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, 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 AMERIPRISE 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
--- ---
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 14, 2005
- --------------------------------------- --------------------------------
Common Stock (par value $150 per share) 20,000 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.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
--------
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2005
and December 31, 2004 1
Consolidated Statements of Income - Three Months
Ended September 30, 2005 and 2004 2
Consolidated Statements of Income - Nine Months
Ended September 30, 2005 and 2004 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2005 and 2004 4
Consolidated Statements of Stockholder's Equity -
Nine Months Ended September 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item 4. Controls and Procedures 18-19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
Assets
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $6,010,457; 2004,
$6,257,483) $5,996,568 $6,368,833
Preferred and common stocks, at fair value (cost: 2005 and 2004, $6,000) 6,214 6,246
Mortgage loans on real estate, at cost (less reserves: 2005 and 2004, $6,862) 361,839 420,899
Other investments 1,137 2,286
---------- ----------
Total investments 6,365,758 6,798,264
Cash and cash equivalents 6,342 47,356
Amounts due from brokers 1,352 71
Other accounts receivable 6,143 4,299
Accrued investment income 66,961 67,655
Deferred policy acquisition costs 333,809 299,708
Deferred sales inducement costs 56,730 49,822
Other assets 4,720 3,394
Separate account assets 2,597,188 1,878,620
---------- ----------
Total assets $9,439,003 $9,149,189
========== ==========
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $5,945,495 $6,325,427
Variable annuity guarantees 6,009 5,505
Policy claims and other policyholders' funds 10,668 4,150
Amounts due to brokers 8,100 6,962
Deferred income taxes, net 18,836 34,984
Other liabilities 43,478 41,826
Separate account liabilities 2,597,188 1,878,620
---------- ----------
Total liabilities 8,629,774 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 222,872 199,175
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities (losses) gains (7,402) 62,082
Net unrealized derivative losses (1,113) (4,414)
---------- ----------
Total accumulated other comprehensive (loss) income (8,515) 57,668
---------- ----------
Total stockholder's equity 809,229 851,715
---------- ----------
Total liabilities and stockholder's equity $9,439,003 $9,149,189
========== ==========
See Notes to Consolidated Financial Statements
1
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
September 30,
------------------------
2005 2004
-------- --------
Revenues:
Net investment income $ 86,589 $ 95,403
Contractholder charges 3,905 3,023
Mortality and expense risk and other fees 11,729 6,504
Net realized (loss) gain on investments (82) 1,018
-------- --------
Total 102,141 105,948
-------- --------
Benefits and Expenses:
Death and other benefits for investment contracts (273) 3,356
Interest credited to account values 48,987 56,143
Amortization of deferred policy acquisition costs 17,220 9,387
Separation costs 3,385 -
Other insurance and operating expenses 16,554 24,345
-------- --------
Total 85,873 93,231
-------- --------
Income before income tax provision 16,268 12,717
Income tax provision 3,777 1,820
-------- --------
Net income $ 12,491 $ 10,897
======== ========
See Notes to Consolidated Financial Statements
2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------
2005 2004
-------- --------
Revenues:
Net investment income $263,941 $285,864
Contractholder charges 10,805 8,278
Mortality and expense risk and other fees 30,185 17,123
Net realized (loss) gain on investments (1,985) 5,116
-------- --------
Total 302,946 316,381
-------- --------
Benefits and Expenses:
Death and other benefits for investment contracts 10,678 10,140
Interest credited to account values 156,110 171,760
Amortization of deferred policy acquisition costs 49,630 39,605
Separation costs 5,023 -
Other insurance and operating expenses 48,828 54,100
-------- --------
Total 270,269 275,605
-------- --------
Income before income tax provision and accounting change 32,677 40,776
Income tax provision 8,980 21,949
-------- --------
Income before accounting change 23,697 18,827
Cumulative effect of accounting change, net of tax - (3,562)
-------- --------
Net income $ 23,697 $ 15,265
======== ========
See Notes to Consolidated Financial Statements
3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,697 $ 15,265
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in accrued investment income 694 (260)
Change in deferred policy acquisition costs, net (18,384) (18,103)
Change in deferred sales inducement costs, net (4,253) (2,985)
Change in policy claims and other policyholders' funds 6,518 4,157
Deferred income taxes 19,489 23,205
Change in other assets and liabilities, net 6,112 1,156
Amortization of premium, net 18,480 19,671
Net realized loss (gain) on investments 1,985 (5,116)
Cumulative effect of accounting change, net of tax - 3,562
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 54,338 40,552
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 411,557 235,867
Maturities, sinking fund payments and calls 398,647 310,338
Purchases (582,553) (295,629)
Other investments:
Sales, maturities, sinking fund payments and calls 65,176 97,272
Purchases (6,206) (6,272)
Change in amounts due to and from brokers, net (143) (78,897)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 286,478 262,679
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 49,933 172,821
Interest credited to account values 156,110 171,760
Surrenders and other benefits (587,873) (576,535)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (381,830) (231,954)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (41,014) 71,277
Cash and cash equivalents at beginning of period 47,356 9,065
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,342 $ 80,342
========= =========
SUPPLEMENTAL DISCLOSURES:
Income taxes refunded $ (353) $ (4,754)
Interest paid on borrowings $ 54 $ 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 income:
Net income 15,265 15,265
Change in net unrealized holding
gains on Available-for-Sale
securities, net 7,718 7,718
Reclassification adjustment for
losses on derivatives included in
net income, net 3,301 3,301
--------
Total comprehensive income 26,284
..............................................................................................................................
Balances at September 30, 2004 $849,963 $3,000 $591,872 $ 62,281 $192,810
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $851,715 $3,000 $591,872 $ 57,668 $199,175
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net income 23,697 23,697
Change in net unrealized holding
losses on Available-for-Sale
securities, net (69,484) (69,484)
Reclassification adjustment for
losses on derivatives included in
net income, net 3,301 3,301
--------
Total comprehensive loss (42,486)
..............................................................................................................................
Balances at September 30, 2005 $809,229 $3,000 $591,872 $ (8,515) $222,872
=============================================================================================================================
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 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. Effective as of the close of
business on September 30, 2005, American Express Company (American
Express) completed the separation of Ameriprise Financial and the
distribution of the Ameriprise Financial common stock to American Express
shareholders in a tax free spin-off (the Distribution).
In connection with the Distribution, Ameriprise Financial entered into
certain agreements with American Express to effect the separation of
its business and to define the responsibility for obligations arising
before and after the date of the Distribution, including, among others,
obligations relating to transition services, taxes, and employees.
American Enterprise Life was allocated certain separation and
distribution-related expenses incurred as a result of Ameriprise
Financial becoming an independent company.
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. Separation costs generally consist of allocated
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. For the
three and nine months ended September 30, 2005, American Enterprise
Life was allocated $3.4 million and $5.0 million, respectively, in
separation costs.
6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Application of Recently Issued Accounting Standards
---------------------------------------------------
On November 3, 2005, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments." FSP FAS 115-1 and FAS 124-1 addresses the determination
as to when an investment is considered impaired, whether that
impairment is other-than-temporary and the measurement of loss. It also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting
periods beginning after December 15, 2005. American Enterprise Life is
currently evaluating the impact of FSP FAS 115-1 and FAS 124-1 on
American Enterprise Life's results of operations and financial
position.
In September 2005, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 05-1, "Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts" (SOP 05-1). SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment
contracts other than those specifically described in Statement of
Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments." SOP 05-1 is
effective for internal replacements occurring in fiscal years beginning
after December 15, 2006, with earlier adoption encouraged. American
Enterprise Life is currently evaluating the impact of SOP 05-1 on
American Enterprise Life's results of operations and financial
position.
In June 2004, the FASB issued FSP No. 97-1, "Situations in Which
Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments (SFAS
No. 97), Permit or Require Accrual of an Unearned Revenue Liability"
(FSP 97-1). The implementation of the AICPA Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP
03-1) raised a
7
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
question regarding the interpretation of the requirements of SFAS No.
97 concerning when it is appropriate to record an unearned revenue
liability. FSP 97-1 clarifies that SFAS No. 97 is clear in its intent
and language, and requires the recognition of an unearned revenue
liability for amounts that have been assessed to compensate insurers
for services to be performed over future periods. SOP 03-1 describes
one situation, when assessments result in profits followed by losses,
where an unearned revenue liability is required. SOP 03-1 does not
amend SFAS No. 97 or limit the recognition of an unearned revenue
liability to the situation described in SOP 03-1. The guidance in FSP
97-1 is effective for financial statements for fiscal periods beginning
after June 18, 2004. The adoption of FSP 97-1 did not have a material
impact on American Enterprise Life's consolidated financial condition
or results of operations.
In July 2003, the AICPA 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.
The AICPA released a series of technical practice aids (TPAs) in
September 2004, which provide additional guidance related to, among
other things, the definition of an insurance benefit feature and the
definition of policy assessments in determining benefit liabilities, as
described within SOP 03-1. The TPAs did not have a material effect on
American Enterprise Life's calculation of liabilities that were
recorded in the first quarter of 2004 upon adoption of SOP 03-1.
8
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 nine months ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
(thousands) 2005 2004 2005 2004
------- ------ ------- -------
Gross realized gains on sales $ 1,381 $1,533 $ 7,726 $ 7,260
Gross realized losses on sales $(1,463) $ (578) $(8,392) $(2,045)
Other-than-temporary impairments $ - $ - $ (229) $ -
3. DEFERRED POLICY ACQUISITION COSTS
The balances and changes in deferred policy acquisition costs were as
follows:
Nine Months Ended Year Ended
September 30, 2005 December 31, 2004
------------------ -----------------
(thousands) (Unaudited)
Balance, beginning of period $299,708 $296,722
Impact of SOP 03-1 - 1,204
Capitalization of acquisition costs 68,014 76,378
Amortization, excluding impact of changes in assumptions (52,430) (61,936)
Amortization, impact of annual third quarter changes in
DAC-related assumptions 2,800 1,100
Impact of changes in net unrealized securities losses
(gains) 15,717 (13,760)
-------- --------
Balance, end of period $333,809 $299,708
======== ========
4. INCOME TAXES
American Enterprise Life's effective tax rate was 23 percent during the
three months ended September 30, 2005 compared to 14 percent in the
three months ended September 30, 2004, due to prior year tax
adjustments. American Enterprise Life's effective tax rate was 27
percent for the nine months ended September 30, 2005 compared to 54
percent for the nine months ended September 30, 2004. The variance
reflects a reduction in net deferred tax assets which increased the
effective rate in 2004.
As a result of the separation of Ameriprise Financial from American
Express, American Enterprise Life will be required to file a short
period income tax return through September 30, 2005 which will be
included as part of the American Express consolidated income tax return
for the year ending December 31, 2005. American Enterprise Life will
also be required to file a separate short period tax return as part of
an IDS Life consolidated life insurance company income tax return for
the period October 1, 2005 through December 31, 2005.
9
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. REGULATORY REQUIREMENTS
American Enterprise Life is subject to regulatory capital requirements.
The actual capital, determined on a statutory basis, as of September
30, 2005 and December 31, 2004 was $631.5 million and $585.0 million,
respectively. The regulatory capital requirement, based on the most
recent statutory risk-based capital filing was $138.8 million as of
December 31, 2004.
6. COMMITMENTS AND CONTINGENCIES
At September 30, 2005 and December 31, 2004, American Enterprise Life
had commitments to fund mortgage loans on real estate of $5.3 million
and $0.2 million, respectively.
The Securities and Exchange Commission, the National Association of
Securities Dealers and several state attorneys general have brought
proceedings challenging several mutual fund and variable product
financial practices, generally including suitability, late trading,
market timing and disclosure of revenue sharing arrangements. 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. 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 its 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 recently completed its audit of American Enterprise
Life for the 1993 through 1996 tax years. The IRS is currently
conducting an audit of American Enterprise Life 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 or results of operations as a result of these audits.
10
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.
The following discussion may contain forward-looking statements that reflect
American Enterprise Life'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 below under "Forward-Looking
Statements."
American Enterprise Life principally issues fixed and variable annuity
contracts primarily through regional and national financial institutions and
regional and/or independent broker-dealers, outside New York. American
Enterprise Life Insurance Company 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.
Effective as of the close of business on September 30, 2005, American
Express Company (American Express) completed the separation of Ameriprise
Financial and the distribution of the Ameriprise Financial common stock to
American Express shareholders in a tax free spin-off (the Distribution).
In connection with the Distribution, Ameriprise Financial entered into
certain agreements with American Express to effect the separation of its
business and to define the responsibility for obligations arising before and
after the date of the Distribution, including, among others, obligations
relating to transition services, taxes, and employees. American Enterprise
Life was 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 significant to American Enterprise Life.
American Enterprise Life follows United States generally accepted accounting
principles (GAAP), and the following discussion is presented on a
consolidated basis consistent with GAAP.
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Net income was $12.5 million for the three months ended September 30, 2005,
compared to $10.9 million for the three months ended September 30, 2004. The
increase reflects lower interest credited and other insurance and operating
expenses, partially offset by higher amortization of deferred policy
acquisition costs and separation costs.
11
REVENUES
Net investment income decreased $8.8 million or 9 percent reflecting lower
average balances of invested assets.
Mortality and expense risk and other fees increased $5.2 million or 80
percent, reflecting higher average market values of separate account assets
and higher net inflows on variable annuity products.
Net realized loss on investments was $0.1 million for the three months ended
September 30, 2005 compared to a net realized gain on investments of $1.0
million for the three months ended September 30, 2004. For the three months
ended September 30, 2005, $1.4 million of total investment gains were offset
by $1.5 million of losses. Included in these total net investment gains and
losses were $1.4 million of gross realized gains and $1.5 million of gross
realized losses from sales of securities, classified as Available-for-Sale.
For the three months ended September 30, 2004, $2.8 million of total
investment gains were partially offset by $1.8 million of losses. Included
in these total net investment gains and losses were $1.5 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
Death and other benefits for investment contracts decreased $3.6 million
primarily reflecting favorable mark-to-market adjustments on guaranteed
minimum withdrawal benefit rider reserves on variable annuity products.
Interest credited to account values decreased $7.2 million or 13 percent
reflecting lower average accumulation values and lower interest crediting
rates on fixed annuity products.
Amortization of deferred policy acquisition costs (DAC) increased to $17.2
million for the three months ended September 30, 2005 from $9.4 million for
the three months ended September 30, 2004. The increase reflects higher
annuity DAC balances, partially offset by the impact of American Enterprise
Life's annual third quarter review of various DAC assumptions and practices.
See the DAC section below for further discussion of DAC and related third
quarter 2005 and 2004 adjustments.
Separation costs generally consist of allocated 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 September 30, 2005, American
Enterprise Life recorded $3.4 million in allocated separation costs.
Other insurance and operating expense decreased $7.8 million or 32 percent
primarily reflecting favorable mark-to-market adjustments on interest rate
swaps for the quarter ended September 30, 2005 compared to the quarter ended
September 30, 2004.
INCOME TAXES
The effective tax rate increased to 23 percent in the three months ended
September 30, 2005 from 14 percent in the three months ended September 30,
2004, due to prior year tax adjustments.
12
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Income before income tax provision and accounting change was $32.7 million
for the nine months ended September 30, 2005, compared to $40.8 million for
the nine months ended September 30, 2004. The decrease primarily reflects
lower net investment income, as further described below.
Net income was $23.7 million for the nine months ended September 30, 2005,
compared to $15.3 million for the nine months ended September 30, 2004. Net
income for the nine months ended September 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.
REVENUES
Net investment income decreased $21.9 million or 8 percent reflecting lower
average balances of invested assets.
Mortality and expense risk and other fees increased $13.1 million or 76
percent, reflecting higher average market values of separate account assets
and higher net inflows on variable annuity products.
Net realized loss on investments was $2.0 million for the nine months ended
September 30, 2005 compared to a net realized gain on investments of $5.1
million for the nine months ended September 30, 2004. For the nine months
ended September 30, 2005, $7.7 million of total investment gains were offset
by $9.7 million of losses and impairments. Included in these total net
investment gains and losses were $7.7 million of gross realized gains and
$8.4 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 nine months ended
September 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 nine months ended September 30, 2004, $9.0 million of total
investment gains were partially offset by $3.9 million of losses and
impairments. Included in these total net investment gains and losses were
$7.3 million of gross realized gains and $2.0 million of gross realized
losses from sales of securities, classified as Available-for-Sale.
13
BENEFITS AND EXPENSES
Interest credited to account values decreased $15.7 million or 9 percent
reflecting lower average accumulation values and lower interest crediting
rates on fixed annuity products.
Amortization of DAC increased to $49.6 million for the nine months ended
September 30, 2005 from $39.6 million for the nine months ended September
30, 2004. The increase reflects higher annuity DAC balances, partially
offset by the impact of American Enterprise Life's annual third quarter
review of various DAC assumptions and practices. See the DAC section below
for further discussion of DAC and related third quarter 2005 and 2004
adjustments.
Separation costs generally consist of allocated 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. For the nine months ended September 30, 2005, American
Enterprise Life recorded $5.0 million in allocated separation costs.
Other insurance and operating expense decreased $5.3 million or 10 percent
primarily reflecting favorable mark-to-market adjustments on interest rate
swaps in the nine months ended September 30, 2005 compared to the same
period a year ago.
INCOME TAXES
The effective tax rate decreased to 27 percent in the nine months ended
September 30, 2005 from 54 percent in the nine months ended September 30,
2004. The effective tax rate in the nine months ended September 30, 2004
included a reduction in net deferred tax assets which increased the
effective rate.
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.
14
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. As a result of these reviews, American
Enterprise Life took actions in the third quarter of 2005 and 2004 that
impacted DAC balances and expenses. In the third quarter 2005, these actions
resulted in a net $2.8 million DAC amortization expense reduction reflecting
lower than previous assumed lapse rates on fixed annuities.
In the third quarter 2004, these actions resulted in a net $1.1 million DAC
amortization expense reduction reflecting higher than previously assumed
interest rate spreads and lower than previously assumed mortality rates on
variable annuity products.
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 behavior of the liabilities underlying the
product 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 that are
designed to optimize trade-offs between risk and return and help ensure the
company is able 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.
15
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 investment income, maturities and periodic repayments of
investments, deposits, proceeds from sales of investments as well as 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 September 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 and $0.5 billion of below investment grade
securities (excluding net unrealized appreciation and depreciation) at
September 30, 2005 and December 31, 2004, respectively. These investments
represent 7 percent and 8 percent of American Enterprise Life's investment
portfolio at September 30, 2005 and December 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.
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), guaranteed minimum income benefits (GMIB), guaranteed
minimum accumulation benefits (GMAB) and certain other variable annuity
benefits, asset management fees, 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, GMIB, GMAB and
other variable annuity benefit provisions, asset management fees 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.
16
OTHER REPORTING MATTERS
Accounting Developments
See "Application of Recently Issued Accounting Standards" section of Note 1
to the Consolidated Financial Statements.
17
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
American Enterprise Life 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 the regulations of the Securities and
Exchange Commission, including controls and procedures designed to ensure
that this information is accumulated and communicated to American Enterprise
Life'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,
American Enterprise Life'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.
American Enterprise Life's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, American Enterprise
Life's Chief Executive Officer and Chief Financial Officer have concluded
that American Enterprise Life's disclosure controls and procedures were
effective at a reasonable level of assurance as of September 30, 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
American Express has historically provided a variety of corporate and other
support services for American Enterprise Life, including information
technology, treasury, accounting, financial reporting, tax administration,
human resources, marketing, legal, procurement and other services. American
Express will continue to provide American Enterprise Life with many of these
services pursuant to a transition services agreement for a transition period
of up to two years following the separation and distribution. American
Enterprise Life is now relying upon American Express as a third party to
perform these services, many of which may impact our financial reporting
processes. During this transition there have been some changes in personnel
and in relative responsibility for oversight of the processes. American
Enterprise Life considers this a material change in internal controls over
financial reporting.
Other than the changes mentioned above, no other 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 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, the following: the success,
timeliness and financial impact (including the amount of intercompany costs
allocated to American Enterprise Life, cost savings and other benefits
including increased revenues), both in the short-term and over time, of
reengineering initiatives being implemented or considered by Ameriprise
Financial that could impact American Enterprise Life, including cost
management, structural and strategic measures such as vendor, process,
facilities and operations consolidation, outsourcing (including, among
others, technologies operations), moving internal and external functions to
the Internet to save costs, and planned staff
18
reductions relating to certain of such reengineering actions; the ability to
control and manage operating, infrastructure, advertising and promotion
expenses as business expands or changes; a downturn in American Enterprise
Life's businesses and/or negative changes in American Enterprise Life's
credit or financial strength ratings, which could result in decreased
liquidity, negative impact on marketing and sale of products, and higher
borrowing costs; American Enterprise Life's ability to improve investment
performance and reduce outflows of invested funds; American Enterprise
Life's ability to develop and introduce new and attractive products to
clients in a timely manner and effectively manage the economics in selling a
growing volume of non-proprietary mutual funds and other retail financial
products to clients; 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
acquisition costs (DAC), as well as the timing of such DAC amortization, in
connection with the sale of annuity and insurance products, and the level of
guaranteed minimum death benefits paid to clients; changes in assumptions
relating to DAC, which could impact the amount of DAC amortization; American
Enterprise Life's ability to avoid deterioration in its high-yield portfolio
in order to mitigate losses in its investment portfolio; fluctuations in
interest rates, which impact American Enterprise Life's borrowing costs,
return on lending products and spreads in the insurance and annuity
products; accuracy of estimates for the fair value of the assets in American
Enterprise Life's investment portfolio and, in particular, those investments
that are not readily marketable; 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; changes in laws or government regulations, including changes in
tax laws or regulations that could result in the elimination of certain tax
benefits; outcomes and costs associated with litigation and compliance and
regulatory matters; lower than anticipated spreads in the annuity business;
the type and the value of certain 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; and competitive pressures in American Enterprise Life's
business. A further description of these and other risks and uncertainties
can be found in American Enterprise Life's Annual Report on Form 10-K for
the year ended December 31, 2004, and its other reports filed with the
Securities and Exchange Commission.
19
PART II. OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Securities and Exchange Commission, the National
Association of Securities Dealers and several state
attorneys general have brought proceedings challenging
several mutual fund and variable product financial
practices, generally including suitability, late trading,
market timing and disclosure of revenue sharing arrangements.
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. 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 its 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
See Exhibit Index on page E-1 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
------------------------------------------
(Registrant)
Date: November 14, 2005 By /s/ Mark E. Schwarzmann
-----------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: November 14, 2005 By /s/ Brian J. McGrane
-----------------------------------
Brian J. McGrane
Executive Vice President and
Chief Financial Officer
21
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
- ------- -----------
*10.1 Copy of Investment Management and Services Agreement by and
between American Enterprise Life Insurance Company and
RiverSource Investments, LLC, dated October 1, 2005.
*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 Brian J. McGrane pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended.
*32.1 Certification of Mark E. Schwarzmann 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.
<FN>
* Filed electronically herewith.
E-1