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 JUNE 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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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 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
- ------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
----------------
829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA
- ------------------------------------------------------------------------------
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 - June 30, 2005
and December 31, 2004 1
Consolidated Statements of Income - Three
Months Ended June 30, 2005 and 2004 2
Consolidated Statements of Income - Six Months
Ended June 30, 2005 and 2004 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2005 and 2004 4
Consolidated Statements of Stockholder's Equity -
Six Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 4. Controls and Procedures 15-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
June 30, December 31,
2005 2004
---------- ------------
(Unaudited)
Assets
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $6,049,262;
2004, $6,257,483) $6,142,395 $6,368,833
Preferred and common stocks, at fair value (cost: 2005 and 2004, $6,000) 6,357 6,246
Mortgage loans on real estate, at cost (less reserves: 2005 and
2004, $6,862) 391,703 420,899
Other investments 1,182 2,286
---------- ----------
Total investments 6,541,637 6,798,264
Cash and cash equivalents 77,147 47,356
Amounts due from brokers 8,869 71
Other accounts receivable 5,565 4,299
Accrued investment income 64,442 67,655
Deferred policy acquisition costs 315,419 299,708
Deferred sales inducement costs 53,264 49,822
Other assets 2,347 3,394
Separate account assets 2,282,468 1,878,620
---------- ----------
Total assets $9,351,158 $9,149,189
========== ==========
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $6,098,116 $6,325,427
Variable annuity guarantees 10,166 5,505
Policy claims and other policyholders' funds 11,009 4,150
Amounts due to brokers 26,636 6,962
Deferred income taxes, net 44,894 34,984
Other liabilities 22,603 41,826
Separate account liabilities 2,282,468 1,878,620
---------- ----------
Total liabilities 8,495,892 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 210,381 199,175
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 52,226 62,082
Net unrealized derivative losses (2,213) (4,414)
---------- ----------
Total accumulated other comprehensive income 50,013 57,668
---------- ----------
Total stockholder's equity 855,266 851,715
---------- ----------
Total liabilities and stockholder's equity $9,351,158 $9,149,189
========== ==========
See Notes to Consolidated Financial Statements
1
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
June 30,
-----------------------
2005 2004
------- --------
Revenues:
Net investment income $86,771 $ 96,066
Contractholder charges 3,511 2,778
Mortality and expense risk and other fees 9,896 5,609
Net realized (loss) gain on investments (539) 2,331
------- --------
Total 99,639 106,784
------- --------
Benefits and Expenses:
Death and other benefits for investment contracts 8,138 2,450
Interest credited to account values 54,645 57,854
Amortization of deferred policy acquisition costs 16,307 15,566
Separation costs 1,638 -
Other insurance and operating expenses 17,771 11,335
------- --------
Total 98,499 87,205
------- --------
Income before income tax provision 1,140 19,579
Income tax provision 40 17,262
------- --------
Net income $ 1,100 $ 2,317
======= ========
See Notes to Consolidated Financial Statements
2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2005 2004
-------- --------
Revenues:
Net investment income $177,352 $190,461
Contractholder charges 6,900 5,255
Mortality and expense risk and other fees 18,456 10,619
Net realized (loss) gain on investments (1,903) 4,098
-------- --------
Total 200,805 210,433
-------- --------
Benefits and Expenses:
Death and other benefits for investment contracts 10,951 6,784
Interest credited to account values 107,123 115,617
Amortization of deferred policy acquisition costs 32,410 30,218
Separation costs 1,638 -
Other insurance and operating expenses 32,274 29,755
-------- --------
Total 184,396 182,374
-------- --------
Income before income tax provision and accounting change 16,409 28,059
Income tax provision 5,203 20,129
-------- --------
Income before accounting change 11,206 7,930
Cumulative effect of accounting change, net of tax (Note 1) - (3,562)
-------- --------
Net income $ 11,206 $ 4,368
======== ========
See Notes to Consolidated Financial Statements
3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
------------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,206 $ 4,368
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in accrued investment income 3,213 499
Change in deferred policy acquisition costs, net (13,200) (12,509)
Change in deferred sales inducement costs, net (3,010) (2,563)
Change in policy claims and other policyholders' funds 6,859 3,390
Deferred income taxes 14,033 12,852
Change in other assets and liabilities, net (10,008) (413)
Amortization of premium, net 12,224 12,282
Net realized loss (gain) on investments 1,903 (4,098)
Cumulative effect of accounting change, net of tax (Note 1) - 3,562
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,220 17,370
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 292,162 160,891
Maturities, sinking fund payments and calls 230,028 211,064
Purchases (327,008) (216,039)
Other investments:
Sales, maturities, sinking fund payments and calls 32,401 46,571
Purchases (3,294) (3,267)
Change in amounts due to and from brokers, net 10,876 (66,740)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 235,165 132,480
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 43,219 141,549
Interest credited to account values 107,123 115,617
Surrenders and other benefits (378,936) (399,211)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (228,594) (142,045)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,791 7,805
Cash and cash equivalents at beginning of period 47,356 9,065
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,147 $ 16,870
========= =========
SUPPLEMENTAL DISCLOSURES:
Income taxes (refunded) paid $ (357) $ 1,713
Interest paid on borrowings $ 33 $ 378
See Notes to Consolidated Financial Statements
4
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 loss:
Net income 4,368 4,368
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 (81,884) (81,884)
Reclassification adjustment for
losses on derivatives included in
net income, net of related
deferred income taxes 2,201 2,201
--------
Total comprehensive loss (75,315)
- -----------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004 $748,364 $3,000 $591,872 $(28,421) $181,913
=============================================================================================================================
Balances at December 31, 2004 $851,715 $3,000 $591,872 $ 57,668 $199,175
Comprehensive income:
Net income 11,206 11,206
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 (9,856) (9,856)
Reclassification adjustment for
losses on derivatives included in
net income, net of related
deferred income taxes 2,201 2,201
--------
Total comprehensive income 3,551
- -----------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2005 $855,266 $3,000 $591,872 $ 50,013 $210,381
=============================================================================================================================
See Notes to Consolidated Financial Statements
5
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.
Separation of Ameriprise Financial
----------------------------------
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 Ameriprise Financial, Inc.
(Ameriprise Financial). Prior to August 1, 2005, Ameriprise Financial
was known as American Express Financial Corporation (AEFC). Ameriprise
Financial is a wholly owned subsidiary of American Express Company
(American Express).
Ameriprise Financial changed its name on August 1, 2005 as a
consequence of the plans announced by American Express on February 1,
2005, to pursue a spin off of the businesses now being operated under
the Ameriprise Financial name. The separation from American Express is
expected to be completed on or after September 30, 2005, subject to
certain regulatory and other approvals, including final approval by the
board of directors of American Express. After the expected separation
from American Express, Ameriprise Financial and its subsidiaries will
no longer be affiliated with American Express. Ameriprise Financial and
American Express will be independent companies, with separate public
ownership, boards of directors and management.
In connection with the separation, American Enterprise Life will be
allocated certain separation and distribution-related expenses incurred
as a result of Ameriprise Financial becoming an independent company.
Cumulatively, the expenses allocated to American Enterprise Life are
expected to be significant to American Enterprise Life. IDS Life will
provide additional capital to American Enterprise Life to support its
current financial strength ratings.
Separation Costs
----------------
During the quarter ended June 30, 2005, Ameriprise Financial developed
an allocation policy for separation costs resulting in the allocation
of certain costs to American Enterprise Life that it considered to be a
reasonable reflection of separation costs benefiting American
Enterprise Life. During the quarter ended June 30, 2005, American
Enterprise Life recorded $1.6 million in allocated separation costs.
Had this allocation method been applied for the quarter ended March 31,
2005, approximately $0.2 million of these costs would have been charged
to American Enterprise Life during that period. Separation costs
generally consist of employee retention program costs, information
technology costs, re-branding and marketing costs and certain
consulting expenses related to the separation and distribution of
Ameriprise Financial.
6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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.
7
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and six months ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2005 2004 2005 2004
------- ------ ------- -------
(Thousands)
Gross realized gains on sales $ 5,766 $ 2,738 $ 6,345 $ 5,727
Gross realized (losses) on sales $(5,215) $ (907) $(6,929) $(1,467)
Realized (losses) recognized for
other-than-temporary impairments $ - $ - $ (229) $ -
3. COMMITMENTS AND CONTINGENCIES
At June 30, 2005 and December 31, 2004, American Enterprise Life had
commitments to fund mortgage loans on real estate of $8.2 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, generally including suitability, 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 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 returns and is currently conducting an audit for 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.
8
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 Ameriprise Financial, Inc. (Ameriprise Financial). Prior to August 1,
2005, Ameriprise Financial was known as American Express Financial
Corporation (AEFC). Ameriprise Financial is a wholly owned subsidiary of
American Express Company (American Express).
Ameriprise Financial changed its name on August 1, 2005 as a consequence of
the plans announced by American Express on February 1, 2005, to pursue a
spin off of the businesses now being operated under the Ameriprise Financial
name. The separation from American Express is expected to be completed on or
after September 30, 2005, subject to certain regulatory and other approvals,
including final approval by the board of directors of American Express.
After the expected separation from American Express, Ameriprise Financial
and its subsidiaries will no longer be affiliated with American Express.
Ameriprise Financial and American Express will be independent companies,
with separate public ownership, boards of directors and management.
American Enterprise Life Insurance Company provides financial institution
clients with 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. 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.
In connection with the separation, American Express has indicated that it
will provide additional capital to Ameriprise Financial of approximately $1
billion. This capital contribution is intended to provide adequate support
for Ameriprise Financial's senior debt rating on the distribution date, to
allow Ameriprise Financial to have efficient access to the capital markets,
and to support the current financial strength ratings of Ameriprise
Financial's insurance subsidiaries.
American Enterprise Life will be allocated certain separation and
distribution-related expenses incurred as a result of Ameriprise Financial
becoming an independent company. Cumulatively, the expenses allocated to
American Enterprise Life will be significant to American Enterprise Life.
IDS Life will provide additional capital to American Enterprise Life to
support 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.
9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Net income was $1.1 million for the three months ended June 30, 2005,
compared to $2.3 million for the three months ended June 30, 2004. The
decrease primarily reflects lower net investment income, higher death and
other benefits and higher insurance and operating expenses, partially offset
by a significantly lower effective tax rate as further described below.
The effective tax rate decreased to 4 percent in the three months ended June
30, 2005 from 88 percent in the three months ended June 30, 2004. The
effective tax rate in the three months ended June 30, 2004 included a
reduction in net deferred tax assets which increased the effective rate.
REVENUES
Net investment income decreased $9.3 million or 10 percent reflecting lower
average balances of invested assets.
Mortality and expense risk and other fees increased $4.3 million or 76
percent, reflecting higher average values of separate account assets.
Net realized loss on investments was $0.5 million for the three months ended
June 30, 2005 compared to a net realized gain on investments of $2.3 million
for the three months ended June 30, 2004. For the three months ended June
30, 2005, $5.8 million of total investment gains were offset by $6.3 million
of losses and impairments. Included in these total net investment gains and
losses were $5.8 million of gross realized gains and $5.2 million of gross
realized losses from sales of securities, classified as Available-for-Sale.
Included in net realized loss on investments classified as
Available-for-Sale for the three months ended June 30, 2005 were gross
realized gains and losses of $1.6 million and $2.8 million, respectively,
related to the sale of all of American Enterprise Life's retained interest
in a collateralized debt obligation (CDO) securitization trust, reflecting
management's decision to continue to improve the investment portfolio's risk
profile through the liquidation of certain structured investments.
For the three months ended June 30, 2004, $3.2 million of total investment
gains were partially offset by $0.9 million of losses and impairments.
Included in these total net investment gains and losses were $2.7 million of
gross realized gains and $0.9 million of gross realized losses from sales of
securities, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Death and other benefits for investment contracts increased $5.7 million
primarily related to guaranteed minimum withdrawal benefit (GMWB) riders on
variable annuity contracts. This increase was partially offset by a
reduction in variable annuity death benefit guarantees.
Interest credited to account values decreased $3.2 million or 6 percent
reflecting lower average accumulation values and lower interest crediting
rates on annuity products.
10
Separation costs generally consist of employee retention program costs,
information technology costs, re-branding and marketing costs and certain
consulting expenses related to the separation and distribution of Ameriprise
Financial. During the quarter ended June 30, 2005, American Enterprise Life
recorded $1.6 million in allocated separation costs.
Other insurance and operating expense increased $6.4 million or 57 percent
primarily reflecting $6.8 million of unfavorable mark-to-market adjustments
on interest rate swaps in the current quarter compared to the same period a
year ago.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Income before income tax provision and accounting change was $16.4 million
for the six months ended June 30, 2005, compared to $28.1 million for the
six months ended June 30, 2004. The decrease primarily reflects lower net
investment income, as further described below.
Net income was $11.2 million for the six months ended June 30, 2005,
compared to $4.4 million for the six months ended June 30, 2004. Net income
for the six months ended June 30, 2004 reflects the $3.6 million after-tax
($5.5 million pretax) cumulative effect of accounting change as a result of
American Enterprise Life's adoption of SOP 03-1. See "Application of
Recently Issued Accounting Standards" section of Note 1 to the Consolidated
Financial Statements for discussion regarding the impact of adoption of
SOP 03-1.
The effective tax rate decreased to 32 percent in the six months ended June
30, 2005 from 72 percent in the six months ended June 30, 2004. The
effective tax rate in the six months ended June 30, 2004 included a
reduction in net deferred tax assets which increased the effective rate.
REVENUES
Net investment income decreased $13.1 million or 7 percent reflecting lower
average balances of invested assets.
Mortality and expense risk and other fees increased $7.8 million or 74
percent primarily reflecting higher average values of separate account
assets.
Net realized loss on investments was $1.9 million for the six months ended
June 30, 2005 compared to a net realized gain on investments of $4.1 million
for the six months ended June 30, 2004. For the six months ended June 30,
2005, $6.3 million of total investment gains were offset by $8.2 million of
losses and impairments. Included in these total net investment gains and
losses were $6.3 million of gross realized gains and $6.9 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. Included in net realized loss on investments
classified as Available-for-Sale for the six months ended June 30, 2005 were
gross realized gains and losses of $1.6 million and $2.8 million,
respectively, related to the sale of all of American Enterprise Life's
retained interest in a CDO securitization trust, reflecting management's
decision to continue to improve the investment portfolio's risk profile
through the liquidation of certain structured investments.
For the six months ended June 30, 2004, $6.2 million of total investment
gains were partially offset by $2.1 million of losses and impairments.
Included in these total net investment gains and losses were $5.7 million of
gross realized gains and $1.5 million of gross realized losses from sales of
securities, classified as Available-for-Sale.
11
BENEFITS AND EXPENSES
Death and other benefits for investment contracts increased $4.2 million or
61 percent primarily related to GMWB riders on variable annuity contracts.
This increase was partially offset by a reduction in variable annuity death
benefit guarantees and other death benefit reserves.
Interest credited to account values decreased $8.5 million or 7 percent
reflecting lower average accumulation values and lower interest crediting
rates on annuity products.
Separation costs generally consist of employee retention program costs,
information technology costs, re-branding and marketing costs and certain
consulting expenses related to the separation and distribution of Ameriprise
Financial. During 2005, American Enterprise Life recorded $1.6 million in
allocated separation costs.
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 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.
12
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 behavior of the liabilities underlying the
products portfolios to achieve targeted levels of profitability within
defined risk parameters to meet contractual obligations.
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 deposits, 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.
Funding Strategy
American Enterprise Life, on a consolidated basis, has available lines of
credit with Ameriprise Financial aggregating $50 million. At June 30, 2005,
there were no line of credit borrowings outstanding with Ameriprise
Financial 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 June 30, 2005, December 31, 2004 and June 30, 2004,
respectively. These investments represent 7 percent, 8 percent and 7 percent
of American Enterprise Life's investment portfolio at June 30, 2005,
December 31, 2004 and June 30, 2004, respectively.
13
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.
During the second quarter 2005, American Enterprise Life sold all of its
retained interest in a CDO securitization trust and recognized a net
realized loss of $1.2 million. As of December 31, 2004, the carrying value
of this retained interest was $41.8 million of which $31.0 million was
considered investment grade.
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), guaranteed minimum withdrawal
benefits (GMWB) 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, GMWB 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.
14
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
Ameriprise Financial'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
15
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).
16
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, generally including suitability, 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.
Form 8-K, filed May 23, 2005, item 5.02, reporting
that on May 18, 2005, Arthur H. Berman resigned
his position as Executive Vice President - Finance
of the Company. Mr. Berman resigned to assume the
role of Senior Vice President and Treasurer of
American Express Financial Advisors, Inc. (n/k/a
Ameriprise Financial Services, Inc.) and American
Express Financial Corporation (n/k/a Ameriprise
Financial, Inc.) and not due to any disagreements
with the Board, auditors or officers of the Company.
In the interim period, Jeryl A. Millner will assume
the role of Executive Vice President - Finance of the
company until the board of the Company can appoint a
new Executive Vice President - Finance. Mr. Berman
will continue to serve upon the board of the Company.
17
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: August 11, 2005 By /s/ Mark E. Schwarzmann
-----------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: August 11, 2005 By /s/ Jeryl A. Millner
-----------------------------------
Jeryl A. Millner
Executive Vice President - Finance
and Chief Financial Officer
18
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 Jeryl A. Millner pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Mark E. Schwarzmann and Jeryl A. Millner pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
E-1