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 33-28976
IDS LIFE INSURANCE COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
- -------------------------------- ------------------------------------
(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 $30 per share) 100,000 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.
IDS 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 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 4. Controls and Procedures 21-22
PART II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits 23
Signatures 24
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS 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, $27,530,031;
2004, $27,400,640) $27,685,727 $28,131,195
Preferred and common stocks, at fair value (cost: 2005 and 2004, $30,019) 31,087 31,256
Mortgage loans on real estate, at cost (less reserves: 2005, $41,347; 2004,
$45,347) 2,867,434 2,923,542
Policy loans 596,352 588,574
Trading and other investments 605,432 802,096
----------- -----------
Total investments 31,786,032 32,476,663
Cash and cash equivalents 1,195,830 131,427
Restricted cash - 535,821
Reinsurance recoverables 942,763 876,408
Amounts due from brokers 10,006 7,109
Other accounts receivable 62,233 52,527
Accrued investment income 337,256 351,522
Deferred policy acquisition costs 3,944,432 3,637,956
Deferred sales inducement costs 357,726 302,997
Other assets 123,663 186,003
Separate account assets 36,210,399 32,454,032
----------- -----------
Total assets $74,970,340 $71,012,465
=========== ===========
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $26,460,685 $26,978,596
Variable annuity guarantees 23,683 32,955
Universal life insurance 3,702,216 3,689,639
Traditional life insurance 291,363 271,516
Disability income and long-term care insurance 2,092,272 1,942,656
Policy claims and other policyholders' funds 83,145 69,884
Amounts due to brokers 104,221 162,609
Deferred income taxes, net 71,578 141,202
Other liabilities 378,664 363,821
Separate account liabilities 36,210,399 32,454,032
----------- -----------
Total liabilities 69,418,226 66,106,910
----------- -----------
Stockholder's equity:
Capital stock, $30 par value;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 2,020,388 1,370,388
Retained earnings 3,532,550 3,190,474
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities gains 34,541 370,615
Net unrealized derivative losses (38,365) (28,922)
----------- -----------
Total accumulated other comprehensive (loss) income (3,824) 341,693
----------- -----------
Total stockholder's equity 5,552,114 4,905,555
----------- -----------
Total liabilities and stockholder's equity $74,970,340 $71,012,465
=========== ===========
See Notes to Consolidated Financial Statements
1
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
September 30,
------------------------------
2005 2004
-------- --------
Revenues:
Premiums:
Traditional life insurance $ 15,933 $ 17,040
Disability income and long-term care insurance 74,310 71,879
-------- --------
Total premiums 90,243 88,919
Net investment income 461,450 443,534
Contractholder and policyholder charges 145,477 139,449
Mortality and expense risk and other fees 125,559 106,420
Net realized gain on investments 8,070 788
-------- --------
Total 830,799 779,110
-------- --------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 10,144 6,921
Investment contracts and universal life-type insurance 49,453 51,442
Disability income and long-term care insurance 18,895 18,726
Increase in liabilities for future policy benefits:
Traditional life insurance 517 104
Disability income and long-term care insurance 49,200 33,067
Interest credited to account values 278,623 278,902
Amortization of deferred policy acquisition costs 24,543 63,446
Separation costs 38,915 -
Other insurance and operating expenses 152,414 128,754
-------- --------
Total 622,704 581,362
-------- --------
Income before income tax provision 208,095 197,748
Income tax provision 83,024 65,245
-------- --------
Net income $125,071 $132,503
======== ========
See Notes to Consolidated Financial Statements
2
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
2005 2004
---------- ----------
Revenues:
Premiums:
Traditional life insurance $ 52,690 $ 51,094
Disability income and long-term care insurance 218,429 210,245
---------- ----------
Total premiums 271,119 261,339
Net investment income 1,343,160 1,323,351
Contractholder and policyholder charges 431,291 413,833
Mortality and expense risk and other fees 348,727 315,402
Net realized gain on investments 45,909 18,301
---------- ----------
Total 2,440,206 2,332,226
---------- ----------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 30,724 27,011
Investment contracts and universal life-type insurance 168,177 168,149
Disability income and long-term care insurance 55,094 50,262
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 2,927 (512)
Disability income and long-term care insurance 108,766 87,753
Interest credited to account values 832,244 841,982
Amortization of deferred policy acquisition costs 221,818 175,230
Separation costs 64,687 -
Other insurance and operating expenses 438,109 374,166
---------- ----------
Total 1,922,546 1,724,041
---------- ----------
Income before income tax provision and accounting change 517,660 608,185
Income tax provision 175,584 205,781
---------- ----------
Income before accounting change 342,076 402,404
Cumulative effect of accounting change, net of tax - (70,568)
---------- ----------
Net income $ 342,076 $ 331,836
========== ==========
See Notes to Consolidated Financial Statements
3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 342,076 $ 331,836
Adjustments to reconcile net income to net cash provided by operating
activities:
Policy loans, excluding universal life-type insurance
Repayment 27,239 28,693
Issuance (29,061) (29,587)
Change in reinsurance recoverables (66,355) (88,877)
Change in other accounts receivable (9,706) 30,773
Change in accrued investment income 14,266 (3,602)
Change in deferred policy acquisition costs, net (246,578) (222,936)
Change in deferred sales inducement costs, net (45,183) (28,833)
Change in liabilities for future policy benefits for traditional
life, disability income and long-term care insurance 169,463 165,220
Change in policy claims and other policyholders' funds 13,261 9,749
Deferred income taxes 116,423 54,248
Change in other assets and liabilities, net 98,979 (12,935)
Amortization of premium, net 66,363 68,107
Net realized gain on investments (45,909) (18,301)
Trading securities and equity method investments in hedge funds,
net 187,944 (12,275)
Net realized gain on trading securities (19,236) (21,982)
Contractholder and policyholder charges, non-cash (175,430) (174,704)
Cumulative effect of accounting change, net of tax - 70,568
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 398,556 145,162
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 2,394,030 1,235,236
Maturities, sinking fund payments and calls 1,527,979 1,577,817
Purchases (4,065,968) (3,037,184)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 501,096 517,035
Purchases (419,774) (301,334)
Change in amounts due to and from brokers, net (61,285) (236,195)
Change in restricted cash 535,821 323,949
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 411,899 79,324
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 1,227,285 1,768,159
Interest credited to account values 832,244 841,982
Surrenders and other benefits (2,449,625) (2,015,188)
Universal life-type insurance policy loans:
Repayment 71,228 66,526
Issuance (77,184) (69,370)
Cash dividend to Ameriprise Financial, Inc. - (430,000)
Capital contribution from Ameriprise Financial, Inc. 650,000 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 253,948 162,109
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,064,403 386,595
Cash and cash equivalents at beginning of period 131,427 400,294
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,195,830 $ 786,889
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 100,707 $ 154,716
Interest paid on borrowings $ 84 $ 379
See Notes to Consolidated Financial Statements
4
IDS 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 $5,397,836 $3,000 $1,370,388 $ 399,611 $3,624,837
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 331,836 331,836
Change in net unrealized holding
gains on Available-for-Sale
securities, net 39,304 39,304
Reclassification adjustment for gains
on derivatives included in net
income, net (18,857) (18,857)
----------
Total comprehensive income 352,283
Cash dividends to Ameriprise
Financial, Inc. (430,000) (430,000)
...............................................................................................................................
Balances at September 30, 2004 $5,320,119 $3,000 $1,370,388 $ 420,058 $3,526,673
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $4,905,555 $3,000 $1,370,388 $ 341,693 $3,190,474
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net income 342,076 342,076
Change in net unrealized holding
losses on Available-for-Sale
securities, net (336,074) (336,074)
Reclassification adjustment for gains
on derivatives included in net
income, net (9,443) (9,443)
----------
Total comprehensive loss (3,441)
Capital contribution from Ameriprise
Financial, Inc. 650,000 650,000
...............................................................................................................................
Balances at September 30, 2005 $5,552,114 $3,000 $2,020,388 $ (3,824) $3,532,550
==============================================================================================================================
See Notes to Consolidated Financial Statements
5
IDS 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 IDS Life Insurance Company (IDS 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
----------------------------------
IDS Life Insurance Company 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. IDS
Life was allocated certain separation and distribution-related expenses
incurred as a result of Ameriprise Financial becoming an independent
company. IDS Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its
current financial strength ratings and to cover the allocated
separation costs.
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 IDS Life that it considered to be a reasonable
reflection of separation costs benefiting IDS Life. Separation costs
generally consist of allocated financial advisor and 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, IDS Life was allocated $38.9 million and
$64.7 million, respectively, in separation costs.
6
IDS 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. IDS Life is currently
evaluating the impact of FSP FAS 115-1 and FAS 124-1 on IDS 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. IDS Life is
currently evaluating the impact of SOP 05-1 on IDS 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 SOP 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1)
7
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
raised a 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 IDS 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 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 the first quarter 2004 results by
$70.6 million ($108.6 million pretax). The cumulative effect of accounting
change consisted of: (i) $42.9 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits ($32.8 million)
and from considering these liabilities in valuing DAC and deferred sales
inducement costs associated with those contracts ($10.1 million) and (ii)
$65.7 million pretax from establishing additional liabilities for certain
variable universal life and single pay universal life insurance contracts
under which contractual cost of insurance charges are expected to be less
than future death benefits ($92 million) and from considering these
liabilities in valuing DAC associated with those contracts ($26.3 million
offset). Prior to the adoption of SOP 03-1, amounts paid in excess of
contract value were expensed when payable. IDS 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 IDS Life's calculation of
liabilities that were recorded in the first quarter of 2004 upon adoption of
SOP 03-1.
8
IDS 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,
---------------------- -----------------------
2005 2004 2005 2004
------- ------- -------- --------
(thousands)
Gross realized gains on sales $11,350 $10,102 $ 83,713 $ 33,871
Gross realized losses on sales $(3,121) $(5,265) $(35,368) $(11,654)
Other-than-temporary impairments $ - $ - $ (636) $ (130)
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 $3,637,956 $3,336,208
Impact of SOP 03-1 - 19,600
Capitalization of acquisition costs 468,397 534,069
Amortization, excluding impact of changes in assumptions (288,818) (340,578)
Amortization, impact of annual third quarter changes in
DAC-related assumptions 67,000 23,700
Amortization, impact of other quarter changes in
DAC-related assumptions (a) - 56,100
Impact of changes in net unrealized securities losses 59,897 8,857
---------- ----------
Balance, end of period $3,944,432 $3,637,956
========== ==========
<FN>
(a) Primarily relates to a $65.7 million reduction in DAC amortization
expense to reflect the lengthening of the amortization periods for
certain annuity and life insurance products impacted by IDS Life's
adoption of SOP 03-1 on January 1, 2004, partially offset by a $9.6
million increase in amortization expense due to a long-term care DAC
valuation system conversion.
9
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. INCOME TAXES
IDS Life's effective tax rate was 40 percent during the three months
ended September 30, 2005 compared to 33 percent in the three months
ended September 30, 2004. The increased effective tax rate primarily
reflects a $20 million tax expense applicable to prior years partially
offset by a $9 million tax benefit related to the finalization of the
prior year tax return. IDS Life's effective tax rate was 34 percent for
the nine months ended September 30, 2005, which resulted from
relatively lower levels of pretax income compared to tax-advantaged
items in 2005, partially offset by a $20 million tax expense applicable
to prior years and a $9 million tax benefit related to the finalization
of the prior year tax return. IDS Life's effective tax rate was 34
percent for the nine months ended September 30, 2004, which included a
reduction in net deferred tax assets.
IDS Life is required to establish a valuation allowance for any portion
of the deferred tax assets that management believes will not be
realized. Among our deferred tax assets is a significant deferred tax
asset relating to capital losses realized for tax return purposes and
capital losses that have been recognized for financial statement
purposes but not yet for tax return purposes. Under current U.S.
federal income tax law, capital losses generally must be used against
capital gain income within five years of the year in which the capital
losses are recognized for tax purposes. IDS Life has less than $50
million in capital loss carryforwards that must be utilized by December
31, 2005, as well as additional capital loss carryforwards that expire
on December 31, 2009. Based on analysis of IDS Life's tax position,
management believes it is more likely than not that the results of
future operations and implementation of tax planning strategies will
generate sufficient taxable income to enable IDS Life to utilize all of
its deferred tax assets. Accordingly, no valuation allowance for
deferred tax assets has been established.
As a result of the separation of Ameriprise Financial from American
Express, IDS 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. IDS Life will also be required to file a separate
short period consolidated life insurance company income tax return for
the period October 1, 2005 through December 31, 2005.
5. REGULATORY REQUIREMENTS
IDS Life Insurance Company and its wholly-owned life insurance
subsidiaries are subject to regulatory capital requirements. Actual
capital, determined on a statutory basis, and regulatory capital
requirements based on the most recent statutory risk-based capital
filings for each of the life insurance entities are:
Regulatory Capital
Actual Capital Requirement
----------------------------------- ------------------
September 30, December 31, December 31,
2005 2004 2004
(thousands) ------------- ------------ -----------------
IDS Life Insurance Company $3,583,159 $2,650,820 $745,861
American Enterprise Life Insurance Company 631,493 584,958 138,836
IDS Life Insurance Company of New York 240,807 238,155 44,076
American Partners Life Insurance Company 66,393 58,721 10,898
American Centurion Life Assurance Company 61,333 53,437 13,770
10
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
At September 30, 2005 and December 31, 2004, IDS Life had commitments
to fund mortgage loans on real estate of $121.8 million and $92.5
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. IDS Life has
received requests for information and has been contacted by regulatory
authorities concerning its practices and is cooperating fully with
these inquiries.
IDS Life is involved in a number of other legal and arbitration
proceedings concerning matters arising in connection with the conduct
of its business activities. In addition, IDS Life is subject to
periodic state insurance department regulatory action, through
examinations or other proceedings. IDS 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 IDS Life's federal income tax returns and
recently completed its audit of IDS Life for the 1993 through 1996 tax
years. The IRS is currently conducting an audit of IDS Life for the
1997 through 2002 tax years. Management does not believe there will be
a material adverse effect on IDS Life's consolidated financial position
or results of operations as a result of these audits.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IDS Life Insurance Company is a stock life insurance company organized
under the laws of the State of Minnesota. IDS Life Insurance Company
and its six subsidiaries are referred to collectively as "IDS Life" in
this Form 10-Q. IDS Life Insurance Company 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 IDS 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."
IDS Life Insurance Company serves residents of the District of Columbia
and all states except New York. IDS Life Insurance Company distributes
its fixed and variable insurance and annuity products almost
exclusively through the Ameriprise Financial Services, Inc. (AFSI)
(formerly known as American Express Financial Advisors Inc.) retail
sales force. IDS Life Insurance Company has four wholly-owned life
insurance company subsidiaries: IDS Life Insurance Company of New York,
a New York stock life insurance company (IDS Life of New York);
American Partners Life Insurance Company, an Arizona stock life
insurance company (American Partners Life); American Enterprise Life
Insurance Company, an Indiana stock life insurance company (American
Enterprise Life); and American Centurion Life Assurance Company, a New
York stock life insurance company (American Centurion Life). IDS Life
of New York serves New York State residents and distributes its fixed
and variable insurance and annuity products exclusively through the
AFSI retail sales force. American Enterprise Life issues fixed and
variable annuity contracts primarily through regional and national
financial institutions and regional and/or independent broker-dealers,
outside New York. American Centurion Life offers fixed and variable
annuity contracts directly to American Express(R) Cardmembers and
others in New York, as well as fixed and variable annuity contracts for
sale through non-affiliated representatives and agents of third party
distributors, in New York. American Partners Life offers fixed and
variable annuity contracts directly to American Express(R) Cardmembers
and others who reside in states other than New York. IDS Life Insurance
Company also owns IDS REO 1, LLC and IDS REO 2, LLC which hold real
estate investments.
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. IDS
Life was allocated certain separation and distribution-related expenses
incurred as a result of Ameriprise Financial becoming an independent
company. IDS Life received a capital contribution of $650 million from
Ameriprise Financial during the third quarter of 2005 to support its
current financial strength ratings and to cover the allocated
separation costs.
12
IDS 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 $125.1 million for the three months ended September 30,
2005 compared to $132.5 million for the three months ended September
30, 2004. The decrease in net income primarily reflects separation
costs, higher other insurance and operating expenses and a higher
effective tax rate, partially offset by a reduction in amortization of
deferred policy acquisition costs.
REVENUES
Net investment income increased $17.9 million or 4 percent reflecting
$7.1 million higher mark-to-market gains on trading securities and
equity method investments in hedge funds, as well as a net $7.7 million
increase due to the effect of appreciation during the current quarter
versus depreciation in the same period a year ago in the S&P on the
value of options hedging equity indexed annuities, which was offset in
related benefits and expenses. The average level of invested assets and
the average yield on invested assets were comparable in both periods.
Contractholder and policyholder charges increased $6.0 million or 4
percent reflecting an increase in the amount of cost of insurance
charges on variable universal life products, as well as an increase in
the amount of surrender charges on variable annuity products.
Mortality and expense risk and other fees increased $19.1 million or 18
percent reflecting higher average market values of separate account
assets.
Net realized gain on investments was $8.1 million for the three months
ended September 30, 2005 compared to $0.8 million for the three months
ended September 30, 2004. For the three months ended September 30,
2005, $11.4 million of total investment gains were partially offset by
$3.3 million of losses. Included in these total net investment gains
and losses were $11.4 million of gross realized gains partially offset
by $3.1 million of gross realized losses from sales of securities,
classified as Available-for-Sale.
For the three months ended September 30, 2004, $13.7 million of total
investment gains were partially offset by $12.9 million of losses and
impairments. Included in these total net investment gains and losses
were $10.1 million of gross realized gains and $5.3 million of gross
realized losses from sales of securities, classified as
Available-for-Sale.
13
BENEFITS AND EXPENSES
Increase in liabilities for future policy benefits for disability
income and long-term care insurance increased $16.1 million or 49
percent primarily reflecting inclusion of a $13.3 million maintenance
reserve adjustment for long-term care insurance.
Amortization of deferred policy acquisition costs (DAC) decreased to
$24.5 million for the three months ended September 30, 2005 from $63.4
million for the three months ended September 30, 2004. The decrease
primarily reflects a net $67.0 million DAC amortization expense
reduction in the third quarter of 2005 compared to a net $23.7 million
DAC amortization expense reduction in the third quarter of 2004, both
as a result of IDS 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 financial advisor and
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, IDS Life was allocated $38.9 million
in separation costs.
Other insurance and operating expenses increased $23.7 million or 18
percent primarily reflecting increased non-deferrable distribution
costs.
INCOME TAXES
IDS Life's effective tax rate was 40 percent during the three months
ended September 30, 2005 compared to 33 percent in the three months
ended September 30, 2004. The increased effective tax rate primarily
reflects a $20 million tax expense applicable to prior years partially
offset by a $9 million tax benefit related to the finalization of the
prior year tax return.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Income before accounting change was $342.1 million for the nine months
ended September 30, 2005 compared to $402.4 million for the nine months
ended September 30, 2004. The decrease in income before accounting
change reflects separation costs, higher other insurance and operating
expenses and amortization of deferred policy acquisition costs,
partially offset by higher mortality and expense risk and other fees.
Net income was $342.1 million for the nine months ended September 30,
2005 compared to $331.8 million for the nine months ended September 30,
2004. Net income for the nine months ended September 30, 2004 reflects
the $70.6 million after-tax ($108.6 million pretax) cumulative effect
of accounting change as a result of IDS 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.
14
REVENUES
Disability income and long-term care insurance premiums increased $8.2
million or 4 percent reflecting higher disability income insurance
inforce levels.
Net investment income increased $19.8 million or 1 percent. The
increase reflects a $13.9 million pretax gain for 2005 compared to a
$24.2 million pretax charge in 2004 all related to the liquidation of
structured investments, partially offset by a $14.5 million decrease
primarily related to lower interest on mortgage investments and
$5.7 million lower mark-to-market gains on trading securities and equity
method investments in hedge funds. The average level of invested assets
and the average yield on invested assets were comparable in both periods.
Contractholder and policyholder charges increased $17.5 million or 4
percent reflecting an increase in the amount of cost of insurance
charges on variable universal life products, as well as an increase in
the amount of surrender charges on variable annuity products.
Mortality and expense risk and other fees increased $33.3 million or 11
percent reflecting higher average market values of separate account
assets.
Net realized gain on investments was $45.9 million for the nine months
ended September 30, 2005 compared to $18.3 million for the nine months
ended September 30, 2004. For the nine months ended September 30, 2005,
$83.8 million of total investment gains were partially offset by $37.9
million of losses and impairments. Included in these total net
investment gains and losses were $83.7 million of gross realized gains
partially offset by $35.4 million of gross realized losses from sales
of securities, as well as $0.6 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale.
Included in net realized gain on investments classified as
Available-for-Sale for the nine months ended September 30, 2005 were
gross realized gains and losses of $39.2 million and $14.3 million,
respectively, related to the sale of all of IDS 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, $40.2 million of total
investment gains were partially offset by $21.9 million of losses and
impairments. Included in these total net investment gains and losses
were $33.9 million of gross realized gains and $11.7 million of gross
realized losses from sales of securities, as well as $0.1 million of
other-than-temporary impairment losses on investments, classified as
Available-for-Sale.
BENEFITS AND EXPENSES
Increase in liabilities for future policy benefits for disability
income and long-term care insurance increased $21.0 million or 24
percent primarily reflecting inclusion of a $13.3 million maintenance
reserve adjustment for long-term care insurance.
Interest credited to account values decreased $9.7 million or 1
percent, primarily reflecting lower interest crediting rates on annuity
products, partially offset by higher average accumulation values and
inforce levels of life insurance products, as well as the effect of
higher appreciation during the first nine months of 2005 compared to
the same period a year ago in the S&P on equity indexed annuities.
15
Amortization of DAC increased to $221.8 million for the nine months
ended September 30, 2005 from $175.2 million for the nine months ended
September 30, 2004. The increase reflects the first quarter 2004 $65.7
million pretax DAC valuation benefit reflecting an adjustment
associated with the lengthening of amortization periods for certain
insurance and annuity products in conjunction with the adoption of SOP
03-1, as well as higher insurance and annuity DAC balances, partially
offset by the impact of IDS 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 financial advisor and
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, IDS Life was allocated $64.7
million in separation costs.
Other insurance and operating expenses increased $63.9 million or 17
percent primarily reflecting increased non-deferrable distribution
costs and business reinvestment initiatives.
INCOME TAXES
IDS Life's effective tax rate was 34 percent for the nine months ended
September 30, 2005, which resulted from relatively lower levels of
pretax income compared to tax-advantaged items in 2005, partially
offset by a $20 million tax expense applicable to prior years and a $9
million tax benefit related to the finalization of the prior year tax
return. IDS Life's effective tax rate was 34 percent for the nine
months ended September 30, 2004, which included a reduction in net
deferred tax assets.
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 and life and health insurance products. These costs are
deferred to the extent they are recoverable from future profits. For
insurance and annuity products, DAC are amortized over periods
approximating the lives of the business, generally as a percentage of
premiums or estimated gross profits or as a portion of product interest
margins depending on the product's characteristics.
For IDS Life's insurance and annuity products, the projections
underlying the amortization of DAC require the use of certain
assumptions, including interest margins, mortality rates, 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.
16
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, IDS Life took actions in the third quarters of 2005 and
2004 that impacted DAC balances and expenses. In the third quarter
2005, these actions resulted in a net $67.0 million DAC amortization
expense reduction consisting of the following:
o A $31.7 million reduction reflecting changes in previously assumed
mortality rates.
o A $32.8 million reduction reflecting lower than previously assumed
surrender rates and higher associated surrender charges.
o A $6.0 million reduction from improved average fee revenues.
o A $5.6 million reduction from the annual extension of the mean
reversion period by one year.
o A $9.1 million increase reflecting changes from previously assumed
interest rate spreads, modeling changes, account maintenance
expenses, and other miscellaneous items.
In the third quarter 2004, these actions resulted in a net $23.7
million DAC amortization expense reduction consisting of the following:
o A $4.2 million reduction reflecting changes in previously assumed
mortality rates.
o A $12.7 million reduction reflecting changes from previously assumed
surrender and lapse rates.
o A $3.3 million reduction from the annual extension of the mean
reversion period by one year.
o A $3.5 million reduction reflecting higher than previously assumed
interest rate spreads and other miscellaneous items.
During the first quarter of 2004 and in conjunction with the adoption
of SOP 03-1, IDS Life (1) established additional liabilities for
insurance benefits that may become payable under variable annuity death
benefit guarantees or on single pay universal life contracts, which
prior to January 1, 2004, were expensed when payable; and (2) extended
the time periods over which DAC associated with certain insurance and
annuity products are amortized to coincide with the liability funding
periods in order to establish the proper relationships between these
liabilities and DAC associated with the same contracts. As a result,
IDS Life recognized a $108.6 million pretax charge due to accounting
change on establishing the future liability under death benefit
guarantees and recognized a $65.7 million pretax reduction in DAC
amortization expense to reflect the lengthening of the amortization
periods for certain products impacted by SOP 03-1.
17
DAC balances for various insurance and annuity products sold by IDS
Life are set forth below:
September 30, 2005 December 31, 2004
------------------ -----------------
(millions) (Unaudited)
Life and health insurance $1,895 $1,766
Annuities 2,049 1,872
------ ------
Total $3,944 $3,638
====== ======
LIQUIDITY AND CAPITAL RESOURCES
Risk Management
IDS Life Insurance Company and its subsidiaries through their
respective 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 investment security
portfolios based upon the type and behavior of the liabilities
underlying the product portfolios to achieve targeted levels of
profitability within defined risk parameters and to meet contractual
obligations.
IDS Life has developed an asset/liability management approach with
separate investment objectives to support specific product liabilities,
such as insurance and annuities. As part of this approach, IDS Life
develops specific investment guidelines that are designed to optimize
trade-offs between risk and return and help ensure IDS Life 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.
IDS 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 IDS Life with a targeted margin between the yield earned on
investments and the interest rate credited to clients' accounts. IDS
Life does not trade in securities to generate short-term profits for
its own account.
As part of IDS Life's investment process, management, with the
assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process conducted by IDS 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 IDS Life are generally met by funds
provided by investment income, maturities and periodic repayments of
investments, deposits, premiums, proceeds from sales of investments as
well as capital contributions from Ameriprise Financial. The primary
uses of funds are policy benefits, commissions, other product-related
acquisition and sales inducement costs, operating expenses, policy
loans, dividends to Ameriprise Financial and investment purchases. IDS
Life routinely reviews its sources and uses of funds in order to meet
its ongoing obligations. In connection with the separation, IDS Life
received a capital contribution of $650 million from Ameriprise
Financial during the third quarter ended September 30, 2005.
18
Funding Strategy
IDS Life, on a consolidated basis, has available lines of credit with
Ameriprise Financial aggregating $295 million ($195 million committed
and $100 million uncommitted). There were no line of credit borrowings
outstanding with Ameriprise Financial at September 30, 2005 and 2004.
At September 30, 2005, IDS Life had outstanding reverse repurchase
agreements of $1.5 million. Both the line of credit and the reverse
repurchase agreements are used strictly as short-term sources of funds.
Investment securities include $2.2 billion and $2.3 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 of IDS Life's
investment portfolio at September 30, 2005 and December 31, 2004.
Separate account assets represent funds held for the exclusive benefit
of variable annuity contractholders and variable life insurance
policyholders. These assets are generally carried at market value, and
separate account liabilities are equal to separate account assets. IDS
Life earns fees from the related accounts.
As of September 30, 2005, IDS Life continued to hold investments in
collateralized debt obligations (CDOs), some of which are also managed
by an affiliate, and were not consolidated pursuant to the adoption of
FASB Interpretation No. 46 (FIN 46) as IDS Life was not considered the
primary beneficiary. As an investor in the residual tranche of CDOs,
IDS Life's return correlates to the performance of portfolios of
high-yield bonds and/or bank loans comprising the CDOs. IDS Life
invested in CDOs as part of its investment strategy in order to offer a
competitive rate to contractholders' accounts. IDS Life's exposure as
an investor is limited solely to its aggregate investment in the CDOs,
and it has no obligations or commitments, contingent or otherwise, that
could require any further funding of such investments. As of September
30, 2005, the carrying values of the CDO residual tranches, managed by
an affiliate, were $3.4 million.
IDS Life's exposure to CDOs and other structured investments, namely
secured loan trusts (SLTs), was significantly higher in prior periods.
During the second quarter of 2005, IDS Life sold all of its retained
interest in a CDO-related securitization trust and realized a pretax
gain of $24.9 million. The carrying value of this retained interest was
$526.2 million at December 31, 2004, of which $389.9 million was
considered investment grade. Additionally, IDS Life liquidated its
interest in all three SLTs which were previously consolidated under FIN
46. One SLT was liquidated in 2004, resulting in a cumulative net
pretax charge of $24.2 million during the year ended December 31, 2004
and the other two SLTs were liquidated in 2004 and 2005 resulting in a
$3.7 million pretax charge in 2004 and a $13.9 million pretax gain for
the nine months ended September 30, 2005. There is no remaining
exposure related to these SLTs as of September 30, 2005.
19
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
As discussed above, various aspects of IDS 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 and
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 IDS Life's structured investment portfolios are
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.
20
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
IDS 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 IDS
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, IDS 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.
IDS 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, IDS Life's Chief Executive
Officer and Chief Financial Officer have concluded that IDS 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 IDS Life, including information technology,
treasury, accounting, financial reporting, tax administration, human
resources, marketing, legal, procurement and other services. American
Express will continue to provide IDS 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. IDS 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. IDS Life
considers this a material change in internal controls over financial
reporting.
Other than the changes mentioned above, no other changes in IDS 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, IDS 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. IDS 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 IDS 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 IDS 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 reductions relating to certain
21
of such reengineering actions; the ability to control and manage
operating, infrastructure, advertising and promotion expenses as
business expands or changes; a downturn in IDS Life's businesses and/or
negative changes in IDS 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; IDS Life's ability to
improve investment performance, including attracting and retaining
high-quality personnel, and reduce outflows of invested funds; IDS
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 IDS Life, and other fees received based on
the value of those assets; IDS 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; IDS 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 IDS
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 IDS Life's investment portfolio and, in
particular, those investments that are not readily marketable; the
potential negative effect on IDS 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;
successfully cross-selling insurance and annuity products and services
to Ameriprise Financial's customer base; lower than anticipated spreads
in the insurance and 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 IDS Life's business. A further description of
these and other risks and uncertainties can be found in IDS 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.
22
PART II - OTHER INFORMATION
IDS 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. IDS Life
has received requests for information and has been contacted by
regulatory authorities concerning its practices and is cooperating
fully with these inquiries.
IDS Life is involved in a number of other legal and arbitration
proceedings concerning matters arising in connection with the
conduct of its business activities. In addition, IDS Life is subject
to periodic state insurance department regulatory action, through
examinations or other proceedings. IDS 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.
23
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.
IDS 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
24
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
- ------- -----------
*10.1 Copy of Gross Administrative Charge Agreement by and between
Ameriprise Financial, Inc. and RiverSource Investments, LLC, dated
October 1, 2005.
*10.2 Copy of Investment Management and Services Agreement by and between
IDS 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.
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