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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO ________
COMMISSION FILE NUMBER 333-65080
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
INDIANA 94-2786905
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
829 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 671-3131
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 March 9, 2006
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Common Stock (par value $150 per share) 20,000 shares
All outstanding shares of the registrant are owned by IDS Life Insurance
Company, a wholly-owned subsidiary of Ameriprise Financial, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)
(a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
PART I PAGE
1. Business............................................................................................. 1
1A. Risk Factors......................................................................................... 6
1B. Unresolved Staff Comments............................................................................ 15
2. Properties........................................................................................... 15
3. Legal Proceedings.................................................................................... 15
4. Submission of Matters to a Vote of Security Holders.................................................. 15
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities........................................................................................... 15
6. Selected Financial Data.............................................................................. 15
7. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations................................................................................ 16
7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 27
8. Financial Statements and Supplementary Data.......................................................... 27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 27
9A. Controls and Procedures.............................................................................. 28
9B. Other Information.................................................................................... 29
10. Directors and Executive Officers of the Registrant................................................... 29
11. Executive Compensation............................................................................... 29
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................................. 29
13. Certain Relationships and Related Transactions....................................................... 29
PART III
14. Principal Accounting Fees and Services............................................................... 29
PART IV
15. Exhibits, Financial Statement Schedules.............................................................. 30
Signatures........................................................................................... 31
Index to Financial Statements........................................................................ F-1
Exhibit Index........................................................................................ E-1
PART I
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ITEM 1. BUSINESS
INTRODUCTION
------------
American Enterprise Life Insurance Company is a stock life insurance company
domiciled in Indiana, which holds Certificates of Authority in the District
of Columbia and all states except New York. American Enterprise Life
Insurance Company is a wholly-owned subsidiary of IDS Life Insurance Company
(IDS Life), which is domiciled in Minnesota. IDS Life is a wholly-owned
subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial).
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-K.
American Enterprise Life provides RiverSource branded financial products and
wholesaling services to support its annuity operations. American Enterprise
Life principally underwrites fixed and variable annuity contracts primarily
through regional and national financial institutions and regional and/or
independent broker-dealers, in all states except New York. In past years,
American Enterprise Life issued a nominal number of variable universal life
contracts.
American Enterprise Life distributes annuities through non-affiliated
representatives and agents of third party distributors. Ameriprise Financial
Services, Inc., a subsidiary of Ameriprise Financial, serves as the
distributor of variable annuities issued by American Enterprise Life.
Prior to August 1, 2005, Ameriprise Financial was referred to as American
Express Financial Corporation. On February 1, 2005, American Express Company
(American Express) announced its intention to pursue the disposition of 100%
of its shareholdings in what is now Ameriprise Financial (the Separation)
through a tax-free distribution to American Express shareholders. Effective
as of the close of business on September 30, 2005, American Express
completed the Separation and distribution of common shares to American
Express shareholders (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.
AMERIPRISE FINANCIAL'S NEW BRAND
--------------------------------
In connection with the separation, Ameriprise Financial launched a new brand
name strategy for its businesses. In October 2005, it began marketing its
annuity products under the RiverSource brand. The transition of the annuity
products to the RiverSource brand is expected to be completed by the end of
2006.
Ameriprise Financial will streamline the organizational structure of its
insurance business by consolidating certain of its insurance subsidiaries at
year-end 2006. This organization will incorporate the new RiverSource
branding strategy into the names of Ameriprise Financial's insurance company
subsidiaries and is expected to result in certain expense and
capital-deployment efficiencies. It is expected that the formal legal entity
consolidation and legal entity name changes with respect to the insurance
company subsidiaries will not be complete until year-end 2006 due to the
time required to obtain all necessary state regulatory approvals.
1
ANNUITIES: PRODUCT FEATURES AND RISKS
-------------------------------------
American Enterprise Life's principal products are fixed and variable
deferred annuities, which are issued to a broad range of consumers through
third party distribution channels. Under fixed and variable deferred
annuities, assets accumulate until the contract is surrendered, the contract
owner (or in some contracts, the annuitant) dies, or the contract owner or
annuitant begins receiving benefits under an annuity payout option.
American Enterprise Life had fixed and variable annuity cash sales in 2005
of $1.0 billion, up from 2004 as a result of a 64% increase in variable
annuities, partially offset by a decrease in fixed annuities. In 2005, 97%
of these annuity cash sales were related to variable annuities. The relative
proportion between fixed and variable annuity sales is generally driven by
the relative performance of the equity and fixed income markets. In times of
lackluster performance in equity markets, fixed sales are generally
stronger. In times of superior performance in equity markets, variable sales
are generally stronger. The relative proportion between fixed and variable
annuity sales is also influenced by product design and other factors.
American Enterprise Life receives fees charged on assets allocated to its
separate accounts. Investment management performance is critical to the
profitability of the annuity business.
VARIABLE ANNUITIES
A variable annuity provides a contract owner with investment returns linked
to the underlying investment options of the contract owner's choice. Most
variable annuity products in force offer a fixed account investment option
with guaranteed minimum interest crediting rates ranging up to 3% as of
December 31, 2005.
Contract purchasers can choose to add various optional benefit provisions to
meet their needs. These include enhanced guaranteed minimum death benefit
(GMDB), guaranteed minimum withdrawal benefit (GMWB), guaranteed minimum
income benefit (GMIB) and guaranteed minimum accumulation benefit (GMAB)
provisions. In general, these provisions can help protect contract owners
and beneficiaries from a shortfall in death or living benefits due to a
decline in the value of the underlying investment accounts.
Innovative features for annuity products have continued to evolve. These
features include GMDBs and enhanced earnings death benefit or an enhanced
earnings plus death benefit for an additional charge. These death benefit
riders are intended to provide additional benefits to offset expenses after
the contract owner's death.
Innovative features for annuity products also include the GMWB, designed to
protect the contract owner's principal against a declining market during the
life of the annuity contract by allowing the client to withdraw the
principal over a period of time. For example, RiverSource Innovations
Select(SM) Variable Annuity contract owners age 80 or younger at contract
issue may purchase the optional Guarantor Withdrawal Benefit rider for an
additional charge which guarantees that limited withdrawals may be taken
over a period of time, regardless of the investment performance of the
contract.
RiverSource Innovations Select(SM) Variable Annuity contract owners age 79 or
younger at contract issue can obtain the principal-back guarantee by
purchasing the optional Accumulation Protector Benefit(SM) rider for an
additional charge, which provides a guaranteed contract value at the end of
a ten-year waiting period. These are known in the industry as guaranteed
minimum accumulation benefits or GMABs. The guaranteed value is the total
amount of purchase payments made minus any withdrawals, regardless of the
investment performance of the contract.
American Enterprise Life issues certain variable annuity contracts that
contain a GMIB feature which, if elected by the contract owner and after a
stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may be
in excess of what the contract account value can purchase at then-current
annuity purchase rates. American Enterprise Life bears the risk that
protracted under-performance of the financial markets could result in GMIB
being higher than what accumulated contract owner account balances would
support.
2
The general account assets of American Enterprise Life support the
contractual obligations under the guaranteed benefit riders American
Enterprise issues (see "General and Variable Account Assets-The General
Account" below). As a result, American Enterprise Life bears the risk that
protracted under-performance of the financial markets could result in
guaranteed benefit payments being higher than what current account values
would support. American Enterprise Life's exposure to risk from these
guaranteed benefits generally will increase when equity markets decline.
FIXED ANNUITIES
American Enterprise Life's fixed annuity products provide a contract owner
with a cash value that increases by a fixed interest rate. Fixed rates are
periodically reset at the discretion of American Enterprise Life subject to
certain policy terms establishing minimum guaranteed interest crediting
rates. American Enterprise Life's earnings from fixed annuities are based
upon the spread between rates earned on assets purchased with fixed annuity
deposits and the rates at which interest is credited to its fixed annuity
contracts.
American Enterprise Life resets interest rates based on a number of factors,
including interest rate scenario models and risk/return measures. The fixed
annuity contracts in force provide guaranteed minimum interest crediting
rates ranging from 1.5% to 4.5% as of December 31, 2005. In 2003, and in
response to a declining interest rate environment, several states adopted an
interim regulation allowing for a guaranteed minimum interest crediting rate
of 1.5% and/or a model regulation providing for a guaranteed indexed rate
and have now adopted regulations that mirror the National Association of
Insurance Commissioners (NAIC) model regulation for a guaranteed index rate.
In response, American Enterprise Life filed a number of contract changes in
recent years to implement lower minimum guarantees. American Enterprise Life
will continue to implement contract changes as states continue to adopt the
new model regulation or as the interim regulation expires according to its
terms.
GENERAL AND VARIABLE ACCOUNT ASSETS
-----------------------------------
Depending on the annuity product purchased, the assets of American
Enterprise Life's contractholders may be placed in the general account of
American Enterprise Life (the general account) for fixed products and for
the fixed account options under certain variable products or, in the case of
variable annuity products, in separate accounts that invest in underlying
investment options (the variable account).
THE GENERAL ACCOUNT
Assets in the general account support all obligations of American Enterprise
Life other than those supported by the separate accounts. American
Enterprise Life bears the investment risk of the general account assets.
In the general account, American Enterprise Life, through its investment
manager, RiverSource Investments, LLC, primarily invests in fixed maturity
securities over a broad range of maturities for the purpose of providing a
targeted rate of return on its investments while controlling risk. The
majority of these fixed maturity securities are interest-bearing investments
such as government obligations, mortgage-backed obligations and various
corporate debt instruments. American Enterprise Life does not invest in
securities to generate trading profits.
In accordance with regulatory investment guidelines, American Enterprise
Life, through its board of directors or board of directors investment
committee 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 securities
portfolio in the general account to meet contractual obligations under the
annuity products and achieve targeted levels of profitability within defined
risk parameters.
American Enterprise Life has the discretion to set the rate of interest
credited to contract owners' accounts subject to each contract's guaranteed
minimum interest crediting rate. As of December 31, 2005, this rate varied
among fixed accounts and was as low as 1.5% and as high as 6.5%. To the
extent the yield on American Enterprise Life's invested general account
asset portfolio declines below its target spread plus the minimum guarantee,
American Enterprise Life's profitability would be negatively affected.
3
The interest rates credited to contract owners' fixed accounts generally
reset towards new business rates; therefore, margins may be negatively
impacted by increases in the general level of interest rates. Part of
American Enterprise Life's strategy includes the use of derivatives, such as
interest rate caps, swaps and floors, for risk management purposes. These
derivatives help protect margins by increasing investment returns if there
is a sudden and severe rise in interest rates, thereby lessening the impact
of an increase in rates credited to contract owners' fixed accounts.
Conversely, in a low interest rate environment, such as that experienced
recently, margins may be negatively impacted as the interest rates available
on American Enterprise Life's invested assets approach guaranteed minimum
interest rates on the annuity contracts in force. This negative impact may
be compounded by the fact that many of these interest-bearing investments
are callable or pre-payable by the issuer and calls and prepayments are more
likely to occur in a low interest rate environment. In light of the interest
rate environment in 2003, when interest rates were at relative lows,
American Enterprise Life imposed a fixed account allocation and transfer
requirements for new variable annuity sales.
THE VARIABLE ACCOUNTS
Annuity products offer variable account investment options. In addition,
many of these products offer fixed account options. Under the variable
account option, contract owners bear the investment risk. The variable
accounts are registered as unit investment trusts under the Investment
Company Act of 1940. State insurance law prescribes that variable accounts
constitute a separate operation from the general account and as such are
only available to fund the liabilities of the separate accounts. Under the
subaccounts of each variable account, American Enterprise Life credits or
charges income, capital gains and losses only to that subaccount.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate
their payments among these variable subaccounts. The underlying funds are
managed both by affiliated and unaffiliated third-party money managers.
These funds invest in portfolios containing a variety of securities
including common stocks, bonds, managed assets and/or short-term securities.
The value of the subaccounts fluctuates with the investment return of the
underlying funds in which the subaccounts invest.
American Enterprise Life's major source of revenue from the variable
annuities it issues is the fees it receives, including mortality and expense
risk and other fees. In addition, American Enterprise Life also receives
marketing and administrative support payments from the affiliates of other
companies' funds included as investment options in its variable products.
These fees vary based on the level of variable account assets.
Variable annuities, with the exception of assets relating to their fixed
account options, are "separate account" rather than general account
products.
COMPETITION
-----------
The annuity business is highly competitive, and American Enterprise Life
competes with numerous other insurance companies, as well as certain banks,
securities brokerage firms, independent financial advisors and other
financial intermediaries that market annuities, mutual funds and other
retirement-oriented products.
Competitive factors affecting the sale of American Enterprise Life's annuity
products include:
o financial strength ratings from agencies such as A. M. Best;
o the breadth, quality, design and pricing of products and services
offered;
o guaranteed benefit features;
o the effectiveness of advertising and promotion campaigns;
o reputation and recognition in the marketplace;
o distribution capabilities and compensation; and
o the quality of customer service.
4
REGULATION
----------
The Indiana Department of Insurance is the domiciliary regulator of American
Enterprise Life Insurance Company. American Enterprise Life is also
regulated by each of the insurance regulators in the states where it is
authorized to transact the business of insurance. These other states also
regulate such matters as the licensing of sales personnel and, in some
cases, the marketing and content of annuity contracts. The primary purpose
of such regulation and supervision is to protect the interests of
contractholders. Financial regulation of American Enterprise Life is
extensive and its financial and intercompany transactions (such as
intercompany dividends and investment activity) are often subject to
pre-notification and continuing evaluation by the Indiana Department of
Insurance. Virtually all states require participation in insurance guaranty
associations, which assess insurance companies in order to fund claims of
contractholders of insolvent insurance companies.
Insurance companies have recently been the subject of increasing regulatory,
legislative and judicial scrutiny. Numerous state and federal regulatory
agencies have commenced investigations regarding sales and marketing
practices, compensation arrangements and anticompetitive activities, and
market timing and late trading in connection with insurance, annuity and
mutual fund products. American Enterprise Life has been contacted by
regulatory agencies for information relating to some of these investigations
and is cooperating with those inquiries. American Enterprise Life has
reviewed its compensation arrangements and other operations that may be
affected by these regulatory investigations. In addition, American
Enterprise Life is reviewing the legal precedents and new industry-wide
legislation, rules and regulations that may arise from ongoing
investigations.
At the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities, accounting procedures, and the treatment of persons differently
because of gender, with respect to terms, conditions, rates or benefits of
an annuity. Adoption of any new federal regulation in any of these areas
could potentially have an adverse effect upon American Enterprise Life.
Also, recent federal legislative proposals aimed at the promotion of
tax-advantaged savings may adversely impact American Enterprise Life's sales
of annuity products if enacted.
FINANCIAL STRENGTH RATINGS
--------------------------
American Enterprise Life Insurance Company receives ratings from independent
rating agencies. Ratings are important to maintaining public confidence in
American Enterprise Life. Lowering of American Enterprise Life's ratings
could have a material adverse effect on its ability to market its products
and could lead to increased surrenders. Rating agencies continually evaluate
the financial soundness and claims-paying ability of insurance companies
based on a number of different factors.
More specifically, the ratings assigned are developed from an evaluation of
a company's balance sheet strength, operating performance and business
profile. Balance sheet strength reflects a company's ability to meet its
current and ongoing obligations to its contractholders and includes analysis
of a company's capital adequacy. The evaluation of operating performance
centers on the stability and sustainability of a company's source of
earnings. The analysis of business profile reviews a company's mix of
business, market position and depth and experience of management. The
ratings relate to an insurer's general account and not to the management or
performance of the variable accounts.
American Enterprise Life Insurance Company does not receive an individual
rating, but receives the same rating as its parent company, IDS Life
Insurance Company. American Enterprise Life Insurance Company is currently
rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength was rated "Aa3" (Excellent) by Moody's Investors
Service, Inc. (Moody's), "AA-" (Very Strong) by Fitch, and "AA-" (Very
Strong) by Standards & Poor's.
5
RISK-BASED CAPITAL
------------------
The NAIC defines Risk-Based Capital (RBC) requirements for life insurance
companies. The RBC requirements are used by the NAIC and state insurance
regulators to identify companies that merit regulatory actions designed to
protect contractholders. The NAIC RBC report is completed as of December 31
and filed annually, along with the statutory financial statements.
American Enterprise Life Insurance Company would be subject to various
levels of regulatory intervention if its total adjusted statutory capital
were to fall below the RBC requirement. At the "company action level,"
defined as total adjusted capital level between 100% and 75% of the RBC
requirement, an insurer must submit a plan for corrective action with its
primary state regulator. The "regulatory action level," which is between 75%
and 50% of the RBC requirement, subjects an insurer to examination, analysis
and specific corrective action prescribed by the primary state regulator. If
a company's total adjusted capital falls between 50% and 35% of its RBC
requirement, referred to as "authorized control level," the insurer's
primary state regulator may place the insurer under regulatory control.
Insurers with total adjusted capital below 35% of the requirement will be
placed under regulatory control.
At December 31, 2005, American Enterprise Life Insurance Company's company
action level RBC was $125.3 million, and the corresponding total adjusted
capital was approximately $583.3 million, which represents 466% of the
company action level RBC.
As described above, American Enterprise Life Insurance Company maintains
capital well in excess of the company action level required by the Indiana
Department of Insurance, its primary regulator.
ITEM 1A. RISK FACTORS
If any of the following risks and uncertainties develops into actual events,
these events could have a material adverse effect on American Enterprise
Life's business, financial condition or results of operations. Based on
current information, the following information identifies the most
significant risk factors affecting American Enterprise Life in each of these
categories of risk. However, the risks and uncertainties American Enterprise
Life faces are not limited to those described below. Additional risks and
uncertainties which are not presently known or which are currently believed
to be immaterial may also adversely affect American Enterprise Life's business.
RISKS RELATING TO AMERICAN ENTERPRISE LIFE'S BUSINESS
-----------------------------------------------------
INTEREST RATE FLUCTUATIONS COULD ADVERSELY AFFECT AMERICAN ENTERPRISE LIFE'S
BUSINESS AND PROFITABILITY.
American Enterprise Life's annuity products are sensitive to interest rate
fluctuations, and its future costs associated with such variations may
differ from its historical costs. In addition, interest rate fluctuations
could result in fluctuations in the valuation of certain minimum guaranteed
benefits contained in some of its variable annuity products.
6
During periods of increasing market interest rates, American Enterprise Life
must offer higher crediting rates on interest-sensitive products, such as
fixed annuities, to keep these products competitive. Because returns on
invested assets may not increase as quickly as current interest rates,
American Enterprise Life may have to accept a lower "spread," or the
difference between the returns it earns on the investments that support its
obligations under these products and the amounts that it must pay
contractholders, and thus lower profitability or face a decline in sales and
greater loss of existing contracts and related assets. In addition,
increases in market interest rates may cause increased withdrawals from
annuity contracts, as contractholders seek to shift assets to products with
perceived higher returns. This process may lead to an earlier than expected
flow of cash out of the business. Also, increases in market interest rates
may result in extension of the maturity of some of American Enterprise
Life's investment assets. These earlier outflows and asset maturity
extensions may require investment assets to be sold at a time when the
prices of those assets are lower because of the increase in market interest
rates, which may result in realized investment losses. Increases in
crediting rates, as well as surrenders and withdrawals, could have an
adverse effect on American Enterprise Life's financial condition and results
of operations. An increase in policy surrenders and withdrawals also may
require American Enterprise Life to accelerate amortization of deferred
policy acquisition costs (DAC), which would increase its expenses and reduce
its net earnings.
During periods of falling interest rates, American Enterprise Life's spread
may be reduced. Because American Enterprise Life may adjust the interest
rates it credits on most of these products downward only at limited,
pre-established intervals, and because some of them have guaranteed minimum
crediting rates, its spreads could decrease and potentially become negative.
Interest rate fluctuations also could have an adverse effect on the results
of American Enterprise Life's investment portfolio. During periods of
declining market interest rates, the interest American Enterprise Life
receives on variable interest rate investments decreases. In addition,
during those periods, American Enterprise Life is forced to reinvest the
cash it receives as interest or return of principal on its investments in
lower-yielding high-grade instruments or in lower-credit instruments to
maintain comparable returns. Issuers of fixed income securities also may
decide to prepay their obligations in order to borrow at lower market rates,
which exacerbates the risk that American Enterprise Life may have to invest
the cash proceeds of these securities in lower-yielding or lower-credit
instruments.
For additional information regarding the sensitivity of the fixed income
securities in American Enterprise Life's investment portfolio to interest
rate fluctuations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management."
POOR INVESTMENT PERFORMANCE IN AMERICAN ENTERPRISE LIFE'S PRODUCTS COULD
ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
American Enterprise Life believes that investment performance is an
important factor in the growth of its variable annuity business. Poor
investment performance could impair revenues and earnings, as well as
American Enterprise Life's prospects for growth, because:
o sales of variable products might decrease;
o existing clients might withdraw assets from American Enterprise
Life's variable products in favor of better performing products of
other companies, which would result in lower revenues; and
o American Enterprise Life's ability to attract funds from existing
and new clients might diminish.
7
A DOWNGRADE OR A POTENTIAL DOWNGRADE IN AMERICAN ENTERPRISE LIFE'S FINANCIAL
STRENGTH RATINGS COULD RESULT IN A LOSS OF BUSINESS AND ADVERSELY AFFECT ITS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Financial strength ratings, which various ratings organizations publish as a
measure of an insurance company's ability to meet contractholder
obligations, are important to maintaining public confidence in American
Enterprise Life's products, the ability to market its products and its
competitive position. Any downgrade in American Enterprise Life's financial
strength ratings, or the announced potential for a downgrade, could have a
significant adverse effect on its financial condition and results of
operations in many ways, including:
o reducing new sales of annuity products;
o adversely affecting American Enterprise Life's relationships with
distributors of its products;
o materially increasing the number or amount of policy surrenders
and withdrawals by contractholders; and
o requiring American Enterprise Life to reduce prices for many of
its products to remain competitive.
DOWNTURNS AND VOLATILITY IN EQUITY MARKETS COULD ADVERSELY AFFECT AMERICAN
ENTERPRISE LIFE'S BUSINESS AND PROFITABILITY.
Significant downturns and volatility in equity markets could have an adverse
effect on American Enterprise Life's financial condition and results of
operations. Market downturns and volatility may cause potential new
purchasers to refrain from purchasing American Enterprise Life's variable
annuities that have returns linked to the performance of the equity markets.
Downturns may also cause contractholders in annuity products to withdraw
cash values from those products.
Additionally, downturns and volatility in equity markets can have an adverse
effect on American Enterprise Life's revenues because the value of
investments under management will be reduced. Some of its variable annuity
products contain GMDB, GMWB, GMIB and GMAB riders. A significant market
decline could result in guaranteed minimum benefits being higher than what
current account values would support, which could have an adverse effect on
American Enterprise Life's financial condition and results of operations.
For additional information regarding the sensitivity of American Enterprise
Life's business results to equity market fluctuations, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management."
DEFAULTS IN AMERICAN ENTERPRISE LIFE'S FIXED INCOME SECURITIES PORTFOLIO
WOULD ADVERSELY AFFECT ITS EARNINGS.
Issuers of the fixed income securities that American Enterprise Life owns
may default on principal and interest payments. At December 31, 2005
and 2004, 7% and 8%, respectively, of American Enterprise Life's investment
portfolio had ratings below investment-grade. Moreover, economic downturns
and corporate malfeasance can increase the number of companies, including
those with investment-grade ratings that default on their debt obligations,
as occurred in 2001 and 2002. As of December 31, 2005, American Enterprise
Life had fixed income securities in or near default (where the issuer had
missed payment of principal or interest or entered bankruptcy) with a fair
value of $4.9 million. Default-related declines in the value of American
Enterprise Life's fixed income securities portfolio could cause its net
earnings to decline and could weaken its capital position.
8
SOME OF AMERICAN ENTERPRISE LIFE'S INVESTMENTS ARE RELATIVELY ILLIQUID.
American Enterprise Life invests a portion of its owned assets in privately
placed fixed income securities, mortgage loans and real estate, among
others, all of which are relatively illiquid. These asset classes
represented approximately 7.7% of the carrying value of American Enterprise
Life's investment portfolio as of December 31, 2005. If American Enterprise
Life requires significant amounts of cash on short notice in excess of its
normal cash requirements, it may have difficulty selling these investments
in a timely manner, or be forced to sell them for an amount less than it
would otherwise have been able to realize, or both. For example, if an
unexpected number of contractholders of its annuity products exercise their
surrender right and American Enterprise Life is unable to access other
liquidity sources, it may have to quickly liquidate assets. Any inability to
quickly dispose of illiquid investments could have an adverse effect on
American Enterprise Life's financial condition and results of operations.
INTENSE COMPETITION COULD NEGATIVELY AFFECT AMERICAN ENTERPRISE LIFE'S
ABILITY TO MAINTAIN OR INCREASE ITS MARKET SHARE AND PROFITABILITY.
American Enterprise Life operates in an intensely competitive industry.
American Enterprise Life competes based on a number of factors including
name recognition, service, product performance and features, price,
perceived financial strength, and claims-paying ratings. American Enterprise
Life's competitors include insurers and other financial institutions.
American Enterprise Life may face competitors that have greater market
share, offer a broader range of products, have greater financial resources;
or offer higher claims-paying ratings than American Enterprise Life does.
AMERICAN ENTERPRISE LIFE'S AFFILIATES MAY BE UNABLE TO ATTRACT AND RETAIN
KEY PERSONNEL.
American Enterprise Life's continued success depends to a substantial degree
on its affiliates' ability to attract and retain qualified personnel to
conduct its business. The market for qualified talent is extremely
competitive and has grown more so in recent periods due to industry growth.
There can be no assurance that American Enterprise Life's affiliates will be
successful in their efforts to recruit and retain the required personnel. If
American Enterprise Life's affiliates are unable to attract and retain
qualified individuals or their recruiting and retention costs increase
significantly, its operations and financial results could be materially
adversely affected.
IF THE COUNTERPARTIES TO THE DERIVATIVE INSTRUMENTS AMERICAN ENTERPRISE LIFE
USES TO HEDGE ITS BUSINESS RISKS DEFAULT, AMERICAN ENTERPRISE LIFE MAY BE
EXPOSED TO RISKS IT HAD SOUGHT TO MITIGATE, WHICH COULD ADVERSELY AFFECT ITS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
American Enterprise Life uses derivative instruments to hedge various
business risks. American Enterprise Life enters into a variety of derivative
instruments with a number of counterparties. If American Enterprise Life's
counterparties fail to honor their obligations under the derivative
instruments, its hedges of the related risk will be ineffective. That
failure could have an adverse effect on its financial condition and results
of operations that could be material.
AMERICAN ENTERPRISE LIFE'S BUSINESS IS HEAVILY REGULATED, AND CHANGES IN
REGULATION MAY REDUCE ITS PROFITABILITY AND LIMIT ITS GROWTH.
American Enterprise Life operates in a highly regulated industry, and is
required to obtain and maintain licenses for its business in addition to
being subject to regulatory oversight. Regulators have significantly
increased the level of regulation in recent years and have several
outstanding proposals for additional regulation. Various regulatory and
governmental bodies have the authority to review its products and business
practices and those of its employees and to bring regulatory or other legal
actions against American Enterprise Life if, in their view, its practices
are improper.
9
Compliance with applicable laws and regulations is time consuming and
personnel-intensive. Changes in these laws and regulations may increase
materially American Enterprise Life's direct and indirect compliance and
other expenses of doing business. The costs of the compliance requirements
American Enterprise Life faces, and the constraints they impose on its
operations, could have a material adverse effect on American Enterprise
Life's financial condition and results of operations. For a further
discussion of the regulatory framework in which American Enterprise Life
operates, see "Business--Regulation." For more information regarding ongoing
investigations, see "Item 3--Legal Proceedings."
LEGAL AND REGULATORY ACTIONS ARE INHERENT IN AMERICAN ENTERPRISE LIFE'S
BUSINESS AND COULD RESULT IN FINANCIAL LOSSES OR HARM ITS BUSINESS.
American Enterprise Life is, and in the future may be, subject to legal and
regulatory actions in the ordinary course of its operations. Substantial
legal liability in legal or regulatory actions could have a material
financial effect or cause significant reputational harm, which in turn could
seriously harm its business prospects.
COMPETITIVE AND REGULATORY PRESSURES MAY REQUIRE AMERICAN ENTERPRISE LIFE TO
REDUCE THE LEVELS OF ITS FEES.
American Enterprise Life's profit margins and earnings are dependent in part
on its ability to maintain current fee levels for the products and services
that it offers. Competition within the financial services industry could
lead American Enterprise Life to reduce the fees that it charges its clients
for products and services. See the risk factor entitled "Intense competition
could negatively affect American Enterprise Life's ability to maintain or
increase its market share and profitability." In addition, American
Enterprise Life may be required to reduce its fee levels, or restructure the
fees it charges, as a result of regulatory initiatives or proceedings that
are either industry-wide or specifically targeted at American Enterprise
Life. See the risk factor entitled "American Enterprise Life's business is
heavily regulated, and changes in regulation may reduce its profitability
and limit its growth" and "Item 3--Legal Proceedings" for more information
regarding this and other regulatory matters. Reductions or other changes in
the fees that American Enterprise Life charges for its products and services
could reduce its revenues and earnings.
MISCONDUCT BY AMERICAN ENTERPRISE LIFE'S AFFILIATES' EMPLOYEES IS DIFFICULT
TO DETECT AND DETER AND COULD HARM AMERICAN ENTERPRISE LIFE'S BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Misconduct by American Enterprise Life's affiliates' employees could result
in violations of law, regulatory sanctions and/or serious reputational or
financial harm. Misconduct can occur in each of American Enterprise Life's
businesses and could include:
o attempting to bind American Enterprise Life to transactions that
exceed authorized limits;
o hiding unauthorized or unsuccessful activities resulting in
unknown and unmanaged risks or losses;
o improperly using, disclosing, or otherwise compromising
confidential information;
o engaging in fraudulent or otherwise improper activity;
o engaging in unauthorized or excessive trading to the detriment of
customers; or
o otherwise not complying with laws or American Enterprise Life's
control procedures.
American Enterprise Life cannot always deter misconduct by agents and the
precautions American Enterprise Life takes to prevent and detect this
activity may not be effective in all cases. American Enterprise Life also
cannot provide assurance that misconduct by agents will not lead to a
material adverse effect on its business, results of operations or financial
condition.
10
IF AMERICAN ENTERPRISE LIFE'S RESERVES FOR FUTURE POLICY BENEFITS AND CLAIMS
ARE INADEQUATE, IT MAY BE REQUIRED TO INCREASE ITS RESERVE LIABILITIES,
WHICH COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
American Enterprise Life establishes reserves as estimates of its
liabilities for future obligations under its products. Reserves do not
represent an exact calculation of liability, but rather are estimates of
contract benefits and related expenses American Enterprise Life expects to
incur over time. The assumptions and estimates American Enterprise Life
makes in establishing reserves require certain judgments about future
experience and, therefore, are inherently uncertain. American Enterprise
Life cannot determine with precision the actual amounts that it will pay for
contract benefits, the timing of payments, or whether the assets supporting
its stated reserves will increase to the levels it estimates before payment
of benefits or claims. American Enterprise Life monitors its reserve levels
continually. If American Enterprise Life were to conclude that its reserves
are insufficient to cover actual or expected contract benefits, it would be
required to increase its reserves and potentially incur income statement
charges for the period in which it makes the determination, which could
adversely affect its results of operations and financial condition. For more
information on how American Enterprise Life sets its reserves, see Note 1 to
the Consolidated Financial Statements.
AMERICAN ENTERPRISE LIFE MAY FACE LOSSES IF MORTALITY RATES DIFFER
SIGNIFICANTLY FROM ITS PRICING EXPECTATIONS.
American Enterprise Life sets prices for some annuity products based upon
expected claim payment patterns, derived from assumptions American
Enterprise Life makes about the mortality rates, or likelihood of death, of
its contractholders. The long-term profitability of these products depends
upon how American Enterprise Life's actual experience compares with its
pricing assumptions. For example, if mortality rates are lower than its
pricing assumptions, American Enterprise Life could be required to make
greater payments under annuity contracts than it had projected. If mortality
rates are higher than its pricing assumptions, American Enterprise Life
could be required to make greater payments under its annuity contracts with
guaranteed minimum death benefits than it had projected.
AMERICAN ENTERPRISE LIFE MAY FACE LOSSES IF THERE ARE SIGNIFICANT DEVIATIONS
FROM ITS ASSUMPTIONS REGARDING THE FUTURE PERSISTENCY OF ITS ANNUITY
CONTRACTS.
The prices and expected future profitability of American Enterprise Life's
deferred annuity products are based in part upon expected patterns of
expenses and benefits, using a number of assumptions, including those
related to persistency, which is the probability that a contract will remain
in force from one period to the next. The effect of persistency on
profitability varies for different products. For most of its deferred
annuity products, actual persistency that is lower than its persistency
assumptions could have an adverse impact on profitability, especially in the
early years of a contract, primarily because American Enterprise Life would
be required to accelerate the amortization of expenses it deferred in
connection with the acquisition of the contract.
Because American Enterprise Life's assumptions regarding persistency
experience are inherently uncertain, reserves for future policy benefits and
claims may prove to be inadequate if actual persistency experience is
different from those assumptions. Significant deviations in experience from
pricing expectations regarding persistency could have an adverse effect on
the profitability of American Enterprise Life's products.
AMERICAN ENTERPRISE LIFE MAY BE REQUIRED TO ACCELERATE THE AMORTIZATION OF
DAC, WHICH WOULD INCREASE ITS EXPENSES AND REDUCE PROFITABILITY.
DAC represents the costs of acquiring new business, principally direct sales
commissions and other distribution and underwriting costs that have been
deferred on the sale of annuities. For annuity products, American Enterprise
Life amortizes DAC over periods approximating the lives of the related
contract, generally as a percentage of estimated gross profits associated
with that contract.
11
American Enterprise Life's projections underlying the amortization of DAC
require the use of certain assumptions, including interest margins,
mortality rates, persistency, maintenance expense levels and client asset
value growth rates for variable products. American Enterprise Life
periodically reviews and, where appropriate, adjusts its assumptions. When
American Enterprise Life changes its assumptions, it may be required to
accelerate the amortization of DAC or to record a charge to increase benefit
reserves.
As of December 31, 2005 and 2004, American Enterprise Life had $344.2
million and $299.7 million of DAC, respectively, and it amortized $63.8
million and $60.8 million, respectively, of DAC as a current period expense
for the years ended December 31, 2005 and 2004, respectively. For more
information regarding DAC, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Critical Accounting Policies".
STATE INSURANCE REGULATORS MAY ADOPT NEW RESERVE OR CAPITAL REQUIREMENTS,
POTENTIALLY IMPACTING AMERICAN ENTERPRISE LIFE'S FINANCIAL STRENGTH RATINGS.
American Enterprise Life must comply with statutory reserve and capital
requirements. State regulators are continually reviewing and updating these
requirements. As of December 31, 2005, American Enterprise Life was subject
to new capital requirements for variable annuity contracts with guaranteed
death or living benefits. These new requirements had minimal impact on
American Enterprise Life's Consolidated Balance Sheet in 2005, but that may
not continue to be true in the event equity market values fall in the
future.
There is active discussion at the NAIC of moving to a principles-based
reserving system. This could change statutory reserve requirements
significantly, and it is not possible to estimate the impact at this time.
CHANGES IN U.S. FEDERAL INCOME TAX LAW COULD MAKE SOME OF AMERICAN
ENTERPRISE LIFE'S PRODUCTS LESS ATTRACTIVE TO CLIENTS.
Many of the products American Enterprise Life issues or on which its
business is based enjoy favorable treatment under current U.S. federal
income tax law. Changes in U.S. federal income tax law could make some of
its products less attractive to clients.
AMERICAN ENTERPRISE LIFE'S RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT
BE FULLY EFFECTIVE IN MITIGATING ITS RISK EXPOSURE IN ALL MARKET
ENVIRONMENTS OR AGAINST ALL TYPES OF RISK.
American Enterprise Life has devoted significant resources toward developing
its risk management policies and procedures and expects to continue to do so
in the future. Nonetheless, American Enterprise Life's policies and
procedures to identify, monitor and manage risks may not be fully effective
in mitigating its risk exposure in all market environments or against all
types of risk. Many of its methods of managing risk and exposures are based
upon its use of observed historical market behavior or statistics based on
historical models. As a result, these methods may not accurately predict
future exposures, which could be significantly greater than what its models
indicate. Other risk management methods depend upon the evaluation of
information regarding markets, clients, catastrophe occurrence or other
matters that is publicly available or otherwise accessible to American
Enterprise Life, which may not always be accurate, complete, up-to-date or
properly evaluated. Management of operational, legal and regulatory risks
requires, among other things, policies and procedures to properly record and
verify a large number of transactions and events, and these policies and
procedures may not be fully effective in mitigating American Enterprise
Life's risk exposure in all market environments or against all types of
risk.
12
AMERICAN ENTERPRISE LIFE'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
BY ECONOMIC AND OTHER FACTORS.
American Enterprise Life's financial condition and results of operations may
be materially affected by economic and other factors. Many such factors of a
global or localized nature include: political, economic and market
conditions; technological changes and events; inflation; investor sentiment
and confidence in the financial markets; terrorism events and armed
conflicts; and natural disasters such as weather catastrophes and widespread
health emergencies. In addition, during periods of unfavorable market or
economic conditions, the level of consumer investing and insuring activity
may also decrease, which may negatively impact the results of American
Enterprise Life's businesses. Moreover, fluctuations in economic and market
activity could impact the way then-existing customers allocate their
available resources, which could affect American Enterprise Life's
persistency, surrender and product cash value loan experience and could
negatively impact its business.
AMERICAN ENTERPRISE LIFE IS SUBJECT TO TAX CONTINGENCIES THAT COULD
ADVERSELY AFFECT RESERVES.
American Enterprise Life is subject to the income tax laws of the U.S., its
states and municipalities and those of the foreign jurisdictions in which it
has significant business operations. These tax laws are complex and subject
to different interpretations by the taxpayer and the relevant governmental
taxing authorities. American Enterprise Life must make judgments and
interpretations about the application of these inherently complex tax laws
when determining the provision for income taxes and must also make estimates
about when in the future certain items affect taxable income in the various
tax jurisdictions. Disputes over interpretations of the tax laws may be
settled with the taxing authority upon examination or audit.
RISKS RELATING TO AMERIPRISE FINANCIAL'S SEPARATION
---------------------------------------------------
FROM AMERICAN EXPRESS
---------------------
CLIENT ACQUISITION AND RETENTION MAY BE ADVERSELY AFFECTED BY AMERICAN
ENTERPRISE LIFE'S SEPARATION FROM AMERICAN EXPRESS.
Although American Enterprise Life generally operated independently of
American Express Company's other operations with respect to client services
prior to the separation and Distribution, American Enterprise Life has
relied on the American Express brand in acquiring clients as part of its
growth strategy. Loss of a significant portion of these clients could
negatively impact American Enterprise Life's business.
AMERIPRISE FINANCIAL AND AMERICAN ENTERPRISE LIFE HAVE EXPERIENCED INCREASED
COSTS IN CONNECTION WITH THE SEPARATION.
Ameriprise Financial is in the process of developing certain independent
facilities, systems, infrastructure and personnel to replace services it had
access to from American Express Company. Ameriprise Financial has also
made significant investments to develop its new brands and establish its
ability and the ability of its subsidiaries, to operate without access to
American Express Company's operational and administrative infrastructure.
These initiatives have been costly to implement. In 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. These costs generally consist of allocated
financial advisor and employee retention program costs, re-branding and
marketing costs and costs to separate and reestablish technology platforms
related to the separation and Distribution of Ameriprise Financial. American
Enterprise Life has been allocated approximately $9.8 million in total
pretax non-recurring separation costs through December 31, 2005 and American
Enterprise Life expects to incur significant additional separation costs.
As a stand-alone company, Ameriprise Financial, and hence, American
Enterprise Life do not have the same purchasing power they had through
American Express and, in some cases, may not have as favorable terms or
prices as those obtained prior to the separation and Distribution, which
could decrease its overall profitability.
13
AMERICAN ENTERPRISE LIFE MAY NOT HAVE SUFFICIENT CAPITAL GENERATION ABILITY
TO MEET ITS OPERATING AND REGULATORY CAPITAL REQUIREMENTS.
As a stand-alone company Ameriprise Financial, and hence American Enterprise
Life is required to maintain higher capital ratios to retain its credit
ratings. In addition, American Enterprise Life needs to cover volatility
associated with variations in its operating, risk-based and regulatory
capital requirements, including separation costs and contingent exposures,
for example, in connection with its ongoing legal and regulatory matters.
See "Business--Risk Based Capital" for more information regarding capital
requirements and see "Item 3--Legal Proceedings" for more information
regarding pending regulatory and legal proceedings.
AS AMERIPRISE FINANCIAL BUILDS ITS INFORMATION TECHNOLOGY INFRASTRUCTURE AND
TRANSITIONS ITS DATA AND THAT OF ITS AFFILIATES, SUCH AS AMERICAN ENTERPRISE
LIFE TO ITS OWN SYSTEMS, IT COULD EXPERIENCE TEMPORARY BUSINESS
INTERRUPTIONS AND INCUR SUBSTANTIAL ADDITIONAL COSTS.
Ameriprise Financial, and hence, American Enterprise Life is in the process
of installing and implementing information technology infrastructure to
support its business functions, including accounting and reporting, customer
service and distribution. American Enterprise Life anticipates this will
involve significant costs. American Enterprise Life may incur temporary
interruptions in business operations if it cannot transition effectively
from American Express' existing technology infrastructure (which covers
hardware, applications, network, telephony, databases, backup and recovery
solutions), as well as the people and processes that support them. American
Enterprise Life may not be successful in implementing its new technology
infrastructure and transitioning its data, and American Enterprise Life may
incur substantially higher costs for implementation than currently
anticipated. American Enterprise Life's failure to avoid operational
interruptions as it implements the new infrastructure and transitions its
data, or its failure to implement the new infrastructure and transition its
data successfully, could disrupt its business and have a material adverse
effect on its profitability. In addition, technology service failures could
have adverse regulatory consequences for American Enterprise Life's business
and make it vulnerable to its competitors.
Ameriprise Financial, and hence, American Enterprise Life continues to rely
on American Express' disaster recovery capabilities as part of its business
continuity processes. American Enterprise Life will only have the right to
use American Express' disaster recovery resources for up to two years after
the Distribution. American Enterprise Life will be required to develop and
implement its own disaster recovery infrastructure and develop business
continuity for its operations, which it anticipates will involve significant
costs. American Enterprise Life may not be successful in developing
stand-alone disaster recovery capabilities and business continuity
processes, and may incur substantially higher costs for implementation than
currently anticipated. American Enterprise Life's failure to avoid
operational interruptions as it implements new business continuity
processes, or its failure to implement the new processes successfully, could
disrupt its business and have a material adverse effect on its profitability
in the event of a significant business disruption.
AMERIPRISE FINANCIAL'S SEPARATION FROM AMERICAN EXPRESS COULD INCREASE
AMERICAN ENTERPRISE LIFE'S U.S. FEDERAL INCOME TAX COSTS.
Due to the separation, American Enterprise Life will not be able to file a
consolidated U.S. federal income tax return with the other members of the
Ameriprise Financial affiliated group for five tax years following the
Distribution. As a consequence, during this period, net operating and
capital losses, credits, and other tax attributes generated by one group
will not be available to offset income earned or taxes owed by the other
group for U.S. federal income tax purposes. Any benefits relating to taxes
arising from being part of the larger American Express group may also not be
available. As a result of these and other inefficiencies, the aggregate
amount of U.S. federal income tax that American Enterprise Life pays may
increase and American Enterprise Life may, in addition, not be able to fully
realize certain of its deferred tax assets.
14
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
American Enterprise Life has no employees and is charged by IDS Life for the
use of joint facilities in Minneapolis, Minnesota, which are owned or leased
by Ameriprise Financial. These facilities are believed to be adequate for
the purposes for which they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission, the National Association of
Securities Dealers and several state authorities have brought proceedings
challenging several mutual fund and variable product financial practices,
generally including suitability, late trading, market timing, compensation
and disclosure of revenue sharing arrangements. American Enterprise Life has
received requests for information concerning some of these practices and is
cooperating fully with these inquiries.
American Enterprise Life is involved in a number of other legal and
arbitration proceedings concerning matters arising in connection with the
conduct of its respective business activities. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2)(a) of Form 10-K.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American Enterprise Life follows United States generally accepted accounting
principles (GAAP), and the following discussion is presented on a
consolidated basis consistent with GAAP.
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 forward-looking statements.
Factors that could cause or contribute to these differences include, but are
not limited to, those discussed under "Forward-Looking Statements" and "Item
1A-Risk Factors" of this Form 10-K.
The following information should be read in conjunction with American
Enterprise Life's accompanying Consolidated Financial Statements and related
notes included elsewhere in this Form 10-K. The following management's
narrative analysis of the results of operations is presented pursuant to
General Instructions I(2)(a) of Form 10-K in lieu of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
American Enterprise Life Insurance Company is a stock life insurance company
domiciled in Indiana, which holds Certificates of Authority in the District
of Columbia and all states except New York. American Enterprise Life
Insurance Company is a wholly-owned subsidiary of IDS Life Insurance Company
(IDS Life), which is domiciled in Minnesota. IDS Life is a wholly-owned
subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial).
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-K.
16
Prior to August 1, 2005, Ameriprise Financial was referred to as American
Express Financial Corporation. On February 1, 2005, American Express Company
(American Express) announced its intention to pursue the disposition of 100%
of its shareholdings in what is now Ameriprise Financial (the Separation)
through a tax-free distribution to American Express shareholders. Effective
as of the close of business on September 30, 2005, American Express
completed the Separation and distribution of common shares to American
Express shareholders (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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Income before accounting change was $25.2 million for each of the years
ended December 31, 2005 and 2004.
Net income for the year ended December 31, 2004 reflects the $3.6 million
($5.5 million pretax) impact of American Enterprise Life's January 1, 2004
adoption of the American Institute of Certified Public Accountants Statement
of Position 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts"
(SOP 03-1). SOP 03-1 requires insurance enterprises to establish liabilities
for benefits that may become payable under variable annuity death benefit
guarantees or other insurance or annuity contract provisions. See the
"Recently Issued Accounting Standards" section in Note 1 to the Consolidated
Financial Statements regarding the impact of adoption of SOP 03-1.
REVENUES
Net investment income decreased $28.2 million or 7% reflecting lower average
general account assets due to the shift in product sales from fixed to
variable.
Contractholder charges increased 32% or $3.6 million to $14.8 million,
reflecting increased charges for variable annuity guaranteed minimum
withdrawal benefits (GMWBs).
Mortality and expense risk and other fees increased $18.5 million or 75%,
reflecting higher average values of separate account assets compared to 2004
due to increased inflows and market appreciation.
Net realized loss on investments was $1.4 million in 2005 compared to a net
realized gain of $5.2 million in 2004. For the year ended December 31, 2005,
$11.2 million of total investment gains were offset by $12.6 million of
impairments and losses. Included in these total net investment gains and
losses are $11.2 million of gross realized gains and $10.2 million of gross
realized losses from sales of securities, as well as $1.3 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 2005 were gross realized gains and losses of $1.6
million and $2.8 million, respectively, related to the sale of American
Enterprise Life's retained interest in a collateralized debt obligations
(CDO) securitization trust.
For the year ended December 31, 2004, $9.8 million of total investment gains
were partially offset by $4.6 million of impairments and losses. Included in
these total net investment gains and losses are $9.5 million of gross
realized gains and $4.0 million of gross realized losses from sales of
securities, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Interest credited to account values decreased $19.6 million or 9% reflecting
lower average accumulation values of annuities and lower interest crediting
rates on fixed annuity products.
Death and other benefits increased $1.8 million or 11% primarily due to
increased amortization of previously deferred sales inducement costs.
17
Amortization of deferred policy acquisition costs (DAC) increased $2.9
million to $63.8 million or 5%. DAC amortization in 2005 was reduced by $2.8
million as a result of the annual DAC assessment in the third quarter, while
DAC amortization in 2004 was reduced by $1.1 million as a result of that
assessment. DAC amortization on American Enterprise Life's growing block of
variable annuity business was significantly higher in 2005 than in 2004. See
the "Deferred Policy Acquisition Costs" section for further discussion of
DAC and related third quarter 2005 and 2004 adjustments.
Separation costs generally consist of allocated employee retention program
costs, re-branding and marketing costs and costs to separate and reestablish
technology platforms related to the separation and Distribution of
Ameriprise Financial. During 2005, American Enterprise Life was allocated
$9.8 million in separation costs. See Note 1 to the Consolidated Financial
Statements for more information about the separation and the allocation of
costs related to American Enterprise Life.
INCOME TAXES
American Enterprise Life's effective tax rate declined to 25% in 2005 from
42% in 2004 which resulted from relatively lower levels of pretax income
compared to tax-advantaged items in 2005 and the impact in 2004 of the
true-up of prior year current and deferred tax estimates based on the
finalization of the 2003 tax return.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Income before accounting change was $25.2 million for the year ended
December 31, 2004 compared to $37.6 million for the year ended December 31,
2003. The decrease primarily reflects reduced net realized gains on
investments, higher other insurance and operating expenses, higher
amortization of DAC, and higher benefit costs on investment contracts,
partially offset by lower interest credited to account values.
Net income for the year ended December 31, 2004 reflects the $3.6 million
($5.5 million pretax) impact of American Enterprise Life's January 1, 2004
adoption of SOP 03-1. SOP 03-1 requires insurance enterprises to establish
liabilities for benefits that may become payable under variable annuity
death benefit guarantees or other insurance or annuity contract provisions.
See the "Recently Issued Accounting Standards" section in Note 1 to the
Consolidated Financial Statements regarding the impact of adoption of SOP
03-1.
REVENUES
Net investment income increased $4.3 million or 1% reflecting higher average
assets.
Mortality and expense risk and other fees increased $11.1 million or 80%,
reflecting higher average values of separate account assets compared to
2003.
Net realized gain on investments was $5.2 million in 2004 compared to $25.1
million in 2003. For the year ended December 31, 2004, $9.8 million of total
investment gains were partially offset by $4.6 million of impairments and
losses. Included in these total net investment gains and losses are $9.5
million of gross realized gains and $4.0 million of gross realized losses
from sales of securities, classified as Available-for-Sale.
For the year ended December 31, 2003, $65.8 million of total investment
gains were partially offset by $40.7 million of impairments and losses.
Included in these total net investment gains and losses are $65.7 million of
gross realized gains and $30.3 million of gross realized losses from sales
of securities, as well as $9.3 million of other-than-temporary impairment
losses on investments, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Interest credited to account values decreased $36.4 million or 14%,
reflecting lower interest crediting rates, partially offset by higher
average accumulation values of annuities.
18
DAC amortization increased $22.4 million or 59%. The increase reflects a
$1.1 million DAC amortization expense reduction in connection with the third
quarter of 2004 review reflecting higher than previously assumed interest
rate spreads and lower than previously assumed mortality rates on variable
annuity products, compared to a $3.2 million DAC amortization expense
reduction in connection with the third quarter of 2003 review reflecting
lower than previously assumed spreads on fixed account values and an
adjustment in the near-term rate and period used in projecting growth in
client asset values on variable annuities. See the "Deferred Policy
Acquisition Costs" section for further discussion of DAC and related third
quarter 2004 and 2003 adjustments.
Other insurance and operating expenses increased $17.4 million or 32%,
primarily reflecting less favorable mark-to-market adjustments on interest
rate swaps during 2004 compared to 2003. American Enterprise Life enters
into pay-fixed, receive-variable interest rate swaps with IDS Life to
protect the spread between yields earned on investments and interest rates
credited to fixed annuity products. The interest rate swaps are economic
hedges that are not designated for hedge accounting treatment under
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133).
INCOME TAXES
American Enterprise Life's effective tax rate increased to 42% in 2004 from
34% in 2003 primarily reflecting the true-up of prior year current and
deferred tax estimates based on the finalization of the 2003 tax return.
DEFERRED POLICY ACQUISITION COSTS
DAC represents the costs of acquiring new business, principally direct sales
commissions and other distribution 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 is amortized over periods approximating
the lives of the business, generally 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, mortality rates, persistency, maintenance expense levels
and client 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 client 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 client asset value growth rates on a
quarterly basis.
Management monitors other principal DAC amortization assumptions, such as
interest margin, mortality rates, persistency and maintenance expense level
assumptions, each quarter. Unless management identifies a significant
deviation over the course of the quarterly monitoring, management reviews
and updates these DAC amortization assumptions annually in the third quarter
of each year. When assumptions are changed, the percentage of estimated
gross profits 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 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 both 2005
and 2004 that impacted the DAC balance and amortization expense. In the
third quarter 2005, these actions resulted in a net $2.8 million DAC
amortization expense reduction reflecting lower than previously 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.
19
In the third quarter 2003, American Enterprise Life refined its modeling of
certain variable annuity contract revenues and unlocked estimated gross
profits retrospectively to reflect actual interest margins and death and
other benefits. American Enterprise Life also adjusted its assumptions to
reflect lower than previously assumed spreads on fixed account values and
adjusted the near-term rate and period used in projecting growth in customer
asset values on variable annuities. These actions resulted in a $3.2 million
reduction in DAC amortization expense.
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.
DAC of $344.2 million and $299.7 million was included in American Enterprise
Life's Consolidated Balance Sheets at December 31, 2005 and 2004,
respectively. In addition to the DAC balances shown above and in conjunction
with American Enterprise Life's adoption of SOP 03-1, sales inducement costs
previously included in DAC were reclassified from DAC and presented as a
separate line item in the Consolidated Balance Sheets. Deferred sales
inducement costs were $54.4 million and $49.8 million at December 31, 2005
and 2004, respectively. Sales inducement costs consist of bonus interest
credits and deposit credits added to certain annuity contract values. These
benefits are capitalized to the extent they are incremental to amounts that
would be credited on similar contracts without the applicable feature. The
amounts capitalized are amortized using the same methodology and assumptions
used to amortize DAC.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies that American Enterprise Life uses
affect its Consolidated Financial Statements. Certain accounting and
reporting policies are critical to an understanding of American Enterprise
Life's results of operations and financial condition, and in some cases the
application of these policies can be significantly affected by the
estimates, judgments and assumptions made by management during the
preparation of the Consolidated Financial Statements. The accounting and
reporting policies American Enterprise Life has identified as fundamental to
a full understanding of its results of operations and financial condition
are described below. See Note 1 to the Consolidated Financial Statements for
further information about American Enterprise Life's accounting policies.
20
VALUATION OF INVESTMENTS
The most significant component of investments is Available-for-Sale
securities. Generally, American Enterprise Life carries its
Available-for-Sale securities at fair value on the Consolidated Balance
Sheet and records unrealized gains (losses) in accumulated other
comprehensive income (loss) within equity, net of income tax provision
(benefit) and net of adjustments in other asset and liability balances, such
as DAC, to reflect the expected impacts on their carrying value had the
unrealized gains (losses) been realized as of respective balance sheet date.
At December 31, 2005, American Enterprise Life had net unrealized pretax
losses on Available-for-Sale securities of $61.3 million. American
Enterprise Life recognizes gains and losses in results of operations upon
disposition of the securities. American Enterprise Life also recognizes
losses in results of operations when management determines that a decline in
value is other-than-temporary. This determination requires the exercise of
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer
downgrade, default or bankruptcy. American Enterprise Life also considers
the extent to which amortized cost exceeds fair value and the duration of
that difference, and management's judgment about the issuer's current and
prospective financial condition, as well as its ability and intent to hold
until recovery. The fair value of approximately 98% of the investment
portfolio classified as Available-for-Sale as of December 31, 2005 is
determined by quoted market prices. As of December 31, 2005, there were
$106.8 million in gross unrealized losses that related to $4.1 billion of
Available-for-Sale securities, of which $1.3 billion has been in a
continuous unrealized loss position for 12 months or more. As part of
American Enterprise Life's ongoing monitoring process, management determined
that a majority of the gross unrealized losses on these securities is
attributable to changes in interest rates. Additionally, because American
Enterprise Life has the ability as well as the intent to hold these
securities for a time sufficient to recover its amortized cost, American
Enterprise Life concluded that none of these securities was
other-than-temporarily impaired at December 31, 2005.
DEFERRED POLICY ACQUISITION COSTS
DAC represents the costs of acquiring new business, principally direct sales
commissions and other distribution 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 is amortized over periods approximating
the lives of the business, principally 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 DAC balances at any
reporting date are supported by projections that show management expects
there to be adequate estimated gross profits after that date to amortize the
remaining DAC balances. These projections are inherently uncertain because
they require management to make assumptions about financial markets,
anticipated mortality levels, and contractholder behavior over periods
extending well into the future. Projection periods used for American
Enterprise Life's annuity products are typically 10 to 15 years. Management
regularly monitors financial market conditions and actual contractholder
behavior experience and compares them to its assumptions.
For annuity products, the assumptions made in projecting future results and
calculating the DAC balance and DAC amortization expense are management's
best estimates. Management is required to update these assumptions whenever
it appears that, based on actual experience or other evidence, earlier
estimates should be revised. When assumptions are changed, the percentage of
estimated gross profits 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 a decrease in DAC balance and an
increase in DAC amortization expense, while a decrease in amortization
percentage will result in an increase in DAC balance and a decrease in DAC
amortization expense. The impact on results of operations of changing
assumptions can be either positive or negative in any particular period and
is reflected in the period in which such changes are made.
21
For American Enterprise Life's annuity products, key assumptions underlying
these long-term projections include interest rates (both earning rates on
invested assets and rates credited to contractholder accounts), equity
market performance, mortality rates and the rates at which contractholders
are expected to surrender their contracts, make withdrawals from their
contracts and make additional deposits to their contracts. Assumptions about
interest rates are the primary factor used to project interest margins,
while assumptions about rates credited to contractholder accounts and equity
market performance are the primary factors used to project client asset
value growth rates and assumptions about surrenders, withdrawals and
deposits comprise projected persistency rates. Management must also make
assumptions to project maintenance expenses associated with servicing its
annuity business during the DAC amortization period.
The client 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
client asset value growth rates on a quarterly basis. American Enterprise
Life uses a mean reversion method as a monthly guideline in setting
near-term client asset value growth rates based on a long-term view of
financial market performance as well as actual historical performance. In
periods when market performance results in actual contract value growth at a
rate that is different than that assumed, American Enterprise Life will
reassess the near-term rate in order to continue to project its best
estimate of long-term growth. The near-term growth rate is reviewed to
ensure consistency with management's assessment of anticipated equity market
performance. Management is currently assuming a 7% long-term client asset
value growth rate. If American Enterprise Life increased or decreased its
assumption related to this growth rate by 100 basis points, the impact on
the annual DAC amortization expense would be a decrease or increase of
approximately $5.0 million. Additionally, if American Enterprise Life
extended or reduced the amortization periods one year for variable annuities
to reflect changes in premium paying persistency and/or surrender
assumptions, the impact on annual DAC amortization expense would be a
decrease or increase of approximately $1.4 million pretax. The amortization
impact of extending or reducing the amortization period any additional years
is not linear.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions described
previously. Unless management identifies a significant deviation over the
course of the quarterly monitoring, management reviews and updates these DAC
amortization assumptions annually in the third quarter of each year. An
assessment of sensitivity associated with changes in any single assumption
would not necessarily be an indicator of future results.
For details regarding the balances of and changes in DAC for the years ended
December 31, 2005, 2004 and 2003, see Note 3 to the Consolidated Financial
Statements.
LIABILITIES FOR FUTURE POLICY BENEFITS AND CLAIMS
Fixed Annuities and Variable Annuity Guarantees
Liabilities for fixed and variable deferred annuities are equal to
accumulation values which are the cumulative gross deposits, credited
interest and fund performance less withdrawals and mortality and expense
risk charges.
The majority of the variable annuity contracts offered by American
Enterprise Life contain guaranteed minimum death benefit (GMDB) provisions.
When market values of the client's accounts decline, the death benefit
payable on a contract with a GMDB may exceed the contract accumulation
value. American Enterprise Life also offers variable annuities with death
benefit provisions that gross up the amount payable by a certain percentage
of contract earnings. These are referred to as gain gross-up (GGU) benefits.
In addition, American Enterprise Life offers contracts containing GMWB,
guaranteed minimum income benefit (GMIB) and guaranteed minimum accumulation
benefit (GMAB) provisions.
22
Effective January 1, 2004, liabilities for variable annuity death benefits
and GMIB have been established under SOP 03-1. Actuarial models to simulate
various equity market scenarios are used to project these benefits and
contract assessments and include making significant assumptions related to
client asset value growth rates, mortality, persistency and investment
margins. These assumptions, as well as their periodic review by management,
are consistent with those used for DAC purposes. Prior to the adoption of
SOP 03-1, amounts paid in excess of contract value were expensed. See the
"Recently Issued Accounting Standards" section in Note 1 to the Consolidated
Financial Statements for more information about these guaranteed benefits.
GMWB and GMAB provisions are considered embedded derivatives under SFAS 133
and, accordingly, are carried at fair value within future policy benefits
for variable annuity guarantees on the Consolidated Balance Sheets. The fair
value of these embedded derivatives is based on the present value of future
benefits less applicable fees charged for the provision. Changes in fair
value are reflected in other insurance and operating expenses within the
Consolidated Statements of Income.
Liabilities for fixed annuities in a benefit or payout status are based on
future estimated payments using established industry mortality tables and
interest rates, ranging from 4.6% to 8.5% at December 31, 2005, depending on
year of issue, with an average rate of approximately 5.5% at December 31,
2005.
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their
expected impact on future consolidated results of operations or financial
condition, see Note 1 to the Consolidated Financial Statements.
FINANCIAL CONDITION
American Enterprise Life's total assets and liabilities increased in 2005
primarily due to higher separate account assets and liabilities, which
increased as a result of net client inflows and market appreciation.
Investments primarily include corporate debt securities and mortgage and
other asset-backed securities. At December 31, 2005, American Enterprise
Life's corporate debt securities comprise a diverse portfolio with the
largest concentrations, accounting for approximately 65% of the portfolio,
in the following industries: banking and finance, utilities, and
communications and media. Investments also include $0.4 billion of mortgage
loans on real estate and other investments at December 31, 2005 and 2004.
Investments are principally funded by sales of annuities and by reinvested
income. Maturities of these investment securities are largely matched with
the expected future payments of annuity obligations.
Investments include $0.4 billion and $0.5 billion of below investment grade
securities (excluding net unrealized appreciation and depreciation) at
December 31, 2005 and 2004, respectively. These investments represent 7% and
8% of American Enterprise Life's investment portfolio at December 31, 2005
and 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 administrative and other fees from
the related accounts.
American Enterprise Life holds reserves for current and future obligations
that are related to fixed annuities and certain guaranteed payments under
variable annuities. Reserves related to fixed annuities and guarantees under
variable annuities are reflected in future policy benefits in the
Consolidated Balance Sheets. Reserves for fixed annuities are equal to the
underlying contract accumulation values.
23
LIQUIDITY AND CAPITAL RESOURCES
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 and 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, and investment purchases. American
Enterprise Life routinely reviews its sources and uses of funds in order to
meet its ongoing obligations.
FUNDING STRATEGY
At December 31, 2005 and 2004, American Enterprise Life had outstanding
reverse repurchase agreements totaling $25.0 million and nil, respectively.
The reverse repurchase agreements are used strictly as short-term sources of
funds.
CONTRACTUAL COMMITMENTS
The contractual obligations identified in the table below include balance
sheet transactions that represent material expected or contractually
committed future obligations of American Enterprise Life. Payments due by
period as of December 31, 2005 are as follows:
Payments due in year ending
- --------------------------------------------------------------------------------------------------------------------
2007- 2009- 2011 and
(Millions) Total 2006 2008 2010 thereafter
- --------------------------------------------------------------------------------------------------------------------
Annuities (1) $7,264 $782 $1,806 $1,431 $3,245
- --------------------------------------------------------------------------------------------------------------------
<FN>
(1) These scheduled payments are represented by reserves of approximately
$5.7 billion at December 31, 2005 and are based on interest credited,
mortality, lapse, surrender and premium payment assumptions. Actual
payment obligations may differ if experience varies from these
assumptions. Separate account liabilities have been excluded as
associated contractual obligations would be met by separate account
assets.
OFF-BALANCE SHEET ARRANGEMENTS
Retained Interest in Assets Transferred to Unconsolidated Entities
During 2001, American Enterprise Life placed a majority of its rated CDO
securities and related accrued interest, as well as a relatively minor
amount of other liquid securities, having an aggregate book value of $53.6
million, into a securitization trust. In return, American Enterprise Life
received $7.1 million in cash (excluding transaction expenses) relating to
sales to unaffiliated investors and retained interests in the trust with
allocated book amounts aggregating $46.5 million. During the second quarter
2005, American Enterprise Life sold all of its retained interest in the CDO
securitization trust and recognized a net realized loss of $1.2 million. The
carrying value of this retained interest was $41.8 million at December 31,
2004, of which $31.0 million was considered investment grade.
CONTINGENT LIQUIDITY PLANNING
Ameriprise Financial has developed a contingent funding plan that enables
American Enterprise Life to meet client obligations during periods in which
its clients elect to withdraw funds from their annuity contracts. Ameriprise
Financial designed this plan to allow American Enterprise Life to meet these
client withdrawals by selling or obtaining financing, through repurchase
agreements, of portions of its investment securities portfolio.
RISK MANAGEMENT
In accordance with regulatory investment guidelines, American Enterprise
Life, through its board of directors or board of directors investment
committee 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 securities
portfolio in the general account to meet contractual obligations under the
annuity products and achieve targeted levels of profitability within defined
risk parameters.
24
American Enterprise Life has developed an asset/liability management
approach with separate investment objectives to support specific product
liabilities, such as annuities. 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 annuity obligations. These
same objectives must be consistent with management's overall investment
objectives for the general account investment portfolio.
American Enterprise Life's owned investment securities are primarily
invested in long-term and intermediate-term fixed maturity securities to
provide clients with a competitive rate of return on their investments while
controlling risk. Investment in fixed maturity securities is designed to
provide American Enterprise Life with a targeted margin between the yield
earned on investments and the interest rate credited to clients' accounts.
American Enterprise Life does not trade in securities to generate short-term
profits for its own account.
As part of American Enterprise Life's investment process, management, with
the assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process conducted by American Enterprise
Life's Investment Committee involves the review of certain invested assets
which the committee evaluates to determine whether or not any investments
are other-than-temporarily impaired and/or which specific interest earning
investments should be put on an interest non-accrual basis.
American Enterprise Life has two principal components of market risk:
interest rate risk and equity market risk. Interest rate risk results from
investing in assets that are somewhat longer and reset less frequently than
the liabilities they support. American Enterprise Life manages interest rate
risk through the use of a variety of tools that include modifying the
maturities of investments supporting its fixed annuities. Additionally,
American Enterprise Life enters into derivative financial instruments, such
as interest rate swaps, caps and floors, which change the interest rate
characteristics of client liabilities or investment assets. Because certain
of its investments and asset management activities are impacted by the value
of its managed equity-based portfolios, from time to time American
Enterprise Life enters into risk management strategies that may include the
use of equity derivative financial instruments, such as equity options, to
mitigate its exposure to volatility in the equity markets.
INTEREST RATE RISK
Interest rate exposures arise primarily with respect to the fixed account
portion of its annuity products and its investment portfolio. Such client
liabilities and investment assets generally do not create naturally
offsetting positions as it relates to basis, repricing or maturity
characteristics. Rates credited to clients' accounts generally reset at
shorter intervals than the yield on underlying investments. Further, the
expected maturities on the investment assets may not align with the
surrender or other benefit payments from fixed annuity products. Therefore,
American Enterprise Life's interest spread margins are affected by changes
in the general level of interest rates. The extent to which the level of
interest rates affects spread margins is managed primarily by a combination
of modifying the maturity structure of the investment portfolio and entering
into swaps or other derivative instruments that effectively lengthen the
rate reset interval on client liabilities. American Enterprise Life has
entered into interest rate swaps and floors with notional amounts totaling
$2.0 billion to economically hedge the impact of increasing interest rates
on forecasted fixed annuity sales. The interest rate swaps and floors are
exclusively held with IDS Life.
The negative effect on American Enterprise Life's pretax earnings of a 100
basis point increase in interest rates, which assumes repricings and client
behavior based on the application of proprietary models, to the book of
business at December 31, 2005 and 2004 would be approximately $6.4 million
and $0.8 million, respectively.
EQUITY MARKET RISK
American Enterprise Life has two primary exposures to the general level of
equity markets. One exposure is that American Enterprise Life earns fees
from variable annuity products. The amount of fees is generally based on the
value of the portfolios, and thus is subject to fluctuation with the general
level of equity market values. To reduce the sensitivity of American
Enterprise Life's fee revenues to the general performance of equity markets,
American Enterprise Life may from time to time enter into various
combinations of financial instruments such as equity market put and collar
options that mitigate the negative effect on fees that would result from a
decline in the equity markets.
25
The second exposure is that although American Enterprise Life currently
bears all risk related to GMDB, GMIB and GMAB, American Enterprise Life
hedges its GMWB risk using structured option contracts which are designed to
mitigate economic risk and its exposure to income statement volatility. Such
annuities, which were first introduced in 2004, typically have account
values that are based on an underlying portfolio of mutual funds which
fluctuate based on equity market performance. The GMWB guarantees that over
a period no shorter than 14 years the client can withdraw an amount equal to
what has been paid into the contract, regardless of the performance of the
underlying funds. This option is an embedded derivative that is accounted
for at fair value, with changes in fair value recorded through earnings. To
economically hedge these changes in market value, American Enterprise Life
may pursue a portfolio of equity future contracts constructed to offset a
portion of the changes in the option mark-to-market.
The negative effect on American Enterprise Life's pretax earnings of a 10%
decline in equity markets would be approximately $3.6 million and $2.6
million based on annuity business in force as of December 31, 2005 and 2004,
respectively.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
As described previously, 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 GMDB, GMWB, GMIB and GMAB, asset management fees and
mortality and expense risk and other fees. The direction and magnitude of
the changes in equity markets can increase or decrease amortization of DAC
and deferred sales inducement costs incurred amounts under GMDB, GMWB, GMIB
and GMAB provisions, asset management fees and mortality and expense risk
and other fees and correspondingly affect results of operations in any
particular period.
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 and outsourcing (including, among
others, technologies operations); 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 DAC, as well as the timing of such DAC
amortization, in connection with the sale of annuity and insurance products;
the level of GMDB or living 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
26
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 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 impact of the separation of Ameriprise Financial from American
Express; and competitive pressures in American Enterprise Life's business.
See "Item 1A-Risk Factors" for further discussion of risks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk
Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements.
See Index to Financial Statements at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
American Enterprise Life's Consolidated Financial Statements for the years
ended December 31, 2005, 2004 and 2003 have been audited by Ernst & Young
LLP, American Enterprise Life's independent registered public accounting
firm.
Through 2004, Ernst & Young LLP provided audit services to American
Enterprise Life as part of the audit services it provided to American
Express. In 2004, the American Enterprise Audit Committee of its Board of
Directors determined to request proposals from auditing firms for their 2005
audit. This request was made pursuant to the American Express Audit
Committee charter, which requires a detailed review of the outside audit
firm at least every ten years. At a meeting held on November 22, 2004, the
American Express Audit Committee approved the future engagement of
PricewaterhouseCoopers LLP as the independent registered public accountants
for the fiscal year ending December 31, 2005 and dismissed Ernst & Young LLP
for the 2005 fiscal year. This decision also applied to American Enterprise
Life. Ernst & Young LLP continued as auditors of American Express and
American Enterprise Life for the year ended December 31, 2004.
Ernst & Young LLP's reports on American Enterprise Life's Consolidated
Financial Statements for the fiscal years ended December 31, 2004 and 2003
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with the audits of American Enterprise Life's Consolidated
Financial Statements for each of the two fiscal years ended December 31,
2004 and 2003, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to
make reference to the matter in their report. During the two most recent
fiscal years and subsequent interim period preceding the dismissal of Ernst
& Young LLP, there were no "reportable events" (as defined in Regulation
S-K, Item 304(a)(1)(v)).
27
In connection with the Separation and Distribution from American Express, on
February 18, 2005, the American Express Audit Committee of its Board of
Directors dismissed PricewaterhouseCoopers LLP and engaged Ernst & Young LLP
to be the independent registered public accountants of American Enterprise
Life for the year ended December 31, 2005. PricewaterhouseCoopers LLP
continues as the independent registered public accountants for the
Consolidated Financial Statements of American Express for the 2005 fiscal
year.
PricewaterhouseCoopers LLP did not issue any report on American Enterprise
Life's Consolidated Financial Statements for either of the past two years.
During the period from November 22, 2004 and through February 18, 2005,
there were no disagreements between American Enterprise Life and
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope or procedures,
which, if not resolved to the satisfaction of PricewaterhouseCoopers LLP,
would have caused PricewaterhouseCoopers LLP to make reference to the matter
in their report. There have been no "reportable events," as defined in Item
304(a)(1)(v) of Regulation S-K, during the period between November 22, 2004
to February 18, 2005.
ITEM 9A. 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 American
Enterprise Life's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of American Enterprise Life's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of the end of the period covered by this
report. Based on such evaluation, American Enterprise Life's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, American Enterprise Life's disclosure controls and procedures
were effective at a reasonable level of assurance as of December 31, 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
fourth fiscal quarter of the year to which this report relates have
materially affected, or are reasonably likely to materially affect, American
Enterprise Life's internal control over financial reporting.
28
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART III
--------
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company
has appointed Ernst & Young LLP (Ernst & Young) as independent auditors to
audit the Consolidated Financial Statements of American Enterprise Life for
the years ended December 31, 2005 and 2004.
FEES PAID TO THE REGISTRANT'S INDEPENDENT AUDITOR
The following table presents fees for professional services rendered by
Ernst & Young for the audit of American Enterprise Life's financial
statements for the years ended December 31, 2005 and 2004 and other fees
billed for other services rendered by Ernst & Young during those periods.
(Thousands) 2005 2004
- -----------------------------------------------------------------------
Audit Fee (1) $601 $509
Tax Fees (2) - -
All Other Fees (3) - -
- -----------------------------------------------------------------------
Total $601 $509
=======================================================================
<FN>
(1) Audit fees include audit work performed in the review and preparation of
the financial statements, as well as, services that generally only the
independent auditor can be expected to provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review
of documents filed with the Securities and Exchange Commission.
(2) Tax fees included all services performed by the independent auditor's
tax personnel.
(3) All other fees included miscellaneous out-of-pocket expenses.
29
POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY INDEPENDENT AUDITOR
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of
the engagement of Ernst & Young are subject to the specific pre-approval of
the Audit Committee of Ameriprise Financial. All audit and permitted
non-audit services to be performed by Ernst & Young for American Enterprise
Life required pre-approval by the Audit Committee of Ameriprise Financial in
accordance with pre-approval procedures established by the Audit Committee
of Ameriprise Financial. The procedures require all proposed engagements of
Ernst & Young for services to American Enterprise Life of any kind to be
directed to the General Auditor of Ameriprise Financial and then submitted
for approval to the Audit Committee of Ameriprise Financial, Inc. prior to
the beginning of any services.
In 2005, 100% of the services provided by Ernst & Young for American
Enterprise Life were pre-approved by the Audit Committee of American Express
Company prior to the Distribution and, thereafter, by the Audit Committee of
Ameriprise Financial.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
See Index to Financial Statements on page F-1 hereof.
(2) Financial Statement Schedules
See Index to Financial Statements on page F-1 hereof.
All information on schedules to the Consolidated Financial
Statements required by Rule 7-05 in Article 7 of Regulation S-X is
included in the Consolidated Financial Statements or is not
required. Therefore, all schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-4 hereof.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 9, 2006 By /s/ Mark E. Schwarzmann
- ------------- ------------------------------------
Date Mark E. Schwarzmann, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 9, 2006 /s/ Gumer C. Alvero
- ------------- -------------------------------------------------
Gumer C. Alvero, Director and President
March 9, 2006 /s/ Timothy V. Bechtold
- ------------- -------------------------------------------------
Date Timothy V. Bechtold, Director
March 9, 2006 /s/ Arthur H. Berman
- ------------- -------------------------------------------------
Date Arthur H. Berman, Director
March 9, 2006 /s/ Brian J. McGrane
- ------------- -------------------------------------------------
Date Brian J. McGrane, Director, Executive
Vice President and Chief Financial Officer
March 9, 2006 /s/ David K. Stewart
- ------------- -------------------------------------------------
Date David K. Stewart, Vice President and Controller
March 9, 2006 /s/ Kevin E. Palmer
- ------------- -------------------------------------------------
Date Kevin E. Palmer, Director, Vice President and
Chief Actuary
March 9, 2006 /s/ Mark E. Schwarzmann
- ------------- -------------------------------------------------
Date Mark E. Schwarzmann, Director, Chairman
of the Board and Chief Executive Officer
31
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(ITEM 14 (a))
Page Number
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at December 31, 2005 and 2004 F-3
Consolidated Statements of Income for each of the three years ended
December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2005, 2004 and 2003 F-5 to F-6
Consolidated Statements of Stockholder's Equity for each of the three
years ended December 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8 to F-31
SCHEDULES:
All information on schedules to the Consolidated Financial Statements
required by Rule 7-05 in Article 7 of Regulation S-X is included in the
Consolidated Financial Statements and notes thereto or is not required.
Therefore, all schedules have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying Consolidated Balance Sheets of American
Enterprise Life Insurance Company (a wholly-owned subsidiary of IDS Life
Insurance Company) as of December 31, 2005 and 2004, and the related
Consolidated Statements of Income, Stockholder's Equity, and Cash Flows for
each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of American Enterprise Life
Insurance Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Enterprise Life Insurance Company at December 31, 2005 and 2004, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, in 2004
American Enterprise Life Insurance Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 27, 2006
F-2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands, except share data)
2005 2004
---------- ----------
ASSETS
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $5,818,741;
2004, $6,257,483) $5,757,419 $6,368,833
Preferred and common stocks, at fair value (cost: 2005, $0; 2004, $6,000) - 6,246
Mortgage loans on real estate, at cost (less allowance for losses:
2005 and 2004, $6,862) 355,306 420,899
Other investments 1,108 2,286
---------- ----------
Total investments 6,113,833 6,798,264
Cash and cash equivalents 859 47,356
Amounts due from brokers 75 71
Other accounts receivable 7,560 4,299
Accrued investment income 60,562 67,655
Deferred policy acquisition costs 344,215 299,708
Deferred sales inducement costs 54,359 49,822
Deferred income tax assets, net 23,883 -
Other assets 20,108 3,394
Separate account assets 2,884,054 1,878,620
---------- ----------
Total assets $9,509,508 $9,149,189
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $5,754,763 $6,325,427
Variable annuity guarantees 7,129 5,505
Policy claims and other policyholders' funds 8,002 4,150
Amounts due to brokers 31,682 6,962
Deferred income tax liabilities, net - 34,984
Other liabilities 40,316 41,826
Separate account liabilities 2,884,054 1,878,620
---------- ----------
Total liabilities 8,725,946 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 224,410 199,175
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities (losses) gains (35,708) 62,082
Net unrealized derivative losses (12) (4,414)
---------- ----------
Total accumulated other comprehensive (loss) income (35,720) 57,668
---------- ----------
Total stockholder's equity 783,562 851,715
---------- ----------
Total liabilities and stockholder's equity $9,509,508 $9,149,189
========== ==========
See Notes to Consolidated Financial Statements.
F-3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Thousands)
2005 2004 2003
--------- -------- --------
REVENUES
Net investment income $ 348,265 $376,487 $372,194
Contractholder charges 14,779 11,211 7,528
Mortality and expense risk and other fees 43,307 24,801 13,749
Net realized (loss) gain on investments (1,361) 5,193 25,105
--------- -------- --------
Total revenues 404,990 417,692 418,576
--------- -------- --------
BENEFITS AND EXPENSES
Death and other benefits for investment contracts 17,193 15,438 6,342
Interest credited to account values 206,424 226,033 262,399
Amortization of deferred policy acquisition costs 63,781 60,836 38,392
Separation costs 9,828 - -
Other insurance and operating expenses 74,075 72,185 54,739
--------- -------- --------
Total benefits and expenses 371,301 374,492 361,872
--------- -------- --------
Income before income tax provision and accounting change 33,689 43,200 56,704
Income tax provision 8,454 18,008 19,075
--------- -------- --------
Income before accounting change 25,235 25,192 37,629
Cumulative effect of accounting change, net of tax - (3,562) -
--------- -------- --------
Net income $ 25,235 $ 21,630 $ 37,629
========= ======== ========
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands)
2005 2004 2003
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,235 $ 21,630 $ 37,629
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change, net of tax - 3,562 -
Amortization of deferred policy acquisition costs 63,781 60,836 38,392
Amortization of deferred sales inducement costs 14,313 9,685 7,213
Capitalization of deferred policy acquisition costs (89,256) (65,864) (99,000)
Capitalization of deferred sales inducement costs (15,411) (13,488) (21,890)
Amortization of premium, net 22,977 26,459 23,699
Deferred income tax (benefit) provision (8,581) 21,835 15,420
Net realized loss (gain) on investments 1,361 (5,193) (25,105)
Changes in operating assets and liabilities:
Other accounts receivable (3,261) (727) (1,988)
Accrued investment income 7,093 2,936 (14,143)
Policy claims and other policyholder's funds 3,852 1,050 (5,950)
Other assets and liabilities, net (8,669) (14,981) (1,661)
-------- -------- --------
Net cash provided by (used in) operating activities $ 13,434 $ 47,740 $(47,384)
-------- -------- --------
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(Thousands)
2005 2004 2003
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales $ 579,784 $ 341,077 $ 3,365,402
Maturities, sinking fund payments and calls 577,264 400,057 875,785
Purchases (735,554) (480,031) (5,678,854)
Other investments:
Sales, maturities, sinking fund payments and calls 77,068 126,676 72,281
Purchases (11,564) (9,338) (25,287)
Change in amounts due to and from brokers, net 24,716 (68,018) (910,172)
--------- --------- -----------
Net cash provided by (used in) investing activities 511,714 310,423 (2,300,845)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts:
Considerations received 37,847 202,999 1,733,030
Interest credited to account values 206,424 226,033 262,399
Surrenders and other benefits (815,916) (748,904) (756,827)
--------- --------- -----------
Net cash (used in) provided by financing activities (571,645) (319,872) 1,238,602
--------- --------- -----------
Net (decrease) increase in cash and cash equivalents (46,497) 38,291 (1,109,627)
Cash and cash equivalents at beginning of year 47,356 9,065 1,118,692
--------- --------- -----------
Cash and cash equivalents at end of year $ 859 $ 47,356 $ 9,065
========= ========= ===========
Supplemental disclosures:
Income taxes paid (refunded) $ 288 $ (6,992) $ 3,266
Interest paid on borrowings $ 326 $ 378 $ 373
See Notes to Consolidated Financial Statements.
F-6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2005
(Thousands)
Accumulated
Additional Other
Capital Paid-in Retained Comprehensive
Total Stock Capital Earnings Income/(Loss)
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $825,813 $3,000 $591,872 $139,916 $ 91,025
Comprehensive loss:
Net income 37,629 37,629
Change in unrealized holding losses
on securities, net (44,180) (44,180)
Reclassification adjustment for losses on
derivatives included in net income, net 4,417 4,417
--------
Total comprehensive loss (2,134)
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $823,679 $3,000 $591,872 $177,545 $51,262
Comprehensive income:
Net income 21,630 21,630
Change in unrealized holding gains
on securities, net 2,004 2,004
Reclassification adjustment for losses on
derivatives included in net income, net 4,402 4,402
--------
Total comprehensive income 28,036
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $851,715 $3,000 $591,872 $199,175 $57,668
Comprehensive loss:
Net income 25,235 25,235
Change in unrealized holding losses
on securities, net (97,790) (97,790)
Reclassification adjustment for losses on
derivatives included in net income, net 4,402 4,402
--------
Total comprehensive loss (68,153)
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2005 $783,562 $3,000 $591,872 $224,410 $(35,720)
===============================================================================================================================
See Notes to Consolidated Financial Statements.
F-7
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business, Basis of Presentation and Summary of Significant
--------------------------------------------------------------------
Accounting Policies
-------------------
Nature of Business
American Enterprise Life Insurance Company is a stock life insurance
company domiciled in Indiana, which holds Certificates of Authority in
the District of Columbia and all states except New York. American
Enterprise Life Insurance Company is a wholly-owned subsidiary of IDS
Life Insurance Company (IDS Life), which is domiciled in Minnesota. IDS
Life is a wholly-owned subsidiary of Ameriprise Financial, Inc.
(Ameriprise Financial).
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-K.
Prior to August 1, 2005, Ameriprise Financial was referred to as
American Express Financial Corporation. On February 1, 2005, American
Express Company (American Express) announced its intention to pursue
the disposition of 100% of its shareholdings in what is now Ameriprise
Financial (the Separation) through a tax-free distribution to American
Express shareholders. Effective as of the close of business on
September 30, 2005, American Express completed the Separation and
distribution of common shares to American Express shareholders (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 Insurance Company provides branded financial
products and wholesaling services to support its annuity operation.
American Enterprise Life principally underwrites fixed and variable
annuity contracts primarily through regional and national financial
institutions and regional and/or independent broker-dealers, in all
states except New York. In past years, American Enterprise Life issued
a nominal amount of variable universal life contracts.
American Enterprise Life's principal products are deferred annuities
which are issued primarily to individuals. It offers single premium and
flexible premium deferred annuities on both a fixed and variable dollar
basis. American Enterprise Life's fixed deferred annuities guarantee a
relatively low annual interest rate during the accumulation period (the
time before annuity payments begin). However, American Enterprise Life
has the option of paying a higher rate set at its discretion. In
addition, persons owning one type of annuity may have their interest
calculated based on an increase in a broad-based stock market index.
Under American Enterprise Life's fixed and variable annuity products
described above, the purchaser may choose among investment options that
include American Enterprise Life's "general account" as well as from a
variety of portfolios including common stocks, bonds, managed assets
and/or short-term securities.
F-8
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts
of American Enterprise Life Insurance Company and its wholly-owned
subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The accompanying Consolidated Financial Statements have been prepared
in conformity with United States generally accepted accounting
principles (GAAP) which vary in certain respects from reporting
practices prescribed or permitted by the Indiana Department of
Insurance as included in Note 6. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
American Enterprise Life consolidates all entities, in which it holds a
greater than 50% voting interest. Entities in which American Enterprise
Life holds a greater than 20% but less than 50% voting interest are
accounted for under the equity method. All other investments are
accounted for under the cost method unless American Enterprise Life
determines that it exercises significant influence over the entity by
means other than voting rights, in which case, these entities are
either accounted for under the equity method or are consolidated, as
appropriate.
Qualifying Special Purpose Entities (QSPEs) under Statement of
Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," are not consolidated. Such QSPEs include a securitization
trust containing its rated collateralized debt obligations (CDOs)
described in Note 2. American Enterprise Life sold all of its retained
interest in this securitization trust in 2005.
BALANCE SHEET
INVESTMENTS
Investments consist of the following:
Available-for-Sale Securities
Available-for-Sale securities are carried at fair value on the
Consolidated Balance Sheets with unrealized gains (losses) recorded in
accumulated other comprehensive income (loss) within equity, net of
income tax provision (benefit) and net of adjustments in asset and
liability balances, such as deferred policy acquisition costs (DAC), to
reflect the expected impact on their carrying values had the unrealized
gains (losses) been realized as of the respective balance sheet date.
Gains and losses are recognized in results of operations upon
disposition of the securities. In addition, losses are also recognized
when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and
timing of recovery. Indicators of other-than-temporary impairment for
debt securities include issuer downgrade, default or bankruptcy.
American Enterprise Life also considers the extent to which amortized
cost exceeds fair value, the duration of that difference, and
management's judgment about the issuer's current and prospective
financial condition, as well as its ability and intent to hold until
recovery. Other-than-temporary impairment charges are recorded in net
realized gains (losses) on investments within the Consolidated
Statements of Income. Fair value is generally based on quoted market
prices.
F-9
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Loans on Real Estate, Net
Mortgage loans on real estate reflect principal amounts outstanding
less allowance for mortgage loan losses. The allowance for mortgage
loan losses is measured as the excess of the loan's recorded investment
over the present value of its expected principal and interest payments
discounted at the loan's effective interest rate, or the fair value of
collateral. Additionally, the level of the allowance for mortgage loan
losses considers other factors, including historical experience and
current economic and political conditions. Management regularly
evaluates the adequacy of the allowance for mortgage loan losses and
believes it is adequate to absorb estimated losses in the portfolio.
American Enterprise Life generally stops accruing interest on mortgage
loans for which interest payments are delinquent more than three
months. Based on management's judgment as to the ultimate
collectibility of principal, interest payments received are either
recognized as income or applied to the recorded investment in the loan.
Other Investments
Other investments principally include real estate and reflect
properties acquired in satisfaction of debt and are carried at the
lower of cost or the property's net realizable value.
CASH AND CASH EQUIVALENTS
American Enterprise Life has defined cash equivalents to include highly
liquid investments with original maturities of 90 days or less.
DEFERRED POLICY ACQUISITION COSTS
DAC represents the costs of acquiring new business, principally direct
sales commissions and other distribution 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 is amortized over periods
approximating the lives of the business, generally 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 DAC balances at
any reporting date are supported by projections that show management
expects there to be adequate estimated gross profits or interest
margins after that date to amortize the remaining DAC balances. These
projections are inherently uncertain because they require management to
make assumptions about financial markets, anticipated mortality levels,
and contractholder behavior over periods extending well into the
future. Projection periods used for American Enterprise Life's annuity
business are typically 10 to 15 years. Management regularly monitors
financial market conditions and actual contractholder behavior
experience and compares them to its assumptions. For annuity products,
the assumptions made in projecting future results and calculating the
DAC balances and DAC amortization expense are management's best
estimates. Management is required to update these assumptions whenever
it appears that, based on actual experience or other evidence, earlier
estimates should be revised. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins
used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in a decrease in DAC balances and
an increase in DAC amortization expenses while a decrease in
amortization percentage will result in an increase in DAC balances and
a decrease in DAC amortization expenses. 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.
F-10
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED SALES INDUCEMENT COSTS
Deferred sales inducement costs (DSIC) consist of bonus interest
credits and deposit credits added to certain annuity contract values.
These benefits are capitalized to the extent they are incremental to
amounts that would be credited on similar contracts without the
applicable feature. These costs were previously included in DAC and
were reclassified as part of the adoption of the American Institute of
Certified Public Accountants (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). The amounts capitalized are amortized using the same methodology
and assumptions used to amortize DAC.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivative instruments are classified on the Consolidated Balance
Sheets at fair value within other assets or liabilities. The fair
value of American Enterprise Life's derivative financial instruments is
determined using either market quotes or valuation models that are
based upon the net present value of estimated future cash flows and
incorporate current market data inputs. In certain instances, the fair
value includes structuring costs incurred at the inception of the
transactions. The accounting for the change in the fair value of a
derivative instrument depends on its intended use and the resulting
hedge designation, if any.
American Enterprise Life has economic hedges that either do not qualify
or are not designated for hedge accounting treatment under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
For derivative financial instruments that do not qualify for hedge
accounting, or are not designated as hedges, changes in the fair value
are reported in current period earnings generally as a component of net
investment income. See the "Derivatives Not Designated as Hedges"
section of Note 8 which describes the types of economic hedges used by
American Enterprise Life.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities are funds held for exclusive
benefit of variable annuity contractholders. American Enterprise Life
receives mortality and expense risk and other fees, including payments
from its affiliate, RiverSource Investments, LLC for providing certain
sponsor and related servicing activity, which are based on asset
levels, and guaranteed minimum death benefit (GMDB) fees from the
related accounts. In addition, American Enterprise Life also receives
marketing and administrative support payments from the affiliates of
other companies' funds included as investment options in its variable
products, which vary based on the level of variable assets. American
Enterprise Life's major source of revenue from variable annuities it
sells is mortality and expense risk and other fees.
American Enterprise Life provides contractual mortality assurances to
variable annuity contractholders that the net assets of the separate
accounts will not be affected by future variations in the actual life
expectancy experience of the annuitants and beneficiaries from the
mortality assumptions implicit in the annuity contracts. American
Enterprise Life makes periodic fund transfers to, or withdrawals from,
the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. American Enterprise
Life also guarantees that the rates at which administrative charges are
deducted from contract funds will not exceed contractual maximums.
LIABILITIES FOR FUTURE POLICY BENEFITS
Fixed Annuities and Variable Annuity Guarantees
Liabilities for fixed and variable deferred annuities are equal to
accumulation values which are the cumulative gross deposits, credited
interest and fund performance less withdrawals and mortality and
expense risk charges.
F-11
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The majority of the variable annuity contracts offered by American
Enterprise Life contain GMDB provisions. When market values of the
customer's accounts decline, the death benefit payable on a contract
with a GMDB may exceed the contract accumulation value. American
Enterprise Life also offers variable annuities with death benefit
provisions that gross up the amount payable by a certain percentage of
contract earnings. These are referred to as gain gross-up (GGU)
benefits. In addition, American Enterprise Life offers contracts
containing guaranteed minimum withdrawal benefit (GMWB), guaranteed
minimum income benefit (GMIB) and guaranteed minimum accumulation
benefit (GMAB) provisions.
Effective January 1, 2004, liabilities for GMDB, GGU and GMIB benefits
have been established under SOP 03-1. Actuarial models to simulate
various equity market scenarios are used to project these benefits and
contract assessments and include making significant assumptions related
to customer asset value growth rates, mortality, persistency and
investment margins. These assumptions, as well as their periodic review
by management, are consistent with those used for DAC purposes. Prior
to the adoption of SOP 03-1, amounts paid in excess of contract value
were expensed when payable. See the "Recently Issued Accounting Standards"
section below and Note 4 for more information about these guaranteed
benefits.
GMWB and GMAB provisions are considered embedded derivatives under SFAS
133 and, accordingly, are carried at fair value within future policy
benefits for variable annuity guarantees on the Consolidated Balance
Sheets. The fair value of these embedded derivatives is based on the
present value of future benefits less applicable fees charged for the
provision. Changes in fair value are reflected in death and other
benefits for investment contracts within the Consolidated Statements of
Income.
Liabilities for fixed annuities in a benefit or payout status are based
on future estimated payments using established industry mortality
tables and interest rates, ranging from 4.6% to 8.5% at December 31,
2005, depending on year of issue, with an average rate of approximately
5.5%.
REVENUES AND EXPENSES
American Enterprise Life's principal sources of revenue include net
investment income, contractholder charges and mortality and expense
risk and other fees.
Net Investment Income
Net investment income predominantly consists of interest income earned
on fixed maturity securities classified as Available-for-Sale, mortgage
loans on real estate and gains and losses on hedges on GMWB. Interest
income is accrued as earned using the effective interest method, which
makes an adjustment of the yield for security premiums and discounts on
all performing fixed maturity securities classified as
Available-for-Sale and mortgage loans on real estate so that the
related security or loan recognizes a constant rate of return on the
outstanding balance throughout its term.
Contractholder Charges
Contractholder charges include administrative and surrender charges on
annuities and are recognized as revenue when collected.
Mortality and Expense Risk and Other Fees
Mortality and expense risk and other fees include risk and
administration fees, which are generated directly and indirectly from
American Enterprise Life's separate account assets. American Enterprise
Life's mortality and expense risk and other fees are generally computed
as a contractual rate based on the underlying asset values and are
generally received monthly.
F-12
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Realized Gain (Loss) on Investments
Realized gains and losses are recognized using the specific
identification method, on a trade date basis, and charges are recorded
when securities are determined to be other-than-temporarily impaired.
Separation Costs
During 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, re-branding and marketing costs and costs to separate
and reestablish technology platforms related to the separation and
Distribution of Ameriprise Financial.
Income Taxes
American Enterprise Life's taxable income is included in the
consolidated federal income tax return of American Express through
September 30, 2005. American Enterprise Life's taxable income will
be included with IDS Life in filing a separate consolidated life
insurance company federal income tax return for five tax years
following the Distribution including the period October 1, 2005 through
December 31, 2005. American Enterprise Life provides for income taxes
on a separate return basis, except that, under an agreement with IDS
Life, tax benefit is recognized for losses to the extent they can be
used on the consolidated tax return. It is the policy of IDS Life that
IDS Life will reimburse subsidiaries for all tax benefits.
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 address 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
anticipates the impact of FSP FAS 115-1 and FAS 124-1 on American
Enterprise Life's consolidated results of operations and financial
condition will not be material.
In September 2005, the 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 DAC on internal replacements of insurance and
investment contracts other than those specifically described in 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
consolidated results of operations and financial condition.
F-13
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" (SFAS 154). This statement replaces APB Opinion No. 20,
"Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements" and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. American Enterprise
Life does not anticipate SFAS 154 will materially impact its
Consolidated Financial Statements upon its adoption on January 1, 2006.
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 SOP 03-1 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 American
Enterprise Life's consolidated results of operations or financial
condition.
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 DAC
and any DSIC 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 DSIC 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.
F-14
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), which addresses consolidation
by business enterprises of variable interest entities (VIEs) and was
subsequently revised in December 2003. FIN 46 was effective for
American Enterprise Life as of December 31, 2003. FIN 46 does not
impact the accounting for QSPEs as defined by SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," such as American Enterprise Life's CDO-related
securitization trust established in 2001 (which was sold in 2005). That
trust contained a majority of American Enterprise Life's rated CDOs
whose retained interest in the trust had a carrying value of $41.1
million at December 31, 2003, of which $30.3 million is considered
investment grade. There were no other impacts on the financial
statements as of December 31, 2003.
2. Investments
-----------
AVAILABLE-FOR-SALE SECURITIES
Available-for-Sale securities at December 31, 2005 are distributed by
type as presented below:
---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
Fixed maturities:
Mortgage and other asset-backed
securities $2,650,573 $7,539 $(47,855) $2,610,257
Corporate debt securities 2,462,313 28,075 (43,009) 2,447,379
Foreign corporate bonds and
obligations 593,440 8,734 (12,993) 589,181
U.S. Government and agencies obligations 74,172 111 (1,743) 72,540
State and municipal obligations 30,240 190 (1,159) 29,271
Foreign government bonds and obligations 8,003 788 - 8,791
---------------------------------------------------------------------------------------------------------
Total fixed maturities 5,818,741 45,437 (106,759) 5,757,419
Preferred and common stocks - - - -
.........................................................................................................
Total $5,818,741 $45,437 $(106,759) $5,757,419
---------------------------------------------------------------------------------------------------------
F-15
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale securities at December 31, 2004 are distributed by
type as presented below:
----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Fixed maturities:
Mortgage and other asset-backed
securities $2,719,323 $ 31,234 $(11,301) $2,739,256
Corporate debt securities 2,715,114 88,129 (9,854) 2,793,389
Foreign corporate bonds and
obligations 638,653 22,603 (3,419) 657,837
U.S. Government and agencies obligations 102,245 310 (71) 102,484
Structured investments(a) 47,968 - (6,194) 41,774
State and municipal obligations 30,239 302 (878) 29,663
Foreign government bonds and obligations 3,941 489 - 4,430
----------------------------------------------------------------------------------------------------------
Total fixed maturities 6,257,483 143,067 (31,717) 6,368,833
Preferred and common stocks 6,000 246 - 6,246
..........................................................................................................
Total $6,263,483 $143,313 $(31,717) $6,375,079
----------------------------------------------------------------------------------------------------------
<FN>
(a) Includes unconsolidated CDOs.
At December 31, 2005 and 2004, fixed maturity securities, excluding net
unrealized appreciation and depreciation, comprised approximately 94%
of American Enterprise Life's total investments. These securities are
rated by Moody's Investors Service, Inc. (Moody's) and Standard &
Poor's (S&P), except for approximately $123.6 million and $139.3
million of securities at December 31, 2005 and 2004, respectively,
which are rated by RiverSource Investments, LLC's internal analysts
using criteria similar to Moody's and S&P. Ratings on investment grade
securities are presented using S&P's convention and, if the two
agencies' ratings differ, the lower rating is used. A summary by
rating, (excluding net unrealized appreciation and depreciation) on
December 31 is as follows:
Rating 2005 2004
-------------------------------------------------------------------------
AAA 49% 47%
AA 3 2
A 18 19
BBB 23 24
Below investment grade 7 8
.........................................................................
Total 100% 100%
-------------------------------------------------------------------------
At December 31, 2005 and 2004, approximately 58% and 63%, respectively,
of the securities rated AAA are GNMA, FNMA and FHLMC mortgage-backed
securities. No holdings of any other issuer were greater than 10% of
stockholder's equity.
F-16
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about Available-for-Sale
securities with gross unrealized losses and the length of time that
individual securities have been in a continuous unrealized loss
position as of December 31, 2005:
------------------------------------------------------------------------------------------------------------------------------
(Thousands) Less than 12 months 12 months or more Total
------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities: Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------
Mortgage and other
asset-backed securities $1,440,072 $(21,811) $ 719,535 $(26,044) $2,159,607 $ (47,855)
Corporate debt securities 1,130,267 (24,674) 414,348 (18,335) 1,544,615 (43,009)
Foreign corporate bonds
and obligations 210,733 (7,352) 131,297 (5,641) 342,030 (12,993)
U.S. Government and
agencies obligations 33,493 (623) 36,557 (1,120) 70,050 (1,743)
State and municipal
obligations 23,961 (1,025) 2,870 (134) 26,831 (1,159)
..............................................................................................................................
Total $2,838,526 $(55,485) $1,304,607 $(51,274) $4,143,133 $(106,759)
------------------------------------------------------------------------------------------------------------------------------
The following table provides information about Available-for-Sale
securities with gross unrealized losses and the length of time that
individual securities have been in a continuous unrealized loss
position as of December 31, 2004:
------------------------------------------------------------------------------------------------------------------------------
(Thousands) Less than 12 months 12 months or more Total
------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities: Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------
Mortgage and other
asset-backed securities $963,075 $ (5,848) $151,475 $ (5,453) $1,114,550 $(11,301)
Corporate debt securities 489,190 (3,892) 214,895 (5,962) 704,085 (9,854)
Foreign corporate bonds and
obligations 120,722 (1,157) 103,192 (2,262) 223,914 (3,419)
U.S. Government and
agencies obligations 71,002 (56) 533 (15) 71,535 (71)
Structured investments - - 41,774 (6,194) 41,774 (6,194)
State and municipal
obligations - - 22,126 (878) 22,126 (878)
..............................................................................................................................
Total $1,643,989 $(10,953) $533,995 $(20,764) $2,177,984 $(31,717)
------------------------------------------------------------------------------------------------------------------------------
In evaluating potential other-than-temporary impairments, American
Enterprise Life considers the extent to which amortized costs exceeds
fair value and the duration of that difference. A key metric in
performing this evaluation is the ratio of fair value to amortized
cost. The following table summarizes the unrealized losses by ratio of
fair value to amortized cost as of December 31, 2005:
(Millions, except
number of securities) Less than 12 months 12 months or more Total
------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross
Ratio of Fair Value Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
to Amortized Cost Securities Value Losses Securities Value Losses Securities Value Losses
------------------------------------------------------------------------------------------------------------------------------
95% - 100% 357 $2,733 $(47) 116 $1,135 $(40) 473 $3,868 $ (87)
90% - 95% 28 78 (5) 22 169 (11) 50 247 (16)
80% - 90% 7 27 (4) 1 1 - 8 28 (4)
..............................................................................................................................
Total 392 $2,838 $(56) 39 $1,305 $(51) 531 $4,143 $(107)
------------------------------------------------------------------------------------------------------------------------------
F-17
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A majority of the gross unrealized losses related to corporate debt
securities and substantially all of the gross unrealized losses related
to mortgage and other asset-backed securities are attributable to
changes in interest rates. A portion of the gross unrealized losses
particularly related to corporate debt securities is also attributed
to credit spreads and specific issuer credit events. As noted in the
table above, a significant portion of the unrealized loss relates to
securities that have a fair value to amortized cost ratio of 95% or
above resulting in an overall 97% ratio of fair value to amortized cost
for all securities with an unrealized loss. The unrealized losses are
not concentrated in any individual industries or with any individual
securities.
American Enterprise Life monitors the investments and metrics discussed
previously on a quarterly basis to identify and evaluate investments
that have indications of possible other-than-temporary impairment. See
the Investments section of Note 1 for information regarding American
Enterprise Life's policy for determining when an investment's decline
in value is other-than-temporary. As stated earlier, American
Enterprise Life's ongoing monitoring process has revealed that a
significant portion of the gross unrealized losses on its
Available-for-Sale securities are attributable to changes in interest
rates. Additionally, American Enterprise Life has the ability and
intent to hold these securities for a time sufficient to recover its
amortized cost and has, therefore, concluded that none are
other-than-temporarily impaired at December 31, 2005.
The change in net unrealized securities gains (losses) recognized in
accumulated other comprehensive income includes three components, net
of tax: (i) unrealized gains (losses) that arose from changes in market
value of securities that were held during the period (holding gains
(losses)), (ii) gains (losses) that were previously unrealized, but
have been recognized in current period net income due to sales and
other-than-temporary impairments of Available-for-Sale securities
(reclassification of realized (gains) losses) and (iii) other items
primarily consisting of adjustments in asset balances, such as DAC and
DSIC, to reflect the expected impact on their carrying values had the
unrealized gains (losses) been realized as of the respective
consolidated balance sheet dates.
The following table presents these components of other comprehensive
(loss) income, net of tax:
(Thousands) 2005 2004 2003
-----------------------------------------------------------------------------------------------------
Holding (losses) gains, net of tax of $60,617, $4,106,
and $18,168, respectively $(112,573) $ 7,624 $(33,742)
Reclassification of realized losses (gains), net of
tax of $95, $1,920, and $9,157, respectively 177 (3,565) (17,006)
DAC, net of tax of $6,660, $294 and $3,536,
respectively 12,372 (544) 6,568
DSIC, net of tax of $1,205, $814, and $0,
respectively 2,234 (1,511) -
.....................................................................................................
Net unrealized securities (losses) gains $ (97,790) $ 2,004 $(44,180)
-----------------------------------------------------------------------------------------------------
F-18
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a distribution of Available-for-Sale securities by
maturity at December 31, 2005:
Amortized Fair
(Thousands) Cost Value
-----------------------------------------------------------------------------------------
Due within 1 year $ 137,638 $ 138,636
Due after 1 through 5 years 871,839 870,118
Due after 5 through 10 years 2,052,358 2,033,347
Due after 10 years 106,333 105,061
----------------------------------------------------------------------------------------
3,168,168 3,147,162
Mortgage and other asset-backed securities 2,650,573 2,610,257
.........................................................................................
Total $5,818,741 $5,757,419
-----------------------------------------------------------------------------------------
The expected payments on mortgage and other asset-backed securities may
not coincide with their contractual maturities. As such, these
securities were not included in the maturities distribution.
The table below includes sales, maturities, and purchases of
investments classified as Available-for-Sale for the years ended
December 31:
(Thousands) 2005 2004 2003
------------------------------------------------------------------------------
Sales $579,784 $341,077 $3,365,402
Maturities, sinking fund payments
and calls $577,264 $400,057 $ 875,785
Purchases $735,554 $480,031 $5,678,854
------------------------------------------------------------------------------
Included in net realized gains and losses were gross realized gains and
losses on sales of securities, as well as other-than-temporary losses
on investments, classified as Available-for-Sale, using the specific
identification method, as noted in the following table for the years
ended December 31:
(Thousands) 2005 2004 2003
------------------------------------------------------------------------------
Gross realized gains from sales $ 11,232 $ 9,464 $ 65,739
Gross realized losses from sales $(10,155) $(3,980) $(30,254)
Other-than-temporary impairments $ (1,349) $ - $ (9,323)
------------------------------------------------------------------------------
The $1.3 million of other-than-temporary impairments in 2005 primarily
related to corporate debt securities within the auto industry which
were downgraded in 2005 and subsequently deteriorated throughout
the year in terms of their fair value to amortized cost. The $9.3
million of other-than-temporary impairments in 2003 consisted of $5.6
million related to corporate debt securities and $3.7 million related
to American Enterprise Life's interest in a CDO securitization trust
which was sold in 2005 as discussed below.
During the second quarter 2005, American Enterprise Life sold all of
its retained interest in a CDO-related securitization trust and
recognized a net realized pretax loss of $1.2 million. The carrying
value of this retained interest was $41.8 million at December 31, 2004,
of which $31.0 million was considered investment grade.
At December 31, 2005 and 2004, bonds carried at $4.2 million were on
deposit with various states as required by law.
F-19
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE LOANS ON REAL ESTATE, NET
The following is a summary of mortgage loans on real estate at
December 31:
(Thousands) 2005 2004
-------------------------------------------------------------------------
Mortgage loans on real estate $362,168 $427,761
Less: allowance for loan losses (6,862) (6,862)
.........................................................................
Net mortgage loans $355,306 $420,899
-------------------------------------------------------------------------
Mortgage loans are first mortgages on real estate. American Enterprise
Life holds the mortgage documents, which gives it the right to take
possession of the property if the borrower fails to perform according
to the terms of the agreements. Mortgage loan fundings are restricted
by state insurance regulatory authorities to 80% or less of the market
value of the real estate at the time of origination of the loan.
Commitments to fund mortgages are made in the ordinary course of
business. The estimated fair value of the mortgage commitments as of
December 31, 2005 and 2004 was not material.
American Enterprise Life did not have a recorded investment in impaired
mortgage loans on real estate at December 31, 2005 and 2004. During
2005 and 2004, the average recorded investment in impaired mortgage
loans on real estate was nil and $1.5 million, respectively. American
Enterprise Life recognized nil, $0.1 million and $0.2 million of
interest income related to impaired mortgage loans on real estate for
the years ended December 31, 2005, 2004 and 2003, respectively.
The balances of and changes in the total allowance for mortgage loan
losses as of and for the years ended December 31, are as follows:
(Thousands) 2005 2004 2003
-------------------------------------------------------------------------------------
Balance, beginning of year $6,862 $ 7,362 $10,812
Provision for mortgage loan losses - 661 281
Foreclosures, write-offs and loan sales - (1,161) (3,731)
.....................................................................................
Balance, end of year $6,862 $ 6,862 $ 7,362
-------------------------------------------------------------------------------------
F-20
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of credit risk of mortgage loans on real estate by region
at December 31 were:
(Thousands) 2005 2004
-----------------------------------------------------------------------------------------------------
On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
-----------------------------------------------------------------------------------------------------
South Atlantic $ 71,153 $ - $ 96,011 $ 240
East North Central 70,402 - 81,737 -
West North Central 66,097 - 74,452 -
Middle Atlantic 48,435 - 51,082 -
Mountain 45,004 - 53,226 -
West South Central 23,721 - 24,585 -
Pacific 14,242 - 20,073 -
New England 13,634 - 16,483 -
East South Central 9,480 - 10,112 -
.....................................................................................................
362,168 427,761 240
Less: allowance for loan losses (6,862) - (6,862) -
.....................................................................................................
Total $355,306 $ - $420,899 $ 240
-----------------------------------------------------------------------------------------------------
Concentration of credit risk of mortgage loans on real estate by
property type at December 31 were:
(Thousands) 2005 2004
-----------------------------------------------------------------------------------------------------
On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
-----------------------------------------------------------------------------------------------------
Office buildings $132,250 $ - $154,259 $ 240
Apartments 82,851 - 89,977 -
Department/retail stores 75,215 - 94,284 -
Industrial buildings 43,690 - 48,087 -
Hotels/motels 13,348 - 25,802 -
Medical buildings 10,520 - 10,890 -
Mixed use 4,294 - 4,462 -
.....................................................................................................
362,168 - 427,761 240
Less: allowance for loan losses (6,862) - (6,862) -
.....................................................................................................
Total $355,306 $ - $420,899 $ 240
-----------------------------------------------------------------------------------------------------
SOURCES OF INVESTMENT INCOME AND REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income for the years ended December 31 is summarized as
follows:
(Thousands) 2005 2004 2003
-------------------------------------------------------------------------------------
Income on fixed maturities $309,257 $328,164 $321,420
Income on mortgage loans on real estate 28,245 36,329 42,482
Other investments 13,649 12,236 11,600
.....................................................................................
351,151 376,729 375,502
Less: investment expenses 2,886 242 3,308
.....................................................................................
Total $348,265 $376,487 $372,194
-------------------------------------------------------------------------------------
F-21
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net realized gains (losses) on investments for the years ended
December 31 is summarized as follows:
(Thousands) 2005 2004 2003
-------------------------------------------------------------------------------------
Fixed maturities $ (272) $5,484 $26,162
Mortgage loans on real estate (1,089) (288) (1,082)
Other investments - (3) 25
.....................................................................................
Total $(1,361) $5,193 $25,105
-------------------------------------------------------------------------------------
3. Deferred Policy Acquisition Costs and Deferred Sales Inducement Costs
---------------------------------------------------------------------
The balances of and changes in DAC as of and for the years ended
December 31, were:
(Thousands) 2005 2004 2003
-------------------------------------------------------------------------------------
Balance, beginning of year $299,708 $296,722 $226,010
Impact of SOP 03-1 - (1,204) -
Capitalization of acquisition costs 89,256 65,864 99,000
Amortization, excluding impact of changes
in assumptions (66,581) (61,936) (41,592)
Amortization, impact of annual third
quarter changes in DAC-related assumptions 2,800 1,100 3,200
Impact of changes in net unrealized
securities losses (gains) 19,032 (838) 10,104
.....................................................................................
Balance, end of year $344,215 $299,708 $296,722
-------------------------------------------------------------------------------------
The balances of and changes in DSIC as of and for the years ended
December 31, were:
(Thousands) 2005 2004 2003
-------------------------------------------------------------------------------------
Balance, beginning of year $ 49,822 $49,244 $34,567
Impact of SOP 03-1 - (900) -
Capitalization of sales inducements 15,411 13,488 21,890
Amortization (14,313) (9,685) (7,213)
Impact of changes in net unrealized
securities losses (gains) 3,439 (2,325) -
.....................................................................................
Balance, end of year $ 54,359 $49,822 $49,244
-------------------------------------------------------------------------------------
F-22
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Variable Annuity Guarantees
---------------------------
This note discusses variable annuity guarantees for which liabilities
are established under SOP 03-1, specifically GMDB, GGU and GMIB. See
Note 8 for more information about guarantees for which liabilities are
established under SFAS 133, specifically GMWB and GMAB.
The majority of the variable annuity contracts offered by American
Enterprise Life contain GMDB provisions. When market values of the
customer's accounts decline, the death benefit payable on a contract
with a GMDB may exceed the contract accumulation value. American
Enterprise Life also offers GGU provisions on variable annuities with
death benefit provisions and contracts containing GMIB provisions. If
elected by the contract owner and after a stipulated waiting period
from contract issuance, a GMIB guarantees a minimum lifetime annuity
based on a specified rate of contract accumulation value growth and
predetermined annuity purchase rates. American Enterprise Life has
established additional liabilities for these variable annuity death
benefits and GMIB provisions.
The variable annuity death benefit liability is determined each period
by estimating the expected value of death benefits in excess of the
projected contract accumulation value and recognizing the excess over
the estimated meaningful life based on expected assessments (e.g.,
mortality and expense fees, contractual administrative charges and
similar fees). Similarly, the GMIB liability is determined each period
by estimating the expected value of annuitization benefits in excess of
the projected contract accumulation value at the date of annuitization
and recognizing the excess over the estimated meaningful life based on
expected assessments.
In determining the additional liabilities for variable annuity death
benefits and GMIB, American Enterprise Life projects these benefits and
contract assessments using actuarial models to simulate various equity
market scenarios. Significant assumptions made in projecting future
benefits and assessments relate to customer asset value growth rates,
mortality, persistency and investment margins and are consistent with
those used for DAC asset valuation for the same contracts. As with DAC,
management will review, and where appropriate, adjust its assumptions
each quarter. Unless management identifies a material deviation over
the course of quarterly monitoring, management will review and update
these assumptions annually in the third quarter of each year.
F-23
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides summary information related to variable annuity
contracts for which American Enterprise Life has established additional
liabilities for death benefits and GMIB as of December 31:
----------------------------------------------------------------------------------------------------
VARIABLE ANNUITY GMDB, GMIB, AND GGU BY BENEFIT TYPE 2005 2004
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------------------
Contracts with GMDB Total Contract Value $1,562,858 $1,205,839
Providing for Return Contract Value in Separate Accounts $ 843,406 $ 333,958
of Premium Net Amount at Risk* $ 5,025 $ 4,430
Weighted Average Attained Age 65 64
----------------------------------------------------------------------------------------------------
Contracts with GMDB Total Contract Value $2,256,534 $1,941,942
Providing for One Year Contract Value in Separate Accounts $1,645,665 $1,287,227
Ratchet Net Amount at Risk* $ 40,412 $ 52,435
Weighted Average Attained Age 63 64
----------------------------------------------------------------------------------------------------
Total Contract Value $ 453,008 $ 305,537
Contracts with Other Contract Value in Separate Accounts $ 387,456 $ 236,344
GMDB Net Amount at Risk* $ 15,883 $ 11,689
Weighted Average Attained Age 63 64
----------------------------------------------------------------------------------------------------
Total Contract Value $ 128,084 $ 103,324
Contracts with GGU Contract Value in Separate Accounts $ 94,482 $ 65,952
Death Benefit Net Amount at Risk* $ 6,513 $ 3,802
Weighted Average Attained Age 64 64
----------------------------------------------------------------------------------------------------
Total Contract Value $ 763,365 $ 579,466
Contracts with GMIB Contract Value in Separate Accounts $ 686,175 $ 497,594
Net Amount at Risk* $ 15,962 $ 11,886
Weighted Average Attained Age 60 59
----------------------------------------------------------------------------------------------------
<FN>
* Represents current death benefit less total contract value for GMDB, amount of gross up for GGU
and accumulated guaranteed minimum benefit base less total contract value for GMIB and assumes
the actuarially remote scenario that all claims become payable on the same day.
----------------------------------------------------------------------------------------------------
ADDITIONAL LIABILITIES AND INCURRED BENEFITS GMDB & GGU GMIB
----------------------------------------------------------------------------------------------------
Liability balance at January 1 $ 2,516 $ 2,989
For the year ended Reported claims $ 967 $ -
December 31, 2005 Liability balance at December 31 $ 2,247 $ 3,527
Incurred claims (reported + change in
liability) $ 698 $ 538
----------------------------------------------------------------------------------------------------
The additional liabilities for guaranteed benefits established under
SOP 03-1 are supported by general account assets. Changes in these
liabilities are included in death and other benefits in the
Consolidated Statements of Income.
Contract values in separate accounts were invested in various equity,
bond and other funds as directed by the contractholder. No gains or
losses were recognized on assets transferred to separate accounts for
the periods presented.
F-24
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income Taxes
------------
American Enterprise Life qualifies as a life insurance company for
federal income tax purposes. As such, American Enterprise Life is
subject to the Internal Revenue Code provisions applicable to life
insurance companies.
Provisions (benefits) for income taxes were:
(Thousands) 2005 2004 2003
----------------------------------------------------------------------------------------
Federal income tax:
Current $16,976 $(2,895) $ 3,371
Deferred (8,581) 21,835 15,420
----------------------------------------------------------------------------------------
Total federal income taxes 8,395 18,940 18,791
State income taxes-current 59 (932) 284
........................................................................................
Income tax provision before
accounting change $ 8,454 $18,008 $19,075
----------------------------------------------------------------------------------------
The principal reasons that the aggregate income tax provision is
different from that computed by using the U.S. statutory rate of 35%
are as follows:
2005 2004 2003
----------------------------------------------------------------------------------------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Changes in taxes resulting from:
Tax-exempt interest and dividend income (5.1) (1.7) (0.8)
State income taxes, net of federal benefit 0.1 (1.4) 0.3
Other, net (4.9) 9.8 (0.9)
........................................................................................
Income tax provision before accounting change 25.1% 41.7% 33.6%
========================================================================================
Deferred income tax assets and liabilities result from temporary
differences between the assets and liabilities measured for U.S. GAAP
reporting versus income tax return purposes. The significant components
of American Enterprise Life's deferred income tax assets and
liabilities as of December 31, 2005 and 2004 are reflected in the
following table:
(Thousands) 2005 2004
-----------------------------------------------------------------------------------------
Deferred income tax assets:
Policy reserves $132,534 $112,410
Deferred taxes related to net unrealized securities and
derivative losses 19,234 -
Other investments - 894
Other 10,183 5,630
.........................................................................................
Total deferred income tax assets 161,951 118,934
-----------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 97,720 86,547
Deferred taxes related to net unrealized securities and
derivative gains - 36,682
Other investments 21,832 -
Other 18,516 30,689
.........................................................................................
Total deferred income tax liabilities 138,068 153,918
.........................................................................................
Deferred tax assets (liabilities), net $ 23,883 $(34,984)
-----------------------------------------------------------------------------------------
F-25
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
American Enterprise Life is required to establish a valuation allowance
for any portion of the deferred tax assets that management believes
will not be realized. Included in American Enterprise Life's 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. American Enterprise Life has $33.4 million in capital loss
carryforwards that expire December 31, 2009. The deferred tax benefit
of these capital loss carryforwards is reflected in the other
investments deferred tax assets, net of other related items. Based on
analysis of American Enterprise 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 American Enterprise Life to utilize
all of its deferred tax assets. Accordingly, no valuation allowance for
deferred tax assets has been established as of December 31, 2005 and
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 ended December 31, 2005. Additionally, IDS Life and
subsidiaries will not be able to file a consolidated U.S. federal
income tax return with the other members of the Ameriprise Financial
affiliated group for five tax years following the Distribution.
Therefore 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.
The items comprising other comprehensive income in the Consolidated
Statements of Stockholder's Equity are presented net of the following
income tax benefit (provision) amounts:
(Thousands) 2005 2004 2003
----------------------------------------------------------------------------------------
Net unrealized securities losses (gains) $52,657 $(1,078) $23,789
Net unrealized derivative gains (2,370) (2,370) (2,379)
........................................................................................
Net income tax benefit (provision) $50,287 $(3,448) $21,410
----------------------------------------------------------------------------------------
6. Statutory Capital and Surplus
-----------------------------
Statutory capital and surplus available for distribution or dividends
to IDS Life are limited to American Enterprise Life's surplus as
determined in accordance with accounting practices prescribed by state
insurance regulatory authorities. American Enterprise Life's statutory
unassigned deficit aggregated $61.9 million and $69.0 million as of
December 31, 2005 and 2004, respectively; therefore, any dividend or
distribution in 2006 would require approval of the Department of
Insurance of the State of Indiana.
F-26
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory net (loss) income for the years ended December 31 and capital
and surplus as of December 31 are summarized as follows:
(Thousands) 2005 2004 2003
-----------------------------------------------------------------------------------------
Statutory net (loss) income $ (8,253) $ 47,380 $ 6,483
Statutory capital and surplus $532,942 $525,885 $495,816
American Enterprise Life is subject to regulatory capital requirements.
Actual capital, determined on a statutory basis, as of December 31,
2005 and 2004 was $583.3 million and $585.0 million, respectively.
Actual capital, as defined by the NAIC for purposes of meeting
regulatory capital requirements, includes statutory capital and
surplus, plus certain statutory valuation reserves. The regulatory
capital requirement was $125.3 million and $138.8 million as of
December 31, 2005 and 2004, respectively.
7. Related Party Transactions
--------------------------
American Enterprise Life has no employees. Charges by IDS Life for use
of joint facilities, technology support, marketing services and other
services aggregated $83.8 million, $64.9 million, and $56.3 million for
2005, 2004 and 2003, respectively. Certain of these costs are included
in DAC. Expenses allocated to American Enterprise Life may not be
reflective of expenses that would have been incurred by American
Enterprise Life on a stand-alone basis.
In connection with Ameriprise Financial being named the investment
manager for the proprietary mutual funds used as investment options by
American Enterprise Life's variable annuity and variable life insurance
contract owners in the fourth quarter of 2003, Ameriprise Financial
received management fees from these funds. American Enterprise Life
continues to provide all fund management services, other than
investment management, and entered into an administrative services
agreement with Ameriprise Financial to be compensated for the services
American Enterprise Life provides. For the years ended December 31,
2005, 2004 and 2003, American Enterprise Life received $1.2 million,
$1.1 million and $0.1 million, respectively, under the agreement with
Ameriprise Financial. In the fourth quarter of 2005, RiverSource
Investments, LLC replaced Ameriprise Financial as the investment
manager. As a result, American Enterprise Life's administrative service
fees were payable from RiverSource Investments, LLC rather than
Ameriprise Financial during the fourth quarter of 2005. For the year
ended December 31, 2005, American Enterprise Life received $0.5 million
under the agreement with RiverSource Investments, LLC.
Included in other liabilities at December 31, 2005 and 2004 are $22.3
million and $6.3 million, respectively, payable to IDS Life for federal
income taxes.
F-27
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
American Enterprise Life maintains an overall risk management strategy
that incorporates the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by
interest rate and equity market volatility. American Enterprise Life
does not engage in any derivative instrument trading activities. Credit
risk associated with American Enterprise Life's derivatives is limited
to the risk that a derivative counterparty will not perform in
accordance with the terms of the contract. To mitigate such risk,
counterparties are all required to be preapproved. Additionally,
American Enterprise Life may, from time to time, enter into master
netting agreements wherever practical. American Enterprise Life
currently has economic hedges that either do not qualify or are not
designated for hedge accounting treatment under SFAS No. 133.
During 2005, 2004 and 2003, American Enterprise Life recognized the
following impacts in other comprehensive income related to its cash
flow hedging activity, net of tax:
(Thousands) 2005 2004 2003
----------------------------------------------------------------------------------------------------------
Reclassification for realized losses, net of tax of $4,402 $4,402 $4,417
$2,370, $2,370, and $2,378, respectively
..........................................................................................................
Net unrealized derivative losses $4,402 $4,402 $4,417
----------------------------------------------------------------------------------------------------------
Derivatives Not Designated as Hedges
American Enterprise Life has economic hedges that either do not qualify
or are not designated for hedge accounting treatment.
From time to time American Enterprise Life enters into interest rate
swaps, floors and caps to manage American Enterprise Life's interest
rate risk. Specifically, American Enterprise Life uses the instruments
to protect the margin between interest rates earned on investments and
the interest rates credited to related annuity contract holders. The
interest rate swaps and floors are exclusively with IDS Life. The
values of derivative financial instruments are based on market values,
dealer quotes or pricing models. The interest rate swaps had carrying
amounts of ($6.8 million) and ($17.6 million) at December 31, 2005 and
2004, respectively, and are included in other liabilities on the
Consolidated Balance Sheets. The interest rate floors had carrying
amounts of $0.5 million and $1.7 million at December 31, 2005 and 2004,
respectively, and are included in other assets on the
Consolidated Balance Sheets. American Enterprise Life incurred $16.1
million and $18.2 million in derivative losses in 2005 and 2004,
respectively, which are included in other insurance and operating
expenses on the Consolidated Statements of Income. The decrease in
derivative losses in 2005 is primarily due to the impact that
increasing interest rates had on the market value of American
Enterprise Life's interest rate swaps. The interest rate swaps and
floors expire in January 2006.
Certain annuity products contain GMWB provisions, which guarantee the
right to make limited partial withdrawals each contract year regardless
of the volatility inherent in the underlying investments. The GMWB
provision is considered an embedded derivative and is valued each
period by estimating the present value of future benefits less
applicable fees charged for the rider using actuarial models, which
simulate various economic scenarios. American Enterprise Life
economically hedges the exposure related to the GMWB provision using
various equity futures and structured derivatives.
F-28
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
American Enterprise Life views these strategies as a prudent management
of equity market sensitivity, such that earnings are not exposed to
undue risk presented by changes in equity market levels. As of December
31, 2005 and 2004, the fair value of the purchased derivatives used in
conjunction with these products was $26.2 million and nil,
respectively. Futures contracts are settled daily by exchanging cash
with the counterparty and gains and losses are reported in earnings.
Embedded Derivatives
Certain annuities contain GMWB and GMAB provisions, which are also
considered embedded derivatives. The changes in fair value of the GMWB
and GMAB features are recognized in death and other benefits for
investment contracts. The fair value of the embedded derivatives is
recognized in the Consolidated Balance Sheets in future policy benefits
for variable annuity guarantees. The total fair value of these
instruments was $1.4 million and $0.9 million at December 31, 2005 and
2004, respectively.
9. Fair Value of Financial Instruments
-----------------------------------
The following table discloses fair value information for financial
instruments. Certain items, such as investments accounted for under the
equity method, DAC and DSIC are not reflected in the table as they are
not required to be disclosed in such table by SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments." The fair values of
financial instruments are estimates based upon market conditions and
perceived risks at December 31, 2005 and 2004 and require management
judgment to estimate such values. These figures may not be indicative
of future fair values. Additionally, management believes the value of
excluded assets and liabilities is significant. The fair value of
American Enterprise Life, therefore, cannot be estimated by aggregating
the amounts presented herein. The following table discloses carrying
value and fair value information for financial instruments at December 31:
2005 2004
-------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Value Value Value Value
-------------------------------------------------------------------------------------------------------------------
Financial Assets
----------------
Assets for which carrying values
approximate fair values $ 859 $ 859 $ 47,356 $ 47,356
Available-for-Sale securities 5,757,419 5,757,419 6,375,079 6,375,079
Mortgage loans on real estate, net 355,306 377,869 420,899 456,174
Trading securities and other investments 73 73 136 136
Separate account assets 2,884,054 2,884,054 1,878,620 1,878,620
Derivative financial instruments 19,937 19,937 2,620 2,620
Financial Liabilities
---------------------
Liabilities for which carrying values
approximate fair values $ 25,000 $ 25,000 $ - $ -
Fixed annuity reserves 5,730,770 5,516,692 6,302,362 6,033,849
Separate account liabilities 2,882,548 2,760,070 1,877,294 1,809,392
Derivative financial instruments 1,157 1,157 25,937 25,937
-------------------------------------------------------------------------------------------------------------------
As of December 31, 2005 and 2004, the carrying and fair values of
off-balance sheet financial instruments are not material. See Note 2
for carrying and fair value information regarding Available-for-Sale
securities and mortgage loans on real estate (net of allowance for loan
losses). The following methods were used to estimate the fair values of
financial assets and financial liabilities:
F-29
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL ASSETS
Assets for which carrying values approximate fair values include cash
and cash equivalents and certain other assets. The carrying value
approximates fair value due to the short-term nature of these
instruments.
Available-for-Sale securities are carried at fair value in the
Consolidated Balance Sheets. Gains and losses are recognized in the
results of operations upon disposition. In addition, impairment losses
are recognized when management determines that a decline in value is
other-than-temporary.
The fair value of mortgage loans on real estate, except those with
significant credit deterioration, are estimated using discounted cash
flow analysis, based on current interest rates for loans with similar
terms to borrowers of similar credit quality. For loans with
significant credit deterioration, fair values are based on estimates of
future cash flows discounted at rates commensurate with the risk
inherent in the revised cash flow projections, or for collateral
dependent loans, on collateral values.
Trading securities are carried at fair value in the Consolidated
Balance Sheets with changes in fair value recognized in current period
earnings.
Separate account assets are carried at fair value in the Consolidated
Balance Sheets.
Derivative financial instruments are carried at fair value within other
assets or other liabilities. The fair value of the derivative financial
instruments are determined using either market quotes or valuation
models that are based upon the net present value of estimated future
cash flows and incorporate current market data inputs.
FINANCIAL LIABILITIES
Liabilities for which carrying values approximate fair values include
certain other liabilities. The carrying value approximates fair value
due to the short-term nature of these instruments.
Fair values of fixed annuities in deferral status are estimated as the
accumulated value less applicable surrender charges. For annuities in
payout status, fair value is estimated using discounted cash flows
based on current interest rates. The fair value of these reserves
excludes life insurance related elements of $24.0 million and $23.1
million at December 31, 2005 and 2004, respectively. If the fair value
of the fixed annuities were realized, the surrender charges received
would be offset by the write off of the DAC and DSIC associated with
the fixed annuities of $100.4 million and $138.1 million as of December
31, 2005 and 2004, respectively.
Fair values of separate account liabilities, excluding life
insurance-related elements of $1.5 million and $1.3 million at December
31, 2005 and 2004, respectively, are estimated as the accumulated value
less applicable surrender charges. If the fair value of the separate
account liabilities were realized, the surrender charges received would
be offset by the write off of the DAC and DSIC associated with separate
account liabilities of $291.7 million and $227.6 million as of December
31, 2005 and 2004, respectively.
F-30
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and Contingencies
-----------------------------
At December 31, 2005 and 2004, American Enterprise Life had no
commitments to purchase investments other than mortgage loan fundings
(see Note 2).
The Securities and Exchange Commission, the National Association of
Securities Dealers and several state authorities have brought
proceedings challenging several mutual fund and variable product
financial practices, generally including suitability, late trading,
market timing, compensation 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.
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
condition or results of operations as a result of these audits.
F-31
EXHIBIT INDEX
-------------
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference.
3.1 Amendment and Restatement of Articles of Incorporation of American
Enterprise Life dated July 29, 1986, filed electronically as Exhibit
6.1 to American Enterprise Life Personal Portfolio Plus 2's Initial
Registration Statement No. 33-54471, filed on or about July 5, 1994,
is incorporated by reference.
3.2 Consent in writing in lieu of a meeting of the Board of Directors of
American Enterprise Life Insurance Company establishing the American
Enterprise MVA Account dated Aug. 18, 1999, filed electronically as
Exhibit 3.3 to Registrant's Initial Registration Statement No.
333-86297, filed on or about Aug. 31, 1999, is incorporated by
reference.
3.3 Amended By-Laws of American Enterprise Life, dated September 11, 2002
filed electronically as Exhibit 6.3 to Post-Effective Amendment No.
10 to the Registration Statement No. 333-92297, is incorporated by
reference.
4.1 Form of Deferred Annuity Contract for the American Express(R)
Signature One Variable Annuity (form 240180), filed electronically as
Exhibit 4.1 to American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 1 to Registration Statement No.
333-85567 on form N-4, filed on or about Dec. 7, 1999, is
incorporated by reference.
4.2 Form of Deferred Annuity Contract for the Wells Fargo Advantage(SM)
Variable Annuity (form 44209), filed electronically as Exhibit 4.1 to
American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Nov. 4, 1999, is incorporated by reference.
4.3 Form of Deferred Annuity Contract for the Wells Fargo Advantage(SM)
Builder Variable Annuity (form 44210), filed electronically as
Exhibit 4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Nov. 4, 1999, is incorporated by
reference.
4.4 Form of Deferred Annuity Contract for the American Express New
Solutions(SM) Variable Annuity (form 240343) filed electronically as
Exhibit 4.1 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-92297
on Form N-4, filed on or about Feb. 11, 2000, is incorporated by
reference.
4.4(a) Form of Deferred Annuity Contract Data Pages (form 240343) filed as
Exhibit 4.1(a) to Post-Effective Amendment No. 10 to Registration
Statement No. 333-92297, is incorporated by reference.
4.5 Form of Deferred Annuity Contract for American Express Signature
Variable Annuity(R) (form 43431) filed electronically as Exhibit 4.1
to American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-74865 on form N-4,
filed on or about Aug. 4, 1999, is incorporated by reference.
E-1
4.6 Form of Deferred Annuity Contract for the American Express(R) Galaxy
Premier Variable Annuity and the American Express Pinnacle Variable
Annuity(SM) (form 44170) filed electronically as Exhibit 4.1 to
American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-82149, filed on or
about Sept. 21, 1999, is incorporated by reference.
4.7 Form of Deferred Annuity Contract for American Express FlexChoice(SM)
Variable Annuity contract Option L (form 271496) filed electronically
as Exhibit 4.1 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-73958
on form N-4, filed on or about Feb. 20, 2002, is incorporated by
reference.
4.8 Form of Deferred Annuity Contract for American Express FlexChoice(SM)
Variable Annuity contract Option C (form 271491) filed electronically
as Exhibit 4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-73958
on form N-4, filed on or about Feb. 20, 2002, is incorporated by
reference.
4.9 Form of Enhanced Death Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity and the American Express FlexChoice(SM) Variable
Annuity contracts (form 44213), filed electronically as Exhibit 4.3
to American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Nov.4, 1999, is incorporated by reference.
4.10 Form of Guaranteed Minimum Income Benefit Rider for the American
Express Signature Variable Annuity(R) and the American Express(R)
Signature One Variable Annuity (6% Accumulation Benefit Base) (form
240186), filed electronically as Exhibit 4.2 to American Enterprise
Variable Annuity Account's Post-Effective Amendment No. 3 to
Registration Statement No. 333-85567 on form N-4, filed on or about
Feb. 11, 2000, is incorporated by reference.
4.11 Form of Guaranteed Minimum Income Benefit Rider for the American
Express New Solutions(SM) Variable Annuity (form 240350), filed
electronically as Exhibit 4.4 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.
333-92297 on Form N-4, filed on or about Feb. 11, 2000, is
incorporated by reference.
4.12 Form of Guaranteed Minimum Income Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity and the American Express FlexChoice(SM) Variable
Annuity contracts (form 44214), filed electronically as Exhibit 4.4
to American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Nov. 4, 1999, is incorporated by reference.
4.13 Form of 5% Accumulation Death Benefit Rider for the American Express
Signature Variable Annuity(R) and the American Express Signature One
Variable Annuity(SM) (form 240183), filed electronically as Exhibit
4.3 to American Enterprise Variable Annuity Account's Post-Effective
Amendment No. 1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Dec. 8, 1999, is incorporated by reference.
4.14 Form of Value Option Return of Purchase Payment Death Benefit Rider
for the American Express(R) Signature One Variable Annuity (form
240182), filed electronically as Exhibit 4.11 to Registrant's
Post-Effective Amendment No. 6 to Registration Statement No.
333-86297 on form S-1, filed on or about May 1, 2000, is incorporated
by reference.
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4.15 Form of 8% Performance Credit Rider for the American Express
Signature Variable Annuity(R) and the American Express(R) Signature
One Variable Annuity (form 240187), filed electronically as Exhibit
4.4 to American Enterprise Variable Annuity Account's Post-Effective
Amendment No. 2 to Registration Statement No. 333-85567 on form N-4,
filed on or about Dec. 30, 1999, is incorporated by reference.
4.16 Form of Performance Credit Rider for the American Express New
Solutions(SM) Variable Annuity (form 240349), filed electronically as
Exhibit 4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-92297
on Form N-4, filed on or about Feb. 11, 2000, is incorporated by
reference.
4.17 Form of Benefit Protector(SM) Death Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity, the American Express New Solutions(SM) Variable
Annuity, the American Express(R) Galaxy Premier Variable Annuity, the
American Express Pinnacle Variable Annuity(SM), the American
Express(R) Signature One Variable Annuity and the American Express
FlexChoice(SM) Variable Annuity contracts (form 271155), filed
electronically as Exhibit 4.15 to American Enterprise Variable
Annuity Account's Post-Effective Amendment No. 6 to Registration
Statement No. 333-85567 on form N-4, filed on or about March 1, 2001,
is incorporated by reference.
4.18 Form of Benefit Protector(SM) Plus Death Benefit Rider for the Wells
Fargo Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM)
Builder Variable Annuity, the American Express New Solutions(SM)
Variable Annuity, the American Express(R) Galaxy Premier Variable
Annuity, the American Express Pinnacle Variable Annuity(SM), the
American Express(R) Signature One Variable Annuity and the American
Express FlexChoice(SM) Variable Annuity contracts (form 271156),
filed electronically as Exhibit 4.16 to American Enterprise Variable
Annuity Account's Post-Effective Amendment No. 6 to Registration
Statement No. 333-85567 on form N-4, filed on or about March 1, 2001,
is incorporated by reference.
4.19 Form of Maximum Anniversary Value Death Benefit Rider for the
American Express New Solutions(SM) Variable Annuity (form 240346),
filed electronically as Exhibit 4.3 to American Enterprise Variable
Annuity Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-92297, filed on or about February 11, 2000, is
incorporated by reference.
4.20 Form of Roth IRA Endorsement for the Wells Fargo Advantage(SM)
Variable Annuity, the Wells Fargo Advantage(SM) Builder Variable
Annuity, the American Express Signature Variable Annuity(R), the
American Express(R) Signature One Variable Annuity, the American
Express New Solutions(SM) Variable Annuity, the American Express(R)
Galaxy Premier Variable Annuity, the American Express Pinnacle
Variable Annuity(SM) and the American Express FlexChoice(SM) Variable
Annuity contracts (form 43094), filed electronically as Exhibit 4.2
to American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-74865 on form N-4,
filed on or about Aug. 4, 1999, incorporated by reference.
4.21 Form of SEP-IRA for the Wells Fargo Advantage(SM) Variable Annuity,
the Wells Fargo Advantage(SM) Builder Variable Annuity, the American
Express(R) Signature One Variable Annuity, the American Express(R)
Galaxy Premier Variable Annuity, and the American Express Pinnacle
Variable Annuity(SM) (form 43412), filed electronically as Exhibit
4.3 to American Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-72777 on form N-4,
filed on or about July 8, 1999, is incorporated by reference.
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4.22 Form of SEP-IRA for the American Express Signature Variable
Annuity(R), the American Express New Solutions(SM) Variable Annuity
and the American Express FlexChoice(SM) Variable Annuity contracts
(form 43433) filed electronically as Exhibit 4.3 to American
Enterprise Variable Annuity Account's Pre-Effective Amendment No. 1
to Registration Statement No. 333-74865 on form N-4, filed on or
about Aug. 4, 1999, is incorporated by reference.
4.23 Form of Disability Waiver of Withdrawal Charges Rider for the Wells
Fargo Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM)
Builder Variable Annuity and the American Express FlexChoice(SM)
Variable Annuity contracts (form 44215), filed electronically as
Exhibit 4.5 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Nov. 4, 1999, is incorporated by
reference.
4.24 Form of Unemployment Waiver of Withdrawal Charges Rider for the Wells
Fargo Advantage(SM) Variable Annuity and the Wells Fargo
Advantage(SM) Builder Variable Annuity (form 44216), to American
Enterprise Variable Annuity Account's Pre-Effective Amendment No. 1
to Registration Statement No. 333-85567 on form N-4, filed on or
about Nov. 4, 1999, is incorporated by reference.
4.25 Form of TSA Endorsement for the Wells Fargo Advantage(SM) Variable
Annuity, the Wells Fargo Advantage(SM) Builder Variable Annuity, the
American Express Signature Variable Annuity(R) and the American
Express FlexChoice(SM) Variable Annuity contracts (form 43413), filed
electronically as Exhibit 4.4 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement
No.1 to Registration Statement No. 333-72777 on form N-4, filed on or
about July 8, 1999, is incorporated by reference.
4.26 Form of Traditional IRA or SEP-IRA Endorsement (form 272108), filed
electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to
Registration Statement No. 333-92297, is incorporated by reference.
4.27 Form of Roth IRA Endorsement (form 272109), filed electronically as
Exhibit 4.12 to Post-Effective Amendment No. 10 to Registration
Statement No. 333-92297, is incorporated by reference.
4.28 Form of Variable Annuity Unisex Endorsement (form 272110), filed
electronically as Exhibit 4.13 to the Post-Effective Amendment No. 10
to Registration Statement No. 333-92297, is incorporated by
reference.
10 Copy of Investment Management and Services Agreement by and between
American Enterprise Life Insurance Company and RiverSource
Investments, LLC, dated October 1, 2005, filed electronically as
Exhibit 10.1 to the Form 10-Q for the quarterly period ending
September 30, 2005 is incorporated herein by reference.
*31.1 Certification of Mark E. Schwarzmann, Chief Executive Officer,
pursuant to Rule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.
*31.2 Certification of Brian J. McGrane, Chief Financial Officer, pursuant
to Rule 13a-14(a) promulgated under the Securities Exchange Act of
1934, as amended.
*32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, and
Brian J. McGrane, Chief Financial Officer, 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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