) $2,571,305 $(41,140) $2,950,735 $(58,612)
======== ======== ========== ======== ========== ========
In evaluating potential other-than-temporary impairments, ACC considers the
extent to which amortized cost exceeds fair value and the duration of that
difference. A key metric in performing this evaluation is the ratio of fair
value to amortized cost. The following table summarizes the unrealized losses by
ratio of fair value to amortized cost:
SEPTEMBER 30, 2008
---------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
---------------------------------- --------------------------------- ----------------------------------
RATIO OF NUMBER GROSS NUMBER GROSS NUMBER GROSS
FAIR VALUE TO OF FAIR UNREALIZED OF FAIR UNREALIZED OF FAIR UNREALIZED
AMORTIZED COST SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES
- -------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
95%-100%....... 181 $1,777,686 $(21,968) 64 $399,124 $ (7,437) 245 $2,176,810 $ (29,405)
90%-95%........ 29 191,497 (14,037) 33 115,887 (9,291) 62 307,384 (23,328)
80%-90%........ 22 155,852 (29,141) 45 158,840 (26,800) 67 314,692 (55,941)
Less than 80%.. 7 43,351 (16,892) 27 112,492 (41,510) 34 155,843 (58,402)
--- ---------- -------- --- -------- -------- --- ---------- ---------
Total....... 239 $2,168,386 $(82,038) 169 $786,343 $(85,038) 408 $2,954,729 $(167,076)
=== ========== ======== === ======== ======== === ========== =========
DECEMBER 31, 2007
----------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
---------------------------------- ---------------------------------- ----------------------------------
RATIO OF NUMBER GROSS NUMBER GROSS NUMBER GROSS
FAIR VALUE TO OF FAIR UNREALIZED OF FAIR UNREALIZED OF FAIR UNREALIZED
AMORTIZED COST SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES SECURITIES VALUE LOSSES
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT NUMBER OF SECURITIES)
95%-100%....... 54 $242,284 $ (3,148) 304 $2,489,523 $(27,745) 358 $2,731,807 $(30,893)
90%-95%........ 13 96,727 (8,392) 17 41,920 (3,198) 30 138,647 (11,590)
80%-90%........ 2 40,419 (5,932) 7 23,197 (4,201) 9 63,616 (10,133)
Less than 80%.. -- -- -- 7 16,665 (5,996) 7 16,665 (5,996)
--- -------- -------- --- ---------- -------- --- ---------- --------
Total....... 69 $379,430 $(17,472) 335 $2,571,305 $(41,140) 404 $2,950,735 $(58,612)
=== ======== ======== === ========== ======== === ========== ========
8
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. FAIR VALUES OF ASSETS AND LIABILITIES
Effective January 1, 2008, ACC adopted SFAS 157, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date; that is, an
exit price. The exit price assumes the asset or liability is not exchanged
subject to a forced liquidation or distressed sale. As a result of adopting SFAS
157, ACC did not record any transition adjustments.
VALUATION HIERARCHY
Under SFAS 157, ACC categorizes its fair value measurements according to a
three-level hierarchy. The hierarchy prioritizes the inputs used by ACC's
valuation techniques. A level is assigned to each fair value measurement based
on the lowest level input that is significant to the fair value measurement in
its entirety. The three levels of the fair value hierarchy are defined as
follows:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active
markets that are accessible at the measurement date.
Level 2 Prices or valuations based on observable inputs other than quoted prices
in active markets for identical assets and liabilities.
Level 3 Prices or valuations that require inputs that are both significant to
the fair value measurement and unobservable.
DETERMINATION OF FAIR VALUE
ACC uses valuation techniques consistent with the market and income approaches
to measure the fair value of its assets and liabilities. ACC's market approach
uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. ACC's income approach
uses valuation techniques to convert future projected cash flows to a single
discounted present value amount. When applying either approach, ACC maximizes
the use of observable inputs and minimizes the use of unobservable inputs.
The following is a description of the valuation techniques used to measure fair
value and the general classification of these instruments pursuant to the fair
value hierarchy.
ASSETS
Cash equivalents
Cash equivalents include highly liquid investments with original maturities of
90 days or less. ACC's cash equivalents are classified as Level 2 and are
measured at amortized cost, which is a reasonable estimate of fair value because
of the short time between the purchase of the instrument and its expected
realization.
Investments in Unaffiliated Issuers (Available-for-Sale securities)
When available, the fair value of securities is based on quoted prices in active
markets. If quoted prices are not available, fair values are obtained from
nationally-recognized pricing services, broker quotes, or other model-based
valuation techniques such as the present value of cash flows. Level 1 securities
include U.S. Treasuries. Level 2 securities include agency mortgage-backed
securities and certain non-agency mortgage-backed securities, asset-backed
securities, municipal and corporate bonds and U.S. agency securities. Level 3
securities include certain non-agency mortgage-backed securities and corporate
bonds.
Derivatives (Equity index options, purchased and written)
The fair values of derivatives that are traded in certain over-the-counter
markets are measured using pricing models with market observable inputs such as
interest rates and equity index levels. These measurements are classified as
Level 2 within the fair value hierarchy.
9
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)
LIABILITIES
Certificate reserves
ACC uses various Black-Scholes calculations to determine the fair value of the
embedded derivative liability associated with the provisions of its stock market
certificates. The inputs to these calculations are primarily market observable.
As a result, these measurements are classified as Level 2.
The following table presents the balances of assets and liabilities measured at
fair value on a recurring basis:
SEPTEMBER 30, 2008
--------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------- ---------- -------- ----------
(IN THOUSANDS)
Assets
Cash equivalents ..................... $ -- $ 613,589 $ -- $ 613,589
Investments in unaffiliated issuers .. 402 3,164,660 397,477 3,562,539
Equity index options, purchased ...... -- 17,582 -- 17,582
---- ---------- -------- ----------
Total assets at fair value .............. $402 $3,795,831 $397,477 $4,193,710
==== ========== ======== ==========
Liabilities
Certificate reserves ................. $ -- $ 8,151 $ -- $ 8,151
Equity index options, written ........ -- 10,016 -- 10,016
---- ---------- -------- ----------
Total liabilities at fair value ......... $ -- $ 18,167 $ -- $ 18,167
==== ========== ======== ==========
The following table provides a summary of changes in Level 3 assets and
liabilities measured at fair value on a recurring basis for the three months
and nine months ended September 30, 2008:
INVESTMENTS IN UNAFFILIATED ISSUERS
---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2008 SEPTEMBER 30, 2008
------------------ ------------------
(IN THOUSANDS)
Balance, beginning of period ......................... $413,616 $470,040
Total gains (losses) included in:
Net loss ....................................... (12,029)(1) (21,864)(1)
Other comprehensive income (loss) .............. 16,868 (37,133)
Purchases, sales, issuances and settlements, net .. (20,978) (13,566)
-------- --------
Balance, end of period ............................... $397,477 $397,477
======== ========
Change in unrealized losses included in net loss
relating to assets held at September 30 ........... $(12,109)(2) $(22,530)(2)
======== ========
- ----------
(1) Represents a $17,788 and $27,987 loss included in net realized investment
losses before income taxes and $5,759 and $6,123 income included in
investment income for the three months and nine months ended September 30,
2008, respectively.
(2) Represents a $17,868 and $28,653 loss included in net realized investment
losses before income taxes and $5,759 and $6,123 income included in
investment income for the three months and nine months ended September 30,
2008, respectively.
During the reporting period, there were no material assets or liabilities
measured at fair value on a nonrecurring basis.
10
AMERIPRISE CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
At September 30, 2008 and December 31, 2007, ACC had no commitments to fund
first mortgage loans on real estate. ACC holds the mortgage document for all
outstanding mortgages, which gives it the right to take possession of the
property if the borrower fails to perform according to the terms of the
agreements. ACC employs policies and procedures designed to ensure the
creditworthiness of the borrowers and that funds will be available on the
funding date. ACC's investments in first mortgage loans on real estate are
restricted to 80 percent or less of the market value of the real estate at the
time of the loan funding.
ACC is not aware that it is a party to any pending legal, arbitration, or
regulatory proceedings that would have a material adverse effect on its
financial condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material adverse effect on
results of operations in any particular reporting period as the proceedings are
resolved.
6. INCOME TAXES
The effective tax rate was 36.5% and 35.6% for the three months and nine months
ended September 30, 2008, respectively, compared to 55.2% and (26.3)% for the
three months and nine months ended September 30, 2007, respectively. The
effective tax rate for the nine months ended September 30, 2008 reflected the
level of current year tax advantaged items relative to the level of pretax loss.
The effective tax rate for the nine months ended September 30, 2007 reflected
the impact of a $0.9 million tax benefit related to the settlement of taxes for
capital losses in prior years and the level of current year tax advantaged items
relative to the level of pretax income.
As of September 30, 2008 and December 31, 2007, ACC had $4.4 million and $4.0
million of gross unrecognized tax benefits, respectively. If recognized,
approximately $1.2 million and $0.8 million, net of federal tax benefits, of the
unrecognized tax benefits as of September 30, 2008 and December 31, 2007,
respectively, would affect the effective tax rate.
ACC recognizes interest and penalties related to unrecognized tax benefits as a
component of the income tax provision. ACC recognized interest and penalties of
$0.2 million for the nine months ended September 30, 2008. ACC had $1.2 million
and $1.0 million for the payment of interest and penalties accrued at September
30, 2008 and December 31, 2007, respectively.
It is not expected that the total amounts of unrecognized tax benefits will
change materially in the next 12 months.
ACC files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. With few exceptions, ACC is no longer subject to U.S. federal or
state and local income tax examinations by tax authorities for years before
1997. The Internal Revenue Service ("IRS"), as part of the overall examination
of the American Express Company consolidated return, commenced an examination of
ACC's U.S. income tax returns for 1997 through 2002 in the third quarter of
2005. In the first quarter of 2007, the IRS expanded the period of the
examination to include 2003 through 2004. ACC's state income tax returns are
currently under examination by various jurisdictions for years ranging from 1998
through 2005.
11
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
The following information should be read in conjunction with Ameriprise
Certificate Company's ("ACC") Financial Statements and related notes presented
in Part I, Item 1. This discussion may contain forward-looking statements that
reflect ACC's plans, estimates and beliefs. Actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to these differences include, but are not limited
to, those discussed under "Forward-Looking Statements." ACC believes it is
useful to read its management's narrative analysis in conjunction with its
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
Securities and Exchange Commission ("SEC") on February 29, 2008 ("2007 10-K"),
as well as its current reports on Form 8-K and other publicly available
information.
ACC is a wholly owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise
Financial"). ACC is registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act") and is in the business of issuing
face-amount investment certificates. Face-amount investment certificates issued
by ACC entitle the certificate owner to receive at maturity a stated amount of
money and interest or credits declared from time to time by ACC, at its
discretion. The certificates issued by ACC are not insured by any government
agency. ACC's certificates are sold primarily by Ameriprise Financial Services,
Inc., an affiliate of ACC. Ameriprise Financial Services, Inc. is registered as
a broker-dealer in all 50 states, the District of Columbia and Puerto Rico.
ACC follows U.S. generally accepted accounting principles ("GAAP"). Certain
reclassifications of prior period amounts have been made to conform to the
current presentation. In the second quarter of 2008, ACC reclassified the
mark-to-market adjustment on certain derivatives from investment income to
provision for certificate reserves. This reclassification was made to enhance
transparency and to better align the financial statement captions with the key
drivers of the business. Prior period amounts were reclassified to conform to
the current presentation.
ACC's profitability has declined in recent periods and future profitability is
dependent primarily on the interest rate environment and investment
opportunities. Affiliates of Ameriprise Financial and unaffiliated third parties
offer certain competing products which have demonstrated strong appeal to
investors.
Management's narrative analysis of the results of operations is presented in
lieu of management's discussion and analysis of financial condition and results
of operations, pursuant to General Instructions H(2)(a) of Form 10-Q.
MARKET RISK
Equity market and interest rate fluctuations can have a significant impact on
ACC's results of operations, primarily due to the effects they have on the
spread income generated on ACC's face amount certificate products.
There have been no material changes in ACC's net risk exposure to pretax income
based on its sources of market risk during the nine months ended September 30,
2008.
CREDIT RISK
ACC is exposed to credit risk within its investment portfolio, which includes
loans, and through derivative counterparties. Credit risk relates to the
uncertainty of an obligor's continued ability to make timely payments in
accordance with the contractual terms of the instrument or contract. ACC's
potential derivative credit exposure to each counterparty is aggregated with all
of its other exposures to the counterparty to determine compliance with
established credit and market risk limits at the time it enters into a
derivative transaction. ACC manages credit risk through fundamental credit
analysis, issuer and industry concentration guidelines, and diversification
requirements. These guidelines and oversight of credit risk are managed through
ACC's comprehensive enterprise risk management program that includes members of
senior management.
ACC manages the risk of adverse default experience on these investments by
applying disciplined fundamental credit analysis and underwriting standards,
prudently limiting exposures to lower-quality, higher-yielding investments, and
diversifying exposures by issuer, industry, region and property type. For each
counterparty or borrowing entity and its affiliates, ACC's exposures from all
types of transactions are aggregated and managed in relation to guidelines set
by risk tolerance thresholds and external and internal rating quality. ACC
remains exposed to occasional adverse cyclical economic downturns during which
default rates may be significantly higher than the long term historical average
used in pricing.
Credit exposures on derivative contracts may take into account enforceable
netting arrangements and collateral arrangements. Before executing a new type of
structure of derivative contract, ACC determines the variability of the
contract's potential market and credit exposures and whether such variability
might reasonably be expected to create exposure to a counterparty in excess of
established limits.
For additional information regarding ACC's sensitivity to market and credit
risk, see "Management's Narrative Analysis" in ACC's 2007 10-K.
12
FAIR VALUE MEASUREMENTS
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("SFAS 157") defines fair value, provides a framework for measuring fair value
and expands disclosures about fair value measurements. Fair value assumes the
exchange of assets or liabilities in orderly transactions. ACC includes actual
market price, or observable inputs in its fair value measurements to the extent
available. SFAS 157 does not require the use of market prices that are the
result of a forced liquidation or distressed sale. Recent market conditions have
increased the likelihood of other-than-temporary impairments for certain
non-agency residential mortgage-backed and asset-backed securities.
Illiquid Markets
Through ACC's own experience transacting in the marketplace and through
discussions with its pricing vendors, ACC believes that the market for certain
non-agency residential mortgage-backed securities is inactive. Indicators of
inactive markets include: pricing services' reliance on brokers or discounted
cash flow analyses to provide prices, an increase in the disparity between
prices provided by different pricing services for the same security,
unreasonably large bid-offer spreads and a significant decrease in the volume of
trades relative to historical levels. This market inactivity has resulted in ACC
applying valuation techniques that rely more on an income approach (discounted
cash flows using market rates) than on a market approach (prices from pricing
services). ACC considers market observable yields for other asset classes it
considers to be of similar risk which includes nonperformance and liquidity for
individual securities to set the discount rate for applying the income approach
to certain non-agency residential mortgage-backed securities. The discount rates
used for these securities at September 30, 2008 ranged from 11% to 15%.
Residential Mortgage-backed Securities Backed by Subprime or Alt-A Collateral
Sub-prime mortgage lending is the origination of residential mortgage loans to
customers with weak credit profiles. Alt-A mortgage lending is the origination
of residential mortgage loans to customers who have credit ratings above
sub-prime but may not conform to government-sponsored standards. ACC has
exposure to these types of loans only through mortgage-backed and asset-backed
securities. The slow down in the U.S. housing market, combined with relaxed
underwriting standards by some originators, has recently led to higher
delinquency and loss rates for some of these investments. Recent market
conditions have increased the likelihood of other-than-temporary impairments for
certain non-agency residential mortgage-backed securities. As a part of ACC's
risk management process, an internal rating system is used in conjunction with
market data as the basis for analysis to assess the likelihood that ACC will not
receive all contractual principal and interest payments for these investments.
For the investments that are more at risk for impairment, ACC performs its own
assessment of projected cash flows incorporating assumptions about default
rates, prepayment speeds, loss severity, and geographic concentrations to
determine if an other-than-temporary impairment should be recognized. Based on
this analysis, other than non-agency mortgage-backed securities that had
credit-related impairments recorded in the nine months ended September 30, 2008,
all contractual payments are expected to be received.
13
The following table presents as of September 30, 2008 ACC's residential
mortgage-backed and asset-backed securities backed by sub-prime and Alt-A
mortgage loans by credit rating and vintage year. For presentation in this
table, other-than-temporarily impaired securities are shown at their internal
rating of BB and below (amounts in thousands):
AAA AA A BBB BB & BELOW TOTAL
------------------ ----------------- ----------------- ----------------- ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- --------
SUB-PRIME
2003 & prior... $ 1,698 $ 1,408 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,698 $ 1,408
2004........... 12,161 10,883 875 629 -- -- 10,085 9,324 -- -- 23,121 20,836
2005........... 16,496 15,087 -- -- -- -- 2,162 1,761 -- -- 18,658 16,848
2006........... 9,603 8,813 -- -- -- -- -- -- -- -- 9,603 8,813
2007........... -- -- -- -- -- -- -- -- -- -- -- --
2008........... -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
TOTAL
SUB-PRIME... $ 39,958 $ 36,191 $ 875 $ 629 $ -- $ -- $12,247 $11,085 $ -- $ -- $ 53,080 $ 47,905
======== ======== ======= ======= ======= ======= ======= ======= ======= ======= ======== ========
ALT-A
2003 & prior... $ 8,184 $ 7,515 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 8,184 $ 7,515
2004........... 43,233 38,659 12,298 8,371 -- -- -- -- -- -- 55,531 47,030
2005........... 129,403 108,403 4,256 2,601 3,099 2,651 -- -- -- -- 136,758 113,655
2006........... 19,158 18,127 -- -- 24,300 18,368 -- -- 35,362 35,362 78,820 71,857
2007........... 7,419 5,524 31,625 25,887 -- -- 22,051 16,544 14,960 14,960 76,055 62,915
2008........... -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
TOTAL ALT-A.... $207,397 $178,228 $48,179 $36,859 $27,399 $21,019 $22,051 $16,544 $50,322 $50,322 $355,348 $302,972
======== ======== ======= ======= ======= ======= ======= ======= ======= ======= ======== ========
GRAND TOTAL.... $247,355 $214,419 $49,054 $37,488 $27,399 $21,019 $34,298 $27,629 $50,322 $50,322 $408,428 $350,877
======== ======== ======= ======= ======= ======= ======= ======= ======= ======= ======== ========
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
For the nine months ended September 30, 2008, investment income decreased $21.5
million, or 13.1%, compared to the same period last year. This was the result of
a reduction in the average balance of investment assets, as well as lower yields
on investments.
Investment expenses for the nine months ended September 30, 2008 decreased $1.9
million, or 6.8%, compared to the same period in 2007. This decrease is due to
lower contractual fees, due to lower client volumes on average, compared to the
same period in 2007.
The provision for certificate reserves decreased $22.5 million, or 16.5%, for
the nine months ended September 30, 2008 compared to the same period in 2007.
This was due to a decrease in client crediting rates, as well as a decrease in
average client volumes. Although there were positive client inflows for the nine
months ended September 30, 2008 as the result of a rate promotion on the seven
and thirteen month term Flexible Savings Certificate which began in April 2008,
the average balance of client reserves is lower in 2008 than 2007.
For the nine months ended September 30, 2008, $0.8 million of gross realized
investment gains were offset by $47.0 million of gross realized investment
losses. For the nine months ended September 30, 2007, ACC had $3.1 million of
gross realized investment gains and $2.0 million of gross realized investment
losses. Included in the total investment losses for the nine months ended
September 30, 2008 and 2007 was $42.0 million and $0.2 million, respectively, of
other-than-temporary impairment losses on investments. These impairment charges
related to the other-than-temporary impairment of securities issued by Lehman
Brothers, Washington Mutual, and various other non-agency, residential
mortgage-backed securities. The majority of the realized investment gains and
losses were from securities classified as Available-for-Sale.
The effective tax rate was 35.6% for the nine months ended September 30, 2008
compared to (26.3)% for the nine months ended September 30, 2007. The effective
tax rate for the nine months ended September 30, 2008 reflected the level of
current year tax advantaged items relative to the level of pretax loss. The
effective tax rate for the nine months ended September 30, 2007 reflected the
impact of a $0.9 million tax benefit related to the settlement of taxes for
capital losses in prior years and the level of tax advantaged items relative to
the level of pretax income.
14
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their expected
impact on ACC's future results of operations or financial condition, see Note 2
to the Financial Statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are subject to risks and
uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "may," "should," "could," "would," "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. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors, which could cause actual results, performance or
achievements to differ materially from future results, performance or
achievements. These statements are not guarantees or indicative of future
performance. Important assumptions and other important factors that could cause
actual results to differ materially from those forward-looking statements
include, but are not limited to, those factors, risks and uncertainties
described in "Item 1A. Risk Factors" and elsewhere in ACC's 2007 10-K. Any
forward-looking statements contained in this report are made only as of the date
hereof. ACC undertakes no obligation to update or revise any forward-looking
statements.
ITEM 4T. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
ACC maintains disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) designed to provide reasonable assurance that the information required to
be reported in the Exchange Act filings is recorded, processed, summarized and
reported within the time periods specified and pursuant to SEC regulations,
including controls and procedures designed to ensure that this information is
accumulated and communicated to ACC's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding the required disclosure. It should be noted that, because of inherent
limitations, ACC's disclosure controls and procedures, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
ACC's management, with the participation of its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of ACC's disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, ACC's Chief Executive Officer and Chief Financial
Officer have concluded that ACC's disclosure controls and procedures were
effective at a reasonable level of assurance as of September 30, 2008.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in ACC's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, ACC's
internal control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 5 to the Financial Statements in Part 1, Item
1 is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The risk factors set forth below update the risk factors section previously
disclosed in Item 1A of Part I of ACC's Annual Report on Form 10-K for the year
ended December 31, 2007 ("2007 Form 10-K").
RISKS RELATING TO ACC'S BUSINESS
ACC'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY
MARKET FLUCTUATIONS, ECONOMIC AND OTHER FACTORS.
ACC's financial condition and results of operations in the past have been, and
in the future may continue to be, materially affected by many factors of a
global or localized nature, including political, economic and market conditions;
the availability and cost of capital; the level and volatility of equity prices,
commodity prices and interest rates; currency values and other market indices;
technological changes and events; the availability and cost of credit;
inflation; and investor sentiment and confidence in the financial markets. These
factors also may have an impact on ACC's ability to achieve its strategic
objectives.
ACC's financial condition and results of operations are affected by the
"spread", or the difference between the returns ACC earns on the investments
that support its product obligations and the amounts that ACC must pay
certificate holders.
ACC's investment products are sensitive to interest rate fluctuations and ACC's
future costs associated with such variations may differ from its historical
costs. During periods of increasing market interest rates, ACC expects to
increase crediting rates on existing face-amount certificates. Because returns
on invested assets may not increase as quickly as current interest rates, ACC
may have to accept a lower spread and thus lower profitability or face a decline
in sales and greater loss of existing certificates. In addition, increases in
market interest rates may cause increased certificate surrenders as certificate
holders seek to shift assets to products with perceived higher returns. This
process may lead to an earlier than expected flow of cash out of ACC's business.
Also, increases in market interest rates may result in the extension of the
maturities of some of ACC's investment assets. These earlier outflows and asset
maturity extensions may require investment assets to be sold at a time when the
prices of those assets are lower because of the increase in market interest
rates, which may result in realized investment losses. Increases in crediting
rates, as well as surrenders and withdrawals, could have an adverse effect on
ACC's financial condition and results of operations.
During periods of falling interest rates, ACC's spread may also be reduced.
Because ACC may adjust the interest rates it credits on most of the products
downward only at limited, pre-established intervals, ACC's spreads could
decrease and potentially become negative. Interest rate fluctuations could also
have an adverse effect on the results of ACC's investment portfolio. During
periods of declining market interest rates, the interest ACC receives on
variable interest rate investments decreases. In addition, during those periods,
ACC is forced to reinvest the cash it receives as interest or return of
principal on its investments in lower-yielding, high-grade instruments or in
lower-credit instruments to maintain comparable returns. Issuers of fixed income
securities also may decide to prepay their obligations in order to borrow at
lower market rates. This increases the risk that ACC may have to invest the cash
proceeds of these securities in lower-yielding or lower-credit instruments.
Offsetting some of these risks is the fact that a significant portion of
certificate balances do not have a minimum guaranteed interest crediting rate.
For additional information regarding the sensitivity of the fixed income
securities in ACC's investment portfolio to interest rate fluctuations, see Item
7A -- "Quantitative and Qualitative Disclosures about Market Risk" of the 2007
Form 10-K.
GOVERNMENTAL INITIATIVES INTENDED TO ADDRESS CAPITAL MARKET CONDITIONS MAY NOT
BE EFFECTIVE AND MAY GIVE RISE TO ADDITIONAL REQUIREMENTS FOR ACC'S BUSINESS,
INCLUDING NEW CAPITAL REQUIREMENTS OR OTHER REGULATIONS, THAT COULD MATERIALLY
AFFECT ACC'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY IN WAYS
THAT ACC CANNOT PREDICT.
Legislation has been passed in an attempt to address the instability in global
financial markets. This legislation includes a provision to grant the U.S.
Treasury Department the authority to, among other things, purchase up to $700
billion of mortgage-backed and other securities from financial institutions.
This legislation or similar proposals, as well as other actions such as monetary
or fiscal actions of U.S. government instrumentalities or comparable authorities
in other countries, may fail to stabilize the financial markets. This
legislation and other proposals or actions may also have other consequences,
including material effects on interest rates and foreign exchange rates, which
could materially affect ACC's investments, results of operations and liquidity
in ways that ACC cannot predict.
In addition, ACC is subject to extensive laws and regulations that are
administered and enforced by a number of different governmental authorities and
non-governmental self-regulatory agencies. The current financial crisis has
prompted or may prompt some of these authorities to consider additional
regulatory requirements intended to prevent future crises or otherwise assure
the stability of institutions under their supervision. These authorities may
also seek to exercise their authority in new or more expansive ways. All of
these possibilities, if they occurred, could affect
16
the way ACC conducts its business and manages its capital, and may require ACC
to satisfy increased capital requirements, any of which in turn could materially
affect ACC's results of operations, financial condition and liquidity.
DEFAULTS IN ACC'S FIXED INCOME MATURITIES PORTFOLIO WOULD ADVERSELY AFFECT ACC'S
EARNINGS.
Issuers of the fixed income maturities owned by ACC may default on principal and
interest payments. As of December 31, 2007, 6.8% of ACC's invested assets had
ratings below investment grade. Moreover, economic downturns and corporate
malfeasance can increase the number of companies, including those with
investment grade ratings, that default on their debt obligations.
IF THE COUNTERPARTIES TO THE DERIVATIVE INSTRUMENTS ACC USES TO HEDGE CERTAIN
CERTIFICATE LIABILITIES DEFAULT, ACC MAY BE EXPOSED TO RISKS IT HAD SOUGHT TO
MITIGATE, WHICH COULD ADVERSELY AFFECT ACC'S FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
ACC uses derivative instruments to hedge certain certificate liabilities. ACC
enters into a variety of derivative instruments with a number of counterparties.
If ACC's counterparties fail to honor their obligations under the derivative
instruments, ACC's hedges of the related liabilities will be ineffective. That
failure could have an adverse effect on ACC's financial condition and results of
operations that could be material. This risk of failure of ACC's hedge
transactions and hedging strategies may be increased by capital market
volatility, such as the volatility that has been experienced since the second
half of 2007.
SOME OF ACC'S INVESTMENTS ARE RELATIVELY ILLIQUID.
ACC invests a portion of its assets in privately placed fixed income securities
and mortgage loans. Mortgage loans are relatively illiquid. ACC's investment
manager periodically reviews ACC's private placement investments using adopted
standards to categorize such investments as liquid or illiquid. As of December
31, 2007, mortgage loans and private placement fixed income securities that have
been categorized as illiquid represented approximately 7.3% of the carrying
value of ACC's investment portfolio. If ACC requires significant amounts of cash
on short notice in excess of its normal cash requirements, ACC may have
difficulty selling these investments in a timely manner or be forced to sell
them for an amount less than it would otherwise have been able to realize, or
both. Any inability to quickly dispose of illiquid investments could have an
adverse effect on ACC's financial condition and results of operations.
THE DETERMINATION OF THE AMOUNT OF ALLOWANCES AND IMPAIRMENTS TAKEN ON CERTAIN
INVESTMENTS IS SUBJECT TO MANAGEMENT'S EVALUATION AND JUDGMENT AND COULD
MATERIALLY IMPACT ACC'S RESULTS OF OPERATIONS OR FINANCIAL POSITION.
The determination of the amount of allowances and impairments vary by investment
type and is based upon ACC's periodic evaluation and assessment of inherent and
known risks associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information becomes
available. Management updates its evaluations regularly and reflects changes in
allowances and impairments in operations as such evaluations are revised.
Historical trends may not be indicative of future impairments or allowances.
The assessment of whether impairments have occurred is based on management's
case-by-case evaluation of the underlying reasons for the decline in fair value
that considers a wide range of factors about the security issuer and
management uses its best judgment in evaluating the cause of the decline in the
estimated fair value of the security and in assessing the prospects for
recovery. Inherent in management's evaluation of the security are assumptions
and estimates about the operations of the issuer and its future earnings
potential, which assumptions and estimates are more difficult to make with
certainty under current market conditions.
IF ACC'S RESERVES FOR FUTURE CERTIFICATE REDEMPTIONS AND MATURITIES ARE
INADEQUATE, ACC MAY BE REQUIRED TO INCREASE ITS RESERVE LIABILITIES, WHICH COULD
ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Investment certificates may be purchased either with a lump-sum payment or by
installment payments. Certificate product owners are entitled to receive, at
maturity, a definite sum of money. Payments from certificate owners are credited
to investment certificate reserves. Investment certificate reserves accumulate
interest at specified percentage rates as declared by ACC. Reserves also are
maintained for advance payments made by certificate owners, accrued interest
thereon, and for additional credits in excess of minimum guaranteed rates and
accrued interest thereon. On certificates allowing for the deduction of a
surrender charge, the cash surrender values may be less than accumulated
investment certificate reserves prior to maturity dates. Cash surrender values
on certificates allowing for no surrender charge are equal to certificate
reserves. The payment distribution, reserve accumulation rates, cash surrender
values, reserve values and other matters are governed by the 1940 Act.
Certain certificates offer a return based on the relative change in a stock
market index. The certificates with an equity-based return contain embedded
derivatives, which are carried at fair value within investment certificate
reserves on the balance sheets. The fair values of these embedded derivatives
incorporate current market data inputs. Changes in fair value are reflected in
provision for certificate reserves within the statements of income.
17
ACC monitors its reserve levels continually. If ACC concluded its reserves were
insufficient to cover actual or expected redemptions or maturities, ACC would be
required to increase its reserves and incur income statement charges for the
period in which it makes the determination. Such a determination could adversely
affect ACC's financial condition and results of operations.
INTENSE COMPETITION COULD NEGATIVELY AFFECT ACC'S ABILITY TO MAINTAIN OR
INCREASE ITS MARKET SHARE AND PROFITABILITY.
ACC's business operates in an intensely competitive industry segment. ACC
competes based on a number of factors including name recognition, service,
investment performance, product features and perceived financial strength. ACC's
competitors include broker-dealers, banks, asset managers and other financial
institutions. ACC's business faces competitors that have greater market share,
offer a broader range of products or have greater financial resources.
ACC'S AFFILIATED DISTRIBUTOR MAY BE UNABLE TO ATTRACT AND RETAIN FINANCIAL
ADVISORS.
ACC is dependent on the branded financial advisors of its affiliated
broker-dealer selling firm for all of the sales of its certificate products. A
significant number of its branded financial advisors operate as independent
contractors under a franchise agreement with its affiliated selling firm. There
can be no assurance that ACC's affiliated selling firm will be successful in its
efforts to recruit and retain new advisors to its network. If ACC's affiliated
selling firm is unable to attract and retain quality financial advisors, no
advisors would be available to sell ACC's certificate products and ACC's
financial condition and results of operations could be materially adversely
affected.
ACC'S BUSINESS IS REGULATED AND CHANGES IN REGULATION MAY REDUCE ACC'S
PROFITABILITY AND LIMIT ITS GROWTH.
ACC operates in a regulated industry. Various regulatory and governmental bodies
have the authority to review ACC's products and business practices and to bring
regulatory or other legal actions against ACC if, in their view, ACC's practices
are improper. Changes in these regulations may lead to increased fees to service
providers. Additionally, ACC is subject to heightened regulatory requirements
relating to privacy and protection of customer data.
CONFLICTS OF INTEREST ARE INCREASING AND A FAILURE TO APPROPRIATELY DEAL WITH
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT ACC'S BUSINESS.
ACC has to address potential conflicts of interest, including those relating to
the activities of its affiliated entities. For example, conflicts may arise
between ACC's position as a manufacturer of certificate products and the
position of an ACC affiliate, AFSI, as the distributor of these products. ACC
and its affiliated entities have procedures and controls in place that are
designed to address conflicts of interest. Appropriately dealing with conflicts
of interest, however, is complex and difficult and the enterprise's reputation
could be damaged if it fails, or appears to fail, to deal appropriately with
conflicts of interest. In addition, the SEC and other federal and state
regulators have increased their scrutiny of potential conflicts of interest. It
is possible that potential or perceived conflicts could give rise to litigation
or enforcement actions. It is possible that the regulatory scrutiny of, and
litigation in connection with, conflicts of interest could make the enterprise's
clients less willing to enter into transactions in which such a conflict may
occur, and could adversely affect ACC's business.
FAILURE OF ACC'S SERVICE PROVIDERS TO PERFORM THEIR RESPONSIBILITIES COULD
ADVERSELY AFFECT ACC'S BUSINESS.
ACC's business operations, including investment management, transfer agent,
custody and distribution services, are performed by affiliated service providers
pursuant to formal contracts. The failure of a service provider to fulfill its
responsibilities could have an adverse effect on ACC's financial condition and
results of operations that could be material.
ACC IS SUBJECT TO TAX CONTINGENCIES THAT COULD ADVERSELY AFFECT ITS PROVISION
FOR INCOME TAXES.
ACC is subject to the income tax laws of the U.S., its states and
municipalities. These tax laws are complex and may be subject to different
interpretations. ACC must make judgments and interpretations about the
application of these inherently complex tax laws when determining the provision
for income taxes and must also make estimates about when in the future certain
items affect taxable income in the various tax jurisdictions. Disputes over
interpretations of the tax laws may be settled with the taxing authority upon
examination or audit.
BREACHES OF SECURITY, OR THE PERCEPTION THAT OUR TECHNOLOGY INFRASTRUCTURE IS
NOT SECURE, COULD HARM OUR BUSINESS.
ACC's business requires the appropriate and secure utilization of consumer and
other sensitive information. ACC's operations require the secure transmission of
confidential information over public networks. Security breaches in connection
with the delivery of ACC's products and services, including products and
services utilizing the Internet, and the trend toward broad consumer and general
public notification of such incidents, could significantly harm ACC's business,
financial condition or results of operations. Even if ACC successfully protects
its technology infrastructure and the confidentiality of sensitive data, ACC
could suffer harm to its business and reputation if attempted security breaches
are publicized. ACC cannot be certain that advances in criminal capabilities,
discovery of new vulnerabilities, attempts to exploit vulnerabilities in ACC's
systems, data
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thefts, physical system or network break-ins or inappropriate access, or other
developments will not compromise or breach the technology or other security
measures protecting the networks used in connection with ACC's products and
services.
PROTECTION FROM SYSTEM INTERRUPTIONS IS IMPORTANT TO ACC'S BUSINESS. IF ACC
EXPERIENCES A SUSTAINED INTERRUPTION TO ACC'S TELECOMMUNICATIONS OR DATA
PROCESSING SYSTEMS, IT COULD HARM ACC'S BUSINESS.
System or network interruptions could delay and disrupt ACC's ability to
develop, deliver or maintain ACC's products and services, causing harm to ACC's
business and reputation and resulting in loss of customers or revenue. These
interruptions can include fires, floods, earthquakes, power losses, equipment
failures, software failures and other events beyond ACC's control.
RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT BE FULLY EFFECTIVE IN MITIGATING
RISK EXPOSURE IN ALL MARKET ENVIRONMENTS OR AGAINST ALL TYPES OF RISK, INCLUDING
EMPLOYEE AND FINANCIAL ADVISOR MISCONDUCT.
ACC has devoted significant resources toward developing ACC's risk management
policies and procedures and will continue to do so in the future. Nonetheless,
ACC's policies and procedures to identify, monitor and manage risks may not be
fully effective in mitigating ACC's risk exposure in all market environments or
against all types of risk. Many of ACC's methods of managing risk and exposures
are based upon ACC's use of observed historical market behavior or statistics
based on historical models. During periods of market volatility or due to
unforeseen events, the historically derived correlations upon which these
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 ACC's models indicate. This could cause us to incur investment losses or
cause ACC's hedging and other risk management strategies to be ineffective.
Other risk management methods depend upon the evaluation of information
regarding markets, clients, catastrophe occurrence or other matters that is
publicly available or otherwise accessible to us, which may not always be
accurate, complete, up-to-date or properly evaluated.
Moreover, ACC is subject to the risks of errors and misconduct by ACC's
employees and AFSI's financial advisors -- such as fraud, non-compliance with
policies, recommending transactions that are not suitable, and improperly using
or disclosing confidential information -- which is difficult to detect in
advance and deter, and could harm ACC's business, results of operations or
financial condition. ACC is further subject to the risk of nonperformance or
inadequate performance of contractual obligations by third party vendors of
products and services that are used in ACC's businesses. Management of
operational, legal and regulatory risks requires, among other things, policies
and procedures to record properly and verify a large number of transactions and
events, and these policies and procedures may not be fully effective in
mitigating ACC's risk exposure in all market environments or against all types
of risk. Insurance and other traditional risk-shifting tools may be held by or
be available to us in order to manage certain exposures, but they are subject to
terms such as deductibles, coinsurance, limits and policy exclusions, as well as
risk of counterparty denial of coverage, default or insolvency.
ITEM 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed
on page E-1 hereof, under "Exhibit Index," which is incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERIPRISE CERTIFICATE COMPANY
(Registrant)
Date: November 4, 2008 By /s/ William F. Truscott
-------------------------------------
William F. Truscott
Chief Executive Officer
Date: November 4, 2008 By /s/ Brian J. McGrane
-------------------------------------
Brian J. McGrane
Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
EXHIBIT DESCRIPTION
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* 31.1 Certification of William F. Truscott pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 31.2 Certification of Brian J. McGrane pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
* 32.1 Certification of William F. Truscott and Brian J. McGrane pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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* Filed electronically herewith.
E-1