UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 333-65080
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
INDIANA 94-2786905
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
NONE
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is 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 MAY 9, 2006
- ---------------------------------------------------------------------------- --------------------------
Common Stock (par value $150 per share) 100,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2006 and December 31, 2005................................... 1
Consolidated Statements of Income - Three Months Ended March 31, 2006 and 2005....................... 2
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005................... 3
Consolidated Statements of Stockholder's Equity - Three Months Ended March 31, 2006 and 2005......... 4
Notes to Consolidated Financial Statements........................................................... 5-7
Item 2. Management's Discussion and Analysis................................................................. 8-10
Item 4. Controls and Procedures.............................................................................. 11-12
Part II. Other Information:
Item 1. Legal Proceedings.................................................................................... 12
Item 1A. Risk Factors......................................................................................... 12
Item 5. Other Information.................................................................................... 12
Item 6. Exhibits............................................................................................. 12
Signatures.................................................................................................... 13
Exhibit Index................................................................................................. E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31, DECEMBER 31,
2006 2005
---------------------- --------------------
(UNAUDITED)
ASSETS
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2006, $5,579,744;
2005, $5,818,741)....................................................... $ 5,431,773 $ 5,757,419
Mortgage loans on real estate, at cost (less allowance for loan losses:
2006 and 2005, $6,862).................................................. 332,089 355,306
Other investments.......................................................... 1,080 1,108
---------------------- --------------------
Total investments...................................................... 5,764,942 6,113,833
Cash and cash equivalents.................................................. 18,994 859
Amounts due from brokers................................................... 51 75
Other accounts receivable.................................................. 10,108 7,560
Accrued investment income.................................................. 58,526 60,562
Deferred acquisition costs................................................. 357,492 344,215
Deferred sales inducement costs............................................ 58,144 54,359
Deferred income tax assets, net............................................ 44,638 23,883
Other assets............................................................... 27,712 20,108
Separate account assets.................................................... 3,280,892 2,884,054
---------------------- --------------------
Total assets............................................................. $ 9,621,499 $ 9,509,508
====================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Future policy benefits:
Fixed annuities.......................................................... $ 5,545,128 $ 5,754,763
Variable annuity guarantees.............................................. 4,323 7,129
Policy claims and other policyholders' funds............................... 7,065 8,002
Amounts due to brokers..................................................... 415 31,682
Other liabilities.......................................................... 36,748 40,316
Separate account liabilities............................................... 3,280,892 2,884,054
---------------------- --------------------
Total liabilities........................................................ 8,874,571 8,725,946
---------------------- --------------------
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.......................................................... 238,414 224,410
Accumulated other comprehensive loss, net of tax........................... (86,358) (35,720)
---------------------- --------------------
Total stockholder's equity............................................... 746,928 783,562
---------------------- --------------------
Total liabilities and stockholder's equity............................... $ 9,621,499 $ 9,509,508
====================== ====================
See Notes to Consolidated Financial Statements.
1
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
2006 2005
------------------- -------------------
REVENUES
Net investment income................................................ $ 77,345 $ 90,581
Contractholder charges............................................... 5,480 3,389
Mortality and expense risk and other fees............................ 15,174 8,560
Net realized loss on investments..................................... (772) (1,364)
------------------- -------------------
Total revenues................................................. 97,227 101,166
------------------- -------------------
BENEFITS AND EXPENSES
Death and other benefits............................................. (238) 2,813
Interest credited to account values.................................. 47,472 52,478
Amortization of deferred acquisition costs........................... 17,467 16,103
Separation costs..................................................... 2,527 -
Other insurance and operating expenses............................... 9,493 14,503
------------------- -------------------
Total benefits and expenses.................................... 76,721 85,897
------------------- -------------------
Income before income tax provision...................................... 20,506 15,269
Income tax provision.................................................... 6,502 5,163
------------------- -------------------
Net income.............................................................. $ 14,004 $ 10,106
=================== ===================
See Notes to Consolidated Financial Statements.
2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2006 2005
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 14,004 $ 10,106
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:...................................................................
Amortization of deferred acquisition costs................................... 17,467 16,103
Amortization of deferred sales inducement costs.............................. 2,195 2,897
Capitalization of deferred acquisition costs................................. (23,539) (21,554)
Capitalization of deferred sales inducement costs............................ (4,458) (4,366)
Amortization of premium, net................................................. 4,782 5,643
Deferred income taxes....................................................... 6,511 12,574
Net realized loss on investments............................................. 772 1,364
Changes in operating assets and liabilities:
Other accounts receivable.................................................... (2,548) -
Accrued investment income.................................................... 2,036 (3,122)
Policy claims and other policyholder's funds................................. (937) 2,836
Other assets and liabilities, net............................................ (13,668) (18,245)
----------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................ 2,617 4,236
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Proceeds from sales.......................................................... 165,528 89,448
Maturities, sinking fund payments and calls.................................. 162,626 102,550
Purchases.................................................................... (94,711) (135,677)
Other investments:
Proceeds from sales, maturities, sinking fund payments and calls............. 23,217 11,219
Purchases.................................................................... - (478)
Change in amounts due to and from brokers, net................................. (31,243) (9,256)
----------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............................ 225,417 57,806
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts:
Considerations received...................................................... 2,649 25,437
Interest credited to account values.......................................... 47,472 52,478
Surrenders and other benefits................................................ (260,020) (180,255)
----------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............................ (209,899) (102,340)
----------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 18,135 (40,298)
Cash and cash equivalents at beginning of period............................... 859 47,356
----------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 18,994 $ 7,058
================= ===============
Supplemental disclosures:
Income taxes paid............................................................ $ 22,557 $ 6,280
Interest paid on borrowings.................................................. $ 146 $ 23
See Notes to Consolidated Financial Statements.
3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(in thousands)
ACCUMULATED
ADDITIONAL OTHER
CAPITAL PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------- ------------- ------------ ----------------- -------------
BALANCES AT DECEMBER 31, 2004.............. $ 3,000 $ 591,872 $ 199,175 $ 57,668 $ 851,715
Comprehensive loss:
Net income............................... 10,106 10,106
Change in unrealized holding gains
on securities, net..................... (69,169) (69,169)
Change in unrealized derivative losses,
net.................................... 1,101 1,101
-------------
Total comprehensive loss................... (57,962)
----------- ------------- ------------ ----------------- -------------
BALANCES AT MARCH 31, 2005................. $ 3,000 $ 591,872 $ 209,281 $ (10,400) $ 793,753
=========== ============= ============ ================= =============
BALANCES AT DECEMBER 31, 2005.............. $ 3,000 $ 591,872 $ 224,410 $ (35,720) $ 783,562
Comprehensive loss:........................
Net income............................... 14,004 14,004
Change in unrealized holding losses
on securities, net..................... (50,650) (50,650)
Change in unrealized derivative losses,
net.................................... 12 12
-------------
Total comprehensive loss................... (36,634)
----------- ------------- ------------ ----------------- -------------
BALANCES AT MARCH 31, 2006................. $ 3,000 $ 591,872 $ 238,414 $ (86,358) $ 746,928
=========== ============= ============ ================= =============
See Notes to Consolidated Financial Statements.
4
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements include the accounts
of American Enterprise Life Insurance Company and companies in which it
directly or indirectly has a controlling financial interest. All
material intercompany transactions and balances between or among
American Enterprise Life Insurance Company and its subsidiaries and
affiliates have been eliminated in consolidation. 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 in this Form 10-Q as "American Enterprise Life." On March
17, 2006, IDS Life and American Enterprise Life executed an Agreement
and Plan of Merger whereby American Enterprise Life will be merged with
and into IDS Life pursuant to the laws of the states of Minnesota and
Indiana. The agreement provides that IDS Life shall be the surviving
corporation of the merger and shall continue to exist as a domestic
stock life insurance company under the laws of the State of Minnesota.
The merger agreement also provides that, upon effectiveness of the
merger, American Enterprise Life shall cease to exist and its property
and obligations shall become the property and obligations of IDS Life.
Simultaneously with the effectiveness of the merger, the agreement
provides that the Articles of Incorporation of IDS Life shall be
amended to change its name to RiverSource Life Insurance Company
("RiverSource Life"). Among other conditions precedent, the merger and
the change of IDS Life's name to RiverSource Life are subject to
certain regulatory approvals. American Enterprise Life currently
anticipates that the merger will be effective as of December 31, 2006.
The accompanying Consolidated Financial Statements have been prepared
in accordance with U.S. generally accepted accounting principles
("GAAP"). The interim financial information in this report has not been
audited. In the opinion of management, all adjustments necessary for a
fair presentation of the consolidated financial position and the
consolidated results of operations for the interim periods have been
made. All adjustments made were of a normal, recurring nature. Results
of operations reported for interim periods are not necessarily
indicative of results for the entire year. These Consolidated Financial
Statements and Notes should be read in conjunction with the Annual
Report on Form 10-K of American Enterprise Life for the year ended
December 31, 2005, filed with the Securities and Exchange Commission
("SEC") on March 10, 2006.
Certain reclassifications of prior period amounts have been made to
conform to the current presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 155,
"Accounting for Certain Hybrid Financial Instruments-an amendment of
FASB Statements No. 133 and 140." SFAS No. 155 improves financial
reporting by eliminating the exemption from applying SFAS No. 133 to
interests in securitized financial assets so that similar instruments
are accounted for similarly regardless of the form of the instruments.
It also improves financial reporting by allowing a preparer to elect
fair value measurement at acquisition, at issuance, or when a
previously recognized financial instrument is subject to a
remeasurement (new basis) event, on an instrument-by-instrument basis,
in cases in which a derivative would otherwise have to be bifurcated.
SFAS No. 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins
after September 15, 2006. American Enterprise Life is currently
evaluating the impact of SFAS No. 155 on American Enterprise Life's
consolidated results of operations and financial condition.
5
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On November 3, 2005, the 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. The effect of adopting FSP FAS 115-1 and FAS 124-1 on American
Enterprise Life's consolidated results of operations and financial
condition was not material.
In September 2005, the American Institute of Certified Public
Accountants issued Statement of Position 05-1, "Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP
05-1 provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance and
investment contracts other than those specifically described in 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.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). This statement replaces Accounting
Principles Board ("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. The effect of adopting SFAS 154 on American
Enterprise Life's consolidated results of operations and financial
condition was not material.
3. SEPARATION OF AMERIPRISE FINANCIAL, INC.
American Enterprise Life is a wholly-owned subsidiary of IDS Life, a
Minnesota Corporation. IDS Life is a wholly-owned subsidiary of
Ameriprise Financial. Prior to August 1, 2005, Ameriprise Financial was
referred to as American Express Financial Corporation. On February 1,
2005, the American Express Company ("American Express") Board of
Directors 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 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.
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 re-branding and
marketing costs and costs to separate and reestablish technology
platforms related to the separation and Distribution of Ameriprise
Financial. For the three months ended March 31, 2006, American
Enterprise Life incurred $2.5 million in separation costs.
6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. INVESTMENT SECURITIES
Gross realized gains and losses on sales of Available-for-Sale
securities and other-than-temporary impairment losses on
Available-for-Sale securities included in net realized gains and losses
were as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2006 2005
----------------- ------------------
(IN THOUSANDS)
Gross realized gains from sales........................ $ 2,256 $ 578
Gross realized losses from sales....................... (3,028) (1,714)
Other-than-temporary impairments....................... - (229)
5. INCOME TAXES
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's deferred tax assets include $33.4
million in capital loss carryforwards that expire December 31, 2009.
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 was established as of March 31, 2006
and December 31, 2005.
6. CONTINGENCIES
The SEC, 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 is involved in other 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 adverse impact on results of
operations in any particular reporting period as the proceedings are
resolved.
7. REGULATORY REQUIREMENTS
American Enterprise Life is subject to regulatory capital requirements.
The actual capital, determined on a statutory basis, as of March 31,
2006 and December 31, 2005 was $585.7 million and $583.3 million,
respectively. Actual capital, as defined by the National Association of
Insurance Commissioners for purposes of meeting regulatory capital
requirements, includes statutory capital and surplus, plus certain
statutory valuation reserves. The regulatory capital requirement, based
on the most recent statutory risk-based capital filing was $125.3
million as of December 31, 2005.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") should be read
in conjunction with American Enterprise Life Insurance Company's
Consolidated Financial Statements and related notes presented in Item 1.
American Enterprise Life Insurance Company and its subsidiary are referred
to collectively in this Form 10-Q as "American Enterprise Life." This
discussion may contain forward-looking statements that reflect American
Enterprise Life's plans, estimates and beliefs. Actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to these differences include, but are not
limited to, those discussed under "Forward-Looking Statements." American
Enterprise Life believes it is useful to read its MD&A in conjunction with
its Annual Report on Form 10-K for the year ended December 31, 2005, filed
with the Securities and Exchange Commission ("SEC") on March 10, 2006, as
well as its current reports on Form 8-K and other publicly available
information.
American Enterprise Life follows United States generally accepted accounting
principles ("GAAP"), and the following discussion is presented on a
consolidated basis consistent with GAAP.
Management's narrative analysis of the results of operations is presented in
lieu of MD&A, pursuant to General Instructions H(2) (a) of Form 10-Q.
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 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 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. The majority of
such costs are expected to be incurred by December 31, 2006.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005
Overview
Net income was $14.0 million for the three months ended March 31, 2006
compared to $10.1 million for the three months ended March 31, 2005. The
increase reflects lower interest credited and other insurance and operating
expenses and higher mortality and expense risk and other fees, partially
offset by lower net investment income.
Revenues
Net investment income decreased $13.2 million or 15% primarily reflecting
lower average general account assets due to the shift in product sales from
fixed to variable and unfavorable mark-to-market adjustments on options
hedging guaranteed minimum withdrawal benefit ("GMWB") provisions. The
negative impact from options hedging GMWB provisions was primarily offset in
the death and other benefits line.
Contractholder charges increased $2.1 million or 62% reflecting increased
charges for variable annuity GMWB provisions.
Mortality and expense risk and other fees increased $6.6 million or 77%
reflecting higher average values of separate account assets due to increased
inflows and market appreciation.
Net realized loss on investments was $0.8 million for the three months ended
March 31, 2006 compared to a net realized loss on investments of $1.4
million for the three months ended March 31, 2005. For the three months
ended March 31, 2006, $2.2 million of total investment gains were offset by
$3.0 million of losses. These gains and losses were related to securities
classified as Available-for-Sale.
For the three months ended March 31, 2005, $0.5 million of total investment
gains were offset by $1.9 million of losses and impairments. Included in
these total net investment gains and losses were $0.6 million of gross
realized gains and $1.7 million of gross realized losses from sales of
securities, as well as $0.2 million of other-than-temporary impairment
losses on investments classified as Available-for-Sale.
Benefits and Expenses
Death and other benefits decreased $3.1 million primarily reflecting
reductions in GMWB reserves on variable annuity products.
Interest credited to account values decreased $5.0 million or 10% reflecting
lower average accumulation values of annuities and lower interest crediting
rates on fixed annuity products.
Separation costs generally consist of allocated re-branding and marketing
costs and costs to separate and reestablish technology platforms related to
the separation and Distribution of Ameriprise Financial. During the quarter
ended March 31, 2006, American Enterprise Life incurred $2.5 million in
separation costs.
Other insurance and operating expenses were lower by $5.0 million or 35% in
2006 primarily reflecting an unfavorable impact in 2005 from intercompany
swaps and floors which expired January 2006.
Income Taxes
The effective tax rate decreased to 32% in the three months ended March 31,
2006 from 34% in the three months ended March 31, 2005, primarily due to
higher tax-advantaged items in the current quarter.
9
LIQUIDITY AND CAPITAL RESOURCES
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.
At March 31, 2006 and December 31, 2005, American Enterprise Life had
outstanding reverse repurchase agreements totaling nil and $25.0 million,
respectively. The reverse repurchase agreements are used strictly as
short-term sources of funds. American Enterprise Life's Available-for-Sale
securities sales of $165.5 million and $89.4 million in the quarters ended
March 31, 2006 and 2005, respectively, also contributed to liquidity, in
part to fund surrenders and other benefits.
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
See Note 2 to the Consolidated Financial Statements.
10
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
American Enterprise Life maintains disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended ("the Exchange Act")) designed to provide reasonable
assurance that the information required to be reported in the Exchange Act
filings is recorded, processed, summarized and reported within the time
periods specified and pursuant to the regulations of the Securities and
Exchange Commission, including controls and procedures designed to ensure
that this information is accumulated and communicated to American Enterprise
Life's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding the required
disclosure. It should be noted that, because of inherent limitations,
American Enterprise Life's disclosure controls and procedures, however well
designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the disclosure controls and procedures are
met.
American Enterprise Life's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of American Enterprise Life's disclosure controls and
procedures as of the end of the period covered by this report. Based upon
that evaluation, American Enterprise Life's Chief Executive Officer and
Chief Financial Officer have concluded that American Enterprise Life's
disclosure controls and procedures were effective at a reasonable level of
assurance as of March 31, 2006.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
American Express Company ("American Express") has historically provided a
variety of corporate and other support services for Ameriprise Financial and
its subsidiaries, including information technology, treasury, accounting,
financial reporting, tax administration, human resources, marketing, legal,
procurement and other services. American Express continues to provide
Ameriprise Financial and its subsidiaries with some of these services
pursuant to a transition services agreement for a transition period of up to
two years following the Distribution. For the quarter ended December 31,
2005, American Enterprise Life noted that many of these services performed
by American Express had an impact on its financial reporting processes,
which it considered a material change in its internal control over financial
reporting. Since the quarter ended December 31, 2005, Ameriprise Financial
has increased the staffing of its accounting and reporting functions and has
taken steps to perform these functions on a basis independent from American
Express. American Enterprise Life considers this reduction in reliance on
American Express to perform accounting and financial reporting related
services a material change in its internal control over financial reporting.
Other than the changes mentioned above, no other changes in American
Enterprise Life's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates have materially affected, or are
reasonably likely to materially affect, American Enterprise Life's internal
control over financial reporting.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "may," "should," "could,"
"would," "likely," and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date on which they are made. American Enterprise Life undertakes no
obligation to update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from these forward-looking
statements include, but are not limited to, the following: the success,
timeliness and financial impact (including the amount of intercompany costs
allocated to American Enterprise Life, cost savings and other benefits
including increased revenues), both in the short-term and over time, of
reengineering initiatives being implemented or considered by Ameriprise
Financial that could impact American Enterprise Life, including cost
management, structural and strategic measures such as vendor, process,
facilities and operations consolidation 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
11
products to clients; fluctuation in the equity and fixed income markets,
which can affect the amount and types of investment products sold by
American Enterprise Life, and other fees received based on the value of
those assets; American Enterprise Life's ability to recover deferred
acquisition costs ("DAC"), as well as the timing of such DAC amortization,
in connection with the sale of annuity and insurance products; the level of
guaranteed minimum death benefit 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 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. A
further description of these and other risks and uncertainties can be found
under "Item 1A - Risk Factors" and elsewhere in American Enterprise Life's
Annual Report on Form 10-K for the year ended December 31, 2005, and its
other reports filed with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The information set forth in Note 6 to Consolidated Financial
Statements in Part I, Item 1 is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes in the risk factors provided
in Part I, Item 1A of American Enterprise Life's Annual Report on
Form 10-K for the year ended December 31, 2005 filed with the SEC.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index on page E-1 hereof.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
------------------------------------------
(Registrant)
Date: May 9, 2006 By /s/ Mark E. Schwarzmann
-----------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: May 9, 2006 By /s/ Brian J. McGrane
-----------------------------------
Brian J. McGrane
Executive Vice President and
Chief Financial Officer
13
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------
*31.1 Certification of Mark E. Schwarzmann pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
*31.2 Certification of Brian J. McGrane pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
*32.1 Certification of Mark E. Schwarzmann and Brian J. McGrane pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
E-1