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 MARCH 31, 2005
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 Identification No.)
incorporation or organization)
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, 2005 and December 31, 2004 1
Consolidated Statements of Income - Three Months Ended March 31, 2005 and
2004 2
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2005
and 2004 3
Consolidated Statements of Stockholder's Equity - Three Months Ended
March 31, 2005 and 2004 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8-11
Item 4. Controls and Procedures 12-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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,
2005 2004
------------------ ------------------
(Unaudited)
Assets
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $6,194,155; 2004,
$6,257,483) $ 6,180,914 $ 6,368,833
Preferred and common stocks, at fair value (cost: 2005 and 2004, $6,000) 6,006 6,246
Mortgage loans on real estate, at cost (less reserves: 2005 and 2004, $6,862) 410,158 420,899
Other investments 2,121 2,150
------------------ -------------------
Total investments 6,599,199 6,798,128
Cash and cash equivalents 7,058 47,356
Amounts due from brokers 14,132 71
Other accounts receivable 4,791 4,299
Accrued investment income 70,777 67,655
Deferred policy acquisition costs 320,915 299,708
Deferred sales inducement costs 53,954 49,822
Other assets 8,315 3,530
Separate account assets 2,039,564 1,878,620
------------------ -------------------
Total assets $ 9,118,705 $ 9,149,189
================== ===================
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $ 6,223,516 $ 6,325,427
Variable annuity guarantees 5,075 5,505
Policy claims and other policyholders' funds 6,986 4,150
Amounts due to brokers 11,767 6,962
Deferred income taxes, net 10,907 34,984
Other liabilities 27,137 41,826
Separate account liabilities 2,039,564 1,878,620
------------------ -------------------
Total liabilities 8,324,952 8,297,474
------------------ -------------------
Stockholder's equity:
Capital stock, $150 par value;
100,000 shares authorized, 20,000 shares issued and outstanding 3,000 3,000
Additional paid-in capital 591,872 591,872
Retained earnings 209,281 199,175
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities (losses) gains (7,086) 62,082
Net unrealized derivative losses (3,314) (4,414)
------------------ -------------------
Total accumulated other comprehensive (loss) income (10,400) 57,668
------------------ -------------------
Total stockholder's equity 793,753 851,715
------------------ -------------------
Total liabilities and stockholder's equity $ 9,118,705 $ 9,149,189
================== ===================
See Notes to Consolidated Financial Statements
1
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------------------------
2005 2004
------------------- -------------------
Revenues:
Net investment income $ 90,581 $ 94,395
Contractholder charges 3,389 2,477
Mortality and expense risk and other fees 8,560 5,010
Net realized (loss) gain on investments (1,364) 1,767
------------------- -------------------
Total 101,166 103,649
------------------- -------------------
Benefits and Expenses:
Death and other benefits for investment contracts 2,813 4,334
Interest credited to account values 52,478 57,763
Amortization of deferred policy acquisition costs 16,103 14,652
Other insurance and operating expenses 14,503 18,420
------------------- -------------------
Total 85,897 95,169
------------------- -------------------
Income before income tax provision and accounting change 15,269 8,480
Income tax provision 5,163 2,867
------------------- -------------------
Income before accounting change 10,106 5,613
Cumulative effect of accounting change, net of tax (Note 1) - (3,562)
------------------- -------------------
Net income $ 10,106 $ 2,051
=================== ===================
See Notes to Consolidated Financial Statements
2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------------
2005 2004
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,106 $ 2,051
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in accrued investment income (3,122) (2,304)
Change in deferred policy acquisition costs, net (5,451) (6,561)
Change in policy claims and other policyholders' funds 2,836 4,328
Deferred income taxes 12,574 850
Change in other assets and liabilities, net (19,714) (1,476)
Amortization of premium, net 5,643 7,793
Net realized loss (gain) on investments 1,364 (1,767)
Cumulative effect of accounting change, net of tax (Note 1) - 3,562
------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,236 6,476
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 89,448 59,981
Maturities, sinking fund payments and calls 102,550 97,801
Purchases (135,677) (126,291)
Other investments:
Sales, maturities, sinking fund payments and calls 11,219 21,015
Purchases (478) (1,160)
Change in amounts due to and from brokers, net (9,256) 1,446
------------------- -------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 57,806 52,792
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 25,437 82,643
Interest credited to account values 52,478 57,763
Surrenders and other benefits (180,255) (206,317)
------------------- -------------------
NET CASH USED IN FINANCING ACTIVITIES (102,340) (65,911)
------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,298) (6,643)
Cash and cash equivalents at beginning of period 47,356 9,065
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,058 $ 2,422
=================== ===================
Supplemental disclosures:
Income taxes paid (refunded) $ 6,280 $ (3,707)
Interest paid on borrowings $ 23 $ 258
See Notes to Consolidated Financial Statements
3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(thousands)
(Unaudited)
Accumulated
Additional Other
Capital Paid-In Comprehensive Retained
Total Stock Capital Income/(Loss) Earnings
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 823,679 $ 3,000 $ 591,872 $ 51,262 $ 177,545
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 2,051 2,051
Change in net unrealized holding
gains on Available-for-Sale
securities, net of reclassification
adjustments and other adjustments
to deferred policy acquisition
costs and deferred sales inducement
costs, net of related deferred
income taxes 75,739 75,739
Reclassification adjustment for losses
on derivatives included in net
income, net of related deferred
income taxes 1,101 1,101
---------------
Total comprehensive income 78,891
-----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2004 $ 902,570 $ 3,000 $ 591,872 $ 128,102 $ 179,596
=============================================================================================================================
Balances at December 31, 2004 $ 851,715 $ 3,000 $ 591,872 $ 57,668 $ 199,175
Comprehensive loss:
Net income 10,106 10,106
Change in net unrealized holding
gains on Available-for-Sale
securities, net of reclassification
adjustments and other adjustments
to deferred policy acquisition
costs and deferred sales inducement
costs, net of related deferred
income taxes (69,169) (69,169)
Reclassification adjustment for losses
on derivatives included in net
income, net of related deferred
income taxes 1,101 1,101
---------------
Total comprehensive loss (57,962)
-----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2005 $ 793,753 $ 3,000 $ 591,872 $ (10,400) $ 209,281
=============================================================================================================================
See Notes to Consolidated Financial Statements
4
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of American Enterprise Life Insurance Company (American Enterprise
Life) for the year ended December 31, 2004. 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.
Application of Recently Issued Accounting Standards
---------------------------------------------------
In July 2003, the American Institute of Certified Public Accountants
issued 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 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 ($3.4 million) and from
considering these liabilities in valuing DAC and deferred sales
inducement costs 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 accounting for separate
accounts was already consistent with the provisions of SOP 03-1 and,
therefore, there was no impact related to this requirement.
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" (EITF 03-1).
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 years ended December 31, 2004
and 2003. In March 2004, the FASB reached a consensus regarding the
application of a three-step impairment model to determine whether
investments accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115),
and other cost method investments are other-than-temporarily impaired.
However, with the issuance of FASB Staff Position (FSP) No. EITF
03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1," on September
30, 2004, the provisions of the consensus relating to the measurement
and
5
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
recognition of other-than-temporary impairments will be deferred
pending further clarification from the FASB. The remaining provisions
of this rule, which primarily relate to disclosure requirements, are
required to be applied prospectively to all current and future
investments accounted for in accordance with SFAS No. 115 and other
cost method investments. American Enterprise Life will evaluate the
potential impact of EITF 03-1 after the FASB completes its
reassessment.
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:
Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
(Thousands)
Gross realized gains on sales $ 578 $ 2,988
Gross realized (losses) on sales $ (1,714) $ (560)
Realized (losses) recognized for other-than-temporary impairments $ (229) $ -
3. COMMITMENTS AND CONTINGENCIES
At March 31, 2005 and December 31, 2004, American Enterprise Life had
commitments to fund mortgage loans on real estate of $4.5 million and
$0.2 million, respectively.
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 of B shares. 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
6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and in February 2005 began the examinations of
the 1997 through 2002 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American Enterprise Life Insurance Company is a stock life insurance company
organized under the laws of the State of Indiana. American Enterprise Life
Insurance Company is a wholly owned subsidiary of IDS Life Insurance Company
(IDS Life), a Minnesota Corporation. IDS Life is a wholly owned subsidiary
of American Express Financial Corporation (AEFC). AEFC is a wholly-owned
subsidiary of American Express Company. American Enterprise Life Insurance
Company provides financial institution clients American Express branded
financial products and wholesaling services to support its retail insurance
and annuity operations. American Enterprise Life principally underwrites
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. Effective in December 2004, American Enterprise
Life Insurance Company received a Certificate of Authority to transact
business in the State of New Hampshire. American Enterprise Life Insurance
Company also owns American Enterprise REO 1, LLC which holds real estate
investments. American Enterprise Life Insurance Company and its subsidiary
are referred to collectively as "American Enterprise Life" in this form
10-Q.
On February 1, 2005, American Express Company announced plans to pursue a
tax-free spin-off of the common stock of AEFC through a special dividend to
American Express common shareholders. The final transaction, which is
subject to certain conditions including receipt of a favorable tax ruling
and approval by American Express Company's Board of Directors, is expected
to close in the third quarter of 2005. In connection with the spin-off,
additional capital may be provided, if necessary, to American Enterprise
Life to confirm its current financial strength ratings.
American Enterprise Life follows United States generally accepted accounting
principles (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 of 1995. See the
Forward-Looking Statements section below.
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(1) (a) of Form
10-Q.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Net income for the three months ended March 31, 2005 was $10.1 million
compared to $2.1 million for the three months ended March 31, 2004. The
increase in net income primarily reflects lower benefits and expenses. Net
income for the three months ended March 31, 2004 reflects the $3.6 million
($5.5 million pretax) impact of American Enterprise Life's January 1, 2004
adoption of the American Institute of Certified Public Accountants Statement
of Position 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts"
(SOP 03-1). SOP 03-1 requires insurance enterprises to establish liabilities
for benefits that may become payable under variable annuity death benefit
guarantees or other insurance or annuity contract provisions. See
"Application of Recently Issued Accounting Standards" section in Note 1 to
the Consolidated Financial Statements regarding the impact of adoption of SOP
03-1.
8
REVENUES
Net investment income decreased $3.8 million or 4 percent reflecting lower
average invested assets.
Mortality and expense risk and other fees increased $3.6 million or 71
percent, reflecting higher average values of separate account assets
compared to the same period a year ago.
Net realized loss on investments was $1.4 million for the three months ended
March 31, 2005 compared to a net realized gain on investments of $1.8
million for the three months ended March 31, 2004. For the three months
ended March 31, 2005, $0.5 million of total investment gains were offset by
$1.9 million of losses and impairments. Included in these total investment
gains and losses are $0.6 million of gross realized gains and $1.7 million
of gross realized losses from sales of securities, as well as $0.2 million
of other-than-temporary impairment losses on investments classified as
Available-for-Sale.
For the three months ended March 31, 2004, $3 million of total investment
gains were partially offset by $1.2 million of losses. Included in these
total net investment gains and losses are $3 million of gross realized gains
and $0.6 million of gross realized losses from sales of securities,
classified as Available-for-Sale.
BENEFITS AND EXPENSES
Interest credited to account values decreased $5.3 million or 9 percent,
reflecting lower interest crediting rates.
Other insurance and operating expense decreased $3.9 million or 21 percent
reflecting comparatively more favorable mark-to-market adjustments on
interest rate swaps in current quarter compared to the same period a year
ago.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of annuity products.
These costs are deferred to the extent they are recoverable from future
profits. DAC for certain annuities are amortized as a percentage of
estimated gross profits or as a portion of product interest margins
depending on the product's characteristics.
For American Enterprise Life's annuity products, the projections underlying
the amortization of DAC require the use of certain assumptions, including
interest margins, persistency rates, maintenance expense levels and customer
asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. The
rate is net of asset fees and anticipates a blend of equity and fixed income
investments. 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 rates, interest margin and maintenance expense level assumptions,
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, 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 might also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an increase in DAC
9
amortization expense while a decrease in amortization percentage will result
in a decrease in DAC amortization expense. 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 in which such changes are made.
During the first quarter of 2004 and in conjunction with the adoption of SOP
03-1, American Enterprise Life established additional liabilities for
insurance benefits that may become payable under variable annuity death
benefit guarantees, which prior to January 1, 2004, were expensed when
payable. As a result, American Enterprise Life recognized a $5.5 million
pretax charge due to accounting change on establishing the future liability
under death benefit guarantees.
LIQUIDITY AND CAPITAL RESOURCES
Risk Management
American Enterprise Life through its Board of Directors' investment
committees or staff functions, review models projecting different interest
rate scenarios, risk/return measures, and their effect on profitability.
They also review the distribution of assets in the portfolio by type and
credit risk sector. The objective is to structure the investments security
portfolio based upon the type and expected behavior or products in the
liability portfolio to meet contractual obligations and achieve targeted
levels of profitability within defined risk parameters.
American Enterprise Life has developed an asset/liability management
approach with separate investment objectives to support specific product
liabilities, such as insurance and annuity. As part of this approach,
American Enterprise Life develops specific investment guidelines outlining
the minimum required investment return and liquidity requirements to support
future benefit payments under its insurance and annuity obligations. These
same objectives must be consistent with management's overall investment
objectives for the general account investment portfolio.
American Enterprise Life's owned investment securities are primarily
invested in long-term and intermediate-term fixed maturity securities to
provide clients with a competitive rate of return on their investments while
controlling risk. Investment in fixed maturity securities is designed to
provide American Enterprise Life with a targeted margin between the yield
earned on investments and the interest rate credited to clients' accounts.
American Enterprise Life does not trade in securities to generate short-term
profits for its own account.
As part of American Enterprise Life's investment process, management, with
the assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process conducted by American Enterprise
Life's Investment Committee involves the review of certain invested assets
which the committee evaluates to determine whether or not any investments
are other than temporarily impaired and/or which specific interest earning
investments should be put on an interest non-accrual basis.
Capital Strategy
The liquidity requirements of American Enterprise Life are generally met by
funds provided by annuity sales, investment income, proceeds from sales of
investments as well as maturities and periodic repayments of investments and
capital contributions from IDS Life. The primary uses of funds are annuity
benefits, commissions, other product-related acquisition and sales
inducement costs, operating expenses, policy loans, dividends to IDS Life
and investment purchases. American Enterprise Life routinely reviews its
sources and uses of funds in order to meet its ongoing obligations.
10
Funding Strategy
American Enterprise Life, on a consolidated basis, has available lines of
credit with AEFC aggregating $50 million. At March 31, 2005, there were no
line of credit borrowings outstanding with AEFC and no outstanding reverse
repurchase agreements. Both the line of credit and the reverse repurchase
agreements are used strictly as short-term sources of funds.
Investments include $0.4 billion, $0.5 billion and $0.5 billion of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively. These investments represent 7 percent, 8 percent and 7 percent
of American Enterprise Life's investment portfolio at March 31, 2005,
December 31, 2004 and March 31, 2004, respectively.
Separate account assets represent funds held for the exclusive benefit of
variable annuity contractholders. These assets are generally carried at
market value, and separate account liabilities are equal to separate account
assets. American Enterprise Life earns fees from the related accounts.
As of March 31, 2005, American Enterprise Life has an interest in a
collateralized debt obligation (CDO) securitization with a carrying value of
$38.7 million, of which $27.9 million is considered investment grade and
$10.8 million is included in the $0.4 billion of below investment grade
securities discussed above.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
As discussed above, 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 guaranteed minimum death benefits (GMDB) 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 amounts under GMDB 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 portfolios 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.
OTHER REPORTING MATTERS
Accounting Developments
See "Application of Recently Issued Accounting Standards" section of Note 1
to the Consolidated Financial Statements.
11
ITEM 4. CONTROLS AND PROCEDURES
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,
American Enterprise Life's disclosure controls and procedures are effective.
There have not been any changes in American Enterprise Life'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, American Enterprise Life's internal control over
financial reporting.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "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. 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: fluctuation in the equity and
fixed income markets, which can affect the amount and types of investment
products sold by American Enterprise Life, and other fees received based on
the value of those assets; American Enterprise Life's ability to recover
Deferred Policy Acquisition Costs (DAC), as well as the timing of such DAC
amortization, in connection with the sale of annuity products; changes in
assumptions relating to DAC, which could impact the amount of DAC
amortization; the ability to improve investment performance in American
Enterprise Life's businesses, including attracting and retaining
high-quality personnel; the success, timeliness and financial impact,
including costs, cost savings and other benefits including increased
revenues, of reengineering initiatives being implemented or considered by
American Enterprise Life, including cost management, structural and
strategic measures such as vendor, process, facilities and operations
consolidation, outsourcing (including, among others, technologies
operations), relocating certain functions to lower-cost overseas locations,
moving internal and external functions to the Internet to save costs, and
planned staff reductions relating to certain of such reengineering actions;
the ability to control and manage operating, infrastructure, advertising and
promotion and other expenses as business expands or changes, including
balancing the need for longer-term investment spending; the potential
negative effect on American Enterprise Life's businesses and infrastructure,
including information technology, of terrorist attacks, disasters or other
catastrophic events in the future; American Enterprise Life's ability to
develop and roll out new and attractive products to clients in a timely
manner; successfully cross-selling annuity products and services to AEFC's
customer base; fluctuations in interest rates, which impacts American
Enterprise Life's spreads in the annuity businesses; credit trends and the
rate of bankruptcies which can affect returns on American Enterprise Life's
investment portfolios; lower than anticipated spreads in the annuity
business; the types and the 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 American Enterprise Life's credit ratings; increasing competition
in all American Enterprise Life's annuity business, which could affect both
American Enterprise Life's financial condition and results of operations;
changes in laws or government regulations; outcomes associated with
litigation and compliance and regulatory matters. A further description of
these and other risks and
12
uncertainties can be found in American Enterprise Life's Annual Report on
Form 10-K for the year ended December 31, 2004 and its other reports filed
with the Securities and Exchange Commission (SEC).
13
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 account financial
practices, including suitability generally, late trading,
market timing, disclosure of revenue sharing arrangements
and inappropriate sales of B shares. 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 a number of 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.
Reports on Form 8-K filed by American Enterprise
Life during the quarterly period ended March 31,
2005 were previously disclosed on Form 10-K. There
were no additional reports on Form 8-K filed by
American Enterprise Life during the quarterly
period ended March 31, 2005.
14
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 5, 2005 By /s/ Mark E. Schwarzmann
----------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: May 5, 2005 By /s/ Arthur H. Berman
----------------------------------------
Arthur H. Berman
Director and Executive Vice President -
Finance and Chief Financial Officer
15
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