UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 33-28976
IDS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
Former name, former address and former fiscal year, if changed since last
report NOT APPLICABLE
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 AUGUST 9, 2006
----------------------------------------- -----------------------------
Common Stock (par value $30 per share) 100,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
IDS LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2006 and December 31, 2005................................... 1
Consolidated Statements of Income - Three months and six months ended June 30, 2006 and 2005........ 2
Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2005..................... 3
Consolidated Statements of Shareholder's Equity - Six months ended June 30, 2006 and 2005........... 4
Notes to Consolidated Financial Statements.......................................................... 5-8
Item 2. Management's Discussion and Analysis................................................................ 9-13
Item 4. Controls and Procedures............................................................................. 14
Part II.Other Information:
Item 1. Legal Proceedings................................................................................... 14
Item 1A. Risk Factors........................................................................................ 14
Item 6. Exhibits............................................................................................ 14
Signatures.................................................................................................... 15
Exhibit Index................................................................................................. E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, DECEMBER 31,
2006 2005
------------ ------------
ASSETS (UNAUDITED)
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2006, $27,000,557; 2005, $27,817,021) .... $ 26,123,018 $ 27,753,174
Common and preferred stocks, at fair value (cost: 2006, $29,965; 2005, $13) ............... 29,573 21
Mortgage loans on real estate, at cost (less allowance for loan losses: 2006, $37,347;
2005, $41,347) ............................................................................ 2,797,890 2,842,362
Policy loans ................................................................................. 622,459 605,212
Trading securities and other investments ..................................................... 406,137 547,668
------------ ------------
Total investments .......................................................................... 29,979,077 31,748,437
Cash and cash equivalents .................................................................... 48,172 233,589
Reinsurance recoverables ..................................................................... 1,042,741 982,521
Amounts due from brokers ..................................................................... 6,349 4,166
Other accounts receivable .................................................................... 54,550 62,930
Accrued investment income .................................................................... 325,313 328,567
Deferred acquisition costs ................................................................... 4,240,902 4,035,879
Deferred sales inducement costs .............................................................. 419,792 370,166
Deferred income tax assets, net .............................................................. 194,584 --
Other assets ................................................................................. 259,249 220,371
Separate account assets ...................................................................... 41,788,456 37,929,960
------------ ------------
Total assets ............................................................................... $ 78,359,185 $ 75,916,586
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities ........................................................................... $ 24,801,082 $ 26,126,068
Variable annuity guarantees ............................................................... 12,460 29,550
Universal life insurance .................................................................. 3,692,498 3,711,628
Traditional life insurance ................................................................ 314,594 298,479
Disability income and long-term care insurance ............................................ 2,270,494 2,145,969
Policy claims and other policyholders' funds ................................................. 102,139 90,233
Amounts due to brokers ....................................................................... 200,922 31,772
Deferred income tax liabilities, net ......................................................... -- 9,099
Other liabilities ............................................................................ 358,285 381,938
Separate account liabilities ................................................................. 41,788,456 37,929,960
------------ ------------
Total liabilities .......................................................................... 73,540,930 70,754,696
------------ ------------
Shareholder's equity:
Common shares, $30 par value;
100,000 shares authorized, issued and outstanding ........................................ 3,000 3,000
Additional paid-in capital ................................................................... 2,020,388 2,020,388
Retained earnings ............................................................................ 3,390,402 3,269,206
Accumulated other comprehensive loss, net of tax ............................................. (595,535) (130,704)
------------ ------------
Total shareholder's equity ................................................................. 4,818,255 5,161,890
------------ ------------
Total liabilities and shareholder's equity ................................................. $ 78,359,185 $ 75,916,586
============ ============
See Notes to Consolidated Financial Statements.
1
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
REVENUES
Premiums:
Traditional life insurance .................................... $ 18,162 $ 19,267 $ 36,326 $ 36,757
Disability income and long-term care insurance ................ 77,567 72,776 151,910 144,119
---------- ---------- ---------- ----------
Total premiums ............................................ 95,729 92,043 188,236 180,876
Net investment income ........................................... 416,180 422,922 860,655 881,710
Contractholder and policyholder charges ......................... 173,425 142,757 325,833 285,814
Mortality and expense risk and other fees ....................... 153,849 108,390 300,121 223,168
Net realized investment gains ................................... 4,976 37,645 10,815 37,839
---------- ---------- ---------- ----------
Total revenues ............................................ 844,159 803,757 1,685,660 1,609,407
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Death and other benefits:
Traditional life insurance .................................... 7,079 8,511 12,497 20,580
Investment contracts and universal life-type insurance ........ 69,786 66,437 127,109 118,724
Disability income and long-term care insurance ................ 19,847 19,022 40,595 36,199
Increase in liabilities for future policy benefits:
Traditional life insurance .................................... 2,911 1,472 2,692 2,410
Disability income and long-term care insurance ................ 31,278 29,969 73,449 59,566
Interest credited to account values ............................. 264,626 280,359 533,867 553,621
Amortization of deferred acquisition costs ...................... 104,507 98,193 209,792 197,275
Separation costs ................................................ 30,785 25,772 55,392 25,772
Other insurance and operating expenses .......................... 159,780 148,171 316,634 285,695
---------- ---------- ---------- ----------
Total benefits and expenses ............................... 690,599 677,906 1,372,027 1,299,842
---------- ---------- ---------- ----------
Income before income tax provision ................................. 153,560 125,851 313,633 309,565
Income tax provision ............................................... 44,263 34,387 92,437 92,560
---------- ---------- ---------- ----------
Net income ......................................................... $ 109,297 $ 91,464 $ 221,196 $ 217,005
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
2
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................................. $ 221,196 $ 217,005
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred acquisition costs ............................................... 209,792 197,275
Amortization of deferred sales inducement costs .......................................... 23,951 20,206
Capitalization of deferred acquisition costs ............................................. (341,599) (303,430)
Capitalization of deferred sales inducement costs ........................................ (60,732) (46,064)
Premium and discount amortization on Available-for-Sale and other securities ............. 37,599 46,370
Deferred income taxes .................................................................... 46,612 39,900
Policyholder and contractholder charges, non-cash ........................................ (109,338) (115,827)
Net realized investment gains ............................................................ (10,815) (37,839)
Net realized gain on trading securities and equity method investments in hedge funds ..... (28,531) (4,962)
Change in operating assets and liabilities:
Trading securities and equity method investments in hedge funds, net ..................... 182,057 116,791
Future policy benefits for traditional life, disability income and long-term care
insurance ............................................................................. 140,640 119,236
Policy claims and other policyholders' funds ............................................. 11,906 9,771
Policy loans, excluding universal life-type insurance:
Repayment ............................................................................. 17,553 18,265
Issuance .............................................................................. (19,416) (18,500)
Reinsurance recoverables ................................................................. (60,220) (71,548)
Other accounts receivable ................................................................ 8,380 (4,999)
Accrued investment income ................................................................ 3,254 13,021
Other assets and liabilities, net ........................................................ (91,862) 47,587
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................................. 180,427 242,258
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Proceeds from sales ...................................................................... 926,510 1,907,590
Maturities, sinking fund payments and calls .............................................. 1,081,838 887,324
Purchases ................................................................................ (1,245,802) (2,458,636)
Other investments, excluding policy loans:
Proceeds from sales, maturities, sinking fund payments and calls ......................... 243,879 308,521
Purchases ................................................................................ (211,554) (227,876)
Change in amounts due to and from brokers, net ............................................. 166,967 47,033
Change in restricted cash .................................................................. -- 327,511
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES .................................................. 961,838 791,467
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type insurance:
Considerations received .................................................................. 651,682 883,552
Interest credited to account values ...................................................... 533,867 553,621
Surrenders and other benefits ............................................................ (2,397,847) (1,578,649)
Universal life-type insurance policy loans:
Repayment ................................................................................ 47,866 46,477
Issuance ................................................................................. (63,250) (50,771)
Cash dividend to Ameriprise Financial, Inc. ................................................ (100,000) --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES ...................................................... (1,327,682) (145,770)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (185,417) 887,955
Cash and cash equivalents at beginning of period ........................................... 233,589 131,427
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 48,172 $ 1,019,382
=========== ===========
Supplemental Disclosures:
Income taxes paid, net ................................................................... $ 85,559 $ 99,798
Interest paid on borrowings .............................................................. $ 589 $ 63
See Notes to Consolidated Financial Statements.
3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(in thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
SHARES CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------- ----------- ----------- -------------- -----------
BALANCES AT DECEMBER 31, 2004 ............. $ 3,000 $ 1,370,388 $ 3,190,474 $ 341,693 $ 4,905,555
Comprehensive income:
Net income ............................. 217,005 217,005
Unrealized holding losses on
securities, net ...................... (18,656) (18,656)
Unrealized derivative losses, net ...... (8,008) (8,008)
-----------
Total comprehensive income ................ 190,341
----------- ----------- ----------- ----------- -----------
BALANCES AT JUNE 30, 2005 ................. $ 3,000 $ 1,370,388 $ 3,407,479 $ 315,029 $ 5,095,896
=========== =========== =========== =========== ===========
BALANCES AT DECEMBER 31, 2005 ............. $ 3,000 $ 2,020,388 $ 3,269,206 $ (130,704) $ 5,161,890
Comprehensive loss:
Net income ............................. 221,196 221,196
Unrealized holding losses on
securities, net ...................... (468,102) (468,102)
Unrealized derivative gains, net ....... 3,271 3,271
-----------
Total comprehensive loss .................. (243,635)
Cash dividend to Ameriprise Financial, Inc. (100,000) (100,000)
----------- ----------- ----------- ----------- -----------
BALANCES AT JUNE 30, 2006 ................. $ 3,000 $ 2,020,388 $ 3,390,402 $ (595,535) $ 4,818,255
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
4
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements include the accounts
of IDS 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 IDS Life
Insurance Company and its subsidiaries and affiliates have been
eliminated in consolidation. IDS Life Insurance Company is a
wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise
Financial"). IDS Life Insurance Company is a stock life insurance
company with four wholly-owned operating subsidiaries: IDS Life
Insurance Company of New York, American Partners Life Insurance
Company, American Enterprise Life Insurance Company and American
Centurion Life Assurance Company. IDS Life Insurance Company also owns
IDS REO 1, LLC; IDS REO 2, LLC and American Enterprise REO 1, LLC which
hold real estate investments. IDS Life Insurance Company and its seven
subsidiaries are referred to collectively in this Form 10-Q as "IDS
Life".
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
Consolidated Financial Statements and Notes in the Annual Report on
Form 10-K of IDS 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 June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB Statement No. 109, "Accounting for Income Taxes."
FIN 48 prescribes a two-step process to recognize and measure a tax
position taken or expected to be taken in a tax return. The first step
is to determine whether a tax position has met the more-likely-than
-not recognition threshold and the second step is to measure a tax
position that meets the threshold to determine the amount of benefit
to recognize. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. IDS Life is currently evaluating
the impact of FIN 48 on IDS Life's consolidated financial condition
and results of operations.
In February 2006, the 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. IDS
Life is currently evaluating the impact of SFAS No. 155 on IDS Life's
consolidated financial condition and results of operations.
5
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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. IDS Life is currently evaluating the
impact of SOP 05-1 on IDS Life's consolidated financial condition and
results of operations.
3. SEPARATION OF AMERIPRISE FINANCIAL, INC.
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. IDS Life was allocated
certain expenses incurred as a result of Ameriprise Financial becoming
an independent company. Cumulatively, the expenses allocated to IDS
Life are significant to IDS Life. IDS Life received a capital
contribution of $650 million from Ameriprise Financial during the third
quarter of 2005 to support its financial strength ratings and to cover
separation costs.
During 2005, Ameriprise Financial developed an allocation policy for
separation costs resulting in the allocation of certain costs to IDS
Life that it considered to be a reasonable reflection of separation
costs benefiting IDS Life. Separation costs incurred during the first
half of 2006 primarily related to marketing and rebranding and
technology costs, while separation costs in 2005 were primarily
comprised of marketing and rebranding, technology costs and advisor and
other retention programs. Net income includes separation costs of $30.8
million and $25.8 million for the three months ended June 30, 2006 and
2005, respectively, and $55.4 million and $25.8 million for the six
months ended June 30, 2006 and 2005, respectively.
6
4. INVESTMENTS
The following is a summary of Available-for-Sale securities by type for
the periods indicated:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED INVESTMENT INVESTMENT FAIR
JUNE 30, 2006 COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Fixed maturities:
Corporate debt securities ......................... $12,842,265 $ 80,108 $ (515,246) $12,407,127
Mortgage and other asset-backed securities ........ 10,335,156 17,341 (363,004) 9,989,493
Foreign corporate bonds and obligations ........... 3,257,576 30,400 (132,558) 3,155,418
U.S. government and agencies obligations .......... 296,227 10,248 (9,616) 296,859
State and municipal obligations ................... 149,165 1,553 (6,951) 143,767
Foreign government bonds and obligations .......... 117,773 10,524 (338) 127,959
Structured investments (a) ........................ 2,395 -- -- 2,395
----------- ----------- ----------- -----------
Total fixed maturities ............................ 27,000,557 150,174 (1,027,713) 26,123,018
Preferred and common stocks ....................... 29,965 7 (399) 29,573
----------- ----------- ----------- -----------
Total ............................................. $27,030,522 $ 150,181 $(1,028,112) $26,152,591
=========== =========== =========== ===========
(a) Includes unconsolidated collateralized debt obligations.
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED INVESTMENT INVESTMENT FAIR
DECEMBER 31, 2005 COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Fixed maturities:
Corporate debt securities ......................... $13,318,636 $ 208,577 $ (198,774) $13,328,439
Mortgage and other asset-backed securities ........ 10,804,984 45,531 (158,784) 10,691,731
Foreign corporate bonds and obligations ........... 3,148,534 67,097 (54,721) 3,160,910
U.S. government and agencies obligations .......... 300,337 16,207 (5,282) 311,262
State and municipal obligations ................... 114,165 2,756 (3,262) 113,659
Foreign government bonds and obligations .......... 127,912 16,922 (114) 144,720
Structured investments (a) ........................ 2,453 -- -- 2,453
----------- ----------- ----------- -----------
Total fixed maturities ........................... 27,817,021 357,090 (420,937) 27,753,174
Preferred and common stocks ....................... 13 8 -- 21
----------- ----------- ----------- -----------
Total ............................................. $27,817,034 $ 357,098 $ (420,937) $27,753,195
=========== =========== =========== ===========
(a) Includes unconsolidated collateralized debt obligations.
The majority of the gross unrealized investment losses related to
corporate debt securities and substantially all of the gross unrealized
investment losses related to mortgage and other asset-backed securities
was attributable to changes in interest rates. A portion of the gross
unrealized investment losses, particularly related to corporate debt
securities, was also attributable to credit spreads and specific issuer
credit events.
Gross realized investment gains and losses on Available-for-Sale
securities and other-than-temporary impairments on
Available-for-Sale securities included in net realized investment gains
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(IN THOUSANDS)
Gross realized investment gains .................... $ 9,440 $ 63,529 $ 19,977 $ 72,363
Gross realized investment losses ................... (4,096) (24,153) (9,268) (32,247)
Other-than-temporary impairments ................... -- -- -- (636)
7
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. LINES OF CREDIT
Effective June 30, 2006, IDS Life has available a committed line of
credit with Ameriprise Financial aggregating $200 million. The
interest rate for any borrowings is established by reference to LIBOR
plus 28 basis points. There were no amounts outstanding on this line
of credit at June 30, 2006.
6. INCOME TAXES
IDS 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 IDS 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. IDS Life's deferred tax
assets include $231 million in capital loss carryforwards that expire
December 31, 2009. Based on analysis of IDS Life's tax position,
management believes it is more likely than not that the results of
future operations and implementation of tax planning strategies will
generate sufficient taxable income to enable IDS Life to utilize all of
its deferred tax assets. Accordingly, no valuation allowance for
deferred tax assets was established as of June 30, 2006 and December
31, 2005.
7. COMMITMENTS AND CONTINGENCIES
At June 30, 2006 and December 31, 2005, IDS Life had commitments to
fund mortgage loans on real estate of $111.7 million and $106.8
million, respectively.
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. IDS Life has received requests for
information and has been contacted by regulatory authorities concerning
its practices and is cooperating fully with these inquiries.
IDS Life is involved in other proceedings concerning matters arising in
connection with the conduct of its business activities. IDS Life
believes that it is not a party to, nor are any of its properties the
subject of, any pending legal, arbitration or regulatory proceedings
that would have a material adverse effect on its consolidated financial
condition, results of operations or liquidity. However, it is possible
that the outcome of any such proceedings could have a material adverse
impact on results of operations in any particular reporting period as
the proceedings are resolved.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") should be read in
conjunction with IDS Life Insurance Company's Consolidated Financial
Statements and related notes presented in Item 1. IDS Life Insurance Company
and its seven subsidiaries are referred to collectively in this Form 10-Q as
"IDS Life". This discussion may contain forward-looking statements that
reflect IDS Life's plans, estimates and beliefs. Actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to these differences include, but are not
limited to, those discussed under "Forward-Looking Statements." IDS 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.
IDS Life follows U.S. 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
IDS Life Insurance Company is a stock life insurance company with four
wholly-owned operating subsidiaries: IDS Life Insurance Company of New York,
American Partners Life Insurance Company, American Enterprise Life Insurance
Company and American Centurion Life Assurance Company. IDS Life Insurance
Company is a wholly-owned subsidiary of Ameriprise Financial, Inc.
("Ameriprise Financial").
o IDS Life Insurance Company is domiciled in Minnesota and holds
Certificates of Authority in American Samoa, the District of Columbia
and all states except New York. IDS Life Insurance Company issues
insurance and annuity products.
o American Enterprise Life Insurance Company ("American Enterprise Life")
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 provides RiverSource branded
financial products and wholesaling services to support its annuity
operations. American Enterprise Life issues variable and fixed 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.
o American Partners Life Insurance Company ("American Partners Life") is
a stock life insurance company domiciled in Arizona, which holds
Certificates of Authority in the District of Columbia and all states
except New York and New Hampshire. American Partners Life markets
annuity products directly to customers, generally persons holding an
American Express(R) Card.
o IDS Life Insurance Company of New York ("IDS Life of New York") is a
stock life insurance company domiciled in New York, which holds
Certificates of Authority in New York and North Dakota. IDS Life of New
York issues insurance and annuity products.
o American Centurion Life Assurance Company ("American Centurion Life")
is a stock life insurance company domiciled in New York, which holds
Certificates of Authority in New York, Alabama and Delaware. American
Centurion Life issues fixed and variable annuity contracts primarily
through financial institutions and independent broker-dealers. American
Centurion Life also markets annuity products directly, generally to
persons holding an American Express(R) Card.
IDS Life Insurance Company also owns IDS REO 1, LLC; IDS REO 2, LLC and
American Enterprise REO 1, LLC which hold real estate investments.
9
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. IDS Life was allocated certain expenses
incurred as a result of Ameriprise Financial becoming an independent company.
Cumulatively, the expenses allocated to IDS Life are significant to IDS Life.
The majority of such costs are expected to be incurred by December 31, 2006.
IDS Life received a capital contribution of $650 million from Ameriprise
Financial during the third quarter of 2005 to support its financial strength
ratings and to cover separation costs.
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their expected
impact on future consolidated financial condition or results of operations,
see Note 2 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
Overview
Net income was $221.2 million for the six months ended June 30, 2006 compared
to $217.0 million for the six months ended June 30, 2005. The increase in net
income primarily reflects increases in mortality and expense risk and other
fees and contractholder and policyholder charges, as well as a decrease in
interest credited, partially offset by lower net realized gain on investments
and net investment income and higher other insurance and operating expense
and separation costs.
Revenues
Premiums for disability income ("DI") and long-term care ("LTC") insurance
increased $7.8 million or 5% reflecting higher DI insurance in force levels.
Net investment income decreased $21.1 million or 2% reflecting a decrease in
both the average yield and in the average level of invested assets, as well
as unfavorable mark-to-market adjustments on derivatives economically
hedging guaranteed minimum withdrawal benefit ("GMWB") provisions. The lower
level of invested assets is primarily a result of declining fixed annuity
account values. The decrease in net investment income also reflects a
reduction in income in 2006 compared to 2005 related to the liquidation of
secured loan trusts. These changes were partially offset by favorable
mark-to-market adjustments on both equity method investments in hedge funds
and derivatives economically hedging equity index annuities ("EIA") and
lower losses related to other derivatives. The impacts from derivatives
economically hedging EIA and GMWB were primarily offset in the interest
credited to account values and death and other benefits for investment
contracts and universal life-type insurance line items, respectively.
Contractholder and policyholder charges increased $40.0 million or 14%
including $17.9 million from recognizing previously deferred cost of
insurance revenues and an increase in the cost of insurance charges on
variable universal life products and charges for variable annuity GMWB
provisions.
Mortality and expense risk and other fees increased $77.0 million or 34%
reflecting higher average values of separate account assets due to increased
inflows and market appreciation.
Net realized investment gains were $10.8 million for the six months ended
June 30, 2006 compared to $37.8 million for the six months ended June 30,
2005. For the six months ended June 30, 2006, $20.5 million of gross realized
investment gains were partially offset by $9.7 million of losses. Included in
these total net investment gains and losses were $20.0 million of gross
realized investment gains, partially offset by $9.3 million of gross realized
investment losses, classified as Available-for-Sale.
10
For the six months ended June 30, 2005, $72.5 million of gross realized
investment gains were partially offset by $34.7 million of losses and
impairments. Included in these total net investment gains and losses were
$72.4 million of gross realized investment gains partially offset by $32.2
million of gross realized investment losses, as well as $0.6 million of
other-than-temporary impairment losses on investments, classified as
Available-for-Sale. Included in net realized investment gains classified as
Available-for-Sale for the six months ended June 30, 2005 were gross realized
investment gains and losses of $39.2 million and $14.3 million, respectively,
related to the sale of all of IDS Life's retained interest in a collateralized
debt obligation securitization trust.
Benefits and Expenses
Death and other benefits for traditional life insurance decreased $8.1
million or 39% reflecting lower claims volume.
Death and other benefits for investment contracts and universal life-type
insurance increased $8.4 million or 7% reflecting a net increase in guaranteed
minimum death benefit ("GMDB") costs of $15.5 million, $13.8 million of
additional claims expense, including $6.9 million in connection with the
recognition of the previously deferred cost of insurance revenues discussed
previously, higher sales inducement costs of $5.3 million and other increases
in costs and benefits of $10.4 million, partially offset by a net decrease in
GMWB costs of $36.6 million.
Benefits for DI and LTC insurance increased $4.4 million or 12% reflecting
unfavorable claims experience relative to the same period a year ago.
Increase in liabilities for future policy benefits for DI and LTC insurance
increased $13.9 million or 23% including a $5.1 million adjustment to the
liabilities for incurred but not reported claims.
Interest credited to account values decreased by $19.8 million or 4%
primarily due to lower interest crediting rates and lower average
accumulation values of annuities, partially offset by the effect of
appreciation on equity indexed annuities linked to the S&P 500 Index in 2006
versus depreciation in the same period a year ago.
Amortization of deferred acquisition costs ("DAC") increased to $209.8 million
for the six months ended June 30, 2006 from $197.3 million for the six months
ended June 30, 2005. Continued strong growth in variable annuity products and
the associated DAC balance resulted in increased DAC amortization. DAC
amortization also increased as a result of an adjustment of $4.7 million to
the unearned commission balance. Partially offsetting these increases, in
connection with recognizing the deferred cost of insurance revenues, the
related claim liabilities and other outstanding claim liabilities were
included in the calculation of estimated gross profits for variable universal
life/universal life resulting in a $5.1 million reduction to DAC amortization.
During the six months ended June 30, 2006 and 2005, IDS Life incurred $55.4
million and $25.8 million, respectively, in separation costs. Separation
costs incurred during the first half of 2006 primarily related to marketing
and rebranding and technology costs, while separation costs in 2005 were
primarily comprised of marketing and rebranding, technology costs and advisor
and other retention programs.
Other insurance and operating expenses increased $30.9 million or 11%
primarily reflecting increased business reinvestment initiatives,
compensation costs and corporate overhead expenses, as well as increased
non-deferrable distribution costs, due in part to higher variable annuity
sales.
Income Taxes
IDS Life's effective tax rate was 29% for the six months ended June 30, 2006
compared to 30% for the six months ended June 30, 2005. The lower effective
tax rate primarily reflects higher tax-advantaged items compared to pretax
income in the six months of 2006 compared to the same period a year ago.
11
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of IDS Life are generally met by funds provided
by investment income, maturities and periodic repayments of investments,
deposits, premiums and proceeds from sales of investments, as well as
capital contributions from Ameriprise Financial. The primary uses of funds
are surrenders and other benefits, commissions, other product-related
acquisition and sales inducement costs, operating expenses, policy loans,
dividends to Ameriprise Financial and investment purchases. IDS Life
routinely reviews its sources and uses of funds in order to meet its ongoing
obligations. In connection with the separation, IDS Life received a capital
contribution of $650 million from Ameriprise Financial during the third
quarter of 2005 to support its financial strength ratings and to cover
separation costs. On May 15, 2006, IDS Life paid an extraordinary dividend
of $100 million to Ameriprise Financial. Prior to the payment of this
dividend, IDS Life made the required advance notice to the Minnesota
Department of Commerce, its primary state regulator, and received a response
from them stating that they did not object to the payment of this dividend.
IDS Life of New York and American Centurion Life paid dividends to IDS Life
Insurance Company on June 19, 2006 of $23 million and $2 million, respectively.
Effective June 30, 2006, IDS Life has available a committed line of credit
with Ameriprise Financial aggregating $200 million. At June 30, 2006 there
were no amounts outstanding on this line of credit. At June 30, 2006 and
December 31, 2005, IDS Life had outstanding reverse repurchase agreements
totaling $106.4 million and $25.0 million, respectively. Both the line of
credit and reverse repurchase agreements are used strictly as short-term
sources of funds.
IDS Life Insurance Company and its wholly-owned life insurance subsidiaries
are subject to regulatory capital requirements. Actual capital, determined on
a statutory basis, and regulatory capital requirements, based on the most
recent statutory risk-based capital filings for each of the life insurance
entities, are as follows:
REGULATORY CAPITAL
ACTUAL CAPITAL AS OF (a) REQUIREMENT
----------------------------------- ------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
2006 2005 2005
-------------- ------------- ------------------
(IN THOUSANDS)
IDS Life Insurance Company.......................... $ 3,382,370 $ 3,270,285 $ 750,975
American Enterprise Life Insurance Company.......... 565,009 583,303 125,285
IDS Life Insurance Company of New York.............. 239,052 246,001 39,880
American Partners Life Insurance Company............ 73,199 67,884 10,906
American Centurion Life Assurance Company........... 65,167 61,748 12,654
(a) 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.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "may," "should," "could," "would," "likely,"
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. IDS Life
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the following:
the success, timeliness and financial impact (including the amount of
intercompany costs allocated to IDS Life, cost savings and other benefits
including increased revenues), both in the short-term and over time, of
reengineering initiatives being implemented or considered by Ameriprise
Financial that could impact IDS Life, including cost management, structural
and strategic measures such as vendor, process, facilities and operations
consolidation and outsourcing (including, among others, technologies
operations); the ability to control and manage operating infrastructure,
advertising and promotion expenses as business expands or changes; the
ability to attract and retain high-quality personnel; a downturn in IDS
Life's businesses and/or negative
12
changes in IDS Life's credit or financial strength ratings, which could
result in decreased liquidity, negative impact on marketing and sale of
products, and higher borrowing costs; IDS Life's ability to improve
investment performance and reduce outflows of invested funds; IDS Life's
ability to develop and introduce new and attractive products to clients in a
timely manner and effectively manage the economics in selling a growing
volume of non-proprietary mutual funds and other retail financial products to
clients; fluctuation in the equity and fixed income markets, which can affect
the amount and types of investment products sold by IDS Life, and other fees
received based on the value of those assets; IDS Life's ability to recover
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; IDS Life's ability to avoid deterioration in
its high-yield portfolio in order to mitigate losses in its investment
portfolio; fluctuations in interest rates, which impact IDS Life's borrowing
costs, return on lending products and spreads in the insurance and annuity
products; accuracy of estimates for the fair value of the assets in IDS
Life's investment portfolio and, in particular, those investments that are
not readily marketable; the potential negative effect on IDS Life's
businesses and infrastructure, including information technology, terrorist
attacks, disasters or other catastrophic events in the future; changes in
laws or government regulations, including changes in tax laws or regulations
that could result in the elimination of certain tax benefits; outcomes and
costs associated with litigation and compliance and regulatory matters;
successfully cross-selling insurance and annuity products and services to
Ameriprise Financial's customer base; lower than anticipated spreads in the
insurance and annuity business; the type and the value of certain benefit
features on variable annuity contracts; the effect of assessments and other
surcharges for guaranty funds; the response of reinsurance companies under
reinsurance contracts; the impact of the separation of Ameriprise Financial
from American Express; the impact of reinsurance rates and the availability
and adequacy of reinsurance; and competitive pressures in IDS Life's
business. A further description of these and other risks and uncertainties
can be found under "Item 1A - Risk Factors" and elsewhere in IDS Life's
Annual Report on Form 10-K for the year ended December 31, 2005, filed on
March 10, 2006 and its other reports filed with the Securities and Exchange
Commission.
13
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
IDS Life maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
("the Exchange Act")) designed to provide reasonable assurance that the
information required to be reported in the Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and
pursuant to the regulations of the Securities and Exchange Commission,
including controls and procedures designed to ensure that this information is
accumulated and communicated to IDS Life's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding the required disclosure.
IDS Life's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of IDS Life's
disclosure controls and procedures as of the end of the period covered by
this report. Based upon that evaluation, IDS Life's Chief Executive Officer
and Chief Financial Officer have concluded that IDS Life's disclosure
controls and procedures were effective at a reasonable level of assurance as
of June 30, 2006.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in IDS Life's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, IDS
Life's internal control over financial reporting.
PART II . OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 7 to the 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 IDS Life's Annual Report on Form 10-K for
the year ended December 31, 2005 filed with the SEC on March 10,
2006.
Item 6. Exhibits
The list of exhibits required to be filed as exhibits to this
report are listed on page E-1 hereof, under "Exhibit Index,"
which is incorporated herein by reference.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IDS LIFE INSURANCE COMPANY
--------------------------
(Registrant)
Date: August 9, 2006 By /s/ Mark E. Schwarzmann
------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: August 9, 2006 By /s/ Brian J. McGrane
------------------------------------
Brian J. McGrane
Executive Vice President and
Chief Financial Officer
15
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