UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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 NOVEMBER 7, 2006
- ----------------------------------------------- -------------------------------
Common Stock (par value $150 per share) 20,000 shares
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2006 and
December 31, 2005..................................... 1
Consolidated Statements of Income - Three Months and
Nine Months Ended September 30, 2006 and 2005......... 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2006 and 2005..................... 3
Consolidated Statements of Shareholder's Equity -
Nine Months Ended September 30, 2006 and 2005......... 4
Notes to Consolidated Financial Statements............ 5-9
Item 2. Management's Discussion and Analysis.................. 10-13
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
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------------ ------------------
(UNAUDITED)
ASSETS
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2006, $5,066,178;
2005, $5,818,741).................................................... $ 4,957,071 $ 5,757,419
Mortgage loans on real estate, at cost (less allowance for loan losses:
2006 and 2005, $6,862)................................................... 300,261 355,306
Other investments.......................................................... 60 1,108
------------------ ------------------
Total investments........................................................ 5,257,392 6,113,833
Cash and cash equivalents.................................................. 137,261 11,597
Amounts due from brokers................................................... 1,093 75
Other accounts receivable.................................................. 12,750 7,560
Accrued investment income.................................................. 53,668 60,562
Deferred acquisition costs................................................. 378,155 344,215
Deferred sales inducement costs............................................ 61,588 54,359
Deferred income tax assets, net............................................ -- 23,883
Other assets............................................................... 46,933 20,108
Separate account assets.................................................... 4,030,086 2,884,054
------------------ ------------------
Total assets............................................................. $ 9,978,926 $ 9,520,246
================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits..................................................... $ 5,084,021 $ 5,761,920
Policy claims and other policyholders' funds............................... 9,028 8,002
Amounts due to brokers..................................................... 21,600 31,682
Deferred income tax liabilities, net....................................... 9,634 --
Other liabilities.......................................................... 35,310 51,026
Separate account liabilities............................................... 4,030,086 2,884,054
------------------ ------------------
Total liabilities........................................................ 9,189,679 8,736,684
================== ==================
Shareholder's equity:
Common shares, $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.......................................................... 256,052 224,410
Accumulated other comprehensive loss, net of tax (61,677) (35,720)
------------------ ------------------
Total shareholder's equity............................................... 789,247 783,562
------------------ ------------------
Total liabilities and shareholder's equity............................... $ 9,978,926 $ 9,520,246
================== ==================
See Notes to Consolidated Financial Statements.
1
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ---------------------------------
2006 2005 2006 2005
---------------- ---------------- --------------- ---------------
REVENUES
Net investment income............................. $ 72,809 $ 86,589 $ 224,789 $ 263,941
Contractholder charges............................ 6,147 3,905 17,113 10,805
Mortality and expense risk and other fees......... 18,767 11,729 50,877 30,185
Net realized investment gains (losses)............ 6,221 (82) 5,476 (1,985)
---------------- ---------------- --------------- ---------------
Total revenues.............................. 103,944 102,141 298,255 302,946
---------------- ---------------- --------------- ---------------
BENEFITS AND EXPENSES
Death and other benefits.......................... (684) (273) 4,911 10,678
Interest credited to account values............... 44,903 48,987 138,981 156,110
Amortization of deferred acquisition costs........ 25,083 17,220 58,131 49,630
Separation costs.................................. 3,830 3,385 9,328 5,023
Other insurance and operating expenses............ 16,637 16,554 41,510 48,828
---------------- ---------------- --------------- ---------------
Total benefits and expenses................. 89,769 85,873 252,861 270,269
---------------- ---------------- --------------- ---------------
Income before income tax provision................... 14,175 16,268 45,394 32,677
Income tax provision................................. 4,668 3,777 13,752 8,980
---------------- ---------------- --------------- ---------------
Net income........................................... $ 9,507 $ 12,491 $ 31,642 $ 23,697
================ ================ =============== ===============
See Notes to Consolidated Financial Statements.
2
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2006 2005
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 31,642 $ 23,697
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred acquisition costs................................... 58,131 49,630
Amortization of deferred sales inducement costs.............................. 8,113 9,290
Capitalization of deferred acquisition costs................................. (84,953) (68,014)
Capitalization of deferred sales inducement costs............................ (14,625) (13,543)
Premium and discount amortization on Available-for-Sale and other securities. 14,018 18,480
Deferred income taxes....................................................... 47,494 19,489
Net realized investment (gains) losses....................................... (5,476) 1,985
Changes in operating assets and liabilities:
Other accounts receivable.................................................... (5,190) --
Accrued investment income.................................................... 6,894 694
Policy claims and other policyholder's funds................................. 1,026 6,518
Other assets and liabilities, net............................................ (45,439) 6,112
----------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 11,635 54,338
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Proceeds from sales.......................................................... 517,770 411,557
Maturities, sinking fund payments and calls.................................. 345,085 398,647
Purchases.................................................................... (118,461) (582,553)
Other investments:
Proceeds from sales, maturities, sinking fund payments and calls............. 60,391 65,176
Purchases.................................................................... (4,742) (6,206)
Change in amounts due to and from brokers, net................................. (11,100) (143)
----------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES...................................... 788,943 286,478
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts:
Considerations received...................................................... 60,273 49,933
Interest credited to account values.......................................... 138,981 156,110
Surrenders and other benefits................................................ (874,168) (587,873)
---------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES.......................................... (674,914) (381,830)
---------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 125,664 (41,014)
Cash and cash equivalents at beginning of period............................... 11,597 47,356
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 137,261 $ 6,342
================ ===============
Supplemental Disclosures:
Income taxes refunded, net................................................... $ (2,794) $ (353)
Interest paid on borrowings.................................................. $ 890 $ 54
See Notes to Consolidated Financial Statements.
3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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 $ 591,872 $ 199,175 $ 57,668 $ 851,715
Comprehensive loss:
Net income.................................. 23,697 23,697
Change in unrealized holding losses on
securities, net........................... (69,484) (69,484)
Change in unrealized derivative gains, net.. 3,301 3,301
Total comprehensive loss...................... -------------
(42,486)
------------ ------------- -------------- -------------------- -------------
BALANCES AT SEPTEMBER 30, 2005................ $ 3,000 $ 591,872 $ 222,872 $ (8,515) $ 809,229
============ ============= ============== ==================== =============
BALANCES AT DECEMBER 31, 2005................. $ 3,000 $ 591,872 $ 224,410 $ (35,720) $ 783,562
Comprehensive income:
Net income.................................. 31,642 31,642
Change in unrealized holding losses on
securities, net........................... (25,969) (25,969)
Change in unrealized derivative gains, net.. 12 12
-------------
Total comprehensive income.................... 5,685
------------ ------------- -------------- -------------------- -------------
BALANCES AT SEPTEMBER 30, 2006................ $ 3,000 $ 591,872 $ 256,052 $ (61,677) $ 789,247
============ ============= ============== ==================== =============
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 subsidiary 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.
Among other conditions precedent, the merger and the change of IDS
Life's name to RiverSource Life Insurance Company are subject to
certain regulatory approvals. It is currently anticipated 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 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 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 September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value
measurements. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early
adoption is permitted provided that the entity has not issued financial
statements for any period within the year of adoption. The provisions
of SFAS 157 are required to be applied prospectively as of the
beginning of the fiscal year in which SFAS 157 is initially applied,
except for certain financial instruments as defined in SFAS 157 which
will require retrospective application of SFAS 157. The transition
adjustment, if any, will be recognized as a cumulative-effect
adjustment to the opening balance of retained earnings for the fiscal
year of adoption. American Enterprise Life is currently evaluating the
impact of SFAS 157 on its consolidated financial condition and results
of operations.
5
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 addresses quantifying the financial statement effects of
misstatements, specifically, how the effects of prior year uncorrected
errors must be considered in quantifying misstatements in the current
year financial statements. SAB 108 does not change the SEC staff's
previous positions in SAB 99, "Materiality," regarding qualitative
considerations in assessing the materiality of misstatements. SAB 108
is effective for fiscal years ending after November 15, 2006. In the
initial year of adoption, the cumulative effect of applying SAB 108, if
any, will be recorded as an adjustment to the beginning balance of
retained earnings. American Enterprise Life is currently evaluating the
impact of SAB 108 on its consolidated financial condition and results
of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
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 recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return. 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. American Enterprise Life is
currently evaluating the impact of FIN 48 on its consolidated financial
condition and results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 amends FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") and FASB Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 140"). SFAS 155: (1) permits fair value
remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation; (2)
clarifies which interest-only and principal-only strips are not subject
to the requirements of SFAS 133; (3) establishes a requirement to
evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; (4) clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and (5) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
SFAS 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's fiscal year that begins after
September 15, 2006. At adoption, the fair value election may also be
applied to hybrid financial instruments that have been bifurcated under
SFAS 133 prior to adoption of this Statement. Any changes resulting
from the adoption of this Statement should be recognized as a
cumulative effect adjustment to beginning retained earnings. American
Enterprise Life is currently evaluating the impact of SFAS 155 on its
consolidated financial condition and results of operations.
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 anticipates the
impact of adopting SOP 05-1 on its consolidated financial condition and
results of operations will not be material.
6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. SEPARATION AND DISTRIBUTION OF AMERIPRISE FINANCIAL, INC.
FROM AMERICAN EXPRESS
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 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 of Ameriprise Financial and the
distribution of Ameriprise Financial common shares to American Express
shareholders ("the Distribution"). Prior to the Distribution,
Ameriprise Financial had been a wholly-owned subsidiary of American
Express. 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 incurred during the first nine months 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 employee retention programs. Net
income includes separation costs of $3.8 million and $3.4 million for
the three months ended September 30, 2006 and 2005, respectively, and
$9.3 million and $5.0 million for the nine months ended September 30,
2006 and 2005, respectively.
4. INVESTMENTS
The following is a summary of Available-for-Sale securities by type:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED INVESTMENT INVESTMENT FAIR
SEPTEMBER 30, 2006 COST GAINS LOSSES VALUE
---------------- --------------- ----------------- ---------------
(IN THOUSANDS)
Fixed maturities:
Mortgage and other asset-backed securities.. $ 2,370,849 $ 3,655 $ (53,854) $ 2,320,650
Corporate debt securities................... 2,092,382 9,120 (55,508) 2,045,994
Foreign corporate bonds and obligations..... 492,968 2,872 (13,459) 482,381
U.S. government and agencies obligations.... 71,737 79 (1,625) 70,191
State and municipal obligations............. 30,241 151 (1,387) 29,005
Foreign government bonds and obligations.... 8,001 849 -- 8,850
---------------- --------------- ----------------- ---------------
Total fixed maturities...................... $ 5,066,178 $ 16,726 $ (125,833) $ 4,957,071
================ =============== ================= ===============
7
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. INVESTMENTS (CONTINUED)
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED INVESTMENT INVESTMENT FAIR
DECEMBER 31, 2005 COST GAINS LOSSES VALUE
---------------- --------------- ----------------- ---------------
(IN THOUSANDS)
Fixed maturities:
Mortgage and other asset-backed securities.. $ 2,650,573 $ 7,539 $ (47,855) $ 2,610,257
Corporate debt securities................... 2,462,313 28,075 (43,009) 2,447,379
Foreign corporate bonds and obligations..... 593,440 8,734 (12,993) 589,181
U.S. government and agencies obligations.... 74,172 111 (1,743) 72,540
State and municipal obligations............. 30,240 190 (1,159) 29,271
Foreign government bonds and obligations.... 8,003 788 -- 8,791
---------------- --------------- ----------------- ---------------
Total fixed maturities...................... $ 5,818,741 $ 45,437 $ (106,759) $ 5,757,419
================ =============== ================= ===============
In the above tables, 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 were attributable to changes in interest rates.
A small 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 (losses) were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2006 2005 2006 2005
--------------- -------------- --------------- ---------------
(IN THOUSANDS)
Gross realized investment gains............... $ 6,230 $ 1,381 $ 9,335 $ 7,726
Gross realized investment losses.............. (9) (1,463) (3,485) (8,392)
Other-than-temporary impairments.............. -- -- -- (229)
5. DEFERRED ACQUISITION COSTS
Changes in deferred acquisition costs were as follows:
2006 2005
----------------- ------------------
(IN THOUSANDS)
BALANCE, JANUARY 1..................................... $ 344,215 $ 299,708
Capitalization of acquisition costs.................... 84,953 68,014
Amortization, excluding impact of changes in assumptions (55,731) (52,430)
Amortization, impact of annual third quarter changes in
DAC-related assumptions............................. (2,400) 2,800
Impact of changes in net unrealized securities losses.. 7,118 15,717
----------------- ------------------
BALANCE, SEPTEMBER 30.................................. $ 378,155 $ 333,809
================= ==================
8
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. LINES OF CREDIT
IDS Life, on a consolidated basis, has available a committed line of
credit with Ameriprise Financial aggregating $200 million of which a
portion is available to American Enterprise Life depending on the total
outstanding balance drawn against the facility and the amount which
American Enterprise Life is permitted to borrow under applicable state
insurance laws without prior notice to insurance regulators. The
interest rate for any borrowings is established by reference to LIBOR
plus 28 basis points. American Enterprise Life had no amounts
outstanding under this line of credit at September 30, 2006.
7. INCOME TAXES
American Enterprise Life's effective tax rate was 30% in the nine
months ended September 30, 2006. American Enterprise Life's effective
tax rate was 27% for the nine months ended September 30, 2005. The
higher effective tax rate primarily reflects the impact of the
finalization of the prior year tax return in the nine months ended
September 30, 2005, partially offset by higher tax-advantaged items
compared to pretax income in the first nine months of 2006 compared to
the same period a year ago.
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 at September
30, 2006 included $23.7 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 September 30, 2006 and December 31, 2005.
8. COMMITMENTS AND CONTINGENCIES
At September 30, 2006 and December 31, 2005, American Enterprise Life
had commitments to fund mortgage loans on real estate of $4.1 million
and nil, 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. 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 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.
9
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 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 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
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 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.
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.
On March 17, 2006, IDS Life and American Enterprise Life Insurance Company
executed an Agreement and Plan of Merger whereby American Enterprise Life
Insurance Company 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 Insurance Company 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. Among
other conditions precedent, the merger and the change of IDS Life's name to
RiverSource Life Insurance Company are subject to certain regulatory
approvals. It is currently anticipated that the merger will be effective as
of December 31, 2006.
10
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 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 of
Ameriprise Financial and the distribution of Ameriprise Financial common
shares to American Express shareholders ("the Distribution"). Prior to the
Distribution, Ameriprise Financial had been a wholly-owned subsidiary of
American Express. 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.
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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Overview
Net income was $31.6 million for the nine months ended September 30, 2006
compared to $23.7 million for the nine months ended September 30, 2005. Net
income was positively impacted by strong growth in separate account assets,
both from variable annuity net flows and market appreciation. Net flows of
client assets are a measure of new sales of, or deposits into, American
Enterprise Life's products offset by redemptions of, or withdrawals from,
American Enterprise Life's products. Net flows can have a significant impact
on American Enterprise Life's results of operations due to their impact on
revenues and expenses.
Revenues
Net investment income decreased $39.2 million or 15% reflecting a decrease
in average general account assets due to the shift in product sales from
fixed annuities to variable annuities and unfavorable mark-to-market
adjustments on derivatives economically hedging guaranteed minimum
withdrawal benefit ("GMWB") riders. Fluctuations in the value of the GMWB
embedded derivative are reported in the death and other benefits line on
American Enterprise Life's Consolidated Statements of Income.
Contractholder charges increased $6.3 million or 58% primarily reflecting
increased charges for variable annuity GMWB riders.
Mortality and expense risk and other fees increased $20.7 million or 69%
reflecting higher average values of separate account assets due to positive
net flows and market appreciation.
Net realized investment gains were $5.5 million for the nine months ended
September 30, 2006 compared to net realized investment losses of $2.0
million for the nine months ended September 30, 2005. For the nine months
ended September 30, 2006, $9.3 million of gross realized investment gains
were partially offset by $3.8 million of losses. Included in these total net
investment gains and losses were $9.3 million of gross realized investment
gains and $3.5 million of gross realized investment losses on securities
classified as Available-for-Sale.
For the nine months ended September 30, 2005, $7.7 million of gross realized
investment gains were offset by $9.7 million of losses and impairments.
Included in these total net investment gains and losses were $7.7 million of
gross realized investment gains and $8.4 million of gross realized
investment losses, as well as $0.2 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale. Included
in net realized investment losses classified as Available-for-Sale for the
nine months ended September 30, 2005 were gross realized investment gains
and losses of $1.6 million and $2.8 million, respectively, related to the
sale of all of American Enterprise Life's retained interest in a
collateralized debt obligation securitization trust.
11
Benefits and Expenses
Total benefits and expenses reflect the impact of American Enterprise Life's
annual third quarter detailed review of deferred acquisition cost ("DAC")
valuation assumptions ("DAC unlocking"). For the third quarter of 2006,
American Enterprise Life recorded an expense from DAC unlocking of $2.6
million. DAC unlocking for the third quarter of 2005 resulted in a $2.8
million reduction to DAC amortization expense.
The DAC unlocking expense for the third quarter of 2006 primarily reflected
impacts of $7.5 million from changes in economic assumptions partially
offset by a $4.3 million benefit from modeling increased product
persistency.
The DAC unlocking net benefit for the third quarter of 2005 primarily
reflected a $2.8 million reduction in DAC amortization reflecting lower than
previously assumed lapse rates on fixed annuities.
Death and other benefits decreased $5.8 million or 54% primarily reflecting
a net decrease in GMWB costs of $8.2 million, partially offset by a net
increase in guaranteed minimum death benefit ("GMDB") costs of $2.2 million.
Interest credited to account values decreased $17.1 million or 11%
reflecting lower average accumulation values of annuities and lower interest
crediting rates on fixed annuity products.
Amortization of DAC increased to $58.1 million for the nine months ended
September 30, 2006 from $49.6 million for the nine months ended September
30, 2005 primarily due to the expense of DAC unlocking related to
amortization in the third quarter of 2006 compared to a benefit of DAC
unlocking related to amortization in the third quarter 2005.
During the nine months ended September 30, 2006 and 2005, American
Enterprise Life incurred $9.3 million and $5.0 million, respectively, in
separation costs. Separation costs incurred during the first nine months 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 employee retention programs.
Other insurance and operating expenses were lower by $7.3 million or 15% in
2006 primarily reflecting lower costs in 2006 compared to 2005 related to
intercompany swaps and floors, which expired January 2006.
Income Taxes
American Enterprise Life's effective tax rate was 30% in the nine months
ended September 30, 2006 compared to 27% for the nine months ended September
30, 2005. The higher effective tax rate primarily reflects the impact of the
finalization of the prior year tax return in the nine months ended September
30, 2005, partially offset by higher tax-advantaged items compared to pretax
income in the first nine months of 2006 compared to the same period a year
ago.
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
surrenders and other 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.
IDS Life, on a consolidated basis, has available a committed line of credit
with Ameriprise Financial aggregating $200 million of which a portion is
available to American Enterprise Life depending on the total outstanding
balance drawn against the facility and the amount which American Enterprise
Life is permitted to borrow under applicable state insurance laws without
prior notice to insurance regulators. American Enterprise Life had no
amounts outstanding under this line of credit at September 30, 2006. At
September 30, 2006 and December 31, 2005, American Enterprise Life had
outstanding reverse repurchase agreements totaling nil and $25.0 million,
respectively.
12
American Enterprise Life is subject to regulatory capital requirements. The
actual capital, determined on a statutory basis, as of September 30, 2006
and December 31, 2005 was $593.1 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.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "may," "should," "could,"
"would," "likely," and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date on which they are made. American Enterprise Life undertakes no
obligation to update or revise any forward-looking statements. Factors that
could cause actual results to differ materially from these forward-looking
statements include, but are not limited to, the following: the success,
timeliness and financial impact (including the amount of intercompany costs
allocated to American Enterprise Life, cost savings and other benefits
including increased revenues), both in the short-term and over time, of
reengineering initiatives being implemented or considered by Ameriprise
Financial that could impact American Enterprise Life, including cost
management, structural and strategic measures such as vendor, process,
facilities and operations consolidation and outsourcing (including, among
others, technologies operations); the ability to control and manage
operating infrastructure, advertising and promotion expenses as business
expands or changes; a downturn in American Enterprise Life's businesses
and/or negative changes in American Enterprise Life's credit or financial
strength ratings, which could result in decreased liquidity, negative impact
on marketing and sale of products, and higher borrowing costs; American
Enterprise Life's ability to improve investment performance and reduce
outflows of invested funds; American Enterprise Life's ability to develop
and introduce new and attractive products to clients in a timely manner and
effectively manage the economics in selling a growing volume of
non-proprietary mutual funds and other retail financial products to clients;
fluctuation in the equity and fixed income markets, which can affect the
amount and types of investment products sold by American Enterprise Life,
and other fees received based on the value of those assets; American
Enterprise Life's ability to recover DAC, as well as the timing of such DAC
amortization, in connection with the sale of annuity and insurance products;
the level of GMDB or living benefits paid to clients; changes in assumptions
relating to DAC, which could impact the amount of DAC amortization; American
Enterprise Life's ability to avoid deterioration in its high-yield 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,
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
effect 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, 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
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.
American Enterprise Life's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, 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
September 30, 2006.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no 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 that have materially affected, or are reasonably likely to
materially affect, American Enterprise Life's internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 8 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 American Enterprise 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
------------------------------------------
(Registrant)
Date: November 7, 2006 By /s/ Mark E. Schwarzmann
----------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: November 7, 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