-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QH47MZ2cO1pnu6riIJ9XjeqSInaP+RY1nmgtxQdPams2Hlt1wrj92PzTinwR0E0r m4lTRjS+4UdUXYNu1RxIDg== 0000820027-04-000957.txt : 20041110 0000820027-04-000957.hdr.sgml : 20041110 20041110174004 ACCESSION NUMBER: 0000820027-04-000957 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20041110 DATE AS OF CHANGE: 20041110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS LIFE INSURANCE CO CENTRAL INDEX KEY: 0000727892 IRS NUMBER: 410823832 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-28976 FILM NUMBER: 041134251 BUSINESS ADDRESS: STREET 1: IDS TOWER 10 STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126713288 MAIL ADDRESS: STREET 1: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE INSURANCE CO /MN DATE OF NAME CHANGE: 19920703 10-Q 1 idsl10q.txt IDS LIFE INSURANCE COMPANY 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, 2004 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 (I.R.S. Employer Identification No.) of incorporation or organization) 829 AXP Financial Center, Minneapolis, Minnesota 55474 - --------------------------------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 671-3131 ------------------------ None - ------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------ -------- THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. IDS LIFE INSURANCE COMPANY FORM 10-Q INDEX Page No. PART I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets -- September 30, 2004 and December 31, 2003 1 Consolidated Statements of Income -- Three months ended September 30, 2004 and 2003 2 Consolidated Statements of Income -- Nine months ended September 30, 2004 and 2003 3 Consolidated Statements of Cash Flows -- Nine months ended September 30, 2004 and 2003 4 Notes to Consolidated Financial Statements 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 Item 4. Controls and Procedures 19 PART II. Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Exhibit Index E-1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (thousands, except share data)
September 30, December 31, 2004 2003 ------------------ -------------------- Assets (Unaudited) Investments: Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2004, $26,780,791; 2003, $26,596,709) $ 27,518,496 $ 27,293,565 Preferred and common stocks, at fair value (cost: 2004, $30,019; 2003, $30,019) 31,074 31,046 Mortgage loans on real estate, at cost (less reserves: 2004, $45,347; 2003, $47,197) 2,995,749 3,180,020 Policy loans 581,738 578,000 Other investments 755,421 801,871 ------------------ -------------------- Total investments 31,882,478 31,884,502 Cash and cash equivalents 786,889 400,294 Restricted cash 510,499 834,448 Amounts recoverable from reinsurers 843,391 754,514 Amounts due from brokers 105,579 1,792 Other accounts receivable 37,649 68,422 Accrued investment income 358,976 355,374 Deferred policy acquisition costs 3,605,204 3,336,208 Deferred sales inducement costs 298,034 278,971 Other assets 333,200 253,858 Separate account assets 29,448,993 27,774,319 ------------------ -------------------- Total assets 68,210,892 65,942,702 ================== ==================== Liabilities and Stockholder's Equity Liabilities: Future policy benefits: Fixed annuities 26,795,532 26,376,944 Variable annuity guarantees 31,771 -- Universal life insurance 3,672,716 3,569,882 Traditional life insurance 265,293 254,641 Disability income and long-term care insurance 1,878,772 1,724,204 Policy claims and other policyholders' funds 77,660 67,911 Amounts due to brokers 96,299 228,707 Deferred income taxes, net 205,070 139,814 Other liabilities 418,667 408,444 Separate account liabilities 29,448,993 27,774,319 ------------------ -------------------- Total liabilities 62,890,773 60,544,866 ------------------ -------------------- Stockholder's equity: Capital stock, $30 par value; 100,000 shares authorized, issued and outstanding 3,000 3,000 Additional paid-in capital 1,370,388 1,370,388 Retained earnings 3,526,673 3,624,837 Accumulated other comprehensive income, net of tax: Net unrealized securities gains 444,760 405,456 Net unrealized derivative losses (24,702) (5,845) ------------------ -------------------- Total accumulated other comprehensive income 420,058 399,611 ------------------ -------------------- Total stockholder's equity 5,320,119 5,397,836 ------------------ -------------------- Total liabilities and stockholder's equity 68,210,892 65,942,702 ================== ====================
See Notes to Consolidated Financial Statements. -1- IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (thousands) (Unaudited)
Three months ended September 30, -------------------------------------- 2004 2003 ----------------- ------------- Revenues: Premiums: Traditional life insurance $ 17,040 $ 16,021 Disability income and long-term care insurance 71,879 71,433 --------------- ------------- Total premiums 88,919 87,454 Net investment income 443,534 427,603 Contractholder and policyholder charges 139,449 131,895 Mortality and expense risk and other fees 106,420 101,980 Net realized gain (loss) on investments 788 (10,665) --------------- ------------- Total 779,110 738,267 --------------- ------------- Benefits and Expenses: Death and other benefits: Traditional life insurance 6,921 11,179 Investment contracts and universal life-type insurance 51,442 58,982 Disability income and long-term care insurance 18,726 14,877 Increase (decrease) in liabilities for future policy benefits: Traditional life insurance 104 (2,374) Disability income and long-term care insurance 33,067 36,398 Interest credited on investment contracts and universal life-type insurance 278,902 303,438 Amortization of deferred policy acquisition costs 63,446 82,419 Other insurance and operating expenses 128,754 103,776 ----------------- ------------- Total 581,362 608,695 ----------------- ------------- Pre-tax income 197,748 129,572 Income tax provision (benefit) 65,245 (3,592) ----------------- ------------- Net income $ 132,503 $ 133,164 ================= =============
See Notes to Consolidated Financial Statements. -2- IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (thousands) (Unaudited)
Nine months ended September 30, ------------------------------------------ 2004 2003 ------------------ ------------------- Revenues: Premiums: Traditional life insurance $ 51,094 $ 48,406 Disability income and long-term care insurance 210,245 210,814 ------------------ ------------------- Total premiums 261,339 259,220 Net investment income 1,323,351 1,246,136 Contractholder and policyholder charges 413,833 397,335 Mortality and expense risk and other fees 315,402 284,430 Net realized gain on investments 18,301 12,655 ------------------ ------------------- Total 2,332,226 2,199,776 ------------------ ------------------- Benefits and Expenses: Death and other benefits: Traditional life insurance 27,011 31,037 Investment contracts and universal life-type insurance 168,149 161,166 Disability income and long-term care insurance 50,262 42,224 (Decrease) increase in liabilities for future policy benefits: Traditional life insurance (512) (2,733) Disability income and long-term care insurance 87,753 102,237 Interest credited on investment contracts and universal life-type insurance 841,982 905,330 Amortization of deferred policy acquisition costs 175,230 236,232 Other insurance and operating expenses 374,166 341,724 ------------------ ------------------- Total 1,724,041 1,817,217 ------------------ ------------------- Pre-tax income before accounting change 608,185 382,559 Income tax provision 205,781 42,974 ------------------ ------------------- Income before accounting change 402,404 339,585 Cumulative effect of accounting change, net of tax (Note 1) (70,568) -- ------------------ ------------------- Net income $ 331,836 $ 339,585 ================== ===================
See Notes to Consolidated Financial Statements. -3-
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (Unaudited) Nine months ended September 30, ---------------------------------------- 2004 2003 ------------------ ------------------ Cash Flows from Operating Activities Net income $ 331,836 $ 339,585 Adjustments to reconcile net income to net cash provided by operating activities: Policy loans, excluding universal life-type insurance Repayment 28,693 33,403 Issuance (29,587) (25,868) Change in amounts recoverable from reinsurers (88,877) (89,583) Change in other accounts receivable 30,773 (2,258) Change in accrued investment income (3,602) (72,249) Change in deferred policy acquisition costs, net (222,936) (190,159) Change in liabilities for future policy benefits for traditional life, disability income and long-term care insurance 165,220 191,227 Change in policy claims and other policyholders' funds 9,749 (2,170) Deferred income taxes 92,243 11,800 Change in other assets and liabilities, net 200,400 (87,688) Amortization of premium, net 68,107 136,950 Net realized gain on investments (18,301) (12,655) Net realized gain on trading securities (20,644) (19,079) Policyholder and contractholder charges, non-cash (174,704) (175,764) Cumulative effect of accounting change, net of tax (Note 1) 70,568 -- ------------------ ------------------ Net cash provided by operating activities 438,938 35,492 ------------------ ------------------ Cash Flows from Investing Activities Available-for-Sale securities: Sales 1,235,236 9,205,312 Maturities, sinking fund payments and calls 1,577,817 3,546,041 Purchases (3,037,184) (16,738,868) Other investments, excluding policy loans: Sales, maturities, sinking fund payments and calls 588,641 471,588 Purchases (342,767) (697,042) Change in amounts due to and from brokers, net (236,195) (3,285,344) ------------------ ------------------ Net cash used in investing activities (214,452) (7,498,313) ------------------ ------------------ Cash Flows from Financing Activities Activity related to investment contracts and universal life-type insurance: Considerations received 1,768,159 3,701,940 Interest credited to account values 841,982 905,330 Surrenders and other benefits (2,015,188) (1,492,730) Universal life-type insurance policy loans: Repayment 66,526 66,085 Issuance (69,370) (61,895) Cash dividend to American Express Financial Corporation (430,000) -- ------------------ ------------------ Net cash provided by financing activities 162,109 3,118,730 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 386,595 (4,344,091) Cash and cash equivalents at beginning of period 400,294 4,424,061 ------------------ ------------------ Cash and cash equivalents at end of period $ 786,889 $ 79,970 ================== ==================
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 should be read in conjunction with the financial statements in the Annual Report on Form 10-K of IDS Life Insurance Company (IDS Life) for the year ended December 31, 2003. Certain reclassifications of prior period amounts have been made to conform to the current presentation. The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. Recently Issued Accounting Standards In June 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS No. 97-1, "Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (SFAS No. 97), Permit or Require Accrual of an Unearned Revenue Liability" (FSP 97-1). The implementation of Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1), raised a question regarding the interpretation of the requirements of SFAS No. 97 concerning when it is appropriate to record an unearned revenue liability. FSP 97-1 clarifies that SFAS No. 97 is clear in its intent and language, and requires the recognition of an unearned revenue liability for amounts that have been assessed to compensate insurers for services to be performed over future periods. SOP 03-1 describes one situation, when assessments result in profits followed by losses, where an unearned revenue liability is required. SOP 03-1 does not amend SFAS No. 97 or limit the recognition of an unearned revenue liability to the situation described in SOP 03-1. The guidance in FSP 97-1 is effective for financial statements for fiscal periods beginning after June 18, 2004. The adoption of FSP 97-1 did not have a material impact on IDS Life's consolidated financial condition or results of operations. (For further discussion of SOP 03-1, see below and Note 3). The AICPA released a series of technical practice aids (TPAs) in September 2004 which provide additional guidance related to, among other things, the definition of an insurance benefit feature and the definition of policy assessments in determining benefit liabilities, as described within SOP 03-1. Although IDS Life is studying the TPAs, its initial assessment is that it will not have a material effect on IDS Life's calculation of liabilities that were recorded in the first quarter of 2004 upon adoption of SOP 03-1. In July 2003, the American Institute of Certified Public Accountants issued SOP 03-1 effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance on separate account presentation and accounting for interests in separate accounts. Additionally, SOP 03-1 provides clarifying guidance as to the recognition of bonus interest and other sales inducement benefits and the presentation of any deferred amounts in the financial statements. Lastly, SOP 03-1 requires insurance enterprises to establish additional liabilities for benefits that may become payable under variable annuity death benefit guarantees or other insurance or annuity contract provisions. Where an additional liability is established, the recognition of this liability will then -5- IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) be considered in amortizing deferred policy acquisition costs (DAC) and any deferred sales inducement costs associated with those insurance or annuity contracts. The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative effect of accounting change that reduced 2004 results by $70.6 million ($108.6 million pretax). The cumulative effect of accounting change consisted of: (i) $42.8 million pretax from establishing additional liabilities for certain variable annuity guaranteed benefits and from considering these liabilities in valuing DAC and deferred sales inducement costs associated with those contracts and (ii) $65.8 million pretax from establishing additional liabilities for certain variable universal life and single pay universal life insurance contracts under which contractual cost of insurance charges are expected to be less than future death benefits and from considering these liabilities in valuing DAC associated with those contracts. Prior to the adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. IDS Life's accounting for separate accounts was already consistent with the provisions of SOP 03-1 and, therefore, there was no impact related to this requirement. In November 2003, the Financial Accounting Standards Board (FASB) ratified a consensus on the disclosure provisions of Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." IDS Life complied with the disclosure provisions of this rule in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2003. In March 2004, the FASB reached a consensus regarding the application of a three-step impairment model to determine whether investments accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and other cost method investments are other-than-temporarily impaired. However, with the issuance of FASB Staff Position (FSP) No. EITF 03-1-1, the provisions of the consensus relating to the measurement and recognition of other-than-temporary impairments will be deferred pending further clarification from the FASB. The remaining provisions of this rule, which primarily relate to disclosure requirements, are required to be applied prospectively to all current and future investments accounted for in accordance with SFAS No. 115 and other cost method investments. IDS Life will evaluate the potential impact of EITF 03-1 after the FASB completes its reassessment. 2. Investment Securities Gross realized gains and losses on sales and losses recognized for other-than-temporary impairments of securities classified as Available-for-Sale, using the specific identification method, were as follows for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------ 2004 2003 2004 2003 ---------- ----------- --------- ----------- (Millions) Gross realized gains on sales $ 10.2 $ 26.3 $ 33.9 $ 217.3 Gross realized (losses) on sales $ (5.3) $ (36.6) $ (11.7) $ (91.4) Realized (losses) recognized for other-than-temporary impairments $ -- $ -- $ (0.1) $ (102.6)
-6- IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Variable Annuities and Sales Inducement Costs The majority of the variable annuity contracts offered by IDS Life contain guaranteed minimum death benefit (GMDB) provisions. When market values of the customer's accounts decline, the death benefit payable on a contract with a GMDB may exceed the contract accumulation value. IDS Life also offers variable annuities with death benefit provisions that gross up the amount payable by a certain percentage of contract earnings; these are referred to as gain gross-up benefits (GGU). In addition, IDS Life offers contracts containing guaranteed minimum income benefit (GMIB) provisions. If elected by the contract owner and after a stipulated waiting period from contract issuance, a GMIB guarantees a minimum lifetime annuity based on a specified rate of contract accumulation value growth and predetermined annuity purchase rates. IDS Life has established additional liabilities for these variable annuity death and GMIB benefits under SOP 03-1. IDS Life has not established additional liabilities for other insurance or annuitization guarantees for which the risk is currently immaterial. The variable annuity death benefit liability is determined each period by estimating the expected value of death benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated meaningful life based on expected assessments (e.g., mortality and expense fees, contractual administrative charges and similar fees). Similarly, the GMIB liability is determined each period by estimating the expected value of annuitization benefits in excess of the projected contract accumulation value at the date of annuitization and recognizing the excess over the estimated meaningful life based on expected assessments. In determining the additional liabilities for variable annuity death benefits and GMIB, IDS Life projects these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency and investment margins and are consistent with those used for DAC asset valuation for the same contracts. As with DAC, management will review, and where appropriate, adjust its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management will review and update these assumptions annually in the third quarter of each year. The following provides summary information related to variable annuity contracts for which IDS Life has established additional liabilities for death benefits and guaranteed minimum income benefits: -7- IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
--------------------------------------------------------------------- ----------------- -------------------- As of Variable Annuity GMDB and GMIB by Benefit Type September 30, As of 2004 December 31, 2003 -------------------------------------------------------------------------------------- --------------------- (Dollar amounts in millions) -------------------------------------------------------------------------------------- --------------------- Contracts with GMDB Total Contract Value $ 3,108.5 $ 3,162.4 Providing for Return of Contract Value in Separate Accounts $ 1,605.4 $ 1,600.7 Premium Net Amount at Risk* $ 22.9 $ 28.0 Weighted Average Attained Age 61 62 ------------------------- ---------------------------------------------- ------------- ----- --------------- Contracts with GMDB Total Contract Value $ 25,366.8 $ 24,570.6 Providing for Six Year Contract Value in Separate Accounts $ 20,851.4 $ 20,316.1 Reset Net Amount at Risk* $ 1,839.4 $ 2,077.5 Weighted Average Attained Age 60 60 ------------------------- ---------------------------------------------- ------------- ----- --------------- Contracts with GMDB Total Contract Value $ 2,989.2 $ 2,827.5 Providing for One Year Contract Value in Separate Accounts $ 2,148.0 $ 1,886.3 Ratchet Net Amount at Risk* $ 62.5 $ 84.7 Weighted Average Attained Age 61 60 ------------------------- ---------------------------------------------- ------------- ----- --------------- Contracts with Other Total Contract Value $ 346.4 $ 251.8 GMDB Contract Value in Separate Accounts $ 260.1 $ 174.8 Net Amount at Risk* $ 36.1 $ 20.8 Weighted Average Attained Age 65 63 ------------------------- ---------------------------------------------- ------------- ----- --------------- Contracts with GGU Total Contract Value $ 328.1 $ 276.4 Death Benefit Contract Value in Separate Accounts $ 253.6 $ 193.1 Net Amount at Risk* $ 9.1 $ 5.8 Weighted Average Attained Age 64 61 ------------------------- ---------------------------------------------- ------------- ----- --------------- Contracts with GMIB Total Contract Value $ 397.6 $ 357.8 Contract Value in Separate Accounts $ 311.2 $ 268.3 Net Amount at Risk* $ 16.1 $ 23.0 Weighted Average Attained Age 59 59 -------------------------------------------------------------------------------------- ----- ---------------
* Represents current death benefit less total contract value for GMDB, amount of gross up for GGU and accumulated guaranteed minimum benefit base less total contract value for GMIB and assumes the actuarially remote scenario that all claims become payable on the same day.
--------------------------------------------------------------------- ---------------- -------------------- Additional Liabilities and Incurred Benefits GMDB & GGU GMIB --------------------------------------------------------------------- ---------------- -------------------- ------------------------- ------------------------------------------- ---------------- -------------------- Nine months ended Liability balance at January 1 $ 30.6 $ 2.2 September 30, 2004 Reported claims $ 14.5 $ 0.1 Liability balance at September 30 $ 29.3 $ 2.5 Incurred claims (reported + change in liability) $ 13.2 $ 0.4 ------------------------- ------------------------------------------- ---------------- --------------------
The additional liabilities for guaranteed benefits established under SOP 03-1 are supported by general account assets. Changes in these liabilities are included in death and other benefits in the Consolidated Statements of Income. Contract values in separate accounts were invested in various equity, bond and other funds as directed by the contract holder. No gains or losses were recognized on assets transferred to separate accounts for the periods presented. -8- IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Sales inducement costs consist of bonus interest credits and premium credits added to certain product contract values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. Deferred sales inducement costs were $298.0 million and $279.0 million at September 30, 2004 and December 31, 2003, respectively. These costs were previously included in DAC and were reclassified as part of the adoption of SOP 03-1. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. IDS Life capitalized $15.8 million and $11.2 million during the three months ended September 30, 2004 and 2003, respectively, and $52.8 million and $54.3 million during the nine months ended September 30, 2004 and 2003, respectively. IDS Life amortized $7.1 million and $4.6 million during the three months ended September 30, 2004 and 2003, respectively, and $24.0 million and $17.9 million during the nine months ended September 30, 2004 and 2003, respectively. 4. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the aggregate change in stockholder's equity, excluding changes in ownership interests. It is the sum of net income and changes in (i) unrealized gains or losses on Available-for-Sale securities and applicable deferred policy acquisition and deferred sales inducement costs; and (ii) unrealized gains or losses on derivatives. The components of comprehensive income (loss), net of related tax, for the three and nine months ended September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ---------------------------- (Millions) 2004 2003 2004 2003 ------------- --------------- ------------- -------------- Net income $ 132.5 $ 133.2 $ 331.8 $ 339.6 Change in: Net unrealized securities gains (losses) 407.7 (206.1) 39.3 38.1 Net unrealized derivative (losses) gains (6.7) (0.2) (18.9) 0.5 ------------- --------------- ------------- -------------- Total $ 533.5 $ (73.1) $ 352.2 $ 378.2 ============= =============== ============= ==============
5. Taxes and Interest Net income taxes paid during the nine months ended September 30, 2004 and 2003, were $154.7 million and $58.8 million, respectively. The income tax benefit in the third quarter of 2003 reflects a $29 million reduction in the tax provision resulting from adjustments related to the finalization of the 2002 tax return filed during the quarter and the publication of favorable technical guidance related to the taxation of dividend income. Interest paid on borrowings during the nine months ended September 30, 2004 and 2003, were $0.4 million and $2.3 million, respectively. -9- IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Commitments and Contingencies Commitments to fund mortgage loans on real estate at September 30, 2004 and December 31, 2003 were $93.1 million and $58.5 million, respectively. The maximum amount of life insurance risk retained by IDS Life is $750,000 on any policy insuring a single life and $1.5 million on any policy insuring a joint-life combination. IDS Life generally retains 10 percent of the mortality risk on new life insurance policies. Risk not retained is reinsured with other life insurance companies. Risk on universal life and variable universal life policies is reinsured on a yearly renewable term basis. Risk on term insurance and long-term care policies is reinsured on a coinsurance basis. IDS Life retains all accidental death benefit, disability income and waiver of premium risk. Reinsurance contracts do not relieve IDS Life from its primary obligation to policyholders. Substantially all of IDS Life's life and annuity products have minimum interest rate guarantees in their fixed accounts. At September 30, 2004, these minimum interest rate guarantees ranged from 1.5 percent to 5.0 percent. To the extent the yield on IDS Life's investment portfolio declines below its target spread plus the minimum guarantee, IDS Life's profitability would be negatively affected. The Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD) and several state attorneys general have brought proceedings challenging several mutual fund and variable account financial practices, including suitability generally, late trading, market timing, disclosure of revenue sharing arrangements and inappropriate sales. IDS Life Insurance Company has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries. IDS Life Insurance Company and its subsidiaries are involved in other legal and arbitration proceedings concerning matters arising in connection with the conduct of their respective business activities. IDS Life believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In addition, IDS Life is subject to periodic state insurance department regulatory action, through examinations or other proceedings. IDS Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved. The IRS routinely examines IDS Life's federal income tax returns and is currently conducting an audit for the 1993 through 1996 tax years. Management does not believe there will be a material adverse effect on IDS Life's consolidated financial position as a result of these audits. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IDS Life Insurance Company is a stock life insurance company organized under the laws of the State of Minnesota. IDS Life Insurance Company is a wholly owned subsidiary of American Express Financial Corporation (AEFC), which is a wholly owned subsidiary of American Express Company. IDS Life Insurance Company serves residents of the District of Columbia and all states except New York. IDS Life Insurance Company distributes its fixed and variable insurance and annuity products exclusively through the American Express Financial Advisors Inc.'s (AEFAI) retail sales force. IDS Life Insurance Company has four wholly owned life insurance company subsidiaries that distribute their products through various distribution channels. IDS Life Insurance Company of New York (IDS Life of New York) is a wholly owned subsidiary of IDS Life Insurance Company and serves New York State residents. IDS Life of New York distributes its fixed and variable insurance and annuity products exclusively through AEFAI's retail sales force. IDS Life Insurance Company also owns American Enterprise Life Insurance Company (American Enterprise Life), an Indiana corporation, which primarily issues fixed and variable annuity contracts for sale through non-affiliated representatives and agents of third party distributors. American Centurion Life Assurance Company (American Centurion Life) is also a subsidiary of IDS Life Insurance Company. American Centurion Life offers fixed and variable annuity contracts to American Express(R) Cardmembers and others in New York, as well as fixed and variable annuity contracts for sale through non-affiliated representatives and agents of third party distributors, in New York. IDS Life Insurance Company also owns American Partners Life Insurance Company (American Partners Life), an Arizona corporation which offers fixed and variable annuity contracts to American Express(R) Cardmembers and others who reside in states other than New York. IDS Life Insurance Company also owns IDS REO 1, LLC and IDS REO II, LLC. These two subsidiaries hold real estate and mortgage loans on real estate. IDS Life Insurance Company and its six subsidiaries are referred to collectively herein as "IDS Life". IDS Life follows United States generally accepted accounting principles (GAAP), and the following discussion is presented on a consolidated basis consistent with GAAP. Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See the Forward-Looking Statements section below. Results of Operations for the Three Months Ended September 30, 2004 and 2003 Net income was $132.5 million for the three months ended September 30, 2004 and $133.2 for the three months ended September 30, 2003, which was reflective of the favorable prior year tax adjustment noted below. Pretax income rose 53 percent. Revenues Net investment income increased $15.9 million or 4 percent reflecting a $6.6 million pretax benefit from lower than expected losses related to management's first quarter decision to liquidate a secured loan trust managed by an affiliate. Additionally, net investment income for the third quarter of 2003 includes $19.3 million of amortization expense of certain low income housing investments, whereas there was no amortization expense of such investments in the third quarter of 2004. See effective tax rate discussion below regarding IDS Life's December 2003 low income housing investment distribution to AEFC. These increases were partially offset by the effect of depreciation during the current quarter versus appreciation in the same period a year ago in the S&P 500 on the value of options hedging equity indexed annuities, which was offset in the related benefits and expenses. Contractholder and policyholder charges increased $7.6 million or 6 percent reflecting increased cost of insurance charges on Variable Universal Life products, as well as an increase in surrender charges on variable annuity products. -11- Mortality and expense risk and other fees increased $4.4 million or 4 percent, reflecting higher average values of separate account assets and the impact of the change from IDS Life to AEFC as investment manager of the internally managed proprietary funds during the fourth quarter of 2003. Concurrent with the investment manager change, IDS Life entered into an agreement with AEFC to receive fees for the services, other than investment management, that IDS Life continues to provide the underlying proprietary mutual funds. The administrative service fees will vary with the market values of these proprietary mutual funds. Previous to this change, IDS Life received management fees directly from the proprietary funds and was party to an agreement with AEFC to compensate AEFC for the investment sub-advisory services AEFC provided these proprietary funds. In addition to the administrative service fees, IDS Life receives mortality and expense risk fees from the separate accounts based on the level of assets. Net realized gain on investments was $0.8 million for the three months ended September 30, 2004 compared to net realized loss on investments of $10.7 million for the three months ended September 30, 2003. For the three months ended September 30, 2004, $13.8 million of total investment gains were partially offset by $13.0 million of impairments and losses. Included in these total investment gains and losses are $10.2 million of gross realized gains and $5.3 million of gross realized losses from sales of securities, classified as Available-for-Sale. For the three months ended September 30, 2003, $26.4 million of investment gains were more than offset by $37.1 million of losses and impairments. Included in these total investment gains and losses are $26.3 million of gross realized gains and $36.6 million of gross realized losses from sales of securities, classified as Available-for-Sale. Benefits and Expenses Interest credited on investment contracts and universal life-type insurance decreased $24.5 million or 8 percent, primarily due to lower interest crediting rates and the effect of depreciation in the S&P 500 on equity index annuities during the current quarter versus appreciation in the same period a year ago, partially offset by higher average accumulation values of annuities and inforce levels of life insurance products. Amortization of deferred policy acquisition costs (DAC) decreased $19.0 million or 23 percent primarily reflecting a net $24 million DAC amortization expense reduction in the third quarter of 2004, compared to a net $2 million DAC amortization expense reduction in the third quarter of 2003, both as a result of IDS Life's annual third quarter review of various DAC assumptions and practices. See the DAC section below for further discussion of DAC and related third quarter 2004 and 2003 adjustments. Other insurance and operating expense increased $25.0 million or 24 percent reflecting increases in distribution costs and non-deferrable expenses related to product management and business reinvestment initiatives. These increases were partially offset by a reduction related to the change in the investment manager of the proprietary mutual funds from IDS Life to AEFC. Effective with this change, the previously existing arrangement under which IDS Life compensated AEFC for investment sub-advisory services were terminated. The effective tax rate was 33 percent for the three months ended September 30, 2004 compared to an income tax benefit for the same period a year ago. This change reflects the third quarter of 2003 $29 million reduction in the tax provision resulting from adjustments related to the finalization of the 2002 tax return filed during the third quarter of 2003 and also the publication of favorable technical guidance related to the taxation of dividend income. Also impacting the increased effective rate is the December 2003 distribution of substantially all of IDS Life's interests in low income housing investments to AEFC which caused unfavorable tax provision -12- impacts. For 2003 and prior years, IDS Life's federal income taxes were reduced by credits arising from such low income housing investments. IDS Life's distribution to AEFC is more fully discussed in IDS Life's Annual Report on Form 10-K for the year ended December 31, 2003. Results of Operations for the Nine Months Ended September 30, 2004 and 2003 Income before accounting change rose 19 percent to $402.4 million for the nine months ended September 30, 2004. The increase primarily reflects increased net investment income, contractholder and policyholder charges, mortality and expense risk and other fees, net realized gain on investments, lower interest credited on investment contracts and universal life-type insurance costs and lower amortization of DAC, partially offset by higher other insurance and operating costs and a higher effective income tax rate. See the DAC section below for further discussion of DAC and related third quarter 2004 and 2003 adjustments. Net income for the nine months ended September 30, 2004 reflects the $70.6 million ($108.6 million pretax) impact of IDS Life's January 1, 2004 adoption of SOP 03-1. SOP 03-1 requires insurance enterprises to establish liabilities for benefits that may become payable under variable annuity death benefit guarantees or other insurance or annuity contract provisions. Revenues Net investment income increased $77.2 million or 6 percent reflecting slightly higher average levels of invested assets and slightly higher yields, as well as a $24.7 million pretax benefit in 2004, reflecting lower than expected losses resulting from management's first quarter 2004 decision to liquidate a secured loan trust managed by an affiliate, offset by the first quarter 2004 $49.0 million pretax charge related to the same early liquidation. Additionally, net investment income for the nine months ended September 30, 2003 includes $58.0 million of amortization expense of certain low income housing investments. See effective tax rate discussion below. Contractholder and policyholder charges increased $16.5 million or 4 percent reflecting increased cost of insurance charges on Variable Universal Life products as well as an increase in surrender charges on variable annuity products. Mortality and expense risk and other fees increased $31.0 million or 11 percent, reflecting higher average values of separate account assets, and the impact of the change from IDS Life to AEFC as investment manager of the internally managed proprietary funds during the fourth quarter of 2003. Net realized gain on investments was $18.3 million for the nine months ended September 30, 2004 and $12.7 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2004, $40.3 million of total investment gains were partially offset by $22.0 million of impairments and losses. Included in these total investment gains and losses are $33.9 million of gross realized gains and $11.7 million of gross realized losses from sales of securities, as well as $0.1 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. For the nine months ended September 30, 2003, $218.4 million of total investment gains were partially offset by $205.7 million of impairments and losses. Included in these total net investment gains and losses are $217.3 million of gross realized gains and $91.4 million of gross realized losses from sales of securities, as well as $102.6 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. -13- Benefits and Expenses Interest credited on investment contracts and Universal Life-type insurance decreased $63.3 million or 7 percent, primarily due to lower interest crediting rates and the effect on equity indexed annuities of lower appreciation in the S&P 500 during the first nine months of 2004 versus the same period a year ago, partially offset by higher average accumulation values of annuities and inforce levels of life insurance products. DAC amortization expense decreased to $175.2 million for the nine months ended September 30, 2004 from $236.2 million for the nine months ended September 30, 2003. The decrease reflects the first quarter 2004 net $56.2 million decrease in expenses primarily in conjunction with the adoption of SOP 03-1 during the first quarter of 2004, and the impact of the annual third quarter DAC-related adjustments. See the DAC section below for further discussion. Other insurance and operating expenses increased $32.4 million or 9 percent reflecting increases in distribution costs and non-deferrable expenses related to product management and business reinvestment initiatives. These increases were partially offset by a reduction related to the changes in the previously existing arrangement between IDS Life and AEFC as noted above. As previously disclosed, IDS Life completed a valuation system conversion for its Long-Term Care insurance business during the first quarter of 2004 which resulted in a $6.5 million pretax reduction of estimated Long-Term Care liabilities for future policy benefits and an offsetting estimated increase of $9.6 million in amortization of deferred policy acquisition costs. The effective tax rate rose to 34 percent in the nine months ended September 30, 2004 from 11 percent in the nine months ended September 30, 2003 as a result of the second quarter 2004 reduction in net deferred tax assets, and the effect of the $29 million reduction to the tax expense in the third quarter of 2003 related to the finalization of the 2002 tax return filed during the third quarter of 2003 and the publication of favorable technical guidance related to the taxation of dividend income, both of which caused relatively unfavorable tax provision impacts. Also impacting the increased effective rate is the December 2003 distribution of substantially all of IDS Life's interests in low income housing investments to AEFC which also caused unfavorable tax provision impacts. Deferred Policy Acquisition Costs Deferred Policy Acquisition Costs represent the costs of acquiring new business, including for example, direct sales commissions, related sales incentive bonuses and awards, underwriting costs, policy issue costs and other related costs, have been deferred on the sale of insurance and annuity contracts. DAC for universal life and variable universal life insurance and certain annuities are amortized as a percentage of the estimated gross profits expected to be realized on the policies. DAC for other annuities are amortized using the interest method. For traditional life, disability income and long-term care insurance policies, the costs are amortized in proportion to premium revenue. Amortization of DAC requires the use of certain assumptions including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. The customer asset value growth rate is the rate at which contract values are assumed to appreciate in the future. This rate is net of asset fees, and anticipates a blend of equity and fixed income investments. Management routinely monitors a wide variety of trends in the business, including comparisons of actual and assumed experience. Management reviews and, where appropriate, adjusts its assumptions with respect to customer asset value growth rates on a quarterly basis. -14- Management monitors other principal DAC assumptions, such as persistency, mortality rate, interest margin and maintenance expense level assumptions, each quarter. Unless management identifies a material deviation over the course of the quarterly monitoring, management reviews and updates these DAC assumptions annually in the third quarter of each year. When assumptions are changed, the percentage of estimated gross profits or portion of interest margins used to amortize DAC may also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in an acceleration of DAC amortization while a decrease in amortization percentage will result in a deceleration of DAC amortization. The impact on results of operations of changing assumptions with respect to the amortization of DAC can be either positive or negative in any particular period, and is reflected in the period that such changes are made. As a result of these reviews, IDS Life took actions in the third quarters of 2004 and 2003 that impacted DAC balances and expenses. In the third quarter 2004, these actions resulted in a net $24 million DAC amortization expense reduction reflecting: o A $27 million DAC amortization reduction reflecting lower than previously assumed surrender and mortality rates on variable annuity products, higher surrender charges collected on Universal and Variable Universal Life products, and higher than previously assumed interest rate spreads on annuity and Universal Life products. Variable annuity surrender rates were reduced between 0 and 20%, depending on product and duration. Additionally, there was an increase in surrender charge revenue ranging from 60% to 80% for Universal Life products and 10% to 50% for certain variable annuity products. The mortality assumption was changed from duration to an attained age basis. Interest rate spreads were higher by approximately 40 basis points relative to previously assumed spreads in 2003. o A $3 million DAC amortization reduction reflecting the extension of the mean reversion period by one year on variable annuity and Variable Universal Life products. o A $6 million DAC amortization increase primarily reflecting a reduction in estimated future premiums on variable annuity products. In the third quarter 2003, these actions resulted in a net $2 million DAC amortization expense reduction reflecting: o A $106 million DAC amortization reduction resulting from extending 10 - 15 year amortization periods for certain Flex Annuity contracts to 20 years. The Flex Annuity is an advisor-distributed variable annuity product sold from 1986 - 1996. In reviewing the persistency of this business in recent years, IDS Life had observed significant volumes persisting beyond the end of the 10- and 15-year amortization periods. IDS Life had maintained these amortization periods, however, due to uncertainty over the impact of a program launched in April 2002 under which eligible Flex Annuity contracts can be exchanged for new variable annuity contracts offered by IDS Life. Exchange rates to date under this program were less than those expected, and IDS Life concluded in the third quarter of 2003 it would be appropriate to measure the meaningful life of this business without anticipating future exchanges. This is consistent with the measurement made for other IDS Life products, and the resulting 20-year period is the same as that used for other advisor-distributed variable annuity products. o A $92 million DAC amortization increase resulting from the recognition of a premium deficiency on IDS Life's Long-Term Care (LTC) business. IDS Life has monitored this business closely in 2003 as claim and persistency experience developed adversely. IDS Life discontinued sales of its proprietary LTC product in the first quarter of 2003, and outsourced claims administration on the existing book in the second quarter of 2003. On the basis of -15- updated analysis completed in the third quarter of 2003, IDS Life concluded that the associated DAC was not fully recoverable at current premium levels. The associated DAC remaining after this $92 million reduction was $162 million. o A $12 million net DAC amortization increase across IDS Life's Universal Life, Variable Universal Life and fixed and variable annuity products. IDS Life updated a number of DAC assumptions resulting in increases in amortization totaling $26 million and decreases in amortization totaling $14 million. The largest single item was a $16 million increase in amortization from reflecting lower than previously assumed spreads on fixed contract values. During the first quarter of 2004 and in conjunction with the adoption of SOP 03-1, IDS Life extended the time periods over which DAC associated with certain insurance and annuity products are amortized. In adopting SOP 03-1, IDS Life established additional liabilities for insurance benefits that may become payable under variable annuity death benefit guarantees or on single pay universal life contracts. In order to establish the proper relationships between these liabilities and DAC associated with the same contracts, IDS Life changed its estimates of meaningful life for certain contracts so DAC amortization periods are the same as liability funding periods. As a result, IDS Life recognized a $65.8 million valuation benefit reflecting the lengthening of the amortization periods for the same contracts impacted by SOP 03-1. The SOP 03-1 valuation benefit above was partially offset by the pretax $9.6 million DAC reduction* due to the valuation system conversion discussed in the Benefits and Expenses section of Management's Discussion and Analysis of Results of Operations for the nine months ended September 30, 2004 and 2003. DAC balances for various insurance and annuity products sold by IDS Life are set forth below:
(Millions) September 30, 2004 December 31, 2003 ------------------- ------------------- (Unaudited) Annuities $ 1,862 $ 1,734 Life and health insurance 1,743 1,602 ------------------ ------------------- Total $ 3,605 $ 3,336 ================== ===================
In addition to the DAC balances shown above and in conjunction with IDS Life's adoption of SOP 03-1, sales inducement costs previously included in DAC were reclassified from DAC and presented as a separate line item in the Consolidated Balance Sheets. Deferred sales inducement costs were $298.0 million and $279.0 million at September 30, 2004 and December 31, 2003, respectively. Sales inducement costs consist of bonus interest credits and premium credits added to certain product contract values. These benefits are capitalized to the extent they are incremental to amounts that would be credited on similar contracts without the applicable feature. The amounts capitalized are amortized using the same methodology and assumptions used to amortize DAC. * This valuation adjustment was an increase to the $92 million estimated premium deficiency IDS Life recognized in the third quarter of 2003. -16- Impact of Market Volatility on Results of Operations Various aspects of IDS Life's business are impacted by equity market levels and other market-based events. Several areas in particular involve DAC and deferred sales inducement costs, recognition of benefits under guaranteed minimum death benefits (GMDB) and certain other variable annuity benefits, mortality and expense risk and other fees and structured investments. The direction and magnitude of the changes in equity markets can increase or decrease amortization of DAC and deferred sales inducement costs, incurred amounts under GMDB and other variable annuity benefit provisions and mortality and expense risk and other fees and correspondingly affect results of operations in any particular period. Similarly, the value of IDS Life's structured investment portfolio and derivatives arising from the consolidation of certain secured loan trusts are impacted by various market factors. Persistency of, or increases in, bond and loan default rates, among other factors, could result in negative adjustments to the market values of these investments in the future, which would adversely impact results of operations. See Liquidity and Capital Resources section for a further discussion of structured investments and consolidated derivatives. Liquidity and Capital Resources The liquidity requirements of IDS Life are generally met by funds provided by premiums, investment income, proceeds from sales of investments, as well as maturities, periodic repayments of investment principal and capital contributions from AEFC. The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to AEFC and investment purchases. IDS Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations. IDS Life intends to pay a dividend to AEFC during the fourth quarter of 2004, which is subject to state regulatory approval. If approved and paid, IDS Life expects to continue to maintain adequate capital to meet internal and external Risk-Based Capital requirements. IDS Life, on a consolidated basis, has available lines of credit with AEFC aggregating $295 million ($195 million committed and $100 million uncommitted). At September 30, 2004, there were no line of credit borrowings outstanding with AEFC and no outstanding reverse repurchase agreements. Both the line of credit and reverse repurchase agreements are used strictly as short-term sources of funds. Investment securities include $2.4 billion, $2.4 billion and $2.0 billion of below investment grade securities (excluding net unrealized appreciation and depreciation) at September 30, 2004, December 31, 2003 and September 30, 2003, respectively. These investments represent 7.9 percent, 7.7 percent and 6.2 percent of IDS Life's investment portfolio at September 30, 2004, December 31, 2003 and September 30, 2003, respectively. During 2004, IDS Life continued to hold investments in Collateralized Debt Obligations (CDOs), some of which are also managed by an affiliate, and were not consolidated pursuant to the adoption of Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities", as revised (FIN 46) as IDS Life was not considered the primary beneficiary. IDS Life invested in CDOs as part of its investment strategy in order to offer a competitive rate to contractholders' accounts. IDS Life's exposure as an investor is limited solely to its aggregate investment in the CDOs, and it has no obligations or commitments, contingent or otherwise, that could require any further funding of such investments. At September 30, 2004, the carrying values of the CDO residual tranches, managed by an affiliate, were $5.2 million. IDS Life also has a retained interest in a CDO securitization with a carrying value of $519.6 million, of which $383.3 million is considered investment grade, as well as an additional $20.7 million in rated CDO tranches managed by a third party. CDOs are illiquid investments. As an investor in the residual tranche of CDOs, IDS Life's return correlates to the performance of portfolios of high-yield bonds and/or bank loans. The carrying value of the CDOs, and IDS Life's projected return are based on discounted cash flow projections that require a significant degree of management judgment as to assumptions -17- primarily related to default and recovery rates of the high-yield bonds and/or bank loans held directly by the CDO and, as such, are subject to change. Although the exposure associated with IDS Life's investment in CDOs is limited to the carrying value of such investments, they have additional volatility associated with them because the amount of the initial value of the loans and/or other debt obligations in the related portfolios is significantly greater than IDS Life's exposure. In addition, the derivatives recorded as a result of consolidating the two remaining Secured Loan Trusts (SLT) under FIN 46 are valued based on the expected performance of a reference portfolio of high-yield loans. Deterioration in the value of the high-yield bonds or bank loans would likely result in deterioration of IDS Life's investment return with respect to the relevant CDO or consolidated derivative, as the case may be. In the event of significant deterioration of a portfolio, the relevant CDO or SLT structure containing the consolidated derivative may be subject to early liquidation, which could result in further deterioration of the investment return or, in severe cases, loss of the CDO or consolidated derivative carrying amount. During the nine months ended September 30, 2004, IDS Life liquidated one of its SLTs. The exposure to loss as a result of IDS Life's investment in the two remaining SLTs consolidated under FIN 46 is represented by the pretax net assets of the consolidated SLTs which were $471.7 million at September 30, 2004. OTHER REPORTING MATTERS Accounting Developments See "Recently Issued Accounting Standards" section of Note 1 to the Consolidated Financial Statements. -18- ITEM 4. CONTROLS AND PROCEDURES IDS Life's management, with the participation of IDS Life's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of IDS Life's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, IDS Life's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, IDS Life's disclosure controls and procedures are effective. There have not been any 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. Forward-Looking Statements This report includes forward-looking statements that are subject to risks and uncertainties that could cause results to differ materially from such statements. The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "should," "could," "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 publicly update or revise any forward-looking statements. Important factors that could cause actual results to differ materially from IDS Life's forward-looking statements include, but are not limited to: fluctuations in external markets, which can affect the amount and types of investment products sold, the market value of its separate account assets and related fees received and the amount of amortization of DAC; potential deterioration in high-yield and other investments, which could result in further losses in IDS Life's investment portfolio; changes in assumptions relating to DAC which also could impact the amount of DAC amortization; the ability to sell certain high-yield investments at expected values and within anticipated time frames and to maintain its high-yield portfolio at certain levels in the future; the types and the value of certain death benefit features on variable annuity contracts; the affect of assessments and other surcharges for guaranty funds; the response of reinsurance companies under reinsurance contracts; the impact of reinsurance rates and the availability and adequacy of reinsurance to protect IDS Life against losses; negative changes in IDS Life Insurance Company's and its four life insurance company subsidiaries' credit ratings; increasing competition in all IDS Life's major businesses; the adoption of recently issued accounting rules related to the consolidation of variable interest entities, including those involving SLTs that IDS Life invests in, and accounting for guarantees under SOP 03-1, both of which could further affect both IDS Life's balance sheet and results of operations; and outcomes of litigation. A further description of these and other risks and uncertainties can be found in IDS Life's Annual Report on Form 10-K for the year ended December 31, 2003, and its other reports filed with the Securities and Exchange Commission (SEC). -19- PART II - OTHER INFORMATION IDS LIFE INSURANCE COMPANY Item 1. Legal Proceedings The Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD) and several state attorneys general have brought proceedings challenging several mutual fund and variable account financial practices, including suitability generally, late trading, market timing, disclosure of revenue sharing arrangements and inappropriate sales. IDS Life Insurance Company has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries. In November 2002, IDS Life Insurance Company was named in a purported class action entitled John Haritos, et al. v. American Express Financial Advisors, Inc. et al., No. 02 2255, United States District Court, District of Arizona. The complaint originally named IDS Life Insurance Company as a defendant, but IDS Life Insurance Company was dismissed when plaintiffs chose to file an Amended Complaint not naming IDS Life Insurance Company. This action alleges that defendants violated the Investment Advisors Act of 1940, 15 U.S.C., in the sale of financial plans and various products including those of IDS Life Insurance Company. The complaint seeks certification of a nationwide class, restitution, injunctive relief, and punitive damages. Defendants have moved to dismiss the action and that motion is pending. IDS Life Insurance Company and its subsidiaries are involved in other legal and arbitration proceedings concerning matters arising in connection with the conduct of their respective business activities. IDS Life believes it has meritorious defenses to each of these actions and intends to defend them vigorously. IDS Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal or arbitration proceedings that would have a material adverse effect on IDS Life's consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page E-1 hereof. (b) Reports on Form 8-K. There were no reports on Form 8-K filed by IDS Life during the quarterly period ended September 30, 2004. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDS LIFE INSURANCE COMPANY -------------------------- (Registrant) Date: November 10, 2004 By /s/ Mark E. Schwarzmann ------------------------ Mark E. Schwarzmann Director, Chairman of the Board and Chief Executive Officer Date: November 10, 2004 By /s/ Arthur H. Berman --------------------- Arthur H. Berman Director and Executive Vice President - Finance and Chief Financial Officer -21- 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 Arthur H. Berman pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 32.1 Certification of Mark E. Schwarzmann and Arthur H. Berman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. E-1 EX-31.1 302 CERT 2 ex31-1.txt CERTIFICATION PURSUANT TO RULE 13A-14(A) Exhibit 31.1 CERTIFICATION I, Mark E. Schwarzmann, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IDS Life Insurance Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2004 /s/ Mark E. Schwarzmann ------------------------ Mark E. Schwarzmann Chief Executive Officer EX-31.2 302 CERT 3 ex31-2.txt CERTIFICATION PURSUANT TO RULE 13A-14(A) Exhibit 31.2 CERTIFICATION I, Arthur H. Berman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IDS Life Insurance Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2004 /s/ Arthur H. Berman -------------------- Arthur H. Berman Chief Financial Officer EX-32.1 906 CERT 4 ex32-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly report on Form 10-Q of IDS Life Insurance Company (the "Company") for the quarterly period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mark E. Schwarzmann, as Chief Executive Officer of IDS Life, and Arthur H. Berman as Chief Financial Officer of IDS Life, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of IDS Life. /s/ Mark E. Schwarzmann ------------------- Name: Mark E. Schwarzmann Title: Chief Executive Officer Date: November 10, 2004 /s/ Arthur H. Berman ---------------- Name: Arthur H. Berman Title: Chief Financial Officer Date: November 10, 2004 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being "filed" as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32.1 is expressly and specifically incorporated by reference in any such filing. A signed original of this written statement required by Section 906 has been provided to IDS Life and will be retained by IDS Life and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----